MTXC Matrix Bancorp

Matrix Bancorp, Inc. (NASDAQ:MTXC): -- Net income for the second quarter 2006 was $310 thousand, or $0.04 per diluted share -- Net income for the year to date was $5.8 million, or $0.71 per diluted share -- Net interest margin expanded 16 basis points on a year over year basis -- Commercial loans grew 14.9% in the second quarter, 33.9% year to date Matrix Bancorp, Inc. (NASDAQ:MTXC) (the "Company"), a Denver-based holding company whose principal subsidiary, Matrix Capital Bank, is a community bank focused on expansion across Colorado's Front Range market, announced today results for the quarter and six month period ended June 30, 2006. For the second quarter 2006, the Company reported net income of $310 thousand, or $0.04 per basic and diluted share, compared to $1.7 million, or $0.26 per basic and diluted share for the second quarter 2005 and $5.5 million or $0.64 per basic and diluted share for the first quarter 2006. The results for the second quarter 2006 were negatively impacted by the previously announced sale of ABS School Services, LLC, which closed on May 5, 2006. Pursuant to terms of the sale, the Company retained certain recourse obligations on the ABS School Services assets sold, and on which an after-tax charge of approximately $590 thousand, or $0.08 per diluted share, is included in net income to establish a liability for those retained obligations. On a year to year basis, the Company's quarterly results reflect the loss of revenue from discontinued operations and other reductions in non-core subsidiary contribution, even while the Company bore the costs, primarily in salaries and benefits, of the ongoing transition at Matrix Capital Bank to a community banking strategy. Net income for the six months ended June 30, 2006 totaled $5.8 million, or $0.72 per basic share and $0.71 per diluted share, compared to $4.6 million, or $0.70 per basic share and $0.69 per diluted share for the six months ended June 30, 2005. Net income for the six months ended June 30, 2006 was positively impacted by the sale of certain assets and operations of non-core subsidiaries during the first quarter 2006 on which the after-tax gain on sale of certain of the subsidiaries of approximately $2.4 million is included in income from discontinued operations. The discontinued operations for the quarter and six months ended June 30, 2006 present operations from those non-core subsidiaries. The Company's assets totaled $2.16 billion on June 30, 2006, compared to $2.08 billion at December 31, 2005. During the first and second quarters 2006, the Company's community bank loan portfolio (consisting of SBA loans, commercial, construction, land and commercial real estate) increased $60.8 million, or 33.9%, to $240.2 million at June 30, 2006, compared to $179.4 million at December 31, 2005. This increase represents the net new loan production from Matrix Bank's community banking professionals. In addition, the Bank continued to redeploy repayments from its single family portfolio into investment securities, which increased $260 million from December 31, 2005 to $800.2 million at June 30, 2006. During the first half of 2006 residential loans in the Company's held for sale and held for investment portfolios declined $180.7 million, principally from repayments. Deposits, including custodial escrow balances, increased $199.3 million from December 31, 2005, to $1.37 billion at June 30, 2006. Of this increase, $27.4 million in deposits was a direct result of our marketing efforts to attract new community bank deposits, $144.2 million represents new institutional deposits and $13.4 million was from utilization of brokered deposits. Due to the growth in deposits used to fund the growth of the balance sheet, the Company's borrowings from FHLBank decreased by $28.0 million to $587.0 million at June 30, 2006. During the first quarter 2006, the Company completed the repurchase of shares under a previously announced tender offer, which closed on January 23, 2006. The Company repurchased 4,184,277 common shares for approximately $79.5 million. This repurchase was charged against additional paid-in capital, which resulted in the overall decrease in shareholders' equity to $107.2 million at June 30, 2006 compared to $180.7 million at December 31, 2005. Scot T. Wetzel, President and CEO, commented, "I am very pleased