SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended September 30, 1997 Commission File No. 0-21231
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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 November 12, 1997 was 6,681,031 shares.
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<PAGE>
TABLE OF CONTENTS
PART I Financial Information
- -----------------------------------
ITEM 1. Condensed Consolidated Balance Sheets
September 30, 1997 (unaudited)
and December 31, 1996..................................... 3
Condensed Consolidated Statements of Income
Three and nine months ended September 30,
1997 and 1996 (unaudited)................................. 4
Condensed Consolidated Statements of Changes
in Shareholders' Equity
Nine months ended September 30, 1997 and
1996 (unaudited).......................................... 5
Condensed Consolidated Statements of Cash Flows
Nine months ended September 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............................................. 21
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)
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
Assets
<S> <C> <C>
Cash $ 8,830 $ 2,855
Interest earning deposits 9,208 9,754
Loans held for sale, net 367,501 182,801
Loans held for investment, net 58,506 29,560
Mortgage servicing rights, net 39,540 23,680
Other receivables 19,692 9,353
Federal Home Loan Bank of Dallas stock 6,494 2,871
Premises and equipment, net 8,713 7,887
Other assets 7,027 5,798
--------- ---------
Total assets $ 525,511 $ 274,559
========= =========
Liabilities and shareholders' equity
Liabilities:
Deposits $ 216,213 $ 90,179
Custodial escrow balances 64,824 37,881
Drafts payable 10,502 5,961
Payable for purchase of mortgage servicing
rights 9,671 8,044
Federal Home Loan Bank of Dallas borrowings 82,000 51,250
Borrowed money 97,018 42,431
Other liabilities 6,799 5,502
Income taxes payable 360 1,041
--------- ---------
Total liabilities $ 487,387 $ 242,289
3
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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 September 30,
1997 and December 31, 1996 1 1
Additional paid in capital 21,983 21,983
Retained earnings 16,140 10,286
--------- ---------
Total shareholders' equity 38,124 32,270
--------- ---------
Total liabilities and shareholders' equity $ 525,511 $ 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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Interest income
Loans and mortgage-backed
<S> <C> <C> <C> <C>
securities $ 8,809 $ 3,917 $ 21,372 $ 11,764
Interest earning deposits 231 115 790 331
---------- ---------- ---------- ----------
Total interest income 9,040 4,032 22,162 12,095
Interest expense
Interest on deposits 2,318 1,041 6,155 2,602
Interest on borrowings 2,808 1,526 6,322 5,364
---------- ---------- ---------- ----------
Total interest expense 5,126 2,567 12,477 7,966
---------- ---------- ---------- ----------
Net interest income before
provision for loan and
valuation losses 3,914 1,465 9,685 4,129
Provision for loan and
valuation losses 237 198 534 350
---------- ---------- ---------- ----------
Net interest income 3,677 1,267 9,151 3,779
Noninterest income
Loan administration 3,782 1,804 12,045 6,436
Brokerage 842 1,394 2,781 3,341
Trust services 806 691 2,574 2,308
Gain on sale of loans
and mortgage-backed
securities 1,131 1,556 2,094 2,409
Gain on sale of mortgage
servicing rights 150 1,064 2,503 2,155
Loan origination 1,212 779 2,720 973
Other 1,146 623 2,683 1,555
---------- ---------- ---------- ----------
Total noninterest income 9,069 7,911 27,400 19,177
Noninterest expenses
Compensation and employee
benefits 3,630 3,359 10,511 9,496
Amortization of mortgage
servicing rights 1,545 575 4,720 1,759
Occupancy and equipment 557 559 1,533 1,460
Professional fees 271 153 687 394
Data processing 213 166 579 454
Losses related to recourse
sales - - 1,125 -
Other general and
administrative 2,841 2,797 7,807 5,332
----------- ---------- ---------- ----------
Total noninterest expense 9,057 7,609 26,962 18,895
----------- ---------- ---------- ----------
Income before income
taxes 3,689 1,569 9,589 4,061
Provision for income taxes 1,459 626 3,735 1,616
----------- ---------- ---------- ----------
Net income $ 2,230 $ 943 $ 5,854 $ 2,445
=========== ========== ========== ==========
Net income per common and
common equivalent share $ .33 $ .18 $ .86 $ .50
=========== ========== ========== ==========
Weighted average common and
common equivalent shares 6,819,049 4,707,221 6,814,342 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
------ ------ ----------- -------- -----
Nine months ended September 30, 1997
- ------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 6,681,031 $ 1 $ 21,983 $ 10,286 $ 32,270
Net income - - - 5,854 5,854
--------- --------- ---------- --------- ---------
Balance at September 30, 1997 6,681,031 $ 1 $ 21,983 $ 16,140 $ 38,124
========= ========= ========== ========= =========
Nine months ended September 30, 1996
- ------------------------------------
Balance at December 31, 1995 4,668,531 $ - $ 3,769 $ 6,917 $ 10,686
Cash dividend paid by pooled
company prior to merger - - - (201) (201)
Capital contribution into pooled
company prior to merger - - 24 - 24
Net income - - - 2,445 2,445
Balance at September 30, 1996 4,668,531 $ - $ 3,793 $ 9,161 $ 12,954
========= ========= =========== ========= =========
See accompanying notes.
