<PAGE>
As filed with the Securities and Exchange Commission on July 2, 1997
Registration No. 333-______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MATRIX CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Colorado 6162 84-1233716
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Code Number) Number)
</TABLE>
<TABLE>
<S> <C>
Guy A. Gibson
President
Matrix Capital Corporation
1380 Lawrence Street, Suite 1410 1380 Lawrence Street, Suite 1410
Denver, Colorado 80204 Denver, Colorado 80204
(303) 595-9898 (303) 595-9898
(Name, address, including zip code, and telephone number, (Name, address, including zip code, and telephone number,
including area code, of registrant's principal executive offices) including area code, of registrant's agent for service)
</TABLE>
Copies to:
Ronald J. Frappier, Esq.
T. Allen McConnell, Esq.
Jenkens & Gilchrist,
a Professional Corporation
1445 Ross Avenue, Suite 3200
Dallas, Texas 75202
(214) 855-4500
Approximate Date of Commencement of Proposed Sale to the Public: As soon
as practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
[_] ____________.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
[_] ____________.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================
Proposed
Proposed maximum maximum
Title of each class of offering price per aggregate Amount of
securities registered Amount to be registered security/(1)/ offering price/(1)/ registration fee
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ............... 779,592 shares $13.75 $10,719,390 $3,249
====================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) and based upon the average of the high and low
prices reported on the Nasdaq National Market on June 26, 1997.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THIS PRELIMINARY PROSPECTUS AND THE INFORMATION CONTAINED HEREIN ARE SUBJECT +
+TO COMPLETION OR AMENDMENT. THESE SECURITIES MAY NOT BE SOLD, NOR MAY OFFERS +
+TO BUY BE ACCEPTED, PRIOR TO THE TIME THE PROSPECTUS IS DELIVERED IN FINAL +
+FORM. UNDER NO CIRCUMSTANCES SHALL THIS PRELIMINARY PROSPECTUS CONSTITUTE AN +
+OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY +
+SALE OF THESE SECURITIES, IN ANY JURISDICTION IN WHICH SUCH OFFER, +
+SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION +
+UNDER THE SECURITIES LAWS OF SUCH JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject To Completion Dated July 2, 1997
PROSPECTUS 779,592 Shares
MATRIX CAPITAL CORPORATION
Common Stock
----------------
This Prospectus relates to 779,592 shares (the "Shares") of common stock,
$.0001 par value per share (the "Common Stock"), of Matrix Capital Corporation,
a Colorado corporation (the "Company"), that may be offered and sold from time
to time by certain shareholders of the Company (the "Selling Shareholders").
See "Plan of Distribution; Selling Shareholders."
The Common Stock is traded on the Nasdaq National Market under the symbol
"MTXC." On June 26, 1997, the closing price for the Common Stock on the Nasdaq
National Market was $13.50. See "Price Range of Common Stock and Dividend
Policy."
The Shares offered hereby may be sold from time to time by the Selling
Shareholders. Such sales may be made directly, through agents designated from
time to time, or through dealers and underwriters also to be designated, or on
the Nasdaq National Market or otherwise at prices and at terms then prevailing
or at prices related to the then current market price or in negotiated
transactions (which may include the pledge or hypothecation of some or all of
the Shares). To the extent required, the specific shares of Common Stock to be
sold, name of the Selling Shareholder (or the pledgee of such Selling
Shareholder, as the case may be), public offering price, the names of any such
agents, dealers, or underwriters, and any applicable commission or discount with
respect to a particular offer will be set forth in an accompanying Prospectus
Supplement. See "Plan of Distribution; Selling Shareholders."
The Company will receive none of the proceeds from the sale of the Common
Stock offered hereby by the Selling Shareholders. All expenses of registration
incurred in connection with this offering are being borne by the Company. All
selling and other expenses incurred by the Selling Shareholders will be borne by
the Selling Shareholders.
For a discussion of certain risks of an investment in the Shares, see "Risk
Factors" beginning on page 10 of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THESE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR OTHERWISE.
---------------------------
The date of this Prospectus is ____________, 1997.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act of
1933, as amended (the "Securities Act"), of which this Prospectus is a part,
with respect to the Common Stock offered hereby. This Prospectus omits certain
information contained in the Registration Statement, including exhibits thereto,
and reference is made to the Registration Statement for further information with
respect to the Company and the Common Stock offered hereby. Statements
contained herein concerning the provisions of documents are necessarily
summaries of such documents and when any such document is an exhibit to the
Registration Statement, each such statement is qualified in its entirety by
reference to the copy of such document filed with the Commission. Copies of the
Registration Statement, and exhibits thereto, may be acquired upon payment of
the prescribed fees or examined without charge at the public reference
facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Commission. Reports and
other information filed by the Company with the Commission pursuant to the
information requirements of the Exchange Act may be inspected and copied at the
public reference facilities maintained by the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the following
Regional Offices of the Commission: Seven World Trade Center, 13th Floor, New
York, New York 10048 and Northwest Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies can be obtained at prescribed rates from
the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. The Commission also maintains a World
Wide Web Site that contains reports, proxy statements and other information
regarding registrants, such as the Company, that file electronically with the
Commission. The address of the site is http://www.sec.gov.
------------
FORWARD-LOOKING INFORMATION
CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS CONSTITUTES "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT, AND SECTION
21E OF THE EXCHANGE ACT, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE" OR
"CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE
TERMINOLOGY, THE STATEMENTS IN "RISK FACTORS" OF THIS PROSPECTUS CONSTITUTE
CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS, INCLUDING CERTAIN RISKS AND
UNCERTAINTIES, WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial information appearing elsewhere in
this Prospectus. Unless the context clearly suggests otherwise, references to
the "Company" include Matrix Capital Corporation and its subsidiaries (the
"Subsidiaries"), collectively, and references to "Matrix Capital" include the
parent company only.
The Company
Overview. Matrix Capital Corporation is a specialized financial
services company that, through its Subsidiaries, focuses on mortgage merchant
banking by purchasing and selling residential mortgage loans and residential
mortgage servicing rights; offering brokerage, consulting, and analytical
services to other financial services companies and financial institutions;
servicing residential mortgage portfolios for investors; originating
residential mortgages; and providing real estate management and disposition
services. The Company also provides trust administration services for self-
directed qualified retirement plans, individual retirement accounts,
custodial and directed trust accounts, and broker-dealer services to
individuals and deferred contribution plans. Based upon management's
experience within the industries in which the Company operates, the Company
believes that its structure of combining a mortgage banking firm, a mortgage
servicing brokerage and consulting firm, a federally chartered banking
institution, a real estate management and disposition firm, a self-directed
trust company, and a securities broker-dealer is unique to the financial
services industry. This unique structure creates revenue enhancing
relationships among the Subsidiaries.
The Company is a broker of mortgage servicing rights serving a
nationwide client base, and, in 1996, brokered the sale of mortgage loan
servicing portfolios totaling $26.4 billion in outstanding principal
balances. As a result of this volume of brokerage activity, the Company has
access to a wide array of information relating to the mortgage banking
industry, including emerging market trends, prevailing market prices, pending
regulatory changes, and changes in levels of supply and demand.
Consequently, the Company is able to identify certain types of mortgage
servicing portfolios that are well suited to its particular servicing
platform and unique corporate structure. The Company, for example, has
focused its mortgage servicing acquisition strategy on seasoned loans having
lower principal and higher custodial escrow balances than newly originated
mortgage loans. Mortgage servicing rights on these types of loans are
generally not attractive to many market participants. However, the Company
believes that given the prevailing pricing for such mortgage servicing rights
and the Company's ability to hold the non-interest bearing custodial escrow
accounts at its federal bank subsidiary, it has been able to achieve
attractive returns on investment in such mortgage servicing rights.
Consolidated net income for the year ended December 31, 1996, and for
the three months ended March 31, 1997, was $3.6 million and $1.8 million,
respectively, resulting in an annualized return on average equity of 24.3%
and 21.1%, respectively. As of March 31, 1997, the Company had consolidated
assets of $422.3 million and shareholders' equity of $34.0 million.
History of the Company. Although Matrix Capital was formed in 1993, the
history of the Company traces back to the formation of United Financial, Inc.
("United Financial") in 1989. United Financial was formed by two of the
Company's principal shareholders to broker mortgage loan servicing rights and
became an approved mortgage loan servicing broker for the Resolution Trust
Corporation (the "RTC"). In 1990, one of the founders of United Financial
divested himself of his interest in United Financial to form Matrix Financial
Services Corporation ("Matrix Financial"), which was established through the
acquisition of an existing mortgage banking company. Matrix Financial
initially focused on the acquisition of mortgage loan servicing portfolios
from the RTC and the Federal Deposit Insurance Corporation (the "FDIC") as
part of their disposition of insolvent thrifts and banks during the early
1990s. In June 1993, Matrix Capital was formed when the founding
shareholders of United Financial and Matrix Financial exchanged all of the
outstanding capital stock of those two entities for shares of Matrix Capital.
The Company acquired Matrix Capital Bank ("Matrix Bank"), a federal savings
bank, in late 1993 in order to capture the benefit of the custodial escrow
account balances relating to the Company's mortgage servicing portfolio and
to engage in the purchase and sale of bulk residential mortgage loan
portfolios. In order to add a source of additional non-interest revenue,
3
<PAGE>
the Company formed United Special Services, Inc. ("USS") in June 1995 to
provide real estate management and disposition services to the Company and
other mortgage companies and financial institutions. The Company formed
United Capital Markets, Inc. ("UCM") in December 1996, primarily to provide
risk management services for existing institutional clients of United
Financial. In February 1997, the Company acquired The Vintage Group, Inc.
("Vintage"), which resulted in the Company moving approximately $80.0 million
of deposits under administration from a third-party institution to Matrix
Bank.
The Subsidiaries. The Company's core business operations are conducted
through the following operating Subsidiaries:
United Financial. United Financial provides brokerage and consulting
services to financial institutions and financial services companies in the
mortgage banking industry. These services include the brokering and analysis
of residential mortgage loan servicing rights, corporate and mortgage loan
servicing portfolio valuations (which includes the complex valuation and
analysis required under the recently-adopted Statement of Financial
Accounting Standards No. 122, Accounting for Mortgage Servicing Rights ("FAS
122")), and, to a lesser extent, consultation and brokerage services in
connection with mergers and acquisitions of mortgage banking entities.
United Financial provides brokerage services to several of the nation's
largest financial institutions, such as Banc One Mortgage Corporation, Chase
Manhattan Mortgage Corporation, and Mellon Mortgage Corporation. During 1996
and the first three months of 1997, United Financial brokered the sale of 92
and 29 mortgage loan servicing portfolios totaling $26.4 billion and $7.9
billion in outstanding mortgage loan principal balances, respectively.
Matrix Financial. Matrix Financial acquires residential mortgage loan
servicing rights on a nationwide basis through purchases in the secondary
market, services the loans underlying these rights, and originates mortgage
loans through its wholesale loan origination network. As of March 31, 1997,
Matrix Financial owned or serviced 76,347 borrower accounts representing $4.1
billion in principal balances (including $617.0 million in subservicing for
non-affiliates of the Company), the majority of which were seasoned loans
having lower principal and higher custodial escrow balances than newly
originated mortgage loans. See "Business--Residential Loan Servicing
Activities--Residential Mortgage Loan Servicing." As a servicer of mortgage
loans, Matrix Financial is required to establish custodial escrow accounts
for the deposit of borrowers' payments, which may include principal,
interest, taxes, and insurance. These payments are held at Matrix Bank.
During the three months ended March 31, 1997, the custodial escrow accounts
at Matrix Bank averaged $43.9 million in the aggregate. For the three months
ended March 31, 1997, Matrix Financial originated $95.5 million in wholesale
mortgage loans through its regional production offices located in Atlanta,
Denver, and Phoenix. The loans originated by Matrix Financial on a wholesale
basis are typically sold in the secondary market.
Matrix Bank. With branches in Las Cruces, New Mexico and Sun City,
Arizona, Matrix Bank serves its local communities by providing a broad range
of personal and business depositors services, offering residential and
consumer loans, and providing, on a limited basis, commercial real estate
loans. Matrix Bank also holds the non-interest bearing custodial escrow
deposits related to the residential mortgage loan servicing portfolio
serviced by Matrix Financial and the deposit accounts of the customers of
Vintage. These custodial escrow deposits, as well as other traditional
deposits, are used to fund bulk purchases of mortgage loan portfolios
throughout the United States, a substantial portion of which are subserviced
by Matrix Financial following their purchase. Maintaining custodial escrow
deposits at Matrix Bank allows the Company to achieve returns historically
greater than could have been realized had the Company used the custodial
escrow deposits as compensating balances to reduce the effective borrowing
cost on its warehouse credit facilities. As of March 31, 1997, Matrix Bank
was deemed to be "well-capitalized" under applicable regulatory standards and
had total assets of $305.9 million, including loans aggregating $267.7
million. On December 31, 1996, the Company disposed of the fixed assets of
the Sterling Finance Co., Inc. ("Sterling Finance") subsidiary of Matrix
Bank, and ceased to originate sub-prime automobile loans.
The Vintage Group, Inc.. On February 5, 1997, the Company completed its
acquisition of Vintage. Vintage's subsidiaries, Sterling Trust Company
("Sterling Trust") and First Matrix Investment Services Corp.,
4
<PAGE>
formerly known as Vintage Financial Services Corp. ("First Matrix"), are
located in Waco, Texas and Arlington, Texas, respectively. Sterling Trust
was incorporated in 1984 as a Texas independent, non-bank trust company
specializing in the administration of self-directed qualified retirement
plans, individual retirement accounts, custodial, and directed trust
accounts. As of March 31, 1997, Sterling Trust had in excess of 25,000
accounts with assets under administration of over $1.2 billion. First Matrix
is an NASD broker-dealer that provides services to individuals and deferred
contribution plans. The purchase price of approximately $11.25 million was
paid through the issuance to the former shareholders of Vintage of 779,592
shares of Common Stock.
United Special Services. USS provides real estate management and
disposition services to financial services companies and financial
institutions. In addition to the unaffiliated clients currently served by
USS, Matrix Financial uses USS exclusively in handling the disposition of its
foreclosed real estate. In addition, USS provides limited collateral
valuation opinions to clients, such as the Federal Home Loan Mortgage
Corporation (the "FHLMC"), that are interested in assessing the value of the
collateral underlying mortgage loans, as well as to clients such as Matrix
Bank and other third-party mortgage loan buyers evaluating potential bulk
purchases of mortgage loans.
United Capital Markets. UCM was formed in December 1996 to advise
institutional clients primarily with regard to risk management issues
relating to residential mortgage loan servicing portfolios. It will provide
a professional outsourcing alternative to in-house risk management
departments on Wall Street derivative products. The focus will be on
interest rate and prepayment risk, as each relates to specific client
objectives. The strategy will include modeling asset risk, setting up and
trading individual hedge accounts, and mirroring accounting practice and
management goals. Although it is anticipated that many asset classes will be
considered for management and advice, UCM intends to focus initially on
mortgage servicing rights. UCM is managed by former senior executives from
nationally recognized investment banks and the mortgage banking industry with
experience in risk management and hedging strategies. UCM generated no
revenues in 1996 and there can be no assurance that its operations will
generate significant revenues, or be profitable, during 1997 or future years.
Other Information. Matrix Capital is a unitary thrift holding company
that was incorporated in Colorado in June 1993. Its principal executive
offices are located at 1380 Lawrence Street, Suite 1410, Denver, Colorado
80204, and its telephone number is (303) 595-9898.
5
<PAGE>
The Offering
This Prospectus relates to 779,592 shares of Common Stock that may be
offered and sold from time to time by the Selling Shareholders. The Company
will not receive any of the proceeds from the sale of shares of Common Stock
by the Selling Shareholders. See "Plan of Distribution; Selling
Shareholders."
6
<PAGE>
Summary Consolidated Financial and Operating Information
(Dollars in thousands, except per share data)
The following table sets forth historical summary financial and other
information of the Company as of the dates and for the periods indicated. In
February 1997, the Company acquired Vintage in a transaction accounted for as
a pooling of interests. As a result of the pooling, the historical financial
and other information of the Company has been restated to include the
financial and other information of Vintage.
<TABLE>
<CAPTION>
As of and for the
As of and for the Three Months
Year Ended December 31, Ended March 31,
------------------------------------ ---------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Operating Data
Net interest income before provision for loan
and valuation losses............................... $ 4,004 $ 3,592 $ 6,059 $ 1,130 $ 2,350
Provision for loan and valuation losses.............. 216 401 143 33 92
---------- ---------- ---------- ---------- ----------
Net interest income.................................. 3,788 3,191 5,916 1,097 2,258
Non-interest income:
Loan administration................................ 6,926 7,749 8,827 2,140 3,982
Brokerage.......................................... 4,017 4,787 4,364 684 1,137
Trust services..................................... 2,488 2,869 3,061 779 879
Gain on sale of loans and mortgage-backed
securities........................................ 1,590 3,272 3,369 436 118
Gain on sale of mortgage servicing rights.......... 684 1,164 3,232 -- 1,411
Loan origination(1)................................ 1,294 2,069 1,561 (301) 641
Other.............................................. 940 1,744 2,173 398 775
---------- ---------- ---------- ---------- ----------
Total non-interest income......................... 17,939 23,654 26,587 4,136 8,943
Non-interest expense................................. 16,593 20,453 26,655 5,251 8,326
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.................... 5,134 6,392 5,848 (18) 2,875
Income taxes (benefit)............................... 2,014 2,469 2,278 (14) 1,121
---------- ---------- ---------- ---------- ----------
Net income (loss).................................... $ 3,120 $ 3,923 $ 3,570(2) $ (4)(2) $ 1,754
========== ========== ========== ========== ==========
Net income (loss) per common and common
equivalent share(3)................................ $ .69 $ .83 $ .68 $ (.01) $ .26
Weighted average common and common equivalent
shares outstanding................................. 4,529,593 4,707,221 5,077,040 4,668,531 6,748,145
Cash dividends paid by pooled company prior to
merger............................................... $ -- $ -- $ 201 $ 66 $ --
Balance Sheet Data
Total assets......................................... $ 113,597 $ 186,313 $ 274,559 $ 255,232 $ 422,292
Total loans (excluding allowance for loan and
valuation losses).................................. 90,068 147,608 213,400 213,875 320,633
Allowance for loan and valuation losses.............. 728 943 1,039 981 1,144
Nonperforming loans(4)............................... 3,314 5,538 3,903 4,433 2,945
Mortgage servicing rights............................ 6,183 13,817 23,680 14,054 38,450
Foreclosed real estate(4)............................ 543 835 788 1,124 853
Deposits............................................. 41,910 48,877 90,179 55,211 181,976(9)
Custodial escrow balances............................ 24,687 27,011 37,881 28,433 69,440
FHLB borrowings...................................... 14,600 19,000 51,250 51,700 34,000
Borrowed money....................................... 18,438 65,093 42,431 84,264 80,197
Total shareholders' equity........................... 6,662 10,686 32,270 10,616 34,024
Operating Ratios and Other Selected Data
Return on average assets(5)(10)...................... 3.13% 2.59% 1.69% (.01)% 2.07%
Return on average equity(5)(10)...................... 57.06 47.62 24.30 (.15) 21.05
Average equity to average assets(5).................. 5.49 5.44 6.97 5.73 9.86
Net interest margin(5)(6)(10)........................ 4.64 2.84 3.45 2.81 3.58
Operating efficiency ratio(7)........................ 76.37 76.19 82.01 100.34 74.33
Total amount of loans purchased...................... $ 80,048 $ 91,774 $ 159,015 $ 50,678 $ 106,330
Balance of owned servicing portfolio (end of period). $1,041,785 $1,596,385 $2,505,036 $1,732,642 $3,499,216
Trust assets under administration (end of period).... $ 750,186 $ 952,528 $1,162,231 $1,012,084 $1,206,600
Wholesale loan origination volume.................... $ 183,130 $ 388,937 $ 583,279 $ 231,488 $ 95,545
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Loan Performance Ratios
Nonperforming loans/total loans(4)................... 3.68 % 3.75 % 1.83 % 2.07% .92%
Nonperforming assets/total assets(5)................. 3.40 3.42 1.89 2.18 1.03
Net loan charge offs/average loans(5)(10)............ 0.03 0.15 0.03 -- (.01)
Allowance for loan and valuation losses/
total loans(8).................................... 0.81 0.64 0.49 0.46 0.36
Allowance for loan and valuation losses/
nonperforming loans(8)............................ 21.97 17.03 26.62 22.13 38.85
</TABLE>
- ----------
(1) On January 1, 1995, the Company adopted FAS 122. Since FAS 122 prohibits
retroactive application, the historical accounting results for 1995, 1996,
and 1997 are not directly comparable to the results for prior periods.
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Comparison of Results of Operations for the Three
Months Ended March 31, 1997 and 1996--Loan Origination" for a discussion of
the impact on net income of a secondary marketing loss incurred in March
1996.
(3) Net income per common and common equivalent share is based on the weighted
average number of common shares outstanding during each period and the
dilutive effect, if any, of stock options and warrants outstanding. There
are no other dilutive securities.
(4) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Asset and Liability Management--Nonperforming
Assets" for a discussion of the impact of certain bulk purchases of
mortgage loan portfolios on the level of nonperforming loans and foreclosed
real estate, and the effect of repurchasing sub-prime automobile loans.
(5) Calculations are based on average daily balances where available, and
monthly averages otherwise.
(6) Net interest margin has been calculated by dividing net interest income
before loan and valuation loss provision by average interest-earning
assets.
(7) The operating efficiency ratio has been calculated by dividing non-interest
expense by operating income (net interest income plus non-interest income).
(8) The allowance for loan and valuation losses does not include a $600,000
liability reserve account at December 31, 1996 and March 31, 1997 to cover
potential losses associated with certain sub-prime automobile loans
repurchased by Matrix Bank. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Asset and Liability
Management--Nonperforming Assets."
(9) Deposits increased by the transfer of approximately $80.0 million of
deposits held in trust from a third-party institution following the
acquisition of Vintage.
(10) Ratios for the three months ended March 31, 1996 and 1997 have been
calculated on an annualized basis.
Recent Developments
The Company has recently settled a dispute with the purchaser of certain of
the automobile loans sold prior to and in connection with the disposition of the
assets of the Sterling Finance Co., Inc. subsidiary of Matrix Bank ("Sterling
Finance"). The purchaser had demanded that Matrix Bank repurchase approximately
$6.3 million of automobile loans on the grounds that titles to the underlying
vehicles were allegedly not delivered prior to the expiration of the time period
set forth in the purchase and sale agreement governing the transaction. In order
to fully resolve the dispute, the parties have agreed to a settlement whereby
Matrix Bank has repurchased approximately $1.5 million of the loans plus
$108,000 of accrued interest. The accrued interest represents all of the accrued
interest on the loans, including all delinquent interest. As part of the
settlement, Matrix Bank and the purchaser have exchanged mutual general
releases.
Based on information provided by the purchaser, approximately $807,000 of
the loans are 30 days or more delinquent. Although the Company has not finalized
its loss analysis, based on initial estimates, the Company anticipates
establishing a loss reserve of $475,000 to $525,000 on an after-tax basis or
8
<PAGE>
approximately $.07 or $.08 loss per share. The loss reserve may increase or
decrease as the Company receives additional information on the loans to be
repurchased.
9
<PAGE>
RISK FACTORS
An investment in the Common Stock involves certain risks. Prospective
investors should consider the following risk factors, in addition to the other
information contained in this Prospectus, in evaluating investment in the Common
Stock offered hereby.
Limited Operating History of the Company
The Company was formed in 1993 to combine the operations of Matrix
Financial and United Financial, which were formed in 1990 and 1989,
respectively. The Company purchased Matrix Bank in 1993, formed USS as a start-
up operation in 1995, formed UCM in 1996, and completed the acquisition of
Vintage in 1997. This series of combinations, purchases, and formations has
involved the integration of the operations of companies that previously operated
independently or, in the case of USS and UCM, not at all. Consequently, the
Company has a limited operating history under its existing corporate structure
upon which investors may base an evaluation of its performance. There can be no
assurance that the Company will not encounter significant difficulties in
integrating operations acquired or commenced in the future, including the
recently acquired self-directed (non-discretionary) trust services and broker-
dealer operations provided by Vintage and its subsidiaries, Sterling Trust and
First Matrix.
Potential Adverse Impact of Fluctuating Interest Rates
Residential Mortgage Loan Servicing Rights. The Company's ownership of
residential mortgage loan servicing rights carries interest rate risk because
the total amount of servicing fees earned, as well as the amortization of the
investment in the servicing rights, fluctuates based on loan prepayments
(affecting the expected average life of a portfolio of residential mortgage
servicing rights). The rate of prepayment of mortgage loans may be influenced by
changing national and regional economic trends, such as recessions or depressed
real estate markets, as well as the difference between interest rates on
existing mortgage loans relative to prevailing mortgage rates. During periods of
declining interest rates, many borrowers refinance their mortgage loans.
Accordingly, prepayments of mortgage loans increase and the loan administration
fee income related to the mortgage loan servicing rights corresponding to a
mortgage loan ceases as underlying loans are prepaid. Consequently, the market
value of portfolios of mortgage loan servicing rights tends to decrease during
periods of declining interest rates, since greater prepayments can be expected.
The income derived from and the market value of the Company's servicing
portfolio, therefore, may be adversely affected during periods of declining
interest rates. See "--Risks Associated with General Economic Conditions" and
"Business--Residential Mortgage Loan Origination."
Asset and Liability Management. The Company's earnings depend in part upon
the level of its net interest income. Net interest income is the difference
between the interest income received from interest-earning assets and the
interest expense incurred in connection with interest-bearing liabilities.
Accordingly, the Company is vulnerable to an increase in interest rates to the
extent that its interest-earning assets, such as mortgage loans, have longer
effective maturities than, or do not adjust as quickly as, its interest-bearing
liabilities. In a rising interest rate environment, interest rates paid to
depositors and on borrowings of the Company may rise more quickly than rates
earned on the Company's loan portfolio. Under such circumstances, material and
prolonged increases in interest rates generally would materially and adversely
affect net interest income and the value of interest-earning assets, while
material and prolonged decreases in interest rates generally would have a
favorable effect on net interest income and the value of interest-earning
assets. Fluctuating interest rates also may affect the net interest income
earned by the Company resulting from the difference between the yield to the
Company on mortgage loans held prior to sale and the interest paid by the
Company for funds advanced under the Company's warehouse lines of credit to
purchase such mortgage loans. The process of balancing the maturities of the
Company's assets and liabilities necessarily involves estimates as to how
changes in the general level of interest rates will impact the yields earned on
assets and the rates paid on liabilities. These estimates may prove to be
inaccurate. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Pipeline Loans. Secondary marketing losses on sales of originated mortgage
loans may result from changes in interest rates from the time the interest rate
on the customer's mortgage loan application is established to the time the
Company sells the loan. Such a change in interest rates could result in a loss
upon the sale of such loans. In order to hedge this risk and to minimize the
effect of interest rate changes on the sale of originated loans, the Company
commits to sell mortgage loans to investors for delivery at a future time for a
stated price. At any given time, the Company's policy is
10
<PAGE>
to sell substantially all of its mortgage loans that are closed and a percentage
of the mortgage loans that are not yet closed but for which the interest rate
has been established ("pipeline loans").
To manage the interest rate risk of the Company's pipeline loans, the
Company continuously projects the percentage of the pipeline loans it expects to
close and, on the basis of such projections, enters into forward commitments to
sell such loans. If an unanticipated change in interest rates occurs, the actual
percentage of mortgage loans that close may differ from the projected
percentage. The resulting mismatch of commitments to originate loans and
commitments to sell loans may have an adverse effect on the results of
operations of the Company. A sudden increase in interest rates can cause a
higher percentage of mortgage loans to close than projected. To the degree this
may not have been anticipated, the Company may not have made commitments to sell
these additional loans and consequently may incur significant losses upon their
sale, adversely affecting results of operations. On the other hand, if a lower
percentage of mortgage loans close than was projected, due to a sudden decrease
in interest rates or otherwise, the Company may have committed to sell more
loans than actually close and as a result may incur significant losses in
fulfilling these commitments, adversely affecting results of operations. This
risk is greatest during times of high interest rate volatility.
In March 1996, a dramatic and sudden increase in interest rates, coupled
with a failure on the part of a former officer of Matrix Financial to adhere to
the hedging policies established by Matrix Financial's board of directors,
resulted in a $1.9 million secondary marketing loss. These established policies
set benchmarks for Matrix Financial's forward commitments to deliver loans or
mortgage backed securities that are to be maintained against the pipeline of
loan commitments made to borrowers. In addition, these policies stipulate that
all closed loans are to be fully hedged with forward commitments. Neither policy
was adhered to, 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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Comparison of
Results of Operations for the Three Months Ended March 31, 1997 and 1996--Loan
Origination."
Potential Fluctuations in Quarterly Results
The Company's financial results are subject to significant quarterly
fluctuations as a result of, among other things, the variance in the number and
magnitude of purchases and sales of mortgage loans and/or mortgage servicing
rights consummated by the Company from time to time. In addition, a portion of
the Company's revenues are derived from brokerage fees, the timing and receipt
of which are unpredictable. Accordingly, the Company's results of operations
for any particular quarter are not necessarily indicative of the results that
may be achieved for any succeeding quarter or for the full fiscal year.
Diversification in Business Lines; Management of Growth
As part of the Company's business strategy, the Company in the past has
diversified, and in the future may diversify, its lines of business into areas
that are not now part of its core business. As a result, the Company must manage
the development of new business lines in which the Company has not previously
participated. Although the Company's strategy is to acquire on-going businesses
and to retain senior management of the entities that the Company acquires, such
as Vintage, each new business line, including start-up operations like USS and
UCM, requires the investment of additional capital and the significant
involvement of senior management of the Company to acquire or develop a new line
of business and integrate it with the Company's operations. There can be no
assurance that the Company will successfully achieve these objectives.
In addition to entering into new lines of business, the Company's business
strategy also envisions the expansion of its existing lines of business,
particularly in the area of servicing mortgage loans. The Company believes that
it currently has in place the infrastructure necessary to undertake this
expansion, including management information systems, senior management, and
other personnel. However, there can be no assurance that any rapid expansion,
similar to that encountered by the Company over the past several years, would
not unduly burden the Company's infrastructure or that senior management of the
Company could successfully oversee such expansion. See "Business--Residential
Loan Servicing Activities--Residential Mortgage Loan Servicing."
11
<PAGE>
Risks Associated with General Economic Conditions
Residential mortgage loans comprised approximately 99.7% of the loans
serviced (including loans subserviced for non-affiliates) by the Company and
approximately 91.8% of the loans held by the Company at March 31, 1997. General
economic conditions, whether regional or industry-related or due to a recession
throughout the United States, affect consumers' decisions to buy or sell
residences, as well as the number of residential mortgage loan delinquencies and
foreclosures, the value of collateral supporting loan portfolios, administrative
costs in evaluating and processing mortgage loan applications, and the costs and
availability of funds that mortgage banking companies rely upon in order to make
or purchase loans. Changes in the level of consumer confidence, real estate
values, prevailing interest rates, and investment returns expected by the
financial community could make mortgage loans of the types purchased, serviced,
and sold by the Company less attractive to borrowers or investors.
Dependence Upon Mortgage Servicing Rights
The Company has relied and expects to continue to rely on the purchase and
sale of mortgage servicing rights for a significant portion of its revenues.
There is no established exchange or trading market for mortgage servicing rights
and no assurance can be given that an active trading market will develop in the
future. The Company believes that it has been able to benefit from opportunities
resulting from inefficiencies in the existing market for mortgage servicing
rights; however, no assurance can be given that such inefficiencies will
continue in the future, and even if continued, that the Company will be able to
benefit from such inefficiencies to the extent it has in the past, or that if an
active trading market for mortgage servicing rights develops in the future, the
Company will be able to benefit from such development. See "Business--
Residential Loan Servicing Activities--Acquisition of Servicing Rights." The
supply of and demand for mortgage servicing rights are affected by a number of
factors beyond the Company's control, including, among others, interest rates,
regional and national economic conditions, other factors affecting the housing
industry, regulations affecting the financial services industry, and accounting
rules and interpretations related to the accounting treatment of mortgage
servicing rights. Some or all of these factors may adversely affect the
Company's ability to originate, purchase, and sell mortgage servicing rights
profitably in the future. See "Business--Residential Loan Servicing
Activities."
Concentration of Loans and Servicing Rights
The Company's portfolio of residential mortgage loans and mortgage
servicing rights are concentrated in certain geographic areas. The geographic
areas in which concentrations exist vary from time to time. Consequently, the
Company's results of operations and financial condition are dependent upon
general trends in the markets in which concentrations exist and, more
specifically, their respective residential real estate markets. A decline in a
market in which the Company has a concentration may adversely affect the values
of properties securing the Company's loans, such that the principal balances of
such loans, together with any primary financing on the mortgaged properties, may
equal or exceed the value of the mortgaged properties, making the Company's
ability to recover losses in the event of a borrower's default extremely
unlikely. In addition, uninsured disasters such as earthquakes and mudslides
may adversely impact borrowers' ability to repay loans made by the Company and
the value of collateral underlying such loans, which could have a material
adverse effect on the Company's results of operations and financial condition.
See "--Risks Associated with General Economic Conditions."
Delinquency, Foreclosure, and Credit Risks
Mortgage Loan Portfolio. The Company's loan portfolios include loans that
were originated by numerous lenders throughout the United States under various
loan programs and underwriting standards. Many of the loan portfolios include
loans that have had payment delinquencies in the past or, to a lesser extent,
are delinquent at the time of the purchase. As a part of the Company's business
strategy, portfolios of mortgage loans with varying degrees of current and past
delinquencies are purchased at discounts. Although the Company performs
extensive due diligence procedures at the time loans are purchased, there
remains the risk of continuing or recurrent delinquency. The Company assumes
substantially all risk of loss associated with its loan portfolio in the case of
foreclosure. This risk includes the cost of the foreclosure, the loss of
interest, and the potential loss of principal to the extent that the value of
the underlying collateral is not sufficient to cover the Company's investment in
the loan. See "Business--Purchase and Sale of Bulk Loan Portfolios."
12
<PAGE>
Servicing Portfolio. The Company also is affected by mortgage loan
delinquencies and defaults on mortgage loans that it services. Under many types
of mortgage servicing contracts, even when mortgage loan payments are
delinquent, the servicer must forward all or part of the scheduled payments to
the owner of the mortgage loan. Also, to protect their liens on mortgaged
properties, owners of mortgage loans usually require the servicer to advance
mortgage and hazard insurance and tax payments on schedule even though
sufficient escrow funds may not be available. Typically, the servicer will
ultimately be reimbursed by the mortgage loan owner or from foreclosure proceeds
for payments advanced that the servicer is unable to recover from the borrower.
However, in the interim, the servicer must absorb the cost of funds advanced
during the time such advance is outstanding. Further, the servicer must bear the
increased costs of attempting to collect on delinquent and defaulted mortgage
loans. Although these increased costs are somewhat reduced through the receipt
of late fees and the reimbursement of certain direct expenses out of foreclosure
proceeds, the Company believes that increased delinquencies and defaults
generally increase the costs of the servicing function. In addition, the Company
is required to forego servicing income from the time a loan becomes delinquent
to the time the mortgage loan is foreclosed. See "Business--Residential Loan
Servicing Activities--Residential Mortgage Loan Servicing."
Possible Inadequacy of Allowance for Loan Losses
The Company's allowance for loan losses is maintained at a level considered
adequate by management to absorb anticipated losses. The amount of future losses
is susceptible to changes in economic, operating, and other conditions,
including changes in interest rates, that may be beyond the Company's control,
and such losses may exceed current estimates. Although management believes that
the Company's allowance for loan losses is adequate to absorb any losses on
existing loans that may become uncollectible, there can be no assurance that the
allowance will prove sufficient to cover actual loan losses on existing loans in
the future. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Asset and Liability Management--Analysis of Allowance
for Loan and Valuation Losses."
Legal Proceedings
In the ordinary course of its business, the Company is subject to claims
made against it by borrowers and private investors arising from, among other
things, losses that are claimed to have been incurred as a result of alleged
breaches of contract and fiduciary obligations, misrepresentations, errors and
omissions of employees, officers, and agents of the Company, incomplete
documentation and failures by the Company to comply with various laws, and
regulations applicable to its business, including federal and state banking and
consumer lending laws. Although management does not believe that any liability
for current outstanding litigation would exceed amounts accrued therefore, there
can be no assurance that any liability with respect to current legal actions, or
ones that might be instituted in the future, would not be material to the
Company's consolidated results of operations, financial condition, or cash
flows. See "--Liabilities Under Representations and Warranties," "Business--
Legal Proceedings," and "Supervision and Regulation."
Liabilities Under Representations and Warranties
In the ordinary course of business, the Company makes representations and
warranties to the purchasers and insurers of mortgage and other loans and the
purchasers of mortgage servicing rights regarding compliance with laws,
regulations, and program standards, as well as representations and warranties
regarding the accuracy of certain information. To a lesser extent, the Company
contractually provides recourse relating to the performance of the loans that it
sells. Under certain circumstances, the Company may become liable for damages or
may be required to repurchase a loan if there has been a breach of these
representations or warranties or in a case where contractual recourse is
permitted. The Company generally receives similar representations and
warranties from the originators and sellers from whom it purchases mortgage and
other loans and servicing rights. However, in the event of breaches of such
representations and warranties, the Company is subject to the risk that an
originator may not have the financial capacity to repurchase loans when called
upon to do so by the Company, or otherwise respond to demands made by the
Company. During 1996 and the three months of 1997, the Company realized losses
of $150,000 and $149,000, respectively, which were reserved for in prior
periods. These losses relate to repurchases resulting from a particular
servicing portfolio purchased by the Company. The Company believes it has
recourse against the seller of these mortgage servicing rights, but does not
expect to pursue the seller or make a significant recovery due to the financial
condition of the seller. The Company also has an accrued liability of $180,000
for additional losses as of March 31, 1997. Matrix Bank had, as of March 31,
1997, repurchased approximately $2.5 million of installment loans and
repossessed automobiles that Sterling
13
<PAGE>
Finance sold to outside investors. In addition, subsequent to March 31, 1997,
the Company repurchased approximately $1.5 million of installment loans plus
$108,000 of accrued interest pursuant to the settlement with a certain
purchaser. See "Prospects Summary--Recent Developments" and "Supervision and
Regulation--Federal Savings Bank Operations--Regulation of Sub-Prime Automobile
Lending." The Company does not anticipate any future material losses in
connection with these portfolios or as a result of additional repurchases due to
breaches of representations and warranties or otherwise; however; there can be
no assurance that the Company will not experience such losses. See "Business--
Residential Loan Servicing Activities--Servicing Sales."
Impact of Regulation
General. The operations of the Company are subject to extensive regulation
by federal and state governmental authorities and are subject to various laws
and regulations and judicial and administrative decisions that, among other
things, establish licensing requirements, regulate credit extension, establish
maximum interest rates and insurance coverages, require specific disclosures to
customers, prohibit discrimination in mortgage lending activities, govern
secured transactions, establish collection, repossession, and claims handling
procedures and other trade practices, and, in certain states, require payment of
interest on servicing-related custodial escrow deposits. In particular, Matrix
Bank is subject to extensive regulation, examination, and supervision by the
Office of Thrift Supervision (the "OTS"), as its chartering agency, and the
Federal Deposit Insurance Corporation (the "FDIC"), as insurer of deposits held
at Matrix Bank. Sterling Trust is regulated by the Texas Department of Banking
as a Texas chartered trust company. Under applicable law, a Texas trust
company, such as Sterling Trust, is subject to virtually all provisions of the
Texas Banking Act of 1995 (the "TBA") as if the trust company were a state
chartered bank. In addition, in certain instances, the ability of Matrix
Financial and Matrix Bank to pay dividends to Matrix Capital could be restricted
due to regulatory requirements. Sterling Trust is regulated by the Texas
Department of Banking as a Texas chartered trust company. There can be no
assurance that more restrictive laws, rules, or regulations will not be adopted
in the future, or that existing or proposed laws will not be changed to the
detriment of the Company. Any change in such laws and regulations, or the
adoption of more restrictive laws and regulations, whether by the OTS, the FDIC,
the Texas Department of Banking, the Congress of the United States, or the Texas
legislature, could have a material adverse effect on the Company and its
financial condition or results of operations. See "Supervision and Regulation."
Proposed Legislation. Matrix Capital is not currently subject to
regulation by the Federal Reserve. The Congress of the United States adopted a
bill that did not become law, but that would have required federal savings banks
to convert to national banks. In the event of such a conversion, subject to
limited grandfathering, thrift holding companies, such as Matrix Capital, would
have become regulated by the Federal Reserve. The Federal Reserve requires bank
holding companies to maintain a leverage ratio of 5.0% with the aggregate amount
of purchased mortgage servicing rights not to exceed 50.0% of Tier 1 capital
(the numerator of the leverage ratio). Had Matrix Capital been subject to the
Federal Reserve's capital regulations as of March 31, 1997, its consolidated
leverage ratio would have been approximately 3.0% (assuming no other
adjustments).
Federal Programs. The Company's ability to sell mortgage loans is largely
dependent upon the continuation of programs administered by the Federal National
Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation (the
"FHLMC"), and the Government National Mortgage Association ("GNMA"), which
facilitate the sale of mortgage loans and the pooling of such loans into
mortgage-backed securities, as well as the Company's continued eligibility to
participate in such programs. The discontinuation of, or a significant reduction
in, the operation of such programs would have an adverse effect on the Company's
operations. The Company expects that it will continue to remain eligible to
participate in such programs, but any significant impairment of such eligibility
would adversely affect its operations because seller/servicer status is vital to
its servicing business. In addition, the products offered under such programs
may be changed from time to time. The profitability of specific products may
vary depending on a number of factors, including the administrative costs to the
Company of originating or acquiring such products. See "Business--Residential
Mortgage Loan Origination--Sale of Loan Originations" and "Supervision and
Regulation."
Potential Limitations on Availability of Funding Sources
Funding for the Company's mortgage banking activities, including the
acquisition of mortgage servicing rights and the acquisition and origination of
mortgage loans, is provided primarily through lines of credit and
sale/repurchase facilities from various financial institutions and from FHLB
borrowings. The Company's business plan entails the
14
<PAGE>
Company's ability to maintain existing credit facilities and negotiate
additional credit facilities for the acquisition of mortgage servicing rights
and other purposes. There can be no assurance that existing credit facilities
will be renewed, or if renewed, that the terms will be favorable to the Company.
Furthermore, there can be no assurance that additional credit lines will be
available, or if available, that the terms will be favorable to the Company.
Unavailability of funding on terms favorable to the Company, or at all, would
have an adverse effect on the Company's business and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Competition
The industries in which the Company competes are highly competitive. The
Company competes with other mortgage banking companies, servicing brokers,
commercial banks, savings associations, credit unions, other financial
institutions, trust companies, broker/dealers, and various other lenders. A
number of these competitors have substantially greater financial resources,
greater operating efficiencies, and longer operating histories than the Company.
Customers distinguish between product and service providers in the industries in
which the Company operates for various reasons, including convenience in
obtaining the product or service, overall customer service, marketing and
distribution channels, and pricing for the various products and services.
Because of its emphasis on mortgage banking activities, competition for the
Company is affected particularly by fluctuations in interest rates. During
periods of rising rates, competitors of the Company who have locked in lower
borrowing costs may have a competitive advantage. During periods of declining
rates, competitors may solicit the Company's customers to refinance their loans.
During economic slowdowns or recessions, credit-impaired borrowers may have new
financial difficulties and may be receptive to offers by the Company's
competitors. See "Business--Competition."
Reliance on Systems and Controls
The Company depends heavily upon its systems and controls, many of which
are designed specifically for its business. These systems and controls support
the evaluation, acquisition, monitoring, collection, and administration of the
Company's mortgage loan and servicing portfolios, as well as support the
consulting and brokerage functions performed by the Company and the depository,
general accounting, trust services, and other management functions of the
Company. For example, in order to track information on its mortgage servicing
portfolio, the Company utilizes a data processing system provided by Alltel
Information Services Inc. ("Alltel"), formerly known as Computer Power
Incorporated, or CPI. There can be no assurance that Alltel or the Company's
other providers can continue to provide the systems and controls on which the
Company relies, or that the Company's systems and controls, including those
specially designed and built for the Company, are adequate or will continue to
be adequate to support the Company's growth. A failure of the automated systems,
including a failure of data integrity or accuracy, could have a material adverse
effect upon the Company's business and financial condition.
Dependence on Key Personnel
The Company is dependent upon the continued services of Guy A. Gibson,
Richard V. Schmitz, D. Mark Spencer, and the Company's other executive officers.
While the Company believes that it could find replacements for its executive
officers, the loss of their services could have an adverse effect on the
Company's financial condition or results of operations. None of the Company's
executive officers named above have entered into employment agreements with the
Company, but each has a significant equity interest in the Company. The Company
does not maintain key-man life insurance on any of its executive officers. See
"Management--Employment Agreements" and "Principal Shareholders."
