<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended September 30, 1996 Commission File No. 0-21231
MATRIX CAPITAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-1233716
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of 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
----------------------------
Indicate by check mark whether the registrant 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 has been subject to such filing requirements
for the past 90 days.
YES X NO
----- -----
Number of shares of Common Stock ($.0001 par value) outstanding at the close of
business on November 25, 1996 was 5,901,439 shares.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
PART I Financial Information
- -------------------------------
ITEM 1. Condensed Consolidated Balance Sheets -
September 30, 1996 (unaudited) and December 31, 1995....... 1
Condensed Consolidated Statements of Income -
Three and nine months ended September 30, 1996 and 1995
(unaudited)................................................ 2
Condensed Consolidated Statements of Changes in Shareholders'
Equity Nine months ended September 30, 1996 and 1995
(unaudited)................................................ 3
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1996 and 1995 (unaudited).. 4
Notes to Unaudited Condensed Consolidated Financial
Statements................................................. 5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 9
PART II Other Information
- ---------------------------
ITEM 1. Legal Proceedings............................................ 22
ITEM 2. Changes in Securities........................................ 22
ITEM 3. Defaults upon Senior Securities.............................. 22
ITEM 4. Submissions of Matters to a Vote of Security Holders........ 22
ITEM 5. Other Information............................................ 22
ITEM 6. Exhibits and Reports on Form 8-K............................. 23
Exhibit 4.1 Employee Stock Purchase Plan, as amended........ 23
Exhibit 11.1 Computation of Net Income Per Share............. 23
Exhibit 27.1 Financial Data Schedule......................... 23
SIGNATURES............................................................ 24
</TABLE>
<PAGE>
Part I - Financial Information
Item 1 - Financial Statements
MATRIX CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31
1996 1995
------------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Cash $ 2,515 $ 1,381
Interest earning deposits 8,831 5,586
Loans held for sale, net of discount of
$3,199 in 1996 and $5,816 in 1995 128,848 118,989
Loans held for investment, net 20,024 18,859
Mortgage servicing rights, net 19,982 13,817
Other receivables 12,138 5,609
Federal Home Loan Bank of Dallas stock 2,696 1,954
Premises and equipment, net 6,769 5,904
Deferred income tax benefit 195 -
Other assets 5,102 3,816
-------- --------
Total assets $207,100 $175,915
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 80,214 $ 48,877
Custodial escrow balances 19,093 27,011
Payable for purchase of mortgage servicing rights 8,076 1,312
Federal Home Loan Bank of Dallas borrowings 31,600 19,000
Borrowed money 44,948 65,093
Other liabilities 10,895 4,409
Income tax payable 843 875
-------- --------
Total liabilities 195,669 166,577
Shareholders' equity:
Preferred stock, par value $.0001; authorized 5,000,000 shares;
no shares outstanding
Common stock, par value $.0001; 50,000,000
shares; shares issued and outstanding 3,888,939
at September 30, 1996 and December 31, 1995 - -
Additional paid in capital 2,626 2,626
Retained earnings 8,805 6,712
-------- --------
Total shareholders' equity 11,431 9,338
-------- --------
Total liabilities and shareholders' equity $207,100 $175,915
======== ========
</TABLE>
See accompanying notes.
1
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MATRIX CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income:
Loans and mortgage backed securities $ 3,917 $ 2,843 $ 11,764 $ 6,935
Interest earning deposits 113 73 297 226
--------- --------- --------- ---------
Total interest income 4,030 2,916 12,061 7,161
Interest expense:
Deposits 1,041 606 2,602 1,551
Borrowings 1,526 1,380 5,364 3,018
--------- --------- --------- ---------
Total interest expense 2,567 1,986 7,966 4,569
--------- --------- --------- ---------
Net interest income before provision for loan losses 1,463 930 4,095 2,592
Provision for loan losses 198 23 350 68
--------- --------- --------- ---------
Net interest income after provision for loan losses 1,265 907 3,745 2,524
Noninterest income:
Loan administration 1,804 1,969 6,436 5,477
Brokerage 1,394 783 3,341 3,741
Gain on sale of loans and mortgage backed securities 1,556 803 2,409 2,123
Gain on sale of mortgage servicing rights 1,064 29 2,155 219
Loan origination 779 525 973 965
Other 340 314 747 604
--------- --------- --------- ---------
Total noninterest income 6,937 4,423 16,061 13,129
Noninterest expense:
Compensation and employee benefits 2,892 2,072 7,963 6,229
Amortization of mortgage servicing rights 575 536 1,759 1,149
Occupancy and equipment 464 403 1,201 1,060
Other general and administrative 2,843 1,272 5,376 3,644
--------- --------- --------- ---------
Total noninterest expense 6,774 4,283 16,299 12,082
--------- --------- --------- ---------
Income before income taxes 1,428 1,047 3,507 3,571
Provision for income taxes 574 376 1,414 1,346
--------- --------- --------- ---------
Net income $ 854 $ 671 $ 2,093 $ 2,225
========= ========= ========= =========
Net income per common and common
equivalent share $ 0.22 $ 0.17 $ 0.53 $ 0.57
========= ========= ========= =========
Weighted average common and common
equivalent shares 3,927,629 3,927,629 3,927,629 3,927,629
========= ========= ========= =========
</TABLE>
See accompanying notes.
2
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MATRIX CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Stock Additional
------------------ Paid In Retained
Shares Amount Capital Earnings Total
--------- ------ ------- -------- --------
<S> <C> <C> <C> <C> <C>
Nine months ended September 30, 1996
- ------------------------------------
Balance at December 31, 1995 3,888,939 - $2,626 $6,712 $ 9,338
Net income (unaudited) - - - 2,093 2,093
--------- ----- ------ ------ -------
Balance at September 30, 1996 3,888,939 - $2,626 $8,805 $11,431
========= ===== ====== ====== =======
Nine months ended September 30, 1995
- ------------------------------------
Balance at December 31, 1994 3,750,001 - $2,525 $3,151 $ 5,676
Issuance of stock for service 138,938 - 101 - 101
Net income (unaudited) - - - 2,225 2,225
--------- ----- ------ ------ -------
Balance at September 30, 1995 3,888,939 - $2,626 $5,376 $ 8,002
========= ===== ====== ====== =======
</TABLE>
See accompanying notes.