</TABLE>
6
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<TABLE>
<CAPTION>
Matrix Capital Corporation
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
Period Ended
September 30,
1997 1996
Operating activities
<S> <C> <C>
Net income $ 5,854 $ 2,445
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation and amortization 1,025 589
Provision for loan and valuation losses 534 350
Amortization of mortgage servicing rights 4,720 1,759
Accretion of premium on deposits - (7)
Gain on sale of loans and mortgage-backed
securities (2,094) (2,408)
Gain on sale of mortgage servicing rights (2,503) (2,155)
Losses related to recourse sales 1,125 -
Loans originated for sale, net of loans sold (28,828) 15,264
Loans purchased for sale (318,179) (96,919)
Proceeds from sale of loans purchased for sale 123,466 59,203
Originated mortgage servicing rights, net 78 (605)
Increase in other receivables and other assets (7,893) (6,743)
Increase in other liabilities and income taxes
payable 616 13,223
Net cash used by operating activities (222,079) (16,004)
Investing activities
Loans originated and purchased for investment (39,174) (3,648)
Principal repayments on loans 53,980 17,135
Purchase of Federal Home Loan Bank of Dallas stock (3,623) (742)
Purchases of premises and equipment (1,667) (1,815)
Acquisition of mortgage servicing rights (35,735) (13,234)
Purchase of land for development - (1,329)
Proceeds from sale of mortgage servicing rights 16,313 8,070
Net cash provided (used) by investing activities (9,906) 4,437
Financing activities
Net increase in deposits 126,034 31,344
Net increase (decrease) in custodial escrow
balances 26,943 (7,918)
Increase (decrease) in revolving lines and
repurchase agreements, net 52,922 (9,237)
Repayments of notes payable (30,022) (3,502)
Proceeds from notes payable 42,553 5,424
Proceeds from issuance of senior notes 19,100 -
Repayment of financing arrangements (116) (230)
Capital contribution by pooled company prior to
merger - 24
Dividend paid by pooled company prior to merger - (201)
Net cash provided by financing activities 237,414 15,704
Increase in cash and cash equivalents 5,429 4,137
Cash and cash equivalents at beginning of period 12,609 7,989
Cash and cash equivalents at end of period $ 18,038 $ 12,126
======== ========
Supplemental disclosure of noncash activity
Payable for purchase of mortgage servicing rights $ 9,671 $ 8,076
======== ========
Supplemental disclosure of cash flow information
Cash paid for interest expense $ 12,249 $ 8,213
======== ========
Cash paid for income taxes $ 4,361 $ 1,753
======== ========
See accompanying notes.
</TABLE>
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<PAGE>
MATRIX CAPITAL CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Three and Nine Months Ended September 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 that 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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<PAGE>
(2) Mortgage Servicing Rights
The activity in the Mortgage Servicing Rights ("MSRs") is summarized as follows:
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September 30, December 31,
1997 1996
------------- -------------
(unaudited)
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 23,680 $ 13,817
Purchases 37,362 17,142
Originated, net (78) 441
Amortization (4,720) (2,432)
Transfer of MSR to FHLMC - (110)
Sales (16,704) (5,178)
------------- --------------
Balance at end of period $ 39,540 $ 23,680
============= ==============
</TABLE>
Accumulated amortization of mortgage servicing rights aggregated approximately
$15,422,000 and $11,347,000 at September 30, 1997 and at December 31, 1996,
respectively.
The Company's servicing portfolio (excluding subserviced loans) was comprised of
the following:
<TABLE>
<CAPTION>
September 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 13,172 $ 699,534 12,107 $ 666,218
FNMA 20,047 1,382,104 13,426 764,632
GNMA 17,042 672,534 9,379 278,700
Other VA, FHA, and
conventional loans 14,501 857,835 12,870 795,486
------------ -------------- -------------- ---------------
64,762 $ 3,612,007 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 $57,752,000, and $27,381,000 at
September 30, 1997 and at December 31, 1996, respectively. The Company also had
custodial escrow accounts on deposit for other mortgage companies aggregating
approximately $7,072,000 and $10,500,000 at September 30, 1997 and December 31,
1996, respectively.
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<PAGE>
(3) Deposits
Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
September 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 $ 2,889 1.34% 3.91% $ 2,757 3.06% 3.45 %
NOW accounts 24,087 11.14 2.85 4,732 5.25 1.66
Money market accounts 100,727 46.58 3.65 9,455 10.48 4.43
127,703 59.06 3.40 16,944 18.79 3.59
Certificate accounts 88,510 40.94 5.91 73,235 81.21 5.85
-------------- -------- ---------- ------------ --------- ---------
Total deposits $ 216,213 100.00% 4.52% $ 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 Capital Bank
("Matrix Bank"), a subsidiary of the Company, and placed in interest bearing
accounts. Approximately $101.2 million of assets under administration are
included in interest bearing accounts as of September 30, 1997.
(4) Commitments and Contingencies
At September 30, 1997, the Company had outstanding commitments to originate and
purchase loans of $26.9 million and commitments to sell loans of $54.7 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 for development. The Company has
no other financial obligations to the developer beyond the $500,000, however the
Company may provide, at its option, funds in excess of the amount obligated.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company's principal activities consist of the purchase and sale of
portfolios of mortgage loans and mortgage servicing rights, administration of
portfolios of mortgage loans, consulting and brokerage activities involving
mortgage loans and mortgage loan servicing, and real estate management and
disposition services. These activities are conducted through the Company's
wholly-owned subsidiaries, Matrix Financial Services Corporation ("Matrix
Financial"), United Financial, Inc. ("United Financial"), 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
primarily 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, brokerage, the value of
the Company's mortgage servicing and loan portfolios, and the volume of such
activities.
