-----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, V2wucBkRTW6nKzEjzdZHJeUg7NGv+hqsLjCnnwb3hEqh8nmyUST3dijjc5zwKJrh CwM1PHA5fximamSv+vCkvg== 0000927356-98-000422.txt : 19980327 0000927356-98-000422.hdr.sgml : 19980327 ACCESSION NUMBER: 0000927356-98-000422 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATRIX CAPITAL CORP /CO/ 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: 98574101 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 10-K 1 FORM 10-K 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, 1997 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 CAPITAL CORPORATION (Exact name of registrant as specified in its charter) COLORADO 84-1233716 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1380 Lawrence Street, Suite 1410 DENVER, COLORADO 80204 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 595-9898 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.0001 PER SHARE (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. [_] As of March 13, 1998, 6,703,880 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 12, 1998, was $47,495,295. 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: The Company's definitive proxy statement for the Annual Meeting of Shareholders to be held May 1, 1998 is incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS PAGE ---- PART I Item 1. Business...................................................................................... 3 Item 2. Properties.................................................................................... 19 Item 3. Legal Proceedings............................................................................. 19 Item 4. Submission of Matters to a Vote of Security Holders........................................... 20 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 20 Item 6. Selected Financial Data....................................................................... 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 23 Item 7a. Quantitative and Qualitative Disclosures about Market Risk.................................... 42 Item 8. Financial Statements and Supplementary Data................................................... 42 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.......... 42 PART III Item 10. Directors and Executive Officers of the Registrant............................................ 42 Item 11. Executive Compensation........................................................................ 42 Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 42 Item 13. Certain Relationships and Related Transactions................................................ 42 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 43
2 PART I ITEM 1. BUSINESS -------- General Matrix Capital Corporation (the "Company") is a unitary thrift holding company that, through its subsidiaries (the "Subsidiaries") focuses on traditional banking, mortgage banking, and the administration of self-directed trust accounts. The Company's traditional banking activities include originating and servicing residential, commercial and consumer loans and providing a broad range of depository services. The Company's mortgage banking activities consist primarily 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. The Company's trust activities focus primarily on the administration of self- directed individual retirement accounts, qualified retirement plans, and custodial and directed trust accounts. The Company was incorporated in Colorado in June 1993. Its principal executive offices are located at 1380 Lawrence Street, Suite 1410, Denver, Colorado 80204, and its telephone number is (303) 595-9898. In February 1998, the Board of Directors approved the change of the Company's name to "Matrix Bancorp", subject to approval of the Company's shareholders. The proposed name change is scheduled to be voted on by the shareholders at the upcoming Annual Meeting of Shareholders on May 1, 1998. If approved, it is anticipated that the trading symbol for the Company's common stock on the Nasdaq National Market will become "MTXB". THE SUBSIDIARIES The Company's core business operations are conducted through the following operating Subsidiaries: MATRIX BANK. With its main office in Las Cruces, New Mexico and a full service branch in Sun City, Arizona, Matrix Capital Bank ("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. In addition, Matrix Bank has established a loan office in Evergreen, Colorado (near Denver) that primarily originates residential real estate construction loans and commercial loans in the Colorado market. Matrix Bank also holds the noninterest-bearing custodial escrow deposits related to the residential mortgage loan portfolio serviced by Matrix Financial Services Corporation ("Matrix Financial") and the interest-bearing money market accounts administered by Sterling Trust Company ("Sterling Trust"). See "--Matrix Financial" and "--The Vintage Group". These custodial escrow deposits, money market accounts under administration, as well as other traditional deposits, are used to fund bulk purchases of residential mortgage loan portfolios throughout the United States, a substantial portion of which are serviced by Matrix Financial following their purchase. As of December 31, 1997, Matrix Bank was deemed to be "well-capitalized" under applicable regulatory standards. UNITED FINANCIAL. United Financial, Inc. ("United Financial") provides brokerage and consulting services to financial institutions and financial services companies in the mortgage banking industry. These services include the brokering and analysis of residential mortgage loan servicing rights, corporate and mortgage loan servicing portfolio valuations (which includes the complex "mark-to-market" valuation and analysis required under Statement of Financial Accounting Standards No. 122, Accounting for Mortgage Servicing Rights ("FAS 122"), superceded by Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("FAS 125")), and to a lesser extent, consultation and brokerage services in connection with mergers and acquisitions of mortgage banking entities. United Financial provides brokerage services to the mortgage banking entities within several of the nation's largest financial institutions, such as Banc One Mortgage Corporation, Chase Manhattan Mortgage Corporation, and Mellon Mortgage Corporation. During 1997 and 1996, United Financial brokered the sale of 91 and 92 mortgage loan servicing portfolios totaling $33.4 billion and $26.4 billion in outstanding mortgage loan principal balances, respectively. As a result of this volume of brokerage activity, the Company has 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, the Company is able to identify certain types of mortgage servicing portfolios that are well suited to its particular servicing platform and unique corporate structure. 3 MATRIX FINANCIAL. Matrix Financial acquires residential mortgage loan servicing rights (sometimes referred to herein as "MSRs") on a nationwide basis through purchases in the secondary market, services the loans underlying these rights, and originates mortgage loans through its wholesale loan origination network and its telemarketing call center established in 1997. As of December 31, 1997, Matrix Financial serviced 61,517 borrower accounts representing $3.3 billion in principal balances (excluding $239.3 million in subservicing for non- affiliates of the Company), the majority of which 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, which may include principal, interest, taxes and insurance. These payments are held at Matrix Bank. At December 31, 1997, the custodial escrow accounts related to the Company's servicing portfolio maintained at Matrix Bank were $42.9 million in the aggregate. For the calendar year 1997, Matrix Financial originated $403.0 million in residential mortgage loans primarily through its regional wholesale production offices located in Atlanta, Denver, Las Vegas and Phoenix. The mortgage loans originated by Matrix Financial on a wholesale and retail basis are typically sold in the secondary market. THE VINTAGE GROUP. In early 1997, the Company acquired The Vintage Group, Inc. ("Vintage"). Vintage's subsidiaries, Sterling Trust and First Matrix Investment Services Corporation ("First Matrix") are located in Waco, and Arlington, Texas, respectively. Sterling Trust was incorporated in 1984 as a Texas independent, non-bank trust company specializing in the administration of self-directed individual retirement accounts, qualified retirement plans, and custodial and directed trust accounts. As of December 31, 1997, Sterling Trust had in excess of 29,000 accounts with assets under administration of over $1.4 billion, approximately $92.4 million of which represented interest-bearing deposits under administration held at Matrix Bank. First Matrix is a NASD broker/dealer that provides services to individuals and deferred contribution plans. UNITED SPECIAL SERVICES. United Special Services, Inc. ("USS") provides real estate management and disposition services to financial services companies and financial institutions. In addition to the unaffiliated clients currently served by USS, Matrix Financial uses USS exclusively in handling the disposition of its foreclosed real estate. USS 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. UNITED CAPITAL MARKETS. United Capital Markets, Inc. ("UCM") is a Registered Investment Advisor that focuses on risk management services for institutional clients. It provides a professional outsourcing alternative to in-house risk management departments and Wall Street derivative products. UCM typically focuses on interest rate and prepayment risk as they relate to specific objectives articulated to UCM by the client. UCM's risk management strategy includes modeling of asset risk, setting up and trading individual hedge accounts and matching accounting practice and management goals. Although the Company believes that UCM will ultimately be able to implement risk management strategies for clients with respect to several asset classes, UCM's initial focus has been on the implementation of risk management strategies for clients' portfolios of mortgage servicing rights. UCM is managed by former senior executives from nationally recognized investment banks and the mortgage banking industry with many years of experience in risk management and hedging strategies. BROKERAGE AND CONSULTING SERVICES BROKERAGE SERVICES. United Financial operates as a national, full-service mortgage servicing broker. It is capable of analyzing, packaging, marketing and closing servicing portfolio and selected corporate merger and acquisition transactions. United Financial markets its services to all types and sizes of market participants, thereby developing diverse relationships. United Financial has provided brokerage services to each of the following clients during the last 12 months: AccuBanc Mortgage Corporation Firstar Bank Banc One Mortgage Corporation Mellon Mortgage Corporation Bank of America NVR Mortgage Finance, Inc. Chase Manhattan Mortgage Corporation Principal Residential Mortgage, Inc. First of America Loan Services, Inc. Resource Bancshares Mortgage Group Mortgage servicing rights are sold either on a bulk basis, in which the seller identifies, packages and sells a portfolio of mortgage servicing rights to a buyer in a single transaction, or on a flow basis, in which the seller agrees to sell to a 4 specified buyer from time to time the mortgage servicing rights originated by the seller that meet certain criteria. United Financial is capable of helping both buyers and sellers with respect to bulk sales and flow sales of mortgage servicing rights. The Company believes 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 other Subsidiaries and make referrals where 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. While servicing rights are the primary asset of most mortgage companies, other institutions such as commercial banks and savings associations also build portfolios of mortgage servicing rights, which can serve as a significant source of noninterest income. 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. With the implementation of FAS 122, which requires companies to capitalize originated mortgage servicing rights, management of mortgage servicing assets has become even more critical. These managerial efforts, combined with interest rate sensitivity of the assets and the growth strategies of market participants, create constantly changing supply and demand and, therefore, 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 facilitate matching 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, United Financial has access to information on the availability of mortgage servicing portfolios and helps bring together interested buyers and sellers. CONSULTING AND ANALYTIC SERVICES. The analytics group of United Financial has developed expertise in helping companies implement and, on an ongoing basis, track their FAS 122 "mark-to-market" valuations and analyses. Expansion into the FAS 122 valuations arena represented a logical progression for United Financial. In connection with the consulting services performed by United Financial on pools of mortgage servicing rights held for sale by United Financial's clients, United Financial performed many of the same types of analyses required by FAS 122. Therefore, United Financial was able to enhance its existing valuation models and create a software program that could be customized to fit its customers' many different needs and unique situations in performing FAS 122 analyses. In addition, United Financial has the infrastructure and management information system capabilities necessary to undertake the complex analyses required by FAS 122. Many of the companies affected by the implementation of FAS 122 have outsourced this function to a third-party rather than dedicate the resources necessary to develop systems for and perform their own FAS 122 valuations. Because FAS 122 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 on mortgage servicing rights as a result of constantly changing interest rates and prepayment speeds on the underlying mortgage portfolio, risk management of portfolios of mortgage servicing rights by the holder of the portfolio, which typically takes the form of hedging the portfolio, has become a more prevalent practice over recent periods. The FAS 122 "mark-to-market" analyses made by United Financial help Company clients assess which of their portfolios of mortgage servicing rights are most susceptible to impairment due to interest rate and prepayment risk. Once identified, the analytics group of United Financial is able to introduce the client to management at UCM, who in turn is able to offer its risk management services relating to the identified or other mortgage servicing portfolios owned by the client in order to meet the client's stated objectives. As previously mentioned, UCM is an outsourcing alternative to buying expensive Wall Street derivative products such as interest rate floors, collars, or principal only swaps. UCM's primary strategy employs risk management techniques similar to those utilized by Wall Street firms to offset risk. The UCM approach includes modeling of asset risk, establishing and trading individual hedge accounts and matching accounting practice and management goals. UCM employs this strategy by calculating the appropriate mix of exchange-traded treasury futures and options to offset the change in value of the clients' portfolios. These calculations are completed 5 with real time market pricing. Monthly portfolio evaluations are calculated to insure correlation and appropriate accounting treatment. The use of these liquid positions to offset risk is a less expensive strategy and mirrors strategies used by major investment banks. Additionally, the hedging instruments have lower transaction costs allowing both ease in rebalancing, if necessary, and daily reporting. UCM uses a combination of futures and options to match both the duration and convexity of the hedged asset. Management believes that combining the services offered by the analytics group of United Financial with those of UCM provides the Company with a competitive advantage in attracting and retaining clients because the Company is able to offer financial services companies and financial institutions a more complete package of services than the Company's competitors. RESIDENTIAL LOAN SERVICING ACTIVITIES Residential Mortgage Loan Servicing. Matrix Financial and Matrix Bank each has its own mortgage servicing portfolio, but the Company conducts its servicing activities exclusively through Matrix Financial. Matrix Bank's mortgage servicing rights are subserviced by Matrix Financial. At December 31, 1997, Matrix Financial serviced approximately $3.3 billion of mortgage loans, including $505.1 million subserviced for Matrix Bank and excluding $239.3 million subserviced for non-affiliates of the Company. 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, where the money can be invested by the Company in interest-earning assets at returns that historically have been greater than could be realized by the Company using the custodial escrow deposits as compensating balances to reduce the effective borrowing cost on the Company's warehouse credit facilities. As compensation for its mortgage servicing activities, the Company receives servicing fees usually ranging from 0.25% to 0.75% per annum of the loan balances serviced, plus any late charges collected from delinquent borrowers and other fees incidental to the services provided. At December 31, 1997, the Company's weighted-average servicing fee was 0.40%. In the event of a default by the borrower, the Company receives no servicing fees until the default is cured. Servicing is provided on mortgage loans on a recourse or nonrecourse basis. The Company's policy is to accept only a limited number of servicing assets on a recourse basis. As of December 31, 1997 and 1996, on the basis of outstanding principal balances, only 0.3% and 0.4%, respectively, of the mortgage servicing contracts owned by the Company involved recourse servicing. To the extent that servicing is done on a recourse basis, the Company is exposed to credit risk with respect to the underlying loan in the event of a repurchase. Additionally, many of the nonrecourse mortgage servicing contracts owned by the Company require the Company 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. The Company, therefore, must bear the funding costs associated with making such advances. If the delinquent loan does not become current, these advances are typically recovered at the time of the foreclosure sale. Foreclosure expenses are generally not fully reimbursable by the Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or the Government National Mortgage Association ("GNMA"), for whom the Company provides significant amounts of mortgage loan servicing. As of December 31, 1997 and 1996, the Company had advanced approximately $5.7 million and $2.4 million, respectively, in funds on behalf of third-party investors. Mortgage servicing rights represent a contractual right to service, and not a beneficial ownership interest in, underlying mortgage loans. Failure to service the loans in accordance with contract or other applicable requirements may lead to the termination of the 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 the Company's failure to service the loans in accordance with its obligations. In order to track information on its servicing portfolio, the Company utilizes a data processing system provided by Alltel Information Services, Inc. ("Alltel"), one of the largest mortgage banking service bureaus in the United States. Management believes that this system gives the Company sufficient capacity to support anticipated expansion of its residential mortgage loan servicing portfolio. 6 The following table sets forth certain information regarding the composition of the Company's mortgage servicing portfolio (excluding loans subserviced for others) as of the dates indicated:
AS OF DECEMBER 31, ---------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ (IN THOUSANDS) FHA insured/VA guaranteed residential......... $ 699,056 $ 318,145 $ 37,135 Conventional loans............................ 2,633,563 2,171,016 1,544,808 Other loans 15,443 15,875 14,442 ------------ ------------ ------------ Total mortgage servicing portfolio....... $ 3,348,062 $ 2,505,036 $ 1,596,385 ============ ============ ============ Fixed rate loans.............................. $ 2,691,409 $ 1,986,599 $ 1,073,803 Adjustable rate loans......................... 656,653 518,437 522,582 ------------ ------------ ------------ Total mortgage servicing portfolio....... $ 3,348,062 $ 2,505,036 $ 1,596,385 ============ ============ ============
The following table shows the delinquency statistics for the mortgage loans serviced by the Company (excluding loans subserviced for others) compared with national average delinquency rates as of the dates presented:
AS OF DECEMBER 31, ------------------------------------------------------------------------------------------------------------- 1997 1996 1995 ---------------------------------- ----------------------------------- ---------------------------------- NATIONAL NATIONAL NATIONAL COMPANY AVERAGE(1) COMPANY AVERAGE(1) COMPANY AVERAGE(1) --------------------- ---------- -------------------- ---------- --------------------- ---------- NUMBER PERCENTAGE PERCENTAGE NUMBER PERCENTAGE PERCENTAGE NUMBER PERCENTAGE PERCENTAGE OF OF SERVICING OF OF OF SERVICING OF OF OF SERVICING OF LOANS PORTFOLIO(2) LOANS LOANS PORTFOLIO(2) LOANS LOANS PORTFOLIO(2) LOANS ------ ------------ ---------- ------ ------------ ---------- ------ ------------ ---------- Loans delinquent for: 30-59 days........... 3,558 5.78% 3.03% 2,607 5.45% 3.04% 843 3.37% 3.07% 60-89 days........... 835 1.36 0.71 667 1.40 0.71 195 0.78 0.70 90 days and over..... 912 1.48 0.62 684 1.43 0.62 166 0.67 0.71 ------ ------------ ---------- ------ ------------ ---------- ------ ------------ ---------- Total delinquencies.. 5,305 8.62% 4.36% 3,958 8.28% 4.37% 1,204 4.82% 4.48% ====== ============ ========== ====== ============ ========== ====== ============ ========== Foreclosures......... 447 0.73% 1.11% 264 0.55% 1.03% 277 1.11% 0.87% ====== ============ ========== ====== ============ ========== ====== ============ ==========
__________ (1) Source: Mortgage Bankers Association, "Delinquency Rates of 1- to 4-Unit Residential Mortgage Loans" (Seasonally Adjusted) (Data as of December 31, 1997, 1996 and 1995, respectively). (2) Delinquencies and foreclosures generally exceed the national average due to high rates of delinquencies and foreclosures on certain bulk loan and bulk servicing portfolios acquired by the Company at a discount. The following table sets forth certain information regarding the number and aggregate principal balance of the mortgage loans serviced by the Company, including both fixed and adjustable rate loans (excluding loans subserviced for others), at various mortgage interest rates:
AS OF DECEMBER 31, ------------------------------------------------------------------------------------------------------------ 1997 1996 1995 ---------------------------------- ----------------------------------- --------------------------------- PERCENTAGE PERCENTAGE PERCENTAGE NUMBER AGGREGATE OF AGGREGATE NUMBER AGGREGATE OF AGGREGATE NUMBER AGGREGATE OF AGGREGATE OF PRINCIPAL PRINCIPAL OF PRINCIPAL PRINCIPAL OF PRINCIPAL PRINCIPAL RATE LOANS BALANCE BALANCE LOANS BALANCE BALANCE LOANS BALANCE BALANCE ---- ------ ---------- ------------ ------ ----------- ------------ ------ ---------- ------------ (Dollars in thousands) Less than 7.00%.... 2,968 $ 220,582 6.59% 3,545 $ 145,720 5.82% 2,781 $ 218,914 13.71% 7.00% -- 7.99%..... 13,836 915,789 27.35 12,269 726,800 29.01 7,386 576,255 36.10 8.00% -- 8.99%..... 19,800 1,121,807 33.51 14,011 838,215 33.46 7,160 442,634 27.73 9.00% -- 9.99%..... 15,780 696,575 20.80 9,567 413,598 16.51 4,460 191,549 12.00 10.00%--10.99%..... 9,086 390,956 11.68 6,322 301,837 12.05 2,005 125,544 7.86 11.00%--11.99%..... 37 2,110 0.06 1,144 45,111 1.80 519 24,220 1.52 12.00% and over.... 10 243 0.01 924 33,755 1.35 647 17,269 1.08 ------ ---------- ------------ ------ ----------- ------------ ------ ---------- ------------ Total............. 61,517 $3,348,062 100.00% 47,782 $ 2,505,036 100.00% 24,958 $1,596,385 100.00% ====== ========== ============ ====== =========== ============ ====== ========== ============
7 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 maturity of the mortgage loans serviced by the Company (excluding loans subserviced for others) as of the dates shown. The changes in the remaining maturities as a percentage of unpaid principal between 1997 and 1996, as reflected below, are the result of acquisitions of mortgage servicing rights completed during 1997.
AS OF DECEMBER 31, ----------------------------------------------------------------------------------------------------------- 1997 1996 --------------------------------------------------- --------------------------------------------------- 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... 7,485 12.17% $ 103,761 3.10% 5,020 10.51% $ 77,136 3.08% 6-10 years... 11,405 18.54 257,208 7.68 8,784 18.39 184,629 7.37 11-15 years... 14,325 23.29 589,747 17.62 6,418 13.43 340,282 13.58 16-20 years... 9,600 15.61 558,605 16.68 14,066 29.44 566,862 22.63 21-25 years... 7,427 12.07 687,563 20.54 7,006 14.66 545,336 21.77 More than 25 years....... 11,275 18.32 1,151,178 34.38 6,488 13.57 790,791 31.57 ------ ---------- ---------- ---------- ------ ---------- ---------- ---------- Total........ 61,517 100.00% $3,348,062 100.00% 47,782 100.00% $2,505,036 100.00% ====== ========== ========== ========== ====== ========== ========== ==========
AS OF DECEMBER 31, --------------------------------------------------- 1995 --------------------------------------------------- PERCENTAGE NUMBER PERCENTAGE UNPAID UNPAID OF OF NUMBER PRINCIPAL PRINCIPAL MATURITY LOANS OF LOANS AMOUNT AMOUNT ------ ---------- ---------- ---------- (DOLLARS IN THOUSANDS) 1- 5 years... 3,077 12.33% $ 60,496 3.79% 6-10 years... 4,898 19.62 118,928 7.45 11-15 years... 5,263 21.09 302,332 18.94 16-20 years... 2,608 10.45 168,166 10.53 21-25 years... 4,880 19.55 472,613 29.61 More than 25 years....... 4,232 16.96 473,850 29.68 ------ ---------- ---------- ---------- Total........ 24,958 100.00% $1,596,385 100.00% ====== ========== ========== ==========
The following table sets forth the geographic distribution of the mortgage loans (including delinquencies) serviced by the Company (excluding loans subserviced for others) by state:
AS OF DECEMBER 31, ------------------------------------------------------------------------------------------------------------ 1997 1996 ---------------------------------------------------- --------------------------------------------------- PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE OF OF OF OF NUMBER AGGREGATE AGGREGATE TOTAL NUMBER AGGREGATE AGGREGATE TOTAL OF PRINCIPAL PRINCIPAL DELINQS. OF PRINCIPAL PRINCIPAL DELINQS. STATE LOANS BALANCE BALANCE BY STATE(1) LOANS BALANCE BALANCE BY STATE(1) - ---------- ------ ---------- ---------- ----------- ------ ---------- ---------- ----------- (DOLLARS IN THOUSANDS) CA(2)..... 7,995 $ 763,529 22.81% 14.10% 6,971 $ 680,075 27.15% 14.60% TX(2)..... 14,195 497,046 14.85 29.05 12,257 410,892 16.40 37.34 MD........ 3,217 220,407 6.58 3.43 2,415 133,298 5.32 2.17 NY........ 2,749 204,691 6.11 4.36 2,396 214,228 8.55 3.87 AZ........ 3,598 160,055 4.78 3.04 3,265 128,251 5.12 4.17 Other(3).. 29,763 1,502,334 44.87 46.02 20,478 938,292 37.46 37.85 ------ ---------- ---------- ----------- ------ ---------- ---------- ----------- Total.... 61,517 $3,348,062 100.00% 100.00% 47,782 $2,505,036 100.00% 100.00% ====== ========== ========== =========== ====== ========== ========== ===========
AS OF DECEMBER 31, ----------------------------------------------------- 1995 ----------------------------------------------------- PERCENTAGE PERCENTAGE OF OF NUMBER AGGREGATE AGGREGATE TOTAL OF PRINCIPAL PRINCIPAL DELINQS. STATE LOANS BALANCE BALANCE BY STATE(1) - --------- ------ ---------- ---------- ----------- (DOLLARS IN THOUSANDS) CA(2).... 4,948 $ 533,590 33.42% 39.04% TX(2).... 4,291 265,242 16.62 7.31 MD....... 1,628 93,495 5.86 4.65 NY....... 532 32,620 2.04 3.49 AZ....... 3,787 139,038 8.71 7.89 Other(3). 9,772 532,400 33.35 37.62 ------ ---------- ---------- ----------- Total.... 24,958 $1,596,385 100.00% 100.00% ====== ========== ========== ===========
_________________ (1) In terms of number of loans outstanding. (2) The concentration in California and Texas does not reflect a business strategy of the Company but rather the pursuit of specific opportunities. (3) No other state accounted for greater than 6.00%, based on aggregate principal balances of the Company's mortgage loan servicing portfolio as of December 31, 1997. ACQUISITION OF SERVICING RIGHTS. The Company's strategy with respect to mortgage servicing focuses on acquiring servicing for which the underlying mortgage loans tend to be more seasoned and have lower principal and higher custodial escrow balances than newly-originated mortgage loans. Management believes this strategy allows the Company to mitigate its prepayment risk, while allowing the Company to capture relatively high custodial escrow balances in relation to the outstanding principal balance. During periods of declining interest rates, prepayments of mortgage loans increase as homeowners seek to refinance at lower interest rates, resulting in a decrease in the value of the servicing portfolio. Mortgage loans with higher interest rates and/or higher principal balances are more likely to result in prepayments since the cost savings from refinancing to the borrower can be significant. The following table shows quarterly and annual average prepayment rate experience on the mortgage loans serviced by the Company (excluding loans subserviced by and for others): 8 FOR THE YEAR ENDED DECEMBER 31, ----------------------------------- 1997(1) 1996 1995 ------- ------ ------ Quarter ended: December 31.......... 12.52% 12.19% 11.05% September 30......... 12.75 11.53 11.32 June 30.............. 10.94 12.00 8.40 March 31............. 8.97 11.83 8.50 ------- ------ ------ Annual average........ 11.30% 11.89% 9.82% ======= ====== ====== _________________ (1) These prepayment rates exclude prepayment experience for mortgage servicing rights subserviced for the Company by others of $700 million, $1.1 billion, $610 million and $1.3 billion for the quarters ended December 31, September 30, June 30 and March 31, 1997, respectively. The Company acquires substantially all of its mortgage servicing rights in the secondary market. The secondary market for purchasing and selling mortgage servicing rights is inefficient in several respects, including the lack of a centralized exchange for conducting trading, the lack of definitive market prices and the lack of conformity in modeling assumptions. The industry expertise of United Financial and Matrix Financial allows the Company to capitalize upon these inefficiencies when acquiring mortgage servicing rights. Prior to completing any such acquisition, the Company analyzes a wide range of characteristics of each portfolio considered for purchase. This analysis includes projecting revenues and expenses and reviewing geographic distribution, interest rate distribution, loan-to-value ratios, outstanding balances, delinquency history and other pertinent statistics. Due diligence is performed either by Matrix Financial employees or a designated independent contractor on a representative sample of the mortgages involved. The purchase price is based on the present value of the expected future cash flow, calculated by using a discount rate and loan prepayment assumptions that management considers to be appropriate to reflect the risk associated with the investment. SERVICING SALES. The Company periodically sells its purchased mortgage servicing portfolios and generally sells all of its originated mortgage loan servicing rights. Such sales increase revenue (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. Originated mortgage servicing rights were sold on both a bulk and flow basis on loans having an aggregate principal amount of $186.1 million and $303.3 million during the years ended December 31, 1997 and 1996, respectively. Periodically, the Company may also sell purchased mortgage servicing rights to restructure its portfolio or generate revenues. Purchased mortgage servicing rights were sold on loans having an aggregate principal amount of $1.3 billion and $646.0 million during the years ended December 31, 1997 and 1996, for net gains of $3.4 million and $3.2 million, respectively. The Company anticipates that it will continue to adhere to its policy of selling substantially all of its originated mortgage servicing rights. The Company also may sell purchased mortgage servicing rights. Management intends to base decisions regarding future mortgage servicing sales upon the Company's cash requirements, purchasing opportunities, capital needs, earnings and the market price for mortgage servicing rights. During a quarter in which a sale occurs, reported income will tend to be greater than if such sale had not occurred 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, the Company, in accordance with industry standards, makes certain representations and warranties to purchasers of mortgage servicing rights. If a loan defaults when there has been a breach of representations or warranties and the Company has no third- party recourse, the Company may become liable for the unpaid principal and interest on defaulted loans. In such a case, the Company may be required to repurchase the mortgage loan and bear any subsequent loss on the loan. In connection with any purchases by the Company of mortgage servicing rights, the Company also is exposed to liability to the extent that an originator or seller of the servicing rights is unable to honor its representations and warranties. Historically, the Company has not incurred material losses due to breaches of representations and warranties, and the Company does not anticipate any future material losses due to breaches of representations and warranties; however, there can be no assurance that the Company will not experience such losses. 9 HEDGING OF SERVICING RIGHTS. Ownership of mortgage servicing rights exposes the Company to impairment of its investment in certain interest rate environments. As previously discussed, the 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, an impairment in the associated basis in the mortgage servicing rights may occur. To mitigate this risk of impairment due to declining interest rates, the Company initiated a hedging strategy during 1997 which is managed by UCM. The Company analyzed its servicing portfolio for potential segments more susceptible to interest-rate risk. Based on the Company's analysis, which focused on higher rate, higher balance, less seasoned loans in the servicing portfolio, the Company hedged a segment of its portfolio. As of December 31, 1997, the Company had identified and hedged $306 million of its servicing portfolio using a program of exchange- traded futures and options. The hedging program qualifies for hedge accounting treatment based on a high degree of statistical correlation and current accounting regulation. PURCHASE AND SALE OF BULK LOAN PORTFOLIOS LOAN PURCHASES. In addition to its traditional mortgage loan origination and servicing-related activities, the Company traditionally makes bulk purchases in the secondary market of residential mortgage loans through Matrix Bank. The Company believes that its structure provides advantages over its competitors in the purchase of bulk mortgage loan packages. United Financial, through its networking within the mortgage banking industry, is able to refer to Matrix Bank mortgage banking companies that are interested in selling mortgage loan portfolios. The direct contacts reduce the number of portfolios that must be purchased through competitive bid situations, thereby reducing the cost associated with the acquisition of bulk mortgage loan portfolios. Because the Company services mortgage loans for more than 200 private investors, including banks, savings associations and insurance companies, it is presented with opportunities to purchase the underlying mortgages. In many cases, the mortgage loans increase in value solely due to the increased liquidity provided by uniting ownership of the mortgage servicing rights with the underlying mortgage loans. As servicer, Matrix Financial possesses information about the quality and performance history related to each of these loans, and, in many cases, the Company acts as custodian for the legal and credit documents on the underlying loans. With such information available, the Company is in a position to negotiate advantageous pricing on loans, which provides the Company with an opportunity to resell the mortgage loans at a higher price (an "arbitrage" opportunity). Controlling ownership of the mortgage servicing and the underlying mortgage loan provides the Company maximum arbitrage opportunity in a sale. During the years ended December 31, 1997 and 1996, the Company made bulk purchases of approximately $493.7 million and $159.0 million in mortgage loans, respectively. TYPES OF LOANS PURCHASED. The Company reviews many loan portfolios for prospective acquisition. The Company 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. The purchased loan portfolios typically include both fixed and adjustable rate mortgage loans. Mortgage loan portfolios are purchased from various sellers who have either originated the loans or, more typically, acquired the loan portfolios in bulk purchases. The Company considers several factors prior to a purchase. Among others, the Company 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 the Company and the product mix in its existing mortgage loan portfolio. In some cases, the mortgage loan portfolios that the Company acquires are purchased at a discount to par. Some of the loans in these portfolios are considered performing loans that have had payment problems in the past or have had document deficiencies. These types of portfolios afford the Company with an arbitrage opportunity if the purchase discount on such 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 the Company prior to reselling the loans. The Company 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, each loan package evaluated is priced based on the specific underlying loan characteristics. DUE DILIGENCE. The Company performs comprehensive 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 10 portfolio and are typically performed by Company employees, but occasionally are outsourced to third-party contractors. The underwriter takes into account many factors 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 situated, the loan-to-value ratios on the underlying loans, the payment histories of the borrowers and other pertinent statistics. In addition, the underwriter attempts to verify that each sample loan conforms to the standards for loan documentation set by FNMA and FHLMC and, in cases where a significant portion of the sample loans contain non-conforming documentation, the Company assesses the additional risk involved in purchasing such loans. This process helps the Company determine whether the mortgage loan portfolio meets the Company's investment criteria and, if it does, the range of pricing that the Company feels is appropriate. LOAN SALES. A majority of the residential mortgage loans in the Company's loan portfolio are classified as held for sale. The Company continually monitors the secondary market for purchases and sales of mortgage loan portfolios and typically undertakes a sale of a particular loan portfolio held by the Company in an attempt to "match" an anticipated bulk purchase of a particular mortgage loan portfolio or generate current period earnings and cash flow. To the extent that the Company is unsuccessful in matching its purchases and sales of mortgage loans, the Company may have excess capital at Matrix Bank, resulting in less than optimum leverage and capital ratios. During the years ended December 31, 1997 and 1996, the Company made bulk sales of approximately $198.3 million and $79.0 million in loans, for gains on sale of bulk mortgage loans of $2.7 million and $3.4 million, respectively. RESIDENTIAL MORTGAGE LOAN ORIGINATION The Company originates residential mortgage loans on both a wholesale and retail basis through Matrix Financial and Matrix Bank. For the years ended December 31, 1997 and 1996, Matrix Financial originated a total of $403.0 million and $583.3 million in residential mortgage loans, respectively. 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 that 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, 1997, Matrix Financial had approved relationships with approximately 400 mortgage loan brokers. From Matrix Financial's offices in Atlanta, Denver, Las Vegas and Phoenix, the sales staff solicits mortgage loan brokers throughout the Southeastern and Rocky Mountain areas of the United States for mortgage loans that meet Matrix Financial's criteria. Mortgage loans submitted by brokers are funded after being underwritten by Matrix Financial. Mortgage loan brokers act as intermediaries between borrowers and Matrix Financial in arranging mortgage loans. Matrix Financial, as an approved FNMA, FHLMC and GNMA seller/servicer, provides such 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. In June 1996, the Company implemented a program to supplement its product offerings made through its wholesale loan origination network by adding products tailored to borrowers who are unable or unwilling to obtain mortgage financing from conventional mortgage sources. The borrowers who need this type of loan product often have impaired or unsubstantiated credit histories and/or unverifiable income and require or seek a high degree of personalized services and swift response to their loan applications. As a result, these borrowers generally are not averse to paying higher interest rates for this loan product type, as compared to the interest rates charged by conventional lending sources. The Company has established classifications with respect to the credit profiles of these borrowers. The classifications range from A- through D depending upon a number of factors, including the borrower's credit history and employment status. During 1997, Matrix Financial originated $48.3 million of A- through D credit residential mortgage loans, all of which were sold to unaffiliated third- party investors on a non-recourse basis. RETAIL ORIGINATIONS. Matrix Bank originates residential, commercial and consumer loans on a retail basis through its branches in Las Cruces, New Mexico and Sun City, Arizona. In early 1997, Matrix Bank opened a lending office in Evergreen, Colorado. This location originates primarily residential construction loans and commercial loans in the local market place. The Company anticipates that the construction loans funded through the Evergreen office will be converted to permanent mortgage loans funded through Matrix Bank. The retail loans originated by Matrix Bank consist of a broad range of residential loans (at both fixed and adjustable rates), consumer loans and commercial real estate loans. 