SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended June 30, 1997 Commission File No. 0-21231
Matrix Capital Corporation
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-1233716
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1380 Lawrence Street, Suite 1410, Denver, Colorado 80204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 595-9898
---------------------------
Indicate by check mark whether the registrant has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and has been subject to such filing requirements
for the past 90 days.
YES X NO
------- -------
Number of shares of Common Stock ($.0001 par value) outstanding at the close of
business on August 5, 1997 was 6,681,031 shares.
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TABLE OF CONTENTS
PART I Financial Information
ITEM 1. Condensed Consolidated Balance Sheets -
June 30, 1997 (unaudited) and December 31, 1996.....................3
Condensed Consolidated Statements of Income -
Three and six months ended June 30, 1997 and 1996 (unaudited).......4
Condensed Consolidated Statements of Changes in Shareholders' Equity
Six months ended June 30, 1997 and 1996 (unaudited).................5
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1997 and 1996 (unaudited).................6
Notes to Unaudited Condensed Consolidated Financial Statements.......7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................10
PART II Other Information
ITEM 1. Legal Proceedings...................................................21
ITEM 2. Changes in Securities...............................................21
ITEM 3. Defaults upon Senior Securities.....................................21
ITEM 4. Submissions of Matters to a Vote of Security Holders................21
ITEM 5. Other Information...................................................22
ITEM 6 Exhibits and Reports on Form 8-K....................................22
SIGNATURES...................................................................23
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Part I Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
Matrix Capital Corporation
Condensed Consolidated Balance Sheets
(Dollars In thousands)
June 30, December 31,
1997 1996
---------------- ----------------
Assets (unaudited)
<S> <C> <C>
Cash $ 10,564 $ 2,855
Interest earning deposits 11,766 9,754
Loans, net 394,537 212,361
Mortgage servicing rights, net 30,811 23,680
Other receivables 35,255 9,353
Federal Home Loan Bank of Dallas stock 4,807 2,871
Premises and equipment, net 8,622 7,887
Other assets 6,201 5,798
---------------- ----------------
Total assets $ 502,563 $ 274,559
================ ================
Liabilities and shareholders' equity
Liabilities:
Deposits $ 202,598 $ 90,179
Custodial escrow balances 80,924 37,881
Drafts payable 7,956 5,961
Payable for purchase of mortgage
servicing rights 4,652 8,044
Federal Home Loan Bank of Dallas
borrowings 70,600 51,250
Borrowed money 87,451 42,431
Other liabilities 12,464 5,502
Income taxes payable 24 1,041
---------------- ----------------
Total liabilities 466,669 242,289
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $.0001;
authorized 5,000,000 shares; no
shares outstanding
Common stock, par value $.0001;
authorized 50,000,000 shares;
issued and outstanding 6,681,031
at June 30, 1997 and December 31,
1996 1 1
Additional paid in capital 21,983 21,983
Retained earnings 13,910 10,286
---------------- ----------------
Total shareholders' equity 35,894 32,270
---------------- ----------------
Total liabilities and shareholders' equity $ 502,563 $ 274,559
================ ================
See accompanying notes.
</TABLE>
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<TABLE>
<CAPTION>
Matrix Capital Corporation
Condensed Consolidated Statements of Income
(Dollars In thousands except per share information)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
Interest income
<S> <C> <C> <C> <C>
Loans and mortgage-backed $ 7,479 $ 4,192 $ 12,563 $ 7,847
securities
Interest earning deposits 147 125 559 217
---------- ---------- ---------- ----------
Total interest income 7,626 4,317 13,122 8,064
Interest expense
Interest on deposits 2,190 855 3,837 1,561
Interest on borrowings 2,015 1,927 3,514 3,838
---------- ---------- ---------- ----------
Total interest expense 4,205 2,782 7,351 5,399
---------- ---------- ---------- ----------
Net interest income before
provision for loan and
valuation losses 3,421 1,535 5,771 2,665
Provision for loan and valuation
losses 205 119 297 152
---------- ---------- ---------- ----------
Net interest income 3,216 1,416 5,474 2,513
Noninterest income
Loan administration 4,281 2,492 8,264 4,632
Brokerage 824 1,263 1,961 1,947
Trust services 890 837 1,768 1,616
Gain on sale of loans and
mortgage-backed securities 846 416 964 852
Gain on sale of mortgage
servicing rights 942 1,091 2,352 1,091
Loan origination 867 495 1,509 194
Other 762 535 1,537 933
---------- ---------- ---------- ----------
Total noninterest income 9,412 7,129 18,355 11,265
Noninterest expenses
Compensation and employee
benefits 3,442 3,310 6,904 6,137
Amortization of mortgage
servicing rights 1,649 683 3,175 1,184
Occupancy and equipment 475 488 977 902
Professional fees 218 140 418 240
Data processing 202 134 365 287
Losses related to recourse sales 900 - 1,125 -
Other general and administrative 2,517 1,280 4,966 2,536
---------- ---------- ---------- ----------
Total noninterest expense 9,603 6,035 17,930 11,286
---------- ---------- ---------- ----------
Income before income taxes 3,025 2,510 5,899 2,492
Provision for income taxes 1,155 1,005 2,275 991
---------- ---------- ---------- ----------
Net income $ 1,870 $ 1,505 $ 3,624 $ 1,501
========== ========== ========== ==========
Net income per common and common
equivalent share $ .28 $ .32 $ .53 $ .31
========== ========== ========== ==========
Weighted average common and
common equivalent shares 6,778,709 4,702,221 6,776,895 4,707,221
========== ========== ========== ==========
See accompanying notes.
