SECURITIES AND EXCHANGE COMMISSION
Mark One
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the year ended December 31, 20022003
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No.: 0-22353
FLAGSTAR BANCORP, INC.
Michigan | 38-3150651 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
5151 Corporate Drive, Troy, Michigan | 48098-2639 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (248) 312-2000
Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $0.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) 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 (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)
The registrant’s voting stock is traded on the New York Stock Exchange. The estimated aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the last sale price ($24.6525.85 per share) at which the stock was sold on March 17, 20031, 2004 was approximately $359.6$784.9 million. For purposes of this calculation, the term “affiliate” refers to all executive officers and directors of the registrant and all members of the original stockholder group that collectively own 50.8%approximately 50.0% of the registrant’s outstanding Common Stock.
As of March 17, 2003, 29,658,8761, 2004, 60,730,466 shares of the registrant’s Common Stock, $0.01 par value, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following lists the documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated:
2. Portions of the Proxy Statement for the 20032004 Annual Meeting of Stockholders.
TABLE OF CONTENTS
PART I | |||||
Item 1. | Business | ||||
Item 2. | Properties | ||||
Item 3. | Legal Proceedings | ||||
Item 4. | Submission of Matters to a Vote of Security Holders | ||||
PART II | |||||
Item 5. | Market for the Company’s Common Stock and Related Stockholder Matters | ||||
Item 6. | Selected Financial Data | ||||
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||
Item 7a. | Quantitative and Qualitative Disclosures about Market Risk | ||||
Item 8. | Financial Statements | ||||
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | ||||
Item 9a. | Controls and Procedures | 108 | |||
PART III | |||||
Item 10. | Directors and Executive Officers of the Registrant | ||||
Item 11. | Executive Compensation | ||||
Item 12. | Security Ownership of Certain Beneficial Owners and Management | ||||
Item 13. | Certain Relationships and Related Transactions | ||||
Item 14. | |||||
PART IV | |||||
Item 15. | Exhibits, Financial | ||||
Signatures |
When used in this Form 10-K orThis report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future filings byperformance and business of the Company with the Securities and Exchange Commission, in the Company’s press releasesincluding statements preceded by, followed by or other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer,that include the words or phrases “would be”, “will allow”, “intends to”, “will likely result”, “are expected to”, “will continue”, “is anticipated”, “estimate”, “project”,such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions, which are intended to identify “forward looking statement” within the meaning of the Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only asThere are a number of the date made, and to advise readersimportant factors that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities and competitive and regulatory factors, could affect the Company’s financial performance and could cause the Company’s actualfuture results for future periods to differ materially from those anticipatedhistorical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) competitive pressures among depository institutions increase significantly; (2) changes in the interest rate environment reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions; (4) general economic conditions, either national or projected.in the states in which the Company does business, are less favorable than expected; (5) political
2
The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.
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GENERAL
Flagstar Bancorp (“Flagstar” or the “Company”) is a Michigan-based thrift holding company founded in 1993. Our stock is traded on the New York Stock Exchange under the symbol “FBC”. Our primary subsidiary is Flagstar Bank, fsb (the “Bank”) a federally-chartered stock savings bank.
We report our financial condition and net earnings on a consolidated basis but report segmented operating results for both our retail banking group and our mortgage bankinghome lending group. Each operation is linked to one another in many aspects of their respective businesses but are indeed separate. The Bank is a member of the Federal Home Loan Bank System (“FHLB”) and is subject to regulation, examination and supervision by the Office of Thrift Supervision (“OTS”) and the Federal Deposit Insurance Corporation (“FDIC”). Our deposits are insured by the FDIC bythrough the Savings Association Insurance Fund (“SAIF”).
Our Retail Banking Groupbanking group (“RBG”BG”) collects deposits from the general public and local government agencies at 8699 banking centers located throughout southern Michigan and Indiana. We also collect certificates of deposits through secondary market offerings and solicit business through our internet branch located atwww.flagstar.com. We also acquire advances from the Federal Home Loan Bank of Indianapolis. We invest these funds in a variety of consumer and commercial loan products offered to the general public.
Our primary investment vehicle is single-family mortgage loans originated or acquired by our Mortgage Banking Grouphome lending group (“MBG”HLG”).