Forward-Looking Statements
Certain statements contained in this Prospectus, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects," and words of similar import, constitute "forward-looking
statements" within the meaning of the Reform Act. Such forward-looking
statements involve known and unknown risks, uncertainties, and other factors
that may cause the actual results, performance, or achievements of the Company
to be materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the factors referenced in this Prospectus, including, without
limitation, under the captions "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and
15
<PAGE>
Results of Operations," "Business," and "Supervision and Regulation." Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on such forward-looking statements. The Company disclaims any
obligation to update any such factors or to publicly announce the results of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
USE OF PROCEEDS
This Prospectus relates to shares of Common Stock that may be offered from
time to time by the Selling Shareholders. See "Plan of Distribution; Selling
Shareholders." The Company will receive none of the proceeds from the sale of
the Common Stock offered hereby by the Selling Shareholders.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997. This information is qualified in its entirety by, and should be
read in conjunction with, the Consolidated Financial Statements of the Company
and Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
March 31, 1997
----------------
(In thousands)
Liabilities
<S> <C>
Deposits ..................................................................... $ 181,976
Custodial escrow balances .................................................... 69,440
FHLB borrowings .............................................................. 34,000
Borrowed money ............................................................... 80,197
---------
Total ................................................................. 365,613
Shareholders' equity
Preferred Stock, $0.0001 par value; 5,000,000 shares authorized; no shares
outstanding; no shares outstanding as adjusted ............................ --
Common Stock, $0.0001 par value; 50,000,000 shares authorized; 6,681,031
shares outstanding ........................................................ 1
Additional paid-in capital ................................................... 21,983
Retained earnings ............................................................ 12,040
---------
Total shareholders' equity ............................................ 34,024
---------
Total capitalization .................................................. $ 399,637
=========
</TABLE>
(1) Excludes an aggregate of (i) 525,000 shares of Common Stock reserved for
issuance under the 1996 Amended and Restated Stock Option Plan, (the
"1996 Stock Option Plan") including 301,350 shares subject to outstanding
options, (ii) 125,000 shares of Common Stock reserved for issuance under
the Employee Stock Purchase Plan of Matrix Capital (the "Purchase Plan"),
and (iii) 75,000 shares of Common Stock issuable to certain investment
banking firms upon exercise of warrants issued to such firms upon
consummation of the initial public offering of the Company in October
1996. See "Management--Stock Option Plan," "--Employee Stock Purchase
Plan," and "Description of Capital Stock--Certain Warrants."
17
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock has been quoted on the Nasdaq National Market under the
symbol "MTXC" since the Company's initial public offering in October 1996 at
$10.00 per share. The following table sets forth the high and low sales prices
of the Common Stock for the periods indicated, as reported by the Nasdaq
National Market.
<TABLE>
<CAPTION>
Year Ended December 31, 1996 High Low
- ---------------------------- -------- -------
<S> <C> <C>
Fourth Quarter (beginning October 18, 1996) ............... $15.875 $10.00
Year Ended December 31, 1997
- ----------------------------
First Quarter ............................................. 15.875 11.625
Second Quarter (through June 26, 1997) .................... 14.00 10.375
</TABLE>
On June 26, 1997, the last reported sale price for the Common Stock was
$13.50 per share. As of June 15, 1997, the Company had 6,681,031 outstanding
shares of Common Stock held by 74 shareholders of record.
Matrix Capital has not paid any dividends on its Common Stock, except an
aggregate of approximately $1,000, $92,000 and $201,000 during 1992, 1993 and
1996, respectively, of which approximately $1,000, $4,000 and $201,000
represented payments made by Vintage prior to its acquisition by the Company
(which was accounted for as a pooling of interests). See "Selected Consolidated
Financial and Operating Information." The Company expects that it will retain
all available earnings generated by its operations for the development and
growth of its business and does not anticipate paying any cash dividends in the
foreseeable future. Any future determination as to dividend policy will be made
at the discretion of the Board of Directors of the Company and will depend on a
number of factors, including the future earnings, capital requirements,
financial condition and future prospects of the Company and such other factors
as the Board of Directors may deem relevant. Under the terms of the Company's
13% Senior Subordinated Notes issued in August 1995 (the "13% Senior
Subordinated Notes"), the Company's ability to pay cash dividends to its
shareholders is limited. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." In
addition, the ability of Matrix Financial and Matrix Bank to pay dividends to
Matrix Capital may be restricted in certain instances, including covenants under
Matrix Financial's existing warehouse facilities. See "Regulation and
Supervision" and Note 7 to the consolidated Financial Statements included
elsewhere herein.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
(Dollars in thousands, except per share data)
The following table sets forth historical selected financial and other
information of the Company as of the dates and for the periods indicated. In
February 1997, the Company completed the acquisition of Vintage in a transaction
accounted for as a pooling of interests. As a result of the pooling, the
historical financial and other information of the Company has been restated to
include the financial and other information of Vintage. The balance sheet data
as of December 31, 1995 and 1996 and the operating data for the years ended
December 31, 1994, 1995, and 1996 have been derived from, and are qualified by
reference to, the Consolidated Financial Statements and Notes thereto, which
have been audited by Ernst & Young LLP, independent auditors, as indicated in
their report included elsewhere herein. The balance sheet and operating data as
of March 31, 1996 and 1997 and for the three-month periods then ended and the
balance sheet data as of December 31, 1994 and the operations data for the years
ended December 31, 1992 and 1993, have been derived from unaudited consolidated
financial statements of the Company. The financial data as of December 31, 1992
and for the year then ended reflects the combined operations of United
Financial, Matrix Financial and Vintage. The unaudited consolidated financial
statements include all adjustments, consisting of normal recurring adjustments,
that the Company considers necessary for a fair presentation of its financial
position as of such adjustments, which the Company considers necessary for a
fair presentation of its financial position as of such dates and the results of
operations and cash flows for such periods. Operating results for the three
months ended March 31, 1997 are not necessarily indicative of the results that
may be expected for the entire year ending December 31, 1997. The selected
financial data should be read in conjunction with the Consolidated Financial
Statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
As of and for the
Year Ended December 31,
-----------------------------------------------------------
1992 1993(1) 1994 1995 1996
------ --------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Operating Data
Net interest income (loss) before provision
for loan and valuation losses................ $ (551) $ 944 $ 4,004 $ 3,592 $ 6,059
Provision for loan and valuation losses........ -- 15 216 401 143
---------- ---------- ---------- ---------- ----------
Net interest income (loss)..................... (551) 929 3,788 3,191 5,916
Non-interest income:
Loan administration.......................... 6,025 6,427 6,926 7,749 8,827
Brokerage.................................... 1,842 2,132 4,017 4,787 4,364
Trust services............................... 1,388 1,685 2,488 2,869 3,061
Gain on sale of loans and mortgage-backed
securities.................................. 546 2,361 1,590 3,272 3,369
Gain on sale of mortgage servicing rights.... 348 38 684 1,164 3,232
Loan origination(2).......................... -- 221 1,294 2,069 1,561
Other........................................ 377 669 940 1,744 2,173
---------- ---------- ---------- ---------- ----------
Total non-interest income................... 10,526 13,533 17,939 23,654 26,587
Non-interest expense........................... 9,872 12,184 16,593 20,453 26,655
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.............. 103 2,278 5,134 6,392 5,848
Income taxes (benefit)(3)...................... -- 404 2,014 2,469 2,278
---------- ---------- ---------- ---------- ----------
Net income (loss).............................. $ 103 $ 1,874 $ 3,120 $ 3,923 $ 3,570\(4)\
========== ========== ========== ========== ==========
Net income (loss) per common and common
equivalent share(5).......................... $ .69 $ .83 $ .68
Pro forma net income(6)........................ $ 62 $ 1,367
Pro forma net income per common and common
equivalent share(6).......................... $ .01 $ .31
Weighted average common and common
equivalent shares outstanding................ 4,222,093 4,375,843 4,529,593 4,707,221 5,077,040
Cash dividends(12)............................. $ 1 $ 92 $ -- $ -- $ 201
Balance Sheet Data
Total assets................................... $ 10,923 $ 96,553 $ 113,597 $ 186,313 $ 274,559
Total loans (excluding allowance for loan and
valuation losses)............................ 497 77,034 90,068 147,608 213,400
Allowance for loan and valuation losses........ -- 538 728 943 1,039
Nonperforming loans(7)......................... -- 853 3,314 5,538 3,903
Mortgage servicing rights...................... 6,200 1,818 6,183 13,817 23,680
Foreclosed real estate(7)...................... 69 726 543 835 788
Deposits....................................... -- 45,517 41,910 48,877 90,179
Custodial escrow balances...................... -- 31,794 24,687 27,011 37,881
FHLB borrowings................................ -- -- 14,600 19,000 51,250
Borrowed money................................. 5,347 8,791 18,438 65,093 42,431
Total shareholders' equity..................... 1,754 3,534 6,662 10,686 32,270
<CAPTION>
As of and for the
Three Months
Ended March 31,
-------------------------
1996 1997
------ ------
<S> <C> <C>
Operating Data
Net interest income (loss) before provision
for loan and valuation losses................ $ 1,130 $ 2,350
Provision for loan and valuation losses........ 33 92
---------- ----------
Net interest income (loss)..................... 1,097 2,258
Non-interest income:
Loan administration.......................... 2,140 3,982
Brokerage.................................... 684 1,137
Trust services............................... 779 879
Gain on sale of loans and mortgage-backed
securities.................................. 436 118
Gain on sale of mortgage servicing rights.... -- 1,411
Loan origination(2).......................... (301) 641
Other........................................ 398 775
---------- ----------
Total non-interest income................... 4,136 8,943
Non-interest expense........................... 5,251 8,326
---------- ----------
Income (loss) before income taxes.............. (18) 2,875
Income taxes (benefit)(3)...................... (14) 1,121
---------- ----------
Net income (loss).............................. $ (4)\(4)\ $ 1,754\(4)\
========== ==========
Net income (loss) per common and common
equivalent share(5).......................... $ (.01) $ .26
Pro forma net income(6)........................
Pro forma net income per common and common
equivalent share(6)..........................
Weighted average common and common
equivalent shares outstanding................ 4,668,531 6,748,145
Cash dividends(12)............................. $ 66 $ --
Balance Sheet Data
Total assets................................... $ 255,232 $ 422,292
Total loans (excluding allowance for loan and
valuation losses)............................ 213,875 320,633
Allowance for loan and valuation losses........ 981 1,144
Nonperforming loans(7)......................... 4,433 2,945
Mortgage servicing rights...................... 14,054 38,450
Foreclosed real estate(7)...................... 1,124 853
Deposits....................................... 55,211 181,976
Custodial escrow balances...................... 28,433 69,440
FHLB borrowings................................ 51,700 34,000
Borrowed money................................. 84,264 80,197
Total shareholders' equity..................... 10,616 34,024
</TABLE>
19
<PAGE>
<TABLE>
As of and for the
As of and for the Three Months
Year Ended December 31, Ended March 31,
------------------------------------------------------------ ---------------------
1992 1993(1) 1994 1995 1996 1996 1997
------ --------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Ratios and Other Selected Data
Return on average assets(8)(13)............ .95% 5.30% 3.13% 2.59% 1.69% (.01)% 2.07%
Return on average equity(8)(13)............ 5.12 73.26 57.06 47.62 24.30 (.15) 21.05
Average equity to average assets(8)........ 18.45 7.24 5.49 5.44 6.97 5.73 9.86
Net interest margin(8)(9)(13).............. -- 4.15 4.64 2.84 3.45 2.81 3.58
Operating efficiency ratio(10)............. 98.97 84.25 76.37 76.19 82.01 100.34 74.33
Total amount of loans purchased............ $ -- $ 32,231 $ 80,048 $ 91,774 $ 159,015 $ 50,678 $ 106,330
Balance of owned servicing portfolio
(end of period)........................... $855,506 $1,007,286 $1,041,785 $1,596,385 $2,505,036 $1,732,642 $3,499,600
Trust assets under administration
(end of period)........................... $521,945 $ 655,750 $ 750,186 $ 952,528 $1,162,231 $1,012,084 $1,206,600
Wholesale loan origination volume.......... $ -- $ 126,200 $ 183,130 $ 388,937 $ 583,279 $ 231,488 $ 95,545
Loan Performance Ratios
Nonperforming loans/total loans(7)......... --% 1.11% 3.68% 3.75% 1.83% 2.07% .92%
Nonperforming assets/total assets(7)....... -- 1.64 3.40 3.42 1.89 2.18 1.03
Net loan charge offs/average loans(8)(13).. -- 0.18 0.03 0.15 0.03 -- (.01)
Allowance for loan and valuation losses/
total loans(11)......................... -- 0.70 0.81 0.64 0.49 0.46 0.36
Allowance for loan and valuation losses/
nonperforming loans(11)................. -- 63.07 21.97 17.03 26.62 22.13 38.85
</TABLE>
- ----------
(1) The Company acquired all of the outstanding capital stock of Matrix Bank
on September 23, 1993. The operations of Matrix Bank have been included in
the consolidated operations of the Company from the date of acquisition.
(2) On January 1, 1995, the Company adopted FAS 122. Since FAS 122 prohibits
retroactive application, the historical accounting results for 1995 and
1996 are not directly comparable to the results for prior periods.
(3) Prior to the formation of Matrix Capital in June 1993, Matrix Financial
and United Financial had elected for certain periods to be taxed under the
provisions of subchapter "s" of the Code and accordingly did not pay
income taxes on their respective earnings; instead the shareholders of
Matrix Financial and United Financial were liable for such taxes. As a
result, there is no income tax provision for earnings during the periods
in which subchapter "s" treatment had been elected.
(4) See "Management's Discussion and Analysis of Financial Condition and of
Operations--Comparison of Results of Operations for the Three Months Ended
March 31, 1997 and 1996--Loan Origination" for a discussion of the impact
on net income of a secondary marketing loss incurred in March 1996.
(5) Net income per common and common equivalent share is based on the weighted
average number of common shares outstanding during each period and the
dilutive effect, if any, of stock options and warrants outstanding. There
are no other dilutive securities.
(6) Pro forma net income and pro forma net income per share are presented for
periods in which the Company was not a taxable entity as a result of its
subchapter "s" election. The pro forma net income assumes an effective tax
rate of 40%. Pro forma net income per share is computed by dividing pro
forma net income by the weighted average number of shares of Common Stock
and Common Stock equivalents outstanding during the year.
(7) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Asset and Liability Management--Nonperforming
Assets" for a discussion of the impact of certain bulk purchases of
mortgage loan portfolios on the level of nonperforming loans and
foreclosed real estate, and the effect of repurchasing sub-prime
automobile loans.
(8) Calculations are based on average daily balances where available, and
monthly averages otherwise.
(9) Net interest margin has been calculated by dividing net interest income
before loan and valuation loss provision by average interest-earning
assets.
(10) The operating efficiency ratio has been calculated by dividing non-
interest expense by operating income (net interest income plus non-
interest income).
(11) The allowance for loan and valuation losses does not include a $600,000
liability reserve account at December 31, 1996 and March 31, 1997 to cover
potential losses associated with sub-prime auto loans repurchased by
Matrix Bank. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Asset and Liability Management--
Nonperforming Assets."
(12) The years 1992 and 1996 are cash dividends paid by the pooled company
prior to its acquisition. The dividend paid in 1993 represents $88,000
from the Company and $4,000 from the pooled company prior to its
acquisition.
20
<PAGE>
(13) Ratios for the three months ended March 31, 1996 and 1997 have been
calculated on an annualized basis.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis of the financial
condition and results of operations of the Company should be read in conjunction
with the preceding "Selected Consolidated Financial and Operating Information."
Additionally, the Company's Consolidated Financial Statements and the Notes
thereto, as well as other data included in this Prospectus, should be read and
analyzed in combination with the analysis below.
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, deposit generation, and administration of self-directed
trust accounts. These activities are conducted through the Company's wholly
owned subsidiaries, Matrix Financial, United Financial, Matrix Bank, and
Sterling Trust. More recently, the Company commenced real estate management and
disposition services, risk management services, and its trust company activities
through its wholly owned subsidiaries, USS, UCM, and Sterling Trust,
respectively. While USS and UCM have not generated material amounts of revenue
or expenses during their limited operating history, management anticipates that
they will make a larger contribution to the Company's revenues and expenses in
the future.
The principal components of the Company's revenues consist primarily of net
interest income recorded by Matrix Bank and Matrix Financial, loan
administration fees generated by Matrix Financial, brokerage fees realized by
United Financial, loan origination fees and gains on sales of mortgage loans and
mortgage servicing rights generated by Matrix Financial and Matrix Bank, and
trust service fees generated by Sterling Trust. The Company's results of
operations are influenced by changes in interest rates and the effect of these
changes on the volume of loan originations, mortgage loan prepayments, and the
value of mortgage servicing portfolios. See "Risk Factors--Potential Adverse
Impact of Fluctuating Interest Rates."
History
The Company was formed in June 1993 when the founding shareholders of two
of its Subsidiaries, Matrix Financial and United Financial, exchanged all of the
outstanding capital stock of those two entities for shares of the Company in a
series of transactions that were each accounted for as a pooling of interests.
As a result, the Company's financial results for 1993 reflect a full 12 months
of operations for Matrix Financial and United Financial. Prior to the
acquisition of Matrix Financial and United Financial by the Company in 1993,
Matrix Financial and United Financial were operated as independent subchapter
"s" corporations.
In September 1993, the Company acquired Matrix Bank, formerly named Dona
Ana Savings Bank, FSB, and Dona Ana Savings and Loan Association, FSB. The
acquisition was accounted for using the purchase method of accounting and all of
the assets and liabilities were recorded at their estimated fair value as of the
date of acquisition. The Company's consolidated financial results for 1993,
therefore, reflect only three months of operations for Matrix Bank.
In June 1995, the Company formed USS. The financial results for USS for
the year ended December 31, 1996 and for the three months ended March 31, 1997
have provided minimal revenue, as such periods have been utilized primarily to
develop marketing material and establish investor relationships.
In December 1996, the Company formed UCM. The financial results to date
reflect a start-up operation with no revenue. All efforts to date have focused
on completion of the financial hedging models, the development of marketing
material, and the establishment of a customer base. No investors have entered
into service agreements with UCM as of the date hereof.
22
<PAGE>
In February 1997, the Company acquired Vintage. The acquisition was
accounted for as a pooling of interests and, accordingly, no goodwill was
recorded and the consolidated financial statements of the Company for the prior
periods have been restated.
Relationships Among the Subsidiaries
Management believes that the synergies within the Company's corporate
structure, and the opportunities resulting from those synergies, make the
Company unique in the financial services industry. United Financial, which is
primarily a broker of mortgage servicing rights and a consultant to the mortgage
banking industry, provides significant benefits to certain of the other
Subsidiaries. Through United Financial's daily contact with businesses in the
mortgage banking industry, Matrix Financial is able to gain insight into the
mortgage banking industry in which it competes. For example, although Matrix
Financial does not buy mortgage servicing rights brokered by United Financial in
competitive bid situations, United Financial provides market intelligence to
Matrix Financial as to the current market for the purchase and sale of mortgage
loan servicing rights in the secondary market, including the buyers and sellers
in the marketplace at any given time. United Financial also provides Matrix
Financial with mortgage loan servicing valuation capabilities, puts Matrix
Financial in direct contact with sellers of servicing portfolios, and apprises
Matrix Financial of the emerging trends in the industry. All mortgage loan
servicing rights that are sold by the Company are brokered through United
Financial, which allows all brokerage fees paid by Matrix Financial to be
retained within the Company.
Management believes that United Financial's affiliation with Matrix Bank
provides both Matrix Bank and United Financial with a competitive advantage.
United Financial provides Matrix Bank with market contacts for the purchase of
mortgage loan portfolios that it may not otherwise have identified. The most
significant advantage for both companies, however, is the financing
opportunities that United Financial is able to refer to Matrix Bank directly
from United Financial's clients. The opportunity for United Financial to refer
its clients to an affiliate for financing provides Matrix Bank with an increased
pipeline of lending opportunities and enables United Financial to provide more
comprehensive services than many of its competitors.
United Financial's affiliation with USS provides both companies with
significant benefits. Disposition of foreclosed real estate on an outsourced
basis through USS is another service that United Financial can provide its
clients. Management considers the referrals and contacts that United Financial
provides USS to be a marketing advantage that has allowed USS to develop a
client base more quickly than it could have otherwise. In addition, Matrix
Financial outsources all of the disposition of foreclosed real estate that it
services to USS. This affiliation with USS allows Matrix Financial to reduce its
overhead and has turned the disposition function from a net cost to the Company
into a revenue producer.
Another strategic affiliation within the Company is the one that exists
between Matrix Financial and Matrix Bank. Prior to the acquisition of Matrix
Bank, the custodial escrow deposits related to Matrix Financial's mortgage loan
servicing portfolio were used as compensating balances with the Company's
warehouse lenders, which reduced the interest rate on the amounts outstanding
under the warehouse lines of credit to the extent of the compensating balances
or the Company's loan balances outstanding, whichever was less. The benefit of
the custodial escrow deposits, therefore, was limited to the amounts outstanding
under the warehouse lines and the reduction in interest negotiated for the use
of these compensating balances. Since its acquisition, Matrix Bank has acted as
the depository institution for all of Matrix Financial's custodial escrow
deposits. This relationship allows the Company to derive the full benefit from
these custodial escrow deposits. The deposits are invested in interest-earning
residential mortgage loans at returns greater than historically had been
realized by depositing these sums as compensating balances with the Company's
warehouse lenders. Prior to the acquisition of Matrix Bank, Matrix Financial
also purchased and sold bulk residential mortgage loan packages, a function that
is now handled primarily through Matrix Bank. This activity was previously
limited due to the lack of availability and expensive cost of the short-term
financing needed to purchase and carry such portfolios. If financing was not
available, Matrix Financial attempted to arrange the simultaneous purchase and
sale of the same portfolio. Transactions executed in this manner prohibited the
Company from earning interest income during the period between the purchase and
corresponding sale, and also resulted in an inefficient execution on the
purchase and sale. With Matrix Bank's funding capabilities, the Company is able
to react to mortgage loan purchase opportunities more quickly, and once
23
<PAGE>
the mortgage loan portfolio has been purchased, the Company is able to hold the
portfolio at lower cost than would otherwise be possible.
In addition to servicing its own portfolio of mortgage servicing rights,
Matrix Financial performs the servicing function for all of Matrix Bank's
mortgage servicing portfolio. Because of the economies of scale achieved with
Matrix Financial's management information systems and its experience in the
servicing industry, management believes that these loans are serviced more
efficiently and at less cost than could normally be achieved by an institution
of Matrix Bank's size. Moreover, Matrix Financial's expertise in the servicing
arena facilitates the purchase by Matrix Bank of bulk loan portfolios throughout
the country.
Matrix Financial's servicing portfolio includes mortgage loans owned by
more than 200 private investors. Matrix Financial routinely contacts these
investors to determine their interest in selling their loan portfolios. In
those instances where a private investor expresses interest in selling a loan
portfolio, Matrix Financial is able to make a referral to Matrix Bank. In many
cases, this referral allows Matrix Bank to purchase loans without having to
participate in a competitive bid process. In addition, with Matrix Financial
acting as servicer for these loan portfolios, Matrix Bank is able to perform due
diligence on the portfolios more efficiently and at a lower cost than
transactions executed in the open market.
United Financial's affiliation with UCM provides both companies with
significant benefits. The relationships and contacts of United Financial provide
a resource for UCM to present the risk management services it provides. The
opportunities for United Financial to refer its clients to an affiliate for risk
management and hedging activities provides another service to its clients to
further strengthen the relationship. Both United Financial and UCM provide
services that relate to analysis of servicing portfolios. Since accurate and
timely data is critical in assisting a client, the sharing of information allows
two companies an opportunity to provide professional advice and execution
without duplicating the clients efforts in providing the necessary information.
Another strong affiliation exists between Sterling Trust and Matrix Bank.
At March 31, 1997, Sterling Trust had trust assets under administration in
excess of $1.2 billion. Historically, approximately 6% to 8% of the assets
under administration have been maintained in interest-earning deposits. In
February 1997, Sterling Trust moved approximately $80.0 million of deposits from
a third-party institution to Matrix Bank.
Comparison of Results of Operations for the Three Months Ended March 31, 1997
and 1996
Net Income; Return on Average Equity. Net income increased to $1.8 million
for the period ended March 31, 1997, as compared to a $4,000 loss for the period
ended March 31, 1996. Return on average equity increased to 21.05% for the
period ended March 31, 1997, as compared to a negative return of (0.15)% for the
period ended March 31, 1996, both on an annualized basis. The increase in return
on average equity was due to the increase in net income for the first quarter of
1997, as compared to the loss in 1996 created by the $1.9 million secondary
marketing loss recognized in the first quarter of 1996. See "--Loan
Origination."
Net Interest Income. The Company's earnings depend, in part, upon the level
of its net interest income. Net interest income is the difference between
interest income, principally derived from the Company's loan portfolios, and
interest expense, principally derived from customer deposits and Company
borrowings. Changes in net interest income result primarily from changes in
volume and spread. Volume refers to the average dollar amount of interest-
earning assets and interest-bearing liabilities. Spread refers to the difference
between the average yield on interest-earning assets and the average cost of
interest-bearing liabilities. Net interest income before provision for loan and
valuation losses increased $1.2 million, or 108.0%, to $2.3 million for the
period ended March 31, 1997, as compared to $1.1 million for the period ended
March 31, 1996. The increase was attributable to positive increases in the net
interest margin and volume of interest-earning assets. The Company's net
interest margin increased to 3.58% for the period ended March 31, 1997, as
compared to 2.81% for the period ended March 31, 1996. This change was
attributable to the decrease in the Company's cost of interest-bearing
liabilities, which declined to 5.83% for the period ended March 31, 1997, as
compared to 7.02% for the quarter ended March 31, 1996, netted against a
decrease in the yield on interest-earning assets, which
24
<PAGE>
decreased to 8.37% for the period ended March 31, 1997, as compared to 9.31% for
the period ended March 31,1996. The decrease in the Company's yield on interest-
earning assets was related to the yield on loans (net), which was primarily
attributable to a decrease in the amortization and payoff of loans that had
significant discounts associated therewith in first quarter 1996. The decrease
in the cost of interest-bearing liabilities was attributable to the lower cost
of borrowed funds and additional no cost or low cost deposits. The Company's
average interest-earning assets increased $101.5 million, or 63.1%, to $262.6
million for the period ended March 31, 1997, as compared to $161.1 million for
the period ended March 31, 1996. This increase was attributable primarily to the
increase in the deposits associated with the additional mortgage servicing
custodial escrow balances and the deposits directed from Sterling Trust. For a
tabular presentation of the changes in net interest income due to changes in
volume of interest-earning assets and changes in interest rates, see "--Analysis
of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes."
Provision for Loan and Valuation Losses. The provision for loan and
valuation losses is an amount charged to expense to provide for estimated losses
that may occur in the future on existing loans. In order to determine the
amount of the provision, the Company conducts a monthly review of its loan
portfolio and a quarterly evaluation of the adequacy of its valuation reserves.
This systematic evaluation includes an allocation of the valuation reserve to
each loan category, based on pre-determined loss reserve factors. For example,
a higher loss reserve factor is applied against commercial real estate loans
than against residential loans. Within each loan category, the loans are
further stratified by delinquency. Loss reserve factors are higher for
delinquent loans. This evaluation also takes into consideration current
economic and market conditions, loan portfolio growth, monthly loan losses and
recoveries, changes in non-performing loans, and the current loan collateral
values. Provision for loan and valuation losses increased $59,000, or 178.8%,
to $92,000 for the period ended March 31, 1997, as compared to $33,000 for the
period ended March 31, 1996. This increase was primarily attributable to the
increase in the dollar amount of loans held for sale. For a discussion of the
Company's allowance for loan and valuation losses as it relates to nonperforming
assets, see "--Asset and Liability Management--Nonperforming Assets."
Loan Administration. Loan administration fees represent service fees and
other income earned from servicing loans for various investors. Loan
administration fees include service fees that are based on a contractual
percentage of the outstanding principal balance on loans serviced plus late fees
and other ancillary charges. Income is recognized when the related payments are
received. Loan administration fees increased $1.9 million, or 86.1%, to $4.0
million for the period ended March 31, 1997, as compared to $2.1 million for the
period ended March 31, 1996. 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. This increase was primarily attributable to
the increase in the average outstanding principal balance underlying the
Company's mortgage servicing rights portfolio for the period ended March 31,
1997, as compared to the period ended March 31, 1996. The mortgage loan
servicing portfolio increased by $1.8 billion, or 105.9%, to $3.5 billion for
the period ended March 31, 1997, as compared to $1.7 billion for the period
ended March 31, 1996.
Brokerage Fees. Brokerage fees increased $453,000, or 66.2%, to $1.1
million for the period ended March 31, 1997, as compared to $684,000 for the
period ended March 31, 1996. This increase was a direct result of the amount of
the residential mortgage servicing portfolio's brokered by United Financial in
the first quarter of 1997, as compared to the same period for 1996. The amount
of servicing brokered during the first quarter of 1996 was lower than normal, as
mortgage banking firms and financial institutions deferred servicing sales
pending their review of the impact of FAS 122 on their operations. See
"Supervision and Regulation--Federal Savings Bank Operations--FAS122."
Trust Services Fees. Trust services fees increased $100,000, or 12.8%, to
$879,000 for the quarter ended March 31, 1997, as compared to $779,000 for the
first quarter of 1996. This increase was associated primarily with the growth
in both accounts and assets under administration at Sterling Trust.
Gain on Sale of Loans. Gain on the sale of loans decreased $318,000, or
72.9%, to $118,000 for the period ended March 31, 1997, as compared to $436,000
for the period ended March 31, 1996. Gain on sale of loans can fluctuate
significantly from quarter to quarter based on a variety of factors, such as the
current interest rate environment, the supply of loan portfolios in the market,
the mix of loan portfolios available in the market, the type of loan portfolios
25
<PAGE>
the Company purchases, and the particular loan portfolios the Company elects to
sell. The decrease was primarily attributable to the mix and amount of the loan
portfolio that the Company sold. The Company's strategy has been and will
continue to be to match its purchases and sales while managing its desired
growth. The strategy of matching the Company's purchases and sales while
growing the assets of Matrix Bank allows the Company to leverage Matrix Bank's
capital and increase the net interest income. See "Business--Purchase and Sale
of Bulk Loan Portfolios."
Gain on Sale of Mortgage Servicing Rights. Gain on the sale of mortgage
servicing rights increased to $1.4 million for the period ended March 31, 1997,
while none were sold for the period ended March 31, 1996. In terms of aggregate
outstanding principal balances of mortgage loans underlying such servicing
rights, the Company sold $503.8 million in purchased GNMA mortgage servicing
rights for the period ended March 31, 1997. The sale in 1997 was consummated to
provide the Company with the opportunity to diversify its servicing portfolio
and generate earnings.
Loan Origination. Loan origination income includes all mortgage loan
origination fees, secondary marketing activity on new loan originations, and
servicing released premiums on new originations sold, net of outside origination
costs. Loan origination income increased $942,000 to $641,000 for the period
ended March 31, 1997, as compared to a loss of $301,000 for the period ended
March 31, 1996. The first quarter 1996 loss was caused by a $1.9 million
secondary marketing loss in March 1996 that was attributable to the failure of a
former officer of Matrix Financial to adhere to the established hedging
policies. As a result, certain closed loans were not adequately hedged,
resulting 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 the 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 change rapidly and
significantly. Wholesale residential mortgage loan production during the
quarter ended March 31, 1997 declined $135.9 million, or 58.7%, to $95.5,
million as compared to $231.5 million for the period ended March 31, 1996,
primarily due to an unusually active residential lending market during the first
quarter of 1996.
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. The management and reporting changes were made
in two major areas. First, the Company reorganized the reporting structure for
the production division related to the Company's secondary marketing activities.
A new Chief Lending Officer was hired to manage loan production and the related
operations for Matrix Financial, and a new secondary marketing manager was hired
to focus specifically on managing the interest rate risk of this business line.
Second, the Company developed and implemented additional policies and procedures
for production and secondary marketing activities to decrease the interest rate
risk exposure of the Company.
The Company also divided the reporting hierarchy for the production and
secondary marketing responsibilities, thus reducing the production pressures on
secondary marketing and allowing the Company to focus specifically on interest
rate risk management. The secondary marketing department has been relocated from
Atlanta to Phoenix and it reports directly to the finance division of Matrix
Financial. The reorganization and centralization of the secondary marketing
department has been supplemented by the development of more formalized pipeline,
interest rate risk management, and hedging policies and procedures to further
reduce secondary marketing risks. The secondary marketing manager provides daily
analysis of loan pipeline, hedge positions, and mark-to-market valuations to
insure the Company's hedging policies are being followed. This analysis is
reviewed daily by the Chief Financial Officer of Matrix Financial and a weekly
summary is provided to the executive officers of Matrix Capital. New procedures
and policies regarding the establishment of customers' interest rates on
pipeline loans (an "interest rate lock"), interest rate lock tracking, and
authorizations for interest rate lock extensions and pricing exceptions have
been implemented. With these changes, the Company believes it has reduced the
risk of significant secondary marketing losses such as the one experienced in
March 1996.
26
<PAGE>
Noninterest Expense. Noninterest expense increased $3.0 million, or 58.6%,
to $8.3 million for the period ended March 31, 1997, as compared to $5.3 million
for the period ended March 31, 1996. This increase was primarily due to the
sub-servicing expenses related to acquired mortgage servicing portfolios, a new
operating subsidiary, an operating subsidiary not fully operational in the first
quarter of 1996, and additional expenses related to the discontinuance of one
operating subsidiary that originated sub-prime automobile loans. The following
table details the major components of non-interest expense for the periods
indicated:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------------
1996 1997
----------------------
(In thousands)
<S> <C> <C>
Compensation and employee benefits..................... $ 2,827 $ 3,461
Amortization of mortgage servicing rights.............. 501 1,527
Occupancy and equipment................................ 414 501
Professional fees...................................... 100 200
Data processing........................................ 153 152
Other general and administrative....................... 1,256 2,485
------- -------
Total................................. $ 5,251 8,326
======= =======
</TABLE>
Compensation and employee benefits increased $634,000, or 22.4%, to $3.5
million for the period March 31, 1997, as compared to $2.8 million for the
period ended March 31, 1996. This increase was the result of the continued
expansion of the Company's business lines in 1997, which included the opening of
one new branch of Matrix Bank in late 1996, the addition of one new subsidiary
that will focus on providing risk management services to institutional clients,
and the increased amount of residential mortgage servicing portfolios brokered
(employees are compensated on a commission basis). The Company had an increase
of 44 employees, or 18.7%, to 279 employees at period end March 31, 1997, as
compared to 235 employees at period end March 31, 1996.
Amortization of mortgage servicing rights increased $1.0 million, or
204.8%, to $1.5 million for the period ended March 31, 1997, as compared to
$501,000 for the period ended March 31, 1996. Amortization of mortgage
servicing rights fluctuates based on the size of the Company's mortgage
servicing portfolio and the prepayment rates experienced with respect to the
underlying mortgage loan portfolio. The Company's portfolio increased to $3.5
billion at March 31, 1997, as compared to $1.7 billion at March 31, 1996.
The remainder of noninterest expense, which includes occupancy and
equipment expenses, professional fees, data processing costs, and other
expenses, increased $1.4 million, or 73.6%, to $3.3 million for the period ended
March 31, 1997, as compared to $1.9 million for the period ended March 31, 1996.
The increase was primarily attributable to the sub-servicing expenses related to
the acquired mortgage servicing portfolios, expansion of both existing and new
business lines, and an additional charge for the disposition of the sub-prime
automobile loan subsidiary.
Provision for Income Taxes. Provision for income taxes increased $1.1
million to $1.1 million for the period ended March 31, 1997, as compared to a
$14,000 benefit for the year period March 31, 1996. The increase was due to the
increase in pre-tax income.
Comparison of Results of Operations for the Years Ended December 31, 1996 and
1995
Net Income; Return on Average Equity. Net income decreased $353,000, or
9.0%, to $3.6 million for the year ended December 31, 1996, as compared to $3.9
million for the year ended December 31, 1995. Return on average equity decreased
to 24.3% for the year ended December 31, 1996, as compared to 47.6% for the year
ended December 31, 1995. The decrease in return on average equity was primarily
due to the Company's policy of retaining all of its earnings and the issuance of
2,012,500 shares of additional stock as part of its initial public offering in
the fourth quarter, both of
27
<PAGE>
which increased its capital base, as well as the reserve for the probable
settlement of certain outstanding litigation, the first quarter 1996 secondary
marketing loss, a one-time expense of $450,000 (pre-tax) for the SAIF
assessment, the reserve for the probable settlement of certain outstanding
litigation, and the recourse losses related to the sub-prime automobile retail
installment contracts repurchased by a subsidiary of Matrix Bank. See "--Loan
Origination," "--Asset Liability Management--Nonperforming Assets," and
"Business--Legal Proceedings."
Net Interest Income. Net interest income before provision for loan and
valuation losses increased $2.5 million, or 68.7%, to $6.1 million for the year
ended December 31, 1996, as compared to $3.6 million for the year ended December
31, 1995. The increase for the year ended December 31, 1996 was attributable to
the increase in the Company's yield on interest earning assets, which increased
to 9.43% for the year ended December 31, 1996, as compared to 8.54% for the year
ended December 31, 1995, and a decrease in the cost of interest-bearing
liabilities, which decreased to 6.59% for the year ended December 31, 1996, as
compared to 7.14% for the year ended December 31, 1995. The increase in the
Company's yield on interest-earning assets was primarily attributable to an
increase in the yield on the Company's adjustable rate loan portfolio, the
amortization and payoffs of loans that had significant discounts, and the
origination of higher yielding consumer loans. The decrease in the cost of
interest-bearing liabilities was attributable to the lower cost of borrowed
funds. The Company's net interest margin increased to 3.45% for the year ended
December 31, 1996, as compared to 2.84% for the year ended December 31, 1995.
The Company's average interest-earning assets increased $49.0 million, or 38.8%,
to $175.4 million for the year ended December 31, 1996, as compared to $126.4
million for the year ended December 31, 1995. This increase was attributable
primarily to the increase in the size of the Company's loan portfolio held for
sale. For a tabular presentation of the changes in net interest income due to
changes in volume of interest-earning assets and changes in interest rates, see
"--Analysis of Changes in Net Interest Income Due to Changes in Interest Rates
and Volumes."
Provision for Loan and Valuation Losses. Provision for loan and valuation
losses decreased $258,000, or 64.3%, to $143,000 for the year ended December 31,
1996, as compared to $401,000 for the year ended December 31, 1995. This
decrease was primarily attributable to the improvement in the portion of the
Company's residential loan portfolio classified as non-accrual. For a
discussion of the Company's allowance for loan and valuation losses as it
relates to nonperforming assets, see "--Asset and Liability Management--
Nonperforming Assets."
Loan Administration. Loan administration fees increased $1.1 million, or
13.9%, to $8.8 million for the year ended December 31, 1996, as compared to $7.7
million for the year ended December 31, 1995. This increase was primarily
attributable to the increase in the average outstanding principal balance
underlying the Company's mortgage servicing rights portfolio for the year ended
December 31, 1996, as compared to the year ended December 31, 1995. Loan
administration fees are affected by factors that include the size of the
Company's residential mortgage loan servicing portfolio, the servicing spread,
the timing of payment collections, and the amount of ancillary fees collected.
The mortgage loan servicing portfolio owned increased by $908.7 million, or
56.9%, to $2.5 billion for the year ended December 31, 1996, as compared to $1.6
billion for the year ended December 31, 1995, with the majority of the increase
occurring in the fourth quarter of 1996.
Brokerage Fees. Brokerage fees decreased $423,000, or 8.8%, to $4.4
million for the year ended December 31, 1996, as compared to $4.8 million for
the year ended December 31, 1995. This decrease was a direct result of the
amount of the residential mortgage servicing portfolios brokered by United
Financial. The balance of residential mortgage servicing portfolios brokered by
United Financial, measured in terms of aggregate unpaid principal balances on
the underlying loans, decreased $6.2 billion, or 19.0%, to $26.4 billion the
year ended December 31, 1996, as compared to $32.6 billion for the year ended
December 31, 1995. The decrease was primarily due to the amount of servicing
brokered in the first quarter of 1996, as mortgage banking firms and financial
institutions deferred servicing sales pending their review of the impact of FAS
122 on their portfolios.
Trust Services Fees. Trust services fees increased $192,000, or 6.7%, to
$3.1 million for the year ended December 31, 1996, as compared to $2.9 million
for the year ended December 31, 1995. The increase in fee income is related to
increases in both assets under administration and the number of accounts being
serviced.
28
<PAGE>
Gain on Sale of Loans and Mortgage Backed Securities. Gain on the sale of
loans and mortgage-backed securities increased $97,000, or 3.0%, to $3.4 million
the year ended December 31, 1996, as compared to $3.3 million for the year ended
December 31, 1995. Gain on sale of loans can fluctuate significantly from
quarter to quarter and from year to year based on a variety of factors, such as
the current interest rate environment, the supply of loan portfolios in the
market, the mix of loan portfolios available in the market, the type of loan
portfolios the Company purchases, and the particular loan portfolios the Company
elects to sell. The Company's strategy has been and will continue to be to match
its purchases and sales while managing its desired growth.
Gain on Sale of Mortgage Servicing Rights. Gain on the sale of mortgage
servicing rights increased $2.0 million, or 177.7%, to $3.2 million for the year
ended December 31, 1996, as compared to $1.2 million for the year ended December
31, 1995. In terms of aggregate outstanding principal balances of mortgage
loans underlying such servicing rights, the Company sold $646.0 million in
purchased mortgage servicing rights for the year ended December 31, 1996, as
compared to $31.8 million for the year ended December 31, 1995. A portion of
the servicing rights sold in 1996 pertained to mortgage servicing portfolios
that the Company combined with the related loan participation interests and then
sold as one asset. The servicing portfolio sold in 1995 consisted of loans with
non-standard payment accrual methodologies, including the Rule of 78's and daily
simple interest accruals, and were secured by second liens. The sales in 1996
were consummated primarily to generate additional cash flow in order to acquire
more desirable residential servicing portfolios and to generate revenues.
Loan Origination. Loan origination income decreased $508,000, or 24.6%, to
$1.6 million for the year ended December 31, 1996, as compared to $2.1 million
for the year ended December 31, 1995, even though the Company experienced an
increase in wholesale residential mortgage loan production of $194.4 million, or
50.0%, to $583.3 million for the year ended December 31, 1996, as compared to
$388.9 million for the year ended December 31, 1995. This decrease was
primarily attributable to the $1.9 million secondary marketing loss that
occurred in March 1996.
Noninterest Expense. Noninterest expense increased $6.2 million, or 30.3%
to $26.7 million for the year ended December 31, 1996, as compared to $20.5
million for the year ended December 31, 1995. This increase was primarily due
to the one-time SAIF assessment of $450,000 (pre-tax), reserve for the probable
settlement of certain outstanding litigation, expenses related to new operating
subsidiaries, and expenses related to the operating loss and recourse losses on
sub-prime automobile installment contracts sold by a subsidiary of Matrix Bank
and the ceasing of its operations in December 1996. The following table details
the major components of noninterest expense for the periods indicated:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------
1995 1996
---------- ----------
(In thousands)
<S> <C> <C>
Compensation and employee benefits.................. $ 10,527 $ 12,722
Amortization of mortgage servicing rights........... 1,817 2,432
Occupancy and equipment............................. 1,451 1,776
Professional fees................................... 783 666
Data processing..................................... 560 642
Other............................................... 5,315 8,417
--------- ---------
Total.......................................... $ 20,453 $ 26,655
========= =========
</TABLE>
Compensation and employee benefits increased $2.2 million, or 20.9%, to
$12.7 million for the year ended December 31, 1996, as compared to $10.5 million
for the year ended December 31, 1995. This increase was the result of the
expansion of the Company's business lines in 1996, including the opening of two
new branches of Matrix Bank, the formation of two new operating subsidiaries,
and the increased amount of wholesale mortgage loan originations (employees in
the mortgage loan origination area are typically compensated on a commission
basis). The Company had
29
<PAGE>
an increase of 34 employees, or 15.0%, to 260 employees at year end December 31,
1996, as compared to 226 employees at year end December 31, 1995.
Amortization of mortgage servicing rights increased $615,000, or 33.8%,
to $2.4 million for the year ended December 31, 1996, as compared to $1.8
million for the year ended December 31, 1995. Amortization of mortgage
servicing rights fluctuates based on the size of the Company's mortgage
servicing portfolio and the prepayment rates experienced with respect to the
underlying mortgage loan portfolio.
The remainder of noninterest expense, which includes occupancy and
equipment expenses, professional fees, data processing costs, and other
expenses, increased $3.4 million, or 41.8%, to $11.5 million for the year ended
December 31, 1996, as compared to $8.1 million for the year ended December 31,
1995. The increase was primarily attributable to the reserve for the probable
settlement of certain outstanding litigation (approximately $600,000), recourse
losses on automobile installment contracts sold by a subsidiary of Matrix Bank
and the ceasing of its operations in December 1996 (approximately $600,000), the
one-time SAIF assessment ($450,000), expansion of both existing and new business
lines, the formation of two operating subsidiaries, and the opening of two bank
branches.
Provision for Income Taxes. Provision for income taxes decreased
$191,000, or 7.7%, to $2.3 million for the year ended December 31, 1996, as
compared to $2.5 million for the year ended December 31, 1995. The decrease was
due to the decline in pre-tax income. The two periods had comparable effective
income tax rates of 39.0% and 38.6%, respectively.
Comparison of Results of Operations for the Years Ended December 31, 1995 and
1994
Net Income; Return on Average Equity. Net income increased $803,000, or
25.7%, to $3.9 million for the year ended December 31, 1995, as compared to $3.1
million for the year ended December 31, 1994. Return on average equity decreased
to 47.6% for the year ended December 31, 1995, as compared to 57.1% for the year
ended December 31, 1994. The decrease in return on average equity was primarily
due to the Company's policy of retaining all of its earnings, which increased
the Company's equity base.