</TABLE>
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<TABLE>
<CAPTION>
Matrix Capital Corporation
Condensed Consolidated Statements of Shareholders' Equity
(Dollars In thousands)
(unaudited)
Common Stock Additional
------------------- Paid In Retained
Shares Amount Capital Earnings Total
---------- ------ ------- -------- ---------
Six months ended June 30,
1997
- ------------------------
Balance at December 31,
<S> <C> <C> <C> <C> <C>
1996 6,681,031 $ 1 $ 21,983 $ 10,286 $ 32,270
Net income - - - 3,624 3,624
---------- ------ -------- -------- --------
Balance at June 30, 1997 6,681,031 $ 1 $ 21,983 $ 13,910 $ 35,894
========== ====== ======== ======== ========
Six months ended June 30,
1996
- ------------------------
Balance at December 31,
1995 4,668,531 $ - $ 3,769 $ 6,917 $ 10,686
Capital contributed into
pooled company prior to
merger - - 24 - 24
Cash dividend paid by pooled
company prior to merger - - - (66) (66)
Net income - - - 1,501 1,501
---------- ------ -------- -------- --------
Balance at June 30, 1996 4,668,531 $ - $ 3,793 $ 8,352 $ 12,145
========== ====== ======== ======== ========
See accompanying notes.
</TABLE>
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<TABLE>
<CAPTION>
Matrix Capital Corporation
Condensed Consolidated Statements of Cash Flows
(Dollars In thousands)
(unaudited)
Six Months Ended
June 30,
1997 1996
Operating activities
<S> <C> <C>
Net income $ 3,624 $ 1,501
Adjustments to reconcile net income to net cash used
by operating activities:
Depreciation and amortization 691 359
Provision for loan and valuation losses 297 152
Amortization of mortgage servicing rights 3,175 1,184
Accretion of premium on deposits - (7)
Gain on sale of loans and mortgage-backed securities (964) (852)
Gain on sale of mortgage servicing rights (2,352) (1,091)
Losses related to recourse sales 1,125 -
Loans originated for sale, net of loans sold (10,973) 11,732
Loans purchased for sale (208,483) (65,262)
Proceeds from sale of loans purchased for sale 38,430 44,169
Increase in due from broker - (21,153)
Originated mortgage servicing rights, net (42) (462)
Increase in other receivables and other assets (10,916) (5,572)
Increase (decrease) in other liabilities and
Income taxes payable 5,945 (481)
--------- ---------
Net cash used by operating activities (180,443) (35,782)
Investing activities
Loans originated and purchased for investment (28,194) (2,608)
Principal repayments on loans 27,707 11,789
Purchase of Federal Home Loan Bank of Dallas stock (1,936) (703)
Purchases of premises and equipment (1,273) (1,077)
Acquisition of mortgage servicing rights (29,100) (2,487)
Purchase of land for development - (1,292)
Proceeds from sale of mortgage servicing rights 3,128 5,071
--------- ---------
Net cash provided (used) by investing activities (29,668) 8,693
Financing activities
Net increase in deposits 112,419 24,639
Net increase in custodial escrow balances 43,043 (322)
Increase in revolving lines and repurchase
agreements, net 35,326 1,991
Repayments of notes payable (5,434) (927)
Proceeds from notes payable 34,558 3,494
Repayment of financing arrangements (80) (162)
Capital contributed into pooled Company prior
to merger - 24
Dividend paid by pooled company prior to merger - (66)
--------- ---------
Net cash provided by financing activities 219,832 28,671
--------- ---------
Increase in cash and cash equivalents 9,721 1,581
Cash and cash equivalents at beginning of year 12,609 7,989
--------- ---------
Cash and cash equivalents at end of year $ 22,330 $ 9,570
========= =========
Supplemental disclosure of noncash activity
Payable for purchase of mortgage servicing rights $ 4,652 $ 297
========= =========
Supplemental disclosure of cash flow information
Cash paid for interest expense $ 7,029 $ 5,392
========= =========
Cash paid for income taxes $ 3,256 $ 692
========= =========
See accompanying notes.
</TABLE>
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MATRIX CAPITAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Three and Six Months Ended June 30, 1997 and 1996
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) necessary for a fair presentation have been
included. For further information, refer to the consolidated financial
statements and footnotes hereto included in Matrix Capital Corporation's
("Company") annual report on Form 10-K for the year ended December 31, 1996.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and the
accompanying notes. Actual results could differ from these estimates.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 - "Earnings per Share" ("SFAS 128") which
specifies the computation, presentation and disclosure requirements for earnings
per common share ("EPS"). SFAS 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 SFAS 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 the adoption of SFAS 128 will have a material impact
on the Company.
On February 5, 1997, the acquisition of the Vintage Group, Inc. ("Vintage") 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 acquisition of Vintage had been in effect for all periods presented.
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(2) Mortgage Servicing Rights
The activity in the Mortgage Servicing Rights ("MSRs") is summarized as follows:
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
June 30, December 31,
1997 1996
--------------- ---------------
(unaudited)
(In thousands)
<S> <C> <C>
Balance at beginning of period $ 23,680 $ 13,817
Purchases 25,708 17,142
Originated 42 441
Amortization (3,175) (2,432)
Transfer of MSR to FHLMC - (110)
Sales (15,444) (5,178)
--------------- ---------------
Balance at end of period $ 30,811 $ 23,680
=============== ===============
</TABLE>
Accumulated amortization of mortgage servicing rights aggregated approximately
$13,974,000 and $11,347,000 at June 30, 1997 and at December 31, 1996,
respectively.
The Company's servicing portfolio (excluding subserviced loans) was comprised of
the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------------------------- ---------------------------
Number Principal Number Principal
of Loans Balance of Loans Balance
Outstanding Outstanding
----------- ------------- ----------- -------------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C>
FHLMC 13,980 $ 790,810 12,107 $ 666,218
FNMA 13,105 742,194 13,426 764,632
GNMA 17,089 650,181 9,379 278,700
Other VA, FHA, and
conventional loans 13,850 797,394 12,870 795,486
----------- ------------- ----------- --------------
58,024 $ 2,980,579 47,782 $ 2,505,036
=========== ============= =========== ==============
</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 $72,219,000, and $27,381,000 at
June 30, 1997 and at December 31, 1996, respectively. The Company also had
custodial escrow accounts on deposit for other mortgage companies aggregating
approximately $8,705,000 and $10,500,000 at June 30, 1997 and December 31, 1996,
respectively.