The MBGHLG acquires single-family mortgage loans on a wholesale basis nationally. We also originate single-family loans on a retailconsumer direct basis from 92 offices128 home loan centers in 2125 states. We also originate retail mortgage loans from our 87 retail99 banking centers located in Michigan and Indiana. Our wholesale division operates from 14 regional lending offices across the country. In order to originate or acquire these loans, the MBGHLG utilizes funds provided by the RBG.BG. We sell the majority of the loans we produce in the secondary market on a whole loan basis or by securitizing the loans into a mortgage-backed security. Mortgage-backed securities are issued through the Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”), and the Government National Mortgage Association (“GNMA”). We sell primarily conforming originations on a servicing-retained basisbasis. We service a large portfolio of mortgage loans for others, $30.4 billion at December 31, 2003. The HLG collects and holds in escrow payments for principal and interest, hazard and mortgage insurance, and various property taxes. The HLG then distributes these funds to the appropriate third party on a contractual basis. We later sell thea significant portion of these mortgage servicing rights in a separate secondary market transaction.transactions.
Our executive offices are located at 5151 Corporate Drive, Troy, Michigan 48098, and our telephone number is (248) 312-2000.
CORPORATE STRATEGIES AND OBJECTIVES
Historical Perspective
34
of Jackson, Michigan. Since that acquisition, we have been focused on growing our banking operation. The revenue stream created by a banking operation was sought to counter the cyclical operating results of our home lending operation.
Although our core operations are categorized as two distinct operations, they are complementary business lines. The mortgage bankinghome lending operation feedsoriginates assets tofor our retail banking operation and our retail banking operation provides funding andfor our home lending operation. The loans originated in our local market areas provide cross-selling opportunities for our local mortgage banking operation.products.
After 16 years in business,At December 31, 2003 our asset base has reached $8.2total assets are $10.6 billion and we are now operating from 87 retailoperate 99 banking centers. During 2002,2003, our RBGBG contributed over 50%25% of pre-tax operating earnings despite a record origination year registered by the MBG.earnings. Over the past 165 years, we have grown our asset base 90%total assets an average of 29% per year, our deposits 52%an average of 25% per year, and our retail origination officeshome loan and retail banking centers by 45%an average of 31% per year. Our goal over the next five years is to double the number of our banking centers and home loan origination officescenters and to continue to increase our market share within the markets we serve.
Toward this goal, during 2003,2004, we will expand the banking center network by 1625 new banking centers and we project the amountnumber of new retail origination officeshome loan centers will expand by 24.64. This large expansion will allow us to continue to grow our retail deposit base and our retail loan originations. We also anticipate growing our asset base approximately 35%.
Capital Strategy
Since taking the Company public, our primary business objective has been to generate stockholder value by providing high returns on equity throughand assets, while aggressively growing the growthCompany’s asset base and enhancement of the value of our franchise. To this end, overfacility locations. Over the past sixfive years, we have averaged a 26% return on average equity of 31% and a return on average assets greater than 1%.
WeSince our initial public offering in 1997, we have not issued any othernew common equity since 1997, although weequity. We have successfully completed threefive debt capital offerings and one secondary offering of common stock for our primary stockholder.offerings. We have also initiated twothree stock splits completed in the form of stock dividends and have increased the cash dividend on our common stock seveneight times.
During the first quarter of 2003, we completed the placement of two additional $25.0 million private debt offerings. The proceeds from these offerings will bewere used to retire the preferred stock of our subsidiary, Flagstar Capital, one of the two previously mentioneda debt capital offerings.offering completed in 1998. In April 2004, the Company intends to redeem its 9.50% preferred securities that were issued by Flagstar Trust in 1999. We do not foresee any need at this time to re-enter the capital markets for any other equity capital offerings.
Business Strategy
RETAIL BANKING OPERATIONS
Through our Retail Banking Group,BG, we offer a comprehensive line of consumer and businesscommercial financial products and services to individuals and small and middle market businesses. We provide service to approximately 158 thousand197,000 households through our 8799 banking centers (both free-standing and in-store) and 130145 automated teller machines located in Michigan and Indiana. We also offer our customers the convenience of 24-hour telephone and internet banking services. Our banking centers are open in most locations from 7:30 a.m. to 7:30 p.m., Monday through Friday, with 8:30 a.m. to 4:00 p.m. hours on Saturday
45
RETAIL BANKING OPERATIONS (continued)
Monday through Friday, with 8:30 a.m. to 4:00 p.m. hours on Saturday and Sunday hours in all our Wal-Mart locations. This accessibility allows our customer base a level of convenience that exceeds that offered by our competitors.