Net Interest Income. Net interest income before provision for loan and
valuation losses decreased $412,000, or 10.3%, to $3.6 million for the year
ended December 31, 1995, as compared to $4.0 million for the year ended December
31, 1994. The decrease for the year ended December 31, 1995 was attributable
primarily to the increase in the Company's cost of interest-bearing liabilities,
which increased to 7.14% for the year ended December 31, 1995, as compared to
5.16% for the year ended December 31, 1994. The increase in the cost of
interest-bearing liabilities was primarily related to borrowings used to fund
the increase in the mortgage loan originations. The Company's mortgage loan
originations are funded through borrowings based on short-term interest rates.
The interest rate spread between short-term interest rates and long-term
interest rates generally was lower during the year ended December 31, 1995, as
compared to the year ended December 31, 1994. The decrease occurred primarily
because the cost of interest-bearing liabilities increased more rapidly than the
yield on interest-earning assets. The effect of smaller spreads between long-
term interest rates and short-term interest rates means generally that the
Company earns less net interest income on its wholesale mortgage loan
originations, which, in turn, reduces its net interest margin (net interest
income before provision for loan losses divided by average interest-earning
assets). The Company's net interest margin decreased to 2.84% for the year
ended December 31, 1995, as compared to 4.64% for the year ended December 31,
1994. The effect of the lower interest rate margin was partially offset by an
increase in the Company's average interest-earning assets. The Company's
average interest-earning assets increased $40.1 million, or 46.4%, to $126.4
million for the year ended December 31, 1995, as compared to $86.3 million for
the year ended December 31, 1994. This increase was attributable primarily to
the increase in the size of the Company's loan portfolio held for sale. For a
tabular presentation of the changes in net interest income due to changes in
volume of interest-earning assets and changes in interest rates, see "--Analysis
of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes."
Provision for Loan and Valuation Losses. The provision for loan and
valuation losses increased $185,000, or 85.6%, to $401,000 for the year ended
December 31, 1995, as compared to $216,000 for the year ended December 31,
30
<PAGE>
1994. This increase was attributable primarily to the corresponding increase in
the size of the Company's loan portfolio. For a discussion of the Company's
allowance for loan and valuation losses as it relates to nonperforming assets,
see "--Asset and Liability Management--Nonperforming Assets."
Loan Administration. Loan administration fees increased $823,000, or 11.9%,
to $7.7 million for the year ended December 31, 1995, as compared to $6.9
million for the year ended December 31, 1994. This increase was attributable
primarily to the increase in the average outstanding principal balance
underlying the Company's mortgage servicing rights portfolio for the year ended
December 31, 1995, as compared to the year ended December 31, 1994.
Brokerage Fees. Brokerage fees increased $770,000, or 19.2%, to $4.8
million for the year ended December 31, 1995, as compared to $4.0 million for
the year ended December 31, 1994. The increase was primarily attributable to an
increase in the volume of residential mortgage servicing portfolios brokered by
United Financial. The balance of residential mortgage servicing portfolios
brokered by United Financial, in terms of aggregate unpaid principal balances on
the underlying loans, increased $3.7 billion, or 12.8%, to $32.6 billion for the
year ended December 31, 1995, as compared to $28.9 billion for the year ended
December 31, 1994.
Trust Services Fees. Trust services fees increased $381,000, or 15.3%,
to $2.9 million for the year ended December 31, 1995, as compared to $2.5
million for the year ended December 31, 1994. The increase in fee income is
related to increases in the volume of accounts being administered as well as
increases in the volume of assets.
Gain on Sale of Loans and Mortgage Backed Securities. Gain on sale of
mortgage loans and mortgage-backed securities increased by $1.7 million, or
105.8%, to $3.3 million for the year ended December 31, 1995, as compared to
$1.6 million for the year ended December 31, 1994. The increase was attributable
primarily to the type of loan portfolios that the Company purchased during 1995.
The Company's strategy has been and will continue to be to match its purchases
and sales while managing its desired growth. Therefore, the increase of $1.7
million in gain on loan sales was attributable to the Company's loan purchases,
which affected the mix and, to a limited extent, the amount of the loan
portfolios that the Company sold.
Gain on Sale of Mortgage Servicing Rights. Gain on sale of mortgage
servicing rights increased $480,000, or 70.2%, to $1.2 million for the year
ended December 31, 1995, as compared to $684,000 for the year ended December 31,
1994. This increase resulted primarily from one particular sale of mortgage
servicing rights with aggregate unpaid principal balances of $16.2 million,
resulting in a gain of $1.0 million. The servicing portfolio sold consisted of
loans with non-standard payment accrual methodologies, including the Rule of 78s
and daily simple interest accruals, and were secured by second liens. The sale
allowed the Company to deploy the cash generated to purchase new servicing
portfolios considered by the Company to be more conforming in nature, and
thereby enhance the efficiencies of the Company's servicing operations.
Loan Origination. Loan origination income increased $775,000, or 59.9%,
to $2.1 million for the year ended December 31, 1995, as compared to $1.3
million for the year ended December 31, 1994. The increase of $775,000 was
primarily the result of the increase in new loan origination volume experienced
by Matrix Financial during 1995. The new loan origination volume increased
$205.8 million, or 112.4%, to $388.9 million for the year ended December 31,
1994.
31
<PAGE>
Noninterest Expense. Noninterest expense increased $3.9 million, or
23.3%, to $20.5 million for the year ended December 31, 1995, as compared to
$16.6 million for the year ended December 31, 1994. This increase was primarily
a result of the continued expansion and diversification of the Company's
operations during 1995. The following table details the major components of
noninterest expense for the periods indicated:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------
1994 1995
---------- ----------
(In thousands)
<S> <C> <C>
Compensation and employee benefits............. $ 8,929 $ 10,527
Amortization of mortgage servicing rights...... 1,185 1,817
Occupancy and equipment........................ 1,434 1,451
Professional fees.............................. 638 783
Data processing................................ 520 560
Other.......................................... 3,887 5,315
------ ------
Total....................................... $ 16,593 $ 20,453
========= =========
</TABLE>
Compensation and employee benefits increased $1.6 million, or 17.9%, to
$10.5 million for the year ended December 31, 1995, as compared to $8.9 million
for the year ended December 31, 1994. The majority of the increase was directly
related to the increase in the brokerage volume at United Financial and the loan
origination volume at Matrix Financial. The majority of employees engaged in
these activities are paid on a commission basis. The brokerage volume increased
$3.7 billion, or 12.8%, and the loan originations increased $205.8 million, or
112.4%, resulting in an increase in compensation of approximately $800,000. The
remainder of the increase is attributable to the Company's development and
expansion of both existing and new business lines during 1995, which also
resulted in the expansion of the Company's employee base. The Company had a
total of 226 employees at December 31, 1995, as compared to 203 at December 31,
1994.
Amortization of mortgage servicing rights increased $632,000, or 53.3%, to
$1.8 million for the year ended December 31, 1995, as compared to $1.2 million
for the year ended December 31, 1994. This increase was due to the growth in the
Company's average outstanding balance of servicing rights, but was partially
offset by the slower rate of prepayments experienced during the year ended
December 31, 1995, as compared to the year ended December 31, 1994.
The remaining non-interest expense, including occupancy and equipment
expenses, professional fees, data processing costs, and other expenses, such as
telephone, postage, advertising, and insurance, increased $1.6 million, or
25.1%, to $8.1 million for the year ended December 31, 1995, as compared to $6.5
million for the year ended December 31, 1994. The increase was the result of the
development and expansion of both existing and new business lines.
Provisions for Income Taxes. Provisions for income taxes increased
$455,000, or 22.6%, to $2.5 million for the year ended December 31, 1995, as
compared to $2.0 million for the year ended December 31, 1994. The increase was
due to the increase in pre-tax income. The two periods had comparable effective
tax rates of 38.6% and 39.2%, respectively.
Average Balance Sheet
The following table sets forth for the periods and as of the dates
indicated information regarding the Company's average balances of assets and
liabilities, as well as the dollar amounts of interest income from interest-
earning assets and interest expense on interest-bearing liabilities and the
resultant yields or costs. Average interest rate information for the three
months ended March 31, 1996 and 1997 has been annualized. Ratio, yield, and rate
information are based on average daily balances where available; otherwise,
average monthly balances have been used. Nonaccrual loans are included in the
calculation of average balances for loans for the periods indicated.
32
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
1994 1995 1996
---------------------------- --------------------------- ----------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans receivable, net of discounts $79,393 $6,681 8.42% $121,206 $10,412 8.59% $162,648 $15,733 9.67%
Mortgage-backed securities........ -- -- -- -- -- -- 4,653 351 7.54
Interest-earning deposits......... 6,201 314 5.06 3,845 288 7.49 5,556 312 5.62
FHLB stock........................ 716 35 4.89 1,321 86 6.51 2,585 153 5.92
------- ------ ---- -------- ------- ---- -------- ------- ----
Total interest-earning assets... 86,310 7,030 8.15 126,372 10,786 8.54 175,442 16,549 9.43
Noninterest earning assets:
Cash.............................. 2,038 2,570 3,085
Allowance for loan and
valuation losses................ (690) (836) (964)
Premises and equipment............ 3,999 5,213 6,976
Other assets...................... 7,992 18,075 26,199
------- -------- --------
Total noninterest-earning assests 13,339 25,022 35,296
------- -------- --------
Total assets.................... $99,649 $151,394 $210,738
======= ======== ========
Liabilities and
Shareholder's Equity
Interest-bearing liabilities:
Passbook accounts................. $2,788 72 2.58 $2,394 85 3.55 $2,389 82 3.43
Money market and negotiable
order of withdrawal ("NOW")
accounts........................ 9,481 271 2.86 8,320 292 3.51 11,964 468 3.91
Certificates of deposit........... 29,273 1,138 3.89 33,332 1,807 5.42 54,824 3,210 5.85
FHLB borrowings................... 3,071 213 6.94 17,662 1,113 6.30 35,838 2,039 5.69
Borrowed money.................... 14,008 1,332 9.51 39,021 3,897 9.99 54,171 4,691 8.66
------ ----- ---- ------- ----- ---- ------- ------ ----
Total interest-bearing liabilities 58,621 3,026 5.16 100,729 7,194 7.14 159,186 10,490 6.59
------ ----- ---- ------- ----- ---- ------- ------ ----
Noninterest-bearing liabilities:
Demand deposits (including
custodial escrow balances)...... 30,559 35,794 27,934
Other liabilities................. 5,001 6,632 8,927
------ ------ ------
Total noninterest bearing liabilities 35,560 42,426 36,861
Shareholders' equity.............. 5,468 8,239 14,691
------ ------ ------
Total liabilities and
shareholders' equity............ $99,649 $151,394 $210,738
======= ======== ========
Net interest income before provision
for loan and valuation losses..... $4,004 $3,592 $6,059
====== ====== ======
Interest rate spread................ 2.99% 1.40% 2.84%
===== ===== =====
Net interest margin................. 4.64% 2.84% 3.45%
===== ===== =====
Ratio of average interest-earning
assets to average interest-bearing
liabilities....................... 147.23% 125.46% 110.21%
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------------------
1996 1997
----------------------------- -------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans receivable, net of discounts $154,126 $3,655 9.49% $229,984 $5,084 8.84%
Mortgage-backed securities........ -- -- -- -- -- --
Interest-earning deposits......... 4,658 58 4.98 29,781 371 4.98
FHLB stock........................ 2,285 34 5.95 2,871 41 5.71
-------- ------ ---- -------- ------ ----
Total interest-earning assets... 161,069 3,747 9.31 262,636 5,496 8.37
Noninterest earning assets:
Cash.............................. 2,052 12,230
Allowance for loan and
valuation losses................ (957) (1,062)
Premises and equipment............ 6,472 7,850
Other assets...................... 23,753 56,557
-------- --------
Total noninterest-earning assets 31,320 75,575
-------- --------
Total assets.................... $192,389 $338,211
======== ========
Liabilities and
Shareholder's Equity
Interest-bearing liabilities:
Passbook accounts................. $2,530 20 3.16 $2,799 28 3.97
Money market and negotiable
order of withdrawal ("NOW")
accounts........................ 13,380 132 3.95 59,320 525 3.54
Certificates of deposit........... 37,841 554 5.86 74,301 1,095 5.89
FHLB borrowings................... 32,418 452 5.58 20,152 277 5.50
Borrowed money.................... 62,865 1,459 9.28 59,233 1,221 8.25
------- ----- ---- ------- ----- ----
Total interest-bearing liabilities 149,034 2,617 7.02 215,805 3,146 5.83
------- ----- ---- ------- ----- ----
Noninterest-bearing liabilities:
Demand deposits (including
custodial escrow balances)...... 26,206 65,941
Other liabilities................. 6,134 23,134
------- -------
Total noninterest bearing liabilities 32,340 89,075
Shareholders' equity.............. 11,015 33,331
------- -------
Total liabilities and
shareholders' equity............ $192,389 $338,211
======== ========
Net interest income before provision
for loan and valuation losses..... $1,130 $2,350
====== ======
Interest rate spread................ 2.29% 2.54%
===== =====
Net interest margin................. 2.81% 3.58%
===== =====
Ratio of average interest-earning
assets to average interest-bearing
liabilities....................... 108.08% 121.70%
======= =======
</TABLE>
33
<PAGE>
Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and
Volume
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase or decrease
related to changes in balances and changes in interest rates. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (i.e., changes in
volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate
multiplied by old volume). For purposes of this table, changes attributable to
both rate and volume, which cannot be segregated, have been allocated
proportionately to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1995 vs 1994 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 of discounts......... $3,519 $ 212 $3,731 $3,561 $ 1,760 $ 5,321
Mortgage-backed securities................. -- ------ -- -- 351 351
Interest-earning deposits.................. (119) 93 (26) 128 (104) 24
FHLB stock................................. 30 21 51 82 (15) 67
------ ------ ------ ------ ------- -------
Total interest-earning assets........... 3,430 326 3,756 3,771 1,992 5,763
------ ------ ------ ------ ------- -------
Interest-bearing liabilities:
Passbook accounts.......................... (10) 23 13 -- (3) (3)
Money market and NOW accounts.............. (33) 54 21 128 48 176
Certificates of deposit.................... 158 511 669 1,165 238 1,403
FHLB advances.............................. 1,012 (112) 900 1,145 (219) 926
Borrowed money............................. 2,378 187 2,565 1,513 (719) 794
------ ------ ------ ------ ------- -------
Total interest-bearing liabilities...... 3,505 663 4,168 3,951 (655) 3,296
------ ------ ------ ------ ------- -------
Change in net interest income before
provision for loan and
valuation losses........................... $ (75) $ (337) $ (412) $ (180) $ 2,647 $ 2,467
====== ====== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 vs 1996
-----------------------------------
Increase (Decrease)
Due to Change in
-----------------------------------
Volume Rate Total
-------- ------ -------
(In thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net of discounts......... $1,799 $ (370) $1,429
Mortgage-backed securities................. -- -- --
Interest-earning deposits.................. 313 -- 313
FHLB stock................................. 10 (3) 7
------ ------- ------
Total interest-earning assets........... 2,122 (373) 1,749
------ ------- ------
Interest-bearing liabilities:
Passbook accounts.......................... 2 6 8
Money market and NOW accounts.............. 453 (60) 393
Certificates of deposit.................... 534 7 541
FHLB advances.............................. (171) (4) (175)
Borrowed money............................. (84) (154) (238)
------ ------- ------
Total interest-bearing liabilities...... 734 (205) 529
------ ------- ------
Change in net interest income before
provision for loan and
valuation losses........................... $1,388 $ (168) $1,220
====== ======= ======
</TABLE>
34
<PAGE>
Asset and Liability Management
General. The Company structures its operations to derive the majority of
its revenues and earnings from noninterest income. However, a portion of the
Company's revenues and net income is derived from net interest income and,
accordingly, the Company strives to manage its interest-earning assets and
interest-bearing liabilities to generate what management believes to be an
appropriate contribution from net interest income. Asset and liability
management seeks to control the volatility of the Company's performance due to
changes in interest rates. The Company constantly attempts to achieve an
appropriate relationship between rate-sensitive assets and rate-sensitive
liabilities. The Company has responded to interest rate volatility by developing
and implementing asset and liability management strategies designed to increase
its noninterest income and improve the match between interest-earning assets and
interest-bearing liabilities.
These strategies include:
. Utilizing mortgage servicing rights as a source of noninterest income and
as a countermeasure against the decline in the value of mortgage loans
during a rising interest rate environment. Increases in interest rates tend
to increase the value of mortgage servicing rights because of the resulting
decrease in prepayment rates on the underlying loans;
. Increasing the noninterest-bearing custodial escrow balances related to the
Company's mortgage servicing rights and interest-earning trust deposits;
. Increasing focus on lines of business that are less interest
rate-sensitive, such as brokerage activities, consulting services,
self-directed trust services, and real estate disposition;
. Maintaining a wholesale loan origination operation. Wholesale originations
provide a form of hedge against the balance of mortgage loan servicing
rights. In a decreasing interest rate environment, the value of the
servicing portfolio tends to decrease due to increased prepayments of the
underlying loans. During this same period, however, the volume of loan
originations generally increases;
. Originating and purchasing adjustable rate mortgages and selling newly
originated fixed rate residential mortgages in the secondary market;
. Increasing emphasis on the origination of construction and commercial real
estate lending, which tend to have higher interest rates with shorter loan
maturities than residential mortgage loans;
. Increasing retail deposits, which are less susceptible to changes in
interest rates than other funding sources; and
. Pursuing strategic acquisitions that provide fee-based income or generate
liabilities that are less expensive or less interest rate-sensitive than
retail deposits or borrowings from third-party institutions to fund the
Companies investing activities.
Lending Activities. The major interest-earning asset of the Company is the
loan portfolio. Consequently, a significant part of the Company's asset and
liability management is monitoring the composition of the Company's loan
portfolio, including the corresponding maturities. The table below sets forth
the composition of the Company's loan portfolio by loan type as of the dates
indicated. The amounts in the table below are shown net of discounts and other
deductions.
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------------------------------------------------
1993 1994 1995 1996
--------------------- -------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential............ $65,858 86.10% $80,010 89.56% $136,741 93.23% $192,118 90.47%
Multi-family and com-
mercial real estate.. 7,813 10.21 7,518 8.41 7,544 5.15 15,352 7.23
Construction........... 125 0.16 106 0.12 78 0.05 1,061 0.50
Consumer............... 3,238 4.23 2,434 2.72 3,245 2.21 4,869 2.29
------ ------ ------ ------ ------- ------ ------- ------
Total loans.......... 77,034 100.70 90,068 100.81 147,608 100.64 213,400 100.49
Less allowance for loan
and valuation losses 538 0.70 728 0.81 943 0.64 1,039 0.49
------- ------ -------- ------ -------- ------ -------- ------
Loans receivable, net.. $76,496 100.00% $ 89,340 100.00% $146,665 100.00% $212,361 100.00%
======= ======= ======== ======= ======== ======= ======== =======
</TABLE>
35
<PAGE>
The following table presents the aggregate maturities of loans in each
major category of the Company's loan portfolio as of December 31, 1996. Loans
held for sale are classified as maturing within one year. Actual maturities may
differ from the contractual maturities shown below as a result of renewals and
prepayments or the timing of loan sales.
<TABLE>
<CAPTION>
As of December 31, 1996
----------------------------------------------------------
Less than One to Over five
one year five years years Total
---------- ---------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Residential.................................................. $ 186,324 $ 618 $ 5,176 $ 192,118
Multi-family and commercial real estate...................... 5 108 15,239 15,35
Construction................................................. 1,061 -- -- 1,061
Consumer..................................................... 1,159 2,446 1,264 4,869
--------- -------- --------- ----------
Total loans............................................. $ 188,549 $ 3,172 $ 21,679 $ 213,400
========= ======== ========= ==========
</TABLE>
Nonperforming Assets. As part of asset and liability management, the
Company monitors nonperforming assets ("NPAs") on a monthly basis. NPAs consist
primarily of nonaccrual loans and foreclosed real estate. Loans are placed on
nonaccrual when full payment of principal or interest is in doubt or when they
are past due 90 days as to either principal or interest. Foreclosed real estate
arises primarily through foreclosure on mortgage loans owned. The following
table sets forth the Company's NPAs as of the dates indicated:
<TABLE>
<CAPTION>
As of
-----------------------------------------------------------------------------
December 31, December 31, December 31, December 31, March 31,
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual mortgage loans..................... $ 657 $ 3,275 $ 5,523 $ 3,031 $ 2,652
Nonaccrual consumer loans..................... 196 39 15 872 293
-------- ----- ----- ----- -----
Total nonperforming loans................ 853 3,314 5,538 3,903 2,945
Foreclosed real estate........................ 726 543 835 788 853
Repossessed automobiles....................... -- -- -- 506 552
--------- --------- -------- -------- ---------
Total nonperforming assets............... $ 1,579 $ 3,857 $ 6,373 $ 5,197 $ 4,350
========= ========= ======== ======== =========
Total nonperforming assets to total assets.... 1.64 % 3.40 % 3.42 % 1.89 % 1.03%
Total nonperforming loans to total loans...... 1.11 % 3.68 % 3.75 % 1.83 % 0.92%
Ratio of allowance for loan and valuation
losses to total non-performing loans....... 63.07 % 21.97 % 17.03 % 26.62 % 38.85%
Interest income on non-performing loans
not included in interest income............ $ 23 $ 140 $ 156 $ 120 $ 38
</TABLE>
As of March 31, 1997, the Company had no accruing loans that were
contractually past due 90 days or more. The higher levels of nonaccrual mortgage
loans during 1994 and 1995 were primarily attributable to purchases by Matrix
Bank of bulk residential loan portfolios in those years. As part of its business
strategy, Matrix Bank purchases loans at a discount that have had delinquencies
in the past. Due to the past delinquency problems, there is often an increase in
delinquencies after the loans are purchased, as a result of the servicing being
transferred to the Company. The Company's experience has been that it generally
takes 90 to 120 days after the servicing transfer to see an improvement in the
delinquency statistics. The decrease in the mortgage nonaccrual loans at
December 31, 1996 and March 31, 1997 is attributable to the improvement of the
loans that had past delinquency problems and the credit quality of the loan
portfolios the Company acquired in 1996. In 1996, Matrix Bank acquired loans
with less delinquency problems and/or document deficiencies, which also resulted
in a decrease in the nonaccrual loans.
The increase in the nonaccrual consumer loans in 1996 over 1995 pertains to
sub-prime automobile loans that the Company repurchased pursuant to limited
representations and warranties included in loan sale agreements. The Company has
a separate reserve of $600,000 included in other liabilities for anticipated
losses relating to the repurchased sub-prime automobile loans at March 31, 1997
and December 31, 1996, respectively. Included in repossessed assets for
36
<PAGE>
1996 and the first quarter of 1997 are $506,000 and $552,000, respectively, of
automobiles that the Company was required to repurchase pursuant to the same
limited representations and warranties. The balance of the repossessed assets
have been written down to the anticipated recoverable amount. The Company sold
the fixed assets of its sub-prime automobile lending subsidiary in December
1996, and it is anticipated the Company will originate no additional sub-prime
automobile contracts.
The prior delinquency and anticipated future delinquencies are considered
in the pricing of the loans acquired. The Company generally purchases such loans
at discounts and, in some instances, receives recourse or credit enhancement
from the seller to further reduce the Company's risk of loss associated with the
loans' nonaccrual status. At March 31, 1997, $2.4 million, or 81.5%, of the
nonaccrual loans were loans that were residential loans purchased in bulk loan
portfolios and remain classified as "held for sale." Total loans held for sale
at March 31, 1997 were $285.8 million, of which $2.4 million, or 0.8%, were
nonaccrual loans. However, against the $285.8 million of total loans held for
sale, the Company has $2.5 million of purchase discounts as well as
approximately $66.0 million of total loans for which the Company had full
recourse to a third-party guaranteeing the repayment.
The percentage of the allowance for loan and valuation losses to nonaccrual
loans varies widely due to the nature of the Company's portfolio of mortgage
loans, which are collateralized primarily by residential real estate. The
Company analyzes the collateral for each nonperforming mortgage loan to
determine potential loss exposure. In conjunction with other factors, this loss
exposure contributes to the overall assessment of the adequacy of the allowance
for loan and valuation losses. See "--Comparison of Results of Operations for
the Years Ended December 31, 1996 and 1995."
Analysis of Allowance for Loan and Valuation Losses. The following table
sets forth information regarding changes in the Company's allowance for loan and
valuation losses for the periods indicated. The table includes the allowance for
both the loans held for investment and the loans held for sale.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1993 1994 1995 1996
---------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period.................................... $ -- $ 538 $ 728 $ 943
Charge-offs:
Real estate-mortgage......................................... 33 26 198 64
Real estate-construction..................................... -- -- 35 --
Consumer..................................................... -- -- 7 6
---------- ---------- ---------- ---------
Total charge-offs....................................... 33 26 240 70
Recoveries:
Real estate-mortgage......................................... -- -- 5 8
Consumer..................................................... -- -- 49 15
---------- ---------- ---------- ---------
Total recoveries........................................ -- -- 54 23
---------- ---------- ---------- ---------
Net charge-offs................................................... 33 26 186 47
Allowance for loan losses established in connection with
the acquisition of Matrix Bank................................. 556 -- -- --
---------- ---------- ---------- ---------
Provision for loan and valuation losses charged to operations..... 15 216 401 143
---------- ---------- ---------- ---------
Balance at end of period.......................................... $ 538 $ 728 $ 943 $ 1,039
========== ========== ========== =========
Ratio of net charge-offs to average loans......................... 0.18 % 0.03 % 0.15 % 0.03 %
========== ========== ========== =========
Average loans outstanding during the period....................... $ 18,608 $ 79,393 $ 121,206 $ 162,648
========== ========== ========== =========
</TABLE>
The allowance for loan and valuation losses is increased by the provision
for loan and valuation losses (which is charged to operations) for particular
loans where management considers ultimate collection to be questionable. The
allowance for loan and valuation losses is calculated, in part, based on
historical loss experience. In addition, management takes into consideration
other factors such as certain qualitative evaluations of individual classified
assets, trends in the portfolio, geographic, and portfolio concentrations, new
products or markets, evaluations of the changes in the historical loss
experience component, and projections of this component into the current and
future periods based on current knowledge and conditions. Due to the nature of
the Company's loan portfolio, substantially all of the allowance for loan and
valuation losses relates to residential loans. However, to the extent that there
is diversification and growth in the Company's loan portfolio, particularly, for
example, with respect to construction and commercial real estate loans,
37
<PAGE>
the Company's allocation of the provision for loan and valuation losses will
change, which could result in an increase in the provision. The ratio of the
allowance for loan and valuation losses to total loans was .81%, .64%, .49%, and
.36% at December 31, 1994, 1995, 1996, and March 31, 1997, respectively. The
allowance for loan and valuation losses is reduced by loans charged off, net of
recoveries.
Risk Sensitive Assets and Liabilities. A traditional indicator of interest
rate risk is gap analysis. Gap analysis focuses on the difference (or gap)
between available repricing opportunities for assets and liabilities within
defined time periods. If the dollar amount of interest rate-sensitive assets is
closely matched with the dollar amount of interest rate-sensitive liabilities in
a given period, then the changes in interest income and interest expense over
this time frame should also be closely matched.
The following table sets forth the estimated maturity or repricing, and the
resulting interest rate gap, of the Company's interest-earning assets and
interest-bearing liabilities as of December 31, 1996. The amounts in the table
are derived from internal data of the Company and could be significantly
affected by external factors such as changes in prepayment assumptions, early
withdrawals of deposits, and competition. Loans held for sale are classified as
maturing within one year due to the Company's expectation of selling its loans
held for sale within one year.
<TABLE>
<CAPTION>
Estimated Maturity or Repricing
-------------------------------------------------------------------------------------
Three months
Less than to One to five Over
three less than years five years Total
months one year
------------ ------------ ------------ ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Fixed-rate loans...................... $ 34,182 $ 48,288 $ 2,950 $ 5,426 $ 90,846
Adjustable-rate loans................. 27,659 80,709 14,186 -- 122,554
Interest-earning deposits............. 9,754 -- -- -- 9,754
FHLB stock............................ 2,871 -- -- -- 2,871
------------ ------------ ------------ ---------- -----------
Total interest-earning assets....... 74,466 128,997 17,136 5,426 226,025
Interest-bearing liabilities:
Passbook, NOW and money market
accounts............................ 16,944 -- -- -- 16,944
Certificates of deposit over
$100,000............................ 1,688 2,689 1,080 -- 5,457
Other certificates of deposit......... 13,458 36,772 17,548 -- 67,778
FHLB borrowings....................... 51,250 -- -- -- 51,250
Short term borrowings................. 31,504 -- -- -- 31,504
Other borrowings...................... 101 738 7,460 2,628 10,927
------------ ------------ ------------ ---------- -----------
Total interest-bearing liabilities.. 114,945 40,199 26,088 2,628 183,860
------------ ------------ ------------ ---------- -----------
Interest rate gap........................ $ (40,479) $ 88,798 $ (8,952) $ 2,798 $ 42,165
============ ============ ============ ========== ===========
Cumulative interest rate gap............. $ (40,479) $ 48,319 $ 39,367 $ 42,16
Gap/assets ratio......................... (17.91) % 39.29 % (3.96) % 1.24 %
Cumulative gap/assets ratio.............. (17.91) % 21.38 % 17.42 % 18.66 %
</TABLE>
Gap analysis attempts to capture interest rate risk, which is attributable
to the mismatching of interest rate-sensitive assets and liabilities. The actual
impact of interest rate movements on the Company's net interest income may
differ from that implied by any gap measurement, depending on the direction and
magnitude of the interest rate movements, the repricing characteristics of
various on- and off-balance sheet instruments, as well as competitive
38
<PAGE>
pressures. These factors are not fully reflected in the foregoing gap analysis
and, as a result, the gap report may not provide a complete assessment of the
Company's interest rate risk.
The generally positive cumulative gap value means that over the periods
indicated the assets of the Company will reprice slightly faster than the
Company's liabilities. This means generally that, in a rising interest rate
environment, net interest income can be expected to increase and that, in a
declining interest rate environment, net interest income can be expected to
decrease.
Short-term Borrowings. A primary function of asset and liability management
is to assure adequate liquidity. In addition to cash and cash equivalents, the
Company relies heavily on short-term borrowing capabilities for liquidity and
as a funding vehicle. The primary sources for short-term borrowing are the FHLB
for Matrix Bank and unaffiliated financial institutions for Matrix Financial.
See "--Liquidity and Capital Resources."
The following table sets forth a summary of the short-term borrowings of
the Company during 1994, 1995, and 1996 and as of the end of each such period:
<TABLE>
<CAPTION>
Average
Amount amount Maximum Weighted Weighted
outstanding outstanding outstanding average interest average interest
at during the at any rate during rate at
year end year(1) month end the year year end
-------------- -------------- --------------- --------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
At or for the year ended December 31, 1994:
FHLB borrowings........................... $ 14,600 $ 3,071 $ 15,000 6.94 % 6.50 %
Revolving lines of credit................. 9,890 4,917 11,042 9.29 9.21
Repurchase agreements..................... 2,529 4,320 6,157 8.03 7.18
At or for the year ended December 31, 1995:
FHLB borrowings........................... 19,000 17,662 33,000 6.30 6.30
Revolving lines of credit................. 46,833 22,842 46,833 7.57 7.30
Repurchase agreements..................... 570 4,559 14,129 8.97 8.70
At or for the year ended December 31, 1996:
FHLB borrowings........................... 51,250 35,838 53,650 5.69 5.84
Revolving lines of credit................. 31,504 35,489 60,804 7.17 6.50
Repurchase agreements..................... -- 991 4,962 12.58 --
- ---------
</TABLE>
(1) Calculations are based on daily averages where available, and monthly
averages otherwise.
Pipeline Management. In the ordinary course of business, the Company makes
commitments to originate residential mortgage loans and holds originated loans
until delivery to an investor. Inherent in this business are risks associated
with changes in interest rates and the resulting change in the market value of
the pipeline loans. The Company mitigates this risk through the use of mandatory
and nonmandatory forward commitments to sell loans. As of December 31, 1996, the
Company had $62.6 million in pipeline and funded loans offset with mandatory
forward commitments of $49.1 million and nonmandatory forward commitments of
$8.1 million. As of March 31, 1997, the Company had $70.3 million in pipeline
and funded loans offset with mandatory forward commitments of $44.0 million and
non-mandatory commitments of $21.0 million. The inherent value of the forward
commitments is considered in the determination of the lower of cost or market
for such loans.
Liquidity and Capital Resources
Liquidity is the ability of the Company to generate funds to support asset
growth, satisfy disbursement needs, maintain reserve requirements, and otherwise
operate on an ongoing basis. To date, Matrix Capital's principal source of
funding for its investing activities has been secured senior debt provided by
unaffiliated financial institutions, the issuance of $2.9 million aggregate
principal amount of Senior Subordinated Notes in August 1995, a bank stock loan,
and the Company's initial public offering. As of March 31, 1997, Matrix Capital
had $10.0 million in indebtedness outstanding. The borrowed funds have been used
historically as capital injections to Matrix Bank and Matrix Financial,
39
<PAGE>
as well as to acquire the office building in Phoenix where Matrix Financial
maintains its headquarters. See "Business--Properties."
The trend experienced over the reported periods of cash used by the
Company's operating activities results primarily from the growth that Matrix
Financial has experienced in its origination activities and the growth that
Matrix Bank has experienced in its whole loan purchasing activity. 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, directed trust
deposits, and FHLB borrowings.
The Company's principal source of funding for its servicing acquisition
activities consists of line of credit facilities provided to Matrix Financial by
unaffiliated financial institutions. In prior years, including the year ended
December 31, 1996, Matrix Financial relied on various sources for funding its
servicing acquisition activities, including servicing acquisition lines, the
sale of mortgage servicing rights that were accounted for as financings, and
capital contributions from the Company. As of March 31, 1997, Matrix Financial's
servicing acquisition facilities aggregated $30.0 million, of which $4.9 million
was available to be utilized after deducting drawn amounts. Borrowings under the
servicing acquisition lines of credit are secured by mortgage servicing rights
owned by Matrix Financial, bear interest at the federal funds rate plus a
negotiated margin, and are due at the earlier of the maturity of the mortgage
servicing rights or amortized over five to six years from the date of borrowing.
At March 31, 1997, $25.1 million was outstanding under the servicing acquisition
line and the interest rate on funds outstanding under these facilities at March
31, 1997 was 7.39%.
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 March 31, 1997, Matrix Financial's warehouse lines of credit aggregated $60.0
million, of which $23.9 million was available to be utilized. Borrowings under
the warehouse lines of credit are secured by all of the mortgage loans funded
with warehouse loan proceeds and bear interest at the federal funds rate plus a
negotiated margin. At March 31, 1997, $36.1 million was outstanding under the
warehouse lines of credit at a weighted average interest rate of 6.63%. As of
March 31, 1997, Matrix Financial's sale/repurchase facilities aggregated $20.0
million, with $3.4 million outstanding. Borrowings under the sale/repurchase
facilities are secured by all of the mortgage loans funded with sale/repurchase
facility proceeds and bear interest at either the prime rate or the LIBOR rate
plus a negotiated margin (depending on the facility).
The Company's principal source of funding for the working capital needs
of Matrix Financial consists of working capital facilities provided to Matrix
Financial by unaffiliated financial institutions. As of December 31, 1996,
Matrix Financial's working capital facilities aggregated $2.5 million, of which
$2.5 million was available. The amount of credit available for working capital
borrowings is a sublimit of the warehouse lines of credit, and therefore, any
amounts borrowed are netted against the amount of credit available from the
warehouse lines of credit. Borrowings under the working capital facilities are
secured by mortgage servicing rights, eligible servicing advance receivables,
and eligible delinquent mortgage loans and bear interest at the federal funds
rate plus a negotiated margin. At March 31, 1997, $2.5 million was outstanding
under the working capital facilities.
The amounts outstanding as stated above under Matrix Financial's servicing
acquisition facility, warehouse lines of credit, sale/repurchase facility, and
working capital facility were significantly reduced as a result of the Company's
completion of its initial public offering. The net proceeds raised from the
public offering were used to reduce balances outstanding on revolving credit
facilities. With the acquisition of additional residential mortgage loan
servicing portfolios subsequent to the initial public offering, the Company
expects to fully utilize all of its credit facilities.
The new credit facility agreement requires Matrix Financial to
maintain, among other things, (i) total shareholder's equity of at least $10.0
million plus 100% of capital contributed after January 1, 1997, plus 50% of
40
<PAGE>
cumulative quarterly net income, (ii) adjusted net worth, as defined therein, of
at least $12.0 million, (iii) a servicing portfolio of at least $2.0 billion,
(iv) principal debt of term line borrowings of no more than the lesser of 70% of
the appraised value of the mortgage servicing portfolio or 1.25% of the unpaid
principal balance of the mortgage servicing portfolio, (v) a ratio of total
adjusted debt to adjusted tangible net worth of no more than 8:1, and (vi) a
ratio of cash flow to current maturities of long-term debt and any capital
leases of at least 1.3:1.
In March 1997, the Company refinanced its bank stock loan and increased
the credit available under the loan by an additional $6.0 million. The new bank
stock loan has two components: a $2.0 million term loan, which was used to
refinance the bank stock loan in place at December 31, 1996, and a revolving
line of credit of $6.0 million. In March of 1998, the balance of the revolving
line of credit will be converted to a term loan. The additional proceeds from
the loan will be used as capital at Matrix Bank. The new bank stock loan
requires the Company to maintain (i) total shareholders' equity of $27.5 million
plus 100% of all future equity contributions, plus 50% of cumulative quarterly
net income, (ii) dividends less than 50% of the Company's net cash income after
adjustments, and (iii) total adjusted debt to shareholders' equity less than
4:1. The Company was in compliance with these covenants at March 31, 1997.
In August 1995, the Company issued $2.9 million in aggregate principal
amount of Senior Subordinated Notes. Interest on the Senior Subordinated Notes
is payable semi-annually on January 15 and July 15, and the Senior Subordinated
Notes mature on July 15, 2002, with earlier mandatory redemptions of $727,500,
or 25% of the Senior Subordinated Notes, scheduled on July 15, 1999, 2000, and
2001, respectively. The Company is restricted from paying cash dividends under
the terms of the Senior Subordinated Notes. However, the Company may pay cash
dividends in an amount equal to 50% of the consolidated net income of the
Company as long as there has been no default under the terms of the Senior
Subordinated Notes and as long as the dividend does not exceed 10% of the
consolidated net worth of the Company. The Company may redeem the Senior
Subordinated Notes, in whole or in part, at any time on or after July 15, 1998,
at a redemption price equal to (i) 102% of par through July 14, 1999, and
thereafter at par, plus (ii) all accrued but unpaid interest. Until February
1997, the Senior Subordinated Notes bore interest at 13% per annum; in February
1997, the interest rate increased to 14% per annum.
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, trust directed deposits, 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 sales are
significantly influenced by general market interest rates and economic
conditions. Borrowings on a short-term basis are used as a cash management
vehicle to compensate for seasonal or other reductions in normal sources of
funds. Matrix Bank utilizes advances from the FHLB as its primary source for
borrowings. At March 31, 1997, Matrix Bank had overnight borrowings from the
FHLB of $34.0 million. The custodial escrow balances held by Matrix Bank
fluctuate based upon the mix and size of the related servicing rights
portfolios. For a tabular presentation of the Company's short-term borrowings,
see "--Asset and Liability Management--Short-term Borrowings."
Matrix Bank offers a variety of deposit accounts having a range of
interest rates and terms. Matrix Bank's deposits principally consist of demand
deposits and certificates of deposit. The flow of deposits is influenced
significantly by general economic conditions, changes in prevailing interest
rates, and competition. Matrix Bank's retail deposits are obtained primarily
from areas in which it is located and, therefore, its retail deposits are
concentrated primarily in Las Cruces and Sun City. Matrix Bank relies
principally on customer service, marketing programs, and its relationships with
customers to attract and retain these deposits. Matrix Bank currently does not
solicit or accept brokered deposits. In pricing deposit rates, management
considers profitability, the matching of term lengths with assets, the
attractiveness to customers, and rates offered by competitors. Matrix Bank
intends to continue its efforts to attract deposits as a primary source of funds
to support its lending and investing activities.
In January 1996, Matrix Bank opened a retail branch in Sun City,
Arizona. The Company has been successful in attracting deposits at the Sun City
location and this success has been the primary reason for the increased deposit
growth that the Company has experienced for the year ended December 31, 1996. In
October 1996, Matrix Bank opened a second retail branch in Las Cruces. In
February 1997, Sterling Trust moved approximately $80.0 million of deposits
41
<PAGE>
from a third-party institution to Matrix Bank. The following table sets forth
the average balances for each major category of Matrix Bank's deposit accounts
and the weighted average interest rates paid for interest-bearing deposits for
the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------ Three Months Ended
1994 1995 1996 March 31, 1997
--------------------- --------------------- --------------------- ---------------------
Weighted Weighted Weighted Weighted
Average Average Average Average Average Average Average Average
Balance Rate Balance Rate Balance Balance Balance Rate
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts........... $ 2,788 2.58% $ 2,394 3.55% $ 2,389 3.45% $ 2,799 3.97%
NOW accounts................ 2,131 1.69 2,460 2.11 2,813 2.24 49,199 3.15
Money market accounts....... 7,350 3.20 5,860 4.10 9,151 4.43 10,121 4.40
Time deposits............... 29,273 3.89 33,332 5.42 54,824 5.85 74,301 5.89
---------- ---- ----------- ---- ---------- ---- --------- ----
Total deposits.............. $ 41,542 3.57% $ 44,046 4.96% $ 69,177 5.43% $ 136,420 4.72%
========== ===== =========== ===== ========== ===== ========= =====
</TABLE>
The following table sets forth the amount of Matrix Bank's certificates of
deposit that are greater than $100,000 by time remaining until maturity as of
March 31, 1997:
<TABLE>
<CAPTION>
As of March 31, 1997
------------------------------------
Weighted Average
Amount Rate Paid
---------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Three months or less................................................. $ 2,004 5.77 %
Over three months through six months................................. 748 5.71
Over six months through twelve months................................ 1,074 5.94
Over twelve months................................................... 1,579 6.20
------------- ---------------
Total........................................................... $ 5,405 5.92 %
============= ===============
</TABLE>
The Company actively monitors Matrix Bank's compliance with regulatory
capital requirements. Historically Matrix Bank has increased its core capital
through the retention of a portion of its earnings. Matrix Bank expects to
achieve its future growth through deposit growth, borrowings from the FHLB, and
custodial deposits from affiliates, which is anticipated to require additional
capital. The capital requirements related to the anticipated growth will be
fulfilled, in part, through retaining earnings, increasing the Company's bank
stock loan. See "Supervision and Regulation--Federal Savings Bank
Operations--Matrix Bank's Capital Ratios."
Matrix Bank and Matrix Financial are restricted from paying dividends
to Matrix Capital due to restrictions of certain debt agreements and regulatory
requirements. At March 31, 1997, the Company was in compliance with all debt
covenants. See "Supervision and Regulation."
In June 1996, the Company purchased 154 acres of land for $1.3 million
in cash for the purpose of developing 750 residential and multi-family lots in
Ft. Lupton, Colorado. The purchase was completed with operating funds of the
Company and a loan from a third-party financial institution. As part of the
acquisition, the Company entered into a Residential Facilities Development
Agreement (the "Development Agreement") with the City of Ft. Lupton. The
Development Agreement is a residential and planned unit development agreement
providing for the orderly planning, engineering, and development of a golf
course and surrounding residential community. The City of Ft. Lupton is
responsible for the development of the golf course and the Company is
responsible for the development of the surrounding residential lots.
The Development Agreement sets forth a mandatory obligation on the part
of the Company to pay the City of Ft. Lupton pledged enhancement assessments of
$600,000. These pledged enhancement assessments require the Company to pay the
city a $2,000 fee each time the Company sells a developed residential lot. The
Company is obligated to pay a minimum of $60,000 in assessment fees per year
beginning in the year 1998 through the year 2007. The Company also entered into
a development management agreement with a local developer to complete the
development of the land. The terms of the agreement specify that the Company is
to earn a preferred rate of return on its investment and, once the initial
amount of its investment has been returned plus the preferred rate of return,
the remaining profits are to be split equally.
42
<PAGE>
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.
It is anticipated that the Company will obtain a loan from an
unaffiliated financial institution for a portion of the future development
costs. The Company expects development to begin during 1997.
Inflation and Changing Prices
The Consolidated Financial Statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation. Unlike most industrial
companies, substantially all of the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a more significant impact
on the Company's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as prices of goods and services. The Company discloses the estimated
fair market value of its financial instruments in accordance with Statement of
Financial Accounting Standards No. 107. See Note 14 to the Consolidated
Financial Statements included elsewhere herein.
Recent Accounting Pronouncements
In June 1996, the FASB issued Statement of Financial Accounting
Standards No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities ("FAS 125"). This statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities and is effective for the above events
that occur after December 31, 1996. Transactions covered by FAS 125 include
securitizations, sales of partial interests in financial assets, repurchase
agreements, securities lending, pledges of collateral, loan syndications and
participations, sales of receivables with recourse, servicing of mortgages and
other loans, and in-substance defeasances. The statement uses a "financial
components" approach that focuses on control to determine the proper accounting
for financial asset transfers. Under that approach, after financial assets are
transferred, an entity would recognize on the balance sheet all assets it
controls and liabilities it has incurred. It would remove from the balance sheet
those assets it no longer controls and liabilities it has satisfied. If the
entity has surrendered control over the transferred assets, the transaction
would be considered a sale. Control is considered surrendered only if the assets
are isolated from the transferor, the transferee has the right to pledge or
exchange the assets or is a qualifying special-purpose entity, and the
transferor does not maintain effective control over the assets through an
agreement to repurchase or redeem them. If those conditions do not exist, the
transfer would be accounted for as a secured borrowing. The Company adopted FAS
125 in the first quarter of 1997, and the effect of such adoption was not
material to its consolidated financial statements.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, Earnings per Share ("FAS 128"), which specifies the
computation, presentation, and disclosure requirements for earnings per common
share ("EPS"). FAS 128 replaces the presentation of primary and fully diluted
EPS pursuant to Accounting Principles Board Opinion No. 15 Earnings per Share
("APB 15"), with the presentation of basic and diluted EPS. Basic EPS excludes
dilution and is computed by dividing net income available to common stockholders
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. The Company is required to adopt FAS 128 with its
December 31, 1997 financial statements and restate all prior-period EPS data.