with the progress we are making towards building a community-banking branch network across key Colorado geographic markets. Our five regional presidents and their teams are working diligently to re-brand the former institutional bank into a leading community bank in our targeted areas. During the quarter, we closed on the purchase of a building for our Boulder branch, located at the intersection of 28th and Arapahoe in Boulder, which has over 80 thousand vehicles pass in daily traffic. We expect construction of our Cherry Creek branch to be completed by the end of the year, and have opened a loan production office in Ft. Collins. We are also pleased to have announced on August 10, 2006, additions to both the Company's and Matrix Bank's Board of Directors. The Company appointed Jeffrey R. Leeds and William D. Snider to serve terms to be ratified at the annual shareholders' meeting in 2007. Mr. Snider was also appointed Vice-Chairman of the Board, and serves as the Company's Chief Financial Officer. Matrix Bank appointed Dennis R. Santistevan and Gary G. Petak to the Matrix Bank Board of Directors. Mr. Santistevan serves as Chief Financial Officer of Matrix Bank and Mr. Petak serves as Chief Credit Officer of Matrix Bank. These appointments strengthen our Boards and will be instrumental in further implementing our community banking platform." Michael J. McCloskey, Chief Operating Officer, added, "During the quarter, we closed the sale of ABS School Services, which substantially completed our divestiture of non-core subsidiaries. We continue to focus on the shareholder value strategies that were identified and communicated in the fall 2005. In the early portion of the third quarter 2006, we monetized additional New Market Tax Credits, realizing fees of $1.65 million, or approximately $1.0 million after tax, and as we had discussed as part of our overall strategy, we will continue to monitor the performance of our former subsidiary, Matrix Asset Management Corporation, and continue to consider the timing of the exercise our put option as we progress into the last part of 2006. The timing and monitoring of the former subsidiary's performance is important because if its business continues to improve, we could realize significant additional monetary value for shareholders beyond the predetermined $2.5 million, pre-tax minimum value when we finally execute our put option to sell our remaining interest. We are also continuing to evaluate options regarding the sale of our owned office tower in downtown Denver. We believe that our progress towards accomplishing completion of our identified short-term strategic directives gives us significant momentum entering the second half of 2006." Financial Highlights Net Interest Income. Net interest income before provision for credit losses totaled $13.5 million for the quarter ended June 30, 2006, compared to $10.9 million for the quarter ended June 30, 2005 and $13.5 million for the quarter ended March 31, 2006. Our net interest margin was 2.64% for the second quarter 2006, 2.45% for the second quarter 2005 and was 2.69% for the first quarter 2006. This modest five basis point decline in net interest margin between the first and second quarter 2006 was due to three primary factors: (1) the continuing origination of the community banking loans which have higher yields and which positively impacted our margins offset by; (2) the increases in short term interest rates upon which the majority of our liabilities are priced and thus increased interest expense; and (3) the impact of the single-family residential held for sale portfolio on which our yield did not increase commensurate with the increase in our cost of funds due to higher than anticipated repayments in the portfolio. Our single-family loans yielded 4.71% in the second quarter 2006, an 18 basis point increase from the first quarter, while our cost of interest-bearing liabilities increased 33 basis points. At Matrix Bank, our net interest margin was 2.87% for the second quarter 2006, 2.76% for the second quarter 2005 and 2.94% for the first quarter 2006. The increase between 2006 and 2005 reflects the impact of the additional community banking commercial loans that have been originated between the periods, which have more than offset the increase in our cost of interest bearing liabilities. The decline