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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<PAGE>
Results of Operations for the
Quarter Ended September 30, 1997 compared to the Quarter Ended September 30,
1996
Net income; Return on average equity. Net income increased $1.3 million to $2.2
million for the quarter ended September 30, 1997, as compared to $943,000 for
the quarter ended September 30, 1996. Return on average equity decreased to
24.3% for the quarter ended September 30, 1997, as compared to 33.1% for the
quarter ended September 30, 1996. The decrease in return on average equity was
primarily due to the increase in the average equity in the third quarter of 1997
as a result of the sale of additional stock in the fourth quarter of 1996, in
conjunction with the Company's initial public offering ("IPO"), which increased
equity by $18.2 million.
Net interest income. Net interest income before the provision for loan and
valuation losses increased $2.4 million, or 167.2%, to $3.9 million for the
quarter ended September 30, 1997, as compared to $1.5 million for the quarter
ended September 30, 1996. The Company's net interest margin increased to 3.70%
for the quarter ended September 30, 1997, as compared to 3.47% for the quarter
ended September 30, 1996. These increases for the quarter ended September 30,
1997 were attributable to the following: a 174.5% increase in the Company's
average loan balance which was $406.0 million for the quarter ended September
30, 1997, as compared to $147.9 million for the quarter ended September 30,
1996, and a decrease in the Company's cost of interest bearing liabilities to
5.67%, as compared to 6.53% for the quarters ended September 30, 1997 and 1996,
respectively. The decrease in the cost of interest bearing liabilities was the
result of trust deposits administered by Sterling Trust being transferred from a
third-party financial institution to Matrix Bank upon completion of the Vintage
acquisition. The above were offset by a 129.9% increase in average interest
bearing liabilities to $361.4 million for the quarter ended September 30, 1997,
as compared to $157.2 million for the quarter ended September 30, 1996, and a
decrease in the Company's yield on interest earning assets to 8.54%, as compared
to 9.56% for the quarters ended September 30, 1997 and 1996, respectively. The
decrease in the Company's yield on interest earning assets was mainly
attributable to the lower yield earned on the loan portfolio which decreased to
8.68% for the quarter ended September 30, 1997 from 10.00% for the quarter ended
September 30, 1996. 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
$39,000 to $237,000 for the quarter ended September 30, 1997, as compared to
$198,000 for the quarter ended September 30, 1996. This increase was primarily
attributable to the increase in the balance of loans receivable which increased
to $426.0 million at September 30, 1997, as compared to $148.9 million at
September 30, 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 $2.0 million, or 109.6%,
to $3.8 million for the quarter ended September 30, 1997, as compared to $1.8
million for the quarter ended September 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 September 30, 1997, as compared to the quarter ended September 30, 1996.
The mortgage loan servicing portfolio increased by $1.4 billion, or 62.4%, to
$3.6 billion at September 30, 1997, as compared to $2.2 billion at September 30,
1996.
Brokerage fees. Brokerage fees decreased $552,000, or 39.6%, to $842,000 for the
quarter ended September 30, 1997, as compared to $1.4 million for the quarter
ended September 30, 1996. This decrease is a direct result of market conditions,
which saw fewer purchases and sales of bulk servicing portfolios. The balance of
residential mortgage servicing portfolios brokered by United Financial, in terms
of aggregate unpaid principal balances on the underlying loans, decreased $5.2
billion, or 68.4% to $2.4 billion for the quarter ended September 30, 1997, as
compared to $7.6 billion for the quarter ended September 30, 1996.
Trust service fees. Trust service fees increased $115,000, or 16.6%, to $806,000
for the quarter ended September 30, 1997, as compared to $691,000 for the
quarter ended September 30, 1996. This increase is associated with the growth in
the number of trust accounts under administration at Sterling Trust which
increased to 28,855 at September 30, 1997, as compared to 25,328 at September
30, 1996.
Gain on sale of loans and mortgage-backed securities. Gain on the sale of loans
and mortgage-backed securities decreased $425,000, or 27.3%, to $1.1 million for
the quarter ended September 30, 1997, as compared to $1.6 million for the
quarter ended September 30, 1996. Gain on the 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, the type of loan portfolios the Company
purchases, and the particular loan portfolios the Company elects to sell.
Gain on sale of mortgage servicing rights. Gain on the sale of mortgage
servicing rights decreased $914,000 to $150,000 for the quarter ended September
30, 1997, as compared to $1.1 million for the quarter ended September 30, 1996.
Gains from the sale of mortgage servicing rights can fluctuate significantly
from quarter to quarter based on the market value of the Company's servicing
12
CORPDAL:93391.1 99999-00001
<PAGE>
portfolio, the particular servicing portfolios the Company elects to sell, and
the availability of similar portfolios in the market.
Loan origination. Loan origination income increased $433,000, or 55.6%, to $1.2
million for the quarter ended September 30, 1997, as compared to $779,000 for
the quarter ended September 30, 1996, even though wholesale residential mortgage
loan production decreased $7.1 million, or 6.5% to $102.1 million for the
quarter ended September 30, 1997, as compared to $109.2 million for the quarter
ended September 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,
and servicing release premiums on new originations sold, net of origination
costs.