The Company will continue to account for EPS under APB 15 until that time.
Management does not expect that the adoption of FAS 128 will have a material
impact on the Company's consolidated financial statements.
43
<PAGE>
BUSINESS
General
Matrix Capital Corporation is a specialized financial services company that,
through its Subsidiaries, focuses on mortgage merchant banking by purchasing and
selling residential mortgage loans and residential mortgage servicing rights;
offering brokerage, consulting, and analytical services to other financial
services companies and financial institutions; servicing residential mortgage
portfolios for investors; originating residential mortgages; and providing real
estate management and disposition services. The Company also provides trust
administration services to self-directed qualified retirement plans, individual
retirement accounts, custodial and self-directed trust accounts, and broker-
dealer services to individuals and deferred contribution plans. The Company is a
unitary thrift holding company that was incorporated in Colorado in June 1993.
Based upon management's experience within the industries in which the Company
operates, the Company believes that its structure of combining a mortgage
banking firm, a mortgage servicing brokering and consulting firm, a federally
chartered banking institution, a real estate management and disposition firm, a
self-directed trust company and a securities broker-dealer is unique to the
financial services industry. This unique structure creates revenue enhancing
relationships among the Subsidiaries. Its principal executive offices are
located at 1380 Lawrence Street, Suite 1410, Denver, Colorado 80204, and its
telephone number is (303) 595-9898.
Brokerage and Consulting Services
Brokerage Services. United Financial operates as a national, full-service
mortgage servicing broker. It is capable of analyzing, packaging, marketing,
and closing servicing portfolio and selected corporate merger and acquisition
transactions. United Financial markets its services to all types and sizes of
market participants, thereby developing diverse relationships. United Financial
has provided brokerage services to each of the following clients during the last
12 months:
<TABLE>
<S> <C>
Banc One Mortgage Corporation Knutson Mortgage
Bank of America Mellon Mortgage Corporation
Chase Manhattan Mortgage Corporation NVR Mortgage Finance, Inc.
First of America Loan Services, Inc. Principal Residential Mortgage, Inc.
Firstar Bank Resource Bancshares Mortgage Group
</TABLE>
The Company believes that the client relationships developed by United
Financial through its national network of contacts with commercial banks,
mortgage companies, savings associations, and other institutional investors
represent a significant competitive advantage and form the basis for United
Financial's national market presence. These contacts also enable United
Financial to identify prospective clients for other Subsidiaries and make
referrals where appropriate.
The secondary market for purchasing and selling mortgage servicing rights
has become increasingly more active since its inception during the early 1980s.
While servicing rights are the primary asset of most mortgage companies, other
institutions, such as commercial banks and savings associations, also build
portfolios of mortgage servicing rights, which can serve as significant source
of non-interest income. Most institutions that own mortgage servicing rights
have found that careful management of those assets is necessary due to their
susceptibility to interest rate cycles, changing prepayment patterns of mortgage
loans, and fluctuating earnings rates achieved on custodial escrow balances.
With the implementation of FAS 122, which requires companies to capitalize
originated mortgage servicing rights, management of mortgage servicing assets
has become even more critical. These managerial efforts, combined with interest
rate sensitivity of the assets and the growth strategies of market participants,
create constantly changing supply and demand and, therefore, price levels in the
secondary market for mortgage servicing rights.
The sale and transfer of mortgage servicing rights occur in a market that
is inefficient and often requires an intermediary to facilitate matching buyers
and sellers. Prices are unpublished and closely guarded by market participants,
unlike most other major financial secondary markets. This lack of pricing
information complicates an already difficult process of differentiating between
servicing product types, evaluating regional, economic, and socioeconomic
trends, and
44
<PAGE>
predicting the impact of interest rate movements. Due to its significant
contacts, United Financial has access to information on the availability of
mortgage servicing portfolios and helps bring together interested buyers and
sellers.
Consulting and Analytic Services. The analytics group of United Financial
has developed expertise in helping companies implement and, on an ongoing basis,
track their FAS 122 (as superseded by FAS 125) valuations and analyses.
Expansion into the FAS 122 valuations arena represented a logical progression
for United Financial. In connection with the consulting services performed by
United Financial on pools of mortgage servicing rights held for sale by United
Financial's clients, United Financial performed many of the same types of
analyses required by FAS 122. Therefore, United Financial was able to enhance
its existing valuation models and create a software program that could be
customized to fit its customers' many different needs and unique situations in
performing FAS 122 analyses. In addition, United Financial has the
infrastructure and management information system capabilities necessary to
undertake the complex analyses required by FAS 122. Many of the companies
affected by the implementation of FAS 122 have determined to outsource this
function to a third-party rather than dedicate the resources necessary to
develop systems for and perform their own FAS 122 valuations. To provide an
additional consulting service to the mortgage banking industry, the Company
formed UCM in December 1996. FAS 122 requires that servicing portfolios be
valued at lower of cost or market. As a result, the management of the servicing
asset has become a critical component to the holders of mortgage servicing
rights. Due to the of risk of companies incurring an impairment of their
servicing portfolio, the need to hedge has become much more prevalent. UCM will
market to many of the same companies as United Financial and will focus its
efforts on providing hedging strategies for institutional clients' servicing
portfolios. Management believes that providing these consulting and analytic
services enhances the Company's ability to attract and retain client
relationships.
Residential Loan Servicing Activities
Residential Mortgage Loan Servicing. Matrix Financial and Matrix Bank each
has its own mortgage servicing portfolio, but the Company conducts its servicing
activities exclusively through Matrix Financial. Matrix Bank's mortgage
servicing rights are subserviced under a contract with Matrix Financial. At
March 31, 1997, Matrix Financial serviced approximately $4.1 billion of mortgage
loans, including $430.5 million for Matrix Bank and $617.0 million subserviced
for non-affiliates of the Company.
Servicing mortgage loans involves a contractual right to receive a fee for
processing and administering loan payments. This processing involves collecting
monthly mortgage payments on behalf of investors, reporting information to those
investors on a monthly basis, and maintaining custodial escrow accounts for the
payment of principal and interest to investors and property taxes and insurance
premiums on behalf of borrowers. These payments are held in custodial escrow
accounts at Matrix Bank, where the money can be invested by the Company in
interest-earning assets at returns that historically have been greater than
could be realized by the Company using the custodial escrow deposits as
compensating balances to reduce the effective borrowing cost on existing
warehouse credit facilities.
As compensation for its mortgage servicing activities, the Company receives
servicing fees, usually ranging from 0.25% to 0.75% per annum of the loan
balances serviced, plus any late charges collected from delinquent borrowers and
other fees incidental to the services provided. At December 31, 1996, the
Company's weighted average servicing fee was 0.40%. In the event of a default
by the borrower, the Company receives no servicing fees until the default is
cured.
Servicing is provided on mortgage loans on a recourse or nonrecourse basis.
The Company's policy is to accept only a limited number of servicing assets on a
recourse basis. As of December 31, 1995 and 1996, on the basis of outstanding
principal balances only 0.7% and 0.4%, respectively, of the mortgage servicing
contracts owned by the Company involved recourse servicing. To the extent that
servicing is done on a recourse basis, the Company is exposed to credit risk
with respect to the underlying loan in the event of a repurchase. Additionally,
many of the nonrecourse mortgage servicing contracts owned by the Company
require the Company to advance all or part of the scheduled payments to the
owner of the mortgage loan in the event of a default by the borrower. Many
owners of mortgage loans also require the servicer to advance insurance premiums
and tax payments on schedule even though sufficient escrow funds may not be
available. The Company, therefore, must bear the funding costs associated with
making such advances. If the delinquent loan does not become current, these
advances are typically recovered at the time of the foreclosure sale.
45
<PAGE>
Foreclosure expenses are generally not fully reimbursable by the FNMA, FHLMC, or
the GNMA, for whom the Company provides significant amounts of mortgage loan
servicing.
Mortgage servicing rights represent a contract right to service and not a
beneficial ownership interest in underlying mortgage loans. Failure to service
the loans in accordance with contract requirements may lead to the termination
of the servicing rights and the loss of future servicing fees. To date, there
have been no terminations of mortgage servicing rights by any mortgage loan
owners because of the Company's failure to service the loans in accordance with
its contractual obligations.
In order to track information on its servicing portfolio, the Company
utilizes a data processing system provided by Alltel, one of the largest
mortgage banking service bureaus in the United States. Management believes that
this system gives the Company sufficient capacity to support anticipated
expansion of its residential mortgage loan servicing portfolio.
The following table sets forth certain information regarding the
composition of the Company's mortgage servicing portfolio (excluding loans
subserviced for others) as of the dates indicated:
<TABLE>
<CAPTION>
As of
---------------------------------------------------------
December 31, December 31, December 31, March 31,
1994 1995 1996 1997
-------------- ------------ ------------ -------------
(In thousands)
<S> <C> <C> <C> <C>
FHA--insured/VA guaranteed residential......... $ 28,630 $ 37,135 $ 318,145 $ 1,242,591
Conventional loans............................. 980,003 1,544,808 2,171,016 2,242,966
Other loans.................................... 33,152 14,442 15,875 13,659
-------------- ------------ ------------ -------------
Total mortgage servicing portfolio........ $ 1,041,785 $ 1,596,385 $ 2,505,036 $3,499,216
============== ============ ============ =============
Fixed rate loans............................... $ 669,933 $ 1,073,803 $ 1,986,599 $ 2,924,668
Adjustable rate loans.......................... 371,852 522,582 518,437 574,548
-------------- ------------ ------------ -------------
Total mortgage servicing portfolio........ $ 1,041,785 $ 1,596,385 $ 2,505,036 $ 3,499,216
============== ============ ============ =============
</TABLE>
46
<PAGE>
The following table shows the delinquency statistics for the mortgage
loans serviced by the Company (excluding loans subserviced for others) compared
with national average delinquency rates as of the dates presented:
<TABLE>
<CAPTION>
As of
---------------------------------------------------------------------------
December 31, 1994 December 31, 1995
----------------------------------- -----------------------------------
National National
Company Average(1) Company Average(2)
---------------------- ---------- ---------------------- ----------
Number Percentage Number Percentage
of of Servicing Percentage of of Servicing Percentage
Loans Portfolio(5) of Loans Loans Portfolio(5) of Loans
----- ------------ -------- ----- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days 648 3.28% 2.76% 843 3.37% 3.07%
60-89 days 223 1.13 0.67 195 0.78 0.70
90 days and over 287 1.46 0.74 166 0.67 0.71
----- ---- ---- ----- ---- ----
Total delinquencies 1,158 5.87% 4.17% 1,204 4.82% 4.48%
===== ===== ===== ===== ===== =====
Foreclosures 236 1.20% 0.86% 277 1.11% 0.87%
===== ===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
As of
--------------------------------------------------------------
December 31, 1996 March 31, 1997(4)
------------------------------------ ----------------------
National
Company Average(3) Company
----------------------- ---------- ----------------------
Number Percentage Number Percentage
of of Servicing Percentage of of Servicing
Loans Portfolio(5) of Loans Loans Portfolio(5)
----- ------------ -------- ----- ------------
<S> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days 2,607 5.45% 3.04% 3,287 4.91%
60-89 days 667 1.40 0.71 848 1.27
90 days and over 684 1.43 0.62 1,031 1.54
----- ---- ---- ----- ----
Total delinquencies 3,958 8.28% 4.37% 5,166 7.72%
===== ===== ===== ===== =====
Foreclosures 264 0.55% 1.03% 466 0.70%
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Source: Mortgage Bankers Association, "Delinquency Rates of 1- to 4-Unit
Residential Mortgage Loans" (Seasonally Adjusted) (March 7, 1995 report).
(2) Source: Mortgage Bankers Association, "Delinquency Rates of 1- to 4-Unit
Residential Mortgage Loans" (Seasonally Adjusted) (March 14, 1996 report).
(3) Source: Mortgage Bankers Association, "Delinquency Rates of 1- to 4-Unit
Residential Mortgage Loans" (Seasonally Adjusted) (March 6, 1997 report).
(4) Data regarding National Average for March 31, 1997 not available as of the
date hereof.
(5) Delinquencies and foreclosures generally exceed the national average due to
high rates of delinquencies and foreclosures on certain bulk loan and bulk
servicing portfolios acquired by the Company at a discount. In the fourth
quarter of 1996, the Company acquired a seasoned servicing portfolio which
had higher delinquencies primarily in the 30 day category. The higher
delinquencies were considered in the pricing of the portfolio.
47
<PAGE>
During periods of declining interest rates, prepayments of mortgage
loans increase as homeowners seek to refinance at lower interest rates,
resulting in a decrease in the value of the servicing portfolio. Mortgage loans
with higher interest rates are more likely to result in prepayments. The
following table sets forth certain information regarding the number and
aggregate principal balance of the mortgage loans serviced by the Company,
including both fixed and adjustable rate loans (excluding loans subserviced for
others), at various mortgage interest rates:
<TABLE>
<CAPTION>
As of
---------------------------------------------------------------------
December 31, 1994 December 31, 1995
--------------------------------- ---------------------------------
Percentage Percentage
Number Aggregate of Aggregate Number Aggregate of Aggregate
of Principal Principal of Principal Principal
Rate Loans Balance Balance Loans Balance Balance
- ----------------------- ----- ------- ------- ----- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Less than 7.00%........ 2,113 $162,274 15.58% 2,781 $218,914 13.71%
7.00% - 7.99%.......... 3,798 204,024 19.58 7,386 576,255 36.10
8.00% - 8.99%.......... 4,894 261,630 25.11 7,160 442,634 27.73
9.00% - 9.99%.......... 4,314 200,025 19.20 4,460 191,549 12.00
10.00% - 10.99%........ 2,179 142,504 13.68 2,005 125,544 7.86
11.00% - 11.99%........ 756 33,772 3.24 519 24,220 1.52
12.00% and over........ 1,667 37,556 3.61 647 17,269 1.08
------ ---------- ------- ------ ---------- -------
Total............. 19,721 $1,041,785 100.00% 24,958 $1,596,385 100.00%
====== ========== ======= ====== ========== =======
</TABLE>
<TABLE>
<CAPTION>
As of
---------------------------------------------------------------------
December 31, 1996 March 31, 1997
--------------------------------- ---------------------------------
Percentage Percentage
Number Aggregate of Aggregate Number Aggregate of Aggregate
of Principal Principal of Principal Principal
Rate Loans Balance Balance Loans Balance Balance
- ----------------------- ----- ------- ------- ----- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Less than 7.00%........ 3,545 $145,720 5.82% 3,267 $167,709 4.79%
7.00% - 7.99%.......... 12,269 726,800 29.01 12,800 793,886 22.69
8.00% - 8.99%.......... 14,011 838,215 33.46 28,616 1,536,595 43.91
9.00% - 9.99%.......... 9,567 413,598 16.51 13,454 605,120 17.29
10.00% - 10.99%........ 6,322 301,837 12.05 8,736 392,968 11.23
11.00% - 11.99%........ 1,144 45,111 1.80 35 2,938 0.09
12.00% and over........ 924 33,755 1.35 0 0 -
------ ---------- ------- ------ ---------- -------
Total............. 47,782 $2,505,036 100.00% 66,908 $3,499,216 100.00%
====== ========== ======= ====== ========== =======
</TABLE>
48
<PAGE>
Loan administration fees decrease as the principal balance on the
outstanding loan decreases and as the remaining time to maturity of the loan
shortens. The following table sets forth certain information regarding the
remaining maturity of the mortgage loans serviced by the Company (excluding
loans subserviced for others) as of the dates shown:
<TABLE>
<CAPTION>
As of
--------------------------------------------------------------------------------------------
December 31, 1994 December 31, 1995
-------------------------------------------- --------------------------------------------
Percentage Percentage
Number Percentage Unpaid Unpaid Number Percentage Unpaid Unpaid
of of Number Principal Principal of of Number Principal Principal
Maturity Loans of Loans Amount Amount Loans of Loans Amount Amount
- ------------------ ----- -------- ------- ------ ----- -------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 - 5 years....... 2,116 10.73% $ 43,818 4.21% 3,077 12.33% $60,496 3.79%
6 - 10 years...... 5,538 28.08 125,648 12.06 4,898 19.62 118,928 7.45
11 - 15 years..... 4,131 20.95 155,598 14.94 5,263 21.09 302,332 18.94
16 - 20 years..... 1,529 7.75 92,028 8.83 2,608 10.45 168,166 10.53
21 - 25 years..... 3,989 20.23 322,703 30.98 4,880 19.55 472,613 29.61
More than 25 years 2,418 12.26 301,990 28.98 4,232 16.96 473,850 29.68
------ ------- ---------- ------ ------ ------ ---------- -------
Total............. 19,721 100.00% $1,041,785 100.00% 24,958 100.00% $1,596,385 100.00%
====== ======= ========== ====== ====== ====== ========== =======
<CAPTION>
As of
------------------------------------------------------------------------------------------------
December 31, 1996 March 31, 1997
---------------------------------------------- -----------------------------------------------
Percentage Percentage
Number Percentage Unpaid Unpaid Number Percentage Unpaid Unpaid
of of Number Principal Principal of of Number Principal Principal
Maturity Loans of Loans Amount Amount Loans of Loans Amount Amount
- ------------------ ----- -------- ------ ------ ----- -------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 - 5 years....... 5,020 10.51% $77,136 3.08% 7,706 11.52% $ 116,576 3.33%
6 - 10 years...... 8,784 18.39 184,629 7.37 12,466 18.63 294,357 8.41
11 - 15 years..... 6,418 13.43 340,282 13.58 15,223 22.75 647,004 18.49
16 - 20 years..... 14,066 29.44 566,862 22.63 8,138 12.16 465,649 13.31
21 - 25 years..... 7,006 14.66 545,336 21.77 6,805 10.17 576,466 16.47
More than 25 years 6,488 13.57 790,791 31.57 16,570 24.77 1,399,164 39.99
------ ------ ---------- ------ ------ ------ ---------- -------
Total............. 47,782 100.00% $2,505,036 100.00% 66,908 100.00% $3,499,216 100.00%
====== ====== ========== ====== ====== ====== ========== =======
</TABLE>
49
<PAGE>
The following table sets forth the geographic distribution of the mortgage loans
(including delinquencies) serviced by the Company (excluding loans subserviced
for others) by state:
<TABLE>
<CAPTION>
As of
--------------------------------------------------------------------------------------------
December 31, 1994 December 31, 1995
--------------------------------------------- ---------------------------------------------
Percentage of Percentage of Percentage of Percentage of
Number Aggregate Aggregate Total Number Aggregate Aggregate Total
of Principal Principal Delinqs. of Principal Principal Delinqs.
Maturity Loans Balance Balance by State(1) Loans Balance Balance by State(1)
- -------------- ----- ------- ------- ----------- ----- ------- ------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CA(2) 2,822 $343,135 32.94% 29.24% 4,948 $533,590 33.42% 39.04%
TX(2)... 945 25,721 2.47 6.64 4,291 265,242 16.62 7.31
NY... 943 36,831 3.54 7.49 532 32,620 2.04 3.49
MD... 1,828 104,384 10.02 4.80 1,628 93,495 5.86 4.65
AZ... 4,132 145,980 14.01 7.49 3,787 139,038 8.71 7.89
MA... 353 21,625 2.08 3.53 890 83,593 5.24 2.82
Other(3) 8,698 364,109 34.94 40.81 8,882 448,807 28.11 34.80
------ ---------- ------- ------- ------ ---------- ------- -------
Total 19,721 $1,041,785 100.00% 100.00% 24,958 $1,596,385 100.00% 100.00%
====== ========== ======= ======= ====== ========== ======= =======
</TABLE>
<TABLE>
<CAPTION>
As of
---------------------------------------------------------------------------------------------------
December 31, 1996 March 31, 1997
--------------------------------------------- -------------------------------------------------
Percentage of Percentage of Percentage of
Number Aggregate Aggregate Total Number Aggregate Aggregate Percentage of
of Principal Principal Delinqs. of Principal Principal Total Delinqs.
Maturity Loans Balance Balance by State(1) Loans Balance Balance by State(1)
- -------------- ----- ------- ------- ----------- ----- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CA(2) 6,971 $680,075 27.15% 14.60% 8,631 $ 814,527 23.28% 14.01%
TX(2)... 12,257 410,892 16.40 37.34 14,117 490,557 14.02 26.65
NY... 2,396 214,228 8.55 3.87 2,326 209,237 5.98 2.63
MD... 2,415 133,298 5.32 2.17 3,680 197,139 5.63 3.66
AZ... 3,265 128,251 5.12 4.17 3,823 160,618 4.59 3.94
MA... 953 81,170 3.24 1.37 935 79,166 2.26 0.92
Other(3) 19,525 857,122 34.22 36.48 33,396 1,547,972 44.24 48.19
------ ---------- ------- ------- ------ ---------- ------- -------
Total 47,782 $2,505,036 100.00% 100.00% 66,908 $3,499,216 100.00% 100.00%
====== ========== ======= ======= ====== ========== ======= =======
</TABLE>
(1) In terms of number of loans outstanding.
(2) The concentration in California and Texas does not reflect a business
strategy of the Company but rather the pursuit of specific opportunities.
(3) No other state accounted for greater than 5.0%, based on aggregate
principal balances, of the Company's mortgage loan servicing portfolio
as of March 31, 1997.
50
<PAGE>
Acquisition of Servicing Rights. The Company acquires substantially all of
its mortgage servicing rights in the secondary market. The secondary market for
purchasing and selling mortgage servicing rights is inefficient in several
respects, including the lack of a centralized exchange for conducting trading,
the lack of definitive market prices, and the lack of conformity in modeling
assumptions. The industry expertise of United Financial's and Matrix
Financial's employees allows the Company to capitalize upon these inefficiencies
when acquiring mortgage servicing rights. Prior to completing any such
acquisition, the Company analyzes a wide range of characteristics of each
portfolio considered for purchase. This analysis includes projecting revenues
and expenses and reviewing geographic distribution, interest rate distribution,
loan-to-value ratios, outstanding balances, delinquency history, and other
pertinent statistics. Due diligence is performed either by Matrix Financial's
employees or a designated independent contractor on a representative sample of
the mortgages involved. The purchase price is based on the present value of the
expected future cash flow, calculated by using a discount rate and loan
prepayment assumptions that management considers to be appropriate to reflect
the risk associated with the investment.
Servicing Sales. The Company periodically sells its purchased mortgage
servicing portfolios and generally sells all of its originated mortgage loan
servicing rights. Such sales increase revenue, as reflected in loan origination
income and gain on sale of servicing, and generate cash at the time of sale, but
reduce future servicing fee income. Originated mortgage servicing rights were
sold on a bulk and flow basis on loans having an aggregate principal amount of
$303.3 million and $63.4 million during the year ended December 31, 1996 and the
three months ended March 31, 1997, respectively. Periodically, the Company may
also sell purchased mortgage servicing rights to restructure its portfolio or
generate revenues. Purchased mortgage servicing rights were sold on loans
having an aggregate principal amount of $646.0 million and $503.8 million during
the year ended December 31, 1996 and the three months ended March 31, 1997, for
net gains of $3.2 million and $1.4 million, respectively.
The Company anticipates that it will continue to adhere to its policy of
selling substantially all of its originated mortgage servicing rights. The
Company also may sell purchased mortgage servicing rights. Management intends
to base decisions regarding future mortgage servicing sales upon the Company's
cash requirements, purchasing opportunities, capital needs, earnings, and the
market price for mortgage servicing rights. During a quarter in which a sale
occurs, reported income will tend to be greater than if such sale had not
occurred during that quarter. Prices obtained for mortgage servicing rights
vary depending on servicing fee rates, anticipated prepayment rates, average
loan balances, remaining time to maturity, servicing costs, custodial escrow
balances, delinquency and foreclosure experience, and purchasers' required rates
of return.
In the ordinary course of selling mortgage servicing rights, the Company, in
accordance with industry standards, makes certain representations and warranties
to purchasers of mortgage servicing rights. If a loan defaults when there has
been a breach of representations or warranties and the Company has no third-
party recourse, the Company may become liable for the unpaid principal and
interest on defaulted loans. In such a case, the Company may be required to
repurchase the mortgage loan and bear any subsequent loss on the loan. In
connection with any purchases by the Company of mortgage servicing rights, the
Company also is exposed to liability to the extent that an originator or seller
of the servicing rights is unable to honor its representations and warranties.
During 1996 and the first quarter of 1997, the Company recognized losses of
$150,000 and $149,000, respectively, on loan repurchases resulting from a
particular servicing portfolio purchased by the Company. The Company does not
anticipate any additional material losses with respect to this or any other
servicing portfolio due to breaches of representations and warranties; however,
there can be no assurance that the Company will not experience such losses.
Purchase and Sale of Bulk Loan Portfolios
Loan Purchases. In addition to its traditional mortgage loan origination and
servicing-related activities, the Company makes bulk purchases of mortgage loans
through Matrix Bank. The Company believes that its structure provides advantages
over its competitors in the purchase of bulk mortgage loan packages. United
Financial, through its networking within the mortgage banking industry, is able
to refer to Matrix Bank mortgage banking companies that are interested in
selling mortgage loan portfolios. The direct contacts reduce the number of
portfolios that must be purchased
51
<PAGE>
through competitive bid situations, thereby reducing the cost associated with
the acquisition of bulk mortgage loan portfolios.
Because the Company services mortgage loans for more than 200 private
investors, including banks, savings associations, and insurance companies, it is
presented with opportunities to purchase the underlying mortgages. In many
cases, the mortgage loans increase in value solely due to the increased
liquidity provided by uniting ownership of the mortgage servicing rights with
the underlying mortgage loans. As servicer, Matrix Financial possesses
information about the quality and performance history related to each of these
loans, and, in many cases, the Company acts as custodian for the legal and
credit documents on the underlying loans. With such information available, the
Company is in a position to negotiate advantageous pricing on loans, which
provides the Company an opportunity to resell the mortgage loans at a higher
price (an "arbitrage" opportunity). Controlling ownership of the mortgage
servicing and the underlying mortgage loan provides the Company maximum
arbitrage opportunity in a sale. During the year ended December 31, 1996 and
first quarter of 1997, the Company made bulk purchases of approximately $159.0
million and $106.3 million in mortgage loans, respectively.
Types of Loans Purchased. The Company reviews many loan portfolios for
prospective acquisition. The Company primarily focuses on acquiring seasoned
first lien priority loans secured primarily by one-to-four single family
residential properties valued at less than $350,000. The purchased loan
portfolios typically include both fixed and adjustable rate mortgage loans.
Mortgage loan portfolios are purchased from various sellers who, in some cases,
have originated the loans; but in most cases such sellers have acquired the loan
portfolios in bulk purchases.
The Company considers several factors prior to the purchase. Among others,
the Company considers the product type, the current loan balance, the current
interest rate environment, the seasoning of the mortgage loans, payment
histories, geographic location of the underlying collateral, price, the current
liquidity of the Company, and the product mix in its existing mortgage loan
portfolio.
In many cases, the mortgage loan portfolios that the Company acquires are
purchased at a discount to par. Some of the loans in these portfolios are
considered performing loans that have had payment problems in the past or have
had document deficiencies. These types of portfolios afford the Company an
arbitrage opportunity if the purchase discount on such portfolios accurately
reflects the additional risks associated with purchasing these types of loans.
Loan document deficiencies are identified in the due diligence process and, to
the extent practical, are cured by the Company prior to reselling the loans.
The Company also analyzes the payment history on each mortgage loan portfolio.
Many prior problems may be a result of inefficient servicing or may be
attributable to several servicing transfers of the loans over a short period of
time. Because many considerations may impact pricing or yield, each loan
package evaluated is priced based on the specific underlying loan
characteristics. The Company purchased fewer loan portfolios at a discount in
1996 and the first quarter of 1997, versus historical levels. The higher prices
paid in the first quarter of 1997 and the years ended 1996 and 1995 resulted
primarily from the Company acquiring loan portfolios believed to have better
payment histories and fewer document deficiencies on average.
Due Diligence. The Company performs comprehensive due diligence on each
mortgage loan portfolio that the Company desires to purchase on a bulk basis.
These procedures consist of analyzing a representative sample of the mortgage
loans in the portfolio and are typically performed by Company employees, but
occasionally are outsourced to third-party contractors. The underwriter takes
into account many factors in analyzing the sample of mortgage loans in the
subject portfolio, including the general economic conditions in the geographic
area or areas in which the underlying residential properties are situated, the
loan-to-value ratios on the underlying loans, the payment histories of the
borrowers, and other pertinent statistics. In addition, the underwriter
attempts to verify that each sample loan conforms to the standards for loan
documentation set by FNMA and FHLMC, and in cases where a significant portion of
the sample loans contains non-conforming documentation, the Company assesses the
additional risk involved in purchasing such loans. Once the underwriting and
due diligence process is complete, the Company categorizes each loan pool into
one of four categories. This process helps the Company determine whether the
mortgage loan portfolio meets the Company's investment criteria and, if it does,
the range of pricing that the Company feels is appropriate.
52
<PAGE>
Loan Sales. Substantially all of the mortgage loans in the Company's loan
portfolio are classified as held for sale. The Company continually monitors the
secondary market for purchases and sales of mortgage loan portfolios and
typically undertakes a sale of a particular loan portfolio held by the Company
in an attempt to "match" an anticipated bulk purchase of a particular mortgage
loan portfolio or to generate current period earnings and cash flow. To the
extent that the Company is unsuccessful in matching its purchases and sales of
mortgage loans, the Company may have excess capital at Matrix Bank, resulting in
less than optimum leverage and capital ratios. During the year ended December
31, 1996 and the first quarter of 1997, the Company made bulk sales of
approximately $79.0 million and $5.5 million in loans, for gains on sale of bulk
mortgage loans of $3.4 million and $118,000, respectively.
Residential Mortgage Loan Origination
Wholesale Originations. The Company originates residential mortgage loans
primarily on a wholesale basis through Matrix Financial. For the year ended
December 31, 1996 and the three months ended March 31, 1997, Matrix Financial
originated a total of $583.3 million and $95.5 million in wholesale residential
mortgage loans, respectively.
Matrix Financial's source of mortgage loan originations is its wholesale
division, which originates mortgage loans through approved independent mortgage
loan brokers that qualify to participate in Matrix Financial's program through a
formal application process that includes an analysis of the brokers' financial
condition and sample loan files, as well as the brokers' reputation, general
lending expertise, and references. As of March 31, 1997, Matrix Financial had
approved relationships with approximately 500 mortgage loan brokers. From
Matrix Financial's offices in Atlanta, Denver, and Phoenix, the sales staff
solicit mortgage loan brokers throughout the Southeastern and Rocky Mountain
areas of the United States for loan packages that meet Matrix Financial's
criteria. Mortgage loans submitted by brokers are funded after being
underwritten by Matrix Financial.
Mortgage loan brokers act as intermediaries between borrowers and Matrix
Financial in arranging mortgage loans. Matrix Financial, as an approved FNMA,
FHLMC, and GNMA seller/servicer, provides such brokers access to the secondary
market for the sale of mortgage loans that they otherwise cannot access because
they do not meet the applicable seller/servicer net worth requirements. Matrix
Financial attracts and maintains relationships with mortgage loan brokers by
offering a variety of services and products.
By concentrating on wholesale mortgage banking services through independent
mortgage loan brokers, Matrix Financial is able to originate mortgage loans in a
cost-effective manner. Historically, retail mortgage loan origination has
involved higher fixed overhead costs such as offices, furniture, computer
equipment, and telephones, as well as additional personnel costs such as sales
representatives and loan processors. By limiting the number of offices and
personnel needed to generate business, Matrix Financial has transferred the
overhead burden of mortgage origination to the independent mortgage loan brokers
that originate the loans. As a result, Matrix Financial can match its
origination costs more directly to loan origination volume so that a substantial
portion of its costs are variable rather than fixed.
In June 1996, the Company implemented a program to supplement its product
offerings made through its wholesale loan origination networks by adding
products tailored to borrowers who are unable or unwilling to obtain mortgage
financing from conventional mortgage sources. The borrowers who need this type
of loan product often have impaired or unsubstantiated credit histories and/or
unverifiable income and require or seek a high degree of personalized services
and swift response to their loan applications. As a result, these borrowers
generally are not averse to paying higher interest rates that the Company will
charge for this loan product type as compared with the interest rates charged by
conventional lending sources. The Company has established classifications with
respect to the credit profiles of these borrowers. The classifications range
from A-minus through D depending upon a number of factors, including the
borrowers's credit history and employment status classifications with respect to
the credit profiles of these borrowers. To date, the operations of the B/C
Lending Division have not been material to those of the Company.
Retail Originations. On a limited basis, and primarily in order to serve the
communities in which it operates, Matrix Bank originates residential loans on a
retail basis through its branches in Las Cruces, New Mexico and Sun City,
Arizona. In early 1997, the Bank opened a lending branch in Evergreen, Colorado,
that is anticipated to increase the
53
<PAGE>
amount of Matrix Bank's retail originations. This location will primarily
originate residential construction loans and some commercial loans in the local
market place. It is anticipated that the construction loans will be converted to
permanent mortgage loans and funded through Matrix Bank. The retail loans
originated by Matrix Bank consist of a broad range of residential (both at fixed
and at adjustable rates), and on a more limited basis, consumer loan products,
commercial real estate loans, and commercial business loans.
Quality Control. The Company has a loan quality control process designed to
ensure sound lending practices and compliance with FNMA, FHLMC, and applicable
private investor guidelines. Prior to funding any wholesale or retail loan, the
Company performs a pre-funding quality control audit that consists of the
verification of a borrower's credit and employment and utilizes a detailed
checklist. Subsequent to funding, the Company on a monthly basis selects 10% of
all closed loans for a detailed audit conducted by its own personnel or a third-
party service provider. The quality control process entails performing a
complete underwriting review and independent reverification of all employment
information, tax returns, source of down payment funds, bank accounts, and
credit. Furthermore, 10% of the audited loans are chosen for an independent
field review and standard factual credit report. All discovered deficiencies in
these audits are reported to senior management of the Company to determine
trends and additional training needs. All resolvable issues are addressed and
cured by the Company. Any loans that fail to meet applicable investment
criteria of an investor are reported to such investor, which could result in a
requirement by the investor for the Company to repurchase the loan. The Company
also performs a quality control audit on all early payment defaults, first
payment defaults, and 60-day delinquent loans; the findings are reported to the
appropriate investor and/or senior management.
Sale of Loan Originations. The Company generally sells the loans that it
originates. In the future, however, it is anticipated that Matrix Bank will hold
for investment certain mortgage loans that it has originated. Under ongoing
programs established with FNMA and FHLMC, conforming conventional loans may be
sold on a cash basis or pooled by the Company and exchanged for securities
guaranteed by FNMA or FHLMC. These securities are then sold by Matrix Financial
and Matrix Bank to national or regional broker/dealers. Mortgage loans sold to
FNMA or FHLMC are sold on a nonrecourse basis so that foreclosure losses are
generally borne by FNMA or FHLMC and not by the Company.
The Company also sells nonconforming mortgage loans on a nonrecourse basis to
other secondary market investors. These loans are typically first lien mortgage
loans that do not meet all of the agencies' underwriting guidelines, and are
originated instead for other institutional investors with whom the Company has
previously negotiated purchase commitments, and for which the Company
occasionally pays a fee. This practice would also apply to the sale of
residential mortgage loans originated through the Company's B/C Lending
Division.
The Company sells mortgage loans on a servicing-retained or servicing-released
basis. Certain purchasers of mortgage loans require that the loan be sold to
them servicing-released. In all other cases the decision is left to the
Company. Generally, the Company sells conforming loans on a servicing-retained
basis and nonconforming loans on a servicing-released basis. See "--Residential
Loan Servicing Activities."
In connection with the Company's mortgage loan originations and sales, the
Company makes customary representations and warranties, similar in nature and
scope to those provided in connection with sales of mortgage servicing rights.
To date, they have not resulted in any significant repurchases of loans by the
Company or any pending or threatened claims by the purchasers against the
Company. However, there can be no assurance that losses will not occur in the
future due to the representations and warranties issued.
The sale of mortgage loans may generate a gain or loss for the Company. Gains
or losses result primarily from two factors. First, the Company may make a loan
to a borrower at a price that is higher or lower than it would receive if it
immediately sold the loan in the secondary market. These price differences
occur primarily as a result of competitive pricing conditions in the primary
loan origination market. Second, gains or losses may result from the changes in
interest rates that result in changes in the market value of the mortgage loans
from the time that the price commitment is given to the borrower until the time
that the mortgage loan is sold to the investor.
54
<PAGE>
In order to hedge against the interest rate risk resulting from these timing
differences, the Company historically has committed to sell all closed
originated mortgage loans held for sale and a portion of the mortgage loans that
are not yet closed but for which the interest rate has been established
("pipeline loans"). The Company adjusts its net commitment position daily
either by entering into new commitments to sell or by buying back commitments to
sell depending upon its projection of the portion of the pipeline loans that it
expects to close. These projections are based on numerous factors, including
changes in interest rates and general economic trends. The accuracy of the
underlying assumptions bears directly upon the effectiveness of the Company's
use of forward commitments and subsequent profitability. At March 31, 1997, the
Company had approximately $70.3 million in pipeline and funded loans offset with
mandatory forward commitments of approximately $44.0 million and non-mandatory
forward commitments of approximately $21.0 million. At, December 31, 1996, the
Company had approximately $62.6 million in pipeline and funded loans offset with
mandatory forward commitments of approximately $49.1 million and non-mandatory
forward commitments of approximately $8.1 million. The inherent value of the
forward commitments is considered in the determination of the lower of cost or
market in valuing the Company's pipeline and funded loans at any given time. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Comparison of Results of Operations for the Years Ended December 31,
1996 and 1995--Loan Origination."
Real Estate Management and Disposition Services
USS, which began operations in June 1995, provides real estate management
and disposition services to customers across the United States. In addition to
the unaffiliated clients currently served by USS, Matrix Financial uses USS
exclusively in handling the disposition of its foreclosed real estate. Having
USS provide this service as opposed to Matrix Financial transforms the
disposition process into a revenue generator for the Company, since USS
typically collects a fee of 1% of the value of the foreclosed real estate from
the real estate broker involved in the sale transaction. USS is able to provide
this disposition service on an outsourced basis and at no additional cost to the
mortgage loan servicer, since USS collects its fee from the real estate broker.
USS is able to pass the cost of the disposition on to the real estate broker
because of the volume it generates. In addition, USS provides limited
collateral valuation opinions to clients such as FHLMC that are interested in
assessing the value of the underlying collateral on non-performing mortgage
loans, as well as to clients such as Matrix Bank and other third-party mortgage
loan originators and buyers that are interested in evaluating potential bulk
purchase of mortgage loans. To date, the operations of USS have not been
material to those of the Company.
Savings Bank Activities
With branches in Las Cruces, New Mexico and Sun City, Arizona, Matrix Bank
serves its local communities by providing a broad range of personal and business
depository services, offering residential loans, and providing, on a more
limited basis, commercial real estate, commercial business loans, and consumer
loans. In January 1997, a loan production branch for Matrix Bank was
established in Evergreen, Colorado that will primarily originate residential
real estate construction loans and commercial loans. For a discussion of the
depository services offered by Matrix Bank, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources." For a discussion of the historical loan portfolio of the Company,
including that of Matrix Bank, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Asset and Liability Management--
Lending Activities."
In May 1996, a subsidiary of Matrix Bank, Sterling Finance, purchased
substantially all of the assets of a Denver-based originator and Seller of sub-
prime automobile retail installment sales contracts. On December 31, 1996,
Matrix Bank sold the fixed assets of Sterling Finance to a third-party buyer and
ceased operations. In conjunction with contractual obligations associated with
selling loans into the secondary market, Matrix Bank has repurchased
approximately $4.0 million of installment loans and repossessed automobiles that
Sterling Finance sold to outside investors, including the repurchase of
approximately $1.5 million in loans (plus $108,000 of accrued interest) in the
second quarter of 1997. These assets will be disposed of or serviced under the
direction of Matrix Bank. See "Prospectus Summary--Recent Developments" and
"Regulation and Supervision--Federal Savings Bank Operations--Regulation of Sub-
Prime Automobile Lending."
55
<PAGE>
Self-Directed Trust Activities
Sterling Trust provides administration services for self-directed individual
retirement accounts, qualified business retirement plans, personal custodial
accounts, and a variety of corporate trust and escrow arrangements. Sterling
Trust actively markets its services on a nationwide basis to the financial
services industry, specifically broker-dealers, registered representatives,
insurance agents, tax professionals, financial planners and advisors, and
investment product sponsors. At March 31, 1997, Sterling Trust was administering
assets in excess of $1.2 billion. Historically, approximately 6% to 8% of the
assets under administration are maintained in money market accounts. Sterling
Trust retains no discretion with respect to the investment of trust assets, and
executes no investment transaction until so instructed by the client or the
client's designated representative. In February 1997, Sterling Trust moved
approximately $80.0 million of money market balances of such trust assets from a
third-party institution to Matrix Bank.
Competition
The industries in which the Company competes are highly competitive. The
Company competes for the acquisition of mortgage loan servicing rights and bulk
loan portfolios mainly with mortgage companies, savings associations, commercial
banks, and other institutional investors. The Company believes that it has
competed successfully for the acquisition of mortgage loan servicing rights and
bulk loan portfolios by relying on the advantages provided by its unique
corporate structure and the secondary marketing expertise of the employees in
each Subsidiary.
Competition in mortgage loan and mortgage servicing rights brokerage and
consulting arises mainly from other mortgage banking consulting firms, national
and regional investment banking companies, and accounting firms. Management
believes that the distinction among market participants is based primarily on
customer service. United Financial competes for its brokerage and consulting
activities by recruiting qualified and experienced sales people, by developing
innovative sales techniques, by providing financing opportunities to its
customers through its affiliation with Matrix Bank, and by seeking to provide a
higher level of service than is furnished by its competitors.
Competition in originating mortgage loans arises mainly from other mortgage
companies, savings associations, and commercial banks. The distinction among
market participants is based primarily on price and, to a lesser extent, the
quality of customer service and name recognition. Aggressive pricing policies of
the Company's competitors, especially during a declining period of mortgage loan
originations, could in the future result in a decrease in the Company's mortgage
loan origination volume and/or a decrease in the profitability of the Company's
loan originations, thereby reducing the Company's revenues and net income. Many
of the nation's largest mortgage companies, savings associations, and commercial
banks have a significant number of branch offices in areas in which the Company
operates. The Company competes for loans by offering competitive interest rates
and product types, and by seeking to provide a higher level of personal service
to mortgage brokers and borrowers than is furnished by competitors. However, the
Company does not have a significant market share of the lending markets in which
it conducts operations.
Management believes that Matrix Bank's most direct competition for deposits
comes from local financial institutions. The distinction among market
participants is based primarily on price and, to a lesser extent, the quality of
customer service and name recognition. Matrix Bank's cost of funds fluctuates
with general market interest rates. During certain interest rate environments,
additional significant competition for deposits may be expected from corporate
and governmental debt securities, as well as money market mutual funds. Matrix
Bank competes for conventional deposits by emphasizing quality of service,
extensive product lines, and competitive pricing.
Competition in brokering and consulting arises mainly from other mortgage
banking consulting firms and national and regional investment banking and
accounting firms. Management believes that the distinction among market
participants is based primarily on customer service. United Financial competes
for its brokering and consulting activities by recruiting qualified and
experienced sales people, by developing innovative sales techniques, by
providing financing opportunities to its customers through its affiliation with
Matrix Bank and by seeking to provide a higher level of service than is
furnished by its competitors.
56
<PAGE>
Sterling Trust faces considerable competition in all of the services and
products that it offers. The main competition comes from the other self-directed
trust companies. However, Sterling Trust also faces competition from other
trust companies and trust divisions of other financial institutions. Sterling
Trust's niche has been, and will continue to be, providing high quality customer
service and servicing niche retirement products. In an effort to increase
market share, Sterling Trust will endeavor to provide superior service, expand
its marketing efforts, provide competitive pricing, and continue to diversify
its product mix.
Employees
At March 31, 1997, the Company had 279 employees. Management believes that
its relations with its employees are good. Neither Matrix Capital nor any of
the Subsidiaries is a party to any collective bargaining agreement.
Properties
The executive and administrative offices of the Company, United Financial,
USS, and UCM are located at 1380 Lawrence Street, Suite 1410, Denver, Colorado
80204. The lease on these premises extends through January 1999 and the current
annual rent is approximately $120,000. The Company also owns a building in
Phoenix that houses the majority of Matrix Financial's operations. This building
was purchased by the Company in 1994 and is subject to third-party mortgage
indebtedness. The Company utilizes approximately 18,000 of the 30,000 square
feet in this building, and the balance is leased to an affiliated company at
current market rates. The Company also leases two smaller office facilities in
Atlanta and Denver, where Matrix Financial conducts its wholesale loan
origination activities.