3
<PAGE>
MATRIX CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
Operating activities
Net income $ 2,093 $ 2,225
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization 477 246
Provision for loan losses 350 68
Amortization of mortgage servicing rights 1,759 1,149
Noncash compensation expense - 101
Accretion of premiums on deposits (7) (23)
Deferred income taxes (195) (163)
Gain on sale of loans and mortgage backed securities (2,408) (2,123)
Gain on sale of mortgage servicing rights (2,155) (219)
Loans originated for sale, net of loans sold 15,264 (32,431)
Loans purchased for sale (96,919) (70,609)
Proceeds from sale of loans purchased for sale 59,203 35,655
Originated mortgage servicing rights (605) (665)
Decrease (increase) in other receivables (6,524) 285
Increase (decrease) in other liabilities and income taxes 13,218 (1,379)
-------- --------
Net cash used by operating activities (16,449) (67,883)
Investing activities
Loans originated and purchased for portfolio (3,648) (4,196)
Principal repayments on loans 17,135 8,842
Purchase of Federal Home Loan Bank of Dallas stock (742) (529)
Purchases of premises and equipment (1,342) (29)
Purchase of land for development (1,292) -
Acquisition of mortgage servicing rights (13,234) (7,484)
Proceeds from sale of mortgage servicing rights 8,070 275
-------- --------
Net cash provided (used) by investing activities 4,947 (3,121)
Financing activities
Net increase in deposits 31,344 5,522
Net increase (decrease) in custodial escrow balances (7,918) 11,034
Net increase (decrease) in revolving lines and repurchase agreements (9,237) 46,920
Repayments of notes payable (3,502) (1,515)
Proceeds from notes payable 5,424 8,029
Proceeds from senior subordinated notes - 2,910
Repayment of financing arrangement (230) (258)
-------- --------
Net cash provided by financing activities 15,881 72,642
-------- --------
Increase in cash and cash equivalents 4,379 1,638
Cash and cash equivalents at beginning of period 6,967 4,702
-------- --------
Cash and cash equivalents at end of period $ 11,346 $ 6,340
======== ========
Supplemental disclosure of cash flow information
Payable for purchase of mortgage servicing rights $ 8,076 $ 1,904
======== ========
Supplemental disclosure of cash flow information
Cash paid for interest expense $ 8,213 $ 4,241
======== ========
Cash paid for income taxes $ 1,445 $ 1,271
======== ========
</TABLE>
See accompanying notes.
4
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MATRIX CAPITAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 1996 and 1995
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) necessary for a fair presentation have been
included. For further information, refer to the consolidated financial
statements and footnotes hereto included in Matrix Capital Corporation's
("Company") Registration Statement on Form S-1 (See File No. 333-10223,
effective October 18,1996).
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.
The results of operations for the three and nine months ended September 30, 1996
are not necessarily indicative of results that may be expected for the entire
fiscal year ended December 31, 1996.
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, as of and for the three and nine
month periods ended September 30, 1996 and 1995 and as of December 31, 1995. All
material intercompany balances and transactions have been eliminated in
consolidation.
(2) MORTGAGE SERVICING RIGHTS
The activity in the MSRs is summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER
1996 1995
------------- ----------
(unaudited)
(In thousands)
<S> <C> <C>
Balance at beginning of period $13,817 $ 6,183
Purchases 13,234 9,203
Originated 605 885
Amortization (1,759) (1,817)
Sales (5,915) (637)
------- -------
Balance at end of period $19,982 $13,817
======= =======
</TABLE>
Accumulated amortization of mortgage servicing rights aggregated approximately
$10,718,000 and $9,495,000 at September 30, 1996 and at December 31, 1995,
respectively.
5
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The Company's servicing portfolio (excluding subserviced loans) was comprised of
the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---------------------------------- ----------------------------------
Number Principal Number Principal
of Loans Balance of Loans Balance
Outstanding Outstanding
------------ ------------- ------------ -------------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C>
FHLMC 14,063 $ 838,360 9,453 $ 671,966
FNMA 11,917 559,284 7,820 483,947
GNMA 9,722 272,698 271 12,883
Other VA, FHA, and
conventional loans 10,088 554,451 7,414 427,589
------ ---------- ------ ----------
45,790 $2,224,793 24,958 $1,596,385
====== ========== ====== ==========
</TABLE>
The Company's custodial escrow balances shown in the accompanying consolidated
balance sheets pertain to escrowed payments of taxes and insurance and the float
on principal and interest payments on loans serviced on behalf of others and
owned by the Company, aggregating approximately $19,092,000, and $26,769,000 at
September 30, 1996 and at December 31, 1995, respectively.
(3) DEPOSITS
Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1996
------------------------------- -------------------------------
Weighted Weighted
Average Average
Amount Percent Rate Amount Percent Rate
-------- ------- -------- -------- ------- --------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 2,190 2.73% 3.35% $ 2,358 4.82% 3.40%
NOW accounts 3,558 4.44 1.49 3,832 7.84 1.49
Money market accounts 9,367 11.67 4.42 6,167 12.62 4.38
------- ------ ---- ------- ------ ----
15,115 18.84 3.48 12,357 25.28 3.18
Certificate accounts 65,099 81.16 5.83 36,513 74.72 5.97
------- ------ ---- ------- ------ ----
80,214 100.00% 48,870 100.00%
====== ======
Purchase premium - 7
------- -------
$80,214 $48,877
======= =======
Weighted-average
interest rate 5.28% 5.23%
==== ====
</TABLE>
6
<PAGE>
(4) 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 3,888,939 shares of common stock
outstanding at December 31, 1995 and September 30, 1996. 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 Split
On September 19, 1996, the Company's board of directors increased the authorized
number of shares of common stock, declared a 3.75-for-one stock split of the
common stock effected as a dividend that was declared and paid on September 19,
1996, and made conforming adjustments on the terms of all outstanding common
stock equivalents. All shares and per share information in the accompanying
consolidated financial statements has been retroactively adjusted to reflect
these actions.
Stock Option Plan
In September 1996, the board of directors and shareholders adopted the 1996
Amended and Restated Stock Option Plan, which amended and restated the Company's
stock option plan adopted in 1995. Substantially all of the Company's full-time
employees and directors are eligible for grants of stock options under the terms
of the 1996 Stock Option Plan.
The 1996 Stock Option Plan authorizes the granting of incentive stock options
("Incentive Options") and nonqualified stock options ("Nonqualified Options") to
purchase common stock to eligible persons. A total of 525,000 shares of common
stock are authorized for sale upon exercise of options granted under the 1996
Stock Option Plan. The 1996 Stock Option Plan is currently administered by the
compensation committee (administrator) of the board of directors.
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 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.
Stock Offering
On October 18, 1996 the Company completed its initial public offering of its
common stock. The Company sold 1,750,000 shares of common stock at a price of
$10.00 per share. On November 18, 1996 the underwriters exercised their
"overallotment option" and acquired an additional 262,000 shares at the
7
<PAGE>
initial public price of $10.00 per share. The Company raised approximately $18.2
million from the offering.