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(3) Deposits
Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------------------------- --------------------------
Weighted Weighted
Average Average
Amount Percent Rate Amount Percent Rate
--------- -------- ---------- -------- -------- --------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 2,885 1.42% 3.92% $ 2,757 3.06% 3.45%
NOW accounts 19,494 9.62 3.14 4,732 5.25 1.66
Money market accounts 96,648 47.71 3.68 9,455 10.48 4.43
--------- -------- ---------- -------- -------- --------
119,027 58.75 3.45 16,944 18.79 3.59
Certificate accounts 83,571 41.25 5.88 73,235 81.21 5.85
--------- -------- ---------- -------- -------- --------
Total deposits $202,598 100.00% 4.61% $ 90,179 100.00% 5.36%
========= ======== ========== ======== ======== ========
</TABLE>
Subsequent to the acquisition of Vintage, assets under administration were
transferred from a third party financial institution to Matrix Bank and placed
in interest-bearing accounts. Approximately $96.8 million of assets under
administration are included in interest-bearing accounts as of June 30, 1997.
(4) Commitments and Contingencies
At June 30, 1997, the Company had outstanding commitments to originate and
purchase loans of $21.7 million and commitments to sell loans of $36.1 million.
In June 1996, the Company purchased 154 acres of land for the purpose of
developing 750 residential and multi-family lots in Ft. Lupton, Colorado. As
part of the acquisition, the Company entered into a Residential Facilities
Development Agreement (the "Development Agreement") with the City of Ft. Lupton.
The Development Agreement is a residential and planned unit development
agreement providing for the orderly planning, engineering and development of a
golf course and surrounding residential community. The City of Ft. Lupton is
responsible for the development of the golf course and the Company is
responsible for the development of the surrounding residential lots.
The Development Agreement sets forth a mandatory obligation on the part of the
Company to pay the City of Ft. Lupton pledged enhancement assessments of
$600,000. These pledged enhancement assessments require the Company to pay the
city a $2,000 fee each time the Company sells a developed residential lot. The
Company is obligated to pay a minimum of $60,000 in assessment fees per year
beginning in the year 1998 through the year 2007. The Company also entered into
a development management agreement with a local developer to complete the
development of the land. The development management agreement obligates the
Company to provide up to an additional $500,000 of funds for development. The
Company has no other financial obligations to the developer beyond the $500,000.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company's principal activities consist of the purchase and sale of
portfolios of mortgage loans and mortgage servicing rights, administration of
portfolios of mortgage loans, consulting and brokerage activities involving
mortgage loan servicing, and real estate management and disposition services. In
addition to the services associated with the mortgage industry, the Company is
involved in deposit generation and trust services. These activities are
conducted through the Company's wholly-owned subsidiaries, Matrix Financial
Services Corporation ("Matrix Financial"), United Financial, Inc. ("United
Financial"), Matrix Capital Bank ("Matrix Bank"), United Special Services, Inc.
("USS"), and United Capital Markets, Inc. ("UCM"). 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.
("First Matrix") are located in Waco, and Arlington, Texas, respectively.
Sterling Trust was incorporated in 1984 as a Texas independent, non-bank trust
company specializing in self-directed qualified retirement plans, individual
retirement accounts, custodial, and directed trust accounts. First Matrix is a
NASD broker/dealer that provides services to individuals and deferred
contribution plans.
The principal components of the Company's revenues consist of net interest
income recorded by Matrix Bank and Matrix Financial, loan administration fees
generated by Matrix Financial, brokerage fees realized by United Financial, loan
origination fees and gains on sales of residential mortgage loans and
residential mortgage servicing rights generated by Matrix Financial and Matrix
Bank and trust administration fees generated by Sterling Trust.
The Company's results of operations are likely to be influenced by changes in
general economic and competitive conditions and more particularly by changes in
market interest rates. Fluctuations in these factors will have an effect on the
volume of loan originations, mortgage loan prepayments and the value of the
Company's mortgage servicing portfolio and loan portfolio.
Forward-Looking Information
Certain information contained in this quarterly report constitutes
"Forward-Looking Statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, which can be identified by the use of forward-looking terminology
such as "may," "will," "expect," "anticipate," "estimate," or "continue" or the
negative thereof or other variations thereon or comparable terminology. The
statements in "Risk Factors" contained in the Company's current report on Form
8-K, filed with the Securities and Exchange Commission on March 25, 1997,
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.
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Results of Operations for the
Three Months Ended June 30, 1997 compared to Three Months Ended June 30, 1996
Net income; return on average equity. Net income increased $365,000 to $1.9
million for the quarter ended June 30, 1997, as compared to $1.5 million for the
quarter ended June 30, 1996. Return on average equity decreased to 21.5% for the
quarter ended June 30, 1997, as compared to 52.8% for the quarter ended June 30,
1996. The decrease in return on average equity was primarily due to the increase
in the average equity in the second quarter of 1997 due to the sale of
additional stock in the fourth quarter of 1996 in conjunction with the Company's
initial public offering, which increased equity by $18.2 million and by the
financial impact of the establishment of a reserve for potential losses on
sub-prime auto loans repurchased in June, 1997. For discussion of the reserve on
repurchased sub-prime auto loans see "---Asset Quality-Nonperforming Assets."
Net interest income. Net interest income before provision for loan and valuation
losses increased $1.9 million, or 122.9%, to $3.4 million for the quarter ended
June 30, 1997, as compared to $1.5 million for the quarter ended June 30, 1996.
The increase for the quarter ended June 30, 1997 was attributable to the
decrease in the Company's cost of interest bearing liabilities, which decreased
to 5.55% for the quarter ended June 30, 1997, as compared to 6.83% for the
quarter ended June 30, 1996, which was partially offset by a decrease in the
yield on interest earning assets, which decreased to 8.76% for the quarter ended
June 30, 1997, as compared to 9.49% for the quarter end June 30, 1996. The
decrease in the cost of the interest bearing liabilities was a result of the
trust deposits administered by Sterling Trust being transferred from a
third-party financial institution to Matrix Bank effective upon completion of
the Vintage acquisition. The decrease in the Company's yield on interest-bearing
assets was attributable to the lower yield on earned on the loan portfolio which
decreased to 8.87% for the quarter ended June 30, 1997 from 9.77% for the
quarter ended June 30, 1996. The Company's net interest margin increased to
3.93% for the quarter ended June 30, 1997 as compared to 3.37% for the quarter
ended June 30, 1996. The Company's average interest earning assets increased
$166.1 million, or 91.2%, to $348.1 million for the quarter ended June 30, 1997,
as compared to $182.0 million for the quarter ended June 30, 1996. This increase
was attributable primarily to the increase in the size of the Company's loan
portfolio. 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 losses increased
$86,000 to $205,000 for the quarter ended June 30, 1997 as compared to $119,000
for the quarter ended June 30, 1996. This increase was primarily in response to
the increase in the balance of loans receivable which increased to $394.5
million at June 30, 1997 as compared to $212.4 million at December 31, 1996. For
a discussion of the Company's allowance for loan losses as it relates to
nonperforming assets, see "--Asset Quality- Nonperforming Assets."