Noninterest expense. Included in noninterest expense for the quarter ended
September 30, 1996 were two large, non-recurring items. The first was a $600,000
accrual for the previously disclosed settlement of a class-action lawsuit, and
the second was a one-time $440,000 fee to recapitalize the Savings Association
Insurance Fund (SAIF). After eliminating the effect of these non-recurring items
from the quarter ended September 30, 1996, noninterest expense increased $2.5
million, or 37.9% to $9.1 million for the quarter ended September 30, 1997, as
compared to $6.6 million for the quarter ended September 30, 1996. This increase
was primarily due to expenses related to interim sub-servicing fees paid on
servicing portfolios recently acquired, the expenses related to UCM which was
formed in December of 1996, the opening of a telemarketing call center for the
origination of mortgage loans at Matrix Financial, the increased amortization
due to the Company's increased investment in mortgage servicing rights, and the
overall growth and expansion of the Company. The following table details the
major components of noninterest expense for the periods indicated:
Quarter Ended
September 30,
-------------------------
1997 1996
-------------------------
(Dollars in thousands)
Compensation and employee benefits $ 3,630 $ 3,359
Amortization of mortgage servicing rights 1,545 575
Occupancy and equipment 557 559
Professional fees 271 153
Data processing 213 166
Other general and administrative 2,841 2,797
---------- ---------
Total $ 9,057 $ 7,609
========== =========
Compensation and employee benefits increased $271,000, or 8.1% to $3.6 million
for the quarter ended September 30, 1997, as compared to $3.4 million for the
quarter ended September 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, the formation
of UCM, and the opening of a telemarketing call center at Matrix Financial. The
above expansion was partially offset by lower commissions-based compensation
paid on brokered servicing and loan origination activities. The Company had an
increase of 81 employees, or 28.2%, to 368 full time employees for the quarter
ended September 30, 1997, as compared to 287 full time employees for the quarter
ended September 30, 1996.
Amortization of mortgage servicing rights increased $970,000, or 168.7%, to $1.5
million for the quarter ended September 30, 1997, as compared to $575,000 for
the quarter ended September 30, 1996. The 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.
After removing the effect of the 1996 third-quarter, non-recurring items, the
remainder of noninterest expense, which includes occupancy and equipment
expenses, professional fees, data processing costs and other expenses increased
$1.2 million, or 47.3% to $3.9 million for the quarter ended September 30, 1997,
as compared to $2.6 million for the quarter ended September 30, 1996. This
increase was primarily attributable to the interim sub-servicing cost on
mortgage servicing portfolios recently acquired and expansion of both existing
and new business lines.
Provision for income taxes. Provision for income taxes increased by $833,000 to
$1.5 million for the quarter ended September 30, 1997, as compared to $626,000
for the quarter ended September 30, 1996. The increase was due to the increase
in pre-tax income.
13
CORPDAL:93391.1 99999-00001
<PAGE>
Results of Operations for the Nine Months Ended September 30, 1997 Compared to
the Nine Months Ended September 30, 1996
Net income; Return on average equity. Net income increased $3.4 million to $5.9
million for the nine months ended September 30, 1997, as compared to $2.4
million for the nine months ended September 30, 1996. Return on average equity
decreased to 22.4% for the nine months ended September 30, 1997, as compared to
29.0% for the nine months ended September 30, 1996. The decrease in return on
average equity was primarily due to the increase in the average equity in the
first nine months of 1997 as a result of the sale of additional stock in the
fourth quarter of 1996 in connection with the IPO, which increased equity by
$18.2 million. Additionally, during 1997, the Company established a reserve for
potential losses on sub-prime auto loans (for additional discussion see "--Asset
Quality--Nonperforming Assets"); the effect of this reserve on 1997 return on
average equity was partially offset by a $1.9 million secondary marketing loss
recognized in the first quarter of 1996. See "--Loan Origination".
Net interest income. Net interest income before the provision for loan and
valuation losses increased $5.6 million, or 134.6%, to $9.7 million for the nine
months ended September 30, 1997, as compared to $4.1 million for the nine months
ended September 30, 1996. The Company's net interest margin increased to 3.74%
for the nine months ended September 30, 1997, as compared to 3.22% for the nine
months ended September 30, 1996. These increases for the nine months ended
September 30, 1997 were attributable to the following: a 108.7% increase in the
Company's average loan balance which was $325.5 million for the nine months
ended September 30, 1997 and $156.0 million for the nine months ended September
30, 1996, and a decrease in the Company's cost of interest bearing liabilities
to 5.65% for the nine months ended September 30, 1997, as compared to 6.74% for
the nine months ended September 30, 1996. The decrease in the cost of interest
bearing liabilities was the result of trust deposits administered by Sterling
Trust being transferred from a third-party financial institution to Matrix Bank
upon completion of the Vintage acquisition. The above were offset by a 86.9%
increase in average interest bearing liabilities to $294.4 million for the nine
months ended September 30, 1997, as compared to $157.5 million for the nine
months ended September 30, 1996, and a decrease in the Company's yield on
interest earning assets to 8.55%, as compared to 9.45% for the nine months ended
September 30, 1997 and 1996, respectively. The decrease in the Company's yield
on interest earning assets was attributable to the lower yield earned on the
loan portfolio which decreased to 8.76% for the nine months ended September 30,
1997 from 9.75% for the nine months ended September 30, 1996. 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 $184,000 to
$534,000 for the nine months ended September 30, 1997, as compared to $350,000
for the nine months ended September 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 $5.6 million, or 87.2%,
to $12.0 million for the nine months ended September 30, 1997, as compared to
$6.4 million for the nine months ended September 30, 1996. This increase was
primarily attributable to the increase in the outstanding principal balance
underlying the Company's mortgage servicing rights portfolio for the nine months
ended September 30, 1997, as compared to the nine months ended September 30,
1996. The mortgage loan servicing portfolio increased by $1.4 billion, or 62.4%,
to $3.6 billion at September 30, 1997 as compared to $2.2 billion at September
30, 1996.