(5) PENDING ACQUISITION
On November 25, the Company announced that it had entered into a definitive
agreement to acquire The Vintage Group, Inc. (Vintage), a privately held
company, for $ 11.25 million in newly issued common stock. The transaction will
be accounted for as a pooling of interests and no goodwill will be recorded.
(6) COMMITMENTS AND CONTINGENCIES
At September 30, 1996, the Company had outstanding commitments to originate and
purchase loans of $28.5 million and commitments to sell loans of $53.8 million.
In June 1996, the Company purchased 154 acres of land for the purpose of
developing 750 residential and multi-family lots in Ft. Lupton, Colorado. 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 development management agreement obligates the
Company to provide up to an additional $500,000 of funds for development. The
Company has no other financial obligations to the developer beyond the $500,000.
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company's principal activities consist of the purchase and sale of
portfolios of mortgage loans and mortgage servicing rights, administration of
portfolios of mortgage loans, consulting and brokerage activities involving
mortgage loan servicing and deposit generation. These activities are conducted
through the Company's wholly-owned subsidiaries, Matrix Financial Services
Corporation ("Matrix Financial"), United Financial, Inc. ("United Financial")
and Matrix Capital Bank ("Matrix Bank"). Recently, the Company commenced real
estate management and disposition services and the financing of sub-prime
automobile retail installment contracts through its wholly-owned subsidiaries
United Special Services, Inc. ("USS") and Sterling Finance Co., Inc.
("Sterling"), respectively. To date, the operations of USS and Sterling have not
been material to those of the Company.
The principal components of the Company's revenues consist of net interest
income recorded by Matrix Bank and Matrix Financial, loan administration fees
generated by Matrix Financial, brokerage fees realized by United Financial and
loan origination fees and gains on sales of residential mortgage loans and
residential mortgage servicing rights generated by Matrix Financial and Matrix
Bank.
On October 18, 1996, the Company completed its initial public offering by
selling 1,750,000 shares of common stock at a price of $10.00 per share. On
November 18, 1996, the underwriters exercised their option to purchase an
additional 262,500 shares of the Company's common stock (over-allotment) at the
initial public offering price of $10.00. The net proceeds raised in the offering
were approximately $18.2 million.
The funds raised in the offering were initially used to reduce a portion the
amounts outstanding under the Company's revolving lines of credit. The Company
anticipates that it will use the funds available under the lines of credit
primarily to purchase mortgage servicing portfolios and to provide capital at
Matrix Bank to support its projected growth.
The Company's results of operations are likely to be influenced by changes in
general economic and competitive conditions and more particularly by changes in
market interest rates. Fluctuations in these factors will have an effect on the
volume of loan originations, mortgage loan prepayments and the value of the
Company's mortgage servicing portfolio and loan portfolio.
FORWARD-LOOKING INFORMATION
Statements contained in this Form 10-Q for the quarter ended September 30, 1996
that are not historical facts, including, but not limited to, statements found
in this Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, are forward-looking statements and involve a number of
risks and uncertainties. The actual results of the future events described in
such forward-looking statements in this Form 10-Q could differ materially from
those stated in such forward-looking statements. Among the factors that could
cause actual results to differ materially are: adverse conditions in the
industries in which the Company competes and other competitive factors,
governmental regulation, including increases in the annual assessment on SAIF
funds, and pending and possible future litigation, seasonality of business, and
increases in interest rates, as well as the risks and uncertainties discussed
elsewhere in this Form 10-Q.
9
<PAGE>
RESULTS OF OPERATIONS FOR THE
QUARTER ENDED SEPTEMBER 30, 1996 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1995
NET INCOME; RETURN ON AVERAGE EQUITY
Net income for the third quarter 1996 increased $183,000 to $854,000, or 27.3%,
as compared to the third quarter 1995 of $671,000. The third quarter of 1996
reflects a one time after-tax charge of $268,000 for the recapitalization of the
Savings Association Insurance Fund ("SAIF"). Excluding the one time SAIF
assessment, net income for the third quarter of 1996 increased $451,000, or
67.2%. Return on average equity for the third quarter 1996 increased to 34.6% as
compared to 33.8% for the third quarter 1995. Excluding the one time SAIF
assessment, return on average equity increased to 45.5%.
On September 30, 1996 the President of the United States signed into law an
omnibus appropriations bill that included among its provisions, legislation to
recapitalize the SAIF, which insures deposits of savings institutions. As a
result of this legislation, all SAIF-insured institutions, including Matrix
Bank, are required to pay a one-time special assessment equal to .657% of SAIF
deposits at March 31, 1995. This charge amounted to $446,000 on a pre-tax basis
and $268,000 on an after-tax basis, equal to $.07 per share.
The legislation will also reduce annual deposit premium assessments for well
capitalized savings institutions beginning January 1, 1997. The new annual
insurance assessment schedule for well-capitalized SAIF insured institutions is
expected to be approximately .064% of SAIF deposits, significantly lower than
the current level of .23%.
NET INTEREST INCOME
Net interest income before provision for loan losses for the third quarter 1996
increased $533,000, or 57.3%, to $1.5 million as compared to the third quarter
1995 of $930,000. The increase was attributable primarily to the increase in the
interest rate spread, which increased to 3.08% for the three months ended
September 30, 1996, as compared to 1.49% for the three months ended September
30, 1995. The increase in the interest rate spread was a result of an increase
in the yield on interest earning assets to 9.61% for the three months ended
September 30, 1996 as compared to 7.83% for the three months ended September 30,
1995. The increase in the yield on interest earning assets was primarily due to
an increase in the yield on the Company's adjustable rate loan portfolio and the
origination of higher yielding consumer loans. The effect of the increase in the
yield on interest earning assets was partially offset by an increase in the cost
of interest bearing liabilities to 6.53% for the three months ended September
30, 1996 as compared to 6.34% for the three months ended September 30, 1995. The
increase in the cost of interest bearing liabilities was due primarily to an
increase in the balance and cost of certificates of deposits at Matrix Bank and
the increase in the cost of other borrowed money. See "--Average Balance Sheet."
The increase in interest income attributable to the increase in interest rate
spread was partially offset by change in volume of interest earning assets and
interest bearing liabilities. The average balance of interest bearing
liabilities increased $31.9 million, or 25.5%, to $157.2 million for the three
months ended September 30, 1996 as compared to $125.3 million for the three
months ended September 30, 1995. The increase in the average balance of interest
bearing liabilities was partially offset by an increase in the average balance
of interest earning assets of $18.9 million, or 12.7%, to $167.8 million for the
three months ended September 30, 1996 as compared to $148.9 million for the
three months ended September 30, 1995. See "---Analysis of Changes in Net
Interest Income Due to Changes in Interest Rates and Volumes."