Loan administration. Loan administration fees increased $1.8 million, or 71.8%
to $4.3 million for the quarter ended June 30, 1997 as compared to $2.5 million
for the quarter ended June 30, 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 outstanding principal balance underlying the Company's
mortgage servicing rights portfolio for the quarter ended June 30, 1997 as
compared to the quarter ended June 30, 1996. The mortgage loan servicing
portfolio increased by $1.6 billion, or 118.7%, to $3.0 billion at June 30,
1997, as compared to $1.4 billion at June 30, 1996.
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Brokerage fees. Brokerage fees decreased $439,000, or 34.8%, to $824,000 for the
quarter ended June 30, 1997, as compared to $1.3 million for the quarter ended
June 30, 1996. This increase was a direct result of the amount of the
residential mortgage servicing portfolio's brokered by United Financial. The
volume of residential mortgage servicing portfolio's brokered by United
Financial decreased $3.1 billion, or 43.1% to $4.1 billion the quarter ended
June 30, 1997, as compared to $7.2 billion for the quarter ended June 30, 1996.
Trust service fees. Trust service fees increased $53,000, or 6.3%, to $890,000
for the quarter ended June 30, 1997 as compared to $837,000 for the quarter
ended June 30, 1996. This increase was primarily due to the growth in the number
of trust accounts under administration at Sterling Trust which increased to
28,396 at June 30, 1997 from 25,787 at June 30, 1996.
Gain on sale of loans and mortgage backed securities. Gain on sale of loans and
mortgage backed securities increased $430,000, or 103.4%, to $846,000 the
quarter ended June 33, 1997, as compared to $416,000 for the quarter ended June
30, 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 the company
purchases, and the particular loan portfolios the Company elects to sale. The
Company sold $33.0 million in bulk loan portfolios for the quarter ended June
30, 1997, as compared to $11.6 million in the second quarter of 1996. The sales
were consummated to generate funds to acquire additional residential loan
portfolios and to generate revenues.
Gain on sale of mortgage servicing rights. Gain on the sale of mortgage
servicing rights decreased $149,000 to $942,000 for the quarter ended June 30,
1997, as compared to $1.1 million for the quarter ended June 30, 1996. In terms
of aggregate outstanding principal balances of mortgage loans underlying such
servicing rights, the Company sold $492.3 million in mortgage servicing rights
for the quarter ended June 30, 1997 as compared to $390.5 million in the second
quarter of 1996. The sale in the quarter ended June 30, 1997 was consummated
primarily to provide the Company with the opportunity to diversify its servicing
portfolio and generate earnings.
Loan origination. Loan origination income increased $372,000, or 75.2%, to
$867,000 for the quarter ended June 30, 1997, as compared to $495,000 for the
quarter ended June 30, 1996, even though wholesale residential mortgage loan
production decreased $44.4 million, or 31.4%, to $97.2 million for the quarter
ended June 30, 1997, as compared to $141.5 million for the quarter ended June
30, 1996. This increase was primarily attributable to the Company originating a
greater amount of non-agency eligible loans which generally result in higher
origination fees. Loan origination income includes all mortgage loan fees,
secondary marketing activity on new loan originations, servicing release
premiums on new originations sold, net of origination costs.
Noninterest expense. Noninterest expense increased $3.6 million, or 59.1%, to
$9.6 million for the quarter ended June 30, 1997, as compared to $6.0 million
for the quarter ended June 30, 1996. This increase was primarily due to expenses
related to the interim subservicing fees paid on the mortgage servicing
portfolios recently acquired, the expenses related to UCM which was formed in
December of 1996, the establishment of a $900,000 reserve for potential losses
on sub-prime auto loans repurchased in June, and the overall growth and
expansion of the Company. The following table details the major components of
noninterest expense for the periods indicated:
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<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
June 30,
--------------------------
1997 1996
--------------------------
(In thousands)
<S> <C> <C>
Compensation and employee benefits $ 3,442 $ 3,310
Amortization of mortgage servicing rights 1,649 683
Occupancy and equipment 475 488
Professional fees 218 140
Data processing 202 134
Other general and administrative 3,617 1,280
----------- ----------
Total $ 9,603 $ 6,035
=========== ==========
</TABLE>
Compensation and employee benefits increased $132,000, or 4.0% to $3.4 million
for the quarter ended June 30, 1997 as compared to $3.3 million for the quarter
ended June 30, 1996. This increase was the result of the continued expansion of
the Company's business lines in 1997, including the opening of a retail branch
of Matrix Bank, a new lending office of Matrix Bank and the formation of UCM,
which was partially offset by lower commission based compensation paid on
brokered servicing and loan origination activities. The Company had an increase
of 50 employees, or 18.3%, to 323 employees at June 30, 1997 as compared to 273
employees at June 30, 1996.
Amortization of mortgage servicing rights increased $966,000, or 141.4% to $1.6
million for the quarter ended June 30, 1997 as compared to $683,000 for the
quarter ended June 30, 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 remainder of noninterest expense, which includes occupancy and equipment
expenses, professional fees, data processing costs and other expenses increased
$2.5 million, or 121.0% to $4.5 million for the quarter ended June 30, 1997 as
compared to $2.0 million for the quarter ended June 30, 1996. The increase was
primarily attributable to the interim subservicing cost of mortgage servicing
portfolios recently acquired, expansion of both existing and new business lines
and the establishment of a $900,000 reserve for potential losses on repurchased
sub-prime auto loans.