Matrix Bank owns an approximately 30,000 square foot building in Las Cruces,
New Mexico. Of this 30,000 square feet, approximately 9,200 square feet serve as
the headquarters for Matrix Bank. Substantially all of the remaining footage is
rented to unaffiliated third-party tenants at market rates. Matrix Bank also
owns a newly opened 1,800 square foot detached branch in Las Cruces and an
approximately 3,000 square foot branch in Sun City, Arizona. In January, 1997,
Matrix Bank opened an approximately 1,500 square foot loan origination branch in
Evergreen, Colorado. The lease on the Evergreen property provides for a one-
year term at an annual cost of $24,000.
Sterling Trust occupies approximately 11,300 square feet in Waco, Texas, under
a lease agreement that is in place until June 30, 2001, at a monthly rent
payment of $13,553. The lease agreement provides for renewal options and
allocation of certain expenses the lessee would reimburse over a specified
amount during the life of the lease.
First Matrix is located in Arlington, Texas and operates in a 1,446 square
foot office suite. The current lease requires a monthly payment of $1,265 and
matures on April 30, 1999.
The Company believes that all of its present facilities are adequate for its
current needs and that additional space is available for future expansion upon
acceptable terms.
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) that purport to
cover a nationwide class of plaintiffs and involve similar facts and legal
claims. 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 unauthorized charges in violation of
the terms of the notes, and demand restitution and attorneys' fees. In
addition, the plaintiffs in Mogavero seek treble damages for Matrix Financial's
alleged violation of 18 U.S.C. (S)1964.
57
<PAGE>
Matrix Financial has entered into an agreement to settle the Limper action and
the Mogavero action. The settlement agreement provides for the administration
of the settlement in the Limper action and the dismissal of the Mogavero action.
A settlement order of dismissal was entered in the Mogavero action in November
1996.
The Court in the Limper action granted preliminary approval of the settlement
in January 1997. Accordingly, as provided by the settlement agreement, Matrix
Financial established a settlement fund of $640,000 that was reserved in the
third quarter of 1996 to account for this contingency. The costs of notice and
class administration, attorneys' fees, and recovery to class members are all to
come from the settlement fund. Notice to class members was mailed in January
1997 and published in February 1997. After a hearing on April 10, 1997, the
Court entered the Final Approval Order on April 21, 1997, approving the
Settlement Agreement as submitted by the parties. The time for appeal from the
Final Approval Order expired on May 21, 1997. No objections to the Settlement
Agreement were filed.
UFI is a defendant in a lawsuit entitled Douglas County Bank & Trust Co. v.
United Financial, Inc., that was commenced on or about May 23, 1997 in the
United States District Court for the District of Nebraska. In the action, the
plaintiff-buyer alleges that UFI, as broker for the seller, made false
representations regarding the GNMA certification of certain mortgage pools the
servicing rights of which were offered for sale in a written offering. The
plaintiff further alleges that it relied on UFI's representations in purchasing
the servicing rights from the seller. The plaintiff seeks recovery of (i) the
deposit paid to the seller in connection with the purchase thereof in the amount
of $147,000; (ii) $1.4 million dollars that the plaintiff claims it paid GNMA to
settle a dispute regarding the certification of the mortgage pools; and (iii)
approximately $1.44 million in lost profits. The Company believes that it has
defenses to this lawsuit; however, no assurances can be given that an adverse
judgment will not be rendered or that such a judgment would not have a material
adverse effect on the Company's consolidated financial condition, results of
operations, or cash flows.
Matrix Bank is a defendant in a lawsuit entitled HLC, Inc. v. Matrix Capital
Bank, that was commenced on or about June 9, 1997 in the United States District
Court for the Middle District of Tennessee. The plaintiff alleges that Matrix
Bank breached an agreement pursuant to which Matrix Bank would act as an issuing
bank in connection with a program allegedly developed by the plaintiff relating
to the issuance of credit cards. The plaintiff agreed to perform, among other
things, network marketing services in an attempt to enroll network marketing
companies in the program, who in turn would solicit credit card applications
from consumers. The plaintiff claims that Matrix Bank failed to comply with its
contractual obligations in performing certain issuing and servicing functions in
connection with the credit card accounts. As a result, the plaintiff is seeking
to recover damages for lost profits and damage to its reputation in an amount in
excess of $10 million. The Company believes that it has defenses to this
lawsuit; however, no assurances can be given that an adverse judgment will not
be rendered or that such a judgment would not have a material adverse effect on
the Company's consolidated financial condition, results of operations, or cash
flows.
The Company is involved from time to time in routine litigation incidental to
its business. However, other than described above, the Company believes that it
is not a party to any material pending litigation that, if decided adversely to
the Company, would have a significant adverse effect on the Company's
consolidated financial condition, results of operations, or cash flows.
58
<PAGE>
SUPERVISION AND REGULATION
Set forth below is a brief description of various laws and regulations
affecting the operations of Matrix Capital and its operating Subsidiaries. The
description of laws and regulations contained herein does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations. Any change in applicable laws, regulations or regulatory policies
may have a material effect on the business, operations, and prospects of the
Company.
Matrix Capital
Matrix Capital is a unitary thrift holding company within the meaning of the
Home Owners' Loan Act of 1933, as amended ("HOLA"). As such, Matrix Capital has
registered with the OTS and is subject to OTS regulation, examination,
supervision, and reporting requirements. In addition, the OTS has enforcement
authority over Matrix Capital and its non-savings institution subsidiaries.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to Matrix Bank. In
addition, Matrix Bank must notify the OTS at least 30 days before making any
distribution to Matrix Capital.
The HOLA prohibits a thrift holding company, directly or indirectly through
one or more subsidiaries, from (i) acquiring another savings institution or
holding company thereof, without prior written approval of the OTS, (ii)
acquiring or retaining, with certain exceptions, more than 5% of a nonsubsidiary
savings institution, a nonsubsidiary holding company, or a nonsubsidiary company
engaged in activities other than those permitted by the HOLA, or (iii) acquiring
or retaining control of a savings institution that is not federally insured. In
evaluating applications by holding companies to acquire savings institutions,
the OTS must consider the financial and managerial resources and future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance funds, the convenience and needs of the community,
and competitive factors.
As a unitary thrift holding company, Matrix Capital generally is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that Matrix Bank continues to be a "qualified thrift
lender" under HOLA (a "QTL"). Upon any nonsupervisory acquisition by Matrix
Capital of another savings association or savings bank that meets the QTL test
and is deemed to be a savings institution by OTS, Matrix Capital would become a
multiple thrift holding company (if the acquired institution is held as a
separate subsidiary) and would be subject to extensive limitations on the types
of business activities in which it could engage. HOLA limits the activities of
a multiple thrift holding company and its uninsured institution subsidiaries
primarily to activities permissible for bank holding companies under Section
4(c)(8) of the Bank Holding Company Act of 1956, as amended (the "BHC Act"),
subject to the prior approval of the OTS, and activities authorized by OTS
regulation.
Legislation has been proposed that would impose limits on the nonbanking
activities of companies that acquire savings associations. It is anticipated
that Matrix Capital's holding company status would be "grandfathered" under such
legislation, but there can be no assurance that Matrix Capital would be exempt
from such limits. Furthermore, any available grandfathering might not continue
to be available to Matrix Capital as a result of a possible merger of the
federal banking agencies. Several proposals have been introduced in Congress
over the past several years with increasing frequency and interest in such a
merger. If the OTS and Office of the Comptroller of the Currency were merged,
as one proposal would require, the federal thrift charter would actually be
eliminated. If adopted, such a proposal would require that Matrix Bank become a
national bank and would subject it to regulation as such. One effect of such a
requirement would be that Matrix Capital could not engage in activities not
permitted for national banks. In addition, the ability to branch interstate
would become subject to the restrictions of the Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 ("Riegle Act"). Accordingly, any out-of-
state branches of Matrix Bank in existence upon the effectiveness of such a
proposal that are not permissible under the Riegle Act and, if not
grandfathered, could be required to be divested. There are also some benefits to
such a charter conversion. For example, Matrix Bank would not, under
regulations currently applicable to national banks, be subject to the QTL test
described below.
Federal law generally provides that no company may acquire control of a
federally-insured savings institution without obtaining the approval of the OTS.
Such acquisitions of control may be disapproved if it is determined, among
59
<PAGE>
other things, that the acquisition would substantially lessen competition or the
financial and managerial resources and further prospects of the acquiror and
savings institution involved or that the acquisition would be detrimental to the
institution or present enhanced insurance risk to the SAIF or Bank Insurance
Fund ("BIF").
Mortgage Banking Operations
The rules and regulations applicable to the Company's mortgage banking
operations establish underwriting guidelines that, among other things, include
anti-discrimination provisions, require provisions for inspections, appraisals,
and credit reports on prospective borrowers, and fix maximum loan amounts.
Moreover, lenders, such as the Company, are required annually to submit to the
HUD, FNMA, and FHLMC audited financial statements, and each such regulatory
entity maintains its own financial guidelines for determining net worth and
eligibility requirements. The Company's affairs are also subject to examination
by HUD, FNMA, and FHLMC at any time to assure compliance with the applicable
regulations, policies, and procedures. Mortgage loan origination activities are
subject to, among others, the Equal Credit Opportunity Act, Federal Truth-in-
Lending Act, and the Real Estate Settlement Procedures Act of 1974, as amended,
and the regulations promulgated thereunder that prohibit discrimination and
require the disclosure of certain basic information to mortgagors concerning
credit terms and settlement costs.
Additionally, there are various state and local laws and regulations affecting
the Company's operations. The Company is licensed in those states in which it
does business requiring such a license where the failure to be licensed would
have a material adverse effect on the Company, its business, or its assets.
Conventional mortgage operations also may be subject to state usury statutes.
Federal Savings Bank Operations
Business Activities. The activities of savings associations are governed by
HOLA and, in certain respects, the Federal Deposit Insurance Act of 1933, as
amended ("FDI Act"). The HOLA and the FDI Act were amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, as amended ("FIRREA")
and the Federal Deposit Insurance Corporation Act of 1991 ("FDICIA"). FIRREA
was enacted to resolve issues relating to problem institutions, including
thrifts, establish a new thrift insurance fund, reorganize the regulatory
structure applicable to savings associations, and impose bank-like standards on
savings associations. FDICIA, among other things, requires that federal banking
agencies intervene promptly when a depository institution experiences financial
difficulties, mandates the establishment of a risk-based deposit insurance
assessment system, and requires imposition of numerous additional safety and
soundness operational standards and restrictions. Both FIRREA and FDICIA
contain provisions affecting numerous aspects of the operations and regulations
of federally-insured savings associations and empower the OTS and the FDIC,
among other agencies, to promulgate regulations implementing their provisions.
Provisions of the federal banking statutes, as amended by FIRREA and FDICIA,
among other matters (i) restrict the use of brokered deposits by troubled
savings associations that are not well capitalized, (ii) prohibit the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories, (iii) subject to OTS waiver, restrict the aggregate
amount of loans secured by non-residential real estate property to 400% of Tier
1 capital, (iv) permit savings and loan holding companies to acquire up to 5% of
the voting shares of non-subsidiary savings associations or savings and loan
holding companies without prior approval, (v) permit bank holding companies to
acquire healthy savings associations, (vi) require the federal banking agencies
to establish by regulation standards for extensions of credit secured by real
estate, and (vii) restrict transactions between a savings association and its
affiliates.
Loans to One Borrower. Under the HOLA, savings associations are generally
subject to the national bank limits on loans to one borrower. Generally, a
savings institution may not make a loan or extend credit to a single or related
group of borrowers in excess of 15% of the institution's unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is fully secured by readily marketable collateral,
which is defined to include certain securities and bullion, but generally does
not include real estate.
60
<PAGE>
QTL Test. The HOLA requires savings associations to meet a QTL test. Under
recent legislation and applicable regulations, any savings institution is a QTL
if (i) it qualifies as a domestic building and loan association under Section
7701(a)(19) of the Internal Revenue Code (which generally requires that at least
60% of the institution's assets constitute loans secured by residential real
estate or deposits, educational loans, cash or certain governmental obligations)
or (ii) at least 65% of its "portfolio assets" (total assets less (a) specified
liquid assets up to 20% of total assets, (b) intangibles, including goodwill,
and (c) the value of property used to conduct business) consist of certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed and related securities) on a
monthly basis in nine out of every 12 months.
A savings association that fails the QTL test for four or more months out of
the prior 12-month period must either convert to a bank charter or operate under
certain restrictions. If the savings association does not convert to a bank
charter, generally it will be prohibited from: (i) making any new investment or
engaging in any new activity not permissible for a national bank; (ii) paying
dividends not permissible under national bank statutes and regulations; (iii)
obtaining any new advances from any FHLB; and (iv) establishing any new branch
office in a location not permissible for a national bank with its head office
located in the association's home state. Any bank chartered as a result of
failure of the QTL test must pay exit and entrance fees as a consequence of
leaving the SAIF and entering the BIF as further described below. In addition,
beginning three years after the association fails the QTL test, the association
will be prohibited from engaging in any activity or retaining any investment not
permissible for a national bank and will have to repay any outstanding advances
from FHLB as promptly as possible consistent with safety and soundness. One
year from the date the association fails the QTL test, any holding company that
controls the association must register as and be deemed to be a bank holding
company, subject to the restrictions and limitations of the BHC Act, and to the
regulations of the Federal Reserve. As of March 31, 1997, Matrix Bank
maintained approximately 92% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test. Consequently, Matrix Capital is
able to retain its savings and loan holding company status.
Limitation on Capital Distributions. OTS regulations impose limitations upon
all capital distributions by savings associations, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of associations that are
based primarily on an institution's capital level. An institution that has
capital that is equal to or exceeds all fully phased-in capital requirements
before and after a proposed capital distribution ("Tier 1 Institution") and has
not been advised by the OTS that it is in need of more than normal supervision,
could, after prior notice but without the approval of the OTS, make capital
distributions during a calendar year equal to the greater of: (i) 100% of its
net income to date during the calendar year plus the amount that would reduce by
one-half its "surplus capital ratio" (the excess capital over its fully phased-
in capital requirements) at the beginning of the calendar year or (ii) 75% of
its net income for the previous four quarters. Any additional capital
distributions would require prior regulatory approval. If Matrix Bank's capital
falls below its fully phased-in requirement or the OTS notifies it that it is in
need of more than normal supervision, Matrix Bank's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, that would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. At March 31, 1997, Matrix Bank was a
Tier 1 Institution.
Liquidity. Matrix Bank must maintain an average daily balance of liquid
assets and short-term liquid assets equal to a monthly average of not less than
specified percentages of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement may be changed from time to time by the
OTS. Monetary penalties may be imposed for failure to meet these liquidity
requirements. Since its acquisition by Matrix Capital, Matrix Bank has never
failed to meet its liquidity requirements.
Assessments. Savings associations must pay assessments to the OTS to fund the
operations of the OTS. The general assessment, currently assessed on a semi-
annual basis, is computed upon the savings institution's total assets, including
consolidated subsidiaries, as reported in the association's latest quarterly
thrift financial report. The assessments paid by Matrix Bank for the years
ended December 31, 1995 and 1996 and for the three months ended March 31, 1997
totaled $155,000, $635,000, and $3,000, respectively.
61
<PAGE>
Branching. In April 1992, the OTS amended its rule on branching by federally
chartered savings associations to permit nationwide branching to the extent
allowed by federal statute. This permits federal savings associations with
interstate networks to diversify their loan portfolios and lines of business.
The OTS authority preempts any state law purporting to regulate branching by
federal savings associations.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial associations, nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community. The CRA requires the OTS, in
connection with its examination of a savings institution, to assess the
institution's records of meeting the credit needs of its community and to take
such record into account in evaluating certain applications by such institution.
The CRA also requires all associations to publicly disclose their CRA rating.
Matrix Bank received a CRA rating of "satisfactory" in its most recent
examination.
Insurance of Accounts and Regulation by the FDIC. Matrix Bank is a member of
the SAIF, which is administered by the FDIC. Savings deposits are insured up to
$100,000 per insured member (as defined by law and regulation) by the FDIC.
Such insurance is backed by the full faith and credit of the United States. As
insurer, the FDIC imposes deposit insurance assessments and is authorized to
conduct examinations of, and to require reporting by, the FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging
in any activity the FDIC determines by regulation or order to pose a serious
risk to the FDIC. The FDIC also may initiate enforcement actions against
savings associations and may terminate the deposit insurance if it determines
that the institution has engaged or is engaging in unsafe or unsound practices,
or is in an unsafe or unsound condition.
FDICIA required the FDIC to implement a risk-based deposit insurance
assessment system. Pursuant to this requirement, the FDIC has adopted a risk-
based assessment system under which all SAIF-insured depository associations are
placed into one of nine categories and assessed insurance assessments based upon
their level of capital and supervisory evaluation. Under this system,
associations classified as well capitalized and considered healthy pay the
lowest assessment while associations that are less than adequately capitalized
and considered of substantial supervisory concern pay the highest assessment.
In addition, under FDICIA, the FDIC may impose special assessments on SAIF
members to repay amounts borrowed from the United States Treasury or for any
other reason deemed necessary by the FDIC. The FDIC may increase assessment
rates, on a semiannual basis, if it determines that the reserve ratio of the
SAIF will be less than the designated reserve ratio of 1.25% of SAIF insured
deposits. In setting these increased assessments, the FDIC must seek to restore
the reserve ratio to that designated reserve level, or such higher reserve ratio
as established by the FDIC. Matrix Bank's current assessment is .064% of
deposits, which is the lowest rate.
By contrast, financial institutions that are members of the BIF, which has
higher reserves, experienced lower deposit insurance assessments. The disparity
in deposit insurance assessments between SAIF and BIF members was exacerbated by
the statutory requirement that both the SAIF and the BIF funds be recapitalized
to a 1.25% reserved deposits ratio and that a portion of most thrift's deposit
insurance assessments be used to service bonds issued by the Financial
Corporation ("FICO"). BIF reached the required reserve ratio in 1995. As a
result, financial institutions that have deposits insured by the SAIF were
subject to a potential competitive disadvantage as compared to BIF members.
To address this rate disparity, on September 30, 1996, the President signed
legislation intended to enable SAIF to reach the designated reserve ratio. The
legislation provided for a one-time special assessment of .657% to be imposed
upon all SAIF deposits as of March 31, 1995. Based on the Company's SAIF
deposits as of March 31, 1995, the cost of the one-time special assessment was
approximately $450,000 (pre-tax). This amount was accrued in the third quarter
of 1996 and paid in the fourth quarter of 1996.
The legislation also provides for BIF members to service a growing portion of
the FICO bond payments. Until January 1, 2000, annual assessments of .013% of
BIF deposits and .064% of SAIF deposits will service the annual payments due on
the FICO bonds. Accordingly, Matrix Bank's portion of the payment on the FICO
bonds is .064% of
62
<PAGE>
the deposits. The legislation provides for subsequent full pro rata sharing of
FICO bond payments by BIF and SAIF institutions. The legislation called for a
merger of the SAIF and BIF as of January 1, 1999, but only if the thrift charter
has been eliminated.
The financing corporations created by FIRREA and the Competitive Equality
Banking Act of 1987 are also empowered to assess premiums on savings
associations to help fund the liquidation or sale of troubled associations.
Such premiums cannot, however, exceed the amount of SAIF assessments and are
paid in lieu thereof.
Brokered Deposits. Under the FDIC regulations governing brokered deposits,
well-capitalized associations are not subject to brokered deposit limitations,
while adequately capitalized associations are subject to certain brokered
deposit limitations and undercapitalized associations may not accept brokered
deposits. Matrix Bank is considered to be a well-capitalized association.
Although Matrix Bank does not currently accept brokered deposits, it may do so
in the future to allow for the desired growth of Matrix Bank. See "--Capital
Requirements."
Financial Management Requirements. FDICIA also imposes new financial
reporting requirements on all depository associations with assets of more than
$500 million, the management of such associations, and the independent auditors
of such associations, and establishes rules for the composition, duties, and
authority of such associations' audit committees and boards of directors.
Transactions With Related Parties. Matrix Bank's authority to engage in
transactions with related parties or affiliates or to make loans to certain
insiders is limited by the Federal Reserve Act of 1913, as amended. In
addition, savings associations may not lend to any affiliate that is engaged in
activities that are not permissible for bank holding companies under the BHC
Act. Further, no savings institution may purchase the securities of any
affiliate other than a subsidiary.
Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility
over savings associations such as Matrix Bank and has the authority to bring
enforcement action against all "institution-related parties," including
shareholders, attorneys, appraisers, and accountants who knowingly or recklessly
participate in wrongful action that caused or is likely to cause more than a
minimal financial loss to, or a significant adverse effect on, an insured
depository institution. Civil penalties cover a wide range of violations and
actions and range up to $25,000 per day unless a finding of reckless disregard
is made, in which case fines of up to $1 million per day are permitted. Criminal
penalties for most financial institution crimes include fines of up to $1
million and imprisonment for up to 30 years. In addition, regulators have
substantial discretion to impose enforcement action on an institution that fails
to comply with its regulatory requirements, particularly with respect to the
capital requirements. Possible enforcement action ranges from the imposition of
a capital plan and capital directive to receivership, conservatorship, or the
termination of deposit insurance. Under the FDI Act, the FDIC has the authority
to recommend to the Director of the OTS that enforcement action be taken with
respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances. Matrix Bank is not presently subject to any of the foregoing
enforcement actions.
Standards for Safety and Soundness. FDICIA requires each federal banking
agency to prescribe for all insured depository institutions and, to some extent,
their holding companies, standards relating to internal controls, information
systems and audit systems, loan documentation, credit underwriting, interest
rate risk exposure, asset growth, and compensation, fees and benefits, and such
other operational and managerial standards as the agency deems appropriate. In
addition, the federal banking regulatory agencies are required to prescribe by
regulation: (i) maximum classified assets to capital ratios; (ii) minimum
earnings sufficient to absorb losses without impairing capital; (iii) to the
extent feasible, a minimum ratio of market value to book value for publicly
traded shares of depository institutions or the depository institution holding
companies; (iv) standards for extensions of credit secured by real estate or
made for the purpose of financing the construction of improvements on real
estate; and (v) such other standards relating to asset quality, earnings, and
valuation as the agency deems appropriate. Finally, each federal banking agency
is required to prescribe standards for employment contracts and other
compensation arrangements of executive officers, employees, directors, and
principal shareholders of insured depository associations that would prohibit
compensation, benefits, and arrangements that are excessive or that could lead
to a material financial loss for the institution. If an insured depository
institution or its
63
<PAGE>
holding company fails to meet any of the standards described above, it must
submit to the appropriate federal banking agency a plan specifying the steps
that will be taken to cure the deficiency. If an institution fails to submit an
acceptable plan or fails to implement the plan, the appropriate federal banking
agency will require the institution or holding company to correct the deficiency
and, until corrected, may impose restrictions on the institution or the holding
company, including any of the restrictions applicable under the prompt
corrective action provisions of FDICIA. See "--Prompt Corrective Action."
Capital Requirements. FDICIA added a provision establishing "capital
categories" in order to facilitate prompt corrective action by the federal
banking regulators. The purpose of this amendment is to impose more scrutiny
and restrictions on institutions, and to prohibit savings institutions from
making capital distributions or paying certain management fees that would leave
the institution undercapitalized. FDICIA established five capital categories
for this purpose:
. An institution will be deemed to be well-capitalized if it (i) has a
total risk-based capital ratio of 10% or more, (ii) has a Tier 1 risk-
based capital ratio of 6% or more, and (iii) has a leverage ratio of
5% or more.
. An institution will be deemed to be adequately capitalized if it (i)
has a total risk-based capital ratio of at least 8%, (ii) has a Tier 1
risk-based capital ratio of at least 4%, and (iii) subject to certain
exceptions, has a leverage ratio of at least 4%.
. An institution will be deemed to be undercapitalized if it (i) has a
total risk-based capital ratio of less than 8%, (ii) has a Tier 1
risk-based capital ratio that is less than 4%, or (iii) subject to
certain exceptions, has a leverage ratio of less than 4%.
. An institution will be deemed to be significantly undercapitalized if
it (i) has a total risk-based capital ratio of less than 6%, (ii) has
a Tier 1 risk-based capital ratio of less than 3%, or (iii) has a
leverage ratio of less than 3%.
. An institution will be deemed to be critically undercapitalized if it
has a ratio of tangible equity to total assets of less than 2%.
The Congress of the United States adopted a bill that did not become law,
but that would require federal savings banks to convert to national banks. In
the event of such a conversion, subject to limited grandfathering, thrift
holding companies, such as Matrix Capital, would become regulated by the Federal
Reserve. The Federal Reserve requires bank holding companies to maintain a
leverage ratio of 5.0% with the aggregate amount of purchased mortgage servicing
rights not to exceed 50.0% of Tier 1 capital (the numerator of the leverage
ratio). Had Matrix Capital been subject to the Federal Reserve Board's capital
regulations, its consolidated leverage ratio would have been approximately 3.0%
at March 31, 1997 (assuming no other adjustments). There is considerable
uncertainty regarding whether such legislation will be adopted.
Prompt Corrective Action. FDICIA establishes a system of prompt corrective
action to resolve the problem of undercapitalized associations. Under that
system, the banking regulators must take certain supervisory actions against
undercapitalized associations, the severity of which depends upon an
institution's level of capitalization. Generally, subject to a narrow exception,
FDICIA requires the appropriate federal banking regulator to appoint a receiver
or conservator for an institution that is critically undercapitalized. FDICIA
authorizes the banking regulators to specify the ratio of tangible capital to
assets at which an institution becomes critically undercapitalized and requires
that ratio to be no less than 2% of assets.
A thrift institution may be reclassified to an even lower category than is
indicated by its current capital position if the OTS determines the institution
to be otherwise in an unsafe or unsound condition or to be engaged in an unsafe
or unsound practice. This could include a failure by the institution to correct
deficiencies following receipt of a less-than-satisfactory rating on its most
recent examination report. Among other things, undercapitalized institutions are
subject to growth limitations and are required to submit capital restoration
plans. If an institution fails to submit an acceptable plan or fails in any
material respect to implement an approved plan, it is treated as significantly
undercapitalized.
64
<PAGE>
The OTS has adopted a rule that modifies the minimum core capital
requirement for some thrift institutions. The general minimum requirement of
Tier 1 capital at least equal to 3% of adjusted total assets is applicable only
to those institutions that receive a composite rating of one (the highest
rating) under the "MACRO" rating system for thrift institutions, and those that
are, in general, considered strong organizations having well-diversified risks
(including no undue interest rate risk exposure, excellent control systems, good
earnings, high asset quality and liquidity, and well-managed on-and off-balance
sheet assets). All other thrift institutions must maintain core capital of 3%
plus an additional 100 to 200 basis points as established by the OTS on a case-
by-case basis.
Matrix Bank's Capital Ratios. The following table indicates Matrix Bank's
regulatory capital ratios at March 31, 1997:
<TABLE>
<CAPTION>
As of
March 31, 1997
------------------------
Core Risk-Based
Capital Capital
------- -----------
(Dollars in thousands)
<S> <C> <C>
Shareholder's equity/GAAP capital................. $ 16,962 $ 16,962
Additional capital items:
General valuation allowances.................. - 1,144
------- -------
Regulatory capital as reported to the OTS......... 16,962 18,106
Minimum capital requirement as reported to the OTS 9,249 13,238
-------- -------
Regulatory capital--excess........................ $ 7,713 $ 4,868
======== =======
Capital ratios.................................... 5.50% 10.94%
Well-capitalized requirement...................... 5.00% 10.00%
</TABLE>
Federal Home Loan Bank System. Matrix Bank is a member of the FHLB system,
which consists of 12 regional FHLBs. The FHLB system provides a central credit
facility primarily for member associations and administers the home financing
credit function of savings associations. FHLB advances must be secured by
specified types of collateral and may only be obtained for the purpose of
providing funds for residential housing finance. The FHLB funds its operations
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB system. Matrix Bank, as a member of the FHLB system, must acquire and hold
shares of capital stock in its regional FHLB in an amount at least equal to 1%
of the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. Matrix Bank was in compliance
with this requirement with an investment in FHLB stock at March 31, 1997 of $2.9
million.
The FHLBs must provide funds to service the FICO bonds and contribute funds
for affordable housing programs. These requirements have affected adversely the
level of FHLB dividends paid and could continue to do so. Such requirements
could also result in the FHLBs' imposing a higher rate of interest on advances
to their members and could have an adverse effect on the value of FHLB stock in
the future, with a corresponding reduction in Matrix Bank's capital. For the
years ended December 31, 1995 and 1996 and for the three months ended March 31,
1997, dividends from the FHLB to Matrix Bank amounted to $86,000, $153,000, and
$41,000, respectively. If dividends were reduced, Matrix Bank's income would
likely also be reduced.
Federal Reserve System. Federal Reserve regulations require savings
associations to maintain non-interest earning reserves against their transaction
accounts (primarily regular checking and NOW accounts). Matrix Bank is in
compliance with these regulations. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve may be used to satisfy liquidity
requirements imposed by the OTS. Because required reserves must be maintained
in the form of vault cash, a noninterest-bearing account at a Federal Reserve
Bank, or a pass-through account as defined by the Federal Reserve, the effect of
this reserve requirement is to reduce Matrix Bank's interest-earning
65
<PAGE>
assets. FHLB system members are also authorized to borrow from the Federal
Reserve, but applicable regulations require associations to exhaust all FHLB
sources before borrowing from a Federal Reserve Bank.
Regulation of Sub-Prime Automobile Lending. On December 31, 1996, Matrix
Bank sold the assets of its subsidiary engaged in sub-prime automobile lending
to a third-party buyer. However, during the time that Matrix Bank owned operated
such entity, it purchased approximately $18.5 million automobile retail
installment contracts and sold them into the secondary market, subject to
certain recourse provisions. In conjunction with the contractual obligations
associated with those sales, Matrix Bank had, as of March 31, 1997, repurchased
approximately $2.5 million of installment loans and repossessed automobiles that
Sterling Finance sold to outside investors. In addition, during the second
quarter of 1997, the Company repurchased approximately $1.5 million of loans
plus $108,000 of the accrued interest pursuant to a settlement with a certain
purchaser of installment loans. The loans will be disposed of or serviced under
the direction of Matrix Bank. See "Prospectus Summary--Recent Developments."
Matrix Bank bears the risk of additional repurchases subject to certain terms
and conditions of the various sale agreements that are primarily restricted to
fraud and title issues. The automobile lending activities are subject to
various federal and state laws and regulations. Consumer lending laws generally
require licensing of the lender and purchasers of loans and adequate disclosure
of loan terms and impose limitations on the terms of consumer loans and on
collection policies and creditor remedies. Federal consumer credit statutes
primarily require disclosures of credit terms in consumer finance transactions.
In general, the Company's sub-prime automobile lending activities were conducted
under licenses issued by individual states and were also subject to the
provisions of the federal Consumer Credit Protection Act and its related
regulations.
Due to the consumer-oriented nature of the industry and uncertainties with
respect to the application of various laws and regulations in certain
circumstances, industry participants are named from time to time as defendants
in litigation involving alleged violations of federal and state consumer lending
or other similar laws and regulations. A significant judgment against the
Company in connection with any litigation could have a material adverse affect
on the Company's financial condition and results of operations. In addition, if
it were determined that a material number of loans purchased by the Company
involved violations of applicable lending laws or fraudulent actions by the
automobile dealers, the Company's financial condition and results of operations
could be materially adversely affected.
FAS 122. In May 1995, the Financial Accounting Standards Board issued FAS
122, which amended Statement of Financial Accounting Standards No. 65,
Accounting for Certain Mortgage Banking Activities ("FAS 65"). FAS 122 requires
the recognition of originated mortgage servicing rights, as well as purchased
mortgage servicing rights, as assets by allocating total costs incurred between
the loan and the servicing rights based on their relative fair values. Under
FAS 65, the cost of originated mortgage servicing rights was not recognized as
an asset and was charged to earnings when the related loan was sold. With
respect to acquisition of mortgage servicing rights through either the purchase
or origination of mortgage loans, FAS 122 has a different cost allocation
methodology than SFAS No. 65. In contrast to a cost allocation based on
estimated fair market value as set forth in FAS 122, the prior requirement was
to allocate the costs incurred in excess of the market value of the loans
without the servicing rights to purchased mortgage servicing rights. If it is
not practicable to estimate fair values of the mortgage servicing rights and the
mortgage loans (without the mortgage servicing rights), the entire cost of
purchasing or originating the loans should be allocated to the mortgage loans
and no cost should be allocated to the mortgage servicing rights. FAS 122 also
requires that all capitalized mortgage servicing rights be evaluated for
impairment based on the excess of the carrying amount of the mortgage servicing
rights over their value and it requires a holder of mortgage servicing rights to
stratify its mortgage servicing rights that are capitalized after the adoption
of FAS 122 based on one or more of the predominant risk characteristics of the
underlying loans. Impairment will be recognized through a valuation allowance
for each impaired stratum.
66
<PAGE>
Regulation of Sterling Trust Company
Activities. Sterling Trust provides custodial services and directed
(nondiscretionary) trustee services. Sterling Trust was chartered under the
laws of the State of Texas, and as a Texas trust company is subject to
supervision, regulation, and examination by the Texas Department of Banking (the
"TDB"). Under applicable law, a Texas trust company, such as Sterling Trust, is
subject to virtually all provisions of the TBA as if the trust company were a
state chartered bank. The activities of a Texas trust company are limited by
applicable law generally to acting as a trustee, executor, administrator,
guardian or agent for the performance of any lawful act, and to lend and
accumulate money when authorized under applicable law. In addition, a Texas
trust company with capital of not less than $1 million, such as Sterling Trust,
has the power to (i) purchase, sell, discount and negotiate notes, drafts,
checks and other evidences of indebtedness, (ii) purchase and sell securities,
(iii) issue debentures, bonds and promissory notes and accept bills and notes
drawn on it (but may not have liabilities exceeding five times its capital and
surplus, or 10 times with the written consent of the Texas Banking
Commissioner), and (iv) exercise powers incidental to the enumerated powers
described in the TBA. A Texas trust company is generally prohibited from
accepting demand or time deposits.
Limitation on Capital Distributions. The TBA prohibits a Texas trust
company from reducing its outstanding capital and surplus through dividend,
redemption or other capital distribution without the prior written approval of
the Texas Banking Commissioner (the "Commissioner"). The TBA does not prohibit
the declaration and payment of pro rata share dividends consistent with the
Texas Business Corporation Act.
Investments. A Texas trust company is generally obligated to maintain an
amount equal to 40% of its capital and surplus in investments that are readily
marketable and can be converted into cash within four business days, including
(i) federally insured certificates of deposit, (ii) securities in which a state
bank can invest without limitation under applicable law, and (iii) corporate
debt or equity securities registered or approved for registration and traded on
a national securities exchange or authorized for quotation on an automated
quotation system sponsored by a registered securities association. Subject to
the requirements set forth in the preceding sentence, a Texas trust company is
permitted to invest its corporate assets in any investment permitted by law,
provided that without the prior written consent of the Commissioner or otherwise
provided by the TBA, a Texas trust company may not invest an amount in excess of
15% of its capital and certified surplus in the securities of a single issuer.
Branching. The TBA permits a Texas trust company to establish and maintain
branch offices at any location within the state of Texas on prior written
approval of the Commissioner. The TDB currently does not permit Texas trust
companies to establish branches outside the state of Texas.
Transactions With Related Parties. The TBA prohibits the sale or lease of
an asset of a Texas trust company, or the purchase or lease of an asset by a
Texas trust company, where the transaction involves an officer, director,
principal shareholder or affiliate, unless such transaction is approved by a
disinterested majority of the board of directors or the prior written approval
of the Commissioner.
Enforcement. Under applicable provisions of the TBA, the Commissioner has
the power to issue enforcement actions against a Texas trust company or any
officer, employee, or director of a Texas trust company. In addition, in certain
circumstances, the Commissioner may remove a present or former officer, director
or employee of a Texas trust company from office or employment, and may prohibit
a shareholder or other persons participating in the affairs of a Texas trust
company from such participation. The Commissioner has the authority to assess
civil penalties of up to $500 per day for violations of a cease and desist,
removal or prohibition order. The Commissioner also has the authority to assess
civil money penalties of up to $1,000 per occurrence for the violation of
certain filing and audit requirements to which Sterling Trust is subject. In
addition, certain violations of the TBA constitute felonies under Texas law.
Capital Requirements. Applicable law requires a Texas trust company to
have and maintain capital of at least $1 million. The Commissioner may require
additional capital of a Texas trust company if the Commissioner determines it
necessary to protect the safety and soundness of such company. Sterling Trust
is in compliance with all capital requirements under Texas law.
67
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding the current
directors and executive officers of the Company.
<TABLE>
<CAPTION>
Director's
Term
Name Age Principal Positions Expires
- ------------------------- --- -------------------------------- ----------
<S> <C> <C> <C>
Guy Gibson............... 32 Matrix Capital: President, Chief 1998
Executive
Officer, and Director
Matrix Financial: Chairman of the Board
and President
Richard V. Schmitz....... 34 Matrix Capital: Chairman of the Board 1999
United Financial: Chairman of the Board
D. Mark Spencer.......... 37 Matrix Capital: Vice Chairman of the 1999
Board
Matrix Bank: Chairman of the Board
Thomas M. Piercy......... 32 Matrix Capital: Director 2000
United Financial: President
David M. Kloos........... 35 Matrix Capital: Senior Vice President, 1998
Chief Financial Officer, and Director
Matrix Bank: Executive Vice President
and
Chief Financial Officer
Gary Lenzo............... 46 Matrix Bank: President and Chief --
Executive Officer
Thomas J. Osselaer....... 38 Matrix Financial: Executive Vice --
President, Chief Operating Officer,
and
Chief Financial Officer
James G. Panero.......... 34 Matrix Capital: Senior Vice President, --
Secretary, and General Counsel
Thomas P. Cronin......... 51 Matrix Capital: Vice Chairman --
United Financial: Chief Executive Officer
Paul E. Skretny.......... 52 Sterling Trust: Chief Executive Officer --
First Matrix: Chairman of the Board
Stephen Skiba............ 42 Matrix Capital: Director 2000
David A. Frank........... 49 Matrix Capital: Director 1998
Peter G. Weinstock....... 35 Matrix Capital: Advisory Director --
</TABLE>
Guy A. Gibson has served as the Chief Executive Officer and a director of
Matrix Capital since its formation in June 1993. Mr. Gibson has served as
Chairman of the Board of Matrix Financial since August 1990 and as its President
since August 1994. Mr. Gibson was one of the original founders of Matrix
Financial. Prior to his tenure with the Company, Mr. Gibson held the position
of Account Executive with the investment banking firms of PaineWebber from 1987
to 1989 and Lincoln Financial Group, a Denver-based servicing brokerage firm,
from 1989 to 1990.
68
<PAGE>
Richard V. Schmitz has served as a director of Matrix Capital since its
formation in June 1993 and was elected Chairman of the Board of Matrix Capital
in February 1996. Mr. Schmitz was one of the original founders of United
Financial, held the position of Chief Executive Officer of United Financial from
1990 until early 1997, and has been Chairman of the Board of United Financial
since that time.
D. Mark Spencer served as Chairman of the Board of Matrix Capital from June
1993 until February 1996. Mr. Spencer has also served as an executive officer
of the Company since June 1993. Mr. Spencer has served as Chairman of the Board
of Matrix Bank since October 1993, and has served as director of Matrix
Financial since August 1990. From 1985 through July 1990, Mr. Spencer served as
Vice President of Secondary Marketing for Austin Federal Savings and Loan, an
Austin, Texas savings and loan association.
Thomas M. Piercy served as Senior Vice President of United Financial from
October 1990 to June 1996, when he was elected President of United Financial.
Mr. Piercy has served as a director of Matrix Capital since June 1993. From 1986
to 1990, Mr. Piercy served as Managing Director of Lincoln Financial Group.
David W. Kloos has served as a Vice President and Chief Financial Officer
of Matrix Capital since June 1993, and he has served as a director of Matrix
Capital also since June 1993. Mr. Kloos was appointed as Senior Vice President
of Matrix Capital in September 1996. Mr. Kloos has served as Executive Vice
President and Chief Financial Officer of Matrix Bank since October 1993. From
1989 through 1993, Mr. Kloos served as Senior Vice President and Chief Financial
Officer of Argo Federal Savings Bank, a Summit, Illinois federal savings bank.
From 1985 to 1989, Mr. Kloos, a certified public accountant, was employed by the
Chicago office of KPMG Peat Marwick LLP.
Gary Lenzo has served as President and Chief Executive Officer and a
director of Matrix Bank since October 1993. From 1987 to 1992, Mr. Lenzo served
as Vice President of Austin Savings Association and Great Western Savings Bank,
both Austin, Texas based savings associations. From 1984 to 1986, Mr. Lenzo
served as Vice President of Unifirst American Mortgage Corporation, an Austin,
Texas mortgage company.
Thomas J. Osselaer has served as Executive Vice President and Chief
Financial Officer of Matrix Financial since July 1993, Chief Operating Officer
since August 1994, and was Vice President from March 1992 to July 1993. From
January 1990 to February 1992, Mr. Osselaer served as Treasurer and Finance
Division Manager for the receivership of MeraBank Federal Savings Bank, a
Resolution Trust Corporation controlled savings bank in Phoenix, Arizona. From
1985 to 1990, Mr. Osselaer served as Vice President, Assistant Treasurer, and
Investment Manager for MeraBank Federal Savings Bank.
James G. Panero has served as Senior Vice President, General Counsel, and
Secretary of Matrix Capital since January 1996. From 1994 to 1995, Mr. Panero
served as Senior Counsel of Chemical Residential Mortgage Corporation of Edison,
New Jersey, the mortgage banking subsidiary of Chemical Bank. From 1992 to 1994,
Mr. Panero served as Associate Counsel of Margaretten and Co., Inc., a publicly
traded national mortgage banking company in Edison, New Jersey, which was
acquired by Chemical Bank in 1994. From 1988 to 1992, Mr. Panero served as an
associate with the law firm of Gurfein & Graubard in New York City where he
specialized in commercial and real estate litigation.
Thomas P. Cronin joined the Company effective March 1, 1997. Mr. Cronin
assumed the management position of Vice Chairman of the Company and Chief
Executive Officer of United Financial. Prior to joining the Company, Mr. Cronin
held various positions with MCA Financial Corporation, a Michigan-based
financial services company, and its wholly owned subsidiary, MCA Mortgage
Corporation. Mr. Cronin's most recent management position with MCA Financial
Corporation was Vice Chairman; however, Mr. Cronin continues to serve as
a director of MCA Financial Corporation. Mr. Cronin has over 30 years of
experience in the mortgage banking industry and currently is the Legislative
Vice Chairman and board member for the Mortgage Bankers Association of America.
Paul E. Skretny has served as Chief Executive Officer of Sterling Trust
since May 1993 and as Chairman of the Board of First Matrix since March 1994.
Prior to his association with Sterling Trust, Mr. Skretny was Senior Vice
69
<PAGE>
President of APS Securities Corporation and Masterson, Moreland, Sauer, Whisman
Inc. from June 1988 to February 1993, providing investment services and
assistance to individual and institutional investors. From May 1975 to April
1988, Mr. Skretny was employed by Jefferson Bancshares, Inc. and its
subsidiaries serving as President and Chief Executive Officer from 1984 to 1988.
From June 1964 to 1975, he was employed by the Manufacturers & Traders Trust
Company and the Bank of Buffalo in various positions as Assistant Manager,
Operations Officer, Assistant Vice President and Vice President of Branch Office
Administration. Mr. Skretny holds professional certifications and licenses as a
fully registered general securities representative, general securities
principal, and uniform securities agent.
Stephen G. Skiba, a director of Matrix Capital since March 1996, is Senior
Vice President and Senior Analyst, focusing on banks and thrifts, for the ABN
Amro Chicago Corporation, an investment banking firm in Chicago, Illinois. From
November 1990 to June 1996, Mr. Skiba was Senior Vice President, Chief Financial
Officer and Treasurer of N.S. Bancorp, Inc. in Chicago, Illinois. Prior to
joining N.S. Bancorp, Inc., Mr. Skiba was an audit partner with the Chicago
office of KPMG Peat Marwick LLP, primarily responsible for financial
institutions and real estate audit engagements.
David A. Frank was elected director of Matrix Capital in September 1996.
Mr. Frank is President, Chief Executive Officer, and founder of America's
Mortgage Source, a mortgage company based in Marlton, New Jersey that is
primarily involved in the origination of residential mortgage loans and which
was formed in 1995. From 1994 to 1995, Mr. Frank served as President and Chief
Executive Officer of Chemical Residential Mortgage Corporation in Edison, New
Jersey, and as a director of Chemical Bank, N.A. Chemical Residential Mortgage
Corporation was the primary mortgage banking operation of Chemical Banking
Corporation. Prior to joining Chemical Residential Mortgage Corporation, Mr.
Frank served from 1989 to 1994 as President and Chief Operating Officer of
Margaretten Financial Corporation, a publicly traded national mortgage banking
company based in Perth Amboy, New Jersey. From 1977 to 1989, Mr. Frank held
various positions with Primerica Corporation/American Can Company (now known as
Travelers, Inc.), where he was primarily involved in mergers, acquisitions,
capital market activities, and in restructuring a manufacturing-based concern
into a diversified financial services company.
Peter G. Weinstock has served as an advisory director to Matrix Capital
since September 1996. In his capacity as advisory director, Mr. Weinstock is
invited to attend meetings of the Board of Directors and to participate in its
discussions. However, Mr. Weinstock is not entitled to vote in matters submitted
for approval and is not involved in the administration or management of the
Company. Mr. Weinstock is a member of the law firm of Jenkens & Gilchrist, a
Professional Corporation, where he has been employed for more than five years.
Jenkens & Gilchrist, a Professional Corporation, serves as outside general
counsel to the Company.