PROVISION FOR LOAN LOSSES
Provision for loan losses for the third quarter 1996 increased by $175,000 to
$198,000 as compared to $23,000 for the third quarter of 1995. This increase was
primarily attributable to the increase in and composition of the Company's loan
portfolio.
10
<PAGE>
LOAN ADMINISTRATION
Loan administration fees for the third quarter 1996 decreased by $165,000, or
8.4%, to $1.8 million as compared to $2.0 million for the third quarter of 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 comparable service fee income from period to period is primarily a result of
the comparable average balance from period to period. The average balance of the
servicing portfolio for the three months ended September 30, 1996 was $1.3
billion as compared to $1.5 billion for the three months ended September 30,
1995.
BROKERAGE
Brokerage fees for the third quarter 1996 increased by $611,000, or 78.0%, to
$1.4 million as compared to $783,000 for the third quarter 1995. This increase
is a direct result of the amount of the residential mortgage servicing
portfolio's brokered of $7.6 billion for the third quarter 1996 an increase of
58.3% as compared to $4.8 billion for the third quarter of 1995.
GAIN ON SALE OF LOANS AND MORTGAGE BACKED SECURITIES
Gain on the sale of loans and mortgage backed securities for the third quarter
1996 increased by $753,000, or 93.8% to $1.6 million as compared to $803,000 for
the third quarter of 1995. This increase was attributable primarily to the
amount and mix of the loan portfolios that the Company sold. Loan portfolios
sold in the third quarter of 1996 amounted to $15.0 million as compared to $9.6
million for the third quarter of 1995. The gain realized for the three months
ended September 30, 1996 resulted primarily from the sale of one loan portfolio.
The portfolio related to loan participation interests that the Company was able
to match up with its servicing rights. The Company was able to maximize the
value of the participation loans by selling the loan participation interest with
the related servicing rights. See "--Gain on Sale of Mortgage Servicing Rights".
GAIN ON SALE OF MORTGAGE SERVICING RIGHTS
Gain on the sale of mortgage servicing rights for the third quarter 1996
increased to $1.0 million as compared to $29,000 for the third quarter 1995. The
gain realized for the three months ended September 30, 1996 resulted primarily
from the sale of one mortgage servicing rights portfolio. In terms of aggregate
outstanding principal balances of mortgage loans underlying such servicing
rights the Company sold $159.7 million in purchased mortgage servicing rights in
the third quarter of 1996 as compared to $7.7 million in the third quarter of
1995. The sale in the third quarter of 1996 was consummated primarily to
generate additional cash flow to acquire additional residential mortgage
servicing portfolios.
LOAN ORIGINATION
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. Loan origination income for
the third quarter 1996 increased by $254,000 or 48.4%, to $779,000, as compared
to $525,000 for the third quarter 1995. This increase was primarily attributable
to the fees associated with the origination of sub-prime automobile retail
installment sales contracts in the third quarter of 1996, a new product for
1996, which was partially offset by a decrease in wholesale mortgage loan volume
of $11.2 million, or 9.3%, to $109.2 million in the third quarter of 1996 as
compared to $120.4 million in the third quarter of 1995.
11
<PAGE>
NON-INTEREST EXPENSE
Non-interest expense for the third quarter 1996 increased by $2.5 million to
$6.8 million, or 58.2%, as compared to $4.3 million for the third quarter 1995.
This increase was primarily due to the one time SAIF assessment, the reserve for
the probable settlement of certain outstanding litigation (see "Part II - Other
Information - Item 1. Legal Proceedings") and expenses related to new operating
subsidiaries. The following table details the major components of non-interest
expense for the third quarter 1996 as compared to the third quarter 1995:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
--------- --------
(In thousands)
<S> <C> <C>
Compensation and employee benefits $2,892 $2,072
Amortization of mortgage servicing 575 536
rights
Occupancy and equipment 464 403
Professional fees 130 188
Data processing 150 134
SAIF assessment 446 -
Other general and administrative 2,117 950
------ ------
Total $6,774 $4,283
====== ======
</TABLE>
Compensation and employee benefits generally represent the largest component of
non-interest expense for the Company. Compensation and employee benefits
increased $820,000, or 39.6%, to $2.9 million for the third quarter 1996 as
compared to $2.1 million for the third quarter 1995. This increase was the
result of the expansion of the Company's business lines in 1996 to include the
opening of a new branch of Matrix Bank and the origination of sub-prime
automobile retail installment sales contracts along with the increased amount of
brokered mortgage servicing rights sold (which increases the amount of incentive
based compensation paid). The Company had a total of 221 employees at September
30, 1996 as compared to 151 employees at September 30, 1995.
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. Amortization of mortgage
servicing rights increased by $39,000, or 7.3%, to $575,000 for the third
quarter 1996 as compared to $536,000 for the third quarter 1995.
Occupancy and equipment expense increased by $61,000, or 15.1%, to $464,000 for
the third quarter 1996 as compared to $403,000 for the third quarter 1995. This
increase is the result of opening a new branch of Matrix Bank and additional
leased space for Sterling.
The remainder of non-interest expense, which includes professional fees, data
processing costs , SAIF assessment and other expenses increased $1.5 million, or
123.5%, to $2.8 million for the third quarter 1996 as compared to $1.3 million
for the third quarter 1995. The increase was primarily attributable to the one
time SAIF assessment, the reserve for the probable settlement of certain
outstanding litigation and expansion of both existing and new business lines.
PROVISION FOR INCOME TAXES
Provision for income taxes increased by $198,000, or 52.7%, to $574,000 for the
third quarter 1996 as compared to $376,000 for the third quarter 1995. The
increase was due to the increase in pre-tax income. The effective income tax
rates were 40% for the third quarter 1996 as compared to 36% for the third
quarter 1995.
12
<PAGE>
RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
NET INCOME; RETURN ON AVERAGE EQUITY
Net income for the nine months ended September 30, 1996 decreased $132,000, or
5.9% to $2.1 million as compared to $2.2 million for the same period in 1995.
The nine months ended September 30, 1996 reflects a one time after-tax charge of
$268,000 for the recapitalization of the SAIF deposit insurance fund. Excluding
the one time SAIF assessment, net income for the nine months ended September 30,
1996 increased $136,000, or 6.1%. Return on average equity for the nine months
ended September 30, 1996 decreased to 28.6% as compared to 45.3% or the same
period in 1995. Excluding the one time SAIF assessment, return on average equity
decreased to 32.3%.