Provision for income taxes. Provision for income taxes increased by $150,000 to
$1.2 million for the quarter ended June 30, 1997, as compared to $1.0 million
for the quarter ended June 30, 1996. The increase was due to the increase in
pre-tax income and a reduction in the effective tax rate to 38.2% for the
quarter ended June 30, 1997, as compared to 40.0% for the quarter ended June 30,
1996.
Results of Operations for the
Six Months Ended June 30, 1997 compared to Six Months Ended June 30, 1996
Net Income; Return on average equity. Net income increased $2.1 million to $3.6
million for the period ended June 30, 1997, as compared to $1.5 million for the
six months ended June 30, 1996. Return on average equity decreased to 21.4% for
the six months ended June 30, 1997 as compared to 26.5% for the six months ended
June 30, 1996. The decrease in return on average equity was primarily due to the
increase in the average equity in the first six months of 1997 due to the sale
of additional stock in the fourth quarter of 1996 which increased equity by
$18.2 million and the establishment of a reserve for potential losses on
repurchased sub-prime auto loans. For additional discussion of reserve on
repurchased sub- prime auto loans see "--Asset Quality-Nonperforming Assets."
The return on average equity of 26.5% for the six months ended June 30, 1996 was
significantly reduced by the effect of the $1.9 million secondary marketing loss
recognized in the first quarter of 1996. See "--Loan Origination."
Net interest income. Net interest income before provision for loan and valuation
losses increased $3.1 million, or 116.5%, to $5.8 million for the six months
ended June 30, 1997, as compared to $2.7 million for the period ended June 30,
1996. The increase for the period ended June 30, 1997 was attributable to the
CORPDAL:69482.1 26059-00019
<PAGE>
decrease in the Company's cost of interest bearing liabilities, which decreased
to 5.66% for the six months ended June 30, 1997, as compared to 6.86% for the
six months ended June 30, 1996, which was partially offset by a decrease in the
yield on interest earning assets, which decreased to 8.59% for the six months
ended June 30, 1997, as compared to 9.38% for the six months ended June 30,
1996. The decrease in the cost of the interest bearing liabilities was a result
of the trust deposits administered by Sterling Trust being transferred to Matrix
Bank upon consummation of the Vintage acquisition. The decrease in the Company's
yield on interest-bearing assets was attributable to the lower yield earned on
the loan portfolio which decreased to 8.85% for the period ended June 30, 1997
from 9.62% for the period ended June 30, 1996. The Company's net interest margin
increased to 3.78% for the period ended June 30, 1997 as compared to 3.10% for
the period ended June 30, 1996. The Company's average interest-earning assets
increased $133.6 million, or 77.7%, to $305.5 million for the period ended June
30, 1997, as compared to $171.9 million for the period ended June 30, 1996. This
increase was attributable primarily to the increase in the size of the Company's
loan portfolio. 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 losses. Provision for loan losses increased $145,000 to
$297,000 for the six months ended June 30, 1997 as compared to $152,000 for the
six months ended June 30, 1996. This increase was primarily in response to the
increase in the loans receivable balance. For a discussion of the Company's
allowance for loan losses as it relates to nonperforming assets, see "--Asset
Quality-Nonperforming Assets."
Loan administration. Loan administration fees increased $3.7 million, or 78.4%,
to $8.3 million for the period ended June 30, 1997. This increase was primarily
attributable to the increase in the outstanding principal balance underlying the
Company's mortgage servicing rights portfolio for the six months ended June 30,
1997, as compared to the six months ended June 30, 1996. The mortgage loan
servicing portfolio increased by $1.6 billion, or 118.7%, to $3.0 billion at
June 30, 1997, as compared to $1.4 billion at June 30, 1996.
Brokerage fees. Brokerage fees increased $14,000, or 0.7%, to $1.9 million for
the six months ended June 30, 1997. The balance of residential mortgage
servicing portfolio's brokered by United Financial, in terms of aggregate unpaid
principal balances on the underlying loans, decreased to $12.0 billion the six
months ended June 30, 1997, as compared to $12.6 billion for the six months
ended June 30, 1996.
Trust service fees. Trust service fees increased $152,000, or 9.4%, to $1.8
million for the six months ended June 30, 1997, as compared to $1.6 million for
the six months ended June 30, 1996. This increase was primarily a result of the
growth in the number of trust accounts under administration at Sterling Trust.
Gain on sale of loans and mortgage backed securities. Gain on the sale of loans
and mortgage backed securities increased by $112,000, or 13.1% to $964,000 the
six months ended June 30, 1997, as compared to $852,000 for the six months ended
June 30, 1996. Gain on sale of loans can fluctuate significantly from period to
period 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 sale.
Gain on sale of mortgage servicing rights. Gain on the sale of mortgage
servicing rights increased $1.3 million to $2.4 million for the six months ended
June 30, 1997, as compared to $1.1 million for the period ended June 30, 1996.
In terms of aggregate outstanding principal balances of mortgage loans
underlying such servicing rights, the Company sold $988.5 million in purchased
mortgage servicing rights for the six months ended June 30, 1997 as compared to
$390.5 million for the six months ended June 30, 1996. All of the mortgage
servicing rights sold in 1997 pertain to mortgage servicing rights purchased in
1997 and were consummated primarily to provide the Company with the opportunity
to diversify its servicing portfolio and generate earnings.
Loan origination. Loan origination income increased $1.3 million to $1.5
million for the six months ended June 30, 1997, as compared to $194,000 for the
six months ended June 30, 1996, even though the
CORPDAL:69482.1 26059-00019
<PAGE>
Company experienced a decrease in wholesale residential mortgage loan production
of $180.3 million, or 48.3%, to $192.7 million for the period ended June 30,
1997, as compared to $373.0 million for the period ended June 30, 1996. This
decrease was primarily attributable to a $1.9 million secondary marketing loss
that occurred in March 1996. The secondary loss 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 which
resulted in the $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 completed hedged when interest rates rapidly and significantly
change. The Company has implemented several management and reporting changes to
help ensure that the hedging policies established by Matrix Financial's board of
directors are adhered to so as to mitigate secondary losses in volatile interest
rate markets. Loan origination income includes all mortgage loan fees, secondary
marketing activity on new loan originations, servicing release premiums on new
originations sold, net of origination costs.