between the first quarter and second quarter 2006 is consistent with the factors discussed above. During the second quarter 2006, interest income on interest yielding loans at Matrix Bank was positively impacted by 13 basis points due to the community bank loans that have been originated to date. Also impacting our net interest margin is our approach to the acquisition of investment securities. During the second quarter 2006, we acquired investment securities that we believe have lower interest rate risk and have lower comparative coupons to securities purchased previously. We are also classifying a portion of these securities as available for sale in order to provide liquidity for our community bank loan funding needs. Net interest income totaled $26.9 million for the six months ended June 30, 2006, compared to $21.8 million for the six months ended June 30, 2005. The increase is attributable to the continued trend of an overall increase in the Company's average balance of interest-earning assets to $2.04 billion and $2.02 billion for the quarter and six months ended June 30, 2006, respectively, compared to $1.78 billion and $1.74 billion for the quarter and six months ended June 30, 2005, respectively. The yield on those interest-earning assets also increased to 5.57% and 5.45% for the second quarter and first six months of 2006, respectively, compared to 4.75% and 4.70% for the corresponding periods of 2005, respectively. There was also a continued increase in the average balance of the Company's interest-bearing liabilities to $1.82 billion and $1.80 billion for the quarter and six months ended June 30, 2006, respectively, compared to $1.58 billion and $1.54 billion for the quarter and six months ended June 30, 2005, respectively. The cost of the interest-bearing liabilities also increased to 3.29% and 3.12% for the second quarter and first six months of 2006, respectively, compared to 2.58% and 2.49% for the comparable periods of 2005, respectively. The increase in yield on the interest-earning assets and in the rate on interest-bearing liabilities was in response to the increase in the overall interest rate environment over the periods and in the change in mix of assets and liabilities that comprise the balances. Provision for Credit Losses. The provision for credit losses was $1.1 million for the quarter ended June 30, 2006 and $2.0 million for the six months ended June 30, 2006, compared to $300 thousand for the quarter ended June 30, 2005 and $1.1 million for the six months ended June 30, 2005. The increase in the provision in the first half of 2006 is attributable to the Company's reevaluation of loan loss reserve levels associated with our commercial loan portfolio, increases in balances in the commercial loan portfolio due to new loan production and additional provisions related to specific loans that have demonstrated weakening conditions. During the first quarter 2006, Matrix Bank's credit risk management team revised the estimated loss factors that are applied to certain of our commercial loans to reflect credit and risk management's experience with inherent losses in these types of loans, and the impact of that revision is reflected in the year to date 2006 provision. Noninterest Income. Noninterest income was $5.4 million for the quarter ended June 30, 2006, compared to $7.0 million for the quarter ended June 30, 2005 and $9.3 million for the first quarter 2006. The decrease in the second quarter 2006 from the second quarter 2005 was due to decreases in the size of our mortgage servicing portfolio compared to prior year balances and lower brokerage revenues due to the sale of non-core subsidiaries discussed above. The decrease compared to the first quarter 2006 was due to legal settlements included in the first quarter, one at Matrix Financial and another at Matrix Bank related to loan losses previously recorded. For the first six months of 2006 noninterest income was $14.7 million, compared to $15.6 million for the first six months of 2005. The decline was the result of lower loan administration income from our depleting mortgage servicing portfolio, lower levels of brokerage revenues, lower gains on sale, which are dependent on market conditions, and lower trust revenue due to the sale of the trust operations of Matrix Bank in April 2005. Noninterest Expense. Noninterest expense