Brokerage fees. Brokerage fees decreased $560,000, or 16.8%, to $2.8 million for
the nine months ended September 30, 1997, as compared to $3.3 million for the
nine months ended September 30, 1996. This was a direct result of market
conditions in the third quarter of 1997, which saw fewer purchases and sales of
bulk servicing portfolios. The balance of residential mortgage servicing
portfolio's brokered by United Financial, in terms of aggregate unpaid principal
balances on the underlying loans, decreased $5.4 billion, or 26.7% to $14.8
billion for the nine months ended September 30, 1997, as compared to $20.2
billion for the nine months ended September 30, 1996.
Trust service fees. Trust service fees increased $266,000, or 11.5%, to $2.6
million for the nine months ended September 30, 1997, as compared to $2.3
million for the nine months ended September 30, 1996. This increase is
associated with the growth in the number of trust accounts under management at
Sterling Trust.
Gain on sale of loans and mortgage-backed securities. Gain on the sale of loans
and mortgage-backed securities decreased by $315,000, or 13.1% to $2.1 million
for the nine months ended September 30, 1997, as compared to $2.4 million for
the nine months ended September 30, 1996. Gain on the 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, the type of loan portfolios
the Company purchases, and the particular loan portfolios the Company elects to
sell.
Gain on sale of mortgage servicing rights. Gain on the sale of mortgage
servicing rights increased $348,000 to $2.5 million for the nine months ended
14
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<PAGE>
September 30, 1997, as compared to $2.2 million for the nine months ended
September 30, 1996. In terms of aggregate outstanding principal balances of
mortgage loans underlying such servicing rights, the Company sold $1.13 billion
in purchased mortgage servicing rights for the nine months ended September 30,
1997, as compared to $550.0 million for the nine months ended September 30,
1996. Gains from the sale of mortgage servicing rights can fluctuate
significantly based on the market value of the Company's servicing portfolio,
the particular servicing portfolios the Company elects to sell, and the
availability of similar portfolios in the market. 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 an opportunity to
diversify its servicing portfolio and generate earnings.
Loan origination. Loan origination income increased $1.7 million to $2.7 million
for the nine months ended September 30, 1997, as compared to $973,000 for the
nine months ended September 30, 1996, even though the Company experienced a
decrease in wholesale residential mortgage loan production of $187.4 million, or
38.9%, to $294.8 million for the nine months ended September 30, 1997, as
compared to $482.2 million for the nine months ended September 30, 1996. This
increase 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 completely hedged when interest rates rapidly and significantly
change. The Company has implemented several management and reporting changes to
help ensure that the hedging policies established by Matrix Financial's Board of
Directors are adhered to so as to mitigate secondary losses in volatile interest
rate markets. Loan origination income includes all mortgage loan fees, secondary
marketing activity on new loan originations, and servicing release premiums on
new originations sold, net of origination costs.
Noninterest expense. Noninterest expense increased $8.1 million, or 42.7% to
$27.0 million for the nine months ended September 30, 1997, as compared to $18.9
million for the nine months ended September 30, 1996. This increase was
primarily due to expenses related to interim sub-servicing on mortgage servicing
portfolios acquired in 1997, the expenses related to UCM which was formed in
December 1996, the opening of a telemarketing call center for the origination of
mortgage loans at Matrix Financial, increased amortization due to the Company's
increased investment in mortgage servicing rights, and the overall growth and
expansion of the Company. During the nine months ended September 30, 1997, the
Company established a $1.1 million reserve for potential losses on repurchased
sub-prime auto loans. This item was essentially offset by the following items
which were recorded during the nine months ended September 30, 1996: a $600,000
accrual for the previously disclosed settlement of a class-action lawsuit, and a
one-time fee of $440,000 to recapitalize the Savings Association Insurance Fund
(SAIF). The following table details the major components of noninterest expense
for the periods indicated:
Nine Months Ended
September 30,
-------------------------
1997 1996
-------------------------
(In thousands)
Compensation and employee benefits $ 10,511 $ 9,496
Amortization of mortgage servicing rights 4,720 1,759
Occupancy and equipment 1,533 1,460
Professional fees 687 394
Data processing 579 454
Other general and administrative 8,932 5,332
---------- ---------
Total $ 26,962 $ 18,895
========== =========
Compensation and employee benefits increased $1.0 million, or 10.7% to $10.5
million for the nine months ended September 30, 1997, as compared to $9.5
million for the nine months ended September 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, the formation of UCM, and the opening of Matrix Financial's
telemarketing call center. The Company had an increase of 81 full time
employees, or 28.2%, to 368 full time employees for the nine months ended
September 30, 1997, as compared to 287 full time employee for the nine months
ended September 30, 1996.
Amortization of mortgage servicing rights increased $2.9 million, or 168.3% to
$4.7 million for the nine months ended September 30, 1997, as compared to $1.8
million for the nine months ended September 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.