11 In June 1997, the Company established a telemarketing call center in Denver for the purpose of soliciting first and second mortgage loan products on a retail basis. The call center is managed by a former senior executive of a nationally-recognized mortgage banker that relocated from outside of the Denver area. The initial focus of the call center has been the origination of second mortgages, but it also has the capability to originate first mortgage loans. The call center has and will solicit the borrowers in Matrix Financial's servicing portfolio for loan products, as well as other third-party customers. Generally, the origination of second mortgages requires Matrix Financial to obtain consumer lending licenses in each state in which it originates. As of December 31, 1997, Matrix Financial was licensed in 30 states. Loans originated out of the call center are currently sold to third-party investors. QUALITY CONTROL. The Company has a loan quality control process designed to ensure sound lending practices and compliance with FNMA, FHLMC and applicable private investor guidelines. Prior to funding any wholesale or retail loan, the Company performs a pre-funding quality control audit that consists of the verification of a borrower's credit and employment and utilizes a detailed checklist. Subsequent to funding, the Company on a monthly basis selects 10% of all closed loans for a detailed audit conducted by its 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 senior management of the Company to determine trends and additional training needs. All resolvable issues are addressed and cured by the Company. Any loans that fail to meet applicable investment criteria of an investor are reported to such investor, which could result in a requirement by the investor for the Company to repurchase the loan. The Company also performs a quality control audit on all early payment defaults, first payment defaults and 60-day delinquent loans; the findings are reported to the appropriate investor and/or senior management. SALE OF LOAN ORIGINATIONS. The Company generally sells the residential mortgage loans that it originates. Under ongoing programs established with FNMA and FHLMC, conforming conventional loans may be sold on a cash basis or pooled by the Company and exchanged for securities guaranteed by FNMA or FHLMC. These securities are then sold by the Company to national or regional broker/dealers. Mortgage loans sold to FNMA or FHLMC are sold on a nonrecourse basis so that foreclosure losses are generally borne by FNMA or FHLMC and not by the Company. The Company also sells nonconforming residential mortgage loans on a nonrecourse basis to other secondary market investors. These loans are typically first lien mortgage loans that do not meet all of the agencies' underwriting guidelines, and are originated instead for other institutional investors with whom the Company has previously negotiated purchase commitments, and for which the Company occasionally pays a fee. The Company sells residential mortgage loans on a servicing-retained or servicing-released basis. Certain purchasers of mortgage loans require that the loans be sold to them servicing-released. In all other cases the decision is left to the Company. Generally, the Company sells conforming loans on a servicing-retained basis and nonconforming loans on a servicing-released basis. See "--Residential Loan Servicing Activities." In connection with the Company's residential mortgage loan originations and sales, the Company makes customary representations and warranties, similar in nature and scope to those provided in connection with sales of mortgage servicing rights. To date, they have not resulted in any significant repurchases of residential mortgage loans by the Company or any pending or threatened claims by the purchasers against the Company. However, there can be no assurance 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 the Company. Gains or losses result primarily from two factors. First, the Company may make a loan to a borrower at a price that is higher or lower than it would receive if it immediately sold the loan in the secondary market. These price differences occur primarily as a result of competitive pricing conditions in the primary loan origination market. Second, gains or losses may result from changes in interest rates that result in changes in the market value of the mortgage loans from the time that the price commitment is given to the borrower until the time that the mortgage loan is sold to the investor. In order to hedge against the interest rate risk resulting from these timing differences, the Company historically has committed to sell all closed originated mortgage loans held for sale and a portion of the mortgage loans that are not yet closed but for which the interest rate has been established ("pipeline loans"). The Company adjusts its net commitment position daily either by entering into new commitments to sell or by buying back commitments to sell depending upon its projection of the portion of the pipeline loans that it expects 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 12 upon the effectiveness of the Company's use of forward commitments and subsequent profitability. At December 31, 1997, the Company had approximately $72.8 million in pipeline and funded loans offset with mandatory forward commitments of approximately $45.6 million and non-mandatory forward commitments of approximately $9.1 million. The inherent value of the forward commitments is considered in the determination of the lower of cost or market in valuing the Company's pipeline and funded loans at any given time. For a discussion of secondary marketing losses incurred by the Company during 1996, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Comparison of Results of Operations for the Years Ended December 31, 1997 and 1996--Loan Origination." REAL ESTATE MANAGEMENT AND DISPOSITION SERVICES USS provides real estate management and disposition services to customers across the United States. In addition to the unaffiliated clients currently served by USS, many of whom are also clients of United Financial, Matrix Financial uses USS exclusively in handling the disposition of its foreclosed real estate. Having USS provide this service as opposed to Matrix Financial transforms the disposition process into a revenue generator for the Company, since USS typically collects a referral fee of 1% of the value of the foreclosed real estate from the real estate broker involved in the sale transaction. Because USS typically collects its fee from the real estate broker, USS is able to provide this disposition service on an outsourced basis and at no additional cost to the mortgage loan servicer. USS is able to pass the cost of the disposition on to the real estate broker because of the volume it generates. In addition, USS provides limited collateral valuation opinions to clients who are interested in assessing the value of the underlying collateral on non-performing mortgage loans, as well as to clients such as Matrix Bank and other third-party mortgage loan originators and buyers interested in evaluating potential bulk purchases of mortgage loans. SAVINGS BANK ACTIVITIES With branches in Las Cruces, New Mexico and Sun City, Arizona, Matrix Bank serves its local communities by providing a broad range of personal and business depository services, offering residential and consumer loans and providing commercial real estate loans. In January 1997, Matrix Bank established a loan production office in Evergreen, Colorado, which primarily originates residential real estate construction loans and commercial loans in the Colorado market. 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." SELF-DIRECTED TRUST ACTIVITIES Sterling Trust provides administrative services for self-directed individual retirement accounts, qualified business retirement plans, personal custodial accounts and a variety of corporate trust and escrow arrangements. Sterling Trust actively markets its services on a nationwide basis to the financial services industry, specifically broker/dealers, registered representatives, insurance agents, tax professionals, financial planners and advisors and investment product sponsors. The advantage Sterling Trust offers to these financial service professionals is the ability to hold a wide-array of assets, including all types of public offerings as well as non-standard assets such as real estate, individually-negotiated debt instruments and private offerings of securities. Sterling Trust retains no discretion with respect to the investment of trust assets, and executes no investment transaction until so instructed by the client or the client's designated representative. Sterling Trust's self-directed IRAs offer the client freedom of choice and the convenience of consolidation. Sterling Trust handles all of the maintenance and administrative duties needed to maintain the tax-deferred status of IRA accounts. All accounts are 100% self-directed and Sterling Trust offers no investment advice or investment products. In the qualified business retirement plan arena, Sterling Trust offers a combination of investment flexibility along with record keeping services on 401(k) plans, profit sharing plans, money purchase pension plans, and other types of defined contribution plans, as well as defined benefit plans. In addition, for employers who desire the handling of investment transactions for the qualified plan but don't require Sterling Trust's full services, record keeping only services are available as an option. Non-qualified custodial services are also available which offer the same flexibility and reporting services as are available for retirement plans. Sterling Trust offers the service of monitoring and tracking all investments within client's portfolios. 13 Sterling Trust also provides a full range of corporate trust and escrow services to investment product sponsors. In general, Sterling Trust will consider serving as administrative trustee on various types of documents, as long as Sterling Trust has no discretion with regard to the investment of assets. Typical administrative services include holding of trust assets, periodic reporting on investment activity, paying agent services, and issuing and maintaining investor records. At December 31, 1997, Sterling Trust had assets under administration of over $1.4 billion. Historically, approximately 6% to 8% of the assets under administration are maintained in interest-bearing accounts. These accounts, which approximated $80.0 million, were transferred to Matrix Bank in February 1997 following the Company's acquisition of Vintage. See "General--The Subsidiaries--Matrix Bank". COMPETITION The industries in which the Company operates are highly competitive. The Company competes for the acquisition of mortgage loan servicing rights and bulk loan portfolios mainly with mortgage companies, savings associations, commercial banks and other institutional investors. The Company believes that it has competed successfully for the acquisition of mortgage loan servicing rights and bulk loan portfolios by relying on the advantages provided by its unique corporate structure and the secondary marketing expertise of the employees in each Subsidiary. Competition in mortgage loan and mortgage servicing rights brokerage and consulting arises mainly from other mortgage banking consulting firms, national and regional investment banking companies and accounting firms. Management believes that the distinction among market participants is based primarily on customer service. United Financial competes for its brokerage and consulting activities by recruiting qualified and experienced sales people, by developing innovative sales techniques, by providing financing opportunities to its customers through its affiliation with Matrix Bank and by seeking to provide a higher level of service than is furnished by its competitors. Competition in originating mortgage loans arises mainly from other mortgage companies, savings associations and commercial banks. The distinction among market participants is based primarily on price and, to a lesser extent, the quality of customer service and name recognition. Aggressive pricing policies of the Company's competitors, especially during a declining period of mortgage loan originations, could in the future result in a decrease in the Company's mortgage loan origination volume and/or a decrease in the profitability of the Company's loan originations, thereby reducing the Company's revenues and net income. The Company competes 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 competitors. However, the Company does not have a significant market share of the lending markets in which it conducts operations. Management believes that Matrix Bank's most direct competition for deposits comes from local financial institutions. The distinction among market participants is 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, additional significant competition for deposits may be expected 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. Sterling Trust faces considerable competition in all of the services and products that it offers. The main competition comes from other self-directed trust companies, broker/dealers and nationally recognized institutions. Sterling Trust also faces competition from other trust companies and trust divisions of financial institutions. Sterling Trust's niche has been, and will continue to be, providing high quality customer service and servicing niche retirement products. In an effort to increase market share, Sterling Trust will endeavor to provide superior service, expand its marketing efforts, provide competitive pricing and continue to diversify its product mix. UCM faces competition from in-house risk management departments and Wall Street derivative products. UCM believes that distinction among market participants is based on name recognition, price and customer service and satisfaction. UCM competes by offering a unique hedging product that tends to be of lower cost than the products offered by competitors. 14 EMPLOYEES At December 31, 1997, the Company had 379 employees. Management believes that its relations with its employees are good. Neither Matrix Capital nor any of the Subsidiaries is a party to any collective bargaining agreement. REGULATION AND SUPERVISION Set forth below is a brief description of various laws and regulations affecting the operations of the Company. The description of laws and regulations contained herein 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 the business, operations and prospects of the Company. MATRIX CAPITAL. The Company is a unitary thrift holding company within the meaning of the Home Owners' Loan Act of 1933, as amended ("HOLA"). As such, Matrix Capital has registered with the OTS and is subject to OTS regulation, examination, supervision and reporting requirements. In addition, the OTS has enforcement authority over Matrix Capital and its non-savings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to Matrix Bank. In addition, Matrix Bank must notify the OTS at least 30 days before making any distribution to Matrix Capital. As a unitary thrift holding company, Matrix Capital generally is not restricted under existing laws as to the types of business activities in which it may engage, provided that Matrix Bank continues to be a "qualified thrift lender" ("QTL") under HOLA. Upon any nonsupervisory acquisition by Matrix Capital of another savings association or savings bank that meets the QTL test and is deemed to be a savings institution by OTS, Matrix Capital would become a multiple thrift holding company (if the acquired institution is held as a separate subsidiary) and would be subject to extensive limitations on the types of business activities in which it could engage. HOLA limits the activities of a multiple thrift 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, as amended (the "BHC Act"), subject to the prior approval of the OTS, and activities authorized by OTS regulation. Legislation has been proposed that would (i) permit banking, insurance and securities industries to merge, (ii) subject unitary thrift holding companies such as Matrix Capital to regulation by the Board of Governors of the Federal Reserve ("FRB"), rather than the OTS and (iii) limit powers of thrifts. Such limitations would include a new minimum requirement that 10% of a thrift's assets be in home lending and a limitation on interstate branching by thrifts. The proposed legislation would permit financial services holding companies to own commercial businesses, subject to a 5% limitation on gross revenues from such businesses and subject to a higher 15% limit for grandfathered financial services companies, such as Matrix Capital, that already engage in both banking and commercial businesses. The proposed legislation does not yet define which financial products would be overseen by banking regulators and which would be overseen by other regulators. Under the proposed legislation, the Bank Insurance Fund ("BIF") and Savings Association Insurance Fund ("SAIF") would be merged. If the proposed legislation becomes law, supervision by the FRB and any imposition of other regulatory scrutiny over Matrix Capital's commercial businesses could, at least initially, result in additional personnel and other costs associated with compliance with such new regulation and supervision. If the proposed legislation becomes law, the 10% minimum home lending asset requirement should not pose any compliance difficulty for Matrix Bank, which already has significantly in excess of 10% of its assets in home lending. However, the limitation on interstate branching of thrifts, if included in final law, would limit the multistate operations of Matrix Bank, unless grandfathered. Even if the Arizona and Colorado operations were grandfathered, Matrix Bank would experience a competitive disadvantage, given the broad interstate branching powers available to commercial banks in most states. The 15% gross revenue limitation on grandfathered commercial business in the proposed legislation, if final, could be problematic for Matrix Capital. Presently 58% of Matrix Capital's gross revenues are derived from its nonbanking enterprises. In addition, such limit would prevent expansion of such businesses. MORTGAGE BANKING OPERATIONS. The rules and regulations applicable to the Company's mortgage banking operations establish underwriting guidelines that, among other things, include anti-discrimination provisions, require provisions for 15 inspections, appraisals and credit reports on prospective borrowers and fix maximum loan amounts. Moreover, lenders, such as the Company, are required annually to submit to the HUD, FNMA and FHLMC audited financial statements, and each regulatory entity maintains its own financial guidelines for determining net worth and eligibility requirements. The Company's affairs are also subject to examination by HUD, FNMA and FHLMC at any time to assure compliance with the applicable regulations, policies and procedures. Mortgage loan origination activities are subject to, among others, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act of 1974, as amended, and the regulations promulgated thereunder that prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs. Additionally, there are various state and local laws and regulations affecting the Company's operations. The Company is licensed in those states in which it does business requiring such a license where the failure to be licensed would have a material adverse effect on the Company, its business, or its assets. Mortgage origination operations also may be subject to state usury statutes. FEDERAL SAVINGS BANK OPERATIONS. Matrix Bank is subject to extensive regulation, examination and supervision by the OTS, as its chartering authority and primary regulator, and by the FDIC, which insures its deposits up to applicable limits. Such regulation and supervision (i) establishes a comprehensive framework of activities in which Matrix Bank can engage (ii) limits the ability of Matrix Bank to extend credit to any given borrower, (iii) imposes specified liquidity requirements, (iv) specifically restricts the transactions in which Matrix Bank may engage with its affiliates, (v) requires Matrix Bank to meet a QTL test that imposes a level of portfolio assets in which Matrix Bank must invest (primarily residential mortgages and related investments), (vi) places limitations on capital distributions by savings associations such as Matrix Bank, including cash dividends, (vii) imposes assessments to the OTS to fund its operations, (viii) establishes a continuing and affirmative obligation, consistent with Matrix Bank's safe and sound operation, to help meet the credit needs of the entire community, including low and moderate income neighborhoods, (ix) requires Matrix Bank to maintain certain noninterest bearing reserves against its transaction accounts, (x) establishes various capital categories resulting in various levels of regulatory scrutiny applied to the institutions in a particular category and (xi) establishes standards for safety and soundness. 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 such regulations, whether by the OTS, the FDIC or the Congress could have a material impact on Matrix Bank and its operations. Insurance of Accounts and Regulation by the FDIC. Matrix Bank is a member of the SAIF, which is administered by the FDIC. Savings deposits are insured up to $100,000 per insured member (as defined by law and regulation) by the FDIC. Such insurance is backed by the full faith and credit of the United States. As insurer, the FDIC imposes deposit insurance assessments and is authorized to conduct examinations of and to require reporting by the FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the FDIC. The FDIC also may initiate enforcement actions against savings associations and may terminate the deposit insurance if it determines that the institution has engaged or is engaging in unsafe or unsound practices, or is in an unsafe or unsound condition. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") required the FDIC to implement a risk-based deposit insurance assessment system. Pursuant to this requirement, the FDIC has adopted a risk-based assessment system under which all SAIF insured depository associations are placed into one of nine categories and assessed based upon their level of capital and supervisory evaluation. Under this system, associations classified as well- capitalized and considered healthy pay the lowest assessment while associations that are less than adequately capitalized and considered of substantial supervisory concern pay the highest assessment. In addition, under FDICIA, the FDIC may impose special assessments on SAIF members to repay amounts borrowed from the United States Treasury or for any other reason deemed necessary by the FDIC. The FDIC may increase assessment rates, on a semiannual basis, if it determines that the reserve ratio of the SAIF will be less than the designated reserve ratio of 1.25% of SAIF insured deposits. In setting these increased assessments, the FDIC must seek to restore the reserve ratio to that designated reserve level, or such higher reserve ratio as established by the FDIC. Matrix Bank's current assessment is .063% of deposits, which is the lowest rate. By contrast, financial institutions that are members of the BIF, which has higher reserves, experienced lower deposit insurance assessments. The disparity in deposit insurance assessments between SAIF and BIF members was exacerbated by the statutory requirement that both the SAIF and the BIF funds be recapitalized to a 1.25% reserved deposits ratio and that a portion of most thrift's deposit insurance assessments be used to service bonds issued by the Financial Corporation 16 ("FICO"). BIF reached the required reserve ratio in 1995. As a result, financial institutions that have deposits insured by the SAIF were subject to a potential competitive disadvantage as compared to BIF members. On September 30, 1996, the President signed legislation that provides for BIF members to service a growing portion of the FICO bond payments. Until January 1, 2000, annual assessments of .013% of BIF deposits and .064% of SAIF deposits will service the annual payments due on the FICO bonds. Accordingly, Matrix Bank's portion of the payment on the FICO bonds is .064% of the deposits. The legislation provided for subsequent full pro rata sharing of FICO bond payments by BIF and SAIF institutions. The legislation called for a merger of the SAIF and BIF as of January 1, 1999, but only if the thrift charter has been eliminated. The financing corporations created by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended ("FIRREA") 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 SAIF assessments and are paid in lieu thereof. Brokered Deposits. Under the FDIC regulations governing brokered deposits, well-capitalized associations are not subject to brokered deposit limitations, while adequately capitalized associations are subject to certain brokered deposit limitations and undercapitalized associations may not accept brokered deposits. Matrix Bank is considered to be a well-capitalized association. Although Matrix Bank historically has not accepted brokered deposits, it is anticipated that it will in the future to allow for the desired growth of Matrix Bank. MATRIX BANK'S CAPITAL RATIOS. The following table indicates Matrix Bank's regulatory capital ratios at December 31, 1997: AS OF DECEMBER 31, 1997 ---------------------- CORE RISK-BASED CAPITAL CAPITAL -------- ---------- (DOLLARS IN THOUSANDS) Shareholder's equity/GAAP capital...................... $ 27,958 $ 27,958 Additional capital items: General valuation allowances......................... -- 1,756 -------- ---------- Regulatory capital as reported to the OTS.............. 27,958 29,714 Minimum capital requirement as reported to the OTS..... 14,623 21,969 -------- ---------- Regulatory capital--excess............................. $ 13,335 $ 7,745 ======== ========== Capital ratios........................................... 5.74% 10.82% Well-capitalized requirement............................. 5.00% 10.00% FEDERAL HOME LOAN BANK SYSTEM. Matrix Bank is a member of the Federal Home Loan Bank ("FHLB") system, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member associations and administers the home financing credit function of savings associations. FHLB 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 FHLB funds its operations primarily from proceeds derived from the sale of consolidated obligations of the FHLB system. Matrix Bank, as a member of the FHLB system, must acquire and hold shares of capital stock in its regional FHLB in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater. Matrix Bank was in compliance with this requirement with an investment in FHLB stock at December 31, 1997 of $8.7 million. REGULATION OF STERLING TRUST. Sterling Trust provides custodial services and directed (nondiscretionary) 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 (the "TDB"). Under applicable law, a Texas trust company, such as Sterling Trust, is subject to virtually all provisions of the Texas Finance Code (the "TFC") 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 not less than $1 million, such as Sterling Trust, has the power to (i) purchase, sell, discount and negotiate notes, drafts, checks and other evidences of indebtedness, (ii) purchase and sell securities, (iii) issue subordinated debentures and capital notes 17 with the written consent of the Texas Banking Commissioner (the "Commissioner") and (iv) exercise powers incidental to the enumerated powers described in the TFC. A Texas trust company, such as Sterling Trust, is generally prohibited from accepting demand or time deposits if not insured by the FDIC. Limitation on Capital Distributions. The TFC prohibits a Texas trust company from reducing its outstanding capital and surplus through redemption or other capital distribution without the prior written approval of the Commissioner. The TFC does not prohibit the declaration and payment of pro rata share dividends consistent with the Texas Business Corporation Act. Investments. A Texas trust company is generally obligated to maintain an amount equal to 40% of its capital and surplus in investments that are readily marketable and can be converted into cash within four business days. Subject to the requirements set forth in the preceding sentence, a Texas trust company is permitted to invest its corporate assets in any investment permitted by law, provided that without the prior written consent of the Commissioner or otherwise provided by the TFC, a Texas trust company may not invest an amount in excess of 15% of its capital and certified surplus in the securities of a single issuer. Branching. The TFC permits a Texas trust company to establish and maintain branch offices at any location on prior written approval of the Commissioner. The TDB currently does not permit Texas trust companies to establish branches outside the state of Texas. Transactions with Related Parties. The TFC 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 such transaction is approved by a disinterested majority of the board of directors or the prior written approval of the Commissioner. Enforcement. Under applicable provisions of the TFC, the 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 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 Commissioner has the authority to assess civil penalties of up to $500 per day for violations of a cease and desist, removal or prohibition order. Capital Requirements. Applicable law requires a Texas trust company to have and maintain capital of at least $1 million. The Commissioner may require additional capital of a Texas trust company if the Commissioner determines it necessary to protect the safety and soundness of such company. Sterling Trust is in compliance with all capital requirements under Texas law. REGULATION OF SUB-PRIME AUTOMOBILE LENDING. On December 31, 1996, Matrix Bank sold the assets of its subsidiary engaged in sub-prime automobile lending to a third-party buyer. However, during the time that Matrix Bank owned such entity, it purchased approximately $18.5 million of automobile retail installment contracts and sold them into the secondary market, subject to certain recourse provisions. In conjunction with the contractual obligations associated with those sales, Matrix Bank repurchased approximately $4.0 million of installment loans and repossessed automobiles previously sold to outside investors. The balance of the loans and automobiles repurchased in 1996 and 1997 were either disposed of or sold to a third-party investor in December 1997. Matrix Bank bears the risk of additional repurchases subject to certain terms and conditions of the various sale agreements that are primarily restricted to fraud. The automobile lending activities are subject to various federal and state laws and regulations. Consumer lending laws generally require licensing of the lender and purchasers of loans and adequate disclosure of loan terms and impose limitations on the terms of consumer loans and on collection policies and creditor remedies. Federal consumer credit statutes primarily require disclosures of credit terms in consumer finance transactions. In general, the Company's sub-prime automobile lending activities were conducted under licenses issued by individual states and were also subject to the provisions of the federal Consumer Credit Protection Act and its related regulations. Due to the consumer-oriented nature of the industry and uncertainties with respect to the application of various laws and regulations in certain circumstances, industry participants are named from time to time as defendants in litigation involving alleged violations of federal and state consumer lending or other similar laws and regulations. A significant judgment against the Company in connection with any litigation could have a material adverse affect on the Company's financial condition and results of operations. In addition, if it were determined that a material number of loans purchased 18 by Sterling Finance involved violations of applicable lending laws or fraudulent actions by the automobile dealers, the Company's financial condition and results of operations could be materially adversely affected. RECENT DEVELOPMENTS - ------------------- On February 19, 1998, the Company announced that it had entered into a letter of intent to acquire The Leader Mortgage Company (The Leader), a privately-held, Ohio-based mortgage banking concern. The letter of intent provides for the issuance of $27,500,000 of common stock of the Company to the shareholders of The Leader and $4,500,000 in cash related to noncompetition agreements. The Company intends to account for the acquisition as a pooling of interests under generally accepted principles. The letter of intent is subject to a number of conditions, including the successful negotiation and execution of a definitive agreement and shareholders' approval, and there can be no assurance that this acquisition will be consummated. On March 25, 1998, the Company announced that it had signed a definitive agreement to merge the Company with a newly formed subsidiary of Fidelity National Financial, Inc. (Fidelity), a leading provider of title insurance and real estate services. It is intended that the merger be treated as a pooling of interests under generally accepted accounting principles. The Company's shares will be converted into the right to receive .80 shares of Fidelity common stock without interest, together with cash in lieu of any fractional share. The conversion to Fidelity shares is based on an exchange ratio, which has been collared between $28.75 and $35.00 per Fidelity share. The merger is subject to due diligence procedures and both regulatory and shareholder approvals. ITEM 2. PROPERTIES ---------- The executive and administrative offices of the Company, United Financial, USS and UCM are located at 1380 Lawrence Street, Suite 1410, Denver, Colorado 80204. The lease on these premises extends through December 2002 and the current annual rent approximates $174,000. The Company leases an additional 8,100 square feet in downtown Denver for a monthly rental payment of approximately $8,100, under terms that extend through July 2001. The Company also owns a building in Phoenix, which houses the majority of Matrix Financial's operations. This building was purchased by the Company in 1994 and is subject to third-party mortgage indebtedness. See Note 8 to the Consolidated Financial Statements included elsewhere herein. The Company utilizes approximately 18,000 of the 30,000 square feet in this building, and the balance is leased to an unaffiliated company at current market rates. The Company also leases five smaller office facilities in Atlanta, Denver, Las Vegas, Scottsdale and Ontario, California, most of which are currently used by Matrix Financial to conduct its wholesale loan origination activities. Matrix Bank owns an approximately 30,000 square foot building in Las Cruces, New Mexico. Of this 30,000 square feet, approximately 11,800 square feet serve as the headquarters for Matrix Bank. Substantially all of the remaining space is rented to unaffiliated third-party tenants at market rates. Matrix Bank also owns an 1,800 square foot detached branch in Las Cruces and an approximately 3,000 square foot branch in Sun City, Arizona. Additionally, Matrix Bank's loan origination branch in Evergreen, Colorado leases approximately 1,600 square feet for a monthly rental payment of approximately $2,000. Sterling Trust occupies approximately 11,300 square feet in Waco, Texas, under a lease agreement that is in place until June 30, 2001, at a monthly rental payment of $13,553. The lease agreement provides for renewal options and allocation of certain expenses the lessee would reimburse over a specified amount during the life of the lease. Two officers of Vintage and an executive officer of the Company own in the aggregate approximately 29% of the equity interests in the lessor. First Matrix is located in Arlington, Texas and operates in a 1,446 square foot office suite. The current lease requires a monthly payment of $1,506 and matures on April 30, 1999. UCM also leases approximately 1,500 square feet in St. Louis, Missouri for a monthly rental payment of $2,500. The St. Louis lease extends through October 1998 and is renewable. The Company believes that all of its present facilities are adequate for its current needs and that additional space is available for future expansion upon acceptable terms. ITEM 3. LEGAL PROCEEDINGS ----------------- United Financial is a defendant is a lawsuit styled Douglas County Bank & Trust Co. v. United Financial, Inc. that was commenced on or about May 23, 1997 in the United States District Court for the District of Nebraska. In the action, the plaintiff-buyer alleges that United Financial, as broker for the seller, made false representations regarding the GNMA certification of certain mortgage pools, the servicing rights of which were offered for sale in a written offering. The plaintiff further alleges that it relied on United Financial's representations in purchasing the servicing rights from the seller. The plaintiff seeks recovery of: (a) the deposit paid to the seller in connection with the purchase thereof in the amount of $147,000; (b) $1.4 million that the plaintiff claims it paid to GNMA to settle a dispute regarding the certification of the mortgage pools; and (c) approximately $1.4 million in lost profits. The Company believes it has defenses to this lawsuit; however, no assurances can be given that an adverse judgment will not be rendered or that such a judgment would not have a material adverse effect on the Company's consolidated financial condition, results of operations or cash flows. Matrix Financial has been named defendant in an action styled Leslie M. Rozatti v. Matrix Financial Services Corp and Wendover Funding. Plaintiff commenced this action on or about August 8, 1997. The plaintiff alleges that Matrix Financial, as subservicer for Matrix Bank, breached the terms of the underlying note and deed of trust with plaintiff and otherwise committed negligence, fraud and violations of RESPA in connection with its servicing of plaintiff's mortgage loan. Matrix Bank purchased this mortgage loan and the servicing rights from a third-party in December 1996. Plaintiff claims $126,000 in actual damages and $2,000,000 in punitive damages, in addition to interest, attorneys' fees and other costs and expenses. The Company believes that it has defenses to this lawsuit; however, no assurances can be given that an 19 adverse judgment will not be rendered or that such a judgment would not have a material adverse effect on the Company's consolidated financial condition, results of operations or cash flows. During the fourth quarter of 1997, Matrix Bank settled a case styled HLC, Inc. v. Matrix Capital Bank that was commenced on or about June 9, 1997 in the United States District Court for the Middle District of Tennessee. The plaintiff had alleged that Matrix Bank breached an agreement pursuant to which Matrix Bank would act as issuing bank in connection with a program allegedly developed by plaintiff relating to the issuance of credit cards. Plaintiff alleged that Matrix Bank failed to perform certain issuing and servicing functions in connection with the credit card accounts. In connection with the settlement, Matrix Bank paid the plaintiff $25,000 upon execution of the settlement, and is to pay plaintiff twelve monthly payments of $15,416. Matrix Bank did not admit any fault or liability in connection with the settlement. The total amount of the settlement was accrued for in the fourth quarter of 1997. The Company is involved from time to time in routine litigation incidental to its business. However, other than described above, the Company believes that it is not a party to any material pending litigation that, if decided adversely to the Company, would have a material adverse effect on the Company's consolidated financial condition, results of operations or cash flows. 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, 1997. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS --------------------------------------------------------------------- The Company's common stock, $.0001 par value ("Common Stock"), is traded on the Nasdaq National Market under the symbol "MTXC." The initial public offering of Common Stock occurred on October 18, 1996. The following table sets forth the high and low sales prices for the Common Stock on the Nasdaq National Market for the periods indicated.
Market Price ---------------- Quarter Ended: High Low -------------- ------- ------- December 31, 1997 $18.250 $13.875 September 30, 1997 16.875 13.000 June 30, 1997 14.250 10.250 March 31, 1997 15.875 11.625 December 31, 1996 (beginning October 18, 1996) $15.875 $10.000
On March 12, 1998, the closing price of the Common Stock was $16.875 per share. Also as of that date the approximate number of holders of record of the Company's Common Stock was 70. This number does not include beneficial owners who hold their shares in a depository trust in "street" name. Since its organization in June 1993, the Company has not paid any dividends on its equity, except for an aggregate of $92,000 paid in 1993 and $201,000 paid in 1996, of which $4,000 for 1993 and $201,000 for 1996 represent dividends paid by Vintage (i.e., the pooled company) prior to its acquisition by the Company. The Company expects that it will retain all available earnings generated by its operations for the development and growth of its business and does not anticipate paying any cash dividends in the foreseeable future. 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 the future earnings, capital requirements, financial condition and future prospects of the Company and such other factors the Board of Directors may deem relevant. Under the terms of the Company's 11.5% Senior Notes due 2004 (the "11.5% Senior Notes") issued in September 1997, the Senior Subordinated Notes (the "Senior Subordinated Notes") issued in August 1995 and the Company's bank stock loan issued in March 1997, the Company's ability to pay cash dividends to its shareholders is limited. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." In addition, the ability of Matrix Financial and Matrix Bank to pay dividends to the 20 Company may be restricted in certain instances, including covenants under Matrix Financial's existing warehouse facilities and certain other debt covenants of the Company. During 1997, the Company issued the following unregistered equity securities in reliance on the exemption from registration set forth in Section 4(2) of the Securities Act of 1933, as amended. In February 1997, the Company issued 779,592 shares of Common Stock to the former shareholders of Vintage in connection with the acquisition by the Company of Vintage. During 1997, prior to the filing of the registration statement on Form S-8, the Company issued options exercisable for an aggregate of (A) 55,000 shares of Common Stock to three executive officers of the Company, with exercise prices ranging from $10.375 to $14.25 per share and (B) 69,500 shares of Common Stock to non-executive employees of the Company, with exercise prices ranging from $12.00 to $17.25 per share. 21 ITEM 6. SELECTED FINANCIAL DATA ----------------------- SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION (Dollars in thousands, except per share data) The following selected financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," each of which is included elsewhere herein. In February 1997, the Company completed the acquisition of Vintage in a transaction accounted for as a pooling of interests. As a result of the pooling, the historical financial and other information of the Company has been restated to include the financial and other information of Vintage.