was $17.6 million for the quarter ended June 30, 2006, compared to $15.2 million for the quarter ended June 30, 2005, and $16.2 million for the quarter ended March 31, 2006. The increases were a result of the combination of the following. The Company had an increase in subaccounting fees at Matrix Bank of $1.9 million between 2006 and 2005 and $500 thousand between the second and first quarter 2006, due to increase in the levels of institutional deposits held on which subaccounting services are incurred and the level of subaccounting fees, which generally move with changes in the Federal Open Market Committee target rate for overnight deposits. The Company experienced increases in compensation and benefits expense of $680 thousand between 2006 and 2005 as a result of the hiring of employees at Matrix Bank, primarily during the first quarter 2006, to implement the community banking strategy. Compensation declined between the first and second quarter 2006 due to lower commissions at First Matrix, lower self-insured medical expenses and lower payroll taxes. Included in compensation expense was $130 thousand and $230 thousand for the quarter and year to date periods of 2006, respectively, for stock options granted during the periods. Also, the Company recorded a $950 thousand recourse reserve during the second quarter 2006 related to the sale of ABS School Services, LLC, included in other expense. Capital. Matrix Bank remains a well capitalized institution. Matrix Bank's tier 1 risk-based, total risk-based and leverage capital ratios are approximately 6.36%, 15.01% and 14.37%, respectively, as of June 30, 2006, all of which are well in excess of regulatory requirements. These ratios reflect the low risk levels associated with the securities and single-family loan portfolio, and the prudent leverage of Matrix Bank's balance sheet. Conference Call The Company's management will host a conference call to review the results of operations for the second quarter and six month period ended June 30, 2006 and other topics that may be raised during the discussion on Friday, August 11, 2006 at 9:00 a.m. Mountain Time. To access the call, participants should dial 800-240-7305 at least ten minutes prior to the start of the call. International callers should dial 303-262-2211. To hear a live web simulcast or to listen to the archived web cast following the completion of the call, please visit the Company's web site at www.matrixbancorp.com, click on the investor relations tab and then select conference calls to access the link to the call. Denver-based Matrix Bancorp, Inc. is focused on developing its community-based banking network through its subsidiary, Matrix Capital Bank, by strategically positioning branches across Colorado's Front Range market. The area spans the Eastern slope of the Rocky Mountains -- from Pueblo to Fort Collins, and includes the metropolitan Denver marketplace. Matrix Bank plans to grow its network to an estimated five to seven community bank branches over the next three to five years. The Company's shareholders have approved "United Western" as our new brand name and the Company anticipates a formal change in legal and trade names to be completed during the third quarter 2006. For more information, please visit our web site at www.matrixbancorp.com. Forward-Looking Statements Certain statements contained in this earnings release that are not historical facts, including, but not limited to, statements that can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "predict," "believe," "plan," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements in this earnings release could differ materially are: the timing of regulatory approvals or consents for new branches or other contemplated actions; the availability of suitable and desirable locations for additional branches; and the continuing strength of our existing business, which may be affected by various factors, including but not limited to interest rate fluctuations, level of delinquencies, defaults and prepayments, general economic conditions, competition; the delay in or failure to receive any required shareholder approvals of the contemplated actions; and the risks and uncertainties discussed elsewhere in the annual report for the year ended December 31, 2005 filed with the Securities and Exchange Commission on March 15, 2006; and