NET INTEREST INCOME
Net interest income before provision for loan losses for the nine months ended
September 30, 1996 increased $1.5 million, or 58.0%, to $4.1 million as compared
to the $2.6 million for the same period in 1995.
The increase was attributable primarily to the increase in the interest rate
spread, which increased to 2.74% for the nine months ended September 30, 1996,
as compared to 1.50% for the nine months ended September 30, 1995. The increase
in the interest rate spread was a result of an increase in the yield on interest
earning assets to 9.48% for the nine months ended September 30, 1996 as compared
to 7.89% for the nine months ended September 30, 1995. The increase in the yield
on interest earning assets was primarily due to an increase in the yield on
Company's adjustable rate loan portfolio and the origination of higher yielding
consumer loans. The effect of the increase in the yield on interest earning
assets was partially offset by an increase in the cost on interest bearing
liabilities to 6.74% for the nine months ended September 30, 1996 as compared to
6.39% for the nine months ended September 30, 1995. The increase in the cost of
interest bearing liabilities was due primarily to an increase in the balance and
cost of certificates of deposits at Matrix Bank and the increase in the cost of
other borrowed money. See "-- Average Balance Sheet."
The increase in interest income attributable to the increase in interest rate
spread was partially offset by a change in volume of interest earning assets and
interest bearing liabilities. The average balance of interest bearing
liabilities increased $62.2 million, or 65.2%, to $157.5 million for the nine
months ended September 30, 1996 as compared to $95.3 million for the nine months
ended September 30, 1995. The increase in the average balance of interest
bearing liabilities was partially offset by an increase in the average balance
of interest earning assets of $48.6 million, or 40.2%, to $169.7 million for the
nine months ended September 30, 1996 as compared to $121.0 million for the nine
months ended September 30, 1995. See "--Analysis of Changes in Net Interest
Income Due to Changes in Interest Rates and Volumes."
PROVISION FOR LOAN LOSSES
Provision for loan losses for nine months ended September 30, 1996 increased by
$282,000 to $350,000 as compared to $68,000 in the same period of 1995. This
increase was primarily attributable to the increase in and composition of the
Company's loan portfolio.
LOAN ADMINISTRATION
Loan administration fees for the nine months ended September 30, 1996 increased
by $959,000, or 17.5%, to $6.4 million as compared to $5.5 million for the same
period in 1995. This increase was primarily attributable to the increase in the
average mortgage loan servicing portfolio for the nine months ended September
30, 1996 as compared to the same period in 1995.
13
<PAGE>
BROKERAGE FEES
Brokerage fees for the nine months ended September 30, 1996 decreased by
$400,000 to $3.3 million, or 10.7%, as compared to $3.7 million for the same
period in 1995. This decrease is a direct result of the amount of the
residential mortgage servicing portfolio's brokered of $20.2 billion for the
nine months ended September 30, 1996, a decrease of 13.3%, as compared to $23.3
billion for the same period in 1995. The decrease for the nine months ended
September 30, 1996 is a result of the decrease in the amount of servicing
portfolios brokered in their first quarter of 1996. The decrease occurred in the
first quarter of 1996, as mortgage banking firms and financial institutions
deferred servicing sales pending their review of the impact of Financial
Accounting Standard ("FAS") 122 on their operations. Beginning the second
quarter, the Company experienced increased volume of sales of servicing and does
not anticipate that FAS 122 will have a significant effect on the Company's
brokerage activity in the foreseeable future.
GAIN ON SALE OF LOANS AND MORTGAGE BACKED SECURITIES
Gain on the sale of loans and mortgage backed securities for the nine months
ended September 30, 1996 increased by $286,000, or 13.5% to $2.4 million as
compared to $2.1 million for the same period in 1995. This increase is
attributable to the amount and mix of the loan portfolios that the company sold.
Loan portfolios sold in the nine months ended September 30, 1996 amounted to
$59.2 million as compared to $35.7 million for the same period in 1995.
GAIN ON SALE OF MORTGAGE SERVICING RIGHTS
Gain on the sale of mortgage servicing rights for the nine months ended
September 30, 1996 increased by $2.0 million to $2.2 million as compared to
$219,000 for the same period in 1995. In terms of aggregate outstanding
principal balances of mortgage loans underlying such servicing rights the
Company sold $450.2 million in purchased mortgage servicing rights in the nine
months ended September 30, 1996 as compared to $23.3 million during the same
period in 1995. The sales in the nine months ended September 30, 1996 were done
primarily to generate cash flow to acquire more desirable residential servicing
portfolios.
LOAN ORIGINATION
Loan origination income for the nine months ended September 30, 1996 increased
by $8,000 to $973,000, or 0.8%, as compared to $965,000 for the same period in
1995. The amount of loan origination income is generally related to the amount
of loan originations. The amount of loan origination income for the nine months
ended September 30, 1996 was comparable to the same period for prior year even
though wholesale loan originations increased $245.5 million, or 103.7%, to
$482.2 million for the nine months ended September 30, 1996 as compared to
$236.7 million for the nine months ended September 30, 1995.
Loan origination income did not experience a comparable increase with the loan
originations due to a $1.9 million secondary marketing loss which occurred in
March 1996. The secondary marketing loss was attributable to the failure of a
former officer of Matrix Financial to adhere to the hedging policies established
by Matrix Financial's board of directors. These policies establish benchmarks
for Matrix Financial's forward commitments to deliver loans or mortgage backed
securities which are maintained against the pipeline and funded loans. In
addition, these policies stipulate that all closed loans are to be fully hedged
with forward commitments. The Company's hedging policies were not adhered to,
resulting in certain of such closed loans not being adequately hedged, which
resulted in a $1.9 million loss when interest rates increased dramatically in
March 1996, thereby causing the funded loans and pipeline commitments to decline
in market value. Had these policies been followed, the Company would still have
recognized a loss, albeit significantly smaller, since it is difficult for the
Company to be completely hedged when interest rates rapidly and significantly
change. The Company has implemented several management and reporting changes to
help ensure that the hedging policies established by Matrix Financial's board of
directors are adhered to so as to mitigate secondary marketing losses in
volatile interest rate markets.