AS OF AND FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------- 1997 1996 1995 1994 1993(1) ---------- ---------- ---------- ----------- ---------- OPERATING DATA Net interest income before provision for loan and valuation losses.................................. $ 13,888 $ 6,059 $ 3,592 $ 4,004 $ 944 Provision for loan and valuation losses................ 874 143 401 216 15 ---------- ---------- ---------- ----------- ---------- Net interest income after provision for loan and valuation losses.................................. 13,014 5,916 3,191 3,788 929 ---------- ---------- ---------- ----------- ---------- Noninterest income: Loan administration................................... 16,007 8,827 7,749 6,926 6,427 Brokerage............................................. 3,921 4,364 4,787 4,017 2,132 Trust services........................................ 3,561 3,061 2,869 2,488 1,685 Gain on sale of loans and mortgage-backed securities........................................... 2,708 3,369 3,272 1,590 2,361 Gain on sale of mortgage servicing rights............. 3,365 3,232 1,164 684 38 Loan origination(2)................................... 4,427 1,561 2,069 1,294 221 Other................................................. 4,040 2,173 1,744 940 669 ---------- ---------- ---------- ----------- ---------- Total noninterest income............................ 38,029 26,587 23,654 17,939 13,533 Noninterest expense.................................... 37,746 26,655 20,453 16,593 12,184 ---------- ---------- ---------- ----------- ---------- Income before income taxes............................. 13,297 5,848 6,392 5,134 2,278 Income taxes........................................... 5,159 2,278 2,469 2,014 404 ---------- ---------- ---------- ----------- ---------- Net income............................................. $ 8,138 $ 3,570(3) $ 3,923 $ 3,120 $ 1,874 ========== ========== ========== =========== ========== Net income per share assuming dilution(4).............. $ 1.20 $ 0.68 $ 0.83 $ 0.69 Weighted average common shares assuming dilution....... 6,781,808 5,077,321 4,707,221 4,529,593 4,375,843 Pro forma net income(5)................................ $ 1,367 Pro forma net income per common share assuming dilution(5).................................. $ 0.31 Cash dividends(6)...................................... $ -- $ 201 $ -- $ -- $ 92 BALANCE SHEET DATA Total assets........................................... $ 606,745 $ 274,559 $ 186,313 $ 113,597 $ 96,553 Total loans (excluding allowance for loan and valuation losses)..................................... 513,128 213,400 147,608 90,068 77,034 Allowance for loan and valuation losses(7)............. 1,756 1,039 943 728 538 Nonperforming loans(8)................................. 4,990 3,903 5,538 3,314 853 Mortgage servicing rights.............................. 36,440 23,680 13,817 6,183 1,818 Foreclosed real estate(8).............................. 1,242 788 835 543 726 Deposits(9)............................................ 224,982 90,179 48,877 41,910 45,517 Custodial escrow balances.............................. 53,760 37,881 27,011 24,687 31,794 FHLB borrowings........................................ 171,943 51,250 19,000 14,600 -- Borrowed money......................................... 89,909 42,431 65,093 18,438 8,791 Total shareholders' equity............................. 40,610 32,270 10,686 6,662 3,534 OPERATING RATIOS AND OTHER SELECTED DATA Return on average assets(10)........................... 1.78% 1.69% 2.59% 3.13% 5.30% Return on average equity(10)........................... 22.71 24.30 47.62 57.06 73.26 Average equity to average assets(10)................... 7.86 6.97 5.44 5.49 7.24 Net interest margin(10)(11)............................ 3.70 3.45 2.84 4.64 4.15 Operating efficiency ratio(12)......................... 73.95 82.01 76.19 76.37 84.25 Total amount of loans purchased........................ $ 493,693 $ 159,015 $ 91,774 $ 80,048 $ 32,231 Balance of owned servicing portfolio (end of period)... $3,348,062 $2,505,036 $1,596,385 $1,041,785 $1,007,286 Trust assets under administration (end of period)...... $1,437,478 $1,162,231 $ 952,528 $ 750,186 $ 655,750 Wholesale loan origination volume...................... $ 402,984 $ 583,279 $ 388,937 $ 183,130 $ 126,200
22
AS OF AND FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------- 1997 1996 1995 1994 1993(1) ---------- ---------- ---------- ----------- ---------- Loan Performance Ratios Nonperforming loans/total loans(8).................... 0.97% 1.83% 3.75% 3.68% 1.11% Nonperforming assets/total assets(8).................. 1.03 1.89 3.42 3.40 1.64 Net loan charge-offs/average loans(10)................ 0.04 0.03 0.15 0.03 0.18 Allowance for loan and valuation losses/ total loans(7)....................................... 0.34 0.49 0.64 0.81 0.70 Allowance for loan and valuation losses/ nonperforming loans(7)............................... 35.19 26.62 17.03 21.97 63.07
__________ (1) The Company acquired all of the outstanding capital stock of Matrix Bank on September 23, 1993. The operations of Matrix Bank have been included in the consolidated operations of the Company from the date of acquisition. (2) On January 1, 1995, the Company adopted FAS 122. Since FAS 122 prohibits retroactive application, the historical accounting results for 1997, 1996 and 1995 are not directly comparable to the results for prior periods. (3) See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Comparison of Results of Operations for the Years Ended December 31, 1997 and 1996--Loan Origination Income" for a discussion of the impact on net income of a secondary marketing loss incurred in March 1996. (4) 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. (5) Prior to the formation of Matrix Capital in June 1993, Matrix Financial and United Financial had elected for certain periods to be taxed under the provisions of subchapter "s" of the code and accordingly did not pay income taxes on their respective earnings; instead the shareholders of Matrix Financial and United Financial were liable for such taxes. Pro forma net income and pro forma net income per common share assuming dilution are presented for periods in which the Company was not a taxable entity as a result of its subchapter "s" election. The pro forma net income assumes an effective tax rate of 40%. Pro forma net income per common share assuming dilution is computed by dividing pro forma net income by the weighted average common shares assuming dilution outstanding during the year. (6) $201,000 and $4,000 in 1996 and 1993, respectively, represent dividends paid by Vintage prior to its acquisition by the Company. (7) The allowance for loan and valuation losses in 1996 does not include a $600,000 liability reserve account to cover potential losses associated with sub-prime auto loans repurchased by Matrix Bank. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Nonperforming Assets." (8) 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 foreclosed real estate, and the effect of repurchasing sub-prime automobile loans. (9) Following the Company's acquisition of Vintage in February 1997, Sterling Trust moved approximately $80.0 million of deposits under administration from a third-party institution to Matrix Bank. (10) Calculations are based on average daily balances where available and monthly averages otherwise. (11) Net interest margin has been calculated by dividing net interest income before loan and valuation loss provision by average interest-earning assets. (12) The operating efficiency ratio has been calculated by dividing noninterest expense by operating income (net interest income plus noninterest income). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ----------------------------------------------------------------------- OF OPERATIONS ------------- The following management's discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the preceding "Selected Consolidated Financial and Operating Information." Additionally, the Company's Consolidated Financial Statements and the Notes thereto, as well as other data included herein, should be read and analyzed in combination with the analysis below. 23 GENERAL The Company was formed in June 1993 when the founding shareholders of Matrix Financial and United Financial, subsidiaries of the Company, exchanged all of the outstanding capital stock of those two entities for shares of the Company in a series of transactions that were each accounted for as a pooling of interests. In September 1993, the Company 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. The Company's consolidated financial results for 1993, therefore, reflect a full twelve months of operations for Matrix Financial and United Financial, and only three months of operations for Matrix Bank. The Company formed USS in June 1995 and UCM in December 1996. In February 1997, the Company acquired Vintage in a pooling of interests and, accordingly, no goodwill was recorded and the consolidated financial statements of the Company for the prior periods have been restated. The principal components of the Company's revenues consist primarily of net interest income recorded by Matrix Bank and Matrix Financial, loan administration fees generated by Matrix Financial, brokerage fees realized by United Financial, loan origination fees and gains on sales of mortgage loans and mortgage servicing rights generated by Matrix Bank and Matrix Financial and trust service fees generated by Sterling Trust. While USS and UCM have not generated material amounts of revenue during their limited operating history, management anticipates that they will make a larger contribution to the Company's revenues in the future. The Company's results of operations are influenced by changes in interest rates and the effect of these changes on the interest spreads of the Company, the volume of loan originations, mortgage loan prepayments and the value of mortgage servicing portfolios. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 NET INCOME; RETURN ON AVERAGE EQUITY. Net income increased $4.5 million, or 128.0%, to $8.1 million, or $1.20 per share (diluted) for the year ended December 31, 1997 as compared to $3.6 million, or $0.68 per share (diluted), for the year ended December 31, 1996. Return on average equity decreased to 22.7% for the year ended December 31, 1997 as compared to 24.3% for the year ended December 31, 1996. The decrease in return on average equity was due to the increase in average equity to $35.8 million for the year ended December 31, 1997 as compared to $14.7 million for the year ended December 31, 1996. The increase in average equity is primarily attributable to the Company's initial public offering during the fourth quarter of 1996, which increased equity by $18.2 million. NET INTEREST INCOME. Net interest income before provision for loan and valuation losses increased $7.8 million, or 129.2%, to $13.9 million for the year ended December 31, 1997 as compared to $6.1 million for the year ended December 31, 1996. The Company's net interest margin increased to 3.70% for the year ended December 31, 1997 as compared to 3.45 % for the year ended December 31, 1996. These increases were attributable to the following: a 118.8% increase in the Company's average loan portfolio balance to $355.8 million for the year ended December 31, 1997 from $162.6 million for the year ended December 31, 1996, and a decrease in the cost of interest-bearing liabilities to 5.66% for the year ended December 31, 1997 as compared to 6.59% for the year ended December 31, 1996. The decrease in the cost of interest-bearing liabilities was the result of trust deposits of approximately $80.0 million administered by Sterling Trust being transferred from a third-party financial institution to Matrix Bank upon completion of the Vintage acquisition. The above were offset by a 102.8% increase in average interest-bearing liabilities to $322.8 million for the year ended December 31, 1997 as compared to $159.2 million for the year ended December 31, 1996, and a decrease in the Company's yield on interest- earning assets to 8.55% from 9.43% for the years ended December 31, 1997 and 1996, respectively. The decrease in the Company's yield on interest-earning assets was attributable to the lower yield earned on the loan portfolio, which decreased to 8.74% as compared to 9.67% for the years ended December 31, 1997 and 1996, respectively. The loan portfolio yield decrease is attributable to the overall market decrease in interest rates and the acquisition of loans with less discounts by the Company. For a tabular presentation of the changes in net interest income due to changes in the volume of interest-earning assets and changes in interest rates, see "--Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes." PROVISION FOR LOAN AND VALUATION LOSSES. Provision for loan losses increased $731,000 to $874,000 for the year ended December 31, 1997 as compared to $143,000 for the year ended December 31, 1996. This increase was primarily attributable to the increase in the gross balance of loans receivable, which increased to $513.1 million at December 31, 24 1997 as compared to $213.4 million at December 31, 1996. For a discussion of the Company's allowance for loan losses as it relates to nonperforming assets, see "--Asset Quality--Nonperforming Assets." LOAN ADMINISTRATION. Loan administration income represents service fees and other income earned from servicing loans for various investors. Loan administration income includes service fees that are based on a contractual percentage of the outstanding principal balance plus late fees and other ancillary charges. Loan administration fees increased $7.2 million, or 81.3%, to $16.0 million for the year ended December 31, 1997 as compared to $8.8 million for the year ended December 31, 1996. Loan administration fees are affected by factors that include the size of the Company's residential mortgage loan servicing portfolio, the servicing fee, the timing of payment collections and the amount of ancillary fees received. This increase was primarily attributable to the increase in the outstanding principal balance underlying the Company's mortgage servicing rights portfolio at December 31, 1997 as compared to December 31, 1996. The mortgage loan servicing portfolio increased by $843.0 million, or 33.7%, to $3.3 billion at December 31, 1997 from $2.5 billion at December 31, 1996. BROKERAGE FEES. Brokerage fees decreased $443,000, or 10.2%, to $3.9 million for the year ended December 31, 1997 as compared to $4.4 million for the year ended December 31, 1996. This decrease occurred despite the increase in bulk servicing portfolios brokered by United Financial. Servicing portfolios brokered by United Financial increased $7.0 billion to $33.4 billion for the year ended December 31, 1997 as compared to $26.4 billion for the year ended December 31, 1996. The decrease in brokerage fees is attributable to an overall decrease in the margins earned on the servicing brokered. TRUST SERVICE FEES. Trust service fees increased $500,000, or 16.3%, to $3.6 million for the year ended December 31, 1997 as compared to $3.1 million for the year ended December 31, 1996. This increase is associated with the growth in the number of trust accounts under administration at Sterling Trust, which increased to 29,382 at December 31, 1997 from 25,772 at December 31, 1996 and the increase in the total assets under administration which increased to over $1.4 billion at December 31, 1997 from under $1.2 billion at December 31, 1996. GAIN ON SALE OF LOANS AND MORTGAGE-BACKED SECURITIES. Gain on the sale of loans and mortgage-backed securities decreased $661,000, or 19.6%, to $2.7 million for the year ended December 31, 1997 as compared to $3.4 million for the year ended December 31, 1996. Gain on the sale of loans can fluctuate significantly from quarter to quarter and from year to year based on a variety of factors, such as the current interest rate environment, the supply of loan portfolios in the market, the mix of loan portfolios available, the type of loan portfolios the Company purchases and the particular loan portfolios the Company elects to sell. GAIN ON SALE OF MORTGAGE SERVICING RIGHTS. Gain on the sale of mortgage servicing rights increased $133,000 to $3.4 million for the year ended December 31, 1997 as compared to $3.2 million for the year ended December 31, 1996. In terms of aggregate outstanding principal balances of mortgage loans underlying such servicing rights, the Company sold $1.3 billion in purchased mortgage servicing rights for the year ended December 31, 1997 as compared to $646.0 million for the year ended December 31, 1996. Gains from the sale of mortgage servicing rights can fluctuate significantly from quarter to quarter and from year to year based on the market value of the Company's servicing portfolio, the particular servicing portfolios the Company elects to sell and the availability of similar portfolios in the market. A majority of the gain in 1997 pertains to servicing rights bought by the Company in 1997. Due to the Company's position in and knowledge of the market, the Company will at times sell servicing portfolios if it is determined that the market value is greater than the economic value that would be achieved from holding the servicing portfolio. LOAN ORIGINATION. Loan origination income increased $2.9 million, or 183.6%, to $4.4 million for the year ended December 31, 1997 as compared to $1.6 million for the year ended December 31, 1996 despite the $180.3 million, or 30.9%, decrease in wholesale residential mortgage loan production to $403.0 million for the year ended December 31, 1997 as compared to $583.3 million for the year ended December 31, 1996. The increase in loan origination income was related to a $1.9 million secondary marketing loss that occurred in the first quarter of 1996 and the origination in 1997 of a greater amount of non-agency eligible loans, which generally result in higher origination fees. The secondary loss was attributable to the failure of a former officer of Matrix Financial to adhere to the Company's established hedging policies, and as a result, certain closed loans were not adequately hedged. The $1.9 million loss resulted when interest rates increased dramatically in March 1996, thereby causing the funded loans and pipeline commitments to decline in market value. Had the Company's policies been followed, a loss still would have been recognized, albeit significantly smaller, since it is difficult for the Company to be completely hedged when interest rates rapidly and significantly change. The 25 Company has implemented several management and reporting changes to help ensure that the hedging policies established by Matrix Financial's Board of Directors are followed to mitigate secondary losses in volatile interest rate markets. Loan origination income includes all mortgage loan fees, secondary marketing activity on new loan originations and servicing release premiums on net originations sold, net of origination costs. OTHER INCOME. Other income increased $1.8 million, or 85.9%, to $4.0 million for the year ended December 31, 1997 as compared to $2.2 million for the year ended December 31, 1996. Other income mainly consists of fee income, including credit card fees earned by Matrix Bank, consulting income earned by UCM, brokerage income earned by First Matrix and USS service fee income. The increase in other income between 1997 and 1996 is predominantly related to the growth in credit card fee income, USS service fees and consulting income generated by UCM, which was formed in December 1996. Credit card fee income increased $889,000 to $908,000 for the year ended December 31, 1997 as compared to $19,000 for the year ended December 31, 1996. Additionally, USS service fees and UCM consulting income increased $557,000 and $184,000, respectively, to $1.1 million and $184,000 for the year ended December 31, 1997 as compared to $564,000 and $0 for the year ended December 31, 1996. NONINTEREST EXPENSE. Noninterest expense increased $11.1 million, or 41.6%, to $37.7 million for the year ended December 31, 1997 as compared to $26.7 million for the year ended December 31, 1996. This increase was primarily due to expenses related to the interim subservicing on mortgage servicing portfolios acquired in 1997, the expenses related to UCM which was formed in December 1996, the opening of a telemarketing call center for the origination of loans at Matrix Financial, increased amortization due to the Company's increased investment in mortgage servicing rights and the overall growth and expansion of the Company. During 1997, the Company recognized a pre-tax loss of approximately $1.4 million relating to the recourse obligation, subsequent operation and ultimate disposition of its entire portfolio of sub-prime auto loans. This loss was less than the following non-recurring items, which were recorded during the year ended December 31, 1996: a $600,000 accrual for the previously disclosed settlement of a class-action lawsuit, a one-time fee of $450,000 to recapitalize the Savings Association Insurance Fund (SAIF), and a $787,000 loss relating to the repurchase of sub-prime auto loans. The following table details the major components of noninterest expense for the periods indicated:
YEAR ENDED DECEMBER 31, ------------------- 1997 1996 ------- ------- (In thousands) Compensation and employee benefits................... $14,724 $12,722 Amortization of mortgage servicing rights............ 6,521 2,432 Occupancy and equipment.............................. 2,132 1,776 Postage and communication............................ 1,522 1,214 Professional fees.................................... 976 666 Data processing...................................... 843 642 Losses related to recourse sales..................... 1,237 787 Other................................................ 9,791 6,416 ------- ------- Total............................................. $37,746 $26,655 ======= =======
Compensation and employee benefits increased $2.0 million, or 15.7%, to $14.7 million for the year ended December 31, 1997 as compared to $12.7 million for the year ended December 31, 1996. This increase was the result of continued expansion of the Company's business lines in 1997, including the opening of a retail branch of Matrix Bank, a new lending office of Matrix Bank, the formation of UCM at the end of 1996 and the opening of Matrix Financial's telemarketing call center. The Company had an increase of 119 employees, or 45.8%, to 379 full-time employees at December 31, 1997 as compared to 260 full-time employees at December 31, 1996. Amortization of mortgage servicing rights increased $4.1 million, or 168.1%, to $6.5 million for the year ended December 31, 1997 as compared to $2.4 million for the year ended December 31, 1996. Amortization of mortgage servicing rights fluctuates based on the size of the Company's mortgage servicing portfolio and the prepayment rates experienced with respect to the underlying mortgage loan portfolio. The prepayment speed experienced by the Company on the loans it serviced was 11.3% for the year ended December 31, 1997 as compared to 11.9% for the year ended December 31, 1996. The remainder of noninterest expense, which includes occupancy and equipment expenses, postage and communication expenses, professional fees, data processing costs, losses related to recourse sales and other expenses, 26 increased $5.0 million, or 43.5%, to $16.5 million for the year ended December 31, 1997 as compared to $11.5 million for the year ended December 31, 1996. The increase was primarily attributable to $1.2 million of interim subservicing costs on mortgage servicing portfolios acquired during 1997 and the expansion of both existing and new business lines. PROVISION FOR INCOME TAXES. The provision for income taxes increased by $2.9 million to $5.2 million for the year ended December 31, 1997 as compared to $2.3 million for the year ended December 31, 1996. The two periods had comparable effective tax rates of 38.8% and 39.0%, respectively. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 NET INCOME; RETURN ON AVERAGE EQUITY. Net income decreased $353,000, or 9.0%, to $3.6 million for the year ended December 31, 1996 as compared to $3.9 million for the year ended December 31, 1995. Return on average equity decreased to 24.3% for the year ended December 31, 1996 as compared to 47.6% for the year ended December 31, 1995. The decrease in return on average equity was primarily due to the Company's policy of retaining all of its earnings, the issuance of 2,012,500 shares of additional stock as part of the IPO in the fourth quarter, the one time expense for the SAIF capitalization, the first quarter 1996 secondary marketing loss, the reserve for the settlement of certain outstanding litigation and the recourse losses related to the sub-prime autos repurchased at Sterling Finance. See "--Comparison of Results of Operations for the Years Ended December 31, 1997 and 1996--Loan Origination" for a discussion of the secondary marketing loss. See "--Asset and Liability Management--Nonperforming Assets" for a discussion of the loss relating to Sterling Finance. NET INTEREST INCOME. Net interest income before provision for loan and valuation losses increased $2.5 million, or 68.7%, to $6.1 million for the year ended December 31, 1996 as compared to $3.6 million for the year ended December 31, 1995. The increase for the year ended December 31, 1996 was attributable to the increase in the Company's yield on interest-earning assets, which increased to 9.43% for the year ended December 31, 1996 as compared to 8.54% for the year ended December 31, 1995, and a decrease in the cost of interest-bearing liabilities, which decreased to 6.59% for the year ended December 31, 1996 as compared to 7.14% for the year ended December 31, 1995. The increase in the Company's yield on interest-earning assets was primarily attributable to an increase in the yield on the Company's adjustable rate loan portfolio, the amortization and payoffs of loans that had significant discounts and the origination of higher yielding consumer loans. The decrease in the cost of interest-bearing liabilities was attributable to the lower cost of borrowed funds. The Company's net interest margin increased to 3.45% for the year ended December 31, 1996 as compared to 2.84% for the year ended December 31, 1995. The Company's average interest-earning assets increased $49.0 million, or 38.8%, to $175.4 million for the year ended December 31, 1996 as compared to $126.4 million for the year ended December 31, 1995. This increase was attributable primarily to the increase in the size of the Company's loan portfolio held for sale. For a tabular presentation of the changes in net interest income due to changes in the volume of interest-earning assets and changes in interest rates, see "--Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes." PROVISION FOR LOAN AND VALUATION LOSSES. Provision for loan and valuation losses decreased $258,000, or 64.3%, to $143,000 for the year ended December 31, 1996 as compared to $401,000 for the year ended December 31, 1995. This decrease was primarily attributable to the improvement in the portion of the Company's residential loan portfolio classified as nonaccrual. For a discussion of the Company's allowance for loan and valuation losses as it relates to nonperforming assets, see "--Asset and Liability Management- Nonperforming Assets." LOAN ADMINISTRATION. Loan administration fees increased $1.1 million, or 13.9%, to $8.8 million for the year ended December 31, 1996 as compared to $7.7 million for the year ended December 31, 1995. This increase was primarily attributable to the increase in the average outstanding principal balance underlying the Company's mortgage servicing rights portfolio for the year ended December 31, 1996 as compared to the year ended December 31, 1995. Loan administration fees are affected by factors that include the size of the Company's residential mortgage loan servicing portfolio, the servicing spread, the timing of payment collections and the amount of ancillary fees collected. The mortgage loan servicing portfolio owned increased by $908.7 million, or 56.9%, to $2.5 billion for the year ended December 31, 1996 as compared to $1.6 billion for the year ended December 31, 1995, with the majority of the increase occurring in the fourth quarter of 1996. BROKERAGE FEES. Brokerage fees decreased $423,000, or 8.8%, to $4.4 million for the year ended December 31, 1996 as compared to $4.8 million for the year ended December 31, 1995. This decrease is a direct result of the amount of the 27 residential mortgage servicing portfolios brokered by United Financial. The balance of residential mortgage servicing portfolios brokered by United Financial, in terms of aggregate unpaid principal balances on the underlying loans, decreased $6.2 billion, or 19.0%, to $26.4 billion for the year ended December 31, 1996 as compared to $32.6 billion for the year ended December 31, 1995. The decrease was primarily due to the amount of servicing brokered in the first quarter of 1996, as mortgage banking firms and financial institutions deferred servicing sales pending their review of the impact of FAS 122 on their portfolios. TRUST SERVICE FEES. Trust service fees increased $192,000, or 6.7%, to $3.1 million for the year ended December 31, 1996 as compared to $2.9 million for the year ended December 31, 1995. This increase is associated with the growth in the amount of trust assets under administration and in the number of trust accounts under management at Sterling Trust. GAIN ON SALE OF LOANS AND MORTGAGE-BACKED SECURITIES. Gain on the sale of loans and mortgage-backed securities increased $97,000, or 3.0%, to $3.4 million for the year ended December 31, 1996 as compared to $3.3 million for the year ended December 31, 1995. Gain on the sale of loans can fluctuate significantly from quarter to quarter and from year to year based on a variety of factors, such as the current interest rate environment, the supply of loan portfolios in the market, the mix of loan portfolios available in the market, the type of loan portfolios the Company purchases and the particular loan portfolios the Company elects to sell. The Company's strategy has been and will continue to be to match its purchases and sales while managing its desired growth. GAIN ON SALE OF MORTGAGE SERVICING RIGHTS. Gain on the sale of mortgage servicing rights increased $2.0 million, or 177.7%, to $3.2 million for the year ended December 31, 1996 as compared to $1.2 million for the year ended December 31, 1995. In terms of aggregate outstanding principal balances of mortgage loans underlying such servicing rights, the Company sold $646.0 million in purchased mortgage servicing rights for the year ended December 31, 1996 as compared to $31.8 million for the year ended December 31, 1995. A portion of the servicing rights sold in 1996 pertained to mortgage servicing portfolios that the Company combined with the related loan participation interests, and then sold as one asset. The servicing portfolio sold in 1995 consisted of loans with non-standard payment accrual methodologies, including the Rule of 78's and daily simple interest accruals, and were secured by second liens. The sales in 1996 were consummated primarily to generate earnings and additional cash flow in order to acquire more desirable residential servicing portfolios. LOAN ORIGINATION. Loan origination income decreased $508,000, or 24.6%, to $1.6 million for the year ended December 31, 1996 as compared to $2.1 million for the year ended December 31, 1995, even though the Company experienced an increase in wholesale residential mortgage loan production of $194.4 million, or 50.0%, to $583.3 million for the year ended December 31, 1996 as compared to $388.9 million for the year ended December 31, 1995. This decrease was primarily attributable to the $1.9 million secondary marketing loss that occurred in March 1996. See "--Comparison of Results of Operations for the Years Ended December 31, 1997 and 1996--Loan Origination" for further discussion of the secondary marketing loss. Loan origination income includes all mortgage loan fees, secondary marketing activity on new loan originations and servicing release premiums on new originations sold, net of outside origination costs. NONINTEREST EXPENSE. Noninterest expense increased $6.2 million, or 30.3% to $26.7 million for the year ended December 31, 1996 as compared to $20.5 million for the year ended December 31, 1995. This increase was primarily due to the one time SAIF assessment of $450,000 (pre-tax), a reserve for the settlement of certain outstanding litigation, expenses related to new operating subsidiaries and expenses related to the operating loss and recourse losses on sub-prime automobile installment contracts sold by Sterling Finance and the ceasing of its operations in December 1996. The following table details the major components of noninterest expense for the periods indicated:
YEAR ENDED DECEMBER 31, ------------------- 1996 1995 ------- ------- (In thousands) Compensation and employee benefits............... $12,722 $10,527 Amortization of mortgage servicing rights........ 2,432 1,817 Occupancy and equipment.......................... 1,776 1,451 Professional fees................................ 666 783 Data processing.................................. 642 560 Other............................................ 8,417 5,315 ------- ------- Total......................................... $26,655 $20,453 ======= =======
28 Compensation and employee benefits increased $2.2 million, or 20.9%, to $12.7 million for the year ended December 31, 1996 as compared to $10.5 million for the year ended December 31, 1995. This increase was the result of the expansion of the Company's business lines in 1996, including the opening of two new branches of Matrix Bank, the formation of two new operating subsidiaries and the increased amount of wholesale mortgage loan originations (i.e., employees in the mortgage loan origination area are typically compensated on a commission basis). The Company had an increase of 34 employees, or 15.0%, to 260 employees at year- end December 31, 1996 as compared to 226 employees at year-end December 31, 1995. The Company also employed an additional 20 employees during portions of 1996 at Sterling Finance. Amortization of mortgage servicing rights increased $615,000, or 33.8%, to $2.4 million for the year ended December 31, 1996 as compared to $1.8 million for the year ended December 31, 1995. Amortization of mortgage servicing rights fluctuates based on the size of the Company's mortgage servicing portfolio and the prepayment rates experience with respect to the underlying mortgage loan portfolio. The remainder of noninterest expense, which includes occupancy and equipment expenses, professional fees, data processing costs and other expenses increased $3.4 million, or 41.8%, to $11.5 million for the year ended December 31, 1996 as compared to $8.1 million for the year ended December 31, 1995. The increase was primarily attributable to the one-time SAIF assessment, the reserve for the settlement of certain outstanding litigation (which was settled in 1997), expansion of both existing and new business lines, the formation of two operating subsidiaries, the opening of two bank branches and the recourse losses on automobile installment contracts sold by Sterling Finance and the ceasing of its operations in December 1996. PROVISION FOR INCOME TAXES. Provision for income taxes decreased $191,000, or 7.7%, to $2.3 million for the year ended December 31, 1996 as compared to $2.5 million for the year ended December 31, 1995. The two periods had comparable effective tax rates of 39.0% and 38.6%, respectively. AVERAGE BALANCE SHEET The following table sets forth for the periods and as of the dates indicated, information regarding the Company's average balances of assets and liabilities as well as the dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities and the resultant yields or costs. Ratio, yield and rate information are based on average daily balances where available; otherwise, average monthly balances have been used. Nonaccrual loans are included in the calculation of average balances for loans for the periods indicated.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------ 1997 1996 1995 ------------------------------ ----------------------------- -------------------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE -------- -------- ------- -------- -------- ------- -------- -------- ------- (DOLLARS IN THOUSANDS) ASSETS Interest-earning assets: Loans receivable, net................... $355,848 $ 31,096 8.74% $162,648 $ 15,733 9.67% $121,206 $ 10,412 8.59% Mortgage-backed securities.............. -- -- -- 4,653 351 7.54 -- -- -- Interest-earning deposits............... 15,371 778 5.06 5,556 312 5.62 3,845 288 7.49 FHLB stock.............................. 4,606 275 5.97 2,585 153 5.92 1,321 86 6.51 -------- -------- ------- -------- -------- ------- -------- -------- ------- Total interest-earning assets....... 375,825 32,149 8.55 175,442 16,549 9.43 126,372 10,786 8.54 Noninterest-earning assets: Cash.................................... 10,268 3,085 2,570 Allowance for loan and valuation losses. (1,343) (964) (836) Premises and equipment.................. 8,302 6,976 5,213 Other assets............................ 62,922 26,199 18,075 -------- -------- -------- Total noninterest-earning assets.... 80,149 35,296 25,022 -------- -------- -------- Total assets........................ $455,974 $210,738 $151,394 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Passbook accounts....................... $ 2,859 113 3.95 $ 2,389 82 3.43 $ 2,394 85 3.55 Money market and NOW accounts........... 96,982 3,278 3.38 11,964 468 3.91 8,320 292 3.51 Certificates of deposit................. 83,993 4,985 5.94 54,824 3,210 5.85 33,332 1,807 5.42 FHLB borrowings......................... 59,984 3,435 5.73 35,838 2,039 5.69 17,662 1,113 6.30 Borrowed money.......................... 79,011 6,450 8.16 54,171 4,691 8.66 39,021 3,897 9.99 -------- -------- ------- -------- -------- ------- -------- -------- ------- Total interest-bearing liabilities.. 322,829 18,261 5.66 159,186 10,490 6.59 100,729 7,194 7.14 -------- -------- ------- -------- -------- ------- -------- -------- -------
29
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------ 1997 1996 1995 ------------------------------ ----------------------------- -------------------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE -------- -------- ------- -------- -------- ------- -------- -------- ------- (DOLLARS IN THOUSANDS) Noninterest-bearing liabilities: Demand deposits (including custodial escrow balances)............. 80,816 27,934 35,794 Other liabilities....................... 16,501 8,927 6,632 -------- -------- -------- Total noninterest-bearing liabilities. 97,317 36,861 42,426 Shareholders' equity.................... 35,828 14,691 8,239 -------- -------- -------- Total liabilities and shareholders' equity............................... $455,974 $210,738 $151,394 ======== ======== ======== Net interest income before provision for loan and valuation losses.............. $ 13,888 $ 6,059 $ 3,592 ======== ======== ======== Interest rate spread..................... 2.89% 2.84% 1.40% ======= ======= ======= Net interest margin...................... 3.70% 3.45% 2.84% ======= ======= ======= Ratio of average interest-earning assets to average interest-bearing liabilities............................ 116.42% 110.21% 125.46% ======= ======= =======
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 (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., 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, 1997 VS 1996 YEAR ENDED DECEMBER 31, 1996 VS 1995 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............................ $18,688 $(3,325) $15,363 $3,561 $1,760 $5,321 Mortgage-backed securities....................... (351) -- (351) -- 351 351 Interest-earning deposits........................ 551 (85) 466 128 (104) 24 FHLB stock....................................... 120 2 122 82 (15) 67 ------- ------- ------- ------ ------ ------ Total interest-earning assets.................. 19,008 (3,408) 15,600 3,771 1,992 5,763 ------- ------- ------- ------ ------ ------ Interest-bearing liabilities: Passbook accounts................................ 16 15 31 -- (3) (3) Money market and NOW accounts.................... 3,322 (512) 2,810 128 48 176 Certificates of deposit.......................... 1,708 67 1,775 1,165 238 1,403 FHLB advances.................................... 1,374 22 1,396 1,145 (219) 926 Borrowed money................................... 2,151 (392) 1,759 1,513 (719) 794 ------- ------- ------- ------ ------ ------ Total interest-bearing liabilities............. 8,571 (800) 7,771 3,951 (655) 3,296 ------- ------- ------- ------ ------ ------ Change in net interest income before provision for loan and valuation losses.................... $10,437 $(2,608) $ 7,829 $ (180) $2,647 $2,467 ======= ======= ======= ====== ====== ======
ASSET AND LIABILITY MANAGEMENT GENERAL. A significant portion of the Company's revenues and net income is derived from net interest income and, accordingly, the Company strives to manage its interest-earning assets and interest-bearing liabilities to generate what management believes to be an appropriate contribution from net interest income. Asset and liability management seeks to control the volatility of the Company's performance due to changes in interest rates. The Company constantly attempts to achieve an appropriate relationship between rate sensitive assets and rate sensitive liabilities. The Company has responded to interest rate volatility by developing and implementing asset and liability management strategies designed to increase its noninterest income and improve the match between interest- earning assets and interest-bearing liabilities. These strategies include: . 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; . Increasing the noninterest-bearing custodial escrow balances related to the Company's mortgage servicing rights; 30 . Increasing focus on lines of business that are less interest rate sensitive, such as brokerage activities, consulting services, self-directed trust services and real estate disposition; . Maintaining a wholesale loan origination operation. Wholesale originations provide a form of hedge against the balance of mortgage loan servicing rights. In a decreasing interest rate environment, the value of the servicing portfolio tends to decrease due to increased prepayments of the underlying loans. During this same period, however, the volume of loan originations generally increases; . Originating and purchasing adjustable rate mortgages and selling newly- originated fixed rate residential mortgages in the secondary market; . Increasing emphasis on the origination of construction and commercial real estate lending, which tend to have higher interest rates with shorter loan maturities than residential mortgage loans; . Increasing retail deposits, which are less susceptible to changes in interest rates than other funding sources; and . 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 the Company's investing activities; and . Hedging segments of the Company's servicing portfolio and forward commitments on our loan pipeline. LENDING ACTIVITIES. The major interest-earning asset of the Company is the loan portfolio. Consequently, a significant part of the Company's asset and liability management involves monitoring the composition of the Company's loan portfolio, including the corresponding maturities. The table below sets forth the composition of the Company's 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, ----------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------------- ------------------ ------------------- ----------------- ----------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT -------- ------- -------- ------- -------- -------- ------- ------- ------- -------- (DOLLARS IN THOUSANDS) Residential.................. $462,604 90.46% $192,118 90.47% $136,741 93.23% $80,010 89.56% $65,858 86.10% Multi-family, commercial real estate and commercial....... 32,200 6.30 15,352 7.23 7,544 5.15 7,518 8.41 7,813 Construction................. 7,591 1.48 1,061 0.50 78 0.05 106 0.12 125 0.16 Consumer..................... 10,733 2.10 4,869 2.29 3,245 2.21 2,434 2.72 3,238 4.23 -------- ------- -------- ------- -------- -------- ------- ------- ------- -------- Total loans............. 513,128 100.34 213,400 100.49 147,608 100.64 90,068 100.81 77,034 100.70 Less allowance for loan and valuation losses............ 1,756 0.34 1,039 0.49 943 0.64 728 0.81 538 0.70 -------- ------- -------- ------- -------- -------- ------- ------- ------- -------- Loans receivable, net........ $511,372 100.00% $212,361 100.00% $146,665 100.00% $89,340 100.00% $76,496 100.00% ======== ======= ======== ======= ======== ======== ======= ======= ======= ========
The following table presents the aggregate maturities of loans in each major category of the Company's loan portfolio as of December 31, 1997 (excluding the allowance for loan and valuation losses). Loans held for sale are classified as maturing within one year. Actual maturities may differ from the contractual maturities shown below as a result of renewals and prepayments or the timing of loan sales.