Our strategy is to expand our base of consumer and businesscommercial relationships by combining a high level of customer service with our broad-based product line. We will continue to open de novo banking centers in areas that meet our demographic model. As has been the approach on all of our other banking center openings, we will lead with price. Upon community acceptance of the location and the Flagstar brand, we will then promote to establish checking and savings accounts.
We offer various consumer and businesscommercial deposit products, as well as a variety of value-added, fee-based banking services. Deposit products offeredOur deposit product offerings include various checking, accounts, various savings, accounts, and time deposit accounts. Fee-based services include, but are not limited to:
• | payment choices, including debit card, pay-by-phone, online banking, money orders, bank checks, and traveler’s checks, | |
• | a membership program featuring free checks, a variety of product discounts, shopping and travel services, and credit card protection service, and | |
• | safety deposit box rentals. |
One of our primary focuses in 20022003 was the opening of 1612 new banking centers. The focus for 20032004 will remain unchanged with 1625 banking centers slatedexpected to open. The majority of these new openings will be in free-standing banking centers located in metropolitan Detroit and Indianapolis.
At December 31, 2002,2003, the Company had 33operated 35 banking centers under its in-store banking centers. Thirtyprogram. Thirty-two of these facilitiesbanking centers are located withinin Wal-Mart superstores. In June 2000, the Company entered into an agreement with Wal-Mart, that permits us to provide banking services within new or refurbished Wal-Mart superstore locations in Michigan and Indiana. The in-store banking centers welcome customers with an open, free-flowing retail environment. The customer can interact with roaming customer service representatives or become engaged by high-tech, self-help, touch screens in the cashless e-banking center. Fourteen of the in-store banking centers are located in Indiana and 21 are located in Michigan. The Company expects to open two more Wal-Mart facilities in 2004.
Forty-seven of the Company’s banking centers were opened within the past three years. Seven of the banking centers in Indiana were opened under the Wal-Mart in-store program during the past three years. The Wal-Mart banking centers had an average deposit portfolio of $16.3 million compared with the remainder of the banking centers which had average deposits of $48.5 million. Of the 99 banking centers, 17 banking centers had deposits of less than $10.0 million. Banking centers opened in 2000, 2001, 2002, and 2003 had average balances of $43.8 million, $22.7 million, $17.7 million, and $9.8 million, respectively. Banking centers opened under the in-store program opened in 2000, 2001, 2002, and 2003 had average balances of $20.0 million, $16.6 million, $10.1 million, and $8.0 million, respectively.
Each of the in-store banking centers offer the same products and services to our customers as are available at our free-standing banking centers without any significant difference in operating costs. By relying upon
6
BANKING OPERATIONS (continued)
in-store banking centers to expand our banking center network, we avoid the significant building costs of free-standing banking centers while obtaining marketing exposure in a high customer traffic area. The customers using our in-store banking centers are substantially the same as the customers using our free-standing banking centers.
One of the RBG’sBG’s primary business objectives is to expand its lending activities, as they generally offer higher yieldsreturns than our mortgagehome lending products.group. The size of our loan portfolio has grown in recent years, partly due to the concentration placed on this objective by team leaders.the Company.
The following consumer loan products are available through our retail banking centers:
• | second mortgage loans, both for purposes unrelated to the property securing the loan and for renovation or remodeling. The loans are originated as a fixed, amortizing loan or a line of credit; | |
• | loans for automobiles, marine and recreational vehicles; | |
• | student loans; | |
• | loans secured by deposit accounts; and | |
• | secured and unsecured loans made under our personal line of credit or term loan programs. |
5
RETAIL BANKING OPERATIONS (continued)
At December 31, 2002,2003, Flagstar’s consumer loan portfolio contained $214.5$141.0 million of second mortgage loans, $110.2$245.8 million of equity line loans, and $14.5$13.9 million of various other consumer loans such as personal lines of credit, and automobile loans. Consumer loans, including second mortgage loans, comprise 3.1%5.9% of the Company’s investment loan portfolio at December 31, 2002.2003. Flagstar’s underwriting standards for a consumer loan include an analysis of the applicant’s payment history on other indebtedness and an assessment of the applicant’s ability to meet existing obligations as well as payments on the proposed loan. During 2002,2003, the Company originated a total of $586.8$392.2 million in consumer loans versus the $244.3$586.8 million originated in 2001.2002.