14
<PAGE>
NON-INTEREST EXPENSE
Non-interest expense for the nine months ended September 30, 1996 increased by
$4.2 million to $16.3 million, or 34.9%, as compared to $12.1 million for the
same period in 1995. This increase was primarily due to the one time SAIF
assessment, the reserve for the probable settlement of certain outstanding
litigation and expenses related to new operating subsidiaries. The following
table details the major components of non-interest expense for the nine months
ended September 30, 1996 as compared to the same period in 1995:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1996 1995
------ ------
(In thousands)
<S> <C> <C>
Compensation and employee benefits $ 7,963 $ 6,229
Amortization of mortgage servicing 1,759 1,149
rights
Occupancy and equipment 1,201 1,060
Professional fees 307 420
Data processing 424 380
SAIF assessment 446 -
Other general and administrative 4,199 2,844
------- -------
Total $16,299 $12,082
======= =======
</TABLE>
Compensation and employee benefits generally represent the largest component of
non-interest expense for the Company. Compensation and employee benefits
increased $1.7 million, or 27.8%, to $8.0 million for the nine months ended
September 30, 1996, as compared to $6.2 million for the same period in 1995.
This increase was the result of the expansion of the Company's business lines
in 1996 including the opening of a new branch of Matrix Bank and the origination
of sub-prime automobile retail installment sales contracts, along with the
increased amount of wholesale mortgage loan origination (which results in
increased incentive based compensation). The Company had a total of 221
employees at September 30, 1996 as compared to 151 employees at September 30,
1995.
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. Amortization of mortgage
servicing rights increased by $610,000, or 53.1%, to $1.8 million for the nine
months ended September 30, 1996 as compared to $1.1 million for the same period
in 1995.
Occupancy and equipment expense increased by $141,000, or 13.3%, to $1.2 million
for the nine months ended September 30, 1996 as compared to $1.1 million for the
same period in 1995. This increase is the result of opening a new branch of
Matrix Bank and the lease of office space for Sterling.
The remainder of non-interest expense, which includes professional fees, data
processing costs, SAIF assessment and other expenses increased $1.8 million, or
47.5%, to $5.4 million for the nine months ended September 30, 1996 as compared
to $3.6 million for the same period in 1995. The increase was primarily
attributable to the one time SAIF assessment, the reserve for the probable
settlement of certain outstanding litigation and expansion of both existing and
new business lines.
PROVISION FOR INCOME TAXES
Provision for income taxes increased by $68,000, or 5.1% to $1.4 million for the
nine months ended September 30, 1996 as compared to $1.3 million for the same
period in 1995. The increase was due to the increase in effective income tax
rates to 40.3% for the nine months ended September 30, 1996 as compared to 37.7%
for the same period in 1995.
15
<PAGE>
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 yield and
costs. Average interest rate information for the three months ended and the nine
months ended September 30, 1996 and 1995, respectively, have been annualized.
Ratio, yield and rate information are based on daily averages where available,
otherwise, average monthly balances have been used. Nonaccrual loans have been
included in the calculation of average balances for loans for the periods
indicated.
16
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
September 30,
----------------------------------------------------------------------------
1996 1995
----------------------------------------------------------------------------
Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate
------- -------- ------- -------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $147,936 $3,700 10.00% $144,549 $2,843 7.87%
Mortgage-backed securities 11,611 217 7.48 - - -
Interest-earning deposits 5,591 74 5.29 3,175 55 6.93
FHLB stock 2,657 39 5.87 1,154 18 6.23
-------- ------ ----- -------- ------ -----
Total interest-earning assets 167,795 4,030 9.61 148,878 2,916 7.83
Noninterest earning assets:
Cash 3,077 2,139
Allowance for loan losses (1,196) (932)
Premises and equipment 6,728 4,193
Other assets 25,773 25,392
-------- --------
Total noninterest earning assets 34,382 30,792
-------- --------
Total assets $202,177 $179,670
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Passbook accounts $ 2,208 $ 19 3.44 $ 2,289 19 3.32
Money market and negotiable order of withdrawal
("NOW") accounts 11,490 112 3.90 8,639 81 3.75
Certificates of deposit 62,125 910 5.86 34,862 506 5.81
FHLB borrowings 30,360 433 5.70 8,834 137 6.20
Borrowed money 51,003 1,093 8.57 70,636 1,243 7.04
-------- ------ ----- -------- ------ -----
Total interest-bearing liabilities 157,186 2,567 6.53 125,260 1,986 6.34
-------- ------ ----- -------- ------ -----
Noninterest bearing liabilities:
Demand deposits (including custodial escrow balances) 27,539 40,763
Other liabilities 7,588 5,712
-------- --------
Total noninterest bearing liabilities 35,127 46,475
Shareholders' equity 9,864 7,935
-------- --------
Total liabilities and shareholders' equity $202,177 $179,670
======== ========
Net interest income before provision for loan losses $1,463 $ 930
====== ======
Interest rate spread 3.08% 1.49%
===== =====
Net interest margin 3.49% 2.50%
===== =====
Ratio of average interest-earning assets to
average interest-bearing liabilities 106.75% 118.86%
====== ======
<CAPTION>
Nine Months Ended
September 30,
----------------------------------------------------------------------------
1996 1995
ASSETS ----------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
--------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $156,007 $11,413 9.75% $116,835 $6,935 7.91%
Mortgage-backed securities 6,215 351 7.53 - - -
Interest-earning deposits 4,941 186 5.02 3,049 170 7.43
FHLB stock 2,522 111 5.87 1,164 56 6.41
-------- ------- ------ -------- ------ ------
Total interest-earning assets 169,685 12,061 9.48 121,048 7,161 7.89
Noninterest earning assets:
Cash 2,790 2,063
Allowance for loan losses (1,128) (908)
Premises and equipment 6,434 4,511
Other assets 24,436 17,418
-------- --------
Total noninterest earning assets 32,532 23,084
-------- --------
Total assets $202,217 $144,132
======= ========
LIABILITIES & SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Passbook accounts 2,350 $ 59 3.35 $ 2,427 $ 65 3.57
Money market and negotiable order
("NOW") accounts 11,782 345 3.90 8,165 209 3.41
Certificates of deposit 50,232 2,198 5.83 32,458 1,277 5.25
FHLB borrowings 33,054 1,409 5.68 13,250 631 6.35
Borrowed money 60,068 3,955 8.78 39,026 2,387 8.16
-------- ------- ------ -------- ------ ------
Total interest-bearing liabilities 157,486 7,966 6.74 95,326 4,569 6.39
-------- ------- ------ -------- ------ ------
Noninterest bearing liabilities:
Demand deposits (including custodian escrow balances) 28,387 36,107
Other liabilities 6,586 6,000
-------- --------
Total noninterest bearing liabilities 34,973 42,107
Shareholders' equity 9,758 6,699
-------- --------
Total liabilities and shareholders' equity $202,217 $144,132
======== ========
Net interest income before provision for loan losses $4,095 $2,592
====== ======
Interest rate spread 2.74% 1.50%
====== ======
Net interest margin 3.22% 2.86%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 107.75% 126.98%
====== ======
</TABLE>
17
<PAGE>
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 and decrease related
to 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 change due to volume and
change due to rate.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1996 vs 1995 1996 vs 1995
-------------------------- --------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
-------------------------- --------------------------
Volume Rate Total Volume Rate Total
-------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $ 266 $ 591 $ 857 $1,550 $2,928 $4,478
Mortgage backed securities - 217 217 - 351 351
Interest-earning deposits 167 (148) 19 70 (54) 16
FHLB stock 94 (73) 21 44 11 55
------- ------- ------ ------ ------ ------
Total interest-earning assets 527 587 1,114 1,664 3,236 4,900
------- ------- ------ ------ ------ ------
Interest-bearing liabilities:
Passbook accounts (3) 3 - (1) (5) (6)
Money market and NOW accounts 107 (76) 31 62 74 136
Certificates of deposit 1,583 (1,179) 404 466 455 921
FHLB borrowings 1,335 (1,039) 296 629 149 778
Borrowed money (1,382) 1,232 (150) 858 710 1,568
------- ------- ------ ------ ------ ------
Total interest-bearing liabilities 1,640 (1,059) 581 2,014 1,383 3,397
------- ------- ------ ------ ------ ------
Change in net interest income before provision
for loan losses $(1,113) $ 1,646 $ 533 $ (350) $1,853 $1,503
======= ======= ====== ====== ====== ======
</TABLE>
18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity represents 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.