AS OF DECEMBER 31, 1997 ---------------------------------------------------------- LESS THAN ONE TO OVER FIVE ONE YEAR FIVE YEARS YEARS TOTAL --------- ---------- --------- -------- (IN THOUSANDS) Residential............................................. $455,314 $ 716 $ 6,574 $462,604 Multi-family, commercial real estate and commercial..... 7,817 11,076 13,307 32,200 Construction............................................ 7,591 - - 7,591 Consumer................................................ 6,888 1,630 2,215 10,733 -------- ------- ------- -------- Total loans........................................... $477,610 $13,422 $22,096 $513,128 ======== ======= ======= ========
31 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, 1997 ------------------------------------------------ One to five Over five years years Total ----------- ----------- ----------- (IN THOUSANDS) Fixed................................................... $ 9,174 $ 5,890 $ 15,064 Adjustable.............................................. 4,248 16,206 20,454 ----------- ----------- ----------- Total loans........................................... $ 13,422 $ 22,096 $ 35,518 =========== =========== ===========
NONPERFORMING ASSETS. As part of asset and liability management, the Company monitors nonperforming assets ("NPAs") on a monthly basis. NPAs 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 the Company's NPAs as of the dates indicated:
AS OF DECEMBER 31, ----------------------------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Nonaccrual mortgage loans...................... $ 4,796 $ 3,031 $ 5,523 $ 3,275 $ 657 Nonaccrual consumer loans...................... 194 872 15 39 196 ------- ------- ------- ------- ------- Total nonperforming loans.................... 4,990 3,903 5,538 3,314 853 Foreclosed real estate......................... 1,242 788 835 543 726 Repossessed automobiles........................ -- 506 -- -- -- ------- ------- ------- ------- ------- Total nonperforming assets................... $ 6,232 $ 5,197 $ 6,373 $ 3,857 $ 1,579 ======= ======= ======= ======= ======= Total nonperforming loans to total loans....... 0.97% 1.83% 3.75% 3.68% 1.11% Total nonperforming assets to total assets..... 1.03% 1.89% 3.42% 3.40% 1.64% Ratio of allowance for loan and valuation losses to total non-performing loans.......... 35.19% 26.62% 17.03% 21.97% 63.07% Interest income on nonperforming loans not included in interest income................... $ 89 $ 120 $ 156 $ 140 $ 23
As of December 31, 1997, the Company had no non-government accruing loans that were contractually past due 90 days or more. Beginning in 1996, however, the Company began to accrue interest for government-sponsored loans such as FHA insured and VA guaranteed loans which are past due 90 or more days, as the interest on these loans is insured by the federal government. The aggregate unpaid principal balance of accruing loans which were past due 90 or more days was $18.7 million and $8.0 million as of December 31, 1997 and 1996, respectively. The higher levels of mortgage nonaccrual loans as a percentage of total loans during 1995 and 1994 were primarily attributable to purchases by Matrix Bank of bulk residential loan portfolios in those years. As part of its business strategy, Matrix Bank purchases loans at a discount that have had delinquencies in the past. However, the purchase activity in 1997 and 1996 has resulted in the Company acquiring lower discounted packages. Due to the past delinquency problems, there is often an increase in delinquencies after the loans are purchased as a result of the servicing being transferred to the Company. The Company's experience has been that it generally takes 90 to 120 days after the servicing transfer to see an improvement in the delinquency statistics. The decrease in the mortgage nonaccrual loans at December 31, 1997 and 1996 is attributable to the improvement of the loans that had past delinquency problems and the credit quality of the loan portfolios the Company acquired in 1997 and 1996. In 1997 and 1996, Matrix Bank acquired loans with fewer delinquency problems and/or document deficiencies, which also resulted in a decrease in the nonaccrual loans. The increase in the nonaccrual consumer loans in 1996 is a result of sub- prime auto loans that the Company repurchased pursuant to limited representations and warranties included in loan sale agreements. The Company had a separate reserve of $600,000 included in other liabilities for anticipated losses relating to the repurchased sub-prime auto loans at December 31, 1996. Included in repossessed assets for 1996 is $506,000 of automobiles that the Company was required to repurchase pursuant to the same limited representations and warranties. The balance of the loans and 32 automobiles repurchased in 1996 and 1997 were either disposed of or sold to a third-party investor in December 1997. The Company does not anticipate that it will originate any additional sub-prime automobile contracts. The prior delinquency and anticipated future delinquencies are taken into consideration in the pricing of the loans acquired. The Company generally purchases such loans at discounts and, in some instances, receives recourse or credit enhancement from the seller to further reduce the Company's risk of loss associated with the loans' nonaccrual status. At December 31, 1997, $4.6 million, or 92.4%, 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, 1997, were $457.0 million, of which $4.6 million or 1.0% were nonaccrual loans. However, against the $457.0 million of total loans held for sale, the Company has $1.2 million of purchase discounts plus an additional $73.7 million of loans which have some form of recourse to the seller. The percentage of the allowance for loan and valuation losses to nonaccrual loans varies widely due to the nature of the Company's portfolio of mortgage loans, which are collateralized primarily by residential real estate. The Company analyzes 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. See "--Comparison of Results of Operations for the Years Ended December 31, 1997 and 1996." ANALYSIS OF ALLOWANCE FOR LOAN AND VALUATION LOSSES. The following table sets forth information regarding changes in the Company's allowance for loan and valuation losses for the periods indicated. The table includes the allowance for both the loans held for investment and the loans held for sale.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- -------- -------- (DOLLARS IN THOUSANDS) Balance at beginning of period................. $ 1,039 $ 943 $ 728 $ 538 $ -- Charge-offs: Real estate-mortgage......................... 22 64 198 26 33 Real estate-construction..................... -- -- 35 -- -- Consumer..................................... 166 6 7 -- -- --------- --------- --------- -------- -------- Total charge-offs......................... 188 70 240 26 33 Recoveries: Real estate-mortgage......................... -- 8 5 -- -- Consumer..................................... 31 15 49 -- -- --------- --------- --------- -------- -------- Total recoveries.......................... 31 23 54 -- -- --------- --------- --------- -------- -------- Net charge-offs................................ 157 47 186 26 33 Allowance for loan losses established in connection with the acquisition of Matrix Bank -- -- -- -- 556 Provision for loan losses charged to operations 874 143 401 216 15 --------- --------- --------- -------- -------- Balance at end of period....................... $ 1,756 $ 1,039 $ 943 $ 728 $ 538 ========= ========= ========= ======== ======== Ratio of net charge-offs to average loans...... 0.04% 0.03% 0.15% 0.03% 0.18% ========= ========= ========= ======== ======== Average loans outstanding during the period.... $ 355,848 $ 162,648 $ 121,206 $ 79,393 $ 18,608 ========= ========= ========= ======== ========
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. The allowance for loan and valuation losses is calculated, in part, based on historical loss experience. In addition, management takes into consideration other factors such as certain qualitative evaluations of individual classified assets, trends in the portfolio, geographic and portfolio concentrations, new products or markets, evaluations of the changes in the historical loss experience component and projections of this component into the current and future periods based on current knowledge and conditions. 33 The Company`s allowance for loan and valuation losses is allocated amongst the various types of loans as follows:
AS OF DECEMBER 31, ------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------------- ------------------- ------------------- ------------------- ------------------- Percentage Percentage Percentage Percentage Percentage of Loans to of Loans to of Loans to of Loans to of Loans to Amount Total loans Amount Total loans Amount Total loans Amount Total loans Amount Total loans ------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ ----------- (DOLLARS IN THOUSANDS) Residential......... $1,234 90.15% $ 911 90.03% $ 830 92.64% $ 635 88.83% $ 452 85.49% Multi-family, commercial real estate and commercial......... 91 6.28 51 7.19 78 5.11 69 8.35 60 10.14 Construction........ 23 1.48 6 0.50 1 0.05 1 0.12 1 0.16 Consumer............ 408 2.09 71 2.28 34 2.20 23 2.70 25 4.20 ------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ ----------- $1,756 100.00% $1,039 100.00% $ 943 100.00% $ 728 100.00% $ 538 100.00% ====== =========== ====== =========== ====== =========== ====== =========== ====== ===========
The ratio of the allowance for loan and valuation losses to total loans was 0.34%, 0.49%, 0.64%, 0.81% and 0.70% at December 31, 1997, 1996, 1995, 1994 and 1993 respectively. The allowance for loan and valuation losses is reduced by loans charged off, net of recoveries. RISK SENSITIVE ASSETS AND LIABILITIES. As discussed in "Asset and Liability Management General" a significant portion of the Company's earnings and ultimate success is partially dependent upon its ability to manage interest rate risk. Interest rate risk can be defined as the exposure of the Company's net interest income to adverse movements in interest rates. Although the Company manages other risks, such as credit, operational and liquidity risk in the normal course of business, management considers interest rate risk to be a significant market risk which could potentially have the largest material effect on the Company's financial condition and results of operations. The majority of the Company's market risk related to interest rates exists within the operations of Matrix Bank. However, Matrix Financial also has interest rate risk related to its primary asset, mortgage servicing rights, and also related to the net interest income earned on its originated loans that are funded through warehouse lines of credit. The susceptibility to movements in interest rates affects the cash flows generated from the MSRs which are recorded in other income versus interest income. In a decreasing interest rate environment, the underlying servicing portfolio tends to prepay faster which reduces future servicing income; while in an increasing interest rate environment, prepayments tend to decrease, which increases expected future servicing income. As it relates to Matrix Financial's lending activities, Matrix Financial originates residential mortgage loans, which are generally pre-sold. However, between the time that the loan is originated and sold to the ultimate investor, Matrix Financial earns interest income. The loans are funded through the use of warehouse credit facilities that are generally priced based on short-term interest rates. Therefore, the net interest income that is earned by Matrix Financial is generally dependent on the spread between long-term mortgage rates and short- term interest rates. The Company currently does not maintain a trading portfolio. As a result, the Company is not exposed to market risk as it relates to trading activities. The majority of the Company's residential loan portfolio is held for sale which requires the Company to perform quarterly market valuations of the portfolio in order to properly record the portfolio at the lower of cost or market. Therefore, the Company continually monitors the interest rates of its loan portfolio as compared to prevalent interest rates in the market. Interest rate risk management at Matrix Bank is the responsibility of the Asset and Liability Committee ("ALCO" or the "Committee"), which reports to the Board of Directors of Matrix Bank. ALCO establishes policies that monitor and coordinate the Company's sources, uses and pricing of its funds. The Committee is also involved in formulating the Company's 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, ALCO has relied on the OTS 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 OTS exposure report as of December 31, 1997, management believes that a 200 basis point shock over a twelve month period, up or down would not significantly affect Matrix Bank's annualized net interest income. The Company continues 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 (see "Asset and Liability Management General" for additional discussion on strategies), management focuses on acquiring adjustable rate residential mortgages and has increased its efforts regarding the origination of residential construction loans, commercial real estate loans and limited consumer lending which reprice or mature more quickly than fixed rate residential real estate loans. The other significant asset that the Company invests in is residential mortgage servicing rights. The value and cash flows from MSRs 34 respond counter-cyclically to the value of fixed rate mortgages. When interest rates increase and the value of rate mortgages decrease (in turn decreasing net interest income) the value of the MSRs increase. In a decreasing interest rate environment, the inverse occurs. Another significant strategy which the Company focuses 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 MSRs, which generate zero cost escrow deposits, and Sterling Trust's operations which create deposits with relatively low costs. In the ordinary course of business, the Company makes commitments to originate residential mortgage loans and holds originated loans until delivery to an investor. Inherent in this business are risks associated with changes in interest rates and the resulting change in the market value of the pipeline loans. The Company mitigates this risk through the use of mandatory and nonmandatory forward commitments to sell loans. As of December 31, 1997, the Company had $72.8 million in pipeline and funded loans offset with mandatory forward commitments of $45.6 million and nonmandatory forward commitments of $9.1 million. The inherent value of the forward commitments is considered in the determination of the lower of cost or market for such loans. The following table represents, in tabular form, contractual balances of the Company's 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 period ended December 31, 1997. The expected maturity categories take into consideration historical and anticipated prepayment speeds, as well as actual amortization of principal and does not take into consideration the reinvestment of cash. The Company's assets and liabilities that do not have a stated maturity date, such as interest-earning deposits, FHLB stock and certain other deposits, are considered to be long term in nature by the Company and are reported in the thereafter column. The Company has made the assumption that the portfolio of loans held for sale will mature in the first year. The Company is very active in the secondary market as it relates to the purchasing and selling of mortgage loans. The total amount of loans sold in 1997 approximates the total loan portfolio balance at December 31, 1996; therefore, the one-year maturity assumption is supported. The Company also treats the FHLB 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 the Company's loan portfolio; as a result, a portion of the information presented is based on the best available information. The carrying amounts of interest-earning deposits, FHLB stock, FHLB 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 value of forward sale commitments are included in the determination of the fair value of loans held for sale. The fair values of demand deposits, are by definition equal to the amount payable upon demand at the reporting date. The fair value of time deposits are based upon the discounted value of contractual cash flows, which is estimated using interest rates currently being offered on certificates to a schedule of aggregated expected periodic maturities on time deposits. MSRs, which are discussed above, are not included in the tabular presentation, as the investment does not directly affect interest income. As noted, however, earnings from MSRs directly correlate with market risk as it relates to interest rate fluctuations. The Company mitigates this risk through both the type of MSRs acquired and hedging of MSRs. The loans underlying the servicing 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. It is also believed that if a loan has been outstanding for a period of time and has been through several declining interest rate cycles with no refinancing, the risk of prepayment in the future is less than a newly-originated loan. The prepayment percentages which the Company has 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, 1997, 1996 and 1995 were 11.3%, 11.9% and 9.8%, respectively, during a primarily decreasing interest rate environment. In the table below, a prepayment speed of 12% was used to project expected cash flows relating to loans held for investment. This assumption is based on the Company's historical prepayment speeds, as well as our knowledge and experience in the market. Ownership of mortgage servicing rights 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 mortgage servicing rights may occur. To mitigate this risk of impairment due to declining interest rates, the Company hedged a segment of its portfolio beginning in September 1997. As of December 31, 1997, the Company had identified and hedged $306 million of its mortgage servicing portfolio using a program of exchange-traded futures and options. At December 31, 1997, the Company had the following open positions:
OPEN POSITIONS FAIR VALUE BY EXPIRATION DATE (CONTRACTS) NOTIONAL AMOUNT CONTRACT --------------- -------------- --------------- ------------- Ten Year Treasury Note Features......... March 1998 110 $ 11,000,000 $ 112,156 Ten Year Treasury Note Put Options...... February 1998 (80) 8,000,000 (164) Ten Year Treasury Note Call Options..... February 1998 94 9,400,000 1,328
During 1997, the Company closed a portion of its hedge positions which resulted in a realized gain of approximately $250,000 being recognized in connection with the sale of a portion of the hedged servicing portfolio. At December 31, 1997, the net realized and the unrealized deferred gain of the open positions was approximately $275,000. 35
EXPECTED MATURITY DATE-FISCAL YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------------- There- Fair 1998 1999 2000 2001 2002 after Total Value --------- -------- ------- ------- ------- --------- --------- --------- (Dollars in thousands) Interest-earning assets: Held for sale (1)(2): Fixed-rate residential loans...... $ 201,081 $ -- $ -- $ -- $ -- $ -- $ 201,081 $ 202,072 Average interest rate......... 9.09% --% --% --% --% --% 9.09% Adjustable-rate residential loans. $ 255,897 $ -- $ -- $ -- $ -- $ -- $ 255,897 $ 257,159 Average interest rate......... 8.03% --% --% --% --% --% 8.03% Held for investment(2): Fixed-rate residential loans...... $ 562 $ 490 $ 427 $ 371 $ 323 $ 1,416 $ 3,589 $ 3,685 Average interest rate(3)...... 9.66% 9.66% 9.66% 9.66% 9.66% 9.66% 9.66% Adjustable-rate residential loans(4)......................... $ 505 $ 441 $ 385 $ 336 $ 293 $ 1,679 $ 3,639 $ 3,736 Average interest rate(3)...... 8.18% 8.18% 8.18% 8.18% 8.18% 8.18% 8.18% Fixed-rate consumer loans......... $ 3,815 $ 3,376 $ 2,989 $ -- $ -- $ -- $ 10,180 $ 10,388 Average interest rate(3)...... 14.44% 14.44% 14.44% --% --% --% 14.44% Adjustable-rate consumer loans(4). $ 69 $ 60 $ 52 $ 45 $ 39 $ 169 $ 434 $ 443 Average interest rate(3)...... 8.38% 8.38% 8.38% 8.38% 8.38% 8.38% 8.38% Fixed-rate other loans(5)......... $ 9,994 $ 8,532 $ -- $ -- $ -- $ -- $ 18,526 $ 18,613 Average interest rate(3)...... 9.79% 9.79% --% --% --% --% 9.79% Adjustable-rate other loans(4)(5). $ 2,843 $ 2,476 $ 2,153 $ 1,871 $ 1,623 $ 7,060 $ 18,026 $ 18,110 Average interest rate(3)...... 9.25% 9.25% 9.25% 9.25% 9.25% 9.25% 9.25% Interest-earning deposits............ $ -- $ -- $ -- $ -- $ -- $ 6,337 $ 6,337 $ 6,337 Average interest rate......... --% --% --% --% --% 5.91% 5.91% FHLB stock........................... $ -- $ -- $ -- $ -- $ -- $ 8,700 $ 8,700 $ 8,700 Average interest rate......... --% --% --% --% --% 6.00% 6.00% Total interest-earning assets.... $ 474,766 $ 15,375 $ 6,006 $ 2,623 $ 2,278 $ 25,361 $ 526,409 $ 529,243 ========= ======== ======= ======= ======= ========= ========= ========= Interest-bearing liabilities: Passbook accounts.................... $ -- $ -- $ -- $ -- $ -- $ 2,851 $ 2,851 $ 2,851 Average interest rate......... --% --% --% --% --% 3.97% 3.97% NOW accounts(6)...................... $ -- $ -- $ -- $ -- $ -- $ 14,669 $ 14,669 $ 14,669 Average interest rate......... --% --% --% --% --% 2.92% 2.92% Money market accounts................ $ -- $ -- $ -- $ -- $ -- $ 99,899 $ 99,899 $ 99,899 Average interest rate......... --% --% --% --% --% 2.96% 2.96% Certificates of deposit over $100,000 $ 4,900 $ 1,030 $ 414 $ 207 $ 634 $ -- $ 7,185 $ 7,258 Average interest rate......... 5.91% 6.06% 6.73% 6.15% 6.44% --% 6.03% Other certificates of deposit........ $ 63,692 $ 13,442 $ 2,984 $ 2,453 $ 6,094 $ -- $ 88,665 $ 89,390 Average interest rate......... 5.88% 6.01% 6.24% 6.30% 6.34% --% 5.96% FHLB borrowings...................... $ -- $ -- $ -- $ -- $ -- $ 171,943 $ 171,943 $ 171,943 Average interest rate......... --% --% --% --% --% 6.37% 6.37% Revolving borrowings................. $ -- $ -- $ -- $ -- $ -- $ 48,338 $ 48,338 $ 48,338 Average interest rate......... --% --% --% --% --% 7.07% 7.07% Term borrowings...................... $ 4,928 $ 4,438 $ 5,373 $ 3,546 $ 1,699 $ 21,587 $ 41,571 $ 41,571 Average interest rate......... 8.57% 8.97% 8.89% 9.14% 10.34% 11.15% 10.11% Total interest-bearing liabilities.................. $ 73,520 $ 18,910 $ 8,771 $ 6,206 $ 8,427 $ 359,287 $ 475,121 $ 475,919 ========= ======== ======= ======= ======= ========= ========= =========
__________ (1) Loans held for sale are assumed to mature within one year, as the intent is to sell the loans. (2) Balances are stated net of discounts and other deductions. (3) For the fixed rate loans held for investment, the Company computed a weighted average interest rate and a weighted average maturity for the loan portfolio and then applied a prepayment assumption of 12% in determining the cash flows. The same approach was used for the adjustable-rate loans which are generally fully indexed loans. (4) The adjustable-rate loans generally are indexed to the 1-year treasury. However, included in the balance are loans indexed to 11th district cost of funds, prime and 3,5 and 7 year treasury. (5) Other consists of multi-family, commercial real estate, commercial and construction loans. (6) Excludes noninterest-bearing demand deposits of approximately $11.7 million. 36 SHORT-TERM BORROWINGS. A primary function of asset and liability management is to ensure adequate liquidity. In addition to cash and cash equivalents, the Company relies heavily on short-term borrowing capabilities for liquidity and as a funding vehicle. The primary sources for short-term borrowing are the FHLB for Matrix Bank and unaffiliated financial institutions for Matrix Financial. See "--Liquidity and Capital Resources." The following table sets forth a summary of the short-term borrowings of the Company during 1997, 1996 and 1995 and as of the end of each such period:
AVERAGE WEIGHTED AMOUNT AMOUNT MAXIMUM WEIGHTED AVERAGE OUTSTANDING OUTSTANDING OUTSTANDING AVERAGE INTEREST INTEREST AT DURING THE AT ANY RATE DURING RATE AT YEAR END YEAR(1) MONTH END THE YEAR YEAR END ----------- ----------- ----------- ---------------- -------- At or for the year ended December 31, 1995: (DOLLARS IN THOUSANDS) FHLB borrowings............................ $ 19,000 $17,662 $ 33,000 6.30% 6.30% Revolving lines of credit.................. 46,833 22,842 46,833 7.57 7.30 Repurchase agreements...................... 570 4,559 14,129 8.97 8.70 At or for the year ended December 31, 1996: FHLB borrowings............................ 51,250 35,838 53,650 5.69 5.84 Revolving lines of credit.................. 31,504 35,489 60,804 7.17 6.50 Repurchase agreements...................... -- 991 4,962 12.58 -- At or for the year ended December 31, 1997: FHLB borrowings............................ 171,943 59,984 171,943 5.73 6.37 Revolving lines of credit.................. 48,338 43,762 57,710 6.99 7.07 Repurchase agreements...................... -- 1,564 3,437 11.26 --
_________ (1) Calculations are based on daily averages where available and monthly averages otherwise. LIQUIDITY AND CAPITAL RESOURCES Liquidity is the ability of the Company to generate funds to support asset growth, satisfy disbursement needs, maintain reserve requirements and otherwise operate on an ongoing basis. To date, Matrix Capital's principal source of funding for its investing activities has been secured senior debt provided by unaffiliated financial institutions, the issuance of 11.5% Senior Notes in September 1997, the issuance of Senior Subordinated Notes in August 1995, a bank stock loan and the Company's initial public offering. As of December 31, 1997, Matrix Capital had $26.0 million in indebtedness outstanding. The borrowed funds have been used historically as capital injections to Matrix Bank and Matrix Financial, as well as to acquire the office building in Phoenix where Matrix Financial maintains its headquarters. See "Properties." In March 1997, the Company refinanced its bank stock loan and increased the credit available under the loan by an additional $6.0 million. The new bank stock loan has two components, a $2.0 million term loan, which was used to refinance the bank stock loan in place at December 31, 1996, and a revolving line of credit of $6.0 million. As of December 31, 1997, the balance of the revolving line of credit was zero. In May of 1998, the balance of the revolving line of credit will be converted to a term loan. The additional proceeds from the loan will be used as capital at Matrix Bank. The new bank stock loan requires the Company to maintain (i) total shareholders' equity of $27.5 million plus 100% of all future equity contributions, plus 50% of cumulative quarterly net income (ii) dividends less than 50% of the Company's net cash income after adjustments and (iii) total adjusted debt to stockholders' equity less than 4:1. In addition, the bank stock loan restricts the ability of Matrix Capital to pay dividends. Matrix Capital may not pay dividends except for dividends payable solely in capital stock and, if no default exists or would be created by the dividend, dividends that do not exceed 50% of Matrix Capital's net cash income after taxes. As of December 31, 1997, these covenants would have allowed Matrix Capital to pay approximately $7.6 million in dividends, although it has no intention to do so. On September 29, 1997, the Company 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, commencing on March 31, 1998, with a balloon payment for the entire principal balance due in September 2004. The proceeds from the offering were used initially to reduce the Company's revolving line of credit balances. At the time investment opportunities become available, the revolving credit lines will once again be drawn upon to fund such opportunities. The 11.5% Senior Notes require the Company to (i) maintain consolidated tangible equity capital of not less than $35 million and (ii) meet the requirements necessary such that Matrix Bank will not be classified as other than "well-capitalized" as defined by 12 C.F.R. Section 565.4. Additionally, the 11.5% Senior Notes 37 contain other covenants regarding certain restricted payments, incurrence of indebtedness and issuance of preferred stock, liens, merger, consolidation or sale of assets and transactions with affiliates. Under the conditions of the 11.5% Senior Notes, the Company may not incur any additional indebtedness if the consolidated leverage ratio exceeds 2:1 and neither Matrix Capital nor any subsidiary may declare or pay dividends other than: (a) dividends or other payments or distributions payable in equity interests of Matrix Capital or (b) dividends or other payments or distributions payable to Matrix Capital or any wholly-owned subsidiary of Matrix Capital that is a restricted subsidiary under the terms of the Indenture unless, at the time and after giving effect to such dividend, no default shall have occurred and be contrary under the Indenture. Matrix Capital (after giving effect to the payment of such dividend) would be permitted to incur at least $1.00 of additional indebtedness pursuant to the 2:1 consolidated leverage ratio described above, and such dividend, together with the aggregate amount of all restricted payments made, is less than 25% of the aggregate consolidated net income of the Company for the period beginning on October 1, 1997 and ending on the date of the Company's most recent quarter and for which consolidated financial statements are available plus 100% of the net cash proceeds received by Matrix Capital from the issuance of equity interests. As of December 31, 1997, under the foregoing test, Matrix Capital would be entitled to declare and pay dividends of approximately $770,000, although it has no present intent to do so. In August 1995, the Company issued $2.9 million in aggregate principal amount of Senior Subordinated Notes. Interest on the Senior Subordinated Notes is payable semi-annually on January 15 and July 15, and the Senior Subordinated Notes mature on July 15, 2002, with earlier mandatory redemptions of $727,500, or 25% of the Senior Subordinated Notes, scheduled on July 15, 1999, 2000, and 2001, respectively. The Company is restricted from paying cash dividends under the Senior Subordinated Notes. However, the Company may pay cash dividends in an amount equal to 50% of the consolidated net income of the Company as long as there has been no default under the terms of the Senior Subordinated Notes and as long as the dividend does not exceed 10% of the consolidated net worth of the Company. The Company may redeem the Senior Subordinated Notes, in whole or in part, at any time on or after July 15, 1998; at a redemption price equal to (i) 102% of par through July 14, 1999 and, thereafter, at par, plus (ii) all accrued but unpaid interest. Until February 1997, the Senior Subordinated Notes bore interest at 13% per annum. In February 1997, the rate increased to 14% per annum. The trend experienced over the reported periods of cash used by the Company's operating activities results primarily from the growth that Matrix Financial has experienced in its investment in mortgage servicing rights and the growth that Matrix Bank has experienced in its whole loan purchasing activity. The Company anticipates the trend of a net use of cash from operations to continue for the foreseeable future. This anticipation results from the expected growth at Matrix Bank, which management believes will consist primarily of increased activity in the purchasing of loan portfolios. The Company anticipates such growth will be funded through retail deposits, brokered deposits, custodial escrow deposits, directed trust deposits and FHLB borrowings. The Company's principal source of funding for its servicing acquisition activities consists of line of credit facilities provided to Matrix Financial by unaffiliated financial institutions. In prior years, Matrix Financial relied on various sources for funding its servicing acquisition activities, including servicing acquisition lines, the sale of mortgage servicing rights that were accounted for as financings and capital contributions from the Company. As of December 31, 1997, Matrix Financial's servicing acquisition facilities aggregated $30.0 million, of which $17.7 million was available to be utilized after deducting drawn amounts. Borrowings under the servicing acquisition lines of credit are secured by mortgage servicing rights owned by Matrix Financial, bear interest at the federal funds rate plus a negotiated margin and are due at the earlier of the maturity of the mortgage servicing rights or amortized over five to six years from the date of borrowing. At December 31, 1997, $12.3 million was outstanding under the servicing acquisition line and the interest rate on funds outstanding under this facility at December 1997 was 7.51%. The Company's principal source of funding for its loan origination business consists of warehouse lines of credit and sale/repurchase facilities provided to Matrix Financial by financial institutions and brokerage firms. As of December 31, 1997, Matrix Financial's warehouse lines of credit aggregated $60.0 million, of which $14.0 million was available to be utilized. Borrowings under the warehouse lines of credit are secured by all of the mortgage loans funded with warehouse loan proceeds and bear interest at the federal funds rate plus a negotiated margin. At December 31, 1997, $46.0 million was outstanding under the warehouse lines of credit at a weighted average interest rate of 7.07%. As of December 31, 1997, Matrix Financial's sale/repurchase facilities aggregated $20.0 million, with no balance outstanding. Borrowings under the sale/repurchase facilities are secured by all of the mortgage loans funded with sale/repurchase facility proceeds and bear interest at either the prime rate or the LIBOR rate plus a negotiated margin (depending on the facility). 38 The Company's principal source of funding for the working capital needs of Matrix Financial consists of working capital facilities provided to Matrix Financial by unaffiliated financial institutions. As of December 31, 1997, Matrix Financial's working capital facilities aggregated $10.0 million, of which $7.6 million was available. Borrowings under the working capital facilities are secured by mortgage servicing rights, eligible servicing advance receivables and eligible delinquent mortgage loans and bear interest at the federal funds rate plus a negotiated margin. At December 31, 1997, $2.4 million was outstanding under the working capital facilities. On January 31, 1997, the Company renegotiated its revolving credit facilities for warehouse lending, servicing acquisitions and working capital. With this renegotiation, the aggregate amount of warehouse lines of credit facilities was increased to $60.0 million, the aggregate amount of the servicing acquisition facility was increased to $30.0 million, and the aggregate amount of the working capital facility was increased to $10.0 million. The $10.0 million working capital facility became a separate component to the revolving credit facilities, and is no longer a sub-limit to the warehouse line of credit. The new credit facility agreement requires Matrix Financial to maintain (i) total shareholders' equity of at least $10.0 million plus 100% of capital contributed after January 1, 1997, plus 50% of cumulative quarterly net income, (ii) adjusted net worth, as defined, of at least $12.0 million, (iii) a servicing portfolio of at least $2.0 billion and (iv) principal debt of term line borrowings of no more than the lesser of 70% of the appraised value of the mortgage servicing portfolio or 1.25% of the unpaid principal balance of the mortgage servicing portfolio. Effective March 1, 1998, the Company executed an amendment to its revolving credit facilities for warehouse lending to increase the aggregate amount of warehouse lines of credit facilities to $90.0 million and to provide an overline facility for an additional $10.0 million. The availability of the overline facility is at the lender's sole discretion. Matrix Bank's primary sources of funds for use in lending, purchasing bulk loan portfolios, investing and other general purposes are retail deposits, custodial escrow balances, FHLB borrowings, sales of loan portfolios and proceeds from principal and interest payments on loans. To the extent that funding sources are not sufficient to fund Matrix Bank's growth, brokered deposits will be utilized. Contractual loan payments and deposit inflows and outflows 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 FHLB as its primary source for borrowings. At December 31, 1997, Matrix Bank had overnight borrowings from the FHLB of $171.9 million. The custodial escrow balances held by Matrix Bank fluctuate based upon the mix and size of the related mortgage servicing rights portfolios. For a tabular presentation of the Company's short- term borrowings, see "--Short-term Borrowings." Matrix Bank offers a variety of deposit accounts having a range of interest rates and terms. Matrix Bank's deposits principally consist of demand deposits and certificates of deposit. The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates and competition. Matrix Bank's retail deposits are obtained primarily from areas in which it is located and, therefore, its retail deposits are concentrated primarily in Las Cruces and Sun City. Matrix Bank relies principally on customer service, marketing programs and its relationships with customers to attract and retain these deposits. Matrix Bank historically has not accepted brokered deposits. However, in 1998, it is anticipated that brokered deposits will be utilized to support the projected growth at Matrix Bank. In pricing deposit rates, management considers profitability, the matching of term lengths with assets, the attractiveness to customers and rates offered by competitors. Matrix Bank intends to continue its efforts to attract deposits as a primary source of funds to support its lending and investing activities. In January 1996, Matrix Bank opened a retail branch in Sun City, Arizona. The Company has been successful in attracting deposits at the Sun City location and this success has been the primary reason for the increased deposit growth that the Company has experienced for the year ended December 31, 1996. In October 1996, Matrix Bank opened a second retail branch in Las Cruces. In February 1997, Sterling Trust moved approximately $80.0 million of deposits under administration from a third-party institution to Matrix Bank. 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: 39
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------------- 1997 1996 1995 --------------------------- --------------------------- -------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE RATE BALANCE RATE BALANCE RATE --------- ---------- --------- ---------- --------- ---------- (DOLLARS IN THOUSANDS) Passbook accounts........... $ 2,859 3.95% $ 2,389 3.45% $ 2,394 3.55% NOW accounts................ 23,838 3.34 2,813 2.24 2,460 2.11 Money market accounts....... 73,145 3.39 9,151 4.43 5,860 4.10 Time deposits............... 83,993 5.94 54,824 5.85 33,332 5.42 -------- ----- ------- ----- ------- ----- Total deposits............ $183,835 4.56% $69,177 5.43% $44,046 4.96% ======== ===== ======= ===== ======= =====
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, 1997:
AS OF DECEMBER 31, 1997 ------------------------- WEIGHTED AVERAGE AMOUNT RATE PAID ------ --------- (DOLLARS IN THOUSANDS) Three months or less...................... $1,151 5.79% Over three months through six months...... 1,647 5.88 Over six months through twelve months..... 2,102 6.01 Over twelve months........................ 2,285 6.30 ------ ---- Total.................................. $7,185 6.03% ====== ====
The Company actively monitors 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, borrowings from the FHLB and custodial deposits from affiliates. The Company anticipates that such growth will require additional capital. The capital requirements related to the anticipated growth will in part be fulfilled through retention of earnings, increasing the Company's bank stock loan and the use of a portion of the proceeds raised from the issuance of 11.5% Senior Notes, which was completed in September 1997. See "Regulation and Supervision--Matrix Bank's Capital Ratios." Matrix Bank and Matrix Financial are restricted from paying dividends to Matrix Capital due to restrictions of certain debt agreements and regulatory requirements. At December 31, 1997, the Company was in compliance with all debt covenants. See "Regulation and Supervision. " In June 1996, the Company purchased 154 acres of land for $1.3 million in cash for the purpose of developing 750 residential and multi-family lots in Ft. Lupton, Colorado. The purchase was completed with operating funds of the Company and a loan from a third-party financial institution of $845,000. As part of the acquisition, the Company entered into a Residential Facilities Development Agreement (the "Development Agreement") with the City of Ft. Lupton. The Development Agreement is a residential and planned unit development agreement providing for the orderly planning, engineering and development of a golf course and surrounding residential community. The City of Ft. Lupton is responsible for the development of the golf course and the Company is responsible for the development of the surrounding residential lots. The Development Agreement sets forth a mandatory obligation on the part of the Company to pay the City of Ft. Lupton pledged enhancement assessments of $600,000. These pledged enhancement assessments require the Company to pay the city a $2,000 fee each time the Company sells a developed residential lot. The Company is obligated to pay a minimum of $60,000 in assessment fees per year beginning in the year 1998 through the year 2007. The Company also entered into a development management agreement with a local developer to complete the development of the land. The terms of the agreement specify that the Company is to earn a preferred rate of return on its investment and, once the initial amount of its investment has been returned plus the preferred rate of return, the remaining profits are split equally. The development management agreement obligates the Company to provide up to an additional $500,000 of funds for development. The Company's current investment in the project is $2.8 million. 40 It is anticipated that the Company may obtain a loan from an unaffiliated financial institution for a portion of the future development costs, as needed. INFLATION AND CHANGING PRICES The Consolidated Financial Statements and related data presented herein 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 the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's 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. The Company discloses the estimated fair market value of its financial instruments in accordance with Statement of Financial Accounting Standards No. 107. See Note 15 to the Consolidated Financial Statements included elsewhere herein. RECENT ACCOUNTING PRONOUNCEMENTS During fiscal 1997, the Company adopted the provisions of three accounting pronouncements: FAS 125, Statement of Financial Accounting Standards No. 128, Earnings Per Share ("FAS 128") and Statement of Financial Accounting Standards No. 129, Disclosure of Information about Capital Structure ("FAS 129"). Additionally, in June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("FAS 130"), and Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("FAS 131"). FAS 130 and FAS 131 are effective for fiscal periods beginning after December 15, 1997. Management believes there will be no material effect on the Consolidated Financial Statements from the adoption of either of these statements. YEAR 2000 In the next two years, most companies will face a potentially serious information systems (computer) problem because many software applications and operational programs written in the past may not properly recognize calendar dates beginning in the Year 2000. This problem could force computers to either shut down or provide incorrect data or information. The Company has begun the process of identifying the changes required to its computer programs and hardware, in consultation with software and hardware providers and regulators. As of March 1, 1998, the Company has completed an inventory of all of its systems and applications. Based on this inventory, ninety-five critical systems have been identified within the Company and its Subsidiaries. The Company's deadline for full system hardware and software compliance for the Year 2000 Issue is January 31, 1999. The Company has established a Year 2000 Plan, which will be implemented in stages to address critical systems and applications first, and includes replacement of any systems that cannot be brought into compliance by the stated deadline. Additionally, the Company has formed a combined Year 2000 team spearheaded by the Company's Chief Information Officer to ensure that consistent methodologies are being used by the Subsidiaries to address the various Year 2000 issues. The Company's computing environment consists largely of personal computers connected to Local Area Network ("LAN") based systems. The exception to this is an in-house Digital VAX mini-computer system used by Sterling Trust. This VAX system houses the Trust Accounting System which is written in the COBOL language. Based on the Company's Year 2000 Plan, this system is scheduled to be in compliance by the January 31, 1999 deadline. The Company's Plan involves modification and/or replacement of systems as necessary to allow them to function properly with respect to date in the Year 2000 and thereafter. Management presently believes that the Year 2000 issue will not pose significant operational problems for its computer systems. However, if the required modifications or replacements are not made, or are not completed in a timely manner, the Year 2000 Issue could have a material impact on the operations of the Company. The Company has identified 300 different vendors and suppliers currently utilized by the Company and its Subsidiaries. Letters requesting the status of the identified vendors' Year 2000 compliance have been sent to approximately 25% of these vendors. The remaining vendors will be contacted by the end of April 1998. The Company and its Subsidiaries receive information from many outside sources. As such, the Company will be working closely with those vendors to minimize its exposure to non-compliant sources of data. Vendors that cannot meet the January 31, 1999 41 deadline for compliance will be reviewed by the project team to evaluate the Company's need to replace the affected system and/or the vendor in exchange for an alternative provider. Processing for many of the Matrix Bank and Matrix Financial systems are handled by outside service bureaus. These service bureaus have already been contacted by the Company and are either already in compliance, or are expected to be in compliance by the Company's deadline. However, there can be no guarantee that the systems of other companies on which the Company relies will be converted timely and will not have an adverse effect on the Company or its systems. The costs for compliance or replacement have been determined for approximately 50% of the Company's systems. The total impact for the remaining systems will be determined during the next quarter. The current costs identified approximate $300,000. The Company anticipates that total costs associated with Year 2000 compliance will not exceed $400,000; as such, Year 2000 compliance is not expected to have a material effect on the results of operations. Most of the costs associated with the Year 2000 issue will be expensed as incurred; however, any costs attributable to the purchase of new software will be capitalized. The costs of the project and the deadline by which the Company believes that it will be Year 2000 compliant are based on management's best estimates, which were derived utilizing numerous assumptions of future events. There can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. FORWARD LOOKING STATEMENTS Certain information contained in this annual report constitutes "Forward- Looking Statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," or "continue" or the negative thereof or other variations thereon or comparable terminology. The statements in "Risk Factors" contained in the Company's current report on Form 8-K, filed with the Securities and Exchange Commission on March 25, 1998, constitute cautionary statements identifying important factors, including certain risks and uncertainties, with respect to such forward-looking statements that could cause actual results to differ materially from those reflected in such forward-looking 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 Risk Sensitive Assets and Liabilities" and Item 1. "Business Residential Loan 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 has been omitted inasmuch as the registrant will file a definitive proxy statement with the Commission pursuant to the Regulation 14A within 120 days of the close of the fiscal year ended December 31, 1997. 42 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 Not applicable. (c) Exhibits See Exhibit Index, beginning on page II-1. (d) Financial Statement Schedules None. 43 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 25th day of March, 1998. Matrix Capital Corporation By: /s/ ------------------------------------- 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/ President, Chief Executive March 25, 1998 - --------------------------- Officer and a Director Guy A. Gibson (Principal Executive Officer) /s/ Chairman of the Board March 25, 1998 - --------------------------- Richard V. Schmitz /s/ Vice Chairman of the Board March 25, 1998 - --------------------------- D. Mark Spencer /s/ Director March 25, 1998 - --------------------------- Thomas M. Piercy /s/ Senior Vice President and March 25, 1998 - --------------------------- Chief Financial Officer, David W. Kloos and a Director (Principal Accounting and Financial Officer) /s/ Director March 25, 1998 - --------------------------- Stephen Skiba /s/ Director March 25, 1998 - --------------------------- David A. Frank 44 Index to Financial Statements Consolidated Financial Statements of Matrix Capital Corporation
Report of Independent Auditors................................................. F-2 Consolidated Balance Sheets December 31, 1997 and 1996........................ F-3 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995............................................................... F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995............................................ F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995............................................................... F-6 Notes to Consolidated Financial Statements December 31, 1997.................. F-7
F-1 Report of Independent Auditors Shareholders and Board of Directors Matrix Capital Corporation We have audited the accompanying consolidated balance sheets of Matrix Capital Corporation (Company) as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, in 1997 the Company adopted Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. /s/ Ernst & Young LLP _____________________ March 6, 1998, except for Note 18, as to which the date is March 25, 1998 F-2 Matrix Capital Corporation Consolidated Balance Sheets (Dollars in thousands)
December 31 1997 1996 ASSETS ---------- ---------- Cash $ 3,296 $ 2,855 Interest-earning deposits 6,337 9,754 Loans held for sale, net 456,978 182,801 Loans held for investment, net 54,394 29,560 Mortgage servicing rights, net 36,440 23,680 Other receivables 22,695 9,353 Federal Home Loan Bank of Dallas stock 8,700 2,871 Premises and equipment, net 9,012 7,887 Deferred income tax benefit 56 54 Other assets 8,837 5,744 ---------- ---------- Total assets $ 606,745 $ 274,559 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits $ 224,982 $ 90,179 Custodial escrow balances 53,760 37,881 Drafts payable 7,506 5,961 Payable for purchase of mortgage servicing rights 8,660 8,044 Federal Home Loan Bank of Dallas borrowings 171,943 51,250 Borrowed money 89,909 42,431 Other liabilities 9,192 5,502 Income taxes payable 183 1,041 ---------- ---------- Total liabilities 566,135 242,289 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 6,703,880 and 6,681,031 shares at December 31, 1997 and 1996, respectively 1 1 Additional paid in capital 22,185 21,983 Retained earnings 18,424 10,286 ---------- ---------- Total shareholders' equity 40,610 32,270 ---------- ---------- Total liabilities and shareholders' equity $ 606,745 $ 274,559 ========== ==========
See accompanying notes. F-3 Matrix Capital Corporation Consolidated Statements of Income (Dollars in thousands except per share information)
YEAR ENDED DECEMBER 31 1997 1996 1995 ---------- ---------- ---------- Interest income Loans and mortgage backed securities $ 31,096 $ 16,084 $ 10,412 Interest earning deposits 1,053 465 374 ---------- ---------- ---------- Total interest income 32,149 16,549 10,786 INTEREST EXPENSE Savings and time deposits 5,098 3,292 1,892 Demand and money market deposits 3,278 468 292 FHLB borrowings 3,435 2,039 1,113 Borrowed money 6,450 4,691 3,897 ---------- ---------- ---------- Total interest expense 18,261 10,490 7,194 ---------- ---------- ---------- Net interest income before provision for loan and valuation losses 13,888 6,059 3,592 Provision for loan and valuation losses 874 143 401 ---------- ---------- ---------- Net interest income 13,014 5,916 3,191 NONINTEREST INCOME Loan administration 16,007 8,827 7,749 Brokerage 3,921 4,364 4,787 Trust services 3,561 3,061 2,869 Gain on sale of loans and mortgage backed securities 2,708 3,369 3,272 Gain on sale of mortgage servicing rights 3,365 3,232 1,164 Loan origination 4,427 1,561 2,069 Other 4,040 2,173 1,744 ---------- ---------- ---------- Total noninterest income 38,029 26,587 23,654 NONINTEREST EXPENSE Compensation and employee benefits 14,724 12,722 10,527 Amortization of mortgage servicing rights 6,521 2,432 1,817 Occupancy and equipment 2,132 1,776 1,451 Postage and communication 1,522 1,214 912 Professional fees 976 666 783 Data processing 843 642 560 Losses related to recourse sales 1,237 787 Federal Deposit Insurance Corporation premiums 107 635 155 Other general and administrative 9,684 5,781 4,248 ---------- ---------- ---------- Total noninterest expense 37,746 26,655 20,453 ---------- ---------- ---------- Income before income taxes 13,297 5,848 6,392 Provision for income taxes 5,159 2,278 2,469 ---------- ---------- ---------- Net income $ 8,138 $ 3,570 $ 3,923 ========== ========== ========== Net income per common share $1.22 $.69 $.84 ========== ========== ========== Net income per common share - assuming dilution $1.20 $.68 $.83 ========== ========== ========== Weighted average common shares 6,681,269 5,034,788 4,668,531 ========== ========== ========== Weighted average common shares - assuming dilution 6,781,808 5,077,321 4,707,221 ========== ========== ==========
See accompanying notes. F-4 Matrix Capital Corporation Consolidated Statements of Shareholders' Equity (Dollars in thousands)
COMMON STOCK ADDITIONAL --------------------- PAID IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ------------- ------------- ------------ -------------- ------------- Balance at December 31, 1994 4,529,593 $ - $ 3,668 $ 2,994 $ 6,662 Issuance of stock for services 138,938 - 101 - 101 Net income - - - 3,923 3,923 ------------- ------------- ------------ -------------- ------------- Balance at December 31, 1995 4,668,531 - 3,769 6,917 10,686 Issuance of stock, net of issuance costs of $1,934 2,012,500 1 18,190 - 18,191 Cash dividends paid by pooled company prior to merger - - - (201) (201) Capital contribution into pooled company prior to merger - - 24 - 24 Net income - - - 3,570 3,570 ------------- ------------- ------------ -------------- ------------- Balance at December 31, 1996 6,681,031 1 21,983 10,286 32,270 Issuance of stock related to employee stock purchase plan and options 22,849 - 202 - 202 Net income - - - 8,138 8,138 ------------- ------------- ------------ -------------- ------------- Balance at December 31, 1997 6,703,880 $ 1 $ 22,185 $ 18,424 $ 40,610 ============= ============= ============ ============== =============
See accompanying notes. F-5 Matrix Capital Corporation Consolidated Statements of Cash Flows (Dollars in thousands)
YEAR ENDED DECEMBER 31 1997 1996 1995 --------- --------- -------- OPERATING ACTIVITIES Net income $ 8,138 $ 3,570 $ 3,923 Adjustments to reconcile net income to net cash used by operating activities: Depreciation and amortization 1,382 1,106 882 Provision for loan and valuation losses 874 143 401 Amortization of mortgage servicing rights 6,521 2,432 1,817 Noncash compensation expense - - 101 Accretion of premium on deposits - (7) (28) Deferred income taxes (2) (54) 212 Gain on sale of loans and mortgage backed securities (2,708) (3,369) (3,272) Gain on sale of mortgage servicing rights (3,365) (3,232) (1,164) Losses related to recourse sales 1,237 787 - Loans originated for sale, net of loans sold (18,800) 8,099 (38,591) Loans purchased for sale (493,693) (159,015) (91,774) Proceeds from sale of loans purchased for sale 198,277 57,395 70,159 Gain on sale of premises and equipment - (78) - Originated mortgage servicing rights, net (818) (441) (885) Increase in other receivables and other assets (13,279) (796) (3,738) Increase (decrease) in other liabilities and income taxes payable 2,832 (2,320) (20) --------- --------- -------- Net cash used by operating activities (313,404) (95,780) (61,977) INVESTING ACTIVITIES Loans originated and purchased for investment (56,793) (15,048) (2,919) Principal repayments on loans 73,908 22,982 17,517 Purchase of Federal Home Loan Bank of Dallas stock (5,829) (917) (814) Purchases of premises and equipment (2,295) (2,695) (1,963) Purchase of land under development - (1,431) - Purchase of revenue anticipation warrants - (818) - Purchase of residential homes - (1,003) - Acquisition of mortgage servicing rights (36,535) (10,410) (9,654) Proceeds from sale of mortgage servicing rights 19,817 8,410 1,769 Proceeds from sale of available for sale securities - 21,548 - --------- --------- -------- Net cash provided (used) by investing activities (7,727) 20,618 3,936 FINANCING ACTIVITIES Net increase in deposits 134,803 41,309 6,995 Net increase in custodial escrow balances 15,879 10,870 2,324 Increase in revolving lines and repurchase agreements, net 137,527 17,151 39,384 Repayments of notes payable (34,347) (13,923) (3,865) Proceeds from notes payable 45,148 6,924 12,933 Proceeds from senior subordinated notes - - 2,910 Proceeds from senior notes, net 19,100 - - Repayment of financing arrangements (157) (564) (307) Dividends paid by pooled company prior to merger - (201) - Capital contribution into pooled company prior to merger - 24 - Proceeds from issuance of common stock related to employee stock purchase plan and options 202 18,191 - --------- --------- -------- Net cash provided by financing activities 318,155 79,781 60,374 --------- --------- -------- (Decrease) increase in cash and cash equivalents (2,976) 4,619 2,333 Cash and cash equivalents at beginning of the year 12,609 7,990 5,657 --------- --------- -------- Cash and cash equivalents at end of the year $ 9,633 $ 12,609 $ 7,990 ========= ========= ======== SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITY Payable for purchase of mortgage servicing rights $ 8,660 $ 8,044 $ 1,312 ========= ========= ======== Drafts payable $ 7,506 $ 5,961 $ 8,817 ========= ========= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest expense $ 17,379 $ 10,598 $ 6,489 ========= ========= ======== Cash paid for income taxes $ 6,019 $ 2,298 $ 1,766 ========= ========= ========
See accompanying notes. F-6 Matrix Capital Corporation Notes to Consolidated Financial Statements December 31, 1997 1. ORGANIZATION Matrix Capital Corporation (Company) is a unitary thrift holding company that, through its subsidiaries, is engaged in a single industry segment, the financial services industries. In February 1998, the Board of Directors approved, subject to shareholder approval, the change of the Company's name to "Matrix Bancorp." The Company's operations are primarily through Matrix Capital Bank (Matrix Bank), Matrix Financial Services Corporation (Matrix Financial), United Financial, Inc. (United Financial), and The Vintage Group, Inc. (Vintage), all of which are wholly owned. Matrix Bank, a federally chartered savings and loan association, serves its local communities of Las Cruces, New Mexico, and Phoenix, Arizona, by providing personal and business depository services, offering residential and consumer loans, and providing, on a limited basis, commercial real estate loans. The Company's mortgage banking business is conducted through Matrix Financial, and was established with the primary objective of acquiring, originating and servicing residential mortgage loan servicing rights. Servicing mortgage loans involves the contractual right to receive a fee for processing and administering mortgage loan payments. The Company acquires servicing rights primarily in the secondary market as well as through Matrix Financial's wholesale loan origination offices in the Atlanta, Denver, Las Vegas, and Phoenix metropolitan areas. United Financial provides brokerage and consulting services to financial institutions and financial services companies in the mortgage banking industry, primarily related to the brokerage and analysis of residential mortgage loan servicing rights, corporate and mortgage loan servicing portfolio valuations, and, to a lesser extent, consultation and brokerage services in connection with mergers and acquisitions of mortgage banking entities. Vintage's operations, which are located in Texas, consist of a nonbank trust company specializing in the administration of self-directed qualified retirement plans, individual retirement accounts, custodial, and directed trust accounts, and a NASD broker/dealer that provides services to individuals and deferred contribution plans. F-7 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of the Company and its subsidiaries conform to generally accepted accounting principles and to general practices within the financial services industry. The following is a description of the more significant policies which the Company follows in preparing and presenting its consolidated financial statements. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from these estimates. Pooling of Interests Accounting On February 5, 1997, the Company completed the merger of The Vintage Group, Inc. (Vintage) with the issuance of 779,592 shares of the Company's common stock, which was accounted for as a pooling of interests. The financial information for all prior periods presented has been restated to present the combined financial condition and results of operations of both companies as if the merger of Vintage had been in effect for all periods presented. The following table sets forth separate company financial information for the years ended December 31, 1996 and 1995, respectively. The separate company financial information for Vintage for 1997 was not significant due to the pooling occurring on February 5, 1997.