the uncertainties set forth from time to time in the Company's periodic reports, filings and other public statements. -0- *T MATRIX BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share information) June 30, Dec. 31, 2006 2005 ----------- ----------- (Unaudited) ASSETS Cash and cash equivalents $10,498 $15,877 Interest-earning deposits and federal funds sold 18,794 18,355 Investment securities - available for sale 35,697 14,462 Investment securities - held to maturity 669,777 421,010 Investment securities - trading 94,691 104,722 Loans held for sale, net 699,115 927,442 Loans held for investment, net 470,540 425,943 FHLBank stock, at cost 41,529 34,002 Mortgage servicing rights, net 18,107 20,708 Accrued interest receivable 10,889 9,752 Other receivables 21,811 19,387 Premises and equipment, net 18,635 17,154 Bank owned life insurance 22,892 22,454 Other assets, net 15,995 19,898 Income taxes receivable and deferred income tax asset 3,334 3,696 Foreclosed real estate, net 3,816 4,526 ----------- ----------- Total assets $2,156,120 $2,079,388 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits $1,309,053 $1,124,044 Custodial escrow balances 63,651 49,385 FHLBank borrowings 586,980 615,028 Borrowed money 10,000 29,581 Junior subordinated debentures owed to unconsolidated subsidiary trusts 61,372 61,372 Deferred income tax liability 2,451 - Other liabilities 15,423 19,250 ----------- ----------- Total liabilities 2,048,930 1,898,660 ----------- ----------- Shareholders' equity: Common stock, $0.0001 par value 1 1 Additional paid-in capital 29,121 108,395 Retained earnings 78,138 72,314 Accumulated other comprehensive (loss) income (70) 18 ----------- ----------- Total shareholders' equity 107,190 180,728 ----------- ----------- Total liabilities and shareholders' equity $2,156,120 $2,079,388 =========== =========== MATRIX BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except share information) (Unaudited) Quarter Ended Six Months Ended June June March June June 30, 30, 31, 30, 30, 2006 2005 2006 2006 2005 ------- ------- ------- ------- ------- Interest and dividend income: Single-family loans $8,707 $11,021 $9,586 $18,293 $21,383 Other loans 9,387 5,548 7,978 17,365 10,740 Investment securities 9,501 4,092 8,329 17,830 8,097 Interest-earning deposits 825 405 759 1,584 756 ------- ------- ------- ------- ------- Total interest and dividend income 28,420 21,066 26,652 55,072 40,976 Interest expense: Deposits 5,867 3,940 4,201 10,068 7,208 FHLBank advances 7,468 4,638 7,428 14,897 8,780 Borrowed money and junior subordinated debentures 1,636 1,620 1,554 3,190 3,172 ------- ------- ------- ------- ------- Total interest expense 14,971 10,198 13,183 28,155 19,160 Net interest income before provision for credit losses 13,449 10,868 13,469 26,917 21,816 Provision for credit losses 1,071 302 957 2,028 1,060 ------- ------- ------- ------- ------- Net interest income after provision for credit losses 12,378 10,566 12,512 24,889 20,756 Noninterest income: Loan administration 1,967 2,499 2,273 4,239 5,534 Brokerage 9 305 553 563 1,000 Trust services 1,654 1,785 1,704 3,358 4,300 Real estate disposition services - 423 168 168 844 Gain on sale of loans and securities 140 537 251 391 1,268 Gain on sale of assets - 302 100 100 302 Litigation settlements 300 - 2,250 2,550 - Other 1,303 1,127 1,978 3,282 2,401 ------- ------- ------- ------- ------- Total noninterest income 5,373 6,978 9,277 14,651 15,649 Noninterest expense: Compensation and employee benefits 5,210 4,527 5,679 10,889 9,655 Amortization of mortgage servicing rights 1,549 2,352 1,517 3,066 4,126 Impairment on (recovery of impairment) mortgage servicing rights - 230 (276) (276) 55 Occupancy and equipment 1,161 999 960 2,121 1,982 Postage and communication 263 304 287 550 664 Professional fees 592 553 525 1,135 1,175 Mortgage servicing rights subservicing fees 639 771 681 1,320 1,596 Data processing 217 208 222 439 512 Subaccounting fees 5,130 3,199 4,638 9,768 5,851 Other general and administrative 2,888 2,104 1,962 4,833 4,635 ------- ------- ------- ------- ------- Total noninterest expense 17,649 15,247 16,195 33,845 30,251 Income from continuing operations before income taxes 102 2,297 5,594 5,695 6,154 Income tax (benefit) provision (102) 703 1,715 1,614 2,045 ------- ------- ------- ------- ------- Income from continuing