The trend of net cash used by the Company's operating activities experienced
over the reported periods results primarily from the growth that Matrix
Financial has experienced in its residential mortgage loan origination
activities and the growth that Matrix Bank has experienced in its whole loan
purchasing activity. The growth in the loan originations experienced by the
Company has been due to a conscious effort to increase loan originations and, to
a lesser extent, market conditions. The Company does not anticipate significant
increases in loan origination activities other than increases directly related
to market conditions. Nevertheless, 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, custodial escrow deposits and FHLB borrowings.
The Company's principal source of funding for its servicing acquisition
activities consist of line of credit facilities provided to Matrix Financial by
unaffiliated financial institutions. At September 30, 1996, $11.2 million was
outstanding under the servicing acquisition line.
The funds raised in the initial public offering were used to reduce the
Company's balance of revolving lines of credit. Included in the borrowings
reduced were the servicing acquisition lines. The lines are now available to
fund future acquisitions of mortgage servicing portfolios. During the three
months ended September 30, 1996, the Company entered into agreements to acquire
approximately $1.1 billion of mortgage servicing rights for an approximate
purchase price of $11.7 million. The servicing acquisition lines in place are
sufficient to fund the servicing rights under commitment.
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 September
30, 1996, Matrix Financial's warehouse lines of credit aggregated $70.0 million,
of which $44.4 million was available to be utilized.
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 September 30, 1996, the
Company had $58.7 million in pipeline and funded loans offset with mandatory
forward commitments of $32.9 million and nonmandatory forward commitments of
$20.9 million. As of December 31, 1995, the Company had $93.1 million in
pipeline and funded loans offset with mandatory forward commitments of $64.7
million and nonmandatory forward commitments of $15.3 million. The inherent
value of the forward commitments is considered in the determination of the lower
of cost or market for such loans.
On July 10, 1996 the Company renewed its primary Revolving Credit Facility for
warehouse lending, servicing acquisitions and working capital. With this
renewal, the aggregate amount of this warehouse line of credit facility totaled
$50.0 million, the aggregate amount of the servicing acquisition facility
totaled $13.5 million, and the aggregate amount of the working capital facility
totaled $2.5 million. The new credit facility agreements require Matrix
Financial to maintain (i) total shareholder's equity of at least $3.0 million
plus 50% of capital contributed after January 1, 1996, (ii) adjusted tangible
net worth, as defined, of at least $9.0 million through January 31, 1997 and
$10.0 million on January 31, 1997 and thereafter, (iii) a servicing portfolio of
at least $1.25 billion and (iv) a ratio of principal debt of receivables
borrowings and 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.
Matrix Bank's primary source 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. Contractual loan payments and deposit
inflows and outflows are a generally predictable source of funds, while loan
prepayments and loan
19
<PAGE>
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 form the FHLB as its primary source for
borrowings. At September 30, 1996, Matrix Bank had overnight borrowings from the
FHLB of $31.6 million. The custodial escrow balances held by Matrix Bank
fluctuate based upon the mix and size of the related servicing rights
portfolios.
Matrix Banks leverage capital ratio at September 30, 1996 was 6.04%. This
exceeded the leverage capital requirement of 3.0% of adjusted assets by $4.5
million. Matrix Bank's risk-based capital ratio was 12.04% at September 30,
1996. Matrix Bank currently exceeds the risk-based capital requirement of 8.0%
of risk weighted assets by $3.3 million.
ASSET QUALITY
NONPERFORMING ASSETS
The following table sets forth information as to the Company's non-performing
assets ("NPA"). 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.
<TABLE>
<CAPTION>
September 30, December 31, December 31,
1996 1995 1994
------------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual mortgage loans $2,958 $5,523 $3,275
Nonaccrual consumer loans 120 15 39
------ ------ ------
Total nonperforming loans 3,078 5,538 3,314
Foreclosed real estate 794 835 543
------ ------ ------
Total nonperforming assets $3,872 $6,373 $3,857
====== ====== ======
Total nonperforming assets
to total assets 1.87% 3.62% 3.44%
Total nonperforming loans to
total loans 2.05% 3.99% 3.68%
Ratio of allowance for loan losses to
total nonperforming loans 40.74% 17.03% 21.97%
</TABLE>
As of September 30, 1996, the Company had no accruing loans that were
contractually past due 90 days or more. At September 30, 1996, $2.9 million, or
93.9%, of the nonaccrual loans were loans that were purchased in bulk loan
portfolios and remain classified as "held for sale." Total loans held for sale
at September 30, 1996, were $128.8 million, of which $2.9 million or 2.3% were
nonaccrual loans. However, against the $128.8 million of total loans held for
sale, the Company has $3.2 million of purchase discounts plus an additional $1.8
of credit enhancements related to specific segments of the loan portfolio.
The percentage of the allowance for loan 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
20
<PAGE>
exposure. In conjunction with other factors, this loss exposure contributes to
the overall assessment of the adequacy of the allowance for loan losses.
PENDING ACQUISITION
On November 25, the Company announced that it had entered into a definitive
agreement to acquire The Vintage Group, Inc. (Vintage), a privately held
company, for $ 11.25 million in newly issued common stock. The transaction will
be accounted for as a pooling of interests and no goodwill will be recorded.