YEAR ENDED YEAR ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 --------------------------------------------- (In thousands) COMPANY VINTAGE COMPANY VINTAGE ---------- ---------- ---------- ---------- Net interest income $ 5,859 $ 57 $ 3,135 $ 56 Total noninterest income 22,471 4,116 19,822 3,832 Total noninterest expense 22,951 3,704 17,136 3,317 Net income 3,273 297 3,561 362
F-8 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Loans Held for Sale Loans originated or purchased with the intent for sale in the secondary market are carried at the lower of cost, net of discounts or premiums and a valuation allowance, or estimated market value in the aggregate. Market value is determined using forward sale commitments to permanent investors or current market rates for loans of similar quality and type. Net unrealized losses, if any, would be recognized in a valuation allowance by charges to income. Discounts or premiums on loans held for sale are not accreted or amortized into income on an interest method, however discounts and premiums related to payments of loan principal are recorded in interest income. The loans are primarily secured by one to four family residential real estate located throughout the United States. The Company includes in loans held for sale first mortgage loans which are acquired under several purchase/repurchase facilities. The Company earns interest income on all the facilities and on some of the facilities receives a profit participation when the loans are subsequently sold which is included in interest income. Gains and losses on loan sales are determined based on the difference between the allocated cost basis of the assets sold and the proceeds, which includes the fair value of any assets or liabilities that are newly created as a result of the transaction. Losses related to recourse provisions in excess of the amount originally provided are accrued as a liability at the time such additional losses are determined, and recorded as part of noninterest expense. Loans Held for Investment Loans held for investment are stated at unpaid principal balances, less unearned discounts and premiums, deferred loan fees, loans in process, and allowance for loan losses. Allowance for Loan Losses The allowance for loan losses is calculated, in part, based on historical loss experience. In addition, management takes into consideration other factors such as any qualitative evaluations of individual classified assets, geographic portfolio concentrations, new products or markets, evaluations of the changes in the historical loss experience component, and projections of this component into the current and future periods 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, and F-9 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) trends in portfolio growth. Loan losses are charged against the allowance when the probability of collection is considered remote. In the opinion of management, the allowance, when taken as a whole, is adequate to absorb reasonably foreseeable losses in the current loan portfolio. The Company considers a loan impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan. The Company evaluates its residential loans collectively due to their homogeneous nature. Accordingly, potential impaired loans of the Company include only commercial, real estate construction and commercial real estate mortgage loans classified as nonperforming loans. Impairment allowances are considered by the Company in determining the overall adequacy of the allowance for loan losses. When a loan is identified as "impaired," accrual of interest ceases. The Company had no impaired loans as of or for the years ended December 31, 1997, 1996 and 1995. Loans are placed on nonaccrual status when full payment of principal or interest is in doubt, or generally when they are past due ninety days as to either principal or interest, unless the interest is guaranteed through recourse provisions. Previously accrued but unpaid interest is reversed and charged against interest income, if not collectible, and future accruals are discontinued. Interest payments received on nonaccrual loans are recorded as interest income unless there is doubt as to the collectibility of the recorded investment. In those cases, cash received is recorded as a reduction in principal. Mortgage Servicing Rights (MSR) Effective January 1, 1997, Statement of Financial Accounting Standards (Statement) No. 122, Accounting for Mortgage Servicing Rights, was superseded by Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The Company adopted Statement No. 125 in 1997 and recognizes originated mortgage servicing rights (OMSRs) as an asset separate from the underlying originated mortgage loan by allocating the total cost of originating a mortgage loan between the loan and the servicing right based on their respective fair values. Mortgage servicing rights are carried at the lower of cost (allocated cost for OMSRs), less accumulated amortization, or fair value. Mortgage servicing rights are amortized in proportion to and over the period of the estimated future net servicing income. The fair value of mortgage servicing rights is determined based on the discounted future servicing income stratified based on one or more predominant risk characteristics of the underlying loans. The Company stratifies its mortgage servicing rights by product type and investor to reflect the predominant risk characteristics. To determine the fair value of mortgage servicing rights, the Company uses a valuation model that calculates the present value of future cash flows to determine the fair value of the mortgage servicing rights. In using this valuation method, the Company incorporates assumptions that F-10 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) market participants would use in estimating future net servicing income which includes estimates of the cost of servicing per loan, the discount rate, float value, an inflation rate, ancillary income per loan, prepayment speeds and default rates. As of December 31, 1997, no valuation allowance was required and the fair value of the aggregate mortgage servicing rights was approximately $45 million. Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight line method over the estimated lives of the assets, which range from three to seven years for office furniture, equipment and software and 30 years for buildings. Foreclosed Real Estate Real estate acquired through foreclosure, deed in lieu of foreclosure or in judgment is carried at the lower of fair value, minus estimated costs to sell, or the related loan balance at the date of foreclosure. Valuations are periodically performed by management and an allowance for loss is established by a charge to operations if the carrying value of a property exceeds its fair value, minus estimated costs to sell. The net carrying value of foreclosed real estate, which is classified in other assets, was $1,242,000 and $788,000 December 31, 1997 and 1996, respectively. All of the companies foreclosed properties relate to residential real estate as of December 31, 1997. 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, 1997 there was no valuation allowance necessary for the land development. Income Taxes The Company and its subsidiaries file consolidated federal and state income tax returns. The subsidiaries are charged for the taxes applicable to their profits calculated on the basis of filing separate income tax returns. Matrix Bank qualifies as a savings and loan association for income tax purposes. The Company follows Statement No. 109, Accounting for Income Taxes, which uses the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. F-11 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Drafts Payable Drafts payable represent the in transit outstanding funding of a new loan by the Company via a negotiable instrument, however, the instrument has not yet been presented to the bank for payment. Presentation to the bank generally occurs within one to three days. Loan Administration Income Loan administration income represents service fees and other income earned from servicing loans for various investors. Loan administration income includes service fees that are based on a contractual percentage of the outstanding principal balance plus late fees and other ancillary charges. Income is recognized when the related payments are received. Brokerage Income Brokerage income represents fees earned related to servicing brokerage and consulting services. Brokerage income is recognized when earned. Trust Services Income Trust services income represents fees earned related to services provided for self-directed IRA, qualified benefit plans, and escrow arrangements. Trust services income is recognized when earned. Gain on Sale of Servicing Rights Gain on sale of servicing rights is recognized when substantially all the risks and rewards inherent in owning the mortgage servicing rights have been transferred to the buyer, and any protection provisions retained by the Company are minor and can be reasonably estimated. Loan Origination Income Loan origination income for loans originated for sale, which includes all mortgage origination fees, secondary marketing activity and servicing-released premiums on mortgage loans sold, net of outside origination costs, is recognized as income at the time the loan is sold. Loan origination income for loans originated for investment, which includes mortgage origination fees and certain direct costs associated with loan originations, is deferred and amortized as a yield adjustment over the contractual life of the related loan using the interest method, adjusted for estimated prepayments. F-12 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Stock Based Compensation The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for stock option grants. Cash and Cash Equivalents Cash equivalents, for purposes of the statements of cash flows, consist of cash and interest earning deposits with banks with original maturities when purchased of three months or less. Hedging of Mortgage Servicing Rights The Company hedges a segment of its servicing portfolio using exchange traded futures and options. A change in the market value of the futures contract is deferred and amortized in proportion to and over the period of the estimated future net servicing income of the hedged servicing portfolio. The option premium or cost is amortized ratably over the period of the option. If any of the hedged servicing portfolio is sold, then the realized and unrealized gain or loss from the futures and options attributable to the portion sold is included in the basis of the MSRs sold for purposes of calculating gain or loss on sale. These realized and unrealized hedging gains and losses are considered in the determination of the fair value of the MSRs. Net Income Per Share As of December 31, 1997, the Company adopted Statement No. 128, Earnings per Share, and restated all prior period earnings per share (EPS) data, as required. Statement No. 128 replaced the presentation of primary and fully diluted EPS pursuant to APB Opinion No. 15, Earnings per Share, with the presentation of basic and diluted EPS. Basic EPS, or net income per common share, excludes dilution and is computed by dividing net 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. F-13 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Impact of Recently Issued Accounting Standards In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income, which establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. Statement No. 130 also requires all items that are required to be recognized under accounting standards as components of comprehensive income, be reported in financial statements and be displayed with equal prominence as other general-purpose financial statements. This Statement is effective for periods beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. Also in June 1997, the FASB issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. This Statement also establishes standards for related disclosures about products and services, geographic areas, and major customers. Statement No. 131 is effective for periods beginning after December 31, 1997. Comparative information provided for earlier periods is required to be restated. Management believes there will be no material effect on the consolidated financial statements from the adoption of either Statement Nos. 130 or 131. Reclassifications Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. F-14 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 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 1997 1996 1995 ------------------------------------------------- (Dollars in thousands) Numerator: Net income $ 8,138 $ 3,570 $ 3,923 Less: preferred stock dividends from pooled company -- (112) -- ------------------------------------------------- Net income available to common shareholders $ 8,138 $ 3,458 $ 3,923 ================================================= Denominator: Weighted average shares outstanding 6,681,269 5,034,788 4,668,531 Effect of dilutive securities: Common stock options 89,333 42,533 38,690 Common stock warrants 11,206 ------------------------------------------------- Dilutive potential common shares 100,539 42,533 38,690 ------------------------------------------------- Denominator for net income per share, assuming dilution 6,781,808 5,077,321 4,707,221 =================================================
F-15 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 4. LOANS RECEIVABLE Loans Held for Investment Loans held for investment consist of the following:
DECEMBER 31 1997 1996 --------- -------- (In thousands) Residential loans $ 7,523 $10,007 Multi-family, commercial real estate, and commercial 32,189 15,352 Construction loans 14,878 1,319 Consumer loans and other, net of specific valuation allowance 10,942 3,654 --------- -------- 65,532 30,332 Less: Loans in process 9,784 254 Purchase discounts, net 236 239 Unearned fees on loans (excluding consumer) 220 - Unearned fees on consumer loans 209 9 Allowance for loan losses 689 270 --------- -------- 11,138 772 --------- -------- $54,394 $29,560 ========= ========
Activity in the allowance for loan losses is summarized as follows:
YEAR ENDED DECEMBER 31 1997 1996 1995 ---------- ----------- ----------- (In thousands) Balance at beginning of period $ 270 $ 227 $ 220 Provision for loan losses 554 34 - Charge-offs (166) (6) (42) Recoveries 31 15 49 ---------- ----------- ----------- Balance at end of period $ 689 $ 270 $ 227 ========== =========== ===========
Nonaccrual loans in the loans held for investment portfolio totaled approximately $381,000 and $335,000 or 0.7 percent and 1.1 percent of the total loans held for investment portfolio at December 31, 1997 and 1996, respectively. The Company had commitments to extend credit on consumer, commercial and construction loans of approximately $28,227,000 at December 31, 1997. F-16 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 4. LOANS RECEIVABLE (CONTINUED) Loans Held for Sale Loans held for sale consist of the following as of:
DECEMBER 31 1997 1996 --------- --------- (In thousands) Residential loans $ 456,552 $ 185,080 Commercial loans and leases 2,728 Automobile installment contracts 1,315 --------- --------- 459,280 186,395 Less: Purchase discounts, net 1,235 2,825 Valuation allowance 1,067 769 --------- --------- 2,302 3,594 --------- --------- $456,978 $182,801 ========= =========
Included in loans held for sale are approximately $36,352,000 and $3,528,000 at December 31, 1997 and 1996, respectively, of first mortgage loans which the Company has acquired under purchase/repurchase facilities with several parties. The terms of the purchase/repurchase facilities vary with each seller but include provisions which require the seller to repurchase the loans within a defined period of time, provide, at the Company's option, the ability, on short notice, to require the seller to repurchase the loans, or in some cases, allow the seller to repurchase the loans. Activity in the valuation allowance is summarized as follows:
YEAR ENDED DECEMBER 31 1997 1996 1995 ------- ------- ------- (In thousands) Balance at beginning of period $ 769 $ 716 $ 508 Provision for valuation allowance 320 109 401 Charge-offs (22) (64) (198) Recoveries - 8 5 ------- ------- ------- Balance at end of period $1,067 $ 769 $ 716 ======= ======= =======
F-17 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 4. LOANS RECEIVABLE (CONTINUED) Nonaccrual loans related to the loans held for sale portfolio aggregated approximately $4,609,000 and $3,568,000 at December 31, 1997 and 1996, respectively. Interest income that would have been recorded for all nonaccrual loans was approximately $89,000, $120,000, and $156,000 during the years ended December 31, 1997, 1996 and 1995, respectively. During 1996, the Company formed two mortgage backed securities with an unpaid principal balance of approximately $21,000,000 from its loans held for sale portfolio. During the year ended December 31, 1996, the Company recognized a gross gain on the sale of mortgage backed securities of approximately $171,000 and the taxes related to this sale were approximately $68,000. During 1996, the Company purchased numerous automobile retail installment contracts and sold approximately $18,500,000 of such contracts, subject to certain recourse provisions. During 1997 and 1996, the Company was required to repurchase approximately $4,000,000 of automobile installment contracts and repossessed automobiles pursuant to the recourse provisions. Included in loans held for sale at December 31, 1997 and 1996 is approximately $-0- and $1,220,000, net of discount, respectively, of these automobile installment contracts. In December 1997, the Company sold the remaining automobile retail installment contracts including its repossessed assets and the charged-off accounts for $800,000, to an independent third party. The Company received $260,000 in cash and financed the remaining balance, with recourse limited to the assets sold. The Company realized a loss of approximately $54,000 upon the sale. The Company recorded losses of $1,237,000 and $787,000 for the years ended December 31, 1997 and 1996, respectively, related to the repurchase and ultimate disposition of the loans and automobiles. F-18 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 5. PREMISES AND EQUIPMENT Premises and equipment consist of the following:
DECEMBER 31 1997 1996 -------- -------- (In thousands) Land $ 684 $ 692 Buildings 4,348 4,257 Leasehold improvements 460 431 Office furniture and equipment 5,485 3,910 Other equipment 1,268 975 -------- -------- 12,245 10,265 Less: accumulated depreciation and amortization 3,233 2,378 -------- -------- $ 9,012 $ 7,887 ======== ========
Included in occupancy and equipment expense is depreciation and amortization expense of premises and equipment of approximately $1,170,000, $828,000 and $602,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 6. MORTGAGE SERVICING RIGHTS The activity in the MSRs is summarized as follows:
YEAR ENDED DECEMBER 31 1997 1996 1995 --------- --------- --------- (In thousands) Balance at beginning of year $ 23,680 $ 13,817 $ 6,183 Purchases 37,151 17,142 9,203 Originated, net of OMSRs sold 818 441 885 Amortization (6,521) (2,432) (1,817) Transfer of MSR to FHLMC (Note 13) - (110) - Sales (18,688) (5,178) (637) --------- --------- --------- Balance at end of year $ 36,440 $ 23,680 $ 13,817 ========= ========= =========
Accumulated amortization of mortgage servicing rights aggregated approximately $17,223,000 and $11,347,000 at December 31, 1997 and 1996, respectively. F-19 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 6. MORTGAGE SERVICING RIGHTS (CONTINUED) The Company's servicing activity is diversified throughout 48 states with concentrations at December 31, 1997 in California and Texas of approximately 22.8 percent and 14.9 percent, respectively, based on aggregate outstanding unpaid principal balances of the mortgage loans serviced. As of December 31, 1997 and 1996, the Company subserviced loans for others of approximately $239,000,000 and $140,000,000, respectively. The Company's servicing portfolio (excluding subserviced loans) comprised the following:
DECEMBER 31 1997 1996 ------------------------------- -------------------------------- PRINCIPAL Number BALANCE NUMBER PRINCIPAL BALANCE OF LOANS OUTSTANDING OF LOANS OUTSTANDING ---------- -------------- ---------- ------------------ (Dollars in thousands) FHLMC 13,134 $ 715,513 12,107 $ 666,218 FNMA 18,000 1,168,199 13,426 764,632 GNMA 15,845 615,234 9,379 278,700 Other VA, FHA, and conventional loans 14,538 849,116 12,870 795,486 ---------- -------------- ---------- ------------------ 61,517 $ 3,348,062 47,782 $ 2,505,036 ========== ============== ========== ==================
The Company's custodial escrow balances shown in the accompanying consolidated balance sheets at December 31, 1997 and 1996 pertain to escrowed payments of taxes and insurance and the float on principal and interest payments on loans serviced on behalf of others of approximately $6,801,000 and $1,587,000, respectively, and owned by the Company of approximately $42,878,000 and $25,794,000, respectively. The Company also has custodial accounts on deposit from other mortgage companies aggregating approximately $4,081,000 and $10,500,000 at December 31, 1997 and 1996, respectively. The Companies custodial accounts are maintained at Matrix Bank in noninterest bearing accounts. The balance of the custodial accounts fluctuate from month to month based on the pass-through of the principal and interest payments to the ultimate investors and the timing of the taxes and insurance payments. F-20 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 7. DEPOSITS Deposit account balances are summarized as follows:
DECEMBER 31 --------------------------------------------------------------- 1997 1996 (Dollars In thousands) WEIGHTED WEIGHTED AVERAGE AVERAGE AMOUNT PERCENT RATE AMOUNT PERCENT RATE -------- -------- -------- ------- -------- ---------- Passbook accounts $ 2,851 1.27% 3.95% $ 2,757 3.06% 3.45% NOW accounts 26,382 11.73 1.62 4,732 5.25 1.66 Money market accounts 99,899 44.40 2.96 9,455 10.48 4.43 -------- -------- -------- ------- -------- ---------- 129,132 57.40 2.70 16,944 18.79 3.59 Certificate accounts 95,850 42.60 5.94 73,235 81.21 5.85 -------- -------- -------- ------- -------- ---------- $224,982 100.00% 4.09% $90,179 100.00% 5.36% ======== ======== ======== ======= ======== ==========
Contractual maturities of certificate accounts as of December 31, 1997:
Under 12 12 to 36 36 to 60 months months months ------------------------------------------ (In thousands) 4.00-4.99% $ 495 $ - $ - 5.00-5.99% 56,046 8,389 833 6.00-6.99% 11,814 9,337 8,552 7.00-7.99% 192 144 3 8.00-10.50% 45 - - ------------------------------------------ $ 68,592 $ 17,870 $ 9,388 ==========================================
Approximately $92,440,000 of assets under administration by Vintage are included in interest bearing accounts as of December 31, 1997. F-21 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 7. DEPOSITS (CONTINUED) Interest expense on deposits is summarized as follows:
YEAR ENDED DECEMBER 31 1997 1996 1995 ------------ ------------ ------------ (In thousands) Passbook accounts $ 113 $ 82 $ 85 NOW accounts 795 63 52 Money market 2,483 405 240 Certificates of deposit 4,985 3,210 1,807 ------------ ------------ ------------ $8,376 $3,760 $2,184 ============ ============ ============
The aggregate amount of deposit accounts with a balance greater than $100,000 was approximately $7,185,000 and $5,457,000 at December 31, 1997 and 1996, respectively. 8. BORROWED MONEY Borrowed money is summarized as follows:
DECEMBER 31 1997 1996 -------- -------- (In thousands) Revolving Lines $60,000,000 revolving warehouse loan agreement with banks, secured by mortgage loans held for sale, interest at federal funds rate plus 0.85-2.00 percent (7.07 percent average rate at December 31, 1997); $14,038,000 available at December 31, 1997. $ 45,962 $ 31,504 $10,000,000 working capital facility with banks secured by mortgage loans held for sale, mortgage servicing rights, eligible servicing advance receivables and eligible delinquent mortgage receivables; interest at federal funds rate plus 1.5 percent (7.01 percent at December 31, 1997); $7,624,000 available at December 31, 1997 2,376 - $6,000,000 revolving line of credit with a third party financial institution, secured by common stock of Matrix Bank; interest due monthly at prime; $6,000,000 available at December 31, 1997. - - -------- -------- Total revolving lines 48,338 31,504
F-22 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 8. BORROWED MONEY (CONTINUED)
DECEMBER 31 1997 1996 -------- -------- (In thousands) Term Notes Payable $30,000,000 servicing acquisition loan agreement with a bank, secured by MSRs, due at the earlier of the maturity of the MSRs or amortized over five to six years from the date of the borrowing through January 31, 2003; interest at federal funds rate plus 2.00 percent (7.51 percent at December 31, 1997); $17,652,000 available at December 31, 1997. $ 12,348 $ 1,500 Senior notes, interest at 11.50 percent payable semiannually, unsecured and maturing September 30, 2004. 20,000 - Senior subordinated notes, interest at 14 percent payable semiannually, unsecured and maturing July 2002, with mandatory redemptions of $727,500 on each of July 15, 1999, 2000 and 2001. 2,910 2,910 $2,000,000 note payable to a third-party financial institution (revised bank stock loan) due in quarterly installments of $71,430, plus interest, through March 12, 2000, collateralized by the common stock of Matrix Bank; interest at 1,786 - prime. Note payable to a third-party financial institution (bank stock loan). - 2,003 Notes payable to banks, secured by a deeds of trust on real estate, interest at prime plus 1.0 percent. 1,740 1,783 Other 1,465 1,252 -------- -------- Total term notes 40,249 9,448
F-23 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 8. BORROWED MONEY (CONTINUED)
DECEMBER 31 1997 1997 --------- -------- (In thousands) Other Agreements with a bank and an investment bank to sell mortgage loans originated by the Company under agreements to repurchase. The agreement can be terminated upon 90 days written notice by either party; interest at the higher of the prime rate or note rate on the loans. Total commitment amount of these agreements is $20,000,000, with $20,000,000 available at December 31, 1997. $ - $ - Financing agreement with a bank, secured by Ft. Lupton Subordinated Series 1996 A1 revenue anticipation warrants, interest is at 5 percent and is due based on the semi-annual bonds payments, unpaid principal due at bond maturity. 800 800 MSR financing, collateralized by MSR's with unpaid principal balances of $59,000,000 at December 31, 1997. 522 679 --------- -------- Total other 1,322 1,479 --------- -------- Total borrowed money $ 89,909 $ 42,431 ========= ========
Effective March 1, 1998, the Company executed an amendment to its revolving credit facilities increasing the aggregate amount of the revolving warehouse loan agreement to $90,000,000 and to provide an overline facility for an additional $10,000,000. The availability of the overline facility is at the lender's sole discretion. F-24 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 8. BORROWED MONEY (CONTINUED) The Company's bank stock loan has two components, a $2,000,000 term loan, which was used to refinance the bank stock loan in place at December 31, 1996, and a revolving line of credit of $6,000,000. In May of 1998, the balance of the revolving line of credit will be converted to a term loan. The Company may redeem the senior subordinated notes, in whole or in part, at any time after July 15, 1998 at a redemption price of 102 percent of par through July 14, 1999 and, thereafter, at par, plus accrued and unpaid interest. The Company was obligated to register under the Securities Act of 1933 the senior subordinated notes on or before February 1, 1997. Since such registration statement was not effected by February 1, 1997, the interest rate increased from 13 to 14 percent. As of December 31, 1997 the maturities of term notes payable during the next five years and thereafter are as follows: (In thousands) 1998 $ 4,787 1999 4,297 2000 5,232 2001 3,447 2002 1,699 Thereafter 20,787 ------------ $ 40,249 ============ The Company must comply with certain financial and other covenants related to the foregoing debt agreements including, among other things, the maintenance of specific ratios, net worth and other amounts as defined in the credit agreements limiting the Company's ability to declare dividends (and its subsidiaries) or incur additional debt, and establishes requirements to maintain certain capital levels in certain subsidiaries. These covenants include requirements for the Company to maintain consolidated tangible capital of not less than $35 million, maintain adjusted debt to shareholders' equity of less than 4:1 and maintain the requirements necessary such that Matrix Bank will not be classified as other than "well capitalized," as defined. At December 31, 1997, the Company was in compliance with these covenants except for a covenant where a waiver was obtained. F-25 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 9. FEDERAL HOME LOAN BANK OF DALLAS BORROWINGS Federal Home Loan Bank of Dallas borrowings aggregated $171,943,000 and $51,250,000 at December 31, 1997 and 1996, respectively. The advances bear interest at rates which adjust daily and are based on the mortgage repo rate. All advances are secured by first mortgage loans of Matrix Bank and all Federal Home Loan Bank of Dallas stock. Matrix Bank has a commitment from the Federal Home Loan Bank of Dallas for advances of approximately $173,000,000 at December 31, 1997. Matrix Bank adopted a collateral pledge agreement whereby it has agreed to keep on hand, at all times, first mortgages free of all other pledges, liens, and encumbrances with unpaid principal balances aggregating no less than 170 percent of the outstanding secured advances from the Federal Home Loan Bank of Dallas. 10. INCOME TAXES The income tax provision consists of the following:
YEAR ENDED DECEMBER 31 1997 1996 1995 -------------------------------------- (In thousands) Current Federal $ 4,108 $ 1,871 $ 1,814 State 1,053 461 443 Deferred Federal (2) (42) 169 State - (12) 43 -------------------------------------- $5,159 $2,278 $2,469 ======================================
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 1997 1996 1995 -------------------------------------- (In thousands) Expected income tax provision $ 4,521 $ 1,988 $ 2,173 State income taxes 694 296 310 Other (56) (6) (14) -------------------------------------- $ 5,159 $ 2,278 $ 2,469 ======================================
F-26 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 10. 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 1997 1996 -------------------------- (In thousands) Deferred tax assets: Allowance for losses $ 475 $ 551 Discounts and premiums 106 108 Amortization of servicing rights 156 - Deferred fees 328 - Other 58 82 -------------------------- Total deferred tax assets 1,123 741 Deferred tax liabilities: Gain on sale of loans (732) (279) Amortization of servicing rights - (106) Depreciation (335) (302) -------------------------- Total deferred tax liabilities (1,067) (687) -------------------------- Net deferred tax asset $ 56 $ 54 ==========================
11. REGULATORY The Company is a unitary thrift holding company and, as such, is subject to the regulation, examination and supervision of the Office of Thrift Supervision (OTS). Matrix Bank is also subject to various regulatory capital requirements administered by the OTS. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions, actions by regulators that, if undertaken, could have a direct material effect on Matrix Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Matrix Bank must meet specific capital guidelines that involve quantitative measures of the Matrix Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Matrix Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require Matrix Bank to maintain minimum amounts and ratios (set forth in the table below) 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, 1997 and 1996, that Matrix Bank meets all capital adequacy requirements to which it is subject. F-27 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 11. REGULATORY (CONTINUED) As of December 31, 1997, the most recent notification from the OTS categorized Matrix Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized Matrix Bank must maintain minimum total risk-based, Tier I risk based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category.