Committees of the Board of Directors
The Board of Directors currently has two standing committees: the
Compensation Committee and the Audit Committee. The Compensation Committee and
the Audit Committee are each comprised of Mr. Skiba and Mr. Frank. The
Compensation Committee is responsible for recommending to the Board of Directors
the Company's executive compensation policies for senior officers and
administering the 1996 Stock Option Plan and the Purchase Plan. The
Compensation Committee held no meetings during 1996, although it did act on
several occasions during 1996 by unanimous consent. The Audit Committee is
responsible for recommending independent auditors, reviewing the audit plan, the
adequacy of internal controls, the audit report and management letter, and
performing such other duties as the Board of Directors may from time to time
prescribe. The Audit Committee held no meetings during 1996.
The Board of Directors does not have a standing Nominating Committee.
The Board of Directors held six meetings during 1996. During 1996, each
director attended all of the meetings of the Board of Directors during the time
that he served as director.
70
<PAGE>
Employment Agreements
In January 1996, the Company entered into a five-year employment agreement
with Mr. Kloos. Under the terms of such agreement, Mr. Kloos is paid an annual
salary as agreed to by Mr. Kloos and Matrix Capital and, in addition, he is to
receive five annual installment payments of $25,000 each. This employment
agreement is terminable without advance notice by the Company for good cause,
which is generally defined to include a breach by Mr. Kloos of the employment
agreement, a breach by Mr. Kloos of his fiduciary duties owed to the Company,
and fraud, embezzlement, or theft from the Company by Mr. Kloos. In addition,
the employment agreement terminates upon the death or disability of Mr. Kloos
and Mr. Kloos may resign upon giving 30 days' notice to the Company.
The Company has also entered into an employment agreement with Mr. Lenzo.
Under the terms of such agreement, Mr. Lenzo is employed as the President and
Chief Executive Officer of Matrix Bank until January 1, 1999 at a base salary of
$110,000 per annum. In addition, Mr. Lenzo is eligible to participate in an
equitable manner in all discretionary bonuses authorized to be paid the
employees of Matrix Bank. The Company may, without notice, terminate this
employment agreement for just cause (which is generally defined to include
personal dishonesty, incompetence, willful misconduct, or a breach of fiduciary
duty) and, in such case, the Company shall not be obligated to pay Mr. Lenzo his
compensation accrued through the date of such termination. The Company may also,
upon giving 60-days' notice to Mr. Lenzo, terminate Mr. Lenzo's employment
agreement for any reason other than just cause, and, in such a case, the Company
will be obligated to pay Mr. Lenzo his compensation through January 1, 1999. In
addition, the Regional Director of the OTS may terminate Mr. Lenzo's employment
agreement in certain instances, including if the FDIC enters into an agreement
to provide assistance to Matrix Bank under its authority granted by the FDIC Act
or if the Regional Director determines that Matrix Bank is in an unsafe or
unsound position. Mr. Lenzo is entitled to certain change in control payments
if, after a change in control of Matrix Bank or Matrix Capital, Mr. Lenzo's
employment is terminated prior to January 1, 1999. The amount of such change in
control payments, if required to be paid, would generally be the balance of Mr.
Lenzo's salary through January 1, 1999 plus an additional amount that is equal
to the amount of Mr. Lenzo's annual compensation paid to Mr. Lenzo by Matrix
Bank for the year prior to his termination. The payments to Mr. Lenzo upon a
change in control, however, may not exceed 2.99 times Mr. Lenzo's "base amount"
(as defined in Section 280G(b)(3) of the Code) without adverse tax consequences.
In connection with the acquisition by the Company of Vintage, the parent
company of First Matrix and Sterling Trust, the Company entered into an
employment agreement with Mr. Skretny. This employment agreement provides for a
term of three years during which Mr. Skretny shall be employed as President and
Chief Executive Officer of Vintage and Sterling Trust and Chairman of the Board
of First Matrix at an annual base salary, subject to periodic review by the
Board of Directors of the Company, of $135,500. Mr. Skretny is also eligible
for a performance bonus if the Board of Directors of the Company determines in
good faith that Mr. Skretny has met the performance standards consistent with
his position. Under the terms of his employment agreement, Mr. Skretny was
granted options to purchase 25,000 shares of Common Stock at $14.25 per share.
Such options will generally become exercisable in 20% increments on the first
through fifth anniversary dates of the date of grant of such options. Mr.
Skretny's employment agreement may be terminated by Mr. Skretny or the Company
upon giving 30 days' notice, but in the event of such termination by the
Company, the Company must pay Mr. Skretny a one-time payment equal to the base
salary that would be due Mr. Skretny for the remainder of the three-year term.
The Company may also terminate the employment agreement for cause (which is
generally defined to include continued failure by Mr. Skretny to perform his
assigned duties, a material breach by Mr. Skretny of any of the terms of his
employment agreement, or intentional dishonest, fraudulent, or felonious acts
committed by Mr. Skretny).
Compensation of Directors
The Company pays each nonemployee director of the Company a $3,750
quarterly retainer and a fee of $1,000 ($250 if such director's attendance is
via teleconference) for each meeting of the Board of Directors of the Company
that he attends. The Company also reimburses each director for ordinary and
necessary travel expenses related to such director's attendance at Board
of Directors and committee meetings. Nonemployee directors are also eligible for
stock option grants under the 1996 Stock Option Plan.
71
<PAGE>
Each advisory director of the Company is paid a $2,500 quarterly retainer
and a fee of $1,000 ($250 if such advisory director's attendance is via
teleconference) for each meeting of the Board of Directors of Matrix Capital
that he attends. The Company also reimburses each advisory director for ordinary
and necessary travel expenses related to such advisory director's attendance at
Board of Directors meetings. Advisory directors are also eligible for stock
option grants under the 1996 Stock Option Plan.
Compensation of Executive Officers
The Summary Compensation Table below provides certain summary information
concerning compensation paid or accrued during 1995 and 1996 by the Company to,
or on behalf of, the Chief Executive Officer and the four other highest paid
executive officers of the Company whose salary and bonus for 1996 were in excess
of $100,000:
<TABLE>
<CAPTION>
Annual Long-Term
Compensation (1) Compensation
---------------------------------- ------------------------
Other
Annual Options/ All Other
Name and Principal Positions Year Salary Bonus Compensation SARs Compensation
- --------------------------------------------- ---- ------ ----- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Guy A. Gibson 1996 $250,000 $ -- $47,514(2) -- $ 8,375(3)(4)
President, Chief Executive Officer, and 1995 250,000 -- 46,552(2) -- 8,300(3)(4)
Director of Matrix Capital; President and
Chairman of the Board of Matrix Financial
Richard V. Schmitz 1996 250,000 -- -- -- 8,375(3)(4)
Chairman of the Board of Matrix Capital; 1995 250,000 100,000 -- -- 8,300(3)(4)
Chief Executive Officer of United Financial
D. Mark Spencer 1996 250,000 -- -- -- 8,375(3)(4)
Vice Chairman of the Board of Matrix Capital 1995 250,000 -- -- -- 8,300(3)(4)
Thomas M. Piercy 1996 293,626 -- -- -- 2,375(4)
Director of Matrix Capital; President of 1995 271,372 -- -- -- 2,300(4)
United Financial
David W. Kloos 1996 100,000 30,000 -- 35,000(5) 84,772(3)(4)(6)
Senior Vice President, Chief Financial 1995 100,000 20,000 -- 109,300(3)(4)(7)
Officer, and Director of Matrix Capital;
Executive Vice President and Chief Financial
Officer of Matrix Bank
</TABLE>
- ---------------
(1) Annual compensation does not include the cost to the Company of benefits
certain executive officers receive in addition to salary and cash bonuses.
The aggregate amounts of such personal benefits, however, did not exceed
the lesser of either $50,000 or 10% of the total annual compensation of
such executive officer.
(2) Each amount specified represents payments made to Mr. Gibson during the
year shown in respect of Mr. Gibson's accrued tax liability during prior
periods in which the Company operated as an "s" corporation.
(3) Of this amount, $6,000 represents directors fees paid by Matrix Bank for
such person's service on that entity's board of directors for each of 1995
and 1996.
(4) Of this amount, $2,300 and $2,375 represent the Company's contribution to
such person's account maintained under the 401(k) savings plan during 1995
and 1996, respectively.
72
<PAGE>
(5) The exercise price per share for these options is $10.00. These options
become exercisable ratably over five years, with the first 20% becoming
exercisable on October 18, 1997.
(6) Of this amount, $76,397 represents the amount paid to Mr. Kloos during 1996
to provide for the income taxes owed by Mr. Kloos in connection with the
$101,000 payment disclosed in footnote (7).
(7) Of this amount, $101,000 represents the estimated value of a stock bonus of
138,938 shares awarded to Mr. Kloos on January 1, 1995 for services
rendered.
Grants of Options
The following table sets forth details regarding stock options granted
during 1996 to the persons named in the Summary Compensation table. In
addition, there are shown the "option spreads" that would exist for the
respective options granted based upon assumed rates of annual compound stock
appreciation of 5% and 10% from the date the options were granted over the full
option term.
73
<PAGE>
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Individual Grants
----------------------------------------------------------
Potential Realizable Value
at Assumed Annual Rates
Number of Percent of of Stock Price Appreciation
Securities Total Options for Option Term (2)
Underlying Granted to ---------------------------
Options Employees in Exercise Expiration
Name Granted Fiscal Year or Base Price Date 5% 10%
- --------------------------- --------- ------------- --------------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Guy A. Gibson.............. -- -- -- -- $ -- $ --
Richard V. Schmitz......... -- -- -- -- -- --
D. Mark Spencer............ -- -- -- -- -- --
Thomas M. Piercy........... -- -- -- -- -- --
David W. Kloos(1).......... 35,000 30.5% $10.00 10/18/06 220,150 557,900
</TABLE>
--------------------------
(1) Options were granted under the 1996 Stock Option Plan. The exercise
price of each option is the fair market value of the Common Stock on
the date of grant. Options vest in one-fifth increments over a five-
year term. The options have a term of 10 years, unless they are
exercised or expire upon certain circumstances set forth in the Plan,
including retirement, termination in the event of a change in control,
death, or disability. See footnote (4) to the Summary Compensation
Table.
(2) These amounts represent certain assumed rates of appreciation only.
Actual gains, if any, on stock option exercises are dependent upon the
future performance of the Company's Common Stock, overall market
conditions, and the executive's continued employment with the Company.
The amounts represented in this table may not be achieved.
Exercises of Options
The following table sets forth information with respect to the
persons named in the Summary Compensation table concerning the exercise of
options during fiscal 1996, and unexercised options held as of December 31,
1996. No options were exercised by the persons named in the Summary
Compensation table during 1996.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year End Option Values
Value of
Number Number of Unexercised
of Unexercised in-the-money
Shares options options
Acquired at FY-end: at FY-end:
on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable(1)
- ------------------------ -------- -------- ------------- ----------------
<S> <C> <C> <C> <C>
Guy A. Gibson........... -- -- --/-- $ --/--
Richard V. Schmitz...... -- -- --/-- --/--
D. Mark Spencer......... -- -- --/-- --/--
Thomas M. Piercy........ -- -- --/-- --/--
David W. Kloos.......... -- -- --/35,000 --/205,625
</TABLE>
- ------------------------
- ----------
(1) Values are stated based upon the closing price of $15.875 per share of the
Common Stock on the Nasdaq National Market on December 31, 1996, the last
trading day of the Company's fiscal year.
74
<PAGE>
Stock Option Plan
In January 1995, the Board of Directors and shareholders of Matrix Capital
adopted the Company's 1995 Stock Option Plan, which was amended and restated as
the 1996 Stock Option Plan by the Board of Directors and shareholders of Matrix
Capital in September 1996. The purpose of the 1996 Stock Option Plan is to
advance the interests of the Company by providing additional incentives to
attract and retain qualified and competent employees and consultants of the
Company and directors of the Company and its subsidiaries, upon whose efforts
and judgment the success of the Company is largely dependent. As of the date
hereof, substantially all of the Company's full-time employees and all of the
Company's directors (including advisory directors) are eligible for grants of
stock options ("Plan 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 Plan Options
granted under the 1996 Stock Option Plan. As of June 30, 1997, options to
purchase an aggregate of 321,250 shares have been granted. The 1996 Stock Option
Plan is administered by the Compensation Committee. The Compensation Committee
consists of at least two members of the Board of Directors, each of whom will be
an "outside director" within the meaning of the Code and a "nonemployee
director" within the meaning of Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The 1996 Stock Option
Plan provides for adjustments to the number of shares and to the exercise price
of outstanding options in the event of a declaration of a stock dividend or any
recapitalization resulting in a stock split-up, combination, or exchange of
shares of Common Stock.
No Incentive Option may be granted with an exercise price per share less
than the fair market value of the Common Stock at the date of grant. The
Nonqualified Options may be granted with any exercise price determined by the
administrator of the 1996 Stock Option Plan. The exercise price of an Employee
Option may be paid in cash, by certified or cashier's check, by money order, by
personal check, or by delivery of already owned shares of Common Stock having a
fair market value equal to the exercise price, or by delivery of a combination
of cash and already owned shares of Common Stock. However, if the optionee
acquired the stock to be surrendered directly or indirectly from the Company, he
must have owned the stock to be surrendered for at least six months prior to
tendering such stock for the exercise of a Plan Option.
An eligible employee may receive more than one Incentive Option, but the
maximum aggregate fair market value of the Common Stock (determined when the
Incentive Option is granted) with respect to which Incentive Options are first
exercisable by such employee in any calendar year cannot exceed $100,000. In
addition, no Incentive Option may be granted to an employee owning directly or
indirectly stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company, unless the exercise price is set at not
less than 110% of the fair market value of the shares subject to such Incentive
Option on the date of grant and such Incentive Option expires not later than
five years from the date of grant. Awards of Nonqualified Options are not
subject to these special limitations.
No Incentive Option granted under the 1996 Stock Option Plan is assignable
or transferable, otherwise than by will or by laws of descent and distribution.
During the lifetime of an optionee, his Incentive Option is exercisable only by
him or his guardian or legal representative. Nonqualified Options may be
transferable if provided for in the option agreement governing the Nonqualified
Option. The expiration date of a Plan Option is determined by the administrator
at the time of the grant, but in no event may a Plan Option be exercisable after
the expiration of 10 years from the date of grant of the Plan Option.
The administrator of the 1996 Stock Option Plan may limit an optionee's
right to exercise all or any portion of a Plan Option until one or more dates
subsequent to the date of grant. The administrator also has the right,
exercisable in its sole discretion, to accelerate the date on which all or any
portion of a Plan Option may be exercised. The 1996 Stock Option Plan also
provides that 30 days prior to certain major corporate events such as, among
other things, certain changes in control, mergers, or sales of substantially all
of the assets of the Company (a "Major Corporate Event"), each Plan Option shall
immediately become exercisable in full. In anticipation of a Major Corporate
75
<PAGE>
Event, however, the administrator may, after notice to the optionee, cancel the
optionee's Employee Options on the consummation of the Major Corporate Event.
The optionee, in any event, will have the opportunity to exercise his Plan
Options in full prior to such Major Corporate Event.
If terminated for cause, all rights of an optionee under the 1996 Stock
Option Plan shall cease and the Plan Options granted to such optionee shall
become null and void for all purposes. The 1996 Stock Option Plan further
provides that in most instances a Plan Option must be exercised by the optionee
within 30 days after the termination of the consulting contract between such
consultant and the Company or termination of optionee's employment with the
Company, as the case may be (for any reason other than termination of cause,
mental or physical disability, or death), if and to the extent, such Plan Option
was exercisable on the date of such termination. If the optionee is not
otherwise employed by, or is not otherwise a consultant to, the Company, his
Plan Option must be exercised within 30 days of the date he ceases to be a
director of the Company or a subsidiary of the Company. Generally, if an
optionee's employment or consulting contract is terminated due to mental or
physical disability, the optionee will have the right to exercise the Plan
Option (to the extent otherwise exercisable on the date of termination) for a
period of one year from the date on which the optionee suffers the mental or
physical disability. If an optionee dies while actively employed by, or
providing consulting services under a consulting contract to, the Company, the
Plan Option may be exercised (to the extent otherwise exercisable on the date of
death) within one year of the date of the optionee's death by the optionee's
legal representative or legalee.
The Company anticipates registering the shares issuable pursuant to the
exercise of Plan Options with the Commission in 1997.
Employee Stock Purchase Plan
In September 1996, the Board of Directors adopted the Purchase Plan and
reserved shares of Common Stock for issuance thereunder. The shareholders of
the Company approved the Purchase Plan in September 1996. The purpose of the
Purchase Plan is to provide eligible employees of the Company and its designated
subsidiaries with an opportunity to purchase Common Stock ("ESPP Shares") from
the Company through payroll deductions. The Purchase Plan is a non-compensatory
plan.
Offerings under the Purchase Plan generally have a duration ("Offering
Period") of 12 months and commence on January 1 of each year, but the Initial
Offering Period under the Purchase Plan commenced on November 1, 1996 and ends
on December 31, 1997. On the first business day of an Offering Period (the
"Enrollment Date"), each eligible employee who chooses to participate
("Participant") is granted the right to purchase ("Purchase Right") on the last
business day of such Offering Period ("Purchase Date") a number of whole ESPP
Shares determined by dividing the Participant's total annual payroll deductions
accumulated during such Offering Period by the Purchase Price described below.
However, the number of ESPP Shares subject to each Participant's Purchase Right
during such Offering Period shall in no event exceed the lesser of (i) the
maximum number of ESPP Shares which could be purchased with such Participant's
total payroll deductions for the Offering Period at a Purchase Price equal to
85% of the fair market value of the ESPP Shares on the Enrollment Date, (ii) the
number of ESPP Shares determined by dividing $25,000 by the fair market value of
the ESPP Shares on the Enrollment Date, or (iii) the maximum number of ESPP
Shares that would cause the total owned by the Participant to exceed the 5%
ownership limits described below. Unless the Participant's participation is
discontinued, his or her Purchase Right will be exercised automatically on the
Purchase Date (i.e., the last business day of the Offering Period) at the
Purchase Price.
The total number of shares of Common Stock issuable under the Purchase Plan
is 125,000. No less than 15 days prior to each Offering Period, the
administrator of the Purchase Plan will determine the total number of ESPP
Shares that will be made available for purchase during such Offering Period and
will notify the eligible employees. With respect to ESPP Shares that are made
available for an Offering Period, but that are not purchased during such
Offering Period, the administrator may again make them available for purchase
with respect to any subsequent Offering period. In the event that on the
Purchase Date of reference the aggregate amount of payroll deductions during the
corresponding Offering Period exceeds the aggregate Purchase Price of all ESPP
Shares available for purchase during
76
<PAGE>
such Offering Period, each Purchase Right of a participant shall be reduced to
that percentage of available ESPP Shares as the accumulated payroll deduction in
his or her account is of the aggregate accumulated payroll deduction in the
accounts of all Participants.
Any employee who is customarily employed for at least 20 hours per week and
more than five months per calendar year by the Company or its designated
subsidiaries, who is employed on the first day of the month preceding the
Enrollment Date of reference, and who continues to be employed on the Enrollment
Date, is eligible to participate in offerings under the Purchase Plan during the
Offering Period, which includes such Enrollment Date. Employees become
Participants by delivering to the Company an agreement authorizing payroll
deductions at any time during the 45 days immediately preceding the Enrollment
Date of reference. No employee is permitted to purchase ESPP Shares under the
Purchase Plan if such employee owns 5% or more of the total combined voting
power or value of all classes of shares of stock of the Company, including as
owned by such employee all ESPP Shares subject to his Purchase Right, as
adjusted, shares subject to any other options, or shares whose ownership is
attributable to the employee by reason of ownership by certain members of his or
her family. In addition, no Participant is entitled to purchase during the
Offering Period of reference more than the maximum number of ESPP Shares subject
to such Participant's Purchase Right during such Offering Period.
The price at which ESPP Shares are sold under the Purchase Plan ("Purchase
Price") is 85% of the lower of the fair market value per Share of Common Stock
on the Enrollment Date (i.e., first business day of the Offering period) or the
Purchase Date (i.e., the last business day of the Offering Period). The
Purchase Price of the ESPP Shares is accumulated by payroll deductions made
during the Offering Period. The total payroll deductions of a Participant for
an Offering Period may not be greater than the lesser of $21,250 or 25% of the
Participant's annualized "considered pay," as determined at the beginning of the
Offering Period, nor may such payroll deductions be less than an aggregate of
$500. A Participant's "considered pay" is the administrator's reasonable
estimate of such Participant's basic rate of pay (i.e., exclusive of bonuses and
other special payments) during the Offering Period.
All payroll deductions of a Participant are credited to his or her account
under the Purchase Plan and are deposited with the general funds of the Company.
Such funds may be used for any corporate purpose. No charges for administrative
or other costs may be made by the Company against the accounts of Participants.
The Purchase Plan is administered by the Compensation Committee of the Board of
Directors.
A Participant may terminate his or her right to purchase ESPP Shares with
respect to a particular Offering Period by notifying the administrator at any
time prior to the last 15 days of the Offering period that the Participant is
withdrawing all, but not less than all, of the accumulated payroll deductions
credited to such Participant's account. The withdrawal of accumulated payroll
deductions automatically terminates the Participant's Purchase Right with
respect to that Offering Period. As soon as practicable after notice of such
withdrawal, the payroll deductions credited to a Participant's account will be
returned to the Participant without interest. A Participant's withdrawal with
respect to an Offering Period does not have any effect upon such Participant's
eligibility to participate in subsequent Offering Periods. Termination of a
Participant's employment for any reason, including retirement or death,
immediately terminates his or her participation in the Offering Period during
which such termination of employment occurs. In such event, the payroll
deductions credited to the Participant's account will be returned to the
Participant as soon as practicable, or in the case of death, to the person or
persons entitled thereto, in either case without interest.
In the event of changes in the Common Stock of the Company, however, due to
stock dividends or other changes in capitalization, or in the event of any
merger, sale, or any other reorganization, appropriate adjustments will be made
by the Company to the ESPP Shares subject to purchase, to the price per share,
and, where necessary, to the conditions relating to the exercise of the Purchase
Right, so that, to the extent reasonably possible, such events do not adversely
affect the rights of Participants. If, however, there is a proposed dissolution
or liquidation of the Company, the Offering Period during which such event
occurs will be deemed terminated upon the occurrence of such event.
77
<PAGE>
The Purchase Plan will terminate automatically on December 31, 2005, and
prior to that date the Board of Directors of Matrix Capital generally may at any
time amend or terminate the Purchase Plan. The Company anticipates registering
the shares issuable under the Purchase Plan with the Commission in 1997.
401(k) Savings Plan
In February 1994, the Company established the Company's 401(k) savings
plan, which is intended to comply with Sections 401(a) and 401(k) of the
Internal Revenue Code of 1986, as amended, and the applicable provisions of the
Employee Retirement Income Security Act of 1974, as amended. Amounts contributed
to the plan are held under a trust intended to be exempt from income tax
pursuant to Section 501(a) of the Internal Revenue Code. All full time employees
of the Company that have completed at least six months of service are eligible
to participate in the plan. Participating employees will be entitled to make
pre-tax contributions to their accounts in amounts equal to not less than 1% and
not more than 15% of their compensation each year, subject to certain maximum
annual limits imposed by law (approximately $9,500 in 1997). The Company matches
employee contributions in the amount of 25% of their contributions. The Company
also has the right to make certain additional matching contributions. Matching
contributions made by the Company vest in participating employees over a six-
year period after the date of contribution. Distributions generally are payable
in a lump-sum after retirement or death and, in certain circumstances, upon
termination of employment with the Company for other reasons.
Compensation Committee Interlocks and Insider Participation
During 1994, 1995, and most of 1996, the Company had no compensation
committee or other committee of the Board of Directors performing similar
functions. Decisions concerning executive compensation for fiscal 1996 were made
by the Board of Directors, including Messrs. Gibson, Kloos, Schmitz, Piercy, and
Spencer, each of whom is an executive officer of the Company and participated in
deliberations of the Board of Directors regarding executive officer
compensation. The Board of Directors of the Company has established a
Compensation Committee. See "--Committees of the Board of Directors."
During the last completed fiscal year, no executive officer of the Company
served as a member of the Compensation Committee (or other board committee
performing equivalent functions or, in the absence of any such committee, the
entire Board of Directors) of another entity, one of whose executive officers
served on the Compensation Committee or, during the period in 1996 in which
there was no Compensation Committee, the entire Board of Directors of the
Company.
During the last completed fiscal year, no executive officer of the Company
served as a director of another entity, one of whose executive officers served
on the Compensation Committee or, during the period in 1996 in which there was
no Compensation Committee, the entire Board of Directors of the Company.
During the last completed fiscal year, no executive officer of the Company
served as a member of the Compensation Committee or, during the period in 1996
in which there was no Compensation Committee, the entire Board of Directors of
another entity, one of whose executive officers served as a director of the
Company.
78
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1995, the Company loaned Matrix Diversified, Inc.
("Diversified"), a company in which Messrs. Gibson, Schmitz, Piercy, Spencer,
Kloos, and Osselaer, each of whom is an executive officer of the Company, and
Mr. Robert Fowls, an officer of United Financial, own all of the outstanding
capital stock, $750,000 in order to enable Diversified to purchase the assets of
an unaffiliated business. Such loan accrues interest at 13% per annum and is
secured by a secondary lien on the assets of Diversified. Principal and interest
on this loan is due and payable in one lump sum on October 1, 2000. In addition,
the Company leases approximately 7,400 square feet in its Phoenix office
building to a subsidiary of Diversified at a base rental of approximately $8,500
per month. The lease expires in September 1997, but the Company anticipates that
it will be renewed for successive one-year terms.
On December 31, 1996, the Company renewed a loan originally made to Mr.
Spencer, Vice Chairman of the Board and a shareholder of the Company, in
December 1994 in the amount of approximately $80,000. The loan to Mr. Spencer
accrues interest at the prime rate, is unsecured, and the entire principal and
all accrued interest is due and payable in one lump sum on December 31, 1997.
The Company has the option of extending the maturity of such loan to Mr. Spencer
in annual increments.
79
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of Common Stock as of June 15, 1997 by (i) each person known by the
Company to own beneficially five percent or more of the outstanding Common
Stock; (ii) each of the Company's directors and advisory directors; (iii) each
of the executive officers named in the Summary Compensation Table; and (iv) all
directors, advisory directors and executive officers of the Company as a group.
The address of each person listed below is 1380 Lawrence Street, Suite 1410,
Denver, Colorado 80204.
<TABLE>
<CAPTION>
Shares Beneficially
Owned (1)
-----------------------------
Percent
Name Number of Class
---------------------------------------- --------------- ------------
<S> <C> <C>
Guy A. Gibson........................... 1,285,358 19.2%
Richard V. Schmitz...................... 1,285,358(3) 19.2
D. Mark Spencer......................... 879,910(2)(3) 13.2
Thomas M. Piercy........................ 236,375 3.5
David W. Kloos.......................... 139,938 2.1
Stephen Skiba........................... 12,500(4) *
David A. Frank.......................... 7,500(4) *
Peter G. Weinstock...................... 5,500(4) *
All directors, advisory directors and
executive officers as a group
(13 persons).......................... 3,979,473(4) 58.8
</TABLE>
- -----------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Except as indicated in the footnotes to this table and
subject to applicable community property laws, the persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned.
(2) On June 24, 1993, Mr. Gibson granted Mr. Spencer an option to purchase
133,983 of Mr. Gibson's shares of Common Stock at any time on or prior to
June 23, 1998, at an exercise price of $2.41 per share. The amount shown
in this table as beneficially owned by Mr. Spencer does not reflect these
133,983 shares of Common Stock.
(3) On June 24, 1993, Mr. Schmitz granted Mr. Spencer an option to purchase
133,983 of Mr. Schmitz's shares of Common Stock, at any time prior to June
23, 1998, at an exercise price of $2.41 per share. The amount shown in
this table as beneficially owned by Mr. Spencer does not reflect these
133,983 shares of Common Stock.
(4) Includes options that are currently exercisable to purchase the number of
shares of Common Stock indicated for the following persons: Stephen Skiba
(2,500), David A. Frank (2,500), and Peter G. Weinstock (2,500).
80
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 5,000,000 shares of
preferred stock, par value $.0001 per share ("Preferred Stock"), and 50,000,000
shares of Common Stock, par value $0.0001 per share.
Common Stock
As of June 15, 1997 there were 6,681,031 shares of Common Stock outstanding
which were held of record by 75 shareholders. Holders of Common Stock are
entitled to receive dividends when, as, and if declared by the Board of
Directors from funds legally available therefor. Each share of Common Stock
entitles the holder thereof to one vote. Cumulative voting for the election of
directors is not permitted, which means that the holders of the majority of
shares voting for the election of directors can elect all members of the Board
of Directors. Except as otherwise required by law, a majority vote is
sufficient for any act of the shareholders. The holders of Common Stock are
entitled to receive the Company's assets remaining after payment of liabilities
proportionate to their pro rata ownership of the outstanding shares of Common
Stock. All shares of Common Stock now outstanding are, and the shares of Common
Stock to be outstanding upon the completion of the offering will be, fully paid
and non-assessable.
Preferred Stock
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. The issuance of shares of Preferred Stock could
adversely affect the holders of Common Stock. By way of example, the issuance
of Preferred Stock could be used in certain circumstances to render more
difficult or discourage a merger, tender offer, proxy contest, or removal of
incumbent management. Preferred Stock may be issued with voting and conversion
rights that could adversely affect the voting power and other rights of the
holders of Common Stock. Upon completion of the offering, the Company will not
have any shares of Preferred Stock outstanding, and currently, the Company has
no intention to issue shares of Preferred Stock after the offering.
Certain Warrants
The Company has issued to two investment banking firms (the
"Warrantholders") certain warrants (the "Warrants") that are exercisable for an
aggregate of 75,000 shares of Common Stock. The Warrants are exercisable from
time to time during the four years after October 1996, and are not transferable
until October 1997. The exercise price for the shares of Common Stock underlying
such warrants is $12.00 per share. The shares of Common Stock underlying such
warrants are entitled to certain demand and incidental registration rights.
Certain Registration Rights; Rights of First Refusal
The Company has granted the Warrantholders a right to demand that one
registration statement on Form S-3 relating to the shares of Common Stock
underlying the Warrants be filed by the Company and declared effective by the
Commission and the right generally to "piggy-back" on any registrations of
Common Stock filed by the Company. The demand registration rights are effective
for a four-year period, and the "piggy back" registration rights are effective
for a six-year period, each beginning in October 1997.
Certain Charter and Bylaws Provisions
Certain provisions in the Articles of Incorporation and the Bylaws could
have the effect of delaying, deferring, or preventing changes in control of the
Company. Among other things, the Articles of Incorporation provide for certain
advance notice requirements relating to nominations of directors and the calling
of special shareholder meetings, and divide the members of the Board of
Directors into three different classes of directors who are elected by holders
of the
81
<PAGE>
Common Stock and who serve three-year staggered terms, require advance notice of
shareholder proposals and nominations of directors, and authorize the issuance
of "blank check" preferred stock. The first class of directors, which currently
includes Messrs. Skiba and Piercy, will be up for election at the 2000 annual
meeting of shareholders; the second class of directors, which currently includes
Messrs. Gibson, Frank, and Kloos, will be up for election at the 1998 annual
meeting of shareholders; and the third class of directors, which currently
includes Messrs. Schmitz and Spencer will be up for election at the 1999 annual
meeting of shareholders.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is American
Securities Transfer & Trust, Inc.
82
<PAGE>
PLAN OF DISTRIBUTION; SELLING SHAREHOLDERS
This Prospectus relates to 779,592 shares of Common Stock that may be offered
and sold from time to time by the Selling Shareholders. Set forth below is
information, as of the date hereof, regarding the beneficial ownership of the
Shares by each Selling Shareholder.
<TABLE>
<CAPTION>
Number of Shares
of Common Stock Shares
Beneficially Number of Beneficially
Owned Shares Owned
Prior to of Common After
Offering(1) Stock Offered Offering(2)
----------------- ------------- ---------------
<S> <C> <C> <C>
Bachik, Brian............................... 5,544 5,544 -
Berg, Clyde................................. 3,710 3,710 -
Brown, Charles A............................ 2,474 2,474 -
First Stock Company, nominee for Dudley Haas
Profit Sharing Plan......................... 14,839 14,839 -
Hezmall Limited Partnership................. 4,507 4,507 -
Hezmall, H. Pat, M.D........................ 21,614 21,614 -
Jones, Jack W., Jr.......................... 28,869 28,869 -
Jones, Jack W., Jr., Custodian for Courtney
Jones....................................... 1,451 1,451 -
Jones, Jack W., Jr., Custodian for
Jack W. Jones III........................... 1,451 1,451 -
Kangas Family Trust......................... 114,513 114,513 -
Lewin, Marcial.............................. 7,420 7,420 -
Maruri, Michelle B.......................... 21,614 21,614 -
Meyer, Jon P................................ 5,834 5,834 -
Naik, P.M., M.D............................. 5,276 5,276 -
Naik, Marian K.............................. 14,839 14,839 -
Neurosurgical Associates, Trustee FBO H.
Stephen Goldberg............................ 3,710 3,710 -
Owens, Joseph A. II......................... 14,839 14,839 -
Posey, Mike................................. 24,694 24,694 -
Quinby Ltd., a Texas Limited Partnership.... 123,152 123,152 -
Regions Bank, Gainsville, as Trustee for
Northeast Georgia Orthopaedic Clinic FBO
Dennis Smith................................ 3,710 3,710 -
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
of Common Stock Shares
Beneficially Number of Beneficially
Owned Shares Owned
Prior to of Common After
Offering(1) Stock Offered Offering(2)
----------------- ------------- ---------------
<S> <C> <C> <C>
Resources Trust Company, TRUA IRA,
FBO: Jack W. Jones, Jr...................... 2,902 2,902 -
Saxton, Clark D............................. 25,097 25,097 -
Sherri Berg Trust........................... 3,710 3,710 -
Skretny, Paul E.(3)......................... 32,434 32,434 -
Sonya Berg Trust............................ 3,710 3,710 -
Smith, J. William........................... 14,839 14,839 -
Snodgrass, Elizabeth W., as separate property 894 894 -
Snodgrass, Kent R........................... 24,088 24,088 -
Snodgrass, Kent R. and Elizabeth W.......... 8,793 6,169 2,804
Snodgrass, Y. F. and Mary Jo................ 2,902 2,902 -
Sterling Trust Company, FBO Brian Bachik,
IRA......................................... 8,709 8,709 -
Sterling Trust Company, FBO Karen A. Kroll,
IRA......................................... 816 816 -
Sterling Trust Company, FBO Patricia Kubitza,
IRA......................................... 4,612 4,612 -
Sterling Trust Company, FBO Donald M. Meyer,
IRA......................................... 3,710 3,710 -
Sterling Trust Company, FBO Jon P. Meyer,
IRA......................................... 11,909 11,909 -
Sterling Trust Company, FBO Melinda Oliver,
IRA......................................... 886 886 -
Sterling Trust Company, FBO John M. Posey,
IRA......................................... 18,035 18,035 -
Sterling Trust Company, FBO Iris K. Russell,
IRA......................................... 1,985 1,985 -
Sterling Trust Company, FBO Robert H.
Saxton, M.D., IRA........................... 7,420 7,420 -
Sterling Trust Company, FBO Sharon L.
Waggoner, IRA............................... 889 889 -
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
of Common Stock Shares
Beneficially Number of Beneficially
Owned Shares Owned
Prior to of Common After
Offering(1) Stock Offered Offering(2)
----------------- ------------- ---------------
<S> <C> <C> <C>
Sterling Trust Company,FBO Bradley C.
Weldy, IRA.................................. 2,480 2,480 -
Sterling Trust Company, FBO James J. Zorn,
IRA......................................... 3,710 3,710 -
Thompson, Jeff.............................. 10,895 10,895 -
Weir, Daniel R.............................. 43,505 43,505 -
Weir, Ralph L. Jr........................... 119,226 119,226 -
</TABLE>
____________________
* Less than one percent
(1) Unless otherwise indicated, to the knowledge of the Company, the persons
and entities named in the table have sole voting and sole investment power
with respect to all shares of Common Stock beneficially owned, subject to
community property laws where applicable.
(2) Assumes that all shares of Common Stock offered hereby by each Selling
Shareholder are actually sold. Such presentation is based on 6,681,031
shares of Common Stock outstanding as of June 15, 1997.
(3) Mr. Skretny is the Chief Executive Officer of Sterling Trust, a wholly
owned subsidiary of the Company, and Chairman of the Board of First Matrix,
a wholly owned subsidiary of the Company.
The shares of Common Stock beneficially owned by the Selling Shareholders
were acquired by such Selling Shareholders in connection with the acquisition by
the Company of all of the outstanding capital stock of Vintage, effective
February 5, 1997. In connection with the acquisition by the Company of Vintage,
the Company agreed to file the Registration Statement of which this Prospectus
forms a part.
The Company has been advised by the Selling Shareholders that they intend
to sell all or a portion of the Shares offered by this Prospectus from time to
time (i) on the Nasdaq National Market, (ii) otherwise than on the Nasdaq
National Market, in negotiated transactions (which may include the pledge or
hypothecation of some or all of the Shares) at fixed prices that may be changed,
at market prices prevailing at the time of sale, or at prices reasonably related
thereto or at negotiated prices, or (iii) by a combination of the foregoing
methods of sale. The Selling Shareholders may effect such transactions by
selling the Shares to or through broker-dealers, and such broker-dealers may
receive compensation in the form of discounts, concessions, or commissions from
the Selling Shareholders and/or the purchasers of the Shares for which such
broker-dealers may act as agent or to whom they may sell as principal, or both.
The Company is not aware as of the date of this Prospectus of any agreements
between any of the Selling Shareholders and any broker-dealers with respect to
the sale of the Shares offered by this Prospectus. The Selling Shareholders and
any broker, dealer, or other agent executing sell orders on behalf of the
Selling Shareholders may be deemed to be "underwriters" within the meaning of
the Securities Act, in which event commissions received by any such broker,
dealer, or agent and profit on any resale of the Shares of principal may be
deemed to be underwriting commissions under the Securities Act. Such
commissions received by a broker, dealer, or agent may be in excess of
85
<PAGE>
customary compensation. The Shares may also be sold in accordance with Rule 144
and Rule 145 under the Securities Act.
All expenses of registration incurred in connection with the offering will
be borne by the Company. All selling and other expenses incurred by the Selling
Shareholders will be borne by the Selling Shareholders.
The Selling Shareholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including without
limitation, Rule 102 under Regulation M, which provisions may limit the timing
of purchases and sales of any of the Common Stock by the Selling Shareholders.
Rule 102 under Regulation M provides, with certain exceptions, that it is
unlawful for a selling shareholder or its affiliated purchaser to, directly or
indirectly, bid for or purchase or attempt to induce any person to bid for or
purchase, for an account in which the selling shareholder or affiliated
purchaser has a beneficial interest in any securities that are the subject of
the distribution during the applicable restricted period under Regulation M. All
of the foregoing may affect the marketability of the Common Stock. The Company
will require each Selling Shareholder, and his or her broker if applicable, to
provide a letter that acknowledges his compliance with Regulation M under the
Exchange Act before authorizing the transfer of such Selling Shareholder's
Shares.
LEGAL MATTERS
The validity of the Shares being offered hereby will be passed upon for the
Company by Jenkens & Gilchrist, a Professional Corporation, Dallas, Texas.
Jenkens & Gilchrist, a Professional Corporation, will rely on the opinion of
James G. Panero, General Counsel of the Company, as to matters of Colorado Law.
EXPERTS
The consolidated financial statements of the Company at December 31, 1996
and 1995 and for each of the three years in the period ended December 31, 1996,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report, given
on the authority of such firm as experts in accounting and auditing.
86
<PAGE>
Index to Financial Statements
Consolidated Financial Statements of Matrix Capital Corporation
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors............................................. F-2
Consolidated Balance Sheets - December 31, 1995 and 1996,
and March 31, 1997 (unaudited)............................................ F-3
Consolidated Statements of Operations - for the years ended December 31,
1994, 1995 and 1996, and for the three months ended March 31, 1996 and
March 31, 1997 (unaudited)................................................ F-4
Consolidated Statements of Shareholders' Equity - for the years ended
December 31, 1994, 1995 and 1996, and for the three months ended
March 31, 1997 (unaudited)................................................ F-5
Consolidated Statements of Cash Flows - for the years ended December 31,
1994, 1995 and 1996, and for the three months ended March 31, 1996
and 1997 (unaudited)...................................................... F-6
Notes to Consolidated Financial Statements - December 31, 1996
and March 31, 1997 (unaudited)............................................ F-7
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
Shareholders and Board of Directors
Matrix Capital Corporation
We have audited the accompanying consolidated balance sheets of Matrix Capital
Corporation (Company) as of December 31, 1995 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at December 31, 1995 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 1995 the
Company changed its method of accounting for mortgage servicing rights as a
result of adopting Statement of Financial Accounting Standards No. 122,
Accounting for Mortgage Servicing Rights.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
May 30, 1997
F-2
<PAGE>
Matrix Capital Corporation
Consolidated Balance Sheets
(Dollars In thousands)
<TABLE>
<CAPTION>
December 31 March 31
1995 1996 1997
-------- -------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash $ 1,929 $ 2,855 $ 19,247
Interest earning deposits 6,061 9,754 5,033
Loans held for sale, net 127,090 182,801 285,845
Loans held for investment, net 19,575 29,560 33,644
Mortgage servicing rights, net 13,817 23,680 38,450
Other receivables 5,609 9,353 22,818
Federal Home Loan Bank of
Dallas stock 1,954 2,871 2,912
Premises and equipment, net 6,167 7,887 7,807
Deferred income tax benefit - 54 54
Other assets 4,111 5,744 6,482
-------- -------- -----------
Total assets $186,313 $274,559 $422,292
======== ======== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 48,877 $ 90,179 $181,976
Custodial escrow balances 27,011 37,881 69,440
Drafts payable 8,817 5,961 7,544
Payable for purchase of
mortgage servicing rights 1,312 8,044 7,389
Federal Home Loan Bank of
Dallas borrowings 19,000 51,250 34,000
Borrowed money 65,093 42,431 80,197
Other liabilities 4,491 5,502 6,204
Income taxes payable 1,026 1,041 1,518
-------- -------- -----------
Total liabilities 175,627 242,289 388,268
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value
$.0001; authorized 5,000,000
shares; no shares outstanding
Common stock, par value
$.0001; authorized 50,000,000
shares; issued and outstanding
4,668,531, 6,681,031 and 6,681,031 shares
at December 31, 1995 and 1996
and March 31, 1997, respectively - 1 1
Additional paid in capital 3,769 21,983 21,983
Retained earnings 6,917 10,286 12,040
-------- -------- -----------
Total shareholders' equity 10,686 32,270 34,024
-------- -------- -----------
Total liabilities and
shareholders' equity $186,313 $274,559 $422,292
======== ======== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
Matrix Capital Corporation
Consolidated Statements of Operations
(Dollars In thousands except per share information)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31 March 31
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest income
Loans and mortgage backed securities $ 6,681 $ 10,412 $ 16,084 $ 3,655 $ 5,084
Interest earning deposits 349 374 465 92 412
---------- ---------- ---------- ---------- ----------
Total interest income 7,030 10,786 16,549 3,747 5,496
Interest expense
Savings and time deposits 1,210 1,892 3,292 574 1,123
Demand and money market deposits 271 292 468 132 525
FHLB borrowings 213 1,113 2,039 452 277
Borrowed money 1,332 3,897 4,691 1,459 1,221
---------- ---------- ---------- ---------- ----------
Total interest expense 3,026 7,194 10,490 2,617 3,146
---------- ---------- ---------- ---------- ----------
Net interest income before provision for loan and
valuation losses 4,004 3,592 6,059 1,130 2,350
Provision for loan and valuation losses 216 401 143 33 92
---------- ---------- ---------- ---------- ----------
Net interest income 3,788 3,191 5,916 1,097 2,258
Noninterest income
Loan administration 6,926 7,749 8,827 2,140 3,982
Brokerage 4,017 4,787 4,364 684 1,137
Trust services 2,488 2,869 3,061 779 879
Gain on sale of loans and
mortgage backed securities 1,590 3,272 3,369 436 118
Gain on sale of mortgage servicing rights 684 1,164 3,232 - 1,411
Loan origination 1,294 2,069 1,561 (301) 641
Other 940 1,744 2,173 398 775
---------- ---------- ---------- ---------- ----------
Total noninterest income 17,939 23,654 26,587 4,136 8,943
Noninterest expense
Compensation and employee benefits 8,929 10,527 12,722 2,827 3,461
Amortization of mortgage servicing rights 1,185 1,817 2,432 501 1,527
Occupancy and equipment 1,434 1,451 1,776 414 501
Professional fees 638 783 666 100 200
Data processing 520 560 642 153 152
Losses related to recourse sales - - 787 - 225
Federal Deposit Insurance Corporation
premiums 176 155 635 44 3
Other general and administrative 3,711 5,160 6,995 1,212 2,257
---------- ---------- ---------- ---------- ----------
Total noninterest expense 16,593 20,453 26,655 5,251 8,326
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes (benefit) 5,134 6,392 5,848 (18) 2,875
Provision for income taxes (benefit) 2,014 2,469 2,278 (14) 1,121
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 3,120 $ 3,923 $ 3,570 $ (4) $ 1,754
========== ========== ========== ========== ==========
Net income (loss) per common and common
equivalent share $ .69 $ .83 $ .68 $ (.01) $ .26
========== ========== ========== ========== ==========
Weighted average common and common
equivalent shares 4,529,593 4,707,221 5,077,040 4,668,531 6,748,145
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
Matrix Capital Corporation
Consolidated Statements of Shareholders' Equity
(Dollars In thousands)
<TABLE>
<CAPTION>
Common Stock Additional Retained
----------------------- Paid In Earnings
Shares Amount Capital (Deficit) Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 4,529,593 $ - $ 3,660 $ (126) $ 3,534
Capital contribution into pooled
company prior to merger - - 8 - 8
Net income - - - 3,120 3,120
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1994 4,529,593 - 3,668 2,994 6,662
Issuance of stock for services 138,938 - 101 - 101
Net income - - - 3,923 3,923
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 4,668,531 - 3,769 6,917 10,686
Issuance of stock, net of issuance
costs of $1,934 2,012,500 1 18,190 - 18,191
Cash dividends paid by pooled
company prior to merger - - - (201) (201)
Capital contribution into pooled
company prior to merger - - 24 - 24
Net income - - - 3,570 3,570
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 6,681,031 1 21,983 10,286 32,270
Net income (unaudited) - - - 1,754 1,754
----------- ----------- ----------- ----------- -----------
Balance at March 31, 1997
(unaudited) 6,681,031 $ 1 $21,983 $12,040 $34,024
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
Matrix Capital Corporation
Consolidated Statements of Cash Flows
(Dollars In thousands)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31 March 31
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net income (loss) $ 3,120 $ 3,923 $ 3,570 $ (4) $ 1,754
Adjustments to reconcile net income (loss) to net cash used by
operating activities:
Depreciation and amortization 615 882 1,106 227 370
Provision for loan and valuation losses 216 401 143 33 92
Amortization of mortgage servicing rights 1,185 1,817 2,432 501 1,527
Noncash compensation expense - 101 - - -
Accretion of premium on deposits (68) (28) (7) (3) -
Deferred income taxes 286 212 (54) - -
Gain on sale of loans and mortgage backed securities (1,590) (3,272) (3,369) (436) (118)
Gain on sale of mortgage servicing rights (684) (1,164) (3,232) - (1,411)
Losses related to recourse sales - - 787 - 225
Loans originated for sale, net of loans sold (4,681) (38,591) 8,099 (28,930) (10,790)
Loans purchased for sale (80,048) (91,774) (159,015) (50,678) (106,330)
Proceeds from sale of loans purchased for sale 62,727 70,159 57,395 10,135 5,455
Gain on sale of premises and equipment - - (78) - -
Originated mortgage servicing rights, net - (885) (441) (705) (14)
Increase in other receivables and other assets (2,288) (3,738) (796) (3,961) (6,689)
Increase (decrease) in other liabilities and income taxes payable 942 (20) (2,320) 10,561 2,762
----------- ----------- ----------- ----------- -----------
Net cash used by operating activities (20,268) (61,977) (95,780) (63,260) (113,167)
Investing activities
Loans originated and purchased for investment (423) (2,919) (15,048) (1,128) (4,365)
Principal repayments on loans 10,962 17,517 22,982 4,775 8,687
Purchase of Federal Home Loan Bank of Dallas stock (536) (814) (917) (665) (41)
Purchases of premises and equipment (1,957) (1,963) (2,695) (516) (200)
Purchase of land under development - - (1,431) - -
Purchase of revenue anticipation warrants - - (818) - -
Purchase of residential homes - - (1,003) - -
Acquisition of mortgage servicing rights (3,920) (9,654) (10,410) (1,194) (24,865)
Proceeds from sale of mortgage servicing rights 677 1,769 8,410 - 1,750
Proceeds from sale of available for sale securities - - 21,548 - -
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by investing activities 4,803 3,936 20,618 1,272 (19,034)
Financing activities
Net (decrease) increase in deposits (3,539) 6,995 41,309 6,337 91,797
Net (decrease) increase in custodial escrow balances (7,107) 2,324 10,870 1,422 31,559
Increase (decrease) in revolving lines and repurchase agreements, net 20,409 39,384 17,151 51,064 (6,695)
Repayments of notes payable (605) (3,865) (13,923) (370) (2,051)
Proceeds from notes payable 2,893 12,933 6,924 1,259 29,300
Proceeds from senior subordinated notes - 2,910 - - -
Repayment of financing arrangements (639) (307) (564) (82) (38)
Dividends paid by pooled company prior to merger - - (201) (66) -
Capital contribution into pooled prior to merger 8 - 24 - -
Proceeds from issuance of common stock - - 18,191 - -
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities 11,420 60,374 79,781 59,564 143,872
----------- ----------- ----------- ----------- -----------
(Decrease) increase in cash and cash equivalents (4,045) 2,333 4,619 (2,424) 11,671
Cash and cash equivalents at beginning of period 9,702 5,657 7,990 7,990 12,609
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 5,657 $ 7,990 $ 12,609 $ 5,566 $ 24,280
=========== =========== =========== =========== ===========
Supplemental disclosure of noncash activity
Payable for purchase of mortgage servicing rights $ 1,763 $ 1,312 $ 8,044 $ 151 $ 7,389
=========== =========== =========== =========== ===========
Drafts payable $ - $ 8,817 $ 5,961 $ 18,232 $ 7,544
=========== =========== =========== =========== ===========
Supplemental disclosure of cash flow information
Cash paid for interest expense $ 2,949 $ 6,489 $ 10,598 $ 2,546 $ 2,979
=========== =========== =========== =========== ===========
Cash paid for income taxes $ 1,702 $ 1,766 $ 2,298 $ 569 $ 609
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements
December 31, 1996 and March 31, 1997
(The information as of March 31, 1997 and for the three months
ended March 31, 1996 and 1997 is unaudited)
1. Organization
On June 30, 1993, Matrix Capital Corporation (Company) was formed and exchanged
1,000,000 shares of its common stock for 100 percent of the common stock of
United Financial, Inc. (United Financial), Matrix Financial Services Corporation
(Matrix Financial) and another company with minimal assets or operations. The
merger was accounted for as a pooling of interests and, accordingly, the 1993
consolidated financial statements were restated to include the accounts and
operations of the companies prior to the merger.