Noninterest expense. Noninterest expense increased $6.6 million, or 58.9% to
$17.9 million for the six months ended June 30, 1997, as compared to $11.3
million for the six months ended June 30, 1996. This increase was primarily due
to expenses related to the interim subservicing on mortgage servicing portfolios
recently acquired, the expenses related to UCM which was formed in December
1996, the establishment of a $1.1 million reserve for potential losses on
repurchased sub-prime auto loans, and the overall growth and expansion of the
Company. The following table details the major components of noninterest expense
for the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1997 1996
--------------------------
(In thousands)
<S> <C> <C>
Compensation and employee benefits $ 6,904 $ 6,137
Amortization of mortgage servicing rights 3,175 1,184
Occupancy and equipment 977 902
Professional fees 418 240
Data processing 365 287
Other general and administrative 6,091 2,536
---------- ---------
Total $ 17,930 $ 11,286
========== =========
</TABLE>
Compensation and employee benefits increased $767,000, or 12.5% to $6.9 million
for the six months ended June 30, 1997 as compared to $6.1 million for the
period ended June 30, 1996. This increase was the result of the continued
expansion of the Company's business lines in 1997 including the opening of a
retail branch of Matrix Bank, a new lending office of Matrix Bank, and the
formation of UCM. The Company had an increase of 50 full time employees, or
18.3%, to 323 full time employees at June 30, 1997 as compared to 273 full time
employees at June 30, 1996.
Amortization of mortgage servicing rights increased $2.0 million, or 168.2% to
$3.2 million for the six months ended June 30, 1997 as compared to $1.2 million
for the six months ended June 30, 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 remainder of non-interest expense, which includes occupancy and equipment
expenses, professional fees, data processing costs and other expenses increased
$3.9 million, or 98.0% to $7.9 million for the six months ended June 30, 1997 as
compared to $4.0 million for the six months ended June 30, 1996. The increase
was primarily attributable to the interim subservicing cost on mortgage
servicing portfolios recently acquired, expansion of both existing and new
business lines, and the establishment of $1.1 million of additional reserves for
potential losses on repurchased sub-prime auto loans.
CORPDAL:69482.1 26059-00019
<PAGE>
Provision for Income Taxes. Provision for income taxes increased $1.3 million to
$2.3 million for the six months ended June 30, 1997 as compared to $991,000 for
the period ended June 30, 1996. The increase was due to the increase in pre-tax
income and a reduction in the effective tax rate to 38.6% for the period ended
June 30, 1997 as compared to 39.8% for the six months ended June 30, 1996.
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
and costs. Average interest rate information for the three and six months ended
June 30, 1997 and 1996, respectively, have been annualized. Ratio, yield and
rate information are based on daily averages where available, otherwise, average
monthly balances have been used. Nonaccrual loans have been included in the
calculation of average balances for loans for the periods indicated.
CORPDAL:69482.1 26059-00019
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------------- ----------------------------------------------------
1997 1996 1997 1996
------------------------- ------------------------- ------------------------- --------------------------
Average Average Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- -------- ------- -------- -------- ------- -------- -------- ------- -------- -------- --------
ASSETS
Interest earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net $337,269 $7,479 8.87% $166,192 $ 4,058 9.77% $284,028 $ 12,563 8.85% $160,380 $ 7,713 9.62%
Mortgage-backed
securities - - - 7,051 134 7.60 - - - 3,487 134 7.69
Interest-earning
deposits 7,689 99 5.15 6,156 91 5.91 18,452 471 5.11 5,582 145 5.20
FHLB stock 3,123 47 6.02 2,625 34 5.18 2,982 88 5.90 2,453 72 5.87
-------- -------- ------- -------- -------- ------- -------- -------- ------- -------- -------- --------
Total interest earning
assets 348,081 7,625 8.76 182,024 4,317 9.49 305,462 13,122 8.59 171,902 8,064 9.38
Noninterest earning
assets:
Cash 10,835 2,423 11,135 2,358
Allowance for loan and
valuation losses (1,178) (1,005) (1,201) (978)
Premises and equipment 7,966 6,754 7,931 6,711
Other assets 68,960 24,297 63,144 23,295
-------- -------- -------- --------
Total noninterest
bearing assets 86,583 32,469 81,009 31,386
-------- -------- -------- --------
Total assets $434,664 $214,493 $386,471 $203,288
======== ======== ======== ========
LIABILITIES &
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
Passbook accounts $ 2,909 28 3.85 $ 2,306 20 3.47 $ 2,854 56 3.92 $ 2,415 40 3.31
Money market and
negotiable order
of withdrawal
("NOW") accounts 105,119 930 3.54 10,651 132 4.96 82,345 1,456 3.54 11,929 233 3.91
Certificates of
deposit 83,685 1,231 5.88 50,586 703 5.56 79,020 2,325 5.88 44,225 1,288 5.82
FHLB borrowings 31,097 441 5.67 36,444 452 4.96 25,654 718 5.60 34,416 976 5.67
Borrowed money 79,837 1,574 7.89 62,948 1,475 9.37 69,867 2,796 8.00 64,359 2,862 8.89
-------- -------- ------- -------- -------- ------- -------- -------- ------- -------- -------- --------
Total interest-
bearing liabilities 302,647 4,204 5.55 162,935 2,782 6.83 259,740 7,351 5.66 157,344 5,399 6.86
-------- -------- ------- -------- -------- ------- -------- -------- ------- -------- -------- --------
Noninterest bearing
liabilities:
Demand deposits
(including
custodial escrow
balances) 83,760 30,983 74,772 28,518
Other liabilities 13,392 9,176 18,101 6,110
-------- -------- -------- --------
Total noninterest
bearing liabilities 97,152 40,159 92,873 34,628
Shareholders' equity 34,865 11,399 33,858 11,316
-------- -------- -------- --------
Total liabilities and
shareholders' equity $434,664 $214,493 $386,471 $203,288
======== ======== ======== ========
Net interest income
before provision for
loan and valuation
losses $3,421 $1,535 $ 5,771 $2,665
======= ======= ======== =======
Interest rate spread 3.21% 2.66% 2.93% 2.52%
======= ======= ======== ========
Net interest margin 3.93% 3.37% 3.78% 3.10%
======= ======= ======== ========
Ratio of average
interest bearing
assets to average
interest bearing
liabilities 115.01% 111.72% 117.60% 109.25%
======== ======== ======== ========
</TABLE>
CORPDAL:69482.1 26059-00019
<PAGE>
Analysis of Changes in Net Interest Income Due to Changes in Interest Rates and
Volumes.