For Capital Actual Adequacy Purposes ---------------------------- --------------------------------------------- Amount Ratio Amount Ratio ------------- ------------- -------------------- ----------------- (In thousands) As of December 31, 1997 Total Capital (to Risk Weighted less than less than Assets) $29,714 10.8% or equal to $ 21,969 or equal to 8.0% Tier I Capital (to Risk less than less than Weighted Assets) 27,958 10.2 or equal to 10,985 or equal to 4.0 Tier I Capital (to ending less than less than Assets) 27,958 5.7 or equal to 19,498 or equal to 4.0 As of December 31, 1996 Total Capital (to Risk Weighted less than less than Assets) 12,406 11.1 or equal to 8,979 or equal to 8.0 Tier I Capital (to Risk less than less than Weighted Assets) 11,367 10.1 or equal to 4,489 or equal to 4.0 Tier I Capital (to ending less than less than Assets) 11,367 5.7 or equal to 7,951 or equal to 4.0
To Be Well Capitalized Under Prompt Corrective Action Provisions ---------------------------------------- Amount Ratio ------------- ----------------- As of December 31, 1997 Total Capital (to Risk Weighted less than less than Assets) or equal to $27,462 or equal to 10.0% Tier I Capital (to Risk less than less than Weighted Assets) or equal to 16,477 or equal to 6.0 Tier I Capital (to ending less than less than Assets) or equal to 24,372 or equal to 5.0 As of December 31, 1996 Total Capital (to Risk Weighted less than less than Assets) or equal to 11,224 or equal to 10.0 Tier I Capital (to Risk less than less than Weighted Assets) or equal to 6,734 or equal to 6.0 Tier I Capital (to ending less than less than Assets) or equal to 9,939 or equal to 5.0
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 Bank is required to maintain balances with the Federal Reserve Bank of Dallas in a noninterest earning account based on a percentage of deposit liabilities. Such balances averaged $6,897,000 and $659,000 in 1997 and 1996, 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, 1997 and 1996, respectively. Matrix Financial is subject to examination by various regulatory agencies involved in the mortgage banking industry. Each regulatory agency requires the maintenance of a certain amount of net worth, the most restrictive of which required $2,587,000 at December 31, 1997 and $1,709,000 at December 31, 1996. F-28 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 12. SHAREHOLDERS' EQUITY Common Stock The authorized common stock of the Company consists of 50,000,000 shares with a par value of $.0001 per share. There were 6,703,880, 6,681,031 and 4,668,531 shares of common stock outstanding at December 31, 1997, 1996 and 1995, respectively. Holders of common stock are entitled to receive dividends when, and if, declared by the board of directors. Each share of common stock entitles the holders thereof to one vote, and cumulative voting is not permitted. Preferred Stock The authorized preferred stock of the Company consists of 5,000,000 shares with a par value of $.0001 per share. The board of directors is authorized, without further action of the shareholders of the Company, to issue from time to time shares of preferred stock in one or more series and with such relative rights, powers, preferences, and limitations as the board of directors may determine at the time of issuance. Such shares may be convertible into common stock and may be superior to the common stock in the payment of dividends, liquidation, voting and other rights, preferences and privileges. Stock Option Plan The Company has elected to follow APB Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under Statement No. 123, Accounting for Stock-Based Compensation, requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB Opinion No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. In September 1996, the board of directors and shareholders adopted the 1996 Stock Option Plan, which amended and restated the Company's stock option plan adopted in 1995. The Company's 1996 Stock Option Plan has authorized the grant of options to substantially all of the Company's full-time employees and directors for up to 525,000 shares of the Company's common stock. All options granted have ten year terms and vest based on the determination by the Company's compensation committee. The 1996 Stock Option Plan authorized the granting of incentive stock options ("Incentive Options") and nonqualified stock options ("Nonqualified Options") to purchase common stock to eligible persons. The 1996 Stock Option Plan is currently administered by the compensation committee (administrator) of the board of directors. The 1996 Stock Option Plan provides for adjustments to the number of shares and to the exercise price of outstanding options in the event of a declaration of stock dividend or any recapitalization resulting in a stock split-up, combination or exchange of shares of common stock. F-29 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 12. SHAREHOLDERS' EQUITY (CONTINUED) No Incentive Option may be granted with an exercise price per share less than the fair market value of the common stock at the date of grant. The Nonqualified Options may be granted with any exercise price determined by the administrator of the 1996 Stock Option Plan. The expiration date of an option is determined by the administrator at the time of the grant, but in no event may an option be exercisable after the expiration of ten years from the date of grant of the option. The 1996 Stock Option Plan further provides that in most instances an option must be exercised by the optionee within 30 days after the termination of the consulting contract between such consultant and the Company or termination of the optionee's employment with the Company, as the case may be, if and to the extent such option was exercisable on the date of such termination. Pro forma information regarding net income and earnings per share is required by Statement No. 123, which also requires that the information be determined as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997 and 1996, respectively: risk-free interest rates of 5.7 percent and 6.0 percent; a dividend yield of zero percent; volatility factors of the expected market price of the Company's common stock of .38 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. F-30 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 12. SHAREHOLDERS' EQUITY (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 1997 1996 --------------------------- (Dollars in thousands except per share data) Pro forma net income $ 7,960 $ 3,534 Pro forma earnings per share: Basic 1.19 0.67 Diluted 1.17 0.67
Because Statement No. 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect was not fully reflected until the current year. A summary of the Company's stock option activity, and related information for the years ended December 31 follows:
YEAR ENDED DECEMBER 31 1997 1996 --------------------------------------------------------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE --------------------------------------------------------------------------- Outstanding, beginning of year 209,100 $ 8.15 79,500 $ 5.13 Granted 149,500 14.12 129,600 10.00 Exercised (2,100) 10.00 - - Forfeited (26,350) 11.93 - - ------------------- ------------------- Outstanding, end of year 330,150 $10.55 209,100 $ 8.15 =================== =================== Exercisable at end of year 117,700 $ 6.75 87,000 $ 5.55 Weighted average fair value of options granted during the year $ 6.67 $ 4.06
F-31 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 12. SHAREHOLDERS' EQUITY (CONTINUED) Options outstanding at December 31, 1997 have exercise prices ranging from $5.13 to $17.25 per share, with a weighted average exercise price of $10.55 per share, as outlined in the following table:
Weighted Weighted Weighted Range of Number of Average Average Number of Average Exercise Options Exercise Remaining Options Exercise Price Prices Outstanding Price Per Contractual Life Exerciseable Per Share Share - ----------------------------------------------------------------------------------------------- $ 5.13 79,500 $ 5.13 7.00 79,500 $ 5.13 10.00 112,150 10.00 8.83 37,200 10.00 10.38 5,000 10.38 9.38 12.00-17.25 133,500 14.25 9.27 1,000 15.00 ------------------------------------------------------------------------------------ 330,150 $10.55 8.57 117,700 $ 6.75 ====================================================================================
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, 1997 and 1996. Warrants The Company issued warrants exercisable for an aggregate of 75,000 shares of its common stock to its primary underwriters upon the closing of the Company's initial public offering. The warrants are exercisable from time to time during the four years after the one year anniversary of their date of grant, and are not transferable during the first year after their grant. The exercise price for the shares of common stock underlying such warrants is $12 per share. The shares of common stock underlying such warrants are entitled to certain demand and incidental registration rights. Employee Stock Purchase Plan In September 1996, the board of directors and shareholders adopted the Matrix Capital Corporation Employee Stock Purchase Plan ("Purchase Plan") and reserved 125,000 shares of common stock ("ESPP Shares") for issuance thereunder. The Purchase Plan became effective upon consummation of the initial public offering. The price at which ESPP shares are sold under the Purchase Plan is 85 percent of the lower of the fair market value per share of common stock on the enrollment or the purchase date. F-32 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 13. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS Leases The Company leases office space and certain equipment under noncancelable operating leases. Annual amounts due under the office and equipment leases as of December 31, 1997 are approximately as follows: (In thousands) 1998 $ 837 1999 707 2000 661 2001 491 2002 287 ------------ $2,983 ============ Total rent expense aggregated approximately $631,000, $541,000, and $647,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Hedging of Pipeline In the ordinary course of business, the Company makes commitments to originate residential mortgage loans (Pipeline) and holds originated loans until delivery to an investor. Inherent in this business is a risk associated with changes in interest rates and the resulting change in the market value of the Pipeline and funded loans. The Company mitigates this risk through the use of mandatory and nonmandatory forward commitments to sell loans. At December 31, 1997, the Company had $72,803,000 in Pipeline and funded loans offset with mandatory forward commitments of $45,622,000 and nonmandatory forward commitments of $9,070,000. At December 31, 1996, the Company had $62,578,000 in Pipeline and funded loans offset with mandatory forward commitments of $49,150,000 and nonmandatory forward commitments of $8,144,000. The inherent value of the forward commitments is considered in the determination of the lower of cost or market for the Pipeline and funded loans. Hedging of Mortgage Servicing Rights. Ownership of mortgage servicing rights 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 F-33 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 13. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED) the mortgage servicing rights may occur. To mitigate this risk of impairment due to declining interest rates, the Company hedged a segment of its mortgage servicing portfolio beginning in September 1997. As of December 31, 1997, the Company had identified and hedged approximately $306 million of its mortgage servicing portfolio using a program of exchange traded futures and options. At December 31, 1997, the Company had the following open positions:
Expiration Open Positions Notional Fair Value Date (No. of Contracts) Amount by Contract ------------------------------------------------------------- Ten year Treasury Note futures March 1998 110 $11,000,000 $112,156 Ten year Treasury Note put February 1998 (80) 8,000,000 (164) options Ten year Treasury Note call February 1998 94 9,400,000 1,328 options
During 1997, the Company closed a portion of its hedge positions which resulted in a realized gain of approximately $250,000 being recognized in connection with the sale of a portion of the hedged servicing portfolio. At December 31, 1997 the net realized deferred gains and the unrealized deferred gain of the open positions was approximately $275,000. Land Development Commitment In June 1996, the Company purchased 154 acres of land for $1.3 million in cash for the purpose of developing residential and multi-family lots in Ft. Lupton, Colorado. As part of the acquisition, the Company entered into a Residential Facilities Development Agreement (Development Agreement) with the City of Ft. Lupton. The Development Agreement is a residential and planned unit development agreement providing for the orderly planning, engineering and development of a golf course and surrounding residential community. The City of Ft. Lupton is responsible for the development of the golf course and the Company is responsible for the development of the surrounding residential lots. The Development Agreement sets forth a mandatory obligation on the part of the Company to pay the City of Ft. Lupton pledged enhancement assessments of $600,000. These pledged enhancement assessments require the Company to pay the city a $2,000 fee each time the Company sells a developed residential lot. The Company is obligated to pay a minimum of $60,000 in assessment fees per year beginning in 1998 through 2007. The Company also entered into a development management agreement with a local developer to complete the development of the land. The terms of the agreement specify that the Company is to earn a preferred rate of return on its investment and, once the initial amount of its investment has been returned F-34 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 13. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED) and the preferred rate has been paid, the remaining profits are split equally. The development management agreement obligates the Company to provide up to an additional $500,000 of funds for development. The Company, at its option, has no other financial obligations to the developer beyond the $500,000. As of December 31, 1997 and 1996, the Company has included in its basis in the development $118,000 and $38,000, respectively, in capitalized interest costs. At December 31, 1997 and 1996, the total basis of the land development is $2,835,000 and $1,431,000, respectively, and is classified in other assets in the accompanying consolidated balance sheets. Financing Agreement In 1996, the Company purchased $800,000 of City of Fort Lupton Subordinated Series 1996 A1 revenue anticipation warrants, with interest at 9.75 percent and due December 15, 2015. The warrants are classified as other receivables in the accompanying consolidated balance sheets. The Company entered into an agreement with a bank to sell the warrants, subject to certain repurchase obligations resulting from the bank's annual remarketing of the bonds, with interest at five percent. The Company entered into a letter of credit agreement of $825,000 to guarantee its repurchase obligation. Contingencies The Company has received demands from an investor for repurchase of loans related to a servicing portfolio purchased by the Company from an unrelated third-party mortgage banker (Seller). The repurchase demand is pursuant to a claim of breach of covenants and warranties by the Seller related to documentation deficiencies in connection with the origination and sale of the loans which were not honored and the Seller subsequently filed bankruptcy. During 1996, the servicing relating to FHLMC was transferred to FHLMC for no consideration. The Company had an accrued liability of approximately $23,000 at December 31, 1997 and $420,000 at December 31, 1996 for the potential loss exposure related to the pending repurchase requests which, in the opinion of management, is adequate for estimated future losses. The Company is a defendant is a lawsuit that was commenced on or about May 23, 1997 in which the plaintiff-buyer alleges that the Company, as broker for the seller, made false representations regarding the GNMA certification of certain mortgage pools the servicing rights of which were offered for sale in a written offering. The plaintiff further alleges that it relied on the Company's representations in purchasing the servicing rights from the seller. The plaintiff seeks recovery of: (a) the deposit paid to the seller in connection with the purchase thereof in the amount of $147,000; (b) $1,400,000 that the plaintiff claims it paid to GNMA to settle a dispute regarding the certification of the mortgage pools; and (c) approximately $1,400,000 in lost profits. F-35 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 13. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED) The Company has been named a defendant in an action which commenced on or about August 8, 1997. The plaintiff alleges that the Company, as servicer, breached the terms of the underlying note and deed of trust with plaintiff and otherwise committed negligence, fraud and violations of RESPA in connection with their servicing of plaintiff's mortgage loan. The Company purchased this mortgage loan and the servicing rights from a third party in December 1996. Plaintiff claims $126,000 in actual damages and $2,000,000 in punitive damages, in addition to interest, attorneys' fees, and other costs and expenses. The Company and its subsidiaries are parties to various other litigation matters, in most cases involving ordinary and routine claims incidental to the business of the Company. The ultimate legal and financial liability of the Company, if any, with respect to the foregoing litigation cannot be estimated with certainty, but the Company believes, based on its examination of such matters, that such ultimate liability will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company. Related Party Transactions The Company had a note receivable from an affiliate of $750,000 at December 31, 1997 and 1996, which bore interest at 13 percent and was due October 1, 2000. In January 1998, the note was paid in full. The Company had leased office space to the affiliate for approximately $8,500 per month. In January 1998, the space was leased to a third party. At December 31, 1997 and 1996, the Company had an unsecured loan receivable from a shareholder of approximately $80,000, which bears interest at the prime rate and is due December 31, 1998 which is renewable at the Company's option. The Company occupies office space under a lease agreement expiring June 30, 2001, at a monthly rental payment of $13,553, in which three officers of subsidiaries of the Company own an equity interest in the lessor. F-36 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 14. DEFINED CONTRIBUTION PLAN The Company has a 401(k) defined contribution plan (Plan) covering all employees who have elected to participate in the Plan. Each participant may make pretax contributions to the Plan up to 15 percent of such participant's earnings with a maximum of $9,500 in 1997. 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 $116,000, $110,000 and $91,000 during the years ended December 31, 1997, 1996 and 1995, respectively. 15. FINANCIAL INSTRUMENTS Off-Balance Sheet Risk and Concentration of Commitments The Company is a party to financial instruments with off-balance sheet risk in the normal course of its business. These instruments are commitments to originate or purchase first mortgage loans and forward loan sale commitments (see Note 13) and involve credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. Commitments to originate or purchase mortgage loans amounted to approximately $26,255,000 at December 31, 1997. The Company plans to fund the commitments in its normal commitment period. The Company evaluates each customer's creditworthiness on a case-by-case basis. The Company's credit risks comprised the outstanding loans held for sale and loans held for investment as shown in the consolidated balance sheets, and loans sold with recourse aggregating approximately $16,000,000 at December 31, 1997. The loans are located throughout the United States and are collateralized primarily by a first mortgage on the property. F-37 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 15. FINANCIAL INSTRUMENTS (CONTINUED) Fair Value of Financial Instruments The carrying amounts and estimated fair value of financial instruments are as follows:
DECEMBER 31 1997 1996 ----------------------------- ----------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------------------------------------------------------------ (In thousands) Financial assets: Cash $ 3,296 $ 3,296 $ 2,855 $ 2,855 Interest earnings deposits 6,337 6,337 9,754 9,754 Loans held for sale, net 456,978 459,231 182,801 183,741 Loans held for investment, net 54,394 54,975 29,560 29,824 Federal Home Loan Bank of Dallas stock 8,700 8,700 2,871 2,871 Financial liabilities: Deposits 224,982 225,780 90,179 90,401 Custodial escrow balances 53,760 53,760 37,881 37,881 Drafts payable 7,506 7,506 5,961 5,961 Payable for purchase of MSRs 8,660 8,660 8,044 8,044 Federal Home Loan Bank of Dallas borrowings 171,943 171,943 51,250 51,250 Borrowed money 89,909 89,909 42,431 42,431
The following methods and assumptions were used by the Company in estimating the fair value of the financial instruments: The carrying amounts reported in the balance sheet for cash, interest earnings deposits, Federal Home Loan Bank of Dallas stock, drafts payable, payable for purchase of MSRs, Federal Home Loan Bank of Dallas borrowings, and borrowed money approximate those assets' and liabilities' fair values. The fair values of loans are based on quoted market prices where available or outstanding commitments from investors. If quoted market prices are not available, fair values are based on quoted market prices of similar loans sold in securitization transactions, adjusted for differences in loan characteristics. The fair value of forward sale commitments are included in the determination of the fair value of loans held for sale. The fair value disclosed for demand deposits (e.g., interest and noninterest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a F-38 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 15. FINANCIAL INSTRUMENTS (CONTINUED) 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, 1997 and 1996 and is not considered in the fair value amount. The fair value disclosed for custodial escrow balances liabilities (noninterest checking) is, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). 16. PARENT COMPANY CONDENSED FINANCIAL INFORMATION Condensed financial information of Matrix Capital Corporation (Parent Company) is as follows:
December 31 1997 1996 1995 --------- -------- -------- CONDENSED BALANCE SHEETS (In thousands) Assets: Cash $ 1,459 $ 45 $ 11 Other receivables 1,040 872 804 Premises and equipment, net 1,481 1,405 1,371 Other assets 1,840 507 515 Investment in and advances to subsidiaries 62,042 36,199 15,201 -------- -------- -------- Total assets $ 67,862 $39,028 $17,902 ======== ======== ========= Liabilities and shareholders' equity: Borrowed money (a) $ 26,002 $ 6,372 $ 6,751 Other liabilities 1,250 386 465 -------- -------- -------- Total liabilities 27,252 6,758 7,216 Shareholders' equity: Common stock 1 1 - Additional paid in capital 22,185 21,983 3,769 Retained earnings 18,424 10,286 6,917 -------- -------- -------- Total shareholders' equity 40,610 32,270 10,686 -------- -------- -------- Total liabilities and shareholders' equity $ 67,862 $ 39,028 $ 17,902 ======== ======== ========
(a) The Parent's debt is set forth below. The parent also guarantees the revolving warehouse and servicing acquisition loan agreements. See Note 8 for additional information regarding the debt. F-39 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 16. PARENT COMPANY CONDENSED FINANCIAL INFORMATION (CONTINUED)
December 31 1997 1996 1995 --------- --------- ---------- (In thousands) $6,000,000 revolving line of credit $ $ $ Senior subordinated notes 2,910 2,910 2,910 $2,000,000 note payablerevised bank stock loan 1,786 - - Note payablebank stock loan - 2,003 2,289 Note payable to a bank secured by real estate 895 938 921 Notes payable secured by MSR 411 521 631 Senior notes 20,000 - - --------- --------- ---------- $ 26,002 $ 6,372 $ 6,751 ========= ========= ==========
As of December 31, 1997, the maturities of term notes payable during the next five years and thereafter are as follows: (In thousands) 1998 $ 1,291 1999 1,124 2000 2,052 2001 809 2002 726 Thereafter 20,000 ------------ $26,002 ============ F-40 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 16. PARENT COMPANY CONDENSED FINANCIAL INFORMATION (CONTINUED)
Year Ended December 31 1997 1996 1995 --------- --------- --------- (In thousands) CONDENSED STATEMENTS OF INCOME Income: Interest income on loans $ 118 $ 142 $ 44 Other 352 130 374 --------- --------- --------- Total income 470 272 418 Expenses: Compensation and employee benefits 1,700 1,344 1,042 Occupancy and equipment 333 299 92 Interest on borrowed money 1,593 805 592 Professional fees 279 138 112 Other general and administrative (b) 1,353 328 704 --------- --------- --------- Total expenses 5,258 2,914 2,542 --------- --------- --------- Loss before income taxes and equity in income of subsidiaries (4,788) (2,642) (2,124) Income taxes (a) - - - --------- --------- --------- Loss before equity in income of subsidiaries (4,788) (2,642) (2,124) Equity in income of subsidiaries 12,926 6,212 6,047 --------- --------- --------- Net income $ 8,138 $ 3,570 $ 3,923 ========= ========= =========
(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. (b) The Parent company has entered into a subaccounting agreement with third parties which require the Parent company to pay a fee to the third party company for record keeping services performed related to custodial escrow deposits directed by that company and maintained at Matrix Bank. The total amount of the subaccounting fees paid by the Parent Company are approximately $544,000, $-0-, and $145,000 for the years ended 1997, 1996, and 1995, respectively F-41 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 16. PARENT COMPANY CONDENSED FINANCIAL INFORMATION (CONTINUED)
Year Ended December 31 1997 1996 1995 --------- --------- --------- (In thousands) CONDENSED STATEMENTS OF CASH FLOWS Cash flows from operating activities: Net income $ 8,138 $ 3,570 $ 3,923 Adjustments to reconcile net income to net cash (used) by operating activities: Equity in income of subsidiaries (12,926) (6,212) (6,047) Dividend from subsidiaries 2,916 1,843 2,207 Depreciation and amortization 192 127 34 Increase (decrease) in other liabilities 864 (78) (368) Increase in other receivables and other assets (701) (133) (1,016) Noncash compensation expense - - 101 --------- --------- --------- Net cash (used) by operating activities (1,517) (883) (1,166) Investing activities: Purchases of premises and equipment (168) (88) (251) Investment in and advances to subsidiaries (15,833) (16,630) (1,451) --------- --------- --------- Net cash (used) by investing activities (16,001) (16,718) (1,702) Financing activities: Repayments of notes payable and revolving line of credit (7,870) (438) (1,133) Proceeds from notes payable and revolving line of credit 7,500 59 922 Dividends paid by pooled company prior to merger - (201) - Capital contribution by pooled company prior to merger - 24 - Proceeds from senior subordinated notes - - 2,910 Proceeds from senior notes, net 19,100 - - Proceeds from issuance of common stock 202 - - Proceeds from the sale of common stock - 18,191 - --------- --------- --------- Net cash provided by financing activities 18,932 17,635 2,699 --------- --------- --------- Increase (decrease) in cash 1,414 34 (169) Cash at beginning of year 45 11 180 --------- --------- --------- Cash at end of year $ 1,459 $ 45 $ 11 ========= ========= =========
F-42 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The acquisition of Vintage was completed in February 1997 and was accounted for as a pooling of interests. Accordingly, the unaudited selected quarterly financial data has been restated for all periods presented.
1997 1996 ---------------------------------------------------------------------------------------------------- Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter ---------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) Operations Net interest income after provision for loan and valuation losses $ 3,863 $ 3,677 $ 3,216 $ 2,258 $ 2,136 $ 1,267 $ 1,416 $ 1,097 Noninterest income 10,605 9,069 9,412 8,943 7,411 7,911 7,129 4,136 Noninterest expense 10,760 9,057 9,603 8,326 7,760 7,609 6,035 5,251 ---------------------------------------------------------------------------------------------------- Income (loss) before income taxes 3,708 3,689 3,025 2,875 1,787 1,569 2,510 (18) Income taxes (benefits) 1,424 1,459 1,155 1,121 661 626 1,005 (14) ---------------------------------------------------------------------------------------------------- Net income (loss) $ 2,284 $ 2,230 $ 1,870 $ 1,754 $ 1,126 $ 943 $ 1,505 $ (4) ==================================================================================================== Net Income per Share Data Basic $ .34 $ .33 $ .28 $ .26 $ .18 $ .19 $ .32 $ .00 ==================================================================================================== Diluted $ .34 $ .33 $ .28 $ .26 $ .18 $ .19 $ .32 $ .00 ==================================================================================================== Balance Sheet Total assets $606,745 $525,511 $502,563 $422,476 $274,559 $208,851 $216,930 $255,232 Total loans, net 511,372 426,007 394,537 319,489 212,361 148,871 149,503 212,894 Shareholders' equity 40,610 38,124 35,894 34,024 32,270 12,954 12,157 10,615
The net income per share for 1996 and the first three quarters of 1997 have been restated to comply with the requirements of FAS 128. F-43 Matrix Capital Corporation Notes to Consolidated Financial Statements (continued) 18. SUBSEQUENT EVENTS (UNAUDITED) On February 19, 1998, the Company announced that it had entered into a letter of intent to acquire The Leader Mortgage Company (The Leader), a privately held, Ohio-based mortgage banking concern. The letter of intent provides for the issuance of $27,500,000 of common stock of the Company to the shareholders of The Leader and $4,500,000 in cash related to noncompetition agreements. The Company intends to account for the acquisition as a pooling of interests under generally accepted accounting principles. The letter of intent is subject to a number of conditions including successful negotiation and execution of a definitive agreement and shareholders' approval, and there can be no assurance that this acquisition will be consummated. On March 25, 1998, the Company signed an agreement to merge the Company with Fidelity National Financial, Inc. (Fidelity), a provider of title insurance and real estate services. It is intended that the merger be treated as a pooling of interests under generally accepted accounting principles. The Company's shares will be converted into the right to receive .80 shares of Fidelity common stock without interest, together with cash in lieu of any fractional share. The conversion to Fidelity shares is based on an exchange ratio, which has been collared between $28.75 and $35.00 per Fidelity share. The merger is subject to due diligence procedures and both regulatory and shareholder approvals. F-44 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 +. Amended and Restated 1996 Stock Option Plan (4.2) 4.4 *. Employee Stock Purchase Plan, as amended 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) 10.1 + Note and Agency Agreement, dated as of August 1, 1995, by and between the Registrant and PHS Mortgage, Inc. as agent (10.1) 10.2 + First Amendment to Note and Agency Agreement, dated as of August 2, 1995, by and between the Registrant and PHS Mortgage, Inc., as agent (10.2) 10.3 + Form of 13% Senior Subordinated Note (10.3) 10.4 +. Executive Employment Agreement, dated as of January 1, 1996, by and between the Registrant and David Kloos (10.4) 10.5 +. Employment Agreement, dated as of January 1, 1995, between Matrix Capital Bank and Gary Lenzo and as amended January 1, 1996 (10.5) 10.6 + Multiple Advance Term Loan Agreement, dated as of June 27, 1994, by and between Matrix Capital Corporation and CorTrust Bank (10.8) 10.7 + Multiple Advance Fixed Rate Term Loan Promissory Note, dated as of June 30, 1994, from Matrix Capital Corporation, as maker, to CorTrust Bank, as payee (10.9) 10.8 + Mortgage Loan Purchase and Servicing Agreement, dated as of August 1, 1993, by and between Argo Federal Savings Bank, FSB, and Matrix Financial Services Corporation (10.11) 10.9 + Mortgage Loan Repurchase Agreement, dated as of March 30, 1995, by and between PaineWebber Real Estate Securities, Inc. and Matrix Financial Services Corporation (10.27) 10.10 + Multiple Advance Fixed Rate Term Loan Promissory Note, dated as of October 19, 1994, from Matrix Capital Corporation, as maker, to CorTrust, as payee (10.29) 10.11 + 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) 10.12 + Development Management Agreement, dated as of June 28, 1996, by and among Fort Lupton, L.L.C. and Matrix Funding Corp. (10.31) 10.13 + Assignment and Assumption of PUD Agreement, dated as of June 28, 1996, by and among Fort Lupton, L.L.C. and Matrix Funding Corp. (10.32) 10.14 + Lease, dated as of October 1, 1995, by and between the Registrant and Matrix Financial Services Corporation (10.33) 10.15 * Promissory Note, dated as of December 31, 1997, from D. Mark Spencer, as maker, to the Registrant, as payee 10.16 + Fort Lupton Golf Course Residential and Planned Unit Development Agreement, dated as of November 28, 1995 (10.36) 10.17 + Loan Agreement, dated as of June 21, 1996, by and between Matrix Funding Corporation and The First Security Bank (10.41) 10.18 + Loan Agreement, dated as of June 29, 1995, by and between the Registrant and Bank One, Arizona, N.A. (10.42) 10.19 + Promissory Note, dated as of June 29, 1995, from the Registrant to Bank One, Arizona, N.A. (10.43) II-1 10.20 + Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing, dated as of June 29, 1995, from the Registrant to Arizona Trust Deed Corporation, as trustee (10.44) 10.21 + Loan Agreement, dated July 10, 1992, by and between American Strategic Income Portfolio Inc. and Matrix Financial Services Corporation (10.45) 10.22 + Promissory Note, dated as of July 10, 1992, by Matrix Financial Services Corporation, as maker, to American Strategic Income Portfolio, Inc., as payee (10.46) 10.23 +++ Agreement and Plan of Merger, dated as of November 22, 1996, by and among the Registrant, The Vintage Group, Inc. and Matrix/Vintage Acquisition, Inc. (10.1) 10.24 +++ Asset Purchase and Exchange Agreement, dated as of February 4, 1997, by and among the Registrant and STC Holdings, Inc. (10.2) 10.25 ** Revolving Subordinated Loan Agreement, dated as of October 18, 1996, by and between Matrix Financial Services Corporation and the Registrant (10.31) 10.26 ** Amended and Restated Loan Agreement, dated as of January 31, 1997, by and between Matrix Financial Services Corporation, as borrower, and Bank One, Texas, N.A., as agent, and certain lenders, as lenders (10.32) 10.27 * Form of Warehouse Note, dated as of March 1, 1998, from Matrix Financial Services Corporation, as borrower, to the lenders under the Amended and Restated Loan Agreement 10.28 ** Amended and Restated Swing Note, dated as of January 31, 1997, from Matrix Financial Services Corporation, as borrower to the lenders under the Amended and Restated Loan Agreement (10.34) 10.29 ** Amended and Restated Working-Capital Note, dated as of January 31, 1997, from Matrix Financial Services Corporation, as borrower to the lenders under the Amended and Restated Loan Agreement (10.35) 10.30 ** Amended and Restated Term-Line Note, dated as of January 31, 1997, from Matrix Financial Services Corporation, as borrower, to the lenders under the Amended and Restated Loan Agreement (10.36) 10.31 ** Amended and Restated Guaranty, dated as of January 31, 1997, from the Registrant to Bank One, Texas, N.A., as agent (10.37) 10.32 **. Employment Agreement, dated as of February 4, 1997, by and between the Registrant and Paul Skretny (10.38) 10.33 ** Credit Agreement, dated as of March 12, 1997, by and between Matrix Capital Corporation, as borrower, and Bank One, Texas, N.A., as agent, and certain lenders, as lenders (10.39) 10.34 ** Term Note, dated as of March 12, 1997, from Matrix Capital Corporation, as borrower, and Bank One, Texas, N.A., as lender (10.40) 10.35 ** Revolving Note, dated as of March 12, 1997, from Matrix Capital Corporation, as borrower, and Bank One, Texas, N.A., as lender (10.41) 10.36 ** Guaranty Form, dated as of March 12, 1997, from each of the Registrant's significant subsidiaries to Bank One, Texas, N.A., as agent (10.42) 10.37 *. Agreement, dated October 1, 1997, with T. Allen McConnell 10.38 *. Amendment of Employment Agreement of Gary Lenzo, dated January 28, 1998 10.39 * Third Amendment to Amended and Restated Loan Agreement, dated as of March 1, 1998, between Matrix Financial Services Corporation, as borrower, Bank One, Texas, N.A., as agent, and certain lenders, as lenders 10.40 * Overline Note, dated as of March 1, 1998, from Matrix Financial Services Corporation, as borrower, to Bank One, Texas, N.A., as lender 21 * Subsidiaries of the Registrant 23 * Consent of Ernst & Young LLP 27 * Financial Data Schedule II-2 ________________________ * 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 quarterly report on Form 10-Q for the quarter ended September 30, 1997, filed by the Registrant with the Commission. +++ Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's current report on Form 8-K, filed with the Commission on February 20, 1997. # Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's registration statement on Form S-1 (No. 333-34977), filed by the Registrant with the Commission . ** Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's annual report on Form 10-K for the fiscal year ended December 31, 1996, filed by the Registrant with the Commission. . Management contract or compensatory plan or arrangement II-3 EX-4.4 2 EMPLOYEE STOCK PURCHASE PLAN, AS AMENDED Exhibit 4.4 AMENDMENT NO. 2 TO THE 1996 EMPLOYEE STOCK PURCHASE PLAN FOR MATRIX CAPITAL CORPORATION This Second Amendment to the 1996 Employee Stock Purchase Plan For Matrix Capital Corporation ("Plan") is made under authority of Section 16 of the Plan and is effective as of the date of the IPO. (1) SECTION 2 is amended by adding thereto the following: "(aa) "SPECIAL OFFERING PERIOD" shall mean each of the periods designated by the Administrator and described in Section 6." (2) SECTION 6 is amended by deleting it in its entirety and substituting therefore the following: "SECTION 6. SPECIAL OFFERING PERIOD. The Administrator, in its sole discretion may designate as a Special Offering Period (i) the period beginning January 1, 1997 and ending on December 31, 1997, and (ii) following the date of an acquisition by an Employer of the stock or assets of another employer (and, in the case of a stock acquisition, only where the acquired employer is a Subsidiary and adopts the Plan), the period beginning on the first day of a month which occurs not less than 30 days following such acquisition, and not later than October 1st of the current calender year, and ending on the following December 31st. In the event the Administrator designates a Special Offering Period then, notwithstanding any provisions hereof to the contrary, (iii) the first day of each such Special Offering Period shall be its Enrollment Date; (iv) the Eligible Employees with respect to the Special Offering Period of reference shall be (a) in the case of the Special Offering Period described in (i), those persons who were not Eligible Employees on the first Enrollment Date under the Plan but who were employed as Employees on January 1, 1997, and (b) with respect to a Special Offering Period described in (ii), those persons who are employed by the acquired employer on the date of the acquisition and are Employees on the Enrollment Date with respect to such Special Offering Period; and (v) the amounts described in the definition of Directed Withholding under (i)(y) and (ii) shall be determined by multiplying them by a fraction whose numerator is the number of months during the Special Offering Period, and whose denominator is 12. Except as provided in (i) through (v) of this Section 6, each Special Offering Period shall be deemed to be an --------- Offering Period hereunder." (3) SECTION 7 is amended by deleting it in its entirety and substituting therefore the following: "SECTION 7. EXERCISE OF PURCHASE RIGHT AND DELIVERY. The Participant's Purchase Right will be exercised automatically on each Purchase Date by debiting his Account with the Purchase Price of the Shares subject to his Purchase Right, and refunding (in a lump sum, in cash) the amount, if any, credited to his Account that exceeds such Purchase Price. As promptly as practicable after each Purchase Date, the Administrator shall arrange the delivery to each Participant of a certificate representing the Shares purchased on such Purchase Date." AMENDMENT NO. 1 TO THE 1996 EMPLOYEE STOCK PURCHASE PLAN FOR MATRIX CAPITAL CORPORATION This First Amendment to the 1996 Employee Stock Purchase Plan For Matrix Capital Corporation ("Plan") is made under authority of Section 16 of the Plan and is effective as of the date of the IPO. SECTION 2 is amended by adding thereto the following: (q) "OFFERING PERIOD" shall mean the period beginning on the day immediately preceding the trade date of the shares to be issued and sold by the Company in connection with its initial public offering pursuant to an effective registration statement under the securities Act of 1933, as amended (the"IPO"), and ending on the following December 31, 1997, and each calendar year thereafter. 1996 EMPLOYEE STOCK PURCHASE PLAN FOR MATRIX CAPITAL CORPORATION SECTION 1. PURPOSE. This 1996 Employee Stock Purchase Plan of Matrix Capital Corporation is intended to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Stock of the Company through accumulated payroll deductions under an "Employee Stock Purchase Plan" as defined in Section 423 of the Code, and all provisions hereof will be construed in accordance with those objectives. SECTION 2. DEFINITIONS. As used herein, the following terms shall have the meaning indicated: (a) "ACCOUNT" shall mean the account established for each Participant to record the amounts withheld from his Compensation during the Offering Period of reference. (b) "ADMINISTRATOR" shall mean the Board or a designated committee of the Board. (c) "BOARD" shall mean the Board of Directors of the Company. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (e) "COMPANY" shall mean Matrix Capital Corporation. (f) "COMPENSATION" shall mean the actual cash remuneration (exclusive of bonuses) paid to a Participant by the Employer in consideration of services rendered. (g) "CONSIDERED COMPENSATION" shall be determined with respect to each Offering Period, and shall mean a reasonable estimate (as determined by the Administrator in its sole discretion, but treating Participants similarly situated in a reasonably similar manner) of the Participant's basic Compensation during the Offering Period (i.e. without taking into account bonuses, overtime pay, noncash benefits or other special payments, all as reasonably determined by the Administrator). (h) "DESIGNATED SUBSIDIARIES" shall mean the Subsidiaries that have been designated by the Board from time to time in its sole discretion as eligible to adopt, and which have in fact adopted, this Plan for the benefit of their Employees. (i) "DIRECTED WITHHOLDING" shall mean the amount that an Eligible Employee directs his or her Employer to withhold from such Eligible Employee's Compensation on each Payroll Date during the Offering Period of reference; provided, however, that the aggregate amount of Directed Withholding for the Offering Period of reference (i) may not exceed the lesser of (x) twenty-five percent (25%) of such Participant's Considered Compensation for such Offering Period, and (y) Twelve Thousand Five Hundred Dollars ($12,500), and (ii) may not be less than Five Hundred Dollars ($500). (j) "DIRECTION TO WITHHOLD" shall mean the written notice to the Administrator, in the form of Exhibit A attached hereto, which directs the --------- Employer to commence to deduct the Directed Withholding from a Participant's Compensation on each Payroll Date during the Offering Period of reference. (k) "ELECTION TO RESCIND" shall mean the written notice to the Administrator, in the form of Exhibit B attached, which directs a Participant's --------- Employer to discontinue deductions of Directed Withholding, and to refund the entire amount credited to such Participant's Account. (l) "ELIGIBLE EMPLOYEE" shall mean each Employee (i) who is employed as an Employee on the first day of the month preceding the Enrollment Date of reference, (ii) who continues to be employed as an Employee on such Enrollment Date, and (iii) who, on such Enrollment Date does not own Stock (within the meaning of Section 423(b)(3) of the Code) possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Subsidiary and, without limiting the generality of the foregoing, in computing the amount of such Stock owned by an Employee, there shall be included the amount of Stock owned directly, the Stock subject to a Purchase Right, the Stock which with respect to which the Employee has an option to acquire, and the Stock owned by any other person whose stock is attributed to such Employee pursuant to Section 425(d) of the Code. (m) "EMPLOYEE" shall mean any person, including an officer and director who is also an Employee, who is customarily employed for at least twenty (20) hours per week and for more than five (5) months in the calendar year by the Employer. (n) "EMPLOYER" shall mean, collectively, the Company and each Designated Subsidiary. (o) "ENROLLMENT DATE" shall mean the first business day of each Offering Period. (p) "FAIR MARKET VALUE" of a Share on the Enrollment Date or on the Purchase Date shall be the closing price of Stock on such date, which shall be (i) if the Stock is listed or admitted for trading on any United States national securities exchange (which for purposes hereof shall include the NASDAQ National Market System), the last reported sale price of Stock on such exchange as reported in any newspaper of general circulation, (ii) if the Stock is quoted on NASDAQ (other than on the NASDAQ National Market System) or any similar system of automated dissemination of quotations of securities prices in common use, the mean between the closing high bid and low asked quotations for such day of the Stock on such system or (iii) if neither clause (i) nor (ii) is applicable, a value determined by any fair and reasonable means prescribed by the Board. (q) "OFFERING PERIOD" shall mean the period beginning on the day immediately preceding the trade date of the shares to be issued and sold by the Company in connection with its initial public offering pursuant to an effective registration statement under the Securities Act of 1933, -2- as amended (the "IPO"), and ending on the following December 31st, and each calender year thereafter. (r) "PARTICIPANT" shall mean each Eligible Employee who is having an amount withheld from his Compensation under Section 4 at the time of reference. --------- (s) "PAYROLL DATE" shall mean each date on which a Participant is paid his Considered Compensation. (t) "PLAN" shall mean this Matrix Capital Corporation Employee Stock Purchase Plan. (u) "PURCHASE DATE" shall mean the last business day of each Offering Period. (v) "PURCHASE PRICE" shall mean the lesser of (i) 85% of the Fair Market Value of the Shares on the Enrollment Date occurring during the Offering Period of reference, or (ii) 85% of the Fair Market Value of the Shares on the Purchase Date occurring during such Offering Period, but never less than the par value of a Share. (w) "PURCHASE RIGHT" shall mean the Participant's right to acquire the number of Shares that may be purchased in accordance with Section 3(b) as ------------ limited by Sections 3(c) and 8. ------------- - (x) "SHARES" shall mean the shares of Stock reserved for issuance under this Plan. (y) "STOCK" shall mean the common stock, $0.0001 par value per share, of the Company. (z) "SUBSIDIARY" shall mean any corporation (other than the Company) in any unbroken chain of corporations beginning with the Company if, at the time of reference, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. SECTION 3. SHARES SUBJECT TO PURCHASE. (a) Subject to adjustments provided in Section 15 hereof, a total of 125,000 Shares shall be subject to the Plan. The Shares subject to the Plan shall consist of unissued Shares or previously issued Shares reacquired and held by the Company, or any Subsidiary, and such number of Shares shall be and hereby is reserved for sale for such purpose. Any of such Shares that may remain unsold at the termination of the Plan shall cease to be reserved for the purpose of the Plan, but until termination of the Plan the Company shall at all times reserve a sufficient number of Shares to meet the requirements of the Plan. Should any Shares subject to Purchase Rights on the Enrollment Date of an Offering Period fail to be purchased on the Purchase Date for such Offering Period, such Shares may again be made available for purchase with respect to a subsequent Offering Period. -3- (b) Not less than 15 days prior to each Offering Period, the Administrator shall determine the maximum number of Shares (if any) that will be available for purchase for such Offering Period. Each Participant will have a Purchase Right to purchase the number of full Shares equal to the quotient of (i) the amount in the Participant's Account on the Purchase Date, and (ii) the Purchase Price of the Shares for the Offering Period, all subject to the maximum amounts, and the adjustments, if any, in Section 8. (c) In the event that as of the Enrollment Date of reference the quotient of (i) the aggregate Directed Withholdings of all Participants for the Offering Period, divided by (ii) the Purchase Price of a Share on such Enrollment Date exceeds the number of Shares designated by the Board in the first sentence of Section 3(b) by a percentage (not less than 50%) specified by ------------ the Board at the time it determines the number of Shares under Section 3(b) ------------ above (and in the absence of a specification by the Board, the percentage shall be deemed to be 50%), the Administrator will take reasonable steps to reduce, as nearly as reasonably possible, each Participant's Directed Withholding to an amount equal to the product of (x) his Directed Withholding, and (y) a fraction, the numerator of which is the product of the percentage specified by the Administrator in (ii) multiplied by the number of Shares designated by the Administrator in the first sentence of Section 3(b), and the denominator of ------------ which is the quotient of (i) and (ii) above. SECTION 4. PARTICIPATION AND DEDUCTION OF DIRECTED WITHHOLDING. (a) During the 45 days ending on the Enrollment Date for the Offering Period of reference, each Eligible Employee may become a Participant for such Offering Period by filing with the Administrator a written Direction to Withhold setting forth the amount of such Eligible Employee's Directed Withholding. Notwithstanding the foregoing, in the case of the initial Offering Period hereunder, the Board, in its sole discretion, may extend the period during which a Direction to Withhold my be filed for any period, not to exceed 60 days after the Enrollment Date for such initial Offering Period, it selects and communicates to the Eligible Employees. (b) All amounts deducted from a Participant's Compensation under this Plan shall be credited to such Participant's Account, but shall remain the unencumbered assets of the Employer. SECTION 5. RECISION, OR TERMINATION OF EMPLOYMENT. (a) A Participant may not increase or decrease the amount of his Directed Withholding during an Offering Period; except, however, (i) a Participant may rescind his Direction to Withhold in its entirety at any time prior to the Purchase Date for the Offering Period of reference by filing a written Election to Rescind with the Administrator prior to December 16 of the Offering Period of reference, (ii) a Participant will be deemed to have rescinded his Direction to Withhold in its entirety in the event that his Compensation payable on any Payroll Date is insufficient to fund the Directed Withholding for such Payroll Date and such Participant fails to furnish the Administrator with personal funds in an amount sufficient to complete the Directed Withholding for such Payroll Date on or before the next Payroll Date, and (iii) a Participant will be deemed to have rescinded his Direction to Withhold in its entirety in the event of his termination of employment by an Employer prior to the Purchase Date for the Offering Period of reference. -4- (b) If an event described in either Section 5(a)(i), (ii) or (iii) --------------- ---- ----- occurs with respect to a Participant before the Purchase Date of reference, the entire amount credited to such Participant's Account automatically will be paid to such Participant in a lump sum, in cash, as soon as reasonably possible following such occurrence. (c) The occurrence of an event described in Section 5(a)(i), (ii) or --------------- ---- (iii) with respect to a Participant during an Offering Period shall not limit - ----- such Participant's right to file a Direction to Withhold with respect to any later Offering Period provided that at such time Participant is an Eligible Employee. SECTION 6. EXERCISE OF PURCHASE RIGHT. The Participant's Purchase Right will be exercised automatically on each Purchase Date by debiting his Account with the Purchase Price of the Shares subject to his Purchase Right, and refunding (in a lump sum, in cash) the amount, if any, credited to his Account that exceeds such Purchase Price. SECTION 7. DELIVERY. As promptly as practicable after each Purchase Date, the Administrator shall arrange the delivery to each Participant of a certificate representing the Shares purchased on such Purchase Date. SECTION 8. MAXIMUM SHARES, AND REDUCTION IN SHARES, SUBJECT TO PURCHASE RIGHTS. (a) Notwithstanding any provision hereof to the contrary, the maximum number of Shares subject to each Participant's Purchase Right at any time during the Offering Period shall be that number of Shares equal to the lesser of (i) that number of Shares that has an aggregate Fair Market Value on the Enrollment Date equal to $14,706, and (ii) that number of Shares that may be purchased with the lesser of the maximum Directed Withholding amounts described in (x) and (y) of Section 2(i) at the Purchase Price set forth in Section 2(v)(i), and (iii) --------------- the maximum number of Shares (if any) that will not cause the Participant to exceed the 5% ownership limitation of Section 2(l). (b) If, on a Purchase Date, the maximum number of Shares available for purchase as determined under Section 3(b) is less than the number of Shares ------------ subject to all then existing Purchase Rights (as limited by Section 8(a), if applicable), the Administrator will reduce the number of Shares subject to each Participant's Purchase Right to an amount equal to the product of (i) the maximum Shares available for purchase as determined under Section 3(b), and (ii) ------------ a fraction, the numerator of which is the amount in such Participant's Account (after such reductions, if any, required by the proviso of Section 2(i)), and ------------ the denominator of which is the amount in the Accounts of all Participants (after such reductions, if any, required by the proviso of Section 2(i)). ------------ SECTION 9. VOTING AND REGISTRATION. (a) A Participant will have no interest or voting right in or other privileges relating to Shares subject to a Purchase Right until delivery of the certificate representing such Shares. (b) Shares to be delivered to a Participant will be registered in the name of the Participant. -5- SECTION 10. ADMINISTRATION. The Plan shall be administered by the Administrator, which will be the Board or a committee appointed by the Board. If a committee of the Board is appointed by the Board to act as Administrator, such committee shall have all of the powers of the Board with respect to the Plan except for those powers set forth in Section 16 hereof. The ---------- administration, interpretation or application of the Plan by the Administrator shall be final, conclusive and binding upon all Participants. Until the Board is advised by legal counsel that such limitation is no longer required, Eligible Employees with respect to the Offering Period of reference may not actively serve as a member of the Administrator with respect to the Offering Period of reference or the succeeding Offering Period. SECTION 11. DESIGNATION OF BENEFICIARY. (a) A Participant may file a written designation of a beneficiary who is to receive any cash as a result of the Participant's death prior to a Purchase Date, or to receive any Shares (and excess cash, if any) in the event of Participant's death subsequent to a Purchase Date but before delivery of the Shares (and excess cash, if any). (b) Such designation of beneficiary may be changed by the Participant at any time by written notice. In the event of the death of a Participant without a designated surviving beneficiary, the Administrator shall deliver such cash and/or Shares to the spouse of the Participant or, if there is no surviving spouse, then to the executor or administrator of the estate of the Participant. SECTION 12. TRANSFERABILITY. Neither payroll deductions credited to Participant's Account, nor any rights with regard to the making or recision of a Directed Withholding, nor the right to receive Shares (and excess cash, if any) may be assigned, transferred, pledged or otherwise disposed of in any way (other than as provided in Section 11) by the Participant. Any such attempt at ---------- assignment, transfer, pledge or other disposition shall be without effect. SECTION 13. USE OF FUNDS. All payroll deductions received or held by the Employer under the Plan may be used by the Employer for any corporate purpose, and the Employer shall not be obligated to segregate such payroll deductions. SECTION 14. REPORTS AND WITHHOLDING. (a) Statements will be given to all Participants within a reasonable time following a Purchase Date, which statements will set forth the amounts of payroll deductions, the per Share Purchase Price, the number of Shares purchased (and an explanation of any reduction in the Shares subject to the Purchase Right), and the remaining cash balance, if any. (b) Each person who acquires Shares hereunder shall agree as a condition of such acquisition that he shall notify his Employer in the event he disposes of the Shares before the second anniversary of the Enrollment Date on which he acquired the Purchase Right with respect to such Shares, and in the event of such disposition while an employee of the Employer, and upon the exercise of the Purchase Right, the Employer may withhold from such Participant's current -6- Compensation such amount as it reasonably determines to be necessary to satisfy the Company's obligation to withhold for federal and state taxes with respect to such events. SECTION 15. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. (a) If a stock dividend, stock split, spinoff, recapitalization, merger, consolidation, exchange of shares or the like, occurs during an Offering Period, as a result of which shares of any class shall be issued in respect of the Shares subject to purchase with respect to such Offering Period, or such Shares shall be changed into a different number of the same or another class or classes, the number of Shares to which each Purchase Right shall be applicable and the calculation of the Fair Market Value as of the Enrollment Date for such Shares shall be appropriately adjusted by the Company in a manner that in its sole discretion will keep this Plan qualified under Section 423 of the Code. (b) In the event of the proposed dissolution or liquidation of the Company, the Offering Period will close, and the Purchase Date will occur, 15 days immediately prior to the consummation of such proposed action, all Participants will be notified in advance of such revised Purchase Date, and each Participant will be entitled to complete all or any portion of the funding of such Participant's Directed Withholding with personal funds. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, either (i) the event will be deemed to constitute the dissolution or liquidation of the Company and Participants shall have the rights set forth in the first sentence hereof, or (ii) this Plan, and each Purchase Right shall be assumed or an equivalent plan and right shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation. SECTION 16. AMENDMENT OR TERMINATION. The Board may at any time and for any reason terminate or amend the Plan, provided, however, that the Plan may not be amended without compliance with any applicable shareholder approval requirements promulgated under the Internal Revenue Code, if applicable, or by any stock exchange or market on which the Common Stock is listed for trading, all as reasonably determined by the Administrator. Except as specifically provided in the Plan, no such termination or amendment can reduce such rights as a Participant would have if the effective date of the termination or amendment were deemed to be a liquidation or dissolution of the Company, with the resulting rights, duties and obligations set forth in Section 15(b). ------------- SECTION 17. NOTICES. All notices or other communications shall be deemed to have been duly given (i) if by a Participant to the Administrator, when received in the required form at the corporate home office of the Company, addressed to "Administrator, Employee Stock Purchase Plan," and (ii) if by the Administrator to the Participant, when mailed to the last known address of Participant shown on the Employer's records. SECTION 18. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued unless such issuance and delivery shall comply with all applicable provisions of law, domestic or foreign, and the requirements of any stock exchange upon which the Shares may then be listed, including, in each case the rules and regulations promulgated thereunder, and shall be further subject to the approval of counsel for the Company with respect to such compliance, which may include a representation and -7- warrants from the Participant that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares. SECTION 19. TERM OF PLAN. The Plan shall become effective on the date of the IPO and shall terminate on the last day of the year in which occurs the 9th anniversary of the date of the IPO. SECTION 20. MISCELLANEOUS. (a) EXECUTION OF RECEIPTS AND RELEASES. Any payment or any issuance or transfer of Shares to any person shall be in full satisfaction of all claims hereunder against the Plan, and the Administrator may require such person, as a condition precedent to receiving delivery of Shares, to execute a receipt and release therefor in such form as it shall determine. (b) PAYMENT OF EXPENSES. All expenses incident to the administration, termination, or protection of the Plan, including, but not limited to, legal and accounting fees, shall be paid by the Company. (c) RECORDS. Records of the Company as to any matters relating to this Plan will be conclusive on all persons. (d) INTERPRETATIONS AND ADJUSTMENTS. To the extent permitted by law, an interpretation of the Plan and a decision on any matter within the Board's or Administrator's discretion made in good faith is binding on all persons. A misstatement or other mistake of fact shall be corrected when it becomes known and the person responsible shall make such adjustment on account thereof as he considers equitable and practicable. (e) NO RIGHTS IMPLIED. Nothing contained in this Plan or any modification or amendment to the Plan or in the creation of any Account, or the execution of any subscription agreement, or the issuance of any Shares under the Plan, shall give any Employee any right to continue employment or any legal or equitable right against the Company or any officer, director, or Employee of the Company, except as expressly provided by the Plan. (f) INFORMATION. The Company shall, upon request or as may be specifically required hereunder, furnish or cause to be furnished, all of the information or documentation which is necessary or required by the Board and/or Administrator to perform its duties and functions under the Plan. The Company's records as to the current information the Company furnishes to the Board and/or Administrator shall be conclusive as to all persons. (g) SEVERABILITY. In the event any provision of the Plan shall be held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions of the Plan, but shall be fully severable and the Plan shall be construed and enforced as if the illegal or invalid provision had never been included herein. (h) HEADINGS; GENDER. The titles and headings are included for convenience of reference only and are not to be considered in construction of the provisions hereof. Words used in -8- the masculine shall apply to the feminine where applicable, and whenever the context of the Plan dictates, the plural shall be read as the singular and the singular as the plural. (i) NO LIABILITY FOR GOOD FAITH DETERMINATIONS; ACTIONS. Neither the members of the Board nor the Administrator (nor their respective delegatees) shall be liable for any act, omission, or determination taken or made in good faith with respect to the Plan or any right to purchase Shares granted under it, and members of the Board and the Administrator (and their delegatees) shall be entitled to indemnification and reimbursement by the Company in respect of any claim, loss, damage, liability or expense (including attorneys' fees, the costs of settling any suit, provided such settlement is approved by independent legal counsel selected by the Company, and amounts paid in satisfaction of a judgment, except a judgment based on a finding of bad faith) arising therefrom to the full extent permitted by law and under any directors' and officers' liability or similar insurance coverage that may from time to time be in effect. The Company assumes no liability to any Participant or his legal representatives, heirs, legatees or distributees for any act of, or failure to act on the part of, the Company, the Board or the Administrator. (j) GOVERNING LAW. 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, the undersigned has executed this Plan as of this _____ day of ______________, 1996 to fully evidence the Company's adoption thereof, to be effective as provided in Section 19 hereof. MATRIX CAPITAL CORPORATION By:_____________________________________ Name:___________________________________ Title:__________________________________ -9- EXHIBIT A --------- EMPLOYEE STOCK PURCHASE PLAN FOR MATRIX CAPITAL CORPORATION DIRECTION TO WITHHOLD 1. I, the undersigned, hereby elect to participate in the Employee Stock Purchase Plan for Matrix Capital Corporation (the "Plan") for the "Offering Period" beginning on the next Enrollment Date and ending on the following December 31, and subscribe to purchase Shares of the Stock in accordance with this Direction to Withhold and the Plan. 2. I hereby authorize payroll deductions on each of my Payroll Dates during the Offering Period in the amount set forth below [YOU MUST FILL IN ALL OF BLANKS [1], [2] AND [3]]: [1] $________________ on each of the [2] ____________ Payroll Dates during the Offering Period, for a total of [3] $__________________ {Multiply [1] and [2] NOTE: the amount in [3] above cannot be less than $500, nor more than 25% of the basic compensation you are scheduled to earn ----- during the Offering Period, not to exceed $12,500. Determine your basic compensation based on your current hourly pay rate, or ----- salary. 3. I direct the Administrator to use the amount in my Account on the Purchase Date to purchase the maximum number of Shares that are available to me under the terms of the Plan. 4. I understand and agree that my right to participate in the Plan is governed by the Plan and the rules of the Administrator developed under the Plan, and that, among other things, I understand and agree: . That I may not change the amount of my withholding during the Offering --- Period. . That the amount of my withholding will be reduced by the Administrator if it exceeds 25% of my Considered Compensation, and that in any case it may not exceed $12,500. . That the amount of my withholding may be reduced by the Administrator if it appears unlikely that I will need all of the withholding I have elected in order to purchase the number of Shares that will be available to me on the Purchase Date, and may also be reduced for other reasons relating to the continued qualification of the Plan. . That I may completely discontinue withholding, and receive a refund of --- all amounts previously withheld from my pay by filing an Election To ----------- Rescind with the Administrator before December 16th. ------- . That I automatically will be withdrawn from the Plan, and all amounts previously withheld from my pay refunded to me, if my pay on any Payroll Date is insufficient to satisfy my Directed Withholding and I --- fail pay the amount of the insufficiency to the Administrator on or before my next Payroll Date. . That I will automatically be withdrawn from the Plan, and all amounts previously withheld from my pay refunded to me, if I terminate my employment with the Company before the end of the year. . That if I have not discontinued withholding before December 16th of the Offering Period, the amounts withheld during Offering Period automatically will be used to purchase the maximum number of Shares ------------- available to me under the terms of the Plan. 5. I have received a copy of the complete Employee Stock Purchase Plan. I understand that my participation in the Plan is in all respects subject to --------------- the terms of the Plan. 6. I hereby agree to be bound by the terms of the Plan. The effectiveness of this Direction to Withhold is dependent upon my continued eligibility to participate in the Plan. 7. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all refunds of my withholding (or Shares if I die after the last business day in September) due me under the Plan, in equal amounts if more than one person is named: BENEFICIARY(IES) NAME(s): (Please print) ____________________________________ ___________________________________ ____________________________________ Relationship(s) Telephone Number(s) Name and Address of Participant [Print]: Signature: _______________________________ ____________________________________ _______________________________ Date:_______________________________ _______________________________ Acknowledgment The undersigned, acting for the Administrator of the Plan, acknowledges receipt of the above Direction To Withhold prior to the Enrollment Date of the Offering Period of reference. DATE RECEIVED:_________________ ADMINISTRATOR ________________________________ EXHIBIT B --------- EMPLOYEE STOCK PURCHASE PLAN FOR MATRIX CAPITAL CORPORATION ELECTION TO RESCIND 1. I, the undersigned, hereby elect to rescind my prior Direction to Withhold and thereby to terminate my participation in the Employee Stock Purchase Plan (the "Plan") for Matrix Capital Corporation for the current "Offering Period." 2. I direct the Company to pay me, as promptly as possible, the payroll deductions credited to my account during the current Offering Period. 3. I understand and agree that my termination of participation is irrevocable, and that under no circumstances will I be entitled to purchase any portion of the Shares available under the Plan for purchase during the current Offering Period, although I continue to be eligible to file a new Direction to Withhold with respect to any future Offering Period(s) for which I otherwise qualify. Name and Address of Participant [Print]: Signature: _______________________________ _______________________________ _______________________________ Date:__________________________ _______________________________ Acknowledgment The undersigned, acting for the Administrator of the Plan, acknowledges receipt of the above Election To Rescind prior to December 16 of the current Offering Period. DATE RECEIVED:__________________ ADMINISTRATOR _______________________________ EX-10.15 3 PROMISSORY NOTE, DATED DECEMBER 31, 1997 EXHIBIT 10.15 PROMISSORY NOTE Dated: December 31, 1997 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 Capital Corporation. Seventy-nine Thousand Three Hundred Forth and 45/100...................., the sum of 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 December 31, 1998. All payment 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 N/A 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. Signed in the presence of: /s/ - ----------------------------------- David W. Kloos, Matrix Capital Corporation GUARANTY We the undersigned jointly and severally guaranty the prompt and punctual payment of all monies due under the aforesaid note and agree to remain bound until fully paid. In the presence of: /s/ - ----------------------------------- D. Mark Spencer EX-10.27 4 FORM OF WAREHOUSE NOTE, DATED AS OF MARCH 1, 1998 EXHIBIT 10.27 ------------- WAREHOUSE NOTE -------------- $_________________ March 1, 1998 FOR VALUE RECEIVED, MATRIX FINANCIAL SERVICES CORPORATION, an Arizona corporation ("BORROWER"), promises to pay to the order of ______________________ ("LENDER") that portion of the principal amount of $____________________________ that may from time to time be disbursed and outstanding under this note together with interest. This note is a "Warehouse Note" under the Amended and Restated Loan Agreement (as renewed, extended, amended, or restated, the "LOAN AGREEMENT") dated as of January 31, 1997, between Borrower, Lender, certain other Lenders, and Bank One, Texas, N.A., as Agent for Lenders. All of the defined terms in the Loan Agreement have the same meanings when used, unless otherwise defined, in this note. This note incorporates by reference the principal and interest payment terms in the Loan Agreement for this note, including, without limitation, the final maturity, which is the Warehouse-Actual-Termination Date. Principal and interest are payable to the holder of this note through Agent at either (a) its offices at 1717 Main Street, Dallas, Texas 75201, or (b) at any other address so designated by Agent in written notice to Borrower. This note incorporates by reference all other provisions in the Loan Agreement applicable to this note, such as provisions for disbursements of principal, applicable-interest rates before and after Default, voluntary and mandatory prepayments, acceleration of maturity, exercise of Rights, payment of attorneys' fees, court costs, and other costs of collection, certain waivers by Borrower and other obligors, assurances and security, choice of Texas and United States federal Law, usury savings, and other matters applicable to Loan Documents under the Loan Agreement. This note is an amendment, restatement, renewal, extension, modification of, consolidation of, and substitution for, the existing Warehouse Notes (as the same may have been amended and replaced to the date hereof, the "FORMER NOTES") which Former Notes were executed and delivered pursuant to the Existing Loan Agreement. MATRIX FINANCIAL SERVICES CORPORATION, as Borrower By _____________________________________________ Thomas J. Osselaer, Executive Vice President EX-10.37 5 EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT 10.37 EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT is effective as of October 1, 1997, and is made and entered into by and between Matrix Capital Corporation, a Colorado corporation ("Employer"), and T. Allen McConnell, an executive employee of Employer ("Executive"). RECITALS A. Employer has proposed that Executive become employed by Employer, effective October 1, 1998, in an executive capacity and Executive has agreed to such emplyment pursuant to the terms of this Agreement. B. Employer desires that the Executive enter into an employment relationship with Employer in order to provide the necessary leadership and senior management skills that are important to the success of Employer. Employer believes that obtaining the Executive's services as an employee of Employer and the benefits of his business experience are of material importance to Employer and Employer's shareholders. AGREEMENT NOW, THEREFORE, in consideration of Executive's continued employment by Employer and the mutual promises and covenants contained herein the receipt and sufficiency of which is hereby acknowledged, Employer and Executive intend by this Agreement to specify the terms and conditions of Executive's employment relationship with Employer. SECTION 1. General Duties of Employer and Executive. 1.1. Employer agrees to employ Executive and Executive agrees to accept employment by Employer and to serve Employer in an executive capacity upon the terms and conditions set forth herein. The duties and responsibilities of Executive shall include those described for the particular position held by Executive while employed hereunder in the Bylaws of Employer or other documents of Employer, and shall also include such other or additional duties, for Employer, as may from time-to-time be assigned to Executive in good faith by the Board of Directors of Employer or any duly authorized committee thereof. The executive capacity that Executive shall hold while this Agreement is in effect shall be that position as determined by the Board of Directors, or any duly authorized committee thereof, from time to time in its good faith discretion. While employed hereunder, the initial position that Executive shall hold (until such time as such position may be changed as aforesaid) shall be the position of Senior Vice President, Secretary and General Counsel. 1.2. While employed hereunder, Executive shall obey the lawful directions of the Board of Directors of Employer, or any duly authorized committee thereof, and shall use his best efforts to promote the interests of Employer and to maintain and to promote the reputation thereof. While employed hereunder, Executive shall devote his time, efforts, skills and attention to the affairs of Employer and its subsidiaries in order that he shall faithfully perform -1- his duties and obligations hereunder and such as may be assigned to or vested in him by the Board of Directors of Employer, or any duly authorized committee thereof. 1.3. While this Agreement is in effect, Executive may from time to time engage in any businesses or activities that do not compete directly and materially with Employer, provided that such businesses or activities do not materially interfere with his performance of the duties assigned to him in compliance with this Agreement by the Board of Directors of Employer or any duly authorized committee thereof. In any event, Executive is permitted to (i) invest his personal assets as a passive investor in such form or manner as Executive may choose in his discretion, (ii) participate in various charitable efforts, and (iii) serve as a director or officer of any other entity or organization that does not compete with Employer. SECTION 2. Compensation and Benefits. 2.1. As compensation for services to Employer, Employer shall pay to Executive an initial salary at a yearly rate of $155,000. Such salary may be adjusted (up or down) upon a good faith determination of the Board of Directors that such salary should be adjusted; provided that the Board of Directors shall not adjust such salary downward prior to January 1, 1999. The salary shall be payable in equal semi-monthly installments, subject only to such payroll and withholding deductions as may be required by law and other deductions applied generally to employees of Employer for insurance and other employee benefit plans. 2.2. Upon Executive's furnishing to Employer customary and reasonable documentary support (such as receipts or paid bills) evidencing costs and expenses incurred by him in the performance of his services and duties hereunder (including, without limitation, travel and entertainment expenses) and containing sufficient information to establish the amount, date, place and essential character of the expenditure, Executive shall be reimbursed for such costs and expenses in accordance with Employer's normal expense reimbursement policy. 2.3. Executive shall have the right to participate in any additional compensation, benefit, life insurance or other plan or arrangement of Employer now or hereafter existing for the benefit of executive officers of Employer. 2.4. Executive shall be entitled to such vacation (in no event less than three (3) weeks per year), holiday and other paid or unpaid leave of absence as consistent with Employer's normal policies or as otherwise approved by the Board of Directors. SECTION 3. Preservation of Business; Fiduciary Responsibility. 3.1. Executive shall use his best efforts to preserve the business and organization of Employer, to keep available to Employer the services of present employees and to preserve the business relations of Employer. So long as the Executive is employed by Employer, Executive shall observe and fulfill proper standards of fiduciary responsibility attendant upon his service and office. -2- SECTION 4. Initial Term; Extensions of the Term. 4.1. The term of this Agreement shall commence on the effective date hereof and shall end on December 31, 1998. 4.2. The term of this Agreement shall automatically be extended for additional one-year periods commencing on January 1, 1999, 2000, 2001 and 2002, respectively, unless Executive gives written notice to Employer on or before December 1, 1998, 1999, 2000 or 2001, respectively, of his intention not to extend this Agreement. SECTION 5. Termination other than by Expiration of the Term. Employer or Executive may terminate Executive's employment under this Agreement at any time, but only on the following terms: 5.1. Executive may terminate his employment under this Agreement at any time upon at least 60 days' prior written notice to Employer. 5.2. Employer may terminate Executive's employment under this Agreement at any time, without prior notice, for "due cause." As used herein, the term "due cause" shall mean any of the following events: (I) any intentional misapplication by Executive of Employer's funds, or any other act of dishonesty injurious to Employer committed by Executive; or (II) Executive's conviction of a felony involving moral turpitude; or (III) Executive's breach, non-performance or non-observance of any of the material terms of this Agreement if such breach, non-performance or non-observance shall continue beyond a period of 30 business days immediately after notice thereof by Employer to Executive; or (IV) any other action by the Executive involving willful and deliberate malfeasance or gross negligence in the performance of Executive's duties. 5.3. In the event Executive is incapacitated by accident, sickness or otherwise so as to render Executive mentally or physically incapable of performing the services required under SECTION 1 of this Agreement for a period of one hundred eighty (180) consecutive days, and such incapacity is confirmed by the written opinion of two (2) practicing medical doctors licensed by and in good standing in the state in which they maintain offices for the practice of medicine, upon the expiration of such period or at any time reasonably thereafter, or in the event of Executive's death, Employer may terminate Executive's employment under this Agreement upon giving Executive or his legal representative written notice at least thirty (30) days' prior to the termination date. Executive agrees, after written notice by the Board of Directors of Employer or a duly authorized committee or officer of Employer, to submit to -3- examinations by such practicing medical doctors selected by the Board of Directors of Employer or a duly authorized committee or officer of Employer. 5.4. Employer may terminate Executive's employment under this Agreement at any time for any reason whatsoever, even without "due cause," by giving a written notice of termination to Executive, in which case the employment relationship shall terminate immediately upon the giving of such notice. SECTION 6. Effect of Termination. 6.1. In the event the employment relationship is terminated (a) by Executive upon 60 days' written notice pursuant to SUBSECTION 5.1 hereof, or (b) by Employer for "due cause" pursuant to SUBSECTION 5.2 hereof, all compensation and benefits shall cease as of the date of termination, other than: (i) those benefits that are provided by retirement and benefit plans and programs specifically adopted and approved by Employer for Executive that are earned and vested by the date of termination, and (ii) Executive's pro rata annual salary through the date of termination. 6.2. If Executive's employment relationship is terminated pursuant to SUBSECTION 5.3 hereof due to Executive's incapacity or death, Executive (or, in the event of Executive's death, Executive's legal representative) will be entitled to those benefits that are provided by retirement and benefits plans and programs specifically adopted and approved by Employer for Executive that are earned and vested at the date of termination and, even though no longer employed by Employer, shall continue to receive the salary compensation (payable at the then current rate at the time of incapacity or death and in the manner as prescribed in the second sentence of SUBSECTION 2.1) for one (1) year following the date of termination. 6.3. If Employer (i) terminates the employment of Executive other than pursuant to SUBSECTION 5.2 hereof for "due cause" or other than for a disability or death pursuant to SUBSECTION 5.3 hereof, (ii) demotes Executive to a position below his present position or substantially decreases the scope of the duties or responsibilities of Employee, (iii) decreases Executive's salary below the initial level described in SECTION 2 hereof (unless it is determined that executive compensation is to be reduced across the board) or reduces the employee benefits and perquisites below the level provided for by the terms of SECTION 2 hereof, other than as a result of any amendment or termination of any employee and/or executive benefit plan or arrangement, which amendment or termination is applicable to all qualifying executives of Employer, or (iv) requires or requests that Executive locate to a place other than Denver, then such action by Employer, unless consented to in writing by Executive, shall be deemed to be a constructive termination by Employer of Executive's employment (a "Constructive Termination"). In the event of a Constructive Termination, the Executive shall be entitled to receive, in a lump sum within thirty (30) days after the date of the Constructive Termination, an amount equal to two years' salary (undiscounted) at the rate in effect immediately prior to the event giving rise to the Constructive Termination. -4- 6.4. For purposes of this SECTION 6, the term "salary" shall mean the sum of (i) the annual rate of compensation provided to Executive by Employer under SUBSECTION 2.1 immediately prior to the Constructive Termination plus (ii) the average annual cash bonuses or other cash incentive compensation paid to Executive by Employer for the three calendar year period immediately preceding the year in which there shall occur a Constructive Termination. 6.5. In the event of a Constructive Termination, all other rights and benefits Executive may have under the employee and/or executive benefit plans and arrangements of Employer generally shall be determined in accordance with the terms and conditions of such plans and arrangements. SECTION 7. Change in Control. 7.1. Notwithstanding anything to the contrary in this Agreement, if a "Change in Control" (as defined below) of the Employer occurs and, within thirty-six months from the date of the Change in Control, the Executive voluntarily terminates his employment under SUBSECTION 5.1 or there occurs a Constructive Termination of Employee, then the Executive, even though no longer employed by the Employer, shall be entitled to all payments provided in SUBSECTION 6.3, payable in a lump sum within thirty (30) days after the date of termination. 7.2. For the purposes of this Agreement, the term "Change in Control" of the Employer shall be deemed to have occurred if (i) after October 1, 1997, any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended) other than any Employer employee stock ownership plan or the Employer, becomes the beneficial owner (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, as amended), directly or indirectly, of securities of the Employer representing 20% or more of the combined voting power of the Employer's then outstanding securities, (ii) the Board ceases to consist of a majority of Continuing Directors (as defined below) or (iii) a person (as defined in CLAUSE (I) above) acquires (or, during the 12-month period ending on the date for the most recent acquisition by such person or group of persons, has acquired) gross assets of Employer that have an aggregate market value greater than or equal to over 50% of the fair market value of all of the gross assets of Executive immediately prior to such acquisition or acquisitions. 7.3. For purposes of this Agreement, a "Continuing Director" shall mean a member of the Board of Directors who either (i) is a member of the Board of Directors at the date of this Agreement or (ii) is nominated or appointed to serve as a director by a majority of the then Continuing Directors. 7.4. Notwithstanding any other provision of this Agreement, if (a) there is a change in the ownership or effective control of the Employer or (b) in the ownership of a substantial portion of the assets of the Employer within the meaning of Section 280G of the Internal Revenue Code ("Section 280G"), the payments to be paid to the Executive in the nature of compensation to be received by or for the benefit of the Executive and contingent upon such event (the "Termination Payments") would create an "excess parachute payment" within the -5- meaning of Section 280G, then the Employer shall make the Termination Payments in substantially equal installments, the first installment being due within thirty days after the date of termination and each subsequent installment being due on January 31 of each year, such that the aggregate present value of all Termination Payments, whether pursuant to this Agreement or otherwise, will be as close as possible to, but not exceed 299% of, the Executive's base salary, within the meaning of Section 280G. It is the intention of this SUBSECTION 8.3 to avoid excise taxes on the Executive under Section 4999 of the Code and the disallowance of a deduction to the Employer pursuant to Section 280G. SECTION 8. Confidential and Proprietary Information. 8.1. Executive acknowledges and agrees that he will not, without the prior written consent of the Employer, at any time during the term of this Agreement or any time thereafter, except as may be required by law, regulatory process or other competent legal authority or as required by the Employer to be disclosed in the course of performing Executive's duties under this Agreement for the Employer, use or disclose to any person, firm or other legal entity, any confidential records, secrets or information related to the Employer or any parent, subsidiary or affiliated person or entity (collectively, "Confidential Information"). Executive acknowledges and agrees that all Confidential Information of Employer and/or its affiliates that he has acquired, or may acquire, were received, or will be received in confidence and as a fiduciary of the Employer. Executive will exercise utmost diligence to protect and guard such Confidential Information. 8.2. Executive agrees that he will not take with him upon the termination of this Agreement, any document or paper, or any photocopy or reproduction or duplication thereof, relating to any Confidential Information (that is disclosed in writing to Executive prior to his departure to be Confidential Information). SECTION 9. Return of Employer's Property. Upon the termination of this Agreement or whenever requested by Employer, Executive shall immediately deliver to Employer all property in his possession or under his control belonging to Employer, in good condition, ordinary wear and tear excepted. SECTION 10. Injunctive Relief. Executive acknowledges that the breach by the Executive of the provisions of this Agreement shall cause irreparable harm to the Employer, which harm cannot be fully redressed by the payment of damages to the Employer. Accordingly, the Employer shall be entitled, in addition to any other right or remedy it may have at law or in equity, to an inunction enjoining or restraining Executive from any violation or threatened violation of this Agreement. SECTION 11. Arbitration. 11.1. As concluded by the parties and as evidenced by the signatures of the parties, any dispute between the parties arising out of any section of this Agreement will, on the written notice of one party served on the other, be submitted to arbitration complying with and -6- governed by the provisions and rules of the American Arbitration Association, provided that such arbitration shall be held in Denver, Colorado. 11.2. Each of the parties will appoint one person as an arbitrator to hear and determine the dispute and if they are unable to agree, then the two arbitrators so chosen will select a third impartial arbitrator whose decision will be final and conclusive upon the parties. 11.3. The expenses of such arbitration will be borne by the losing party or in such proportion as the arbitrators decide. 11.4. A material or anticipatory breach of any section of this Agreement shall not release either party from the obligations of this SECTION 14. SECTION 12. Miscellaneous. 12.1. If any provision contained in this Agreement is for any reason held to be totally invalid or unenforceable, such provision will be fully severable, and in lieu of such invalid or unenforceable provision there will be added automatically as part of this Agreement a provision as similar in terms as may be valid and enforceable. 12.2. All notices and other communications required or permitted hereunder or necessary or convenient in connection herewith shall be in writing and shall be deemed to have been given when faxed (with confirmation of receipt), sent via overnight courier, or mailed by registered mail or certified mail, return receipt requested, as follows (provided that notice of change of address shall be deemed given only when received): if to Employer: Matrix Capital Corporation 1380 Lawrence Street, Suite 1410 Denver, Colorado 80204 Fax: 303-595-9906 Attn: President if to Executive: T. Allen McConnell 1443 Belford Court Evergreen, Colorado 80439 Fax: 303-674-0576 -7- or to such other names or addresses as Employer or Executive, as the case may be, shall designate by notice to the other party hereto in the manner specified in this SUBSECTION 12.2. 12.3. This Agreement shall be binding upon and inure to the benefit of Employer, its successors, legal representatives and assigns, and upon Executive, his heirs, executors, administrators, representatives, legatees and assigns. Executive agrees that his rights and obligations hereunder are personal to him and may not be assigned without the express written consent of Employer. 12.4. This Agreement replaces and merges all previous agreements and discussions relating to the same or similar subject matters between Executive and Employer with respect to the subject matter of this Agreement. This Agreement may not be modified in any respect by any verbal statement, representation or agreement made by any employee, officer, or representative of Employer or by any written agreement unless signed by an officer of Employer who is expressly authorized by Employer to execute such document. 12.5. The laws of the State of Colorado will govern the interpretation, validity and effect of this Agreement without regard to the place of execution or the place for performance thereof, and Employer and Executive agree that the state and federal courts situated in Denver County, Colorado shall have personal jurisdiction over Employer and Executive to hear all disputes arising under this Agreement. This agreement is to be at least partially performed in Denver County, Colorado, and, as such, Employer and Executive agree that venue shall be proper with the state or federal courts in Denver County, Colorado to hear such disputes. In the event either Employer or Executive is not able to effect service of process upon the other with respect to such disputes, Employer and Executive expressly agree that the Secretary of State for the State of Colorado shall be an agent of Employer and/or the Executive to receive service of process on behalf of Employer and/or the Executive with respect to such disputes. 