We also offer a full line of businesscommercial loan products and banking services especially developed for our business consumerscommercial customers through our retail banking centers and main office location. We concentrate on developing and maintaining strong client relationships with small and mid-sized companies. Our core businesscommercial customers are companies with $5 million to $100 million in total sales. We provideoffer the following commercial loan products to our business customers:products:
– | business lines of credit, including warehouse lines of credit to other mortgage lenders, | |
– | working capital loans, | |
– | equipment loans, and | |
– | loans secured by real estate. |
Commercial business loans are made on a secured or unsecured basis. Collateral for secured commercial loans may be business assets, real estate, personal assets, or some combination thereof. Our decision to make a commercial loan is based on an evaluation of the borrower’s financial capacity, including such factors as income, other
7
BANKING OPERATIONS (continued)
indebtedness, credit history, company performance, and collateral. All loans on income-producing properties are evaluated by a qualified, certified appraiser to ensure that the appraised value of the property to be mortgaged or the enterprise value of the borrower satisfies the Company’s loan-to-value ratio requirements of no higher than 85%90%. The Company also generally requires a minimum debt-service ratio of 1.2 to 1. In addition, the Company considers the experience of the prospective borrower with similar properties, the creditworthiness and managerial ability of the borrower, the enforceability and collectibility of any relevant guarantees and the quality of the asset to be mortgaged. The Company officer processing the loan also generally performs various feasibility and income absorption studies in connection with the loan.
We also offer warehouse lines of credit to other mortgage lenders. These lines allow the lender to fund the closing of a mortgage loan that most often is acquired by the Company. Each extension or drawdown on the line is collateralized by a mortgage loan. These lines of credit are also personally guaranteed by a qualified principal officer of the borrower. It is not a requirement that the loan collateralizing the borrowing be sold to Flagstar or that the borrower behave a correspondent ofrelationship with the Company.
The aggregate amount of warehouse lines of credit granted to other mortgage lenders was $1.1$2.0 billion of which $558.8$346.8 million was outstanding at December 31, 2003. At December 31, 2002 versus $619.1 million$1.1 billion in lines had been granted, of which $298.5$558.8 million was outstanding at December 31, 2001.outstanding. At December 31, 2002,2003, our commercial real estate loan portfolio totaled $445.3$548.4 million, or 11.1%8.0% of our investment loan portfolio. At December 31, 2002,2003, our
6
Business Strategy (continued)
RETAIL BANKING OPERATIONS (continued)
non-real estate commercial loan portfolio was $7.7$7.9 million, or 0.2%0.1% of our investment loan portfolio. During 2002,2003, we originated $190.5$239.5 million commercial loans versus $195.6$190.5 million in 2001.2002.
MORTGAGE BANKING OPERATIONHOME LENDING OPERATIONS
We conduct our retail mortgage lendingOur HLG conducts its operations from our 87 retail99 banking centers and 92128 home loan origination centers located in 2125 states. Our largest concentration of offices is in southern Michigan, where we have 74 retail82 banking centers and 5481 home loan origination centers. We also maintain 14 wholesale lending offices that conduct business with correspondent mortgage lenders nationwide. During 2002,2003, we continued to be amongwere one of the country’s top 20 largest mortgage loan originators.
The origination or acquisition of residential mortgage loans constitutes our most significant lending activity. We originated or acquired $56.4 billion, $43.2 billion, $33.0 billion, and $9.9$33.0 billion of mortgage loans during the years ended December 31, 2003, 2002, 2001, and 2000,2001, respectively. Each loan originated or acquired is for the purpose of acquiring or refinancing a one to four family residence and is secured by a first mortgage on the property. We offer traditional fixed-rate and adjustable-rate mortgage loans with terms ranging from one year to 30 years. The majority of our products conform to the respective underwriting guidelines established by FNMA, FHLMC, and GNMA. We also offer other residential mortgage loans that meet agency underwriting guidelines, but have other terms and conditions customized to meet the needs of the borrower.