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 received in the
offering were approximately $18.2 million.
On September 23, 1993 the Company acquired Dona Ana Savings Bank, FSB (changed
its name to Matrix Capital Bank, herein referred to as Matrix Bank), a federally
chartered savings and loan association. Upon the acquisition of Matrix Bank,
the Company became a unitary savings and loan holding company which, through its
subsidiaries, is engaged in a single industry segment, the financial services
industries.
The Company's mortgage banking business is conducted through Matrix Financial,
and was established with the primary objective of acquiring, originating and
servicing residential mortgage loan servicing rights. Servicing mortgage loans
involves the contractual right to receive a fee for processing and administering
mortgage loan payments. The Company acquires servicing rights primarily in the
secondary market as well as through Matrix Financial's wholesale loan
origination offices in the Atlanta, Denver, and Phoenix metropolitan areas.
In June 1996, Matrix Financial formed an operating subsidiary, Matrix Funding
Corp., which purchased 154 acres of land for $1.3 million in cash for the
purpose of developing residential and multi-family lots in Ft. Lupton, Colorado.
F-7
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
1. Organization (continued)
Matrix Bank serves its local community by providing a full range of personal and
business depository services, offering residential and consumer loans, and
providing, on a limited basis, commercial real estate loans. Matrix Bank's
participation in the mortgage banking business includes the purchase of bulk
residential loan portfolios, with the intent of reselling the majority of the
loans, and extends to acquisitions of servicing portfolios, which are in turn
subserviced by Matrix Financial.
In May 1996, Matrix Bank formed an operating subsidiary, Sterling Finance Co.,
Inc. (Sterling Finance), which acquired substantially all the assets of an
origination and seller of subprime automobile retail installment sales contracts
for approximately $47,000 in cash. The assets acquired (fixed assets and
prepaid expenses) were purchased at their estimated fair value and no goodwill
was recorded. On December 31, 1996, Matrix Bank sold the fixed assets and the
name of Sterling Finance to a third party buyer and ceased its subprime auto
lending operations.
United Financial provides brokerage and consulting services to financial
institutions and financial services companies in the mortgage banking industry,
primarily related to the brokerage and analysis of residential mortgage loan
servicing rights, corporate and mortgage loan servicing portfolio valuations,
and, to a lesser extent, consultation and brokerage services in connection with
mergers and acquisitions of mortgage banking entities.
United Special Services, Inc. (USS), a wholly owned subsidiary of the Company
formed in June 1995, provides real estate management and disposition services to
financial services companies and financial institutions, including Matrix
Financial and Matrix Bank.
United Capital Markets (UCM), a wholly owned subsidiary of the Company formed in
December 1996, focuses on risk management services for institutional clients.
On February 5, 1997, the Company completed the merger of The Vintage Group, Inc.
("Vintage") with the issuance of 779,592 shares of the Company's common stock,
which was accounted for as a pooling of interests. Vintage's subsidiaries,
Sterling Trust Company ("Sterling Trust") and Vintage Financial Services
Corporation ("VFSC") are located in Waco, and Arlington, Texas, respectively.
Sterling Trust was incorporated in 1984 as a Texas independent, nonbank trust
company specializing in the administration of self-directed qualified retirement
plans, individual retirement accounts, custodial, and directed trust accounts.
As of March 31, 1997, Sterling Trust had in excess of 25,000 accounts with
assets under administration of over $1.2 billion. VFSC, whose name has been
changed to First Matrix Investment Services Corp., is a NASD broker/dealer that
provides services to individuals and deferred contribution plans.
F-8
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies
The accounting and reporting policies of the Company and its subsidiaries
conform to generally accepted accounting principles and to general practices
within the financial services industry.
The following is a description of the more significant policies which the
Company follows in preparing and presenting its consolidated financial
statements.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and the
accompanying notes. Actual results could differ from these estimates.
Pooling of Interests Accounting
On February 5, 1997, the merger of The Vintage Group, Inc. was completed, which
was accounted for as a pooling of interests. The financial information for all
prior periods presented has been restated to present the combined financial
condition and results of operations of both companies as if the merger of
Vintage had been in effect for all periods presented.
Loans Held for Sale
Loans originated or purchased with the intent for sale in the secondary market
are carried at the lower of cost, net of discounts or premiums, or estimated
market value in the aggregate. Market value is determined using forward sale
commitments to permanent investors or current market rates for loans of similar
quality and type. Net unrealized losses, if any, would be recognized in a
valuation allowance by charges to income. Discounts or premiums on loans held
for sale are not accreted or amortized into income on an interest method,
however discounts and premiums related to payments of loan principal are
recorded in interest income. The loans are primarily secured by one to four
family residential real estate located throughout the United States.
F-9
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
Gains and losses on loan sales are recognized at the time of sale. Gains and
losses are calculated based upon the total consideration received, after
provisions to cover estimated future servicing costs and recourse provisions.
Losses related to recourse provisions in excess of the amount originally
provided are accrued as a liability at the time such additional losses are
determined, and recorded as part of noninterest expense.
Loans Held for Investment
Loans held for investment are stated at unpaid principal balances (since it is
the Company's intention to hold the loans until maturity), less unearned
discounts and premiums, deferred loan fees, loans in process, and allowance for
loan losses. Premiums, discounts and net origination fees on loans are
amortized to interest income over the contractual life of the related loans
using the interest method.
Allowance for Loan Losses
In January 1995, the Company adopted Statement of Financial Accounting Standards
(Statement) No. 114, Accounting by Creditors for Impairment of a Loan, amended
in October 1994 by Statement No. 118, Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosures, hereinafter collectively referred
to as Statement No. 114. Under Statement No. 114, a loan is considered impaired
when, based on current information and events, it is probable that a creditor
will be unable to collect all amounts due according to the contractual terms of
the loan. Statement No. 114 applies to all loans except large groups of
smaller-balance homogeneous loans, which are collectively evaluated, loans
measured at fair value or at the lower of cost or fair value, leases and debt
securities. The statement does not address the overall adequacy of the
allowance for loan losses.
Potential impaired loans of the Company, as defined by Statement No. 114,
include only commercial, real estate construction and commercial real estate
mortgage loans classified as nonperforming loans. Impairment allowances are
considered by the Company in determining the overall adequacy of the allowance
for loan losses. The adoption of Statement No. 114 resulted in no material
change in the allowance for loan losses. When a loan is identified as
"impaired," accrual of interest ceases. The Company had no impaired loans, as
defined by Statement No. 114, as of or for the years ended December 31, 1995 and
1996, respectively.
The Company evaluates its mortgage loans collectively due to their homogeneous
nature. The allowance for loan losses is calculated, in part, based on
historical loss experience. In addition, management takes into consideration
other factors such as any qualitative evaluations of individual classified
assets, geographic portfolio concentrations, new products or markets,
evaluations of the changes in the historical loss experience component, and
projections of this component into the current and future periods based on
current knowledge and conditions. After an allowance has been established
F-10
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
for the loan portfolio, management establishes an unallocated portion of the
allowance for loan losses, which is attributable to factors that cannot be
associated with a specific loan or loan portfolio. These factors include
general economic conditions, recognition of specific regional geographic
concerns, and trends in portfolio growth. Loan losses are charged against the
allowance when the probability of collection is considered remote. In the
opinion of management, the allowance, when taken as a whole, is adequate to
absorb reasonably foreseeable losses in the current loan portfolio.
Loans are placed on nonaccrual status when full payment of principal or interest
is in doubt, or generally when they are past due ninety days as to either
principal or interest. Previously accrued but unpaid interest is reversed and
charged against interest income, if not collectible, and future accruals are
discontinued. Interest payments received on nonaccrual loans are recorded as
interest income unless there is doubt as to the collectibility of the recorded
investment. In those cases, cash received is recorded as a reduction in
principal.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight line method over the estimated lives
of the assets, which range from three to seven years for office furniture,
equipment and software and 30 years for buildings.
Mortgage Servicing Rights (MSR)
On January 1, 1995, the Company adopted Statement No. 122, Accounting for
Mortgage Servicing Rights. Since Statement No. 122 prohibits retroactive
application, the historical accounting results for 1994 have not been restated,
and accordingly, the accounting results for 1995 and 1996 are not directly
comparable to the results for prior periods.
With the adoption of this statement, the Company recognizes originated mortgage
servicing rights (OMSRs) as an asset separate from the underlying originated
mortgage loan by allocating the total cost of originating a mortgage loan
between the loan and the servicing right based on their respective fair values.
Mortgage servicing rights are carried at the lower of cost (allocated cost for
OMSRs), less accumulated amortization, or fair value. Mortgage servicing rights
are amortized in proportion to and over the period of the estimated future net
servicing income.
The fair value of mortgage servicing rights is determined based on the
discounted future servicing income stratified based on one or more predominant
risk characteristics of the underlying loans. The Company stratifies its
mortgage servicing rights by product type and investor to reflect the
predominant risk characteristics. To determine the fair value of mortgage
servicing rights, the Company uses a valuation model that calculates the present
value of future cash flows to determine the fair value of the
F-11
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
mortgage servicing rights. In using this valuation method, the Company
incorporates assumptions that market participants would use in estimating future
net servicing income which includes estimates of the cost of servicing per loan,
the discount rate, float value, an inflation rate, ancillary income per loan,
prepayment speeds and default rates. As of December 31, 1996, no valuation
allowance was required and the fair value of the aggregate mortgage servicing
rights was approximately $29,900,000.
Gain on Sale of Servicing Rights
The Company complies with EITF Issue No. 95-5, Determination of What Constitutes
a Sale of Mortgage Loan Servicing Rights, such that the gain on sale of
servicing rights is recognized when substantially all the risks and rewards
inherent in owning the mortgage servicing rights have been transferred to the
buyer, and any protection provisions retained by the Company are minor and can
be reasonably estimated.
Drafts Payable
Drafts payable represent the in transit outstanding funding of a new loan by the
Company via a negotiable instrument, however, the instrument has not yet been
presented to the bank for payment. Presentation to the bank generally occurs
within one to three days.
Loan Administration Income
Loan administration income represents service fees and other income earned from
servicing loans for various investors. Loan administration income includes
service fees that are based on a contractual percentage of the outstanding
principal balance plus late fees and other ancillary charges. Income is
recognized when the related payments are received.
Brokerage Income
Brokerage income represents fees earned related to brokerage and consulting
services. Brokerage income is recognized when earned.
Trust Services Income
Trust services income represents fees earned related to services provided for
self-directed IRA, pension, and escrow arrangements. Trust services income is
recognized when earned.
F-12
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
Loan Origination Income
Loan origination income for loans originated for sale, which includes all
mortgage origination fees, secondary marketing activity and servicing-released
premiums on mortgage loans sold, net of outside origination costs, is recognized
as income at the time the loan is sold.
Loan origination income for loans originated for investment, which includes
mortgage origination fees and certain direct costs associated with loan
originations, is deferred and amortized as a yield adjustment over the
contractual life of the related loan using the interest method, adjusted for
estimated prepayments.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 123, Accounting for Stock-Based Compensation, which provides an
alternative to Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, in accounting for stock-based compensation issued to
employees. Statement No. 123 allows for a fair value based method of accounting
for employee stock options and similar equity instruments awarded after December
31, 1995. The Company has elected to account for stock-based compensation plans
in accordance with APB Opinion No. 25 and to follow the pro forma net income,
pro forma earnings per share, and stock-based compensation plan disclosure
requirements set forth in Statement No. 123.
Foreclosed Real Estate
Real estate acquired through foreclosure, deed in lieu of foreclosure or in
judgment is carried at the lower of fair value, minus estimated costs to sell,
or the related loan balance at the date of foreclosure. Valuations are
periodically performed by management and an allowance for loss is established by
a charge to operations if the carrying value of a property exceeds its fair
value, minus estimated costs to sell. The net carrying value of foreclosed real
estate, which is classified in other assets, was $835,000, $788,000 and $853,000
at December 31, 1995 and 1996 and March 31, 1997, respectively.
F-13
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
Acquired Real Estate
Costs directly attributable to the acquisition, development, and construction of
land development are capitalized. Such costs include preacquisition costs,
direct project costs, and holding costs. The investment in land development is
carried at the lower of cost, which includes capitalized costs, or net
realizable value. Net unrealized losses, if any, would be recognized in a
valuation allowance. As of December 31, 1996 there was no valuation allowance
necessary for the land development.
Income Taxes
The Company and its subsidiaries file consolidated federal and state income tax
returns. The subsidiaries are charged for the taxes applicable to their profits
calculated on the basis of filing separate income tax returns. Matrix Bank
qualifies as a savings and loan association for income tax purposes.
The Company follows Statement No. 109, Accounting for Income Taxes, which uses
the liability method in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax basis of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
Fair Value of Financial Instruments
In 1995, the Company adopted Statement No. 107, Disclosures about Fair Value of
Financial Instruments, which requires disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet, where it
is practicable to estimate their value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instruments. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company. For additional information refer
to Note 14 - Financial Instruments.
Cash and Cash Equivalents
Cash equivalents, for purposes of the statements of cash flows, consist of cash
and interest earning deposits with banks with original maturities when purchased
of three months or less.
F-14
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
Net Income Per Share
Net income per common and common equivalent share are computed based on net
income, adjusted for any preferred stock dividends declared, and the weighted
average number of common shares outstanding during each period and the dilutive
effect, if any, of stock options and warrants outstanding.
Interim Financial Statements
The accompanying consolidated balance sheet at March 31, 1997 and the
consolidated statements of operations, shareholders' equity and cash flows for
the three month periods March 31, 1996 and 1997 are unaudited and have been
prepared on the same basis as the audited consolidated financial statements
included herein. In the opinion of management, such unaudited consolidated
financial statements include all adjustments (all of which are of a normal
recurring nature) necessary to present fairly the consolidated financial
position and the results of operations for the periods presented. The results
of operations for such interim periods are not necessarily indicative of results
for the full year.
Impact of Recently Issued Accounting Standards
In June 1996, the FASB issued Statement No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, which
supercedes Statement No. 122. This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities and is effective for periods beginning after December 31, 1996.
Transactions covered by Statement No. 125 include securitizations, sales of
partial interests in financial assets, repurchase agreements, securities
lending, pledges of collateral, loan syndications and participations, sales of
receivables with recourse, servicing of mortgages and other loans, and in-
substance defeasances. The statement uses a "financial components" approach
that focuses on control to determine the proper accounting for financial asset
transfers. Under that approach, after financial assets are transferred, an
entity would recognize on the balance sheet all assets it controls and
liabilities it has incurred. It would remove from the balance sheet those
assets it no longer controls and liabilities it has satisfied.
If the entity has surrendered control over the transferred assets, the
transaction would be considered a sale. Control is considered surrendered only
if the assets are isolated from the transferor; the transferee has the right to
pledge or exchange the assets or is a qualifying special-purpose entity; and the
transferor does not maintain effective control over the assets through an
agreement to repurchase or redeem them. If those conditions do not exist, the
transfer would be accounted for as a secured borrowing.
The Company adopted Statement No. 125 in the first quarter of 1997 and the
effect of adoption was not material to its consolidated financial statements.
F-15
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
In February 1997, the FASB issued Statement No. 128, Earnings per Share which
specifies the computation, presentation and disclosure requirements for earnings
per common share (EPS). Statement No. 128 replaces the presentation of primary
and fully diluted EPS pursuant to APB Opinion No. 15, Earnings per Share with
the presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. The Company is required to adopt Statement No. 128 with its December
31, 1997 financial statements and restate all prior-period EPS data. The
Company will continue to account for EPS under APB Opinion No. 15 until that
time. Management does not expect the adoption of Statement No. 128 will have a
material impact.
Reclassifications
Certain amounts in the prior period financial statements have been reclassified
to conform to the current period presentation.
3. Loans Receivable
Loans Held for Investment
Loans held for investment consist of the following:
<TABLE>
<CAPTION>
December 31 March 31
1995 1996 1997
----------- ----------- -----------
(Unaudited)
(In thousands)
<S> <C> <C> <C>
Residential loans $ 9,349 $10,007 $ 9,448
Multi-family and commercial real estate 7,544 15,352 16,571
Construction loans 577 1,319 1,873
Consumer loans and other 3,381 3,704 7,394
----------- ----------- -----------
20,851 30,382 35,286
Less:
Loans in process 499 254 1,035
Purchase discounts, net 414 239 240
Unearned discounts on consumer loans 14 9 47
Allowance for loan losses 227 270 283
Specific valuation allowance on purchased loans 122 50 37
----------- ----------- -----------
1,276 822 1,642
----------- ----------- -----------
$19,575 $29,560 $33,644
=========== =========== ===========
</TABLE>
F-16
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
3. Loans Receivable (continued)
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31 March 31
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 196 $ 220 $ 227 $ 227 $ 270
Provision for loan losses 24 - 34 9 -
Charge-offs - (42) (6) - -
Recoveries - 49 15 - 13
-------- -------- -------- -------- --------
Balance at end of period $ 220 $ 227 $ 270 $ 236 $ 283
======== ======== ======== ======== ========
</TABLE>
Nonaccrual loans in the loans held for investment portfolio totaled
approximately $440,000, $335,000 and $394,000 or 2.1 percent, 1.1 percent and
1.1 percent of the total loans held for investment portfolio at December 31,
1995 and 1996 and March 31, 1997, respectively.
Matrix Bank had commitments to extend credit on consumer and construction loans
of approximately $3,885,000 and $8,671,000 at December 31, 1996 and March 31,
1997, respectively.
Loans Held for Sale
Loans held for sale consist of the following as of:
<TABLE>
<CAPTION>
December 31 March 31
1995 1996 1997
-------- -------- --------
(Unaudited)
(In thousands)
<S> <C> <C> <C>
First mortgage loans $133,622 $185,080 $288,453
Automobile installment contracts - 1,315 669
-------- -------- --------
133,622 186,395 289,122
Less:
Purchase discounts, net 5,816 2,825 2,416
Valuation allowance 716 769 861
-------- -------- --------
6,532 3,594 3,277
-------- -------- --------
$127,090 $182,801 $285,845
======== ======== ========
</TABLE>
F-17
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
3. Loans Receivable (continued)
Activity in the valuation allowance is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31 March 31
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(Unaudited)
(In thousands)
Balance at beginning of
period $ 342 $ 508 $ 716 $ 716 $ 769
Provision for valuation
allowance 192 401 109 24 92
Charge-offs (26) (198) (64) - -
Recoveries - 5 8 5 -
-------- -------- -------- -------- --------
Balance at end of period $ 508 $ 716 $ 769 $ 745 $ 861
======== ======== ======== ======== ========
</TABLE>
Nonaccrual loans related to the loans held for sale portfolio aggregated
approximately $5,098,000, $3,568,000 and $2,551,000 at December 31, 1995 and
1996 and March 31, 1997, respectively. Approximately $1,123,000, $722,000 and
$-0- at December 31, 1995 and 1996 and March 31, 1997, respectively, of the
nonaccrual loans related to a 90 percent senior participation interest acquired
by the Company in a $22,000,000 passthrough certificate secured by single family
residential real estate mortgages which was classified as loans held for sale.
Losses incurred related to loans underlying the passthrough certificate were
first charged to the subordinate participation interest. The Company sold the
loans related to this participation interest during the three months ended March
31, 1997.
Interest income that would have been recorded for all nonaccrual loans was
approximately $140,000, $156,000, and $120,000 during the years ended December
31, 1994, 1995, and 1996, respectively, and $63,000 and $38,000 during the three
months ended March 31, 1996 and 1997, respectively.
During 1996, the Bank formed two mortgage backed securities with an unpaid
principal balance of approximately $21,000,000 from its loans held for sale
portfolio. During the year ended December 31, 1996, the Company recognized a
gross gain on the sale of mortgage backed securities of approximately $171,000
and the taxes related to this sale were approximately $68,000.
On December 31, 1996, Matrix Bank sold the fixed assets and the right to the
name of Sterling Finance to a third party buyer and ceased its subprime auto
lending operations. During the time that Matrix Bank owned Sterling Finance, it
purchased numerous automobile retail installment contracts and sold
approximately $18,500,000 of such contracts, subject to certain recourse
provisions. During 1996, Sterling Finance was required to repurchase
approximately $2,500,000 of automobile installment contracts and repossessed
automobiles pursuant to the recourse provisions. Included in loans held for
F-18
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
3. Loans Receivable (continued)
sale at December 31, 1996 and March 31, 1997 is approximately $1,220,000 and
$617,000, net of discount, respectively, of these automobile installment
contracts. Matrix Bank had a recourse liability recorded of approximately
$600,000 and $600,000 at December 31, 1996 and March 31, 1997, respectively, for
the potential loss exposure related to these automobile installment contracts
and repossessed automobiles.
Matrix Bank received in January 1997 a signed letter from the purchaser of the
automobile retail installment contracts that no additional repurchases would be
required, except with respect to certain terms and conditions in the purchase
and sale agreement.
The Company recorded $225,000 in losses related to recourse sales for the three
months ended March 31, 1997 for titles to the underlying vehicles that were not
timely delivered to the purchaser. For additional information see Note 16.
Additionally, in other assets at December 31, 1996 and March 31, 1997 is
approximately $500,000 and $550,000, respectively, in repossessed automobiles
which represents the estimated fair value of the automobiles, less estimated
costs to sell.
4. Premises and Equipment
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
December 31 March 31
1995 1996 1997
--------- --------- --------
<S> <C> <C> <C>
(Unaudited)
(In thousands)
Land $ 532 $ 692 $ 684
Buildings 3,761 4,257 4,266
Leasehold improvements 136 431 449
Office furniture and equipment 2,475 3,910 3,988
Other equipment 960 975 975
--------- --------- ---------
7,864 10,265 10,362
Less: accumulated depreciation
and amortization 1,697 2,378 2,555
--------- --------- ---------
$6,167 $ 7,887 $ 7,807
========= ========= =========
</TABLE>
F-19
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
4. Premises and Equipment (continued)
Included in occupancy and equipment expense is depreciation and amortization
expense of premises and equipment of approximately $598,000, $602,000, and
$828,000 for the years ended December 31, 1994, 1995 and 1996, respectively, and
$175,000 and $280,000 during the three months ended March 31, 1996 and 1997,
respectively.
5. Mortgage Servicing Rights
The activity in the MSRs is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31 March 31
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(Unaudited)
(In thousands)
Balance at beginning
of year $ 1,818 $ 6,183 $13,817 $13,817 $23,680
Purchases 5,550 9,203 17,142 33 24,210
Originated, net of
OMSRs sold - 885 441 705 14
Amortization (1,185) (1,817) (2,432) (501) (1,527)
Transfer of MSR to FHLMC
(Note 12) - - (110) - -
Sales - (637) (5,178) - (7,927)
-------- -------- -------- -------- --------
Balance at end of year $ 6,183 $13,817 $23,680 $14,054 $38,450
======== ======== ======== ======== ========
</TABLE>
Accumulated amortization of mortgage servicing rights aggregated approximately
$9,495,000, $11,347,000, and $12,873,000 at December 31, 1995, 1996 and March
31, 1997, respectively.
The Company's servicing activity is diversified throughout 48 states with
concentrations at December 31, 1996 in California, New York and Texas of
approximately 27.2 percent, 8.6 percent and 16.4 percent, respectively, based on
aggregate outstanding unpaid principal balances of the mortgage loans serviced.
As of December 31, 1995, 1996 and March 31, 1997, the Company subserviced loans
for others of approximately $85,000,000, $140,000,000 and $617,000,000,
respectively. The increase in the March 31, 1997 subserviced loans is due to a
sale of Company owned MSRs which occurred in March 1997 and the subservicing
will terminate in September 1997.
F-20
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
5. Mortgage Servicing Rights (continued)
The Company's servicing portfolio (excluding subserviced loans) comprised the
following:
<TABLE>
<CAPTION>
December 31 March 31
1995 1996 1997
---------------------- ---------------------- ----------------------
Principal Principal Principal
Number Balance Number Balance Number Balance
of Loans Outstanding of Loans Outstanding of Loans Outstanding
-------- ----------- -------- ----------- -------- -----------
(Unaudited)
(Dollars In thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLMC 9,453 $ 671,966 12,107 $ 666,218 12,912 $ 779,702
FNMA 7,820 483,947 13,426 764,632 13,109 750,802
GNMA 271 12,883 9,379 278,700 28,016 1,174,120
Other VA, FHA, and
conventional loans 7,414 427,589 12,870 795,486 12,871 794,592
-------- ------------ -------- ------------ -------- ------------
24,958 $1,596,385 47,782 $2,505,036 66,908 $3,499,216
======== ============ ======== ============ ======== ============
</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 $26,769,000, $27,381,000 and
$55,875,000 at December 31, 1995, 1996 and March 31, 1997, respectively. The
Company also has custodial accounts on deposit from other mortgage companies
aggregating approximately $242,000, $10,500,000 and $13,565,000 at December 31,
1995, 1996 and March 31, 1997, respectively. The Companies custodial accounts
are maintained at Matrix Bank in noninterest bearing accounts. The balance of
the custodial accounts fluctuate from month to month based on the pass-through
of the principal and interest payments to the ultimate investors and the timing
of the taxes and insurance payments.
The mortgage servicing portfolio includes recourse servicing equal to
approximately 0.7, 0.4 and 0.4 percent of the total owned at December 31, 1995
and 1996 and March 31, 1997, respectively. A reserve for losses is recorded, as
appropriate, for loans serviced for others, in which the investor has recourse
to the Company, which had a balance of approximately $49,000, $61,000 and
$498,000 at December 31, 1995 and 1996 and March 31, 1997, respectively.
Additionally, in certain circumstances the Company is required to make advances
for escrow and foreclosure costs for loans which it services. The Company
experienced losses for unrecoverable advances of approximately $34,000,
$144,000, and $28,000 for the years ended December 31, 1994, 1995 and 1996,
respectively, and $5,000 and $11,000 for the three months ended March 31, 1996
and 1997, respectively.
F-21
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
6. Deposits
Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
December 31 March 31
-------------------------------------------------------------------------------------------------------
1995 1996 1997
-------------------------------------------------------------------------------------------------------
(Dollars In thousands)
Weighted Weighted Weighted
Average Average Average
Amount Percent Rate Amount Percent Rate Amount Percent Rate
--------- --------- ---------- --------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 2,358 4.82% 3.40% $ 2,757 3.06% 3.45% $ 3,036 1.67% 3.97%
NOW accounts 3,832 7.84 1.49 4,732 5.25 1.66 88,643 48.71 3.15
Money market accounts 6,167 12.62 4.38 9,455 10.48 4.43 10,516 5.78 4.40
--------- --------- ---------- --------- --------- ---------- --------- --------- ---------
12,357 25.28 3.18 16,944 18.79 3.59 102,195 56.16 3.38
Certificate accounts 36,513 74.72 5.97 73,235 81.21 5.85 79,781 43.84 5.89
--------- --------- ---------- --------- --------- ---------- --------- --------- ---------
48,870 100.00% 90,179 100.00% 181,976 100.00%
========= ========= =========
Purchase premium 7 - -
--------- --------- ---------
$48,877 $90,179 $181,976
========= ========= =========
Weighted-average interest
rate 5.23% 5.36% 4.72%
========== ========== =========
</TABLE>
Contractual maturities of certificate accounts as of December 31, 1996:
<TABLE>
<CAPTION>
Under 12 12 to 36 36 to 60
months months months
--------------------------------------------
(In thousands)
<S> <C> <C> <C>
3.00-3.99% $ 104 $ - $ -
4.00-4.99% 807 - -
5.00-5.99% 43,211 5,663 318
6.00-6.99% 8,078 8,737 3,211
7.00-7.99% 2,409 258 395
8.00-10.50% - 41 3
--------------------------------------------
$54,609 $14,699 $ 3,927
============================================
</TABLE>
Subsequent to the merger with Vintage, assets under administration were
transferred from a third party financial institution to Matrix Bank and placed
in interest bearing accounts. Approximately $83,000,000 of assets under
administration are included in interest bearing accounts as of March 31, 1997.
F-22
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
6. Deposits (continued)
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31 March 31
1994 1995 1996 1996 1997
----------- ----------- ----------- ------------ -----------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C>
Passbook accounts $ 72 $ 85 $ 82 $ 20 $ 28
NOW accounts 76 52 63 15 414
Money market 195 240 405 117 111
Certificates of deposit 1,138 1,807 3,210 554 1,095
------- ------- ------- -------- -------
$ 1,481 $ 2,184 $ 3,760 $ 706 $ 1,648
======= ======= ======= ======== =======
</TABLE>
The aggregate amount of deposit accounts with a balance greater than $100,000
was approximately $2,066,000, $5,457,000 and $5,405,000 at December 31, 1995,
1996, and March 31, 1997, respectively.
7. Borrowed Money
Borrowed money is summarized as follows:
<TABLE>
<CAPTION>
December 31 March 31
1995 1996 1997
----------- ----------- -----------
(Unaudited)
(In thousands)
<S> <C> <C> <C>
Revolving Lines
$50,000,000 ($60,000,000 at March 31, 1997) revolving
warehouse loan agreement (with a $2,500,000 working
capital sublimit in 1996) with banks, secured by
mortgage loans held for sale, interest at federal
funds rate plus 0.85 (6.63 percent average rate at
March 31, 1997); $23,861,000 available at
March 31, 1997. $46,833 $31,504 $36,139
$10,000,000 working capital facility with banks secured
by mortgage loans held for sale, mortgage servicing
rights, eligible servicing advance receivables and
eligible delinquent mortgage receivables; interest at
federal funds rate plus 1.5 percent (6.89 percent at
March 31, 1997); $7,518,000 available at March 31, 1997 - - 2,482
$6,000,000 revolving line of credit with a third party
financial institution, secured by common stock of
Matrix Bank; interest due monthly at prime; $2,300,000
available at March 31, 1997. - - 3,700
----------- ----------- -----------
46,833 31,504 42,321
</TABLE>
F-23
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
7. Borrowed Money (continued)
<TABLE>
<CAPTION>
December 31 March 31
1995 1996 1997
------------ ------------ ------------
(Unaudited)
(In thousands)
<S> <C> <C> <C>
Term Notes Payable
$13,500,000 ($30,000,000 at March 31, 1997) servicing
acquisition loan agreement with a bank, secured by
MSRs, due at the earlier of the maturity of the MSRs
or amortized over five to six years from the date of
the borrowing through January 31, 2003; interest at
federal funds rate plus 2.00 percent (7.39 percent at
March 31, 1997); $4,900,000 available at March 31, 1997. $ 8,709 $ 1,500 $25,100
Senior subordinated notes, interest at 14 percent payable
semiannually, unsecured and maturing July 2002, with
mandatory redemptions of $727,500 on each of July 15,
1999, 2000 and 2001. 2,910 2,910 2,910
Notes payable to a third-party financial institution
(revised bank stock loan) due in quarterly
installments of $71,430, plus interest, through
March 12, 2000, collateralized by the common stock
of Matrix Bank; interest at prime. - - 2,000
Note payable to a third-party financial institution
(bank stock loan) due in annual principal installments
of $286,101, plus interest, through 2003, collateralized
by the common stock of Matrix Bank; interest at prime
plus 1.0 percent. 2,289 2,003 -
Note payable to a bank, secured by a deed of trust on
real estate, unpaid principal balance plus interest due
June 1998; interest at prime plus 1.0 percent. 921 938 931
Note payable to a bank, secured by a deed of trust on real
estate, interest due monthly at prime plus 1 percent,
unpaid principal due July 21, 1998. - 845 845
Note payable to a third-party financial institution due in
monthly installments through 2000, secured by equipment;
interest at the one year treasury rate plus 2.4 percent. 786 731 718
Notes payable to a third-party financial institution due in
28 consecutive quarterly installments, secured by MSRs;
interest at prime plus 2.0 percent and fixed at 10 percent. 631 521 493
Other, interest at prime plus 2.0 percent. 201 - -
------------ ------------ ------------
Total term notes 16,447 9,448 32,997
</TABLE>
F-24
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
7. Borrowed Money (continued)
<TABLE>
<CAPTION>
December 31 March 31
1995 1996 1997
------------ ------------ ------------
(Unaudited)
(In thousands)
<S> <C> <C> <C>
Other
Agreements with a bank and an investment bank to sell
mortgage loans originated by the Company under agreements
to repurchase. The agreement can be terminated upon 90
days written notice by either party; interest at the
higher of the prime rate or note rate on the loans. Total
commitment amount of these agreements is $20,000,000,
with $16,562,000 available at March 31, 1997. $ 570 $ - $ 3,438
Financing agreement with a bank, secured by Ft. Lupton
Subordinated Series 1996 A1 revenue anticipation warrants,
interest is at 5 percent and is due based on the semi-annual
bonds payments, unpaid principal due at bond maturity. - 800 800
MSR financing (see below). 1,243 679 641
------------ ------------ ------------
1,813 1,479 4,879
------------ ------------ ------------
$ 65,093 $ 42,431 $ 80,197
============ ============ ============
</TABLE>
On January 31, 1997, the Company renegotiated the revolving credit facilities
for its $50,000,000 warehouse loan agreement, including the working capital sub-
limit, and its $13,500,000 servicing acquisition loan agreement. With this
renegotiation, the aggregate amount of revolving warehouse lines of credit
facilities was increased to $60.0 million, the aggregate amount of the servicing
acquisition facility was increased to $30.0 million, and the aggregate amount of
the working capital facility was increased to $10.0 million. The $10.0 million
working capital facility became a separate component to the revolving credit
facilities, and is no longer a sublimit to the warehouse loan agreement. The
new credit facility agreement requires Matrix Financial to maintain, among other
things, (i) total shareholder's equity of at least $10.0 million plus 100
percent of capital contributed after January 1, 1997, plus 50 percent of
cumulative quarterly net income, (ii) adjusted net worth, as defined, of at
least $12.0 million, (iii) a servicing portfolio of at least $2.0 billion, (iv)
principal debt of term line borrowings of no more than the lesser of 70 percent
of the appraised value of the mortgage servicing portfolio or 1.25 percent of
the unpaid principal balance of the mortgage servicing portfolio, (v) a ratio of
total adjusted debt to adjusted tangible net worth of no more than 8 to 1, and
(vi) a ratio of cash flow to current maturities of long-term debt and any
capital leases of at least 1.3 to 1.0.
F-25
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
7. Borrowed Money (continued)
In March 1997, the Company refinanced its bank stock loan and increased the
credit available under the loan by an additional $6.0 million. The new bank
stock loan has two components of the loan, a $2.0 million term loan, which was
used to refinance the bank stock loan in place at December 31, 1996, and a
revolving line of credit of $6.0 million. In March of 1998, the balance of the
revolving line of credit will be converted to a term loan. The additional
proceeds from the loan will be used as capital at Matrix Bank. The new bank
stock loan requires the Company to maintain (i) total stockholders' equity of
$27.5 million plus 100 percent of all future equity contributions, plus 50
percent of cumulative quarterly net income, (ii) dividends less than 50 percent
of the Company's net cash income after adjustments, and (iii) total adjusted
debt to stockholders' equity less than 4 : 1.
The terms of the senior subordinated notes limit cash dividends to an amount
equal to 50 percent of consolidated net income as long as the dividend does not
exceed 10 percent of consolidated shareholders' equity. The Company may redeem
the senior subordinated notes, in whole or in part, at any time after July 15,
1998 at a redemption price of 102 percent of par through July 14, 1999 and,
thereafter, at par, plus accrued and unpaid interest. The Company was obligated
to register under the Securities Act of 1933 the senior subordinated notes on or
before February 1, 1997. Since such registration statement was not effected by
February 1, 1997, the interest rate increased from 13 to 14 percent.
As of December 31, 1996 the maturities of term notes payable during the next
five years and thereafter are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1997 $ 648
1998 2,500
1999 1,493
2000 1,499
2001 1,479
Thereafter 1,829
-----------
$ 9,448
===========
</TABLE>
The Company must comply with certain financial and other covenants related to
the foregoing debt agreements including the maintenance of specific ratios, net
worth and other amounts as defined in the credit agreements. At December 31,
1996 and March 31, 1997, the Company was in compliance with these covenants.
F-26
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
7. Borrowed Money (continued)
MSR Financing
In 1992 and 1994 the Company entered into two unrelated transactions with
portions of its owned servicing portfolio which were accounted for as financings
due to various terms of the agreements regarding continuing involvement.
Amounts due to the other parties under the financings had balances of
approximately $1,243,000, $679,000 and $641,000 at December 31, 1995 and 1996
and March 31, 1997, respectively. The MSRs pledged as collateral for the loans
relate to mortgage loans with unpaid principal balances of approximately
$125,000,000, $74,000,000 and $71,000,000 at December 31, 1995 and 1996 and
March 31, 1997, respectively. One of these financing arrangements was
completely paid off in 1996. In the remaining financing arrangement, the
Company retains a portion of the servicing income associated with the pledged or
related MSRs, with the balance of the servicing income paid to the other parties
as a reduction of the debt and interest. The implicit interest rate of the
financing varies depending on the servicing income derived from the MSRs.
A portion of the payment made under this arrangement is recorded as interest
expense on the level yield method. The amounts due the other parties are
payable solely from the servicing income derived from the MSRs, and there is no
implicit or explicit guarantee as to repayment. The total amounts paid to the
other parties aggregated approximately $717,000, $620,000 and $785,000 during
the years ended December 31, 1994, 1995 and 1996, respectively, and $85,000 and
$68,000 during the three months ended March 31, 1996 and 1997, respectively.
8. Federal Home Loan Bank of Dallas Borrowings
Federal Home Loan Bank of Dallas borrowings aggregated $19,000,000, $51,250,000
and $34,000,000 at December 31, 1995 and 1996 and March 31, 1997, respectively.
The advances bear interest at rates which adjust daily and are based on the
mortgage repo rate. All advances are secured by first mortgage loans of Matrix
Bank and all Federal Home Loan Bank of Dallas stock.
Matrix Bank has a commitment from the Federal Home Loan Bank of Dallas for
advances of approximately $55,000,000 at December 31, 1996. Matrix Bank adopted
a collateral pledge agreement whereby it has agreed to keep on hand, at all
times, first mortgages free of all other pledges, liens, and encumbrances with
unpaid principal balances aggregating no less than 170 percent of the
outstanding secured advances from the Federal Home Loan Bank of Dallas.
F-27
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
9. Income Taxes
The income tax provision consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31
1994 1995 1996
-------------------------------
(In thousands)
<S> <C> <C> <C>
Current
Federal $1,489 $1,814 $1,871
State 239 443 461
Deferred
Federal 236 169 (42)
State 50 43 (12)
-------------------------------
$2,014 $2,469 $2,278
===============================
</TABLE>
A reconciliation of the provision for income taxes with the expected income
taxes based on the statutory federal income tax rate follows:
<TABLE>
<CAPTION>
Year Ended December 31
1994 1995 1996
-------------------------------
(In thousands)
<S> <C> <C> <C>
Expected income tax provision $1,746 $2,173 $1,988
State income taxes 289 310 296
Other (21) (14) (6)
-------------------------------
$2,014 $2,469 $2,278
===============================
</TABLE>
F-28
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued))
Deferred tax assets and liabilities result from the tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes shown below.
<TABLE>
<CAPTION>
December 31
1995 1996
---------------------
<S> <C> <C>
(In thousands)
Deferred tax assets:
Allowance for losses $ 190 $ 551
Discounts and premiums 177 108
Amortization of servicing rights 160 -
Other 51 82
---------------------
Total deferred tax assets 578 741
Deferred tax liabilities:
Gain on sale of loans (275) (279)
Amortization of servicing rights - (106)
Depreciation (241) (302)
Other (62) -
---------------------
Total deferred tax liabilities (578) (687)
---------------------
Net deferred tax asset $ - $ 54
=====================
</TABLE>
10. Regulatory
The Company is a unitary thrift holding company and, as such, is subject to the
regulation, examination and supervision of the Office of Thrift Supervision
(OTS).