The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest earning assets and interest
bearing liabilities. It distinguishes between the increase and decrease related
to changes in interest rates. For each category of interest earning assets and
interest bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to change due to volume and
change due to rate.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 vs 1996 1997 vs 1996
-------------------------- -------------------------
Increase (Decrease)
Due to Change in
-----------------------------------------------------
Volume Rate Total Volume Rate Total
--------- ------ -------- --------- -------- --------
(dollars in thousands)
Interest earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans, net $ 4,177 $ (756) $ 3,421 $ 5,946 $(1,096) $ 4,850
Mortgage backed
securities (134) - (134) (134) - (134)
Interest earning deposits 23 (15) 8 334 (8) 326
FHLB stock 6 7 13 16 - 16
--------- ------- -------- -------- -------- ---------
Total interest-earning
assets 4,072 (764) 3,308 6,162 (1,104) 5,058
Interest bearing
liabilities:
Passbook accounts 5 3 8 7 9 16
Money market and NOW
accounts 1,171 (373) 798 1,375 (152) 1,223
Certificates of deposit 460 68 528 1,013 24 1,037
FHLB borrowings (66) 55 (11) (248) (10) (258)
Borrowed money 396 (297) 99 245 (311) (66)
--------- ------- --------- ------- -------- ---------
Total interest bearing
liabilities 1,966 (544) 1,422 2,392 (440) 1,952
--------- ------- -------- -------- -------- ---------
Change in net interest
income before provision
for loan and valuation $ 2,106 $ (220) $ 1,886 $ 3,770 $ (664) $ 3,106
========= ======= ======== ======== ======== =========
</TABLE>
Liquidity and Capital Resources
Liquidity represents the ability of the Company to generate funds to support
asset growth, satisfy disbursement needs, maintain reserve requirements and
otherwise operate on an ongoing basis.
The trend of net cash used by the Company's operating activities experienced
over the reported periods results primarily from the growth that Matrix Bank has
experienced in its residential loan purchasing activity. The Company anticipates
the trend of a net use of cash from operations to continue for the foreseeable
future. This anticipation results from the expected growth at Matrix Bank, which
management believes will consist primarily of increased activity in the
purchasing of loan portfolios. The Company anticipates such growth will be
funded through retail deposits, custodial escrow deposits, trust deposits and
FHLB borrowings.
The Company's principal source of funding for its servicing acquisition
activities consist of line of credit facilities provided to Matrix Financial by
unaffiliated financial institutions. At June 30, 1997, $24.9 million was
outstanding under the servicing acquisition line. The servicing acquisition
lines in place are sufficient to fund the servicing rights under purchase
commitments.
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 June 30,
1997, Matrix Financial's warehouse lines of credit aggregated $80.0 million, of
which $41.6 million was available to be utilized.
In the ordinary course of business, the Company makes commitments to originate
residential mortgage loans and holds originated loans until delivery to an
investor. Inherent in this business are risks associated with changes in
interest rates and the resulting change in the market value of the pipeline
loans. The Company mitigates this risk through the use of mandatory and
nonmandatory forward commitments to sell loans. As of June 30, 1997, the Company
had $56.0 million in pipeline and funded loans offset with mandatory forward
CORPDAL:69482.1 26059-00019
<PAGE>
commitments of $36.1 million and nonmandatory forward commitments of $10.8
million. The inherent value of the forward commitments is considered in the
determination of the lower of cost or market for such loans.
On January 31, 1997, the Company renegotiated its revolving credit facilities
for warehouse lending, servicing acquisitions and working capital. With this
renegotiation, the aggregate amount of warehouse lines of credit facilities was
increased to $60.0 million, the aggregate amount of the servicing acquisition
facility was increased to $30.0 million, and the aggregate amount of the working
capital facility was increased to $10.0 million. The $10.0 million working
capital facility became a separate component to the revolving credit facilities,
and is no longer a sublimit to the warehouse line of credit. The new credit
facility agreement requires Matrix Financial to maintain (i) total shareholder's
equity of at least $10.0 million plus 100% of capital contributed after January
1, 1997, plus 50% of cumulative quarterly net income, (ii) adjusted net worth,
as defined, of at least $12.0 million, (iii) a servicing portfolio of at least
$2.0 billion and (iv) principal debt of term line borrowings of no more than the
lesser of 70% of the appraised value of the mortgage servicing portfolio or
1.25% of the unpaid principal balance of the mortgage servicing portfolio.
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. As of June 30, 1997, the balance of
the revolving line of credit was $5.5 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% of all future equity contributions, plus 50% of
cumulative quarterly net income (ii) dividends less than 50% of the Company's
net cash income after adjustments and (iii) total adjusted debt to stockholders'
equity less than 4 : 1.
Matrix Bank's primary source of funds for use in lending, purchasing bulk loan
portfolios, investing and other general purposes are retail deposits, trust
deposits, custodial escrow balances, FHLB borrowings, sales of loan portfolios
and proceeds from principal and interest payments on loans. Contractual loan
payments and deposit inflows and outflows are a generally predictable source of
funds, while loan prepayments and loan 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 June 30, 1997,
Matrix Bank had overnight borrowings from the FHLB of $70.6 million. The trust
deposits generated from the trust administration services fluctuate based on the
trust assets under administration and to a lesser extent the general economic
conditions. The custodial escrow balances held by Matrix Bank fluctuate based
upon the mix and size of the related servicing rights portfolios.
Matrix Bank's leverage capital ratio at June 30, 1997 was 5.4%. This exceeded
the leverage capital requirement of 4.0% of adjusted assets by $5.4 million.
Matrix Bank's risk-based capital ratio was 10.3% at June 30, 1997. Matrix Bank
currently exceeds the risk-based capital requirement of 8.0% of risk weighted
assets by $4.9 million.