As a part of our overall mortgage banking strategy, we securitize the majority of our mortgage loans through FNMA, FHLMC, or GNMA. We generally securitize our longer-term, fixed-rate loans while we invest in the shorter duration and adjustable rate product we originate. Securitization is the process by which mortgage loans we own are exchanged for mortgage-backed securities that are guaranteed by FNMA, FHLMC, or GNMA. These mortgage-backed securities are then sold to a secondary market investor. The
8
Business Strategy (continued)
HOME LENDING OPERATIONS (continued)
servicing related to the sold loans is generally retained and later sold to other secondary market investors. We, for the most part, do not sell the servicing rights to loans originated within our retail market area. For further information see Notes 3, 5,4, 6, 7, and 1012 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, herein.
Our written underwriting guidelines for mortgage loans employ a system of internal controls designed to maintain the quality of the mortgage loan portfolio. All mortgage loans are reviewed by an underwriter at our national headquarters or at one of our wholesale lending centers. We also contract underwriters employed by mortgage insurance companies to underwrite loans. Additionally, certain correspondents have been delegated underwriting authority. Any loan not underwritten by a Flagstar employed underwriter is warranted by the individual underwriter’s employer whether it be a mortgage company or a mortgage insurance company.
To further protect us from loss, we generally require that any loan with a loan-to-value ratio in excess of 80% must carry mortgage insurance. A loan-to-value ratio is the percentage that the original principal amount of a loan bears to the appraised value of the mortgaged property. In the case of a purchase money mortgage, the lower of the appraised value of the property or the purchase price of the property securing the loan is used. We require a lower loan-to-value ratio, and thus a higher down payment, for non-owner-occupied loans. In addition, all home mortgage loans originated are subject to requirements for title, fire, and hazard insurance. Real estate taxes are generally collected and held in escrow for disbursement. We are also protected against
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MORTGAGE BANKING OPERATION (continued)
fire or casualty loss on home mortgage loans by a blanket mortgage impairment insurance policy that insures us when the mortgagor’s insurance is inadequate.
We utilize three production channels to acquire mortgage loans. Each production channel produces a similar loan product and each loan acquired is underwritten by us or a contracted representative using the same underwriting standards.
Wholesale
Correspondent
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HOME LENDING OPERATIONS (continued)
versus the $14.2 billion originated in 2002 and $11.8 billion originated in 2001 and $4.0 billion originated2001. During 2003, 83.9% of loan originations in 2000.this category were for the refinance of an existing mortgage loan.
RetailConsumer Direct
During 2002,2003, we opened 2336 new offices under our “My Net Branch” concept. In this process, the loan origination officer functions much like our brokerwholesale channel. The loan officer operates his or her own office on a stand-alone basis. The office is responsible for all costs related to the individual office but in turn receives all fees collected in the origination process. We provide the office staff with accounting, legal, data processing, underwriting, and payroll services for a nominal fee in exchange for the delivery of the closed loan. The office staff is allowed to broker away a small portion of its originations when we do not provide the needed loan program to complete the transaction. During 2002,2003, less than 4.8%5.3% of retail originations were not delivered into Flagstar loan products.
During 2002,2003, we closed $4.1$6.1 billion utilizing this origination channel versus the $4.1 billion originated in 2002 and $3.0 billion originated in 2001 and $1.0 billion originated in 2000.
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Business Strategy (continued)
MORTGAGE BANKING OPERATION (continued)
MORTGAGE LENDING AND THE INTERNET
We have always been a strong advocate of the Internet and its use within the mortgage origination process. During 2002, our customers were able to register loans, lock the interest rates on loans, check their in-process inventory, production statistics, and underwriting status through the Internet. During 2002, approximately 80% of all mortgage loans closed utilized the Internet as a communication tool and delivery system. In March 2002, Flagstar completed its first fully electronic, paperless loan closing.2001. During 2003, we will continue to utilize our research and development budget to streamline the mortgage origination process and bring service and convenience to our customers.