Matrix Bank is also subject to various regulatory capital requirements
administered by the OTS. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions,
actions by regulators that, if undertaken, could have a direct material effect
on Matrix Bank's financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, Matrix Bank must meet
specific capital guidelines that involve quantitative measures of the Matrix
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. Matrix Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Matrix Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to total
assets (as defined). Management believes, as of December 31, 1996 and March 31,
1997, that Matrix Bank meets all capital adequacy requirements to which it is
subject.
F-29
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
10. Regulatory (continued)
As of December 31, 1996, the most recent notification from the OTS categorized
Matrix Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized Matrix Bank must
maintain minimum total risk-based, Tier I risk based and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- -------------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- --------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total Capital (to Risk
Weighted Assets) $12,406 11.1% +$8,979 + 8.0% +$11,224 +10.0%
Tier I Capital (to Risk
Weighted Assets) 11,367 10.1 + 4,489 + 4.0 + 6,734 + 6.0
Tier I Capital (to Average
Assets) 11,367 7.8 + 5,803 + 4.0 + 7,254 + 5.0
As of December 31, 1995
Total Capital (to Risk
Weighted Assets) 8,321 13.3% + 4,997 + 8.0% + 6,246 +10.0%
Tier I Capital (to Risk
Weighted Assets) 7,540 12.1 + 2,499 + 4.0 + 3,748 + 6.0
Tier I Capital (to Average
Assets) 7,540 7.2 + 4,195 + 4.0 + 5,243 + 5.0
+ Greater than or equal to
</TABLE>
The various federal banking statutes to which Matrix Bank is subject also
include other limitations regarding the nature of the transactions in which it
can engage or assets it may hold or liabilities it may incur.
Matrix Bank is required to maintain balances with the Federal Reserve Bank of
Dallas in a noninterest earning account based on a percentage of deposit
liabilities. Such balances averaged $888,000 and $659,000 in 1995 and 1996,
respectively.
Matrix Bank is required by Federal regulations to maintain a minimum level of
liquid assets of five percent. Matrix Bank exceeded the Federal requirement at
December 31, 1995 and 1996, respectively.
Matrix Financial is subject to examination by various regulatory agencies
involved in the mortgage banking industry. Each regulatory agency requires the
maintenance of a certain amount of net worth, the most restrictive of which
required $1,224,000 at December 31, 1995 and $1,709,000 at December 31, 1996.
Sterling Trust is subject to supervision, regulation and examination by the
Texas Department of Banking.
F-30
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
11. 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 4,668,531, 6,681,031 and 6,681,031
shares of common stock outstanding at December 31, 1995 and 1996 and March 31,
1997, respectively. Holders of common stock are entitled to receive dividends
when, and if, declared by the board of directors. Each share of common stock
entitles the holders thereof to one vote, and cumulative voting is not
permitted.
Preferred Stock
The authorized preferred stock of the Company consists of 5,000,000 shares with
a par value of $.0001 per share. The board of directors is authorized, without
further action of the shareholders of the Company, to issue from time to time
shares of preferred stock in one or more series and with such relative rights,
powers, preferences, and limitations as the board of directors may determine at
the time of issuance. Such shares may be convertible into common stock and may
be superior to the common stock in the payment of dividends, liquidation, voting
and other rights, preferences and privileges.
Stock Option Plan
The Company has elected to follow APB Opinion No. 25, Accounting for Stock
Issued to Employees and related Interpretations in accounting for its employee
stock options because, as discussed below, the alternative fair value accounting
provided for under Statement No. 123, Accounting for Stock-Based Compensation,
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB Opinion No. 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
In September 1996, the board of directors and shareholders adopted the 1996
Stock Option Plan, which amended and restated the Company's stock option plan
adopted in 1995. The Company's 1996 Stock Option Plan has authorized the grant
of options to substantially all of the Company's full-time employees and
directors for up to 525,000 shares of the Company's common stock. All options
granted have ten year terms and vest based on the determination by the Company's
compensation committee.
The 1996 Stock Option Plan authorized the granting of incentive stock options
("Incentive Options") and nonqualified stock options ("Nonqualified Options") to
purchase common stock to eligible persons. The 1996 Stock Option Plan is
currently administered by the compensation committee (administrator) of the
board of directors. The 1996 Stock Option Plan provides for adjustments to the
number of shares and to the exercise price of outstanding options in the event
of a declaration of stock dividend or any recapitalization resulting in a stock
split-up, combination or exchange of shares of common stock.
F-31
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
11. Shareholders' Equity (continued)
No Incentive Option may be granted with an exercise price per share less than
the fair market value of the common stock at the date of grant. The Nonqualified
Options may be granted with any exercise price determined by the administrator
of the 1996 Stock Option Plan. The expiration date of an option is determined by
the administrator at the time of the grant, but in no event may an option be
exercisable after the expiration of ten years from the date of grant of the
option.
The 1996 Stock Option Plan further provides that in most instances an option
must be exercised by the optionee within 30 days after the termination of the
consulting contract between such consultant and the Company or termination of
the optionee's employment with the Company, as the case may be, if and to the
extent such option was exercisable on the date of such termination.
Pro forma information regarding net income and earnings per share is required by
Statement No. 123, which also requires that the information be determined as if
the Company had accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1995
and 1996, respectively: risk-free interest rates of 5.4 percent and 6.0 percent;
a dividend yield of zero percent; volatility factors of the expected market
price of the Company's common stock of .39 and .39; and a weighted-average
expected life of the option of four years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
Year Ended December 31
1995 1996
------------------------
<S> <C> <C>
Pro forma net income $3,808 $3,534
Pro forma earnings per share:
Primary 0.81 0.67
Fully diluted 0.81 0.67
</TABLE>
F-32
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
11. Shareholders' Equity (continued)
Because Statement No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1997.
A summary of the Company's stock option activity, and related information for
the years ended December 31 follows:
<TABLE>
<CAPTION>
Year Ended December 31
1995 1996
------------------------------------------------------------
Weighted Weighted
Average Average
Options Exercise Price Options Exercise Price
------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year - $ - 79,500 $ 5.13
Granted 79,500 5.13 129,600 10.00
Exercised - - - -
Forfeited - - - -
------------- -------------
Outstanding, end of year 79,500 $ 5.13 209,100 $ 8.15
============= =============
Exercisable at end of year 39,750 $ 5.13 87,000 $ 5.55
Weighted average fair value of options
granted during the year $ 2.19 $ 4.06
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged from
$5.13 to $10.00. The weighted average remaining contractual life of those
options is 9.1 years. For the three months ended March 31, 1997 there were
97,000 grants under the stock option plan at a weighted average exercise price
of $14.08. The Company granted 97,000 options during the three months ended
March 31, 1997 at prices ranging from $13.75 to $15.75.
Restricted Net Assets
As a result of the regulatory requirements and debt covenants, substantially all
of the net assets of the Company are restricted at December 31, 1995 and 1996,
and March 31, 1997.
Warrants
The Company issued warrants exercisable for an aggregate of 75,000 shares of its
common stock to its primary underwriters upon the closing of the Company's
initial public offering. The warrants are exercisable from time to time during
the four years after the one year anniversary of their date of grant, and are
not transferable during the first year after their grant. The exercise price
for the shares of common stock underlying such warrants is $12 per share. The
shares of common stock underlying such warrants are entitled to certain demand
and incidental registration rights.
F-33
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
12. Commitments, Contingencies and Related Party Transactions
Employee Stock Purchase Plan
In September 1996, the board of directors and shareholders adopted the Matrix
Capital Corporation Employee Stock Purchase Plan ("Purchase Plan") and reserved
125,000 shares of common stock ("ESPP Shares") for issuance thereunder. The
Purchase Plan became effective upon consummation of the initial public offering.
The price at which ESPP shares are sold under the Purchase Plan is 85 percent of
the lower of the fair market value per share of common stock on the enrollment
or the purchase date.
Leases
The Company leases office space and certain equipment under noncancelable
operating leases. Annual amounts due under the office and equipment leases as
of December 31, 1996 are approximately as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1997 $ 550
1998 448
1999 223
2000 184
2001 82
------------
$1,487
============
</TABLE>
Total rent expense aggregated approximately $658,000, $647,000 and $541,000, for
the years ended December 31, 1994, 1995 and 1996, respectively, and $203,000 and
$148,000 for the three months ended March 31, 1996 and 1997, respectively.
Loan Commitments and Hedging
In the ordinary course of business, the Company makes commitments to originate
residential mortgage loans (Pipeline) and holds originated loans until delivery
to an investor. Inherent in this business is a risk associated with changes in
interest rates and the resulting change in the market value of the Pipeline and
funded loans. The Company mitigates this risk through the use of mandatory and
nonmandatory forward commitments to sell loans. At December 31, 1995, the
Company had $93,133,000 in Pipeline and funded loans offset with mandatory
forward commitments of $64,743,000 and nonmandatory forward commitments of
$15,267,000. At December 31, 1996, the Company had $62,578,000 in Pipeline and
funded loans offset with mandatory forward commitments of $49,150,000 and
nonmandatory forward commitments of $8,144,000. At March 31, 1997, the Company
had $70,300,000
F-34
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
12. Commitments, Contingencies and Related Party Transactions (continued)
in Pipeline and funded loans offset with mandatory forward commitments of
$44,000,000 and nonmandatory forward commitments of $21,000,000. The inherent
value of the forward commitments is considered in the determination of the lower
of cost or market for the Pipeline and funded loans. The Company does not hold
any other derivatives at December 31, 1995 and 1996 or March 31, 1997.
Land Development Commitment
In June 1996, the Company purchased 154 acres of land for $1.3 million in cash
for the purpose of developing residential and multi-family lots in Ft. Lupton,
Colorado. As part of the acquisition, the Company entered into a Residential
Facilities Development Agreement (Development Agreement) with the City of Ft.
Lupton. The Development Agreement is a residential and planned unit development
agreement providing for the orderly planning, engineering and development of a
golf course and surrounding residential community. The City of Ft. Lupton is
responsible for the development of the golf course and the Company is
responsible for the development of the surrounding residential lots.
The Development Agreement sets forth a mandatory obligation on the part of the
Company to pay the City of Ft. Lupton pledged enhancement assessments of
$600,000. These pledged enhancement assessments require the Company to pay the
city a $2,000 fee each time the Company sells a developed residential lot. The
Company is obligated to pay a minimum of $60,000 in assessment fees per year
beginning in 1998 through 2007.
The Company also entered into a development management agreement with a local
developer to complete the development of the land. The terms of the agreement
specify that the Company is to earn a preferred rate of return on its investment
and, once the initial amount of its investment has been returned and the
preferred rate has been paid, the remaining profits are split equally. The
development management agreement obligates the Company to provide up to an
additional $500,000 of funds for development. The Company has no other
financial obligations to the developer beyond the $500,000. As of December 31,
1996 and March 31, 1997, the Company has included in its basis in the
development $38,000 and $58,000, respectively, in capitalized interest costs. At
December 31, 1996 and March 31, 1997, the total basis of the land development is
$1,431,000 and $1,505,000, respectively, and is classified in other assets in
the accompanying consolidated balance sheets.
Financing Agreement
In 1996, the Company purchased $800,000 of City of Fort Lupton Subordinated
Series 1996 A1 revenue anticipation warrants, with interest at 9.75 percent and
due December 15, 2015. The warrants are classified as other receivables in the
accompanying consolidated balance sheets. The Company entered
F-35
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
12. Commitments, Contingencies and Related Party Transactions (continued)
into an agreement with a bank to sell the warrants, subject to certain
repurchase obligations resulting from the bank's annual remarketing of the
bonds, with interest at five percent. The Company entered into a letter of
credit agreement of $825,000 to guarantee its repurchase obligation.
Contingencies
Matrix Bank has received demands from an investor for repurchase of loans
related to a servicing portfolio purchased by Matrix Bank from an unrelated
third-party mortgage banker (Seller). The repurchase demand is pursuant to a
claim of breach of covenants and warranties by the Seller related to
documentation deficiencies in connection with the origination and sale of the
loans. In January 1996, Matrix Bank commenced suit against the Seller to
recover, among other things, the purchase price paid for certain residential
mortgage loans. In connection with the lawsuit and the servicing portfolio at
issue, Matrix Bank has full representations and warranties from the Seller.
Since the representations and warranties have not been honored by the Seller,
Matrix Bank included a cause of action in the lawsuit seeking to compel the
Seller to repurchase the portfolio. During 1996, the servicing relating to
FHLMC was transferred to FHLMC for no consideration. Matrix Bank had an accrued
liability of approximately $500,000 at December 31, 1995, $420,000 at December
31, 1996 and $180,000 at March 31, 1997 for the potential loss exposure related
to the pending repurchase requests which, in the opinion of management, is
adequate for estimated future losses.
The Company is a defendant in two lawsuits filed in 1996 that seek class action
status, which allege that the Company breached the terms of plaintiffs'
promissory notes and mortgages by imposing certain charges at the time the
plaintiffs prepaid their mortgage loans. The Company has entered into an
agreement, which is subject to court approval, to settle one lawsuit and dismiss
the other lawsuit. A settlement order of dismissal was entered into for the
dismissed lawsuit in November 1996.
In January 1997, a preliminary approval of the settlement was granted by the
court. Accordingly, as provided by the settlement agreement, the Company
established a settlement fund of $640,000 that was reserved in the third quarter
of 1996 to account for this contingency. The costs of notice and class
administration, attorneys' fees, and recovery to class members are all to come
from the settlement fund. Notice to class members was mailed in January 1997
and published in February 1997. After a hearing on April 10, 1997, the court
entered the final approval order on April 21, 1997, approving the settlement
agreement as submitted by the parties. The time for appeal from the final
approval order expired on May 21, 1997. No objections to the settlement
agreement were filed.
F-36
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
12. Commitments, Contingencies and Related Party Transactions (continued)
The Company and its subsidiaries are parties to various other litigation
matters, in most cases involving ordinary and routine claims incidental to the
business of the Company. The ultimate legal and financial liability of the
Company, if any, with respect to such pending litigation cannot be estimated
with certainty, but the Company believes, based on its examination of such
matters, that such ultimate liability will not have a material adverse effect on
the consolidated financial position, results of operations or cash flows of the
Company.
Related Party Transactions
The Company has a note receivable from an affiliate of $750,000 at December 31,
1995 and 1996 and March 31, 1997, which bears interest at 13 percent and is due
October 1, 2000. The note is secured by a secondary lien on the assets of the
affiliate. The Company leases office space to the affiliate for approximately
$8,500 per month. The lease expires in September 1997, but the Company
anticipates that it will be renewed.
At December 31, 1995 and 1996 and March 31, 1997, the Company had an unsecured
loan receivable from a shareholder of approximately $80,000, which bears
interest at the prime rate and is due December 31, 1997 which is renewable at
the Company's option.
13. Defined Contribution Plan
The Company has a 401(k) defined contribution plan (Plan) covering all employees
who have elected to participate in the Plan. Each participant may make pretax
contributions to the Plan up to 15 percent of such participant's earnings with a
maximum of $9,500 in 1996. The Company makes a matching contribution of 25
percent of the participant's total contribution. Matching contributions made by
the Company vest over six years. The cost of the plan approximated $54,000,
$91,000 and $110,000 during the years ended December 31, 1994, 1995 and 1996,
respectively, and $30,000 and $36,000 for the three months ended March 31, 1996
and 1997, respectively.
14. Financial Instruments
Off-Balance Sheet Risk and Concentration of Commitments
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of its business. These instruments are commitments to
originate or purchase first mortgage loans and forward loan sale commitments
(see Note 12) and involve credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheet.
F-37
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
14. Financial Instruments (continued)
Commitments to originate or purchase mortgage loans amounted to approximately
$18,900,000 at December 31, 1996. Additionally, the Company has a $400,000
commitment to lend funds on a secured basis. The Company plans to fund the
commitments in its normal commitment period. The Company evaluates each
customer's creditworthiness on a case-by-case basis.
The Company's credit risks comprised the outstanding loans held for sale and
loans held for investment as shown in the consolidated balance sheets, and loans
sold with recourse aggregating approximately $354,000 and $16,214,000 at
December 31, 1995 and 1996, respectively. The loans are located throughout the
United States and are collateralized primarily by a first mortgage on the
property.
Fair Value of Financial Instruments
The carrying amounts and estimated fair value of financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31
1995 1996
-------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 1,929 $ 1,929 $ 2,855 $ 2,855
Interest earnings deposits 6,061 6,061 9,754 9,754
Loans held for sale, net 127,090 130,638 182,801 183,741
Loans held for investment, net 19,575 19,829 29,560 29,824
Federal Home Loan Bank of Dallas stock 1,954 1,954 2,871 2,871
Financial liabilities:
Deposits 48,877 49,283 90,179 90,401
Custodial escrow balances 27,011 27,011 37,881 37,881
Drafts payable 8,817 8,817 5,961 5,961
Payable for purchase of MSRs 1,312 1,312 8,044 8,044
Federal Home Loan Bank of Dallas
borrowings 19,000 19,000 51,250 51,250
Borrowed money 65,093 65,093 42,431 42,431
</TABLE>
The following methods and assumptions were used by the Company in estimating the
fair value of the financial instruments:
F-38
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
14. Financial Instruments (continued)
The carrying amounts reported in the balance sheet for cash, interest earnings
deposits, Federal Home Loan Bank of Dallas stock, drafts payable, payable for
purchase of MSRs, Federal Home Loan Bank of Dallas borrowings, and borrowed
money approximate those assets' and liabilities' fair values.
The fair values of loans are based on quoted market prices where available or
outstanding commitments from investors. If quoted market prices are not
available, fair values are based on quoted market prices of similar loans sold
in securitization transactions, adjusted for differences in loan
characteristics. The fair value of forward sale commitments are included in the
determination of the fair value of loans held for sale.
The fair value disclosed for demand deposits (e.g., interest and noninterest
checking, savings, and money market accounts) are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying amounts).
Fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected periodic maturities
on time deposits. The component commonly referred to as deposit base intangible,
was not estimated at December 31, 1995 and 1996 and is not considered in the
fair value amount. The fair value disclosed for custodial escrow balances
liabilities (noninterest checking) is, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying amounts).
F-39
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
15. Parent Company Condensed Financial Information
Condensed financial information of Matrix Capital Corporation (Parent Company)
is as follows:
<TABLE>
<CAPTION>
December 31 March 31
1994 1995 1996 1997
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(Unaudited)
Condensed Balance Sheets (In thousands)
Assets:
Cash $ 180 $ 11 $ 45 $ 246
Other receivables - 804 872 917
Premises and
equipment, net 1,154 1,371 1,405 1,395
Other assets 303 515 507 508
Investment in and
advances to
subsidiaries 9,910 15,201 36,199 41,543
---------- ----------- ----------- -----------
Total assets $11,547 $17,902 $39,028 $44,609
========== ========== =========== ===========
Liabilities and shareholders'
equity:
Borrowed money (a) $ 4,052 $ 6,751 $ 6,372 $10,034
Other liabilities 833 465 386 551
---------- ----------- ----------- -----------
Total liabilities 4,885 7,216 6,758 10,585
Shareholders' equity:
Common stock - - 1 1
Additional paid in capital 3,668 3,769 21,983 21,983
Retained earnings 2,994 6,917 10,286 12,040
---------- ----------- ----------- -----------
Total shareholders'equity 6,662 10,686 32,270 34,024
---------- ----------- ----------- -----------
Total liabilities and
shareholders' equity $11,547 $17,902 $39,028 $44,609
========== =========== =========== ===========
</TABLE>
(a) The Parent's debt consists of a note payable and a revolving line of credit
to a third party financial institution secured by common stock at Matrix
Bank, note payable to a bank secured by a deed of trust on real estate,
senior subordinated notes and a note payable to a third party financial
institution secured by MSRs. The Parent also guarantees the revolving
warehouse and servicing acquisition loan agreements. See Note 7 for
additional information regarding the debt.
F-40
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
15. Parent Company Condensed Financial Information (continued)
As of December 31, 1996, the maturities of term notes payable during the next
five years and thereafter are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1997 $ 439
1998 1,291
1999 1,123
2000 1,123
2001 1,096
Thereafter 1,300
-----------
$6,372
============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31 March 31
1994 1995 1996 1996 1997
--------- -------- ---------- --------- -----------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C>
Condensed Statements of Income
Income:
Interest income on loans $ - $ 44 $ 142 $ 44 $ 49
Other 472 374 130 88 88
--------- -------- ---------- --------- -----------
Total income 472 418 272 132 137
Expenses:
Compensation and employee
benefits 767 1,042 1,344 277 401
Occupancy and equipment 18 92 299 30 72
Interest on borrowed money 170 592 805 206 195
Professional fees 82 112 138 18 80
Other general and
administrative 81 704 328 94 338
--------- -------- ---------- --------- -----------
Total expenses 1,118 2,542 2,914 625 1,086
--------- -------- ---------- --------- -----------
Loss before income taxes and
equity in income of subsidiaries (646) (2,124) (2,642) (493) (949)
Income taxes (b) - - - - -
--------- -------- ---------- --------- -----------
Loss before equity in income of
subsidiaries (646) (2,124) (2,642) (493) (949)
Equity in income of subsidiaries 3,766 6,047 6,212 489 2,703
--------- -------- ---------- --------- -----------
Net income (loss) $3,120 $ 3,923 $ 3,570 $ (4) $ 1,754
========= ======== ========== ========= ===========
</TABLE>
(b) The Company's tax sharing agreement with its subsidiaries provides that
the subsidiaries will pay the Parent an amount equal to its individual
current income tax provision calculated on the basis of the subsidiary
filing a separate return. In the event a subsidiary incurs a net
operating loss in future periods, the subsidiary will be paid an amount
equal to the current income tax refund the subsidiary would be due as a
result of carryback of such loss, calculated on the basis of the
subsidiary filing a separate return. Accordingly, the parent's
condensed statements of income do not include any income tax benefit
for the current losses.
F-41
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements (continued)
15. Parent Company Condensed Financial Information (continued)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31 March 31
1994 1995 1996 1996 1997
-------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
(Unaudited)
(In thousands)
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net income (loss) $ 3,120 $ 3,923 $ 3,570 $ (4) $ 1,754
Adjustments to reconcile net in ncome to net
cash provided by operating
activities:
Equity in income of subsidiaries (3,766) (6,047) (6,212) (489) (2,703)
Dividend from subsidiaries 1,368 2,207 1,843 242 1,005
Depreciation and amortization 5 34 127 30 31
Increase (decrease) in other liabilities 410 (368) (78) (56) 165
Increase in other receivables and other assets (202) (1,016) (133) (135) (60)
Noncash compensation expense - 101 - - -
-------- -------- --------- -------- ---------
Net cash provided (used) by operating
activities 935 (1,166) (883) (412) 192
Investing activities:
Purchases of premises and equipment (1,159) (251) (88) (41) (7)
Investment in and advances to subsidiaries (1,904) (1,451) (16,630) 501 (3,646)
-------- -------- --------- -------- ---------
Net cash provided (used) by investing activities (3,063) (1,702) (16,718) 460 (3,653)
Financing activities:
Repayments of notes payable (185) (1,133) (438) (35) (2,038)
Proceeds from notes payable and revolving
line of credit 2,487 922 59 59 5,700
Dividends paid by pooled company prior to
merger - - (201) (66) -
Capital contribution by pooled company
prior to merger - - 24 - -
Proceeds from senior subordinated notes - 2,910 - - -
Proceeds from the sale of common stock - - 18,191 - -
-------- -------- --------- -------- ---------
Net cash provided (used) by financing
activities 2,302 2,699 17,635 (42) 3,662
-------- -------- --------- -------- ---------
Increase (decrease) in cash and
cash equivalents 174 (169) 34 6 201
Cash and cash equivalents at
beginning of year 6 180 11 11 45
-------- -------- --------- -------- ---------
Cash and cash equivalents at end of year $ 180 $ 11 $ 45 $ 17 $ 246
======== ========= ========= ======== ==========
</TABLE>
F-42
<PAGE>
Matrix Capital Corporation
Notes to Consolidated Financial Statements
16. Subsequent Events (Unaudited)
On June 23, 1997, the Company settled a dispute with the purchaser of certain
of the automobile installment contracts sold by Sterling Finance. In a
letter dated May 14, 1997, the purchaser demanded that the Company repurchase
approximately $6.3 million of automobile installment contracts on the grounds
that titles to the underlying vehicles were allegedly not delivered prior to
the expiration of the time period set forth in the purchase and sale
agreement governing the transaction. In order to fully resolve the dispute,
the parties have agreed to a settlement whereby the Company will repurchase
approximately $1,493,000 of the automobile installment contracts plus
$108,000 of accrued interest. The accrued interest represents all of the
accrued interest on the automobile installment contracts, including all
delinquent interest. As part of the settlement, the Company and the
purchaser have exchanged mutual general releases.
Based on information provided by the purchaser, approximately $807,000 of the
automobile installment contracts are 30 days or more delinquent. Although
the Company has not finalized its losses related to recourse sales, based on
initial estimates, the Company anticipates a charge, in the second quarter,
of $475,000 to $525,000 on an after-tax basis or approximately $.07 or $.08
loss per share. The recourse liability may increase or decrease as the
Company receives additional information on the automobile installment
contracts to be repurchased.
United Financial is a defendant in a lawsuit that was commenced on or about
May 23, 1997. The plaintiff-buyer alleges that United Financial as broker
for the seller, made false representations regarding the GNMA certification
of certain mortgage pools the servicing rights of which were offered for sale
in a written offering. The plaintiff further alleges that it relied on United
Financial's representations in purchasing the servicing rights from the
seller. The plaintiff seeks recovery of (i) the deposit paid to the seller in
connection with the purchase thereof in the amount of $147,000; (ii) $1.4
million that the plaintiff claims it paid GNMA to settle a dispute regarding
the certification of the mortgage pools; and (iii) approximately $1.44
million in lost profits.
Matrix Bank is a defendant in a lawsuit that was commenced on or about June
9, 1997. The plaintiff alleges that Matrix Bank breached an agreement
pursuant to which Matrix Bank would act as an issuing bank in connection with
a program allegedly developed by the plaintiff relating to the issuance of
credit cards. The plaintiff agreed to perform, among other things, network
marketing services in an attempt to enroll network marketing companies in the
program, who in turn would solicit credit card applications from consumers.
The plaintiff claims that Matrix Bank failed to comply with its contractual
obligations in performing certain issuing and servicing functions in
connection with the credit card accounts. As a result, the plaintiff is
seeking to recover damages for lost profits and damage to its reputation in
an amount in excess of $10 million.
F-43
<PAGE>
================================================================================
No dealer, salesperson or any other person has been authorized to give any
information or to make any representation in connection with the Offering other
than those contained in this Prospectus, and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company or the Underwriters. This Prospectus does not constitute an
offer to sell or solicitation of any offer to buy by anyone in any jurisdiction
in which such offer or solicitation is not authorized, or in which the person
making such offer or solicitation is not qualified to do so or to any person to
whom it is unlawful to make such offer or solicitation. Neither the delivery of
this Prospectus nor any sale hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof or that the information contained herein is correct as of
any time subsequent to its date.
-----------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
PROSPECTUS SUMMARY ......................................................... 3
RISK FACTORS .............................................................. 10
USE OF PROCEEDS ........................................................... 16
CAPITALIZATION ............................................................ 17
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY ........................... 18
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION ................. 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ............................................................. 22
BUSINESS .................................................................. 44
SUPERVISION AND REGULATION ................................................ 59
MANAGEMENT ................................................................ 68
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............................ 79
PRINCIPAL SHAREHOLDERS .................................................... 80
DESCRIPTION OF CAPITAL STOCK .............................................. 81
PLAN OF DISTRIBUTION; SELLING SHAREHOLDERS ................................ 83
LEGAL MATTERS ............................................................. 86
EXPERTS ................................................................... 86
</TABLE>
================================================================================
================================================================================
779,592 Shares
MATRIX CAPITAL
CORPORATION
Common Stock
--------------
PROSPECTUS
--------------
____________________, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table indicates the expenses to be incurred by the
Company in connection with the issuance and distribution of the securities
described in this registration statement, other than underwriting discounts and
commissions.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee........ $ 3,249
Nasdaq National Market Filing Fee........................... 16,500
Blue Sky Fees and Expenses.................................. 1,000*
Accounting Fees and Expenses................................ 5,000*
Legal Fees and Expenses..................................... 15,000*
Fees of Transfer Agent and Registrar........................ 1,000*
Printing and Engraving Fees and Expenses.................... 5,000*
Miscellaneous............................................... 3,251*
------
Total.................................................... $50,000*
======
</TABLE>
*Estimated.
Item 14. Indemnification of Directors and Officers
The Articles of Incorporation of Matrix Capital, together with its
Bylaws, provide that Matrix Capital shall indemnify officers and directors, and
may indemnify its other employees and agents, to the fullest extent permitted by
law. The laws of the State of Colorado permit, and in some cases require,
corporations to indemnify officers, directors, agents and employees who are or
have been a party to or are threatened to be made a party to litigation against
judgments, fines, settlements and reasonable expenses under certain
circumstances.
The Registrant has also adopted provisions in its Articles of
Incorporation that limit the liability of its directors to the fullest extent
permitted by the laws of the State of Colorado. Under Matrix Capital's Articles
of Incorporation, and as permitted by the laws of the State of Colorado, a
director is not liable to Matrix Capital or its shareholders for damages for
breach of fiduciary duty. Such limitation of liability does not affect
liability for (i) breach of the director's duty of loyalty, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law, (iii) any transaction from which the director directly or
indirectly derived an improper personal benefit, or (iv) the payment of any
unlawful distribution.
Item 15. Recent Sales of Unregistered Securities
The following sets forth information as of June 30, 1997 regarding all
sales of unregistered securities of Matrix Capital during the past three years.
In connection with each of these transactions, the shares were sold to a limited
number of persons, such persons were provided access to all relevant information
regarding the issuer and/or represented to the issuer that they were
"sophisticated" investors, and such persons represented to the issuer that the
shares were purchased for investment purposes only and not with a view toward
distribution. Each such issuance was made in reliance on Section 4(2) of the
Securities Act of 1933, as amended.
On January 1, 1995, David W. Kloos was issued an aggregate of 138,938
shares of Common Stock by the Company in consideration of past services
rendered.
On January 1, 1995, Thomas J. Osselaer was granted options by the
Company to purchase an aggregate of 79,500 shares of Common Stock at an exercise
price of $5.13 per share.
II-1
<PAGE>
On August 1, 1995, the Registrant issued an aggregate of $2,910,000 in
principal amount of its Senior Subordinated Notes to approximately 35
individuals, trusts, corporations, and other business entities. Such notes were
issued for cash at face value.
In October 1996, the Company granted options exercisable for a total
of 10,000 shares of Common Stock to the two nonemployee directors of the
Company, 5,000 shares of Common Stock to an advisory director of the Company,
and 114,600 shares of Common Stock to various employees of the Company. All
such options are exercisable at $10.00 per share, which was the fair market
value of the Common Stock on the date of grant of such options.
In October 1996, the Company also issued warrants exercisable for an
aggregate of 75,000 shares of its Common Stock to its primary underwriters upon
the closing of the Company's initial public offering. The warrants are
exercisable from time to time during the four years after the one year
anniversary of their date of grant, and are not transferable during the first
year after their grant. The exercise price of the shares of Common Stock
underlying such warrant is $12.00 per share.
During 1997, the Company has granted the following options to
employees of the Company: On February 5, 1997, the Company granted options
exercisable for an aggregate of 35,000 shares of Common Stock (exercise price
$14.25 per share); on March 3, 1997, the Company granted options exercisable for
an aggregate of 25,000 shares of Common Stock (exercise price $13.75 per share);
on March 11, 1997, the Company granted options exercisable for an aggregate of
37,000 shares of Common Stock (exercise price $13.88 with respect to 32,000
shares and $15.75 with respect to 5,000 shares), on April 3, 1997, the Company
granted options exercisable for an aggregate of 15,000 shares of Common Stock
(exercise price $12.00 per share); and on April 15, 1997, the Company granted
options exercisable for an aggregate of 5,000 shares of Common Stock (exercise
price $10.375 per share).
In February 1997, the Company issued an aggregate of 779,592 shares of
Common Stock to the 43 former shareholders of Vintage in connection with the
Company's acquisition of all of the outstanding capital stock of Vintage.
Item 16. Exhibits
(a) Exhibits
3.1+ Amended and Restated Articles of Incorporation of Matrix
Capital Corporation. (3.1)
3.2+ Bylaws of Matrix Capital Corporation, as amended (3.2)
4.1+ Specimen Certificate for Common Stock of Matrix Capital
(4.1)
4.2+ Form of Amended and Restated 1996 Stock Option Plan (4.2)
4.3++ Form of Employee Stock Purchase Plan, as amended (4.1)
5.1 Opinion of Jenkens & Gilchrist, a Professional Corporation
10.1+ Note and Agency Agreement, dated as of August 1, 1995, by
and between the Registrant and PHS Mortgage, Inc. as agent
(10.1)
10.2+ First Amendment to Note and Agency Agreement, dated as of
August 2, 1995, by and between the Registrant and PHS
Mortgage, Inc., as agent (10.2)
10.3+ Form of 13% Senior Subordinated Note (10.3)
10.4+ Executive Employment Agreement, dated as of January 1,
1996, by and between the Registrant and David Kloos (10.4)
10.5+ Employment Agreement, dated as of January 1, 1995, between
Matrix Capital Bank and Gary Lenzo and as amended January
1, 1996 (10.5)
10.6+ Loan Agreement, dated as of October 2, 1995, by and
between Matrix Diversified, Inc. and the Registrant (10.6)
10.7+ Multiple Advance Term Loan Agreement, dated as of June 27,
1994, by and between Matrix Capital Corporation and
CorTrust Bank (10.8)
10.8+ Multiple Advance Fixed Rate Term Loan Promissory Note,
dated as of June 30, 1994, from Matrix Capital
Corporation, as maker, to CorTrust Bank, as payee (10.9)
II-2
<PAGE>
10.9+ Mortgage Loan Purchase and Servicing Agreement, dated as
of August 1, 1993, by and between Argo Federal Savings
Bank, FSB, and Matrix Financial Services Corporation
(10.11)
10.10+ Mortgage Loan Repurchase Agreement, dated as of March 30,
1995, by and between PaineWebber Real Estate Securities,
Inc. and Matrix Financial Services Corporation (10.27)
10.11+ Multiple Advance Fixed Rate Term Loan Promissory Note,
dated as of October 19, 1994, from Matrix Capital
Corporation, as maker, to CorTrust, as payee (10.29)
10.12+ Assignment and Assumption Agreement, dated as of June 28,
1996, by and among Mariano C. DeCola, William M. Howdon,
R. James Nicholson and Matrix Funding Corp. (10.30)
10.13+ Development Management Agreement, dated as of June 28,
1996, by and among Fort Lupton, L.L.C. and Matrix Funding
Corp. (10.31)
10.14+ Assignment and Assumption of PUD Agreement, dated as of
June 28, 1996, by and among Fort Lupton, L.L.C. and Matrix
Funding Corp. (10.32)
10.15+ Lease, dated as of October 1, 1995, by and between the
Registrant and Matrix Financial Services Corporation
(10.33)
10.16+ Promissory Note, dated as of December 31, 1995, from D.
Mark Spencer, as maker, to the Registrant, as payee
(10.35)
10.17+ Fort Lupton Golf course Residential and Planned Unit
Development Agreement, dated as of November 28, 1995
(10.36)
10.18+ Loan Agreement, dated as of December 10, 1994, by and
between the Registrant and Bankers' Bank of the West
(10.37)
10.19+ Continuing Guaranty of D. Mark Spencer, dated as of
December 10, 1994 (10.38)
10.20+ Continuing Guaranty of Richard V. Schmitz, dated as of
December 10, 1994 (10.39)
10.21+ Continuing Guaranty of Guy A. Gibson, dated as of December
10, 1994 (10.40)
10.22+ Loan Agreement, dated as of June 21, 1996, by and between
Matrix Funding Corporation and The First Security Bank
(10.41)
10.23+ Loan Agreement, dated as of June 29, 1995, by and between
the Registrant and Bank One, Arizona, N.A. (10.42)
10.24+ Promissory Note, dated as of June 29, 1995, from the
Registrant to Bank One, Arizona, N.A. (10.43)
10.25+ Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Filing, dated as of June 29, 1995, from the
Registrant to Arizona Trust Deed Corporation, as trustee
(10.44)
10.26+ Loan Agreement, dated July 10, 1992, by and between
American Strategic Income Portfolio Inc. and Matrix
Financial Services Corporation (10.45)
10.27+ Promissory Note, dated as of July 10, 1992, by Matrix
Financial Services Corporation, as maker, to American
Strategic Income Portfolio, Inc., as payee (10.46)
10.28+++ Agreement and Plan of Merger, dated as of November 22,
1996, by and among the Registrant, The Vintage Group, Inc.
and Matrix/Vintage Acquisition, Inc. (10.1)
10.29+++ Asset Purchase and Exchange Agreement, dated as of
February 4, 1997, by and among the Registrant and STC
Holdings, Inc. (10.2)
10.30++++ Lease, dated as of October 1, 1996, by and between the
Registrant and Creative Networks, LLC
10.31++++ Revolving Subordinated Loan Agreement, dated as of October
18, 1996, by and between Matrix Financial Services
Corporation and the Registrant
10.32++++ Amended and Restated Loan Agreement, dated as of January
31, 1997, by and between Matrix Financial Services
Corporation, as borrower, and Bank One, Texas, N.A., as
agent, and certain lenders, as lenders
10.33++++ Amended and Restated Warehouse Note, dated as of January
31, 1997, from Matrix Financial Services Corporation, as
borrower, and Bank One, Texas, N.A., as lender
10.34++++ Amended and Restated Swing Note, dated as of January 31,
1997, from Matrix Financial Services Corporation, as
borrower, and Bank One, Texas, N.A., as lender
II-3
<PAGE>
10.35++++ Amended and Restated Working-Capital Note, dated as of
January 31, 1997, from Matrix Financial Services
Corporation, as borrower, and Bank One, Texas, N.A., as
lender
10.36++++ Amended and Restated Term-Line Note, dated as of January
31, 1997, from Matrix Financial Services Corporation, as
borrower, and Bank One, Texas, N.A., as lender
10.37++++ Amended and Restated Guaranty, dated as of January 31,
1997, from the Registrant to Bank One, Texas, N.A.
10.38++++ Employment Agreement, dated as of February 4, 1997, by and
between the Registrant and Paul Skretny
10.39++++ Credit Agreement, dated as of March 12, 1997, by and
between Matrix Capital Corporation, as borrower, and Bank
One, Texas, N.A., as agent, and certain lenders, as
lenders
10.40++++ Term Note, dated as of March 12, 1997, from Matrix Capital
Corporation, as borrower, and Bank One, Texas, N.A., as
lender
10.41++++ Revolving Note, dated as of March 12, 1997, from Matrix
Capital Corporation, as borrower, and Bank One, Texas,
N.A., as lender
10.42++++ Guaranty Form, dated as of March 12, 1997, from each of
the Registrant's significant subsidiaries to Bank One,
Texas, N.A.,as agent
11.1 Statement regarding computation of per share earnings
21.1++++ Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Jenkens & Gilchrist, a Professional Corporation
(included in Exhibit 5.1 above)
24.1 A power of attorney is set forth on the signature page of
the Registration Statement
__________________
+ Incorporated by reference from the exhibit number shown in
parenthesis from the Registrant's registration statement on Form S-1
(No. 333-10223), filed by the Registrant with the Commission.
++ Incorporated by reference from the exhibit number shown in
parenthesis form the Registrant's quarterly report on Form 10-Q for
the quarter ended September 30, 1996, filed by the Registrant with
the Commission.
+++ Incorporated by reference from the exhibit number shown in
parenthesis from the Registrant's current report on Form 8-K, filed
with the Commission on February 20, 1997.
++++ Incorporate by reference from the exhibit number shown in
parenthesis from the Registrant's annual report on Form 10-K for the
fiscal year ended December 31, 1996, filed by the Registrant with
the Commission.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in
the information set forth in the registration statement; and
II-4
<PAGE>
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change in such information in
the registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(5) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, thereunto duly authorized, in the City of Denver, and the State of
Colorado, the 1st day of July, 1997.
MATRIX CAPITAL CORPORATION
By: /s/ Guy A. Gibson
-----------------------------
Guy A. Gibson
President and Chief Executive Officer
POWER OF ATTORNEY
Know All Men By These Presents, that each person whose signature appears
below constitutes and appoints Guy A. Gibson, David W. Kloos, and James G.
Panero, and each of them, each with full power to act without the other, his
true and lawful attorney-in-fact and agent, with full power and substitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Registration Statement, and to file the same, with all
exhibits thereto, and all other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute, may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Guy A. Gibson President, Chief Executive Officer, July 1, 1997
- ------------------------ and Director (Principal Executive
Guy A. Gibson Officer)
/s/ Richard V. Schmitz Chairman of the Board July 1, 1997
- ------------------------
Richard V. Schmitz
/s/ D. Mark Spencer Vice Chairman of the Board July 1, 1997
- ------------------------
D. Mark Spencer
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Thomas M. Piercy Director July 1, 1997
- ------------------------
Thomas M. Piercy
/s/ David W. Kloos Senior Vice President, Chief July 1, 1997
- ------------------------ Financial Officer, and Director
David W. Kloos (Principal Accounting and Financial
Officer)
/s/ Stephen Skiba Director July 1, 1997
- ------------------------
Stephen Skiba
/s/ David A. Frank Director July 1, 1997
- ------------------------
David A. Frank
</TABLE>
II-7
<PAGE>
Exhibit 5.1
[JENKENS & GILCHRIST LETTERHEAD]
July 1, 1997
Matrix Capital Corporation
1380 Lawrence Street, Suite 1410
Denver, Colorado 80204
Re: Offering of Common Stock of Matrix Capital Corporation
Gentlemen:
Concurrently with the giving of this opinion, Matrix Capital Corporation, a
Colorado corporation (the "Company"), is filing with the Securities and Exchange
Commission (the "Commission") its registration statement on Form S-1 (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Act"). The Registration Statement relates to the sale by certain shareholders
of the Company of an aggregate of 779,592 shares (the "Shares") of the Company's
common stock, par value $.0001 per share, pursuant to Rule 415 under the Act.
We have acted as counsel to the Company in connection with the preparation and
filing of the Registration Statement.
In connection therewith, we have examined and relied upon the original or
copies, certified to our satisfaction, of (i) the Amended and Restated Articles
of Incorporation and the bylaws of the Company, as amended, (ii) copies of
resolutions of the Board of Directors of the Company authorizing the offering of
the Shares, the preparation and filing of the Registration Statement and related
matters, (iii) the Registration Statement, and all amendments and exhibits
thereto, and (iv) such other documents and instruments as we have deemed
necessary for the expression of the opinions herein contained. In making the
foregoing examinations, we have assumed the genuineness of all signatures and
the authenticity of all documents submitted to us as originals, and the
conformity to original documents of all documents submitted to us as certified
or photostatic copies. As to various questions of fact material to this
opinion, we have relied, to the extent we deem reasonably appropriate, upon
representations or certificates of officers or directors of the Company and upon
documents, records and instruments furnished to us by the Company, without
independent check or verification of their accuracy.
Based upon the foregoing examination, we are of the opinion that the Shares
to be sold by the Selling Shareholders in the offering, as described in the
Prospectus forming a part of the Registration Statement, have been duly and
validly authorized for issuance and the Shares, when sold by the Selling
Shareholders in the manner stated in the Prospectus constituting a part of the
Registration Statement, will be validly issued, fully paid and nonassessable.
<PAGE>
Matrix Capital Corporation
July 1, 1997
Page 2
We advise you that we are licensed to practice law only in the State of
Texas, and we are not experts with respect to the laws of any other
jurisdictions other than the laws of the State of Texas and the federal laws of
the United States of America. In rendering the opinions herein relating to the
laws of the State of Colorado, we advise you that we have rendered such opinions
in reliance upon the legal opinion, dated July 1, 1997, given to this firm and
the Company by James G. Panero, the General Counsel of the Company.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus forming part of the Registration Statement. In
giving such consent, we do not admit that we come within the category of persons
whose consent is required by Section 7 of the Act or the rules and regulations
of the Commission thereunder.
Respectfully submitted,
JENKENS & GILCHRIST,
a Professional Corporation
By: /s/
-------------------------------------
Ronald J. Frappier
Authorized Signatory
<PAGE>
Exhibit 11.1
Matrix Capital Corporation
Computation of Earnings Per Share
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31 March 31
1994 1995 1996 1996 1997
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Unaudited)
Net income (loss) $ 3,120 $ 3,923 $ 3,570 $ (4) $ 1,754
Less dividends on preferred stock by
pooled company prior to merger - - 112 37 -
--------------------------------------------------------------
Earnings (loss) available to
common shareholders 3,120 3,923 3,458 (41) 1,754
--------------------------------------------------------------
Weighted average common shares
outstanding before common equivalents 4,529,593 4,668,531 5,034,788 4,668,531 6,681,031
Common equivalent stock options and
warrants - 38,690 42,252 - 67,114
--------------------------------------------------------------
Weighted average outstanding common
and common equivalent shares 4,529,593 4,707,221 5,077,040 4,668,531 6,748,145
==============================================================
Earnings (loss) per common and
common equivalent share $ 0.69 $ 0.83 $ 0.68 $ (0.01) $ 0.26
==============================================================
</TABLE>
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated May 30, 1997, with respect to the consolidated financial
statements of Matrix Capital Corporation as of December 31, 1995 and 1996 and
for each of the three years in the period ended December 31, 1996, in the
Registration Statement (Form S-1 No. 333-________) and related Prospectus of
Matrix Capital Corporation for the registration of 779,592 shares of its common
stock.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
June 27, 1997