After removing the effects of the non-recurring items (the $1.1 million reserve
on repurchased sub-prime auto loans in 1997 and the $600,000 accrual for the
15
CORPDAL:93391.1 99999-00001
<PAGE>
settlement of a class-action lawsuit and the $440,000 SAIF recapitalization,
both in 1996 discussed above), the remainder of noninterest expense, which
includes occupancy and equipment expenses, professional fees, data processing
costs and other expenses increased $4.0 million, or 61.1% to $10.6 million for
the nine months ended September 30, 1997 as compared to $6.6 million for the
nine months ended September 30, 1996. The increase was primarily attributable to
the interim sub-servicing cost on mortgage servicing portfolios recently
acquired and expansion of both existing and new business lines.
Provision for Income Taxes. Provision for income taxes increased $2.1 million to
$3.7 million for the nine months ended September 30, 1997 as compared to $1.6
million for the nine months ended September 30, 1996. The increase was due to
the increase in pre-tax income.
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 nine months ended
September 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.
16
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<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 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 $406,014 $ 8,809 8.68% $147,936 $ 3,700 10.00% $325,517 $21,372 8.76% $156,007 $11,413 9.75%
Mortgage-backed securities - - - 11,611 217 7.48 - - - 6,215 351 7.53
Interest earning deposits 11,773 147 4.99 6,532 75 4.59 16,203 618 5.09 5,860 220 5.01
FHLB stock 5,572 84 6.03 2,657 39 5.87 3,855 172 5.95 2,522 111 5.87
-------- ------- ----- -------- ------- ------ -------- ------- ----- -------- ------- -----
Total interest earning
assets 423,359 9,040 8.54 168,736 4,031 9.56 345,575 22,162 8.55 170,604 12,095 9.45
Noninterest earning assets:
Cash 9,096 3,093 10,375 2,803
Allowance for loan and
valuation losses (1,405) (1,196) (1,270) (1,128)
Premises and equipment 8,491 7,255 8,128 6,915
Other assets 59,726 26,120 62,381 24,755
-------- -------- -------- --------
Total noninterest earning
assets 75,908 35,272 79,614 33,345
-------- -------- -------- --------
Total assets $499,267 $204,008 $425,189 $203,949
======== ======== ======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Passbook accounts $ 2,843 $ 28 3.94% $ 2,208 $ 19 3.44% $ 2,851 $ 84 3.93% $ 2,350 $ 59 3.35%
Money market and negotiable
order of withdrawal ("NOW")
accounts 112,256 1,017 3.62 11,490 112 3.90 92,425 2,473 3.57 11,782 345 3.90
Certificates of deposit 85,293 1,273 5.97 62,125 910 5.86 81,134 3,598 5.91 50,232 2,198 5.83
FHLB borrowings 84,346 1,213 5.75 30,360 433 5.70 45,433 1,931 5.67 33,054 1,409 5.68
Borrowed money 76,631 1,595 8.33 51,003 1,093 8.57 72,573 4,391 8.07 60,068 3,955 8.78
-------- ------- ----- -------- ------- ------ -------- ------- ----- -------- ------- -----
Total interest bearing
liabilities 361,369 5,126 5.67 157,186 2,567 6.53 294,416 12,477 5.65 157,486 7,966 6.74
-------- ------- ----- -------- ------- ------ -------- ------- ----- -------- ------- -----
Noninterest bearing liabilities:
Demand deposits (including
custodial escrow balances) 89,885 27,539 79,875 28,387
Other liabilities 11,323 7,872 16,118 6,836
-------- -------- -------- --------
Total noninterest bearing
liabilities 101,208 35,411 95,993 35,223
Shareholders' equity 36,690 11,411 34,780 11,240
-------- -------- -------- --------
Total liabilities and
shareholders' Equity $499,267 $204,008 $425,189 $203,949
======== ======== ======== ========
Net interest income before
provision for loan
and valuation losses $ 3,914 $ 1,464 $ 9,685 $ 4,129
======= ======= ======= =======
Interest rate spread 2.87% 3.03% 2.90% 2.71%
===== ===== ===== =====
Net interest margin 3.70% 3.47% 3.74% 3.22%
===== ===== ===== =====
Ratio of average interest
earning assets to average
interest bearing liabilities 117.15% 107.35% 117.38% 108.33%
======= ======= ======= =======
</TABLE>
17
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<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 Nine Months Ended
September 30, September 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 $ 5,599 $(490) $ 5,109 $11,129 $(1,170) $9,959
Mortgage backed securities (217) - (217) (351) - (351)
Interest earning deposits 65 7 72 394 4 398
FHLB stock 44 1 45 59 2 61
------------ ------------ ------------ ------------- ------------ ------------
Total interest earning assets 5,491 (482) 5,009 11,231 (1,164) 10,067
Interest bearing liabilities:
Passbook accounts 6 3 9 15 10 25
Money market and NOW accounts 913 (8) 905 2,158 (30) 2,128
Certificates of deposit 346 17 363 1,370 30 1,400
FHLB borrowings 776 4 780 526 (4) 522
Borrowed money 533 (31) 502 757 (321) 436
------------ ------------ ------------ ------------- ------------ -------------
Total interest bearing
liabilities 2,574 (15) 2,559 4,826 (315) 4,511
------------ ------------- ------------ ------------ ------------ ------------
Change in net interest income
before provision for
loan and valuation losses $ 2,917 $(467) $ 2,450 $ 6,405 $ (849) $ 5,556
=========== ============= ============ ============ ============ =============
</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 consists of line of credit facilities provided to Matrix Financial by
unaffiliated financial institutions. At September 30, 1997, $14.0 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 September
30, 1997, Matrix Financial's warehouse lines of credit aggregated $80.0 million,
of which $29.8 million was available to be utilized.