Vintage is the parent company of Sterling Trust Company (Sterling Trust) of
Waco, Texas and Vintage Financial Services Corporation, a NASD broker/dealer
based in Arlington, Texas.
Sterling is a non-bank trust company specializing in self-directed qualified
retirement plans, individual retirement accounts, custodial and directed trust
accounts. As of September 30, 1996, Sterling Trust had assets under
administration of over $1.0 billion.
The consummation of the acquisition is subject to certain conditions, including
regulatory and shareholder approval.
21
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Matrix Financial is a defendant in two lawsuits, Limper v. Matrix Financial
Services Corporation (Court of Common Pleas, Ottawa County, Ohio, January 29,
1996), and Mogavero v. Matrix Financial Services Corporation (United States
District Court for the District of Massachusetts, June 17, 1996), which purport
to cover a nationwide class of plaintiffs and involve similar facts and legal
claims. The plaintiffs have requested class action status for each of these
lawsuits. In both cases, the plaintiffs allege that Matrix Financial breached
the terms of plaintiffs' promissory notes and mortgages by imposing certain fax
and payoff statement fees at the time the plaintiffs prepaid their loans. The
plaintiffs claim that such fees constitute prepayment charges in violation of
the terms of the notes and demand restitution and attorneys' fees.
Matrix Financial has filed an answer in Limper denying the plaintiffs' claims.
By order dated September 13,1996, the Mogavero action has been dismissed without
prejudice to the right of any party upon good cause shown within 60 days to
reopen the action if the settlement is not consummated. Matrix Financial
believes it has defenses to these lawsuits; however, no assurance 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. A joint settlement proposal has
been tendered by plaintiffs' counsel, whereby Matrix Financial would pay a
settlement payment of not more than $640,000, including attorneys' fees of the
plaintiffs, payments to the plaintiff class members and all administrative costs
associated with the settlement. Assuming the settlement occurs, and depending on
the response rate from the plaintiff class members, the ultimate total of
payments made by Matrix Financial could be significantly smaller. The terms of
the settlement, however, are being negotiated, and there can be no assurance
that either action will be settled on terms acceptable to the Company, or at
all. The Company established a reserve in the third quarter of 1996 to account
for this contingency.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 19, 1996, the Shareholders by unanimous consent approved the
following:
* A 3.75 for 1 stock split on common stock in the form of a stock dividend.
* Amendment and Restatement of Stock Option Plan.
* Adoption of Employee Stock Purchase Plan.
* Amendment of Articles of Incorporation to, among other things, to increase
authorized common and preferred shares and establish advance notice
requirement relating to nomination of directors.
* Election of David A. Frank to the Board of Directors.
* Approval of the classification of Board of Directors into three classes.
ITEM 5. OTHER INFORMATION
None
22
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
* 4.1 Employee Stock Purchase Plan, as Amended
* 11.1 Computation of Earnings Per Share
* 27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
______________________
* Filed herewith.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly cause this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATRIX CAPITAL CORPORATION
Dated: /s/
--------------------------- ------------------------------------
Guy A. Gibson
President and
Chief Executive Officer
Dated: /s/
--------------------------- ------------------------------------
David W. Kloos
Senior Vice President and
Chief Financial Officer
24
<PAGE>
EXHIBIT 4.1
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)
<PAGE>
Twelve Thousand Five Hundred ($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-
<PAGE>
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-
<PAGE>
(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-
<PAGE>
(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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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:
------------------------------------------
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<PAGE>
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.
<PAGE>
. 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:
----------------------------------
- -----------------------------------
<PAGE>
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
----------------------------------
<PAGE>
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
---------------------------------------
<PAGE>
UNANIMOUS WRITTEN CONSENT OF THE
BOARD OF DIRECTORS OF
MATRIX CAPITAL CORPORATION
WHEREAS, on September 24, 1996, the Board of Directors adopted and approved
the 1996 Employee Stock Purchase Plan (the "Purchase Plan"); and
WHEREAS, it is deemed in the best interests of the Company that Section
2(q) of the Employee Stock Purchase Plan be amended;
NOW, THEREFORE, BE IT RESOLVED, that Section 2(q) of the Purchase Plan be
amended to read as follows:
"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.
FURTHER RESOLVED, that the officers of the Company are authorized,
empowered and directed to take all such further actions and to execute and
deliver all such other documents and instruments as are deemed by any such
officer to be appropriate or necessary in implementing the provisions and intent
of the Purchase Plan, as amended.
DIRECTORS:
_________________ _________________
Guy A. Gibson Richard V. Schmitz
_________________ _________________
D. Mark Spencer Thomas M. Piercy
_________________ _________________
David W. Kloos Stephen Skiba
_________________
David A. Frank
<PAGE>
EXHIBIT 11.1
MATRIX CAPITAL CORPORATION
Computation of Earnings Per Share
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 854 $ 671 $ 2,093 $ 2,225
--------- --------- --------- ---------
Earnings available to
common shareholders 854 671 2,093 2,225
--------- --------- --------- ---------
Weighted average common
shares outstanding before
common equivalents 3,888,939 3,888,939 3,888,939 3,888,939
Common equivalent stock
options 38,690 38,690 38,690 38,690
--------- --------- --------- ---------
Weighted average outstanding
common and equivalent shares 3,927,629 3,927,629 3,927,629 3,927,629
--------- --------- --------- ---------
Earnings per common
and equivalent share $ 0.22 $ 0.17 $ 0.53 $ 0.57
--------- --------- --------- ---------
</TABLE>
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,515
<INT-BEARING-DEPOSITS> 8,831
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 150,126
<ALLOWANCE> 1,254
<TOTAL-ASSETS> 207,100
<DEPOSITS> 99,307
<SHORT-TERM> 25,566
<LIABILITIES-OTHER> 19,814
<LONG-TERM> 19,382
0
0
<COMMON> 0
<OTHER-SE> 11,431
<TOTAL-LIABILITIES-AND-EQUITY> 207,100
<INTEREST-LOAN> 11,764
<INTEREST-INVEST> 297
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 12,061
<INTEREST-DEPOSIT> 2,602
<INTEREST-EXPENSE> 7,966
<INTEREST-INCOME-NET> 4,095
<LOAN-LOSSES> 350
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 16,299
<INCOME-PRETAX> 3,507
<INCOME-PRE-EXTRAORDINARY> 2,093
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,093
<EPS-PRIMARY> .53
<EPS-DILUTED> .53
<YIELD-ACTUAL> 3.22
<LOANS-NON> 4,372
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 943
<CHARGE-OFFS> 70
<RECOVERIES> 31
<ALLOWANCE-CLOSE> 1,254
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,254
</TABLE>