CONSTRUCTION LENDING
We also engage75.2% of loan originations in construction lending involving loans to individuals for construction of one-to-four family residential housing. These properties are primarily located in southern Michigan markets. These construction loans usually convert to permanent financing upon completion of construction. At December 31, 2002, our portfolio of loans held for investment included $54.7 million of loans secured by properties under construction, or 1.4% of total loans held for investment. All construction loans are secured by a first lien on the property under construction. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. Construction/permanent loans may have adjustable or fixed interest rates and are underwritten in accordance with the same terms and requirements as permanent mortgages, except during a construction period of up to nine months, the borrower is required to make interest-only monthly payments. Monthly payments of principal and interest commence one month from the date the loan is converted to permanent financing. Borrowers must satisfy all credit requirements that would apply to permanent mortgage loan financing prior to receiving construction financingthis category were for the subject property. During 2002, the Company originated a totalrefinance of $73.8 million in construction loans versus the $70.0 million originated in 2001 and $78.0 million originated in 2000.an existing mortgage loan.
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MORTGAGE BANKING OPERATION (continued)
LOANS BY TYPE
The following table sets forth the Company’s investment loan portfolio at December 31, 2002,2003, categorized as having fixed interest rates or adjustable interest rates.
Fixed | Adjustable | Fixed | Adjustable | |||||||||||||||||||||
Rate | Rate | Total | Rate | Rate | Total | |||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||
Mortgage loans held for investment | $ | 500,908 | $ | 2,092,097 | $ | 2,593,005 | $ | 734,428 | $ | 4,743,772 | $ | 5,478,200 | ||||||||||||
Second mortgage loans | 214,485 | — | 214,485 | 141,010 | — | 141,010 | ||||||||||||||||||
Commercial real estate | 404,071 | 41,199 | 445,270 | 472,465 | 75,927 | 548,392 | ||||||||||||||||||
Construction | 54,650 | — | 54,650 | 58,323 | — | 58,323 | ||||||||||||||||||
Warehouse lending | — | 346,780 | 346,780 | |||||||||||||||||||||
Consumer | 14,035 | 110,750 | 124,785 | 13,785 | 245,866 | 259,651 | ||||||||||||||||||
Non-real estate commercial | 2,603 | 5,103 | 7,706 | 2,749 | 5,147 | 7,896 | ||||||||||||||||||
Warehouse lending | — | 558,781 | 558,781 | |||||||||||||||||||||
Total | $ | 1,907,752 | $ | 2,807,930 | $ | 3,998,682 | $ | 1,422,760 | $ | 5,417,492 | $ | 6,840,252 | ||||||||||||
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LOAN REPAYMENT SCHEDULE
The following table sets forth the scheduled principal payments of Flagstar’s loan portfolio at December 31, 2002,2003, assuming that principal repayments are made in accordance with the contractual terms of the loans.
Within | 1 Year | 2 Years | 3 Years | 5 Years | 10 years | Over | Within | 1 Year | 2 Years | 3 Years | 5 Years | 10 years | Over | |||||||||||||||||||||||||||||||||||||||||||||||||||
1 year | to 2 years | to 3 years | to 5 years | to 10 years | to 15 years | 15 years | Totals | 1 year | to 2 years | to 3 years | to 5 years | to 10 years | to 15 years | 15 years | Totals | |||||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage loans held for investment | $ | 38,747 | $ | 44,274 | $ | 43,747 | $ | 93,025 | $ | 263,226 | $ | 363,794 | $ | 1,731,751 | $ | 2,578,565 | $ | 90,774 | $ | 78,822 | $ | 77,646 | $ | 152,975 | $ | 371,025 | $ | 343,347 | $ | 4,259,122 | $ | 5,373,711 | ||||||||||||||||||||||||||||||||
Second mortgage loans | 7,858 | 9,740 | 9,429 | 20,716 | 62,889 | 99,939 | — | 210,571 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Second mortgage | 4,554 | 4,406 | 4,263 | 8,248 | 19,280 | 16,147 | 83,235 | 140,133 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate | 43,553 | 54,944 | 48,943 | 104,993 | 192,493 | — | — | 444,927 | 45,265 | 41,530 | 38,104 | 69,920 | 145,958 | 85,749 | 122,121 | 548,647 | ||||||||||||||||||||||||||||||||||||||||||||||||
Construction | 53,133 | — | — | — | — | — | — | 53,133 | 57,731 | — | — | — | — | — | — | 57,731 | ||||||||||||||||||||||||||||||||||||||||||||||||
Warehouse lending | 346,780 | — | — | — | — | — | — | 346,780 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer | 10,364 | 12,658 | 11,516 | 24,475 | 65,754 | — | — | 124,767 | 20,338 | 18,745 | 17,277 | 31,846 | 67,142 | 40,843 | 63,429 | 259,620 | ||||||||||||||||||||||||||||||||||||||||||||||||