18
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<PAGE>
In the ordinary course of business, the Company makes commitments to originate
residential mortgage loans and holds originated loans until delivery to an
investor. Inherent in this business are risks associated with changes in
interest rates and the resulting change in the market value of the pipeline
loans. The Company mitigates this risk through the use of mandatory and
nonmandatory forward commitments to sell loans. As of September 30, 1997, the
Company had $81.2 million in pipeline and funded loans offset with mandatory
forward commitments of $54.7 million and nonmandatory forward commitments of
$15.4 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 September 30, 1997, the balance
of the revolving line of credit was zero. 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.
On September 29, 1997, the Company completed a registered debt offering of $20.0
million in Senior Notes due 2004, raising net proceeds of approximately $19.1
million. Interest on the Senior Notes of 11.5% is payable semi-annually on March
31 and September 30 of each year, commencing on March 31, 1998, with a balloon
payment for the entire principal balance due in September 2004. The proceeds
from the offering were used initially to reduce the Company's revolving line of
credit balances. At the time investment opportunities become available, the
revolving credit lines will once again be drawn upon to fund such opportunities.
The Senior Notes require the Company to (i) maintain consolidated tangible
equity capital of not less than $35 million, and (ii) meet the requirements
necessary such that Matrix Bank will not be classified as other than "well
capitalized" as defined by 12 C.F.R. Section 565.4. Additionally, the Senior
Notes contain other covenants regarding certain restricted payments, incurrence
of indebtedness and issuance of preferred stock, liens, merger, consolidation or
sale of assets, and transactions with affiliates. Under the conditions of the
Senior Notes, the Company may not incur any additional indebtedness if the
consolidated leverage ratio exceeds 2:1.
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 September 30,
1997, Matrix Bank had overnight borrowings from the FHLB of $82.0 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 September 30, 1997 was 5.9%. This
exceeded the leverage capital requirement of 4.0% of adjusted assets by $7.3
million. Matrix Bank's risk-based capital ratio was 10.9% at September 30, 1997.
Matrix Bank currently exceeds the risk-based capital requirement of 8.0% of risk
weighted assets by $6.5 million.
Asset Quality
Nonperforming Assets
The following table sets forth information as to the Company's nonperforming
assets ("NPAs"). 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.
19
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<PAGE>
<TABLE>
<CAPTION>
September 30, December 31, December 31,
1997 1996 1995
----------------- ----------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual mortgage loans $ 3,315 $ 3,031 $ 5,523
Nonaccrual consumer loans 394 872 15
----------------- ----------------- ----------------
Total nonperforming loans 3,709 3,903 5,538
Foreclosed real estate 1,125 788 835
Repossessed automobiles 225 506 -
----------------- ----------------- ----------------
Total nonperforming assets $ 5,059 $ 5,197 $ 6,373
================= ================= ================
Total nonperforming assets
to total assets 0.96% 1.89% 3.42%
Total nonperforming loans to total loans 0.87% 1.83% 3.75%
Ratio of allowance for loan losses to
total nonperforming loans 40.42% 26.62% 17.03%
</TABLE>
As of September 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 September 30, 1997, $3.2 million, or 86.6%, 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 $261,000 included in other
liabilities for anticipated losses related to the repurchased sub-prime auto
loans at September 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.
20
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<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
United Financial, Inc. ("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 was named 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 alleged 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. In October 1997, Matrix Bank settled this lawsuit
in consideration of the payment by Matrix Bank of approximately $210,000,
payable over 12 months (but fully accrued during the fourth quarter of 1997).
Matrix Bank is under no obligation to approve any more network marketers
submitted to it under the plaintiff's program.
The Company is involved from time to time in routine litigation incidental to
its business. However, other than described above, the Company believes that it
is not a party to any material pending litigation that, if decided adversely to
the Company, would have a significant adverse effect on the Company's
consolidated financial condition, results of operations, or cash flows.
Item 2. Changes in Securities
During the three months ended September 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 September 30, 1997, the Company granted options exercisable
for a total of 2,500 shares of Common Stock to a non-executive employee of the
Company. All such options are exercisable at $13.60 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
Item 5. Other Information
None
21
CORPDAL:93391.1 99999-00001
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
* 10.1 Letter Agreement, dated September 15, 1997, with T. Allen McConnell
* 11.1 Computation of Earnings Per Share
* 27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
- ----------------------
* Filed herewith.
22
CORPDAL:93391.1 99999-00001
<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: November 12, 1997 /s/Guy A. Gibson
----------------------------- -----------------------------
Guy A. Gibson
President and
Chief Executive Officer
(Principal Executive Officer)
Dated: November 12, 1997 /s/David W. Kloos
------------------------------ -----------------------------
David W. Kloos
Senior Vice President and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
23
CORPDAL:93391.1 99999-00001
September 15, 1997
Mr. Allen McConnell
4218 Gilbert Avenue
Unit G
Dallas, Texas 75219
RE: Offer of Employment
Dear Allen:
Pursuant to our recent discussions, Matrix Capital Corporation ("Matrix",
"Company") is pleased to offer for your review the following employment
package:
Position: Senior Vice President and General Counsel for Matrix
and its Subsidiaries. Additional responsibilities will
include secretary to the board for Matrix, United Financial,
United Special Services, and United Capital Markets.
Corporate secretary for Matrix, United Financial, United
Special Services, and United Capital Markets.