CORPDAL:69482.1 26059-00019
<PAGE>
Asset Quality
Nonperforming Assets
The following table sets forth information as to the Company's nonperforming
assets ("NPA"). NPAs consist primarily of nonaccrual loans and foreclosed real
estate. Loans are placed on nonaccrual when full payment of principal or
interest is in doubt or when they are past due 90 days as to either principal or
interest. Foreclosed real estate arises primarily through foreclosure on
mortgage loans owned.
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual mortgage loans $ 2,520 $ 3,031 $ 5,523
Nonaccrual consumer loans 856 872 15
------------ ------------- ------------
Total nonperforming loans 3,376 3,903 5,538
Foreclosed real estate 1,418 788 835
Repossessed automobiles 191 506 -
------------ ------------- ------------
Total nonperforming assets $ 4,985 $ 5,197 $ 6,373
============ ============= ============
Total nonperforming assets
to total assets 0.99% 1.89% 3.42%
Total nonperforming loans to
total loans 0.85% 1.83% 3.75%
Ratio of allowance for loan
losses to total nonperform-
ing loans 39.66% 26.62% 17.03%
</TABLE>
As of June 30, 1997, the Company had no accruing loans that were contractually
past due 90 days or more, unless the interest was guaranteed through recourse
provisions. At June 30, 1997, $2.3 million, or 69.5%, of the nonaccrual loans
were loans that were purchased in bulk loan portfolios. Against the loans
receivable, the Company has $2.8 million of purchase discounts.
The balance in the nonaccrual consumer loans primarily pertains to sub-prime
auto loans that the Company repurchased. As previously disclosed, the Company
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 Sterling
Finance Co., Inc., a subsidiary of Matrix Capital Bank ("Matrix Bank"). To
settle the dispute the Company was required in June 1997 to repurchase
approximately $1.5 million of automobile loans plus $108,000 of accrued
interest. The Company has a separate reserve of $896,000 included in other
liabilities for anticipated losses related to the repurchased sub-prime auto
loans at June 30, 1997. The balance of the repossessed assets have been written
down to the anticipated recoverable amount.
The percentage of the allowance for loan losses to nonaccrual loans varies
widely due to the nature of the Company's portfolio of mortgage loans, which are
collateralized primarily by residential real estate. The Company analyzes the
collateral for each nonperforming mortgage loan to determine potential loss
exposure. In conjunction with other factors, this loss exposure contributes to
the overall assessment of the adequacy of the allowance for loan losses.
CORPDAL:69482.1 26059-00019
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
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 that the plaintiff claims it paid GNMA to settle
a dispute regarding the certification of the mortgage pools; and (iii)
approximately $1.4 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 form 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.
Item 2. Changes in Securities
During the three months ended June 30, 1997, the Company issued the following
unregistered securities in reliance on the exemption from registration set forth
in Section 4(2) of the Securities Act of 1933, as amended. For the three months
ended June 30, 1997 the Company granted options exercisable for a total of
25,000 shares of Common Stock to various non-executive employees of the Company.
All such options are exercisable at a range of $10.375 to $17.25 per share,
which was at or greater than fair market value of the Common Stock on the date
of grant of such options.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
CORPDAL:69482.1 26059-00019
<PAGE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
* 11 Computation of Earning Per Share
* 27 Financial Data Schedule
(b) Reports on Form 8-K
None
- ----------------------
* Filed herewith.
CORPDAL:69482.1 26059-00019
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly cause this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATRIX CAPITAL CORPORATION
Dated: August 12, 1997 /s/Guy A. Gibson
----------------------- ------------------------------
Guy A. Gibson
President and
Chief Executive Officer
(Principal Executive Officer)
Dated: August 12, 1997 /s/David W. Kloos
------------------------ ------------------------------
David W. Kloos
Senior Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
CORPDAL:69482.1 26059-00019
Exhibit 11
<TABLE>
<CAPTION>
Matrix Capital Corporation
Computation of Earnings Per Share
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1997 1996 1997 1996
------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Net income $ 1,870 $ 1,505 $ 3,624 $ 1,501
Less dividends on
preferred stock by
pooled company
prior to merger - - - 37
------------- -------------- ------------ -------------
Earnings available
to common share-
holders 1,870 1,505 3,624 1,464
------------- -------------- ------------ -------------
Weighted average
common shares
outstanding before
common equivalents 6,681,031 4,668,531 6,681,031 4,668,531
Common equivalent
stock options and
warrants 97,678 38,690 95,864 38,690
------------- -------------- ------------ -------------
Weighted average
outstanding
common and common
equivalent shares 6,778,709 4,707,221 6,776,895 4,707,221
------------- -------------- ------------ -------------
Earnings per common
and common
equivalent share $ .28 $ .32 $ .53 $ .31
------------- -------------- ------------- -------------
</TABLE>
CORPDAL:69482.1 26059-00019
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000944725
<NAME> Matrix Capital Corporation
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 10,564 10,564
<INT-BEARING-DEPOSITS> 11,766 11,766
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 0
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 395,876 395,876
<ALLOWANCE> 1,339 1,339
<TOTAL-ASSETS> 502,563 502,563
<DEPOSITS> 283,522 283,522
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 0 0
<LONG-TERM> 33,072 33,072
0 0
0 0
<COMMON> 1 1
<OTHER-SE> 35,893 35,893
<TOTAL-LIABILITIES-AND-EQUITY> 502,563 502,563
<INTEREST-LOAN> 7,479 12,563
<INTEREST-INVEST> 147 559
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 7,626 13,122
<INTEREST-DEPOSIT> 2,190 3,837
<INTEREST-EXPENSE> 4,205 7,351
<INTEREST-INCOME-NET> 3,421 5,771
<LOAN-LOSSES> 205 297
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 9,421 18,355
<INCOME-PRETAX> 3,025 5,899
<INCOME-PRE-EXTRAORDINARY> 1,870 3,624
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,870 3,624
<EPS-PRIMARY> .28 .53
<EPS-DILUTED> .28 .53
<YIELD-ACTUAL> 3.93 2.93
<LOANS-NON> 3,376 3,376
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 1,144 1,039
<CHARGE-OFFS> 10 10
<RECOVERIES> 0 13
<ALLOWANCE-CLOSE> 1,339 1,339
<ALLOWANCE-DOMESTIC> 0 0
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 1,339 1,339
</TABLE>