12.6. Executive and Employer shall execute and deliver any and all additional instruments and agreements that may be necessary or proper to carry out the purposes of this Agreement. 12.7. The descriptive headings of the several sections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 12.8. If either party should file a lawsuit against the other to enforce any right such party has hereunder, the prevailing party shall also be entitled to recover reasonable attorneys' fees and costs of suit in addition to any other relief awarded such prevailing party. 12.9. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement. 12.10. Executive acknowledges that Executive has had the opportunity to read this Agreement and discuss it with advisors and legal counsel, if Executive has so chosen. -8- Executive also acknowledges the importance of this Agreement and that Employer is relying on this Agreement in entering into an employment relationship with Executive. 12.11. Notwithstanding anything else herein to the contrary, this Agreement shall not supercede or govern the terms of the stock options granted to Executive as of October 1, 1997, which are governed by an option agreement dated as of October 1, 1997. 12.12. The provisions of Sections 6, 7, 8, 9, 10, and 11 shall survive a termination of this Agreement. The undersigned, intending to be legally bound, have executed this Agreement as of October 1, 1997. EMPLOYER: MATRIX CAPITAL CORPORATION By: ----------------------------------- ------------, Authorized Signatory EXECUTIVE: -------------------------------------- T. Allen McConnell -9- EX-10.38 6 AMENDMENT OF EMPLOYMENT AGREEMENT OF GARY LENZO EXHIBIT 10.38 EMPLOYMENT AGREEMENT ADDENDUM THIS EMPLOYMENT AGREEMENT ADDENDUM, is a supplement to the original EMPLOYMENT AGREEMENT dated JANUARY 1, 1995, by and between MATRIX CAPITAL BANK, (hereinafter referred to as the "BANK") and GARY LENZO (hereinafter referred to as the "EMPLOYEE"). WHEREAS, the Employee has heretofore been employed by the Bank as President and Chief Executive Officer, and WHEREAS, the Bank wishes to assure itself of the services of the Employee as outlined in SECTION 5. TERM of the original Employment Agreement, and ---- WHEREAS, the parties desire by this writing to set forth the continued employment relationship of the Bank and the Employee. NOW THEREFORE, it is agreed to amend SECTION 2. BASE COMPENSATION and SECTION 5. ----------------- TERM as follows: - ---- 2. BASE COMPENSATION. The Bank agrees to pay the Employee during the terms of ----------------- this Addendum, a salary at the rate of $120,000.00 per annum payable in cash not less frequently than twice monthly and shall be increased annually in such an amount as the Board of Directors may determine. 5. TERM. This Addendum extends the period of employment an additional twelve ---- (12) months, per performance evaluation by the Board of Directors, as outlined in the original Employment Contract, thereby extending the term of said Employment Agreement to JANUARY 1, 2001. IN WITNESS WHEREOF, the parties have executed this Employment Agreement Addendum, on the 28th day of January 1998. MATRIX CAPITAL BANK BY: /s/ ------------------------------------ NAME: D. Mark Spencer ITS: Chairman BY: /s/ ------------------------------------ NAME: Gary Lenzo EX-10.39 7 THIRD AMENDMENT TO AMENDED AND RESTATED LOAN EXHIBIT 10.39 ------------- THIRD AMENDMENT TO ------------------ AMENDED AND RESTATED LOAN AGREEMENT ----------------------------------- THIS DOCUMENT is entered into effective as of March 1, 1998, between MATRIX FINANCIAL SERVICES CORPORATION, an Arizona corporation ("BORROWER"), the Lenders listed on the signature page below, and BANK ONE, TEXAS, N.A., as Agent (in that capacity "AGENT"). Borrower, Lenders, and Agent have entered into the Amended and Restated Loan Agreement (as renewed, extended, amended, or restated, the "LOAN AGREEMENT") dated as of January 31, 1997, providing for loans to Borrower both on a revolving and a term basis. Borrower, Lenders, and Agent have agreed, upon the following terms and conditions, to amend the Loan Agreement to (1) increase the total Warehouse Commitments to $90,000,000, (2) increase the B/C-Paper Sublimit to $45,000,000, (3) increase the Uncommitted-B/C-Paper Sublimit to $35,000,000, and (4) provide for a discretionary Overline Facility by Bank One, Texas, N.A., in its individual capacity and in its sole discretion. Accordingly, for adequate and sufficient consideration, Borrower, Lenders, and Agent agree as follows: I. TERMS AND REFERENCES. Unless otherwise stated in this document (A) terms -------------------- defined in the Loan Agreement have the same meanings when used in this document and (B) all references to "Sections", "Schedules", and "Exhibits" are to the Loan Agreement's sections, schedules, and exhibits. I. AMENDMENTS. The Loan Agreement is amended as follows: ---------- (A) A new sentence is added at the end of RECITAL B as follows: Borrower has also requested Bank One, in its individual capacity and on a discretionary basis, to provide -- and Bank One is willing to consider providing -- Borrowings to Borrower under an Overline Facility, subject in all respects to the terms, conditions, and limitations of the Loan Documents. (B) SECTION 1.1 is amended to add or entirely amend the following definitions in alphabetical order with the other definitions in that section: "BANK ONE" means Bank One, Texas, N.A., in its individual capacity. "B/C-PAPER SUBLIMIT" means $45,000,000. "DRY BORROWING" means EITHER a Warehouse Borrowing OR an Overline Borrowing for which, in either case, all of the Collateral Documents have been delivered to Agent in accordance with SECTION 4.3. "GESTATION BORROWING" means (a) EITHER a Warehouse Borrowing (that is a Ratable Borrowing) OR an Overline Borrowing that is (b) in either case (i) subject to the Gestation Sublimit and (ii) supported by the Borrowing Base for Gestation Collateral. "NOTES" means the Warehouse Notes, Swing Note, Overline Note, Working-Capital Notes, and Term-Line Notes. "OVERLINE BORROWING" means a Borrowing under the Overline Facility, which may not be a Committed-B/C Paper Borrowing, a Repurchase Borrowing, a Second-Lien Borrowing, or an Uncommitted-B/C Borrowing. "OVERLINE FACILITY" means $10,000,000, as that amount may be canceled or terminated under this agreement. "OVERLINE NOTE" means a promissory note executed and delivered by Borrower, payable to Bank One's order, in the stated principal amount of the Overline Facility, and substantially in the form of EXHIBIT A- 5, as renewed, extended, amended, or replaced. "UNCOMMITTED-B/C-PAPER SUBLIMIT" means $35,000,000. (C) A new row is added at the end of the table in the definition of Applicable-Covered Rate in SECTION 1.1 as follows: - -------------------------------------------------------------------------------- Overline Borrowings As agreed by Borrower and Bank One from time to time. - -------------------------------------------------------------------------------- (D) Two new rows are added at the end of the table in the definition of Applicable Margin in SECTION 1.1 as follows: - -------------------------------------------------------------------------------- Overline Borrowings Base Rate As agreed by Borrower and Bank One from time to time. - -------------------------------------------------------------------------------- Fed-Funds Rate or LIBOR As agreed by Borrower and Bank One from time to time. - -------------------------------------------------------------------------------- (E) The first two bullet points in SECTION 2.1 are entirely amended as follows: The SUM (without duplication) of the total Principal Debt PLUS the total LC Exposure may never exceed the lesser of EITHER (a) the total Combined Commitments and the Overline Facility, OR (b) the total Borrowing Base. The total Principal Debt of all Warehouse Borrowings may never exceed the lesser of EITHER (i) the total Warehouse Commitments OR (ii) the SUM of the Borrowing Base for Mortgage Collateral PLUS the Borrowing Base for Gestation Collateral MINUS the Principal Debt of all Overline Borrowings. (F) A new SECTION 2.1(aa) is added to the Loan Agreement immediately after SECTION 2.1(a) as follows: THIRD AMENDMENT --------------- (aa) OVERLINE FACILITY. Borrower may from time to time request Bank One to provide Overline Borrowings to it. Bank One does not commit to provide any Overline Borrowing but may elect to do so in its sole discretion. If Bank One does provide one or more Overline Borrowings in its sole discretion, it is not then obligated to provide any additional Overline Borrowings. Subject the foregoing conditions and the limitations below and other provisions of the Loan Documents, Bank One may -- on a revolving basis and on Business Days before the Warehouse-Actual-Termination Date -- provide Overline Borrowings to Borrower SO LONG AS, in each case, no Overline Borrowing may be disbursed that would cause any of the applicable limitations in SECTION 2.1(a) or below to be exceeded, which limitations must be read together and are not mutually exclusive: The total Principal Debt of all Overline Borrowings may never exceed the lesser of EITHER (i) the Overline Facility OR (ii) the SUM of the Borrowing Base for Mortgage Collateral PLUS the Borrowing Base for Gestation Collateral, MINUS the Principal Debt of all Warehouse Borrowings. No Overline Borrowing may be made to the extent that there is any Borrowing availability under SECTION 2.1(a). No Overline Borrowing may be made on a day that is not a Business Day, or on or after the Warehouse-Actual-Termination Date. Each disbursement of an Overline Borrowing must be at least $25,000. (G) The first bullet point in each of SECTIONS 2.1(b) and 2.1(c) are entirely amended as follows: The SUM (without duplication) of the total Principal Debt PLUS the total LC Exposure may never exceed the lesser of EITHER (a) the total Combined Commitments and the Overline Facility, OR (b) the total Borrowing Base. (H) SECTION 2.8 is entirely amended as follows: 2.8 TERMINATIONS. All Warehouse Commitments, the Overline Facility, and all Working-Capital Commitments automatically terminate in full on the Warehouse-Actual-Termination Date, and all Term-Line Commitments automatically terminate in full on the Tranche A-Actual- Termination Date or Tranche B-Actual-Termination Date (as applicable). After giving written and irrevocable notice to Agent and each Lender at least five Business Days before the effective date of any termination, Borrower may fully or partially terminate the Warehouse Commitments, the Working-Capital Commitments, or the Term- Line Commitments, or THIRD AMENDMENT --------------- any combination of them before those respective dates, and any partial termination must be ratable in accordance with each Lender's Commitment Percentage. After giving written and irrevocable notice to Agent and to Bank One at least five Business Days before the effective date of any termination, Borrower may fully or partially terminate the Overline Facility. Once terminated, no part of the Warehouse Commitment, the Overline Facility, the Working-Capital Commitment, or Term-Line Commitment (as applicable) may be reinstated except by an amendment to this agreement. (I) A new SECTION 2.9 is added as follows: 2.9 OVERLINE BORROWING PROCEDURES. The conditions and procedures of SECTION 2.2 and SECTION 2.4 apply to Overline Borrowings except that (a) the Borrowing Request for an Overline Borrowing must be delivered to Bank One by 3:00 p.m. on the Borrowing Date and (b) Bank One shall then elect in its sole discretion whether to loan that Overline Borrowing. If Bank One elects to loan that Overline Borrowing, then it shall follow the funding procedures that are applicable under SECTIONS 2.2, 2.3, and 2.4. (J) The first sentence of SECTION 3.1 is entirely amended as follows: The Principal Debt (and related interest) of Warehouse Borrowings that are Ratable Borrowings, Warehouse Borrowings that are Swing Borrowings, Overline Borrowings, Working-Capital Borrowings, and Term-Line Borrowings is respectively evidenced by the Warehouse Notes, Swing Note, Overline Note, Working-Capital Notes, and Term- Line Notes. (K) The third row after the captions in the table in SECTION 3.3 is entirely amended as follows: - -------------------------------------------------------------------------------- Principal Debt of Swing Borrowings and Overline Borrowings On demand - -------------------------------------------------------------------------------- (L) SECTION 3.5(a)(i) is entirely amended as follows: (i) (a) First to Principal Debt of Overline Borrowings and (B) then Principal Debt of Swing Borrowings -- in each case payable solely to Agent, which Agent shall distribute in accordance with the participation interests in that Principal Debt that any one or more Lenders may have purchased and paid for under SECTION 2.5(c). (M) The introductory provisions of SECTION 3.5(b)(vi) are entirely amended as follows: (vi) Principal Debt in the order below -- payable ratably to each Lender in accordance with its Termination Percentage -- except as the order may be rearranged by Agent to the extent possible to avoid the application of any Funding Loss for LIBOR Borrowings. For purposes of THIRD AMENDMENT --------------- this section, no distinction shall be made whether the Borrowings arose under the Warehouse Commitments or the Overline Facility. Principal Debt shall be applied (A) to the Borrowing-Purpose Category to the extent the collections or proceeds are from or arose in respect of the Collateral in its Borrowing Base and (B) then in the following order: (N) A new amendment is added to the Loan Agreement in the form of the attached EXHIBIT A-5. (O) SCHEDULE 2 and EXHIBITS A-1, D-1, and D-3 are entirely amended in the forms of, and all references in the Loan Agreement to SCHEDULE 2 and EXHIBITS A- 1, D-1, and D-3 are changed to, the attached SECOND AMENDED SCHEDULE 2 and AMENDED EXHIBITS A-1, D-1, and D-3, respectively. I. CONDITIONS PRECEDENT. Notwithstanding any contrary provision, the -------------------- foregoing paragraphs in this document are not effective unless and until (A) the representations and warranties in this document are true and correct and (B) Agent receives (1) counterparts of this document executed by each party on the signature pages of this document and (2) each document and other item listed on the attached ANNEX A, each of which must be in form, substance, and number of counterparts as may be acceptable to Agent and its special counsel. I. RATIFICATIONS. To induce Agent and Lenders to enter into this ------------- document, Borrower (A) ratifies and confirms all provisions of the Loan Documents as amended by this document, (B) ratifies and confirms that all guaranties, assurances, and Liens granted, conveyed, or assigned to Agent and Lenders under the Loan Documents (as they may have been renewed, extended, and amended) are not released, reduced, or otherwise adversely affected by this document and continue to guarantee, assure, and secure full payment and performance of the present and future Obligation, and (C) agrees to perform those acts and duly authorize, execute, acknowledge, deliver, file, and record those additional documents, and certificates as Agent or any Lender may request in order to create, perfect, preserve, and protect those guaranties, assurances, and Liens. I. REPRESENTATIONS. To induce Agent and Lenders to enter into this --------------- document, Borrower represents and warrants to Agent and Lenders that as of the date of this document (A) Borrower has all requisite authority and power to execute, deliver, perform its obligations under this document, which execution, delivery, and performance have been duly authorized by all necessary corporate action, require no action by or filing with any Tribunal, do not violate its corporate charter or bylaws or (except where not a Material-Adverse Event) violate any Law applicable to it or any material agreement to which it or its assets are bound, (B) upon execution and delivery by all parties to it, this document will constitute Borrower's legal and binding obligation, enforceable against it in accordance with their respective terms except as that enforceability may be limited by Debtor Laws and general principles of equity, (C) all other representations and warranties in the Loan Documents are true and correct in all material respects except to the extent that (1) any of them speak to a different specific date or (2) the facts on which any of them were based have been changed by transactions contemplated or permitted by the Loan Agreement, and (D) no Material-Adverse Event, Default, or Potential Default exists. THIRD AMENDMENT --------------- I. EXPENSES. Borrower shall pay all costs, fees, and expenses paid or -------- incurred by Agent incident to this document, including, without limitation, the reasonable fees and expenses of Agent's special counsel in connection with the negotiation, preparation, delivery, and execution of this document and any related documents. I. MISCELLANEOUS. All references in the Loan Documents to the "Loan ------------- Agreement" refer to the Loan Agreement as amended by this document. This document is a "Loan Document" referred to in the Loan Agreement; therefore, the provisions relating to Loan Documents in SECTIONS 1 and 12 are incorporated in this document by reference. Except as specifically amended and modified in this document, the Loan Agreement is unchanged and continues in full force and effect. This document may be executed in any number of counterparts with the same effect as if all signatories had signed the same document. All counterparts must be construed together to constitute one and the same instrument. This document binds and inures to each of the undersigned and their respective successors and permitted assigns, subject to SECTION 12.12. THIS DOCUMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. REMAINDER OF PAGE INTENTIONALLY BLANK. SIGNATURE PAGES FOLLOW. THIRD AMENDMENT --------------- EXECUTED as of the date first stated in this Third Amendment to Restated and Amended Loan Agreement. MATRIX FINANCIAL SERVICES BANK ONE, TEXAS, N.A., as CORPORATION, as Borrower Agent, as a Lender,and as Bank One By /s/ By /s/ -------------------------------- -------------------------------- Thomas J. Osselaer, Mark L. Freeman, Vice President Executive Vice President COLORADO NATIONAL BANK, as RESIDENTIAL FUNDING CORPORATION, as a Lender a Lender By /s/ By /s/ -------------------------------- -------------------------------- Name: Name: Title: Title: PAGE ONE OF TWO SIGNATURE PAGES ------------------------------- CONSENT AND AGREEMENT --------------------- To induce Agent and Lenders to enter into this document, the undersigned (a) consents and agrees to this document's execution and delivery, (b) ratifies and confirms that all guaranties, assurances, Liens, and subordinations granted, conveyed, or assigned to Agent and Lenders under the Loan Documents (as they may have been renewed, extended, and amended) are not released, diminished, impaired, reduced, or otherwise adversely affected by this document and continue to guarantee, assure, secure, and subordinate other debt to the full payment and performance of all present and future Obligation, (c) agrees to perform those acts and duly authorize, execute, acknowledge, deliver, file, and record those additional guaranties, assignments, security agreements, deeds of trust, mortgages, and other agreements, documents, instruments, and certificates as Agent or any Lender may reasonably deem necessary or appropriate in order to create, perfect, preserve, and protect those guaranties, assurances, Liens, and subordinations, (d) represents and warrants to Agent and Lenders that (i) the value of the consideration received and to be received by the undersigned in respect of those guaranties, assurances, Liens, and subordinations are reasonably worth at least as much as the related liability and obligation, (ii) that liability and obligation may reasonably be expected to directly or indirectly benefit the undersigned, and (iii) the undersigned is -- and after giving effect to those guaranties, assurances, Liens, subordinations, and the Loan Documents, in light of all existing facts and circumstances (including, without limitation, collateral for and other obligors in respect of the Obligation and various components of it and various rights of subrogation and contribution), the undersigned will be -- Solvent, and (e) waives notice of acceptance of this consent and agreement, which consent and agreement binds the undersigned and its successors and permitted assigns and inures to Agent, each Lender, and their successors and permitted assigns. MATRIX CAPITAL CORPORATION, as Guarantor By /s/ ------------------------------------- Guy A. Gibson, Chief Executive Officer and President PAGE TWO OF TWO SIGNATURE PAGES ------------------------------- ANNEX A ------- CLOSING CONDITIONS ------------------ Unless otherwise specified, all document must be dated effective as of March 1, 1998 (the "AMENDMENT-CLOSING DATE"), or a date no more than 30 days before that date (an "AMENDMENT-CURRENT DATE"). I. H&B /1/[] THIRD AMENDMENT TO RESTATED AND AMENDED LOAN AGREEMENT dated as of the Amendment-Closing Date, executed by MATRIX FINANCIAL SERVICES CORPORATION, an Arizona corporation ("BORROWER"), certain Lenders, and BANK ONE TEXAS, N.A., as Agent (in that capacity, "AGENT"), and consented and agreed to by other parties as reflected in it, accompanied by: Annex A - Closing Conditions Second Amended Schedule 2 - Lenders and Commitments Amended Exhibit A-1 - Warehouse Note Amended Exhibit A-5 - Overline Note Amended Exhibit D-1 - Borrowing Report Amended Exhibit D-3 - Borrowing-Base Report I. H&B [] WAREHOUSE NOTES dated as of the Amendment-Closing Date, executed by Borrower, substantially in the form of AMENDED EXHIBIT A-1 to the Loan Agreement, one each payable to each Lender in the amount of its amended Warehouse Commitment as follows: ----------------------------------------------------------- LENDER AMOUNT ----------------------------------------------------------- Bank One, Texas, N.A. $45,000,000 ----------------------------------------------------------- Colorado National Bank $22,500,000 ----------------------------------------------------------- Residential Funding Corporation $22,500,000 ----------------------------------------------------------- I. H&B [] OVERLINE NOTE dated as of the Amendment-Closing Date, executed by Borrower, in substantially the form of EXHIBIT A-5 to the Loan Agreement, payable to the order of Bank One, Texas, N.A., in the stated principal amount of $10,000,000. I. Bank One [] LETTER AGREEMENT dated an Amendment-Current Date, between Borrower and Bank One as to the Applicable-Covered Rate and Applicable Margin for Overline Borrowings. I. H&B [] OFFICERS' CERTIFICATE dated as of the Amendment-Closing Date, executed by the President or a Vice President and Secretary or an Assistant Secretary of Borrower, certifying resolutions adopted by Borrower's directors, incumbency of certain officers of Borrower, and changes to Borrower's charter or bylaws, if any, attached to which are: Annex A - Resolutions Annex B - Changes to charter, if any Annex C - Changes to bylaws, if any ________________________ /1/[ ] denote items not furnished or complete at the time this version of this - -------------------------------------------------------------------------------- annex was prepare along with the names or initials of the party or ------------------------------------------------------------------------ counsel responsible for each. ----------------------------- ANNEX A ------- I. H&B [] CERTIFICATES OF CORPORATE EXISTENCE AND GOOD STANDING for Borrower issued as of an Amendment-Current Date, by the Secretary of State of Arizona. I. H&B [] OPINION dated as of the Amended-Closing Date, of counsel to Borrower, in form and substance acceptable to Lender. I. [] Such other agreements, documents, instruments, and items as Agent may request. SECOND AMENDED SCHEDULE 2 ------------------------- LENDERS AND COMMITMENTS -----------------------
Name of Lender Warehouse Working Term-Line Combined Commit- Capital Commit- Commitment Commitment ment ment (by Lender) BANK ONE, TEXAS, N.A. $45,000,000 $5,000,000 $15,000,000 $65,000,000 1717 Main Street, 4th Floor Dallas, TX 75201 Attn: Mark L. Freeman, Vice President Fed Tax ID No. 75-2270994 Tel (214) 290-2780 Fax (214) 290-2275 Account # (see account #'s in Loan Agreement) Bank: Bank One, Dallas ABA # 111000614 Attn: Gloria Sadler, (214) 290-6069 Ref: (see account names in Loan Agreement) COLORADO NATIONAL BANK $22,500,000 $2,500,000 $7,500,000 $32,500,000 918 Seventeenth Street Denver, CO 80202 Attn: Jerry A. Davis Tel (303) 585-4267 Fax (303) 585-4246 RESIDENTIAL FUNDING CORPORATION $22,500,000 $2,500,000 $7,500,000 $32,500,000 1646 North California Boulevard Suite 400 Walnut Creek, CA 94596 Attn: L. L. Schellenberg Tel (510) 935-0614 Fax (510) 935-6424 Total $90,000,000 $10,000,000 $30,000,000 $130,000,000
ANNEX A ------- AMENDED EXHIBIT A-1 ------------------- WAREHOUSE NOTE -------------- $________________ March 1, 1998 FOR VALUE RECEIVED, MATRIX FINANCIAL SERVICES CORPORATION, an Arizona corporation ("BORROWER"), promises to pay to the order of ______________________ ("LENDER") that portion of the principal amount of $____________________________ that may from time to time be disbursed and outstanding under this note together with interest. This note is a "Warehouse Note" under the Amended and Restated Loan Agreement (as renewed, extended, amended, or restated, the "LOAN AGREEMENT") dated as of January 31, 1997, between Borrower, Lender, certain other Lenders, and Bank One, Texas, N.A., as Agent for Lenders. All of the defined terms in the Loan Agreement have the same meanings when used, unless otherwise defined, in this note. This note incorporates by reference the principal and interest payment terms in the Loan Agreement for this note, including, without limitation, the final maturity, which is the Warehouse-Actual-Termination Date. Principal and interest are payable to the holder of this note through Agent at either (a) its offices at 1717 Main Street, Dallas, Texas 75201, or (b) at any other address so designated by Agent in written notice to Borrower. This note incorporates by reference all other provisions in the Loan Agreement applicable to this note, such as provisions for disbursements of principal, applicable-interest rates before and after Default, voluntary and mandatory prepayments, acceleration of maturity, exercise of Rights, payment of attorneys' fees, court costs, and other costs of collection, certain waivers by Borrower and other obligors, assurances and security, choice of Texas and United States federal Law, usury savings, and other matters applicable to Loan Documents under the Loan Agreement. This note is an amendment, restatement, renewal, extension, modification of, consolidation of, and substitution for, the existing Warehouse Notes (as the same may have been amended and replaced to the date hereof, the "FORMER NOTES") which Former Notes were executed and delivered pursuant to the Existing Loan Agreement. MATRIX FINANCIAL SERVICES CORPORATION, as Borrower By Thomas J. Osselaer, Executive Vice President AMENDED EXHIBIT A-1 ------------------- EXHIBIT A-5 ----------- OVERLINE NOTE ------------- $10,000,000 March 1, 1998 FOR VALUE RECEIVED, MATRIX FINANCIAL SERVICES CORPORATION, an Arizona corporation ("BORROWER"), promises to pay to the order of BANK ONE, TEXAS, N.A. ("BANK ONE") that portion of the principal amount of $10,000,000 that may from time to time be disbursed and outstanding under this note together with interest. This note is the "Overline Note" under the Amended and Restated Loan Agreement (as renewed, extended, amended, or restated, the "LOAN AGREEMENT") dated as of January 31, 1997, between Borrower, Bank One, certain other Lenders, and Bank One, Texas, N.A., as Agent for Lenders. All of the defined terms in the Loan Agreement have the same meanings when used, unless otherwise defined, in this note. This note incorporates by reference the principal and interest payment terms in the Loan Agreement for this note, including, without limitation, the final maturity, which is the Warehouse-Actual-Termination Date. Principal and interest are payable to the holder of this note through Agent at either (a) its offices at 1717 Main Street, Dallas, Texas 75201, or (b) at any other address so designated by Agent in written notice to Borrower. This note incorporates by reference all other provisions in the Loan Agreement applicable to this note, such as provisions for disbursements of principal, applicable-interest rates before and after Default, voluntary and mandatory prepayments, acceleration of maturity, exercise of Rights, payment of attorneys' fees, court costs, and other costs of collection, certain waivers by Borrower and other obligors, assurances and security, choice of Texas and United States federal Law, usury savings, and other matters applicable to Loan Documents under the Loan Agreement. MATRIX FINANCIAL SERVICES CORPORATION, as Borrower By Thomas J. Osselaer, Executive Vice President SECOND AMENDED SCHEDULE 2 ------------------------- AMENDED EXHIBIT D-1 ------------------- BORROWING REQUEST ----------------- AGENT: Bank One, Texas, N.A. DATE: _________________________, 19_____ BORROWER: Matrix Financial Services Corporation This request is delivered under the Amended and Restated Loan Agreement (as renewed, extended, and amended, the "LOAN AGREEMENT") dated as of January 31, 1997, between Borrower, Agent, and certain Lenders. Terms defined in the Loan Agreement have the same meanings when used, unless otherwise defined, in this request. Borrower requests $____________ in Borrowings (collectively, the "REQUESTED BORROWING") to be funded on _______________, 19_____/1/(the "REQUESTED BORROWING DATE") in the one or more Borrowing-Purpose Categories indicated on the attached schedule, which has been completed as to all other relevant information. Borrower certifies that as of the Requested Borrowing Date -- after giving effect to the Requested Borrowing -- (a) the representations and warranties of Borrower in the Loan Documents are true and correct in all material respects except to the extent that (i) a representation or warranty speaks to a specific date or (ii) the facts on which a representation or warranty is based have changed by transactions or conditions contemplated or permitted by the Loan Documents, (b) no Default or Potential Default exists, (c) the extension of the Requested Borrowing does not cause any Borrowing Excess to exist, (d) Borrower has timely delivered a Collateral-Delivery Notice, if applicable, (e) all Collateral Documents required by the Loan Agreement to be delivered to Agent in connection with the Requested Borrowing have been delivered to Agent, and (f) Borrower has otherwise complied with all conditions of the Loan Documents to permit the Requested Borrowing to be extended. MATRIX FINANCIAL SERVICES CORPORATION, as Borrower By Name: /2/Title: ________ ________________________ /1/ Must be no later than (a) the third Business Day after request if the - -------------------------------------------------------------------------------- Requested Borrowings involves any LIBOR Borrowing or (b) the Business Day --------------------------------------------------------------------------- of request otherwise. --------------------- /2/ Must be a Responsible Officer of, or an individual designated to Agent in - -------------------------------------------------------------------------------- writing by a Responsible Officer of, Borrower. ---------------------------------------------- SECOND AMENDED SCHEDULE 2 - ------------------------- SCHEDULE TO BORROWING REQUEST ----------------------------- DATED _____________________, 19__; FOR $_____________________ [Complete EACH applicable box or mark N.A.]
Borrowing-Purpose Amount Extended By Borrowing-Price Category Interest Period Ending Category Warehouse Borrowing $ Ratable Base Rate ________________, 19__ (Dry) Swing Fed-Funds Rate LIBOR (not for Swing) (check and indicate amount if Committed- B/C-Paper Borrowing- $__________________) (check and indicate amount if Uncommitted- B/C-Paper Borrowing- $____________________) (check and indicate amount if Second-Lien Borrowing- $________) v(check and indicate amount if Repurchase Borrowing- $_______) Overline Borrowing $ Bank One Base Rate ________________, 19__ (Dry) Fed-Funds Rate LIBOR (check and indicate amount if Committed- B/C-Paper Borrowing- $__________________) (check and indicate amount if Uncommitted- B/C-Paper Borrowing- $____________________) (check and indicate amount if Second-Lien Borrowing-$_________) (check and indicate amount if Repurchase Borrowing-$________) Warehouse Borrowing $ Bank One Base Rate ________________, 19__ (Wet) Fed-Funds Rate LIBOR (not for Swing) (check and indicate amount if Committed- B/C-Paper Borrowing- $__________________) (check and indicate amount if Uncommitted- B/C-Paper Borrowing- $____________________) (check and indicate amount if Second-Lien Borrowing-$_________) (check and indicate AMENDED EXHIBIT D-1 - -------------------
amount if Repurchase Borrowing-$________) Overline Borrowing $ Bank One Base Rate ________________, 19__ (Wet) Fed-Funds Rate LIBOR (check and indicate amount if Committed- B/C-Paper Borrowing- $__________________) (check and indicate amount if Uncommitted- B/C-Paper Borrowing- $____________________) (check and indicate amount if Second-Lien Borrowing-$_________) (check and indicate amount if Repurchase Borrowing-$________) Warehouse Borrowing $ Ratable Base Rate ________________, 19__ (Gestation) Fed-Funds Rate LIBOR Overline Borrowing $ Bank One Base Rate ________________, 19__ (Gestation) Fed-Funds Rate LIBOR Working-Capital $ Ratable Base Rate ________________, 19__ Borrowing (P&I) Fed-Funds Rate LIBOR Working-Capital $ Ratable Base Rate ________________, 19__ Borrowing (T&I) Fed-Funds Rate LIBOR Working-Capital $ Ratable Base Rate ________________, 19__ Borrowing (Foreclosure) Fed-Funds Rate LIBOR Term-Line $ Ratable Base Rate ________________, 19__ Borrowing Fed-Funds Rate LIBOR
AMENDED EXHIBIT D-1 - ------------------- AMENDED EXHIBIT D-3 ------------------- BORROWING-BASE REPORT --------------------- AGENT: Bank One, Texas, N.A. DATE:_______________, 199___ BORROWER: Matrix Financial Services Corporation This report is delivered under the Amended and Restated Loan Agreement (as renewed, extended, and amended, the "LOAN AGREEMENT") dated as of January 31, 1997, between Borrower, Agent, and certain Lenders. Terms defined in the Loan Agreement have the same meanings when used, unless otherwise defined, in this report. Agent has calculated the Borrowing Base and its various components as of the date of this report. TABLE 1--WAREHOUSE BORROWINGS -----------------------------
FACE WAREHOUSE I. RECONCILIATION FOR DRY BORROWINGS (EXCLUDING GESTATION BORROWINGS) A. Ending Collateral balance (last report) $ $ B. Collateral removed (since last report) $ $ C. Beginning Collateral balance -- Line 1.a. MINUS Line 1.b. $ $ D. Collateral received (since last report) $ $ E. New Collateral balance (today) -- Line 1.c. PLUS Line 1.d. $ $ F. Ineligibles -- expired 120-day limit (or after applicable limit) $ $ G. Ineligibles -- expired Shipping Period $ $ H. Ineligibles -- expired Correction Period $ $ I. Jumbo Sublimit exclusions $ $ J. Other ineligibles $ $ K. Total Ineligibles -- TOTAL of Lines 1.f. THROUGH 1.j. $ $ L. Total Collateral amount-- Line 1.e. MINUS Line 1.k. $ $ M. If Agent or Determining Lenders elect -- Market Value of items in Line 1.l. $ $ N. Lesser of EITHER Lines 1.l. OR -- if applicable -- 1.m. $ $ O. Portion of Collateral amount attributable to Eligible-Committed-B/C-Paper Loans which have been held for more than 60 calendar days $ $ P. Portion of Collateral amount attributable to Eligible-Uncommitted-B/C-Paper Loans $ $ Q. Portion of Collateral amount attributable to Eligible-Second-Lien-Loans which have been held for more than 60 calendar days $ $ R. Portion of Collateral amount attributable to Eligible-Repurchased Loans $ $
SECOND AMENDED SCHEDULE 2 - -------------------------
S. Portion of Collateral amount attributable to Eligible-Mortgage Collateral (other than as listed in Lines 1.o. through r. above) $ $ II. RECONCILIATION FOR WET BORROWINGS A. Ending Collateral balance (last report) $ $ B. Collateral removed (since last report) $ $ C. Beginning Collateral balance -- Line 2.a. MINUS Line 2.b. $ $ D. Collateral received (since last report) $ $ E. New Collateral Balance $ $ F. Ineligibles -- expired Wet Period $ $ G. Jumbo Sublimit exclusions $ $ H. Other ineligibles $ $ I. Total Ineligibles -- TOTAL of Lines 2.f., 2.g., and 2.h. $ $ J. Total Wet Collateral $ $ K. If Agent or Determining Lender's elect -- Market Value of items in Line 2.j. $ $ L. Lesser of EITHER Lines 2.j. OR -- if applicable -- 2.k. $ $ M. Portion of Collateral amount attributable to Eligible-Uncommitted-B/C-Paper Loans $ $ N. Portion of Collateral amount attributable to Eligible-Repurchased Loans $ $ O. Portion of Collateral amount attributable to Eligible-Mortgage Collateral (other than as listed in Lines 2.m. and 2.n. above) $ $
AMENDED EXHIBIT D-3 -------------------
I. RECONCILIATION FOR GESTATION BORROWINGS A. Ending Collateral balance (last report) $ $ B. Collateral removed (since last report) $ $ C. Beginning Collateral balance -- Line 3.a. MINUS Line 3.b. $ $ D. Collateral received (since last report) $ $ E. New Collateral balance (today) -- Line 3.c. PLUS Line 3.d. $ $ F. Ineligibles $ $ G. Total Collateral amount -- Line 3.e. MINUS Line 3.f. $ $ H. Portion of Line 3.g. identified to a security settlement $ $ I. Portion of Line 3.g. not identified to a whole-loan settlement $ $ II. BORROWING BASE FOR MORTGAGE COLLATERAL A. Dry Collateral Value B. 95% of Line 1.o. $ C. 97% of Line 1.p. $ D. 95% of Line 1.q. $ E. 97% of Line 1.r. $ F. 98% of Line 1.s. $ G. Total Dry Collateral Value - Line 4.b. PLUS Line 4.c. PLUS Line 4.d. PLUS Line 4.e. PLUS Line 4.f. $ H. Wet Collateral Value I. 97% of Line 2.m. $ J. 97% of Line 2.n. $ K. 98% of Line 2.o. $ L. Total Wet Collateral Value - Line 4.i. PLUS Line 4.j. PLUS Line 4.k. $ M. Gestation Collateral Value N. 99% of Line 3.h. $ O. 98% of Line 3.i. $ P. Total Gestation Collateral Value - Line 4.n. PLUS Line 4.o. $ Q. Borrowing Base - Total of Lines 4.g., 4.l., and 4.p. $ III. PRINCIPAL DEBT FOR WAREHOUSE BORROWINGS A. Dry Borrowings $ B. Wet Borrowings $
AMENDED EXHIBIT D-3 -------------------
C. Gestation Borrowings $ D. TOTAL of Lines 5.a. THROUGH 5.c. $ IV. WAREHOUSE COMMITMENTS A. Warehouse Commitments $90,000,000 B. Wet Sublimit (either $21,000,000 during the first 5 and last 5 Business Days of each Calendar Month or $12,000,000 at all other times) $ C. Gestation Sublimit $30,000,000 V. WAREHOUSE AVAILABILITY A. Lesser of EITHER Line 4.l. OR Line 6.b. $ B. MAXIMUM WET BORROWING if positive OR BORROWING EXCESS if negative -- Line 7.a. MINUS Line 5.b.and Line 8.b.ii. $ C. Lesser of either Line 4.p. OR Line 6.c. $ D. MAXIMUM GESTATION BORROWING if positive OR BORROWING EXCESS if negative -- Line 7.c. MINUS Line 5.c. and Line 8.b.iii. $ E. Lesser of EITHER Line 4.q. OR Line 6.a. $ F. MAXIMUM TOTAL WAREHOUSE BORROWINGS if positive OR BORROWING EXCESS if negative -- Line 7.e. MINUS Line 5.d. and Line 8.b.iv. $ VI. OVERLINE AVAILABILITY A. Overline Facility $10,000,000 B. Principal Debt under Overline Facility 1. Dry Borrowings $ 2. Wet Borrowings $ 3. TOTAL of Lines 8.b.i. PLUS 8.b.ii. $ C. MAXIMUM WET BORROWING if positive OR BORROWING EXCESS if negative -- Line 7.a. MINUS Line 5.b. and Line 8.b.ii. $ D. Lesser of EITHER Line 4.q. OR Line 8.a. $ E. MAXIMUM TOTAL OVERLINE BORROWINGS if positive OR BORROWING EXCESS if negative -- Line 8.e. MINUS Line 5.d. and Line 8.b.iii. -- BUT IN ANY EVENT ZERO to the extent of availablity under LIne 7.f. $
TABLE 2 -- WORKING-CAPITAL BORROWINGS ------------------------------------- - -------------------------------------------------------------------------------- I. BORROWING BASE FOR ELIGIBLE-FORECLOSURE RECEIVABLES - -------------------------------------------------------------------------------- A. Ending Collateral balance (last report) $ - -------------------------------------------------------------------------------- B. Repayments (since last report) $ - -------------------------------------------------------------------------------- C. New Eligible-Foreclosure Receivables (since last report) $ - -------------------------------------------------------------------------------- D. TOTAL of Line 1.a. MINUS Line 1.b. PLUS Line 1.c. $ - -------------------------------------------------------------------------------- E. 80% of Line 1.d. $ - -------------------------------------------------------------------------------- II. BORROWING BASE FOR ELIGIBLE-P&I RECEIVABLES AMENDED EXHIBIT D-3 ------------------- - -------------------------------------------------------------------------------- A. Ending Collateral balance (last report) $ - -------------------------------------------------------------------------------- B. Repayments (since last report) $ - -------------------------------------------------------------------------------- C. New Eligible-P&I Receivables (since last report) $ - -------------------------------------------------------------------------------- D. TOTAL of Line 2.a. MINUS Line 2.b. PLUS Line 2.c. $ - -------------------------------------------------------------------------------- E. 95% of Line 2.d. $ - -------------------------------------------------------------------------------- III.BORROWING BASE FOR ELIGIBLE-T&I RECEIVABLES - -------------------------------------------------------------------------------- A. Ending Collateral balance (last report) $ - -------------------------------------------------------------------------------- B. Repayments (since last report) $ - -------------------------------------------------------------------------------- C. New Eligible-T&I Receivables (since last report) $ - -------------------------------------------------------------------------------- D. TOTAL of Line 3.a. MINUS Line 3.b. PLUS Line 3.c. $ - -------------------------------------------------------------------------------- E. 80% of Line 3.d. $ - -------------------------------------------------------------------------------- IV.BORROWING BASE FOR RECEIVABLES -- TOTAL of Lines 1.e., 2.e. and 3.e. $ - -------------------------------------------------------------------------------- V. PRINCIPAL DEBT OF WORKING-CAPITAL BORROWINGS $ - -------------------------------------------------------------------------------- VI.WORKING-CAPITAL COMMITMENT $10,000,000 - -------------------------------------------------------------------------------- VII.AVAILABILITY - -------------------------------------------------------------------------------- A. Lesser of EITHER Line 4 OR Line 6 $ - -------------------------------------------------------------------------------- B. Maximum Total Working-Capital Borrowings if positive OR Borrowing Excess if negative -- Line 7(a) MINUS Line 5 $ ================================================================================ TABLE 3 -- TERM-LINE BORROWINGS ------------------------------- - -------------------------------------------------------------------------------- I. BORROWING BASE FOR TERM-LINE - -------------------------------------------------------------------------------- A. Cost of pledged portfolio $ - -------------------------------------------------------------------------------- B. Appraised Value of pledged portfolio $ - -------------------------------------------------------------------------------- C. 350% of average serving fee for pledged portfolio $ - -------------------------------------------------------------------------------- D. Lesser of EITHER Line 1.a., Line 1.b., OR Line 1.c. $ - -------------------------------------------------------------------------------- E. Borrowing Base for Term-Line - 70% of Line 1.d. $ - -------------------------------------------------------------------------------- II.PRINCIPAL DEBT OF TERM-LINE BORROWINGS $ - -------------------------------------------------------------------------------- III.TERM-LINE COMMITMENT $30,000,000 - -------------------------------------------------------------------------------- IV. AVAILABILITY - -------------------------------------------------------------------------------- A. Lesser of EITHER Line 1.e. OR Line 3 $ - -------------------------------------------------------------------------------- B. Maximum Total Term-Line Borrowings if positive or Borrowing Excess if negative -- Line 4.a. MINUS Line 2 $ ================================================================================ AMENDED EXHIBIT D-3 ------------------- BANK ONE, TEXAS, N.A., Agent By Name: Title: AMENDED EXHIBIT D-3 ------------------- EX-10.40 8 OVERLINE NOTE, DATED MARCH 1, 1998 EXHIBIT 10.40 ------------- OVERLINE NOTE ------------- $10,000,000 March 1, 1998 FOR VALUE RECEIVED, MATRIX FINANCIAL SERVICES CORPORATION, an Arizona corporation ("BORROWER"), promises to pay to the order of BANK ONE, TEXAS, N.A. ("BANK ONE") that portion of the principal amount of $10,000,000 that may from time to time be disbursed and outstanding under this note together with interest. This note is the "Overline Note" under the Amended and Restated Loan Agreement (as renewed, extended, amended, or restated, the "LOAN AGREEMENT") dated as of January 31, 1997, between Borrower, Bank One, certain other Lenders, and Bank One, Texas, N.A., as Agent for Lenders. All of the defined terms in the Loan Agreement have the same meanings when used, unless otherwise defined, in this note. This note incorporates by reference the principal and interest payment terms in the Loan Agreement for this note, including, without limitation, the final maturity, which is the Warehouse-Actual-Termination Date. Principal and interest are payable to the holder of this note through Agent at either (a) its offices at 1717 Main Street, Dallas, Texas 75201, or (b) at any other address so designated by Agent in written notice to Borrower. This note incorporates by reference all other provisions in the Loan Agreement applicable to this note, such as provisions for disbursements of principal, applicable-interest rates before and after Default, voluntary and mandatory prepayments, acceleration of maturity, exercise of Rights, payment of attorneys' fees, court costs, and other costs of collection, certain waivers by Borrower and other obligors, assurances and security, choice of Texas and United States federal Law, usury savings, and other matters applicable to Loan Documents under the Loan Agreement. MATRIX FINANCIAL SERVICES CORPORATION, as Borrower By _____________________________________________ Thomas J. Osselaer, Executive Vice President EX-21 9 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 MATRIX CAPITAL CORPORATION 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. United Special Services, Inc. - Incorporated in Colorado 5. United Capital Markets, Inc. - Incorporated in Colorado 6. The Vintage Group Inc. - Incorporated in Texas 7. Vintage Delaware Holdings, Inc. - Incorporated in Delaware 8. Sterling Trust Company - Incorporated in Texas 9. First Matrix Investment Services Corp. - Incorporated in Texas 10. Matrix Funding Corp. - Incorporated in Colorado 11. Matrix Advisory Services Corporation - Incorporated in Colorado 12. Equi-Mor Holdings, Inc. - Incorporated in Nevada 13. Matrix Aviation Corporation - Incorporated in Colorado 14. MCNP-1 Corp. - Incorporated in New Mexico II-3 EX-23 10 CONSENT OF ERNST & YOUNG Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-36671) pertaining to the 1996 Amended and Restated Employee Stock Option Plan and the 1996 Employee Stock Purchase Plan of Matrix Capital Corporation of our report dated March 6, 1998, except for Note 18, as to which the date is March 25, 1998, with respect to the consolidated financial statements of Matrix Capital Corporation as of December 31, 1996 and 1997 and for each of the three years in the period ended December 31, 1997 included in the Form 10-K for the year ended December 31, 1997. /s/ ERNST & YOUNG LLP --------------------- Phoenix, Arizona March 25, 1998 EX-27 11 FINANCIAL DATA SCHEDULE
9 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 3,296,503 6,336,536 0 0 0 0 0 513,128,474 1,756,426 606,744,598 278,742,440 221,602,659 25,539,585 40,249,623 0 0 671 40,609,620 606,744,598 31,095,596 1,053,455 0 32,149,051 8,376,183 18,261,028 13,888,023 874,314 0 37,746,667 13,296,434 8,137,626 0 0 8,137,626 1.22 1.20 3.70 4,989,719 0 0 0 1,038,853 187,614 30,872 1,756,426 1,756,426 0 0
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