Compensation: $155,000. You will receive any appropriate salary adjustment
at December 31, 1998 and annually each year thereafter.
Employment Date: A date mutually agreeable. However, October 1, 1997 is
the anticipated start date. It is understood for a period of
time, you may have to commute from Dallas. All commuting
expenses will be reimbursed by Matrix.
Responsibilities: Including performing all functions associated with the
position of Corporate Counsel for Matrix and each of its
Subsidiaries.
Benefits: Corporate benefits will be as offered to all employees
of Matrix. Corporate benefits currently include Major
Medical, Dental, Life, Short Term Disability, 401(k), Stock
CORPDAL:93390.1 99999-00001
<PAGE>
Purchase Plan and Flexible Benefits Plan. Effective date of
benefits will be the first day of employment with the
exception of the 401(k) Plan and the Stock Purchase Plan.
Enrollment will be allowed per the provisions of the plans.
Sick Time and Paid Holiday benefits will be according to the
schedule contained in the Employee Handbook. The position
will include 3 weeks of vacation time. Vacation will be
available immediately.
Stock Options: An initial grant of options to purchase 20,000 shares with
an exercise price equal to the fair market value of the
common stock as of the date of the grant. The date of the
grant will be the first day of employment. Additional
options granted will be commensurate with other senior
executives receive at the sole discretion of the
compensation committee.
Bonus (Annual): To be determined, however, the bonus will be based on
performance. The amount of the bonus will be in line with
other senior executives of the Company and its subsidiaries.
Signing Bonus: $37,500
Employment
Agreement: Matrix will enter into a two year agreement that will cause
the Company to make a lump sum payment in the amount of two
times your salary in the case of a change control. The
agreement will also stipulate that if you voluntarily and
without "good cause" terminate your employment prior to one
(1) year that you will reimburse the Company the pro-rata
portion of your signing bonus, and the loss incurred on the
sale of your house (you will earn 1/12 each month).
Relocation
Package: Matrix agrees to reimburse all actual moving expenses
incurred relocating from Dallas to Denver Colorado,
including closing costs, etc. on sale and purchase of homes.
All expenses must be approved by Matrix.
Matrix also agrees to reimburse the loss, if any, on the
sale of your house in Dallas. Matrix would like to have the
ability to list your house through United Special Services.
Staffing of the
Legal Department: It is anticipated that the department will have additional
staffing needs. The staffing needs will be addressed based
on your recommendations.
CORPDAL:93390.1 99999-00001
<PAGE>
Please indicate your acceptance of this offer by signing below. We look forward
to you joining the Matrix Team.
Sincerely,
/s/D. Mark Spencer
- ------------------
D. Mark Spencer
Vice Chairman
Acknowledged and Accepted:
/s/T. Allen McConnell
- ---------------------
T. Allen McConnell
9/15/97
- ---------------------
Date
CORPDAL:93390.1 99999-00001
<TABLE>
<CAPTION>
Exhibit 11.1
Matrix Capital Corporation
Computation of Earnings Per Share
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ----------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income $ 2,230 $ 943 $ 5,854 $ 2,445
Less dividends on preferred stock by
pooled company prior to merger - 75 - 112
Earnings available to
common shareholders $ 2,230 $ 868 $ 5,854 $ 2,333
-------------- -------------- -------------- --------------
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 138,018 38,690 133,311 38,690
-------------- -------------- -------------- --------------
Weighted average outstanding
common and common equivalent shares 6,819,049 4,707,221 6,814,342 4,707,221
------------- -------------- --------------- --------------
Earnings per common
and common equivalent share $ .33 $ .18 $ .86 $ .50
-------------- -------------- -------------- --------------
</TABLE>
CORPDAL:93391.1 99999-00001
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> Financial Data Sheet
</LEGEND>
<CIK> 0000944725
<NAME> Matrix Capital Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<EXCHANGE-RATE> 1 1
<CASH> 8,830 8,830
<INT-BEARING-DEPOSITS> 9,208 9,208
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 0
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 427,506 427,506
<ALLOWANCE> 1,499 1,499
<TOTAL-ASSETS> 525,511 525,511
<DEPOSITS> 281,037 281,037
<SHORT-TERM> 137,038 137,038
<LIABILITIES-OTHER> 27,332 27,332
<LONG-TERM> 41,980 41,980
0 0
0 0
<COMMON> 1 1
<OTHER-SE> 38,123 38,123
<TOTAL-LIABILITIES-AND-EQUITY> 525,511 525,511
<INTEREST-LOAN> 8,809 21,372
<INTEREST-INVEST> 231 790
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 9,040 22,162
<INTEREST-DEPOSIT> 2,318 6,155
<INTEREST-EXPENSE> 5,126 12,477
<INTEREST-INCOME-NET> 3,914 9,685
<LOAN-LOSSES> 237 534
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 9,057 26,962
<INCOME-PRETAX> 3,689 9,589
<INCOME-PRE-EXTRAORDINARY> 2,230 5,854
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,230 5,854
<EPS-PRIMARY> .33 .86
<EPS-DILUTED> .33 .86
<YIELD-ACTUAL> 3.70 3.74
<LOANS-NON> 3,709 3,709
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 1,339 1,039
<CHARGE-OFFS> 82 92
<RECOVERIES> 5 18
<ALLOWANCE-CLOSE> 1,499 1,499
<ALLOWANCE-DOMESTIC> 0 0
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 1,499 1,499
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