SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: March 25, 1997
MATRIX CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 0-21231 84-1233716
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(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Identification No.)
1380 Lawrence Street, Suite 1410
Denver, Colorado 80204
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 595-9898.
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ITEM 5. OTHER EVENTS.
Ownership of the Common Stock and other securities of Matrix Capital
Corporation (the "Company") involves certain risks. Holders of the Company's
securities and prospective investors should carefully consider the following
risk factors in evaluating an investment in the Company's securities.
LIMITED OPERATING HISTORY
The Company was formed in 1993 to combine the operations of two
subsidiaries of the Company, Matrix Financial Services Corporation ("Matrix
Financial"), and United Financial, Inc. ("United Financial"), which were formed
in 1990 and 1989, respectively. The Company purchased Matrix Capital Bank
("Matrix Bank") in 1993, formed United Special Services, Inc. ("USS") as a
start-up operation in 1995, formed United Capital Markets, Inc. ("UCM") in 1996
and purchased The Vintage Group, Inc. ("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 custodial and directed
(non-discretionary) trust services provided by Vintage and its subsidiaries,
Sterling Trust Company ("STC") and First Matrix Investment Services Corporation
("First Matrix"), formerly known as Vintage Financial Services Corporation.
POTENTIAL ADVERSE IMPACT OF FLUCTUATING INTEREST RATES
RESIDENTIAL MORTGAGE LOAN SERVICING RIGHTS. Owning 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."
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.
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
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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 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.
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 has in the past
diversified, and may in the future 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 of 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.
RISKS ASSOCIATED WITH GENERAL ECONOMIC CONDITIONS
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.
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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 developments. 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.
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 varies 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. California in
particular, where the Company had 26.7% at its servicing portfolio secured by
properties at December 31, 1996, has experienced an economic slowdown or
recession over the last several years, which has been accompanied by a sustained
decline in the California real estate market. Such a decline 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, California historically has been
vulnerable to certain risks of natural disasters, such as earthquakes and
mudslides, which are not typically covered by standard hazard insurance policies
maintained by borrowers. Uninsured disasters 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.
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, the risk of
continuing or recurrent delinquency remains. 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.
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
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Company is required to forego servicing income from the time a loan becomes
delinquent to the time the mortgage loan is foreclosed.
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.
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. 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."
LIABILITIES UNDER REPRESENTATIONS AND WARRANTIES
In the ordinary course of business, the Company makes representations
and warranties to the purchasers and insurers of mortgage loans and consumer
loans and the purchasers of mortgage servicing rights regarding compliance with
laws, regulations and program standards, and as to 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 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. The Company does not anticipate any future
material losses in connection as a result of mortgage loan repurchases due to
breaches in representations and warranties; however, there can be no assurance
that the Company will not experience such losses.
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. Matrix Bank is a member of the Federal Home
Loan Bank (the "FHLB") system and its deposits are insured by the FDIC up to the
applicable limits of the Savings Association Insurance Fund (the "SAIF"). 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. STC 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
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adoption of more restrictive laws and regulations, whether by the OTS, the FDIC
or the Congress of the United States, could have a material adverse effect on
the Company and its financial condition or results of operations.
PROPOSED LEGISLATION. The Congress of the United States adopted a bill
that did not become law, but which 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 Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). The Federal Reserve Board 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 I capital (the
numerator of the leverage ratio). Had Matrix Capital been subject to the Federal
Reserve Board's capital regulations as of December 31, 1996, its consolidated
leverage ratio would have exceeded applicable regulatory requirements. There is
considerable uncertainty regarding whether such legislation will be adopted.
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 ("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.
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, and the profitable use of the
proceeds of the offering depends, in part, on the 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.
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.
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
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by the Company and the depository, general accounting 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.
CONCENTRATION OF VOTING CONTROL IN MANAGEMENT
As of December 31, 1996, the Company's executive officers beneficially
owned an aggregate of approximately 65.0% of the outstanding Common Stock.
Therefore, the Company's management, acting together, will be able to elect the
entire Board of Directors of Matrix Capital and generally will be able to
approve or disapprove all matters submitted to shareholders for a vote.
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.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price for shares of Common Stock may be significantly
affected by such factors as quarter-to-quarter variations in the Company's
results of operations, which may be due to, among other things, the variance in
the number and magnitude of purchases and sales of mortgage loans and/or
servicing rights consummated by the Company from period to period, as well as by
news announcements or changes in general market or industry conditions. There
can be no assurance that shares of Common Stock purchased in the offering may be
later sold at or in excess of the price paid.
EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of the Company's Amended and Restated Articles of
Incorporation (the "Articles of Incorporation") and Bylaws, as amended (the
"Bylaws"), could delay or frustrate the removal of incumbent directors and could
make difficult a merger, tender offer or proxy contest involving the Company,
even if such events could be viewed as beneficial by the Company's shareholders.
For example, the Articles of Incorporation divide the members of the Board of
Directors into three different classes of directors who are elected by holders
of the 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 without a shareholder vote.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: March 25, 1997
MATRIX CAPITAL CORPORATION
By: /s/ David W. Kloos
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Name: David W. Kloos
Title: Chief Financial Officer
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