operations 204 1,594 3,879 4,081 4,109 Discontinued operations: Income from discontinued operations, net of income tax provision (benefit) 103 116 1,638 1,743 521 ------- ------- ------- ------- ------- Net income $307 $1,710 $5,517 $5,824 $4,630 ======== ======== ======== ======= ======== Income from continuing operations per share - basic $0.03 $0.24 $0.45 $0.51 $0.62 Income from continuing operations per share - assuming dilution 0.03 0.24 0.45 0.50 0.61 ------- -------- -------- ------- -------- Income from discontinued operations per share - basic and assuming dilution 0.01 0.02 0.19 0.21 0.08 ------- -------- -------- ------- -------- Net income per share - basic $0.04 $0.26 $0.64 $0.72 $0.70 ======== ======== ======== ======== ======== Net income per share - assuming dilution $0.04 $0.26 $0.64 $0.71 $0.69 ======== ======== ======== ======== ======== MATRIX BANCORP, INC. AND SUBSIDIARIES OPERATING RATIOS AND OTHER SELECTED DATA (Dollars in thousands, except share information) (Unaudited) Quarter Ended June 30, June 30, March 31, 2006 2005 2006 ----------- ----------- ----------- Weighted average shares - basic 7,556,573 6,620,850 8,579,396 Weighted average shares - assuming dilution 7,639,560 6,698,498 8,632,135 Number of shares outstanding at end of period 7,556,573 6,620,850 7,556,573 Average Balances ---------------- Single-family loans receivable $739,475 $1,090,806 $846,313 Other loans receivable 301,310 257,205 265,446 Originated SBA loans and securities 304,046 169,695 319,649 Other mortgage backed securities 633,063 220,008 510,309 Interest-earning assets 2,039,458 1,775,521 2,001,185 Total assets 2,162,275 1,952,914 2,150,211 Interest-bearing deposits 20,606 4,248 21,472 FHLBank and other borrowings 701,227 623,172 770,276 Interest-bearing liabilities 1,822,888 1,578,674 1,782,324 Shareholders' equity 106,768 95,638 116,623 Operating Ratios & Other Selected Data (1) ------------------------------------------ Return on average equity 0.76% 6.67% 13.30% Net interest margin (2) 2.64 2.45 2.69 Net interest margin - Matrix Bank (2) 2.87 2.76 2.94 Operating efficiency ratios (3) 85.54 70.97 65.74 Balance of servicing portfolio $1,484,035 $2,005,054 $1,600,754 Average prepayment rate on owned servicing portfolio 20.93% 24.10% 18.90% Book value per share (end of period) $14.19 $14.68 $14.16 Loan Performance Ratios (1) --------------------------- Annualized net charge offs/average loans 0.30% 0.07% 0.03% Allowance for loan and loan valuation losses/total loans 0.78% 0.80% 0.83% Six Months Ended June 30, June 30, 2006 2005 ----------- ----------- Weighted average shares - basic 8,065,159 6,620,850 Weighted average shares - assuming dilution 8,132,599 6,698,199 Number of shares outstanding at end of period 7,556,573 6,620,850 Average Balances ---------------- Single-family loans receivable $785,696 $1,048,858 Other loans receivable 397,131 247,659 Originated SBA loans and securities 311,804 199,077 Other mortgage backed securities 465,620 208,795 Interest-earning assets 2,020,773 1,741,807 Total assets 2,156,623 1,926,155 Interest-bearing deposits 21,037 3,895 FHLBank and other borrowings 735,560 621,317 Interest-bearing liabilities 1,802,717 1,542,013 Shareholders' equity 111,696 94,501 Operating Ratios & Other Selected Data (1) ------------------------------------------ Return on average equity 7.31% 8.70% Net interest margin (2) 2.66 2.50 Net interest margin - Matrix Bank (2) 2.90 2.85 Operating efficiency ratios (3) 74.71 69.58 Balance of servicing portfolio $1,484,035 $2,005,054 Average prepayment rate on owned servicing portfolio 19.95% 21.97% Book value per share (end of period) $14.19 $14.68 Loan Performance Ratios (1) --------------------------- Annualized net charge offs/average loans 0.16% 0.12% Allowance for loan and loan valuation losses/total loans 0.78% 0.80% (1) Calculations are based on average daily balances where available and monthly averages otherwise, as applicable. (2) Net interest margin has been calculated by dividing net interest income before credit losses by average interest earning assets. (3) The operating efficiency ratios have been calculated by dividing noninterest expense, excluding amortization of mortgage servicing rights, by operating income. Operating income is equal to net interest income before provision for credit losses plus noninterest income. *T