Non-real estate commercial | 1,166 | 1,551 | 1,237 | 1,316 | 2,010 | — | — | 7,280 | 814 | 730 | 655 | 1,174 | 2,330 | 1,127 | 1,056 | 7,886 | ||||||||||||||||||||||||||||||||||||||||||||||||
Warehouse lending | 558,781 | — | — | — | — | — | — | 558,781 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 713,602 | $ | 123,167 | $ | 114,872 | $ | 244,525 | $ | 586,373 | $ | 463,733 | $ | 1,731,751 | $ | 3,978,024 | $ | 566,256 | $ | 144,233 | $ | 137,945 | $ | 264,163 | $ | 605,735 | $ | 487,213 | $ | 4,528,963 | $ | 6,734,508 | ||||||||||||||||||||||||||||||||
10 HOME LENDING AND THE INTERNET
We have always been a strong advocate of the Internet and its use within the mortgage origination process. During 2003, our customers were able to register loans, lock the interest rates on loans, check their in-process inventory, production statistics, and underwriting status through the Internet. During 2003, approximately 90% of all mortgage loans closed utilized the Internet as a communication tool and delivery system. During 2004, we will continue to utilize our research and development budget to streamline the mortgage origination process and bring service and convenience to our customers.
CONSTRUCTION LENDING
We also engage in construction lending involving loans to individuals for construction of one-to-four family residential housing. These properties are primarily located in southern Michigan markets. These construction loans usually convert to permanent financing upon completion of construction. At December 31, 2003, our portfolio of loans held for investment included $58.3 million of loans secured by properties under construction, or 0.9% of total loans held for investment. All construction loans are secured by a first lien on the property under construction. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. Construction/permanent loans may have adjustable or fixed interest rates and are underwritten in accordance with the same terms and requirements as permanent mortgages, except during a construction period of up to nine months, the borrower is required to make interest-only monthly payments. Monthly payments of principal and interest commence one month from the date the loan is converted to permanent financing. Borrowers must satisfy all credit requirements that would apply to permanent mortgage loan financing prior to receiving construction financing for the subject property. During 2003, the Company originated a total of $99.8 million in construction loans versus the $73.8 million originated in 2002 and $70.0 million originated in 2001.
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ASSET QUALITY
We have implemented comprehensive internal asset review systems to provide for early detection of problem assets. Our asset classifications and the adequacy of our allowances for losses are analyzed quarterly based on, among other things, historical loss experience and current economic conditions. Although this system will not eliminate future losses due to unanticipated declines in the real estate market or economic downturns, it should provide for timely identification of the loans that could cause a potential loss. Refer to the four schedules included hereafter (Pages 3736 through 39)38), which set forth certain information about our non-performing assets. At December 31, 2002,2003, we had no other loans outstanding where known information about possible credit problems of borrowers caused management concern regarding the ability of the same borrowers to comply with the loan repayment terms.
Repurchased Loans.Assets.Although all of the loans we sell to the secondary market are done so on a non-recourse basis, we repurchased $25.5$46.3 million, $44.0 million, $19.1$34.3 million, and $30.9$47.0 million in mortgage loans from secondary market investors during 2003, 2002, 2001, 2000, and 1999,2001, respectively. Generally, for loans sold to the secondary market, we are responsible for certain representations and warranties regarding the adherence to underwriting and loan program guidelines. At December 31, 2002,2003, we had sold $110.0$144.1 billion in loans to the secondary market over the previous 60 months. This volume of loan sales is $33.2$34.1 billion, or 43.2%31.0%, larger than the $76.8$110.0 billion sold in the 60 months preceding December 31, 2001.2002. A repurchase is required because of a loan’s delinquent status or its non-compliance with the underwriting or loan program guidelines that it was initially sold under. A large portion of the mortgage loan charge-offs we recorded ($3.8Losses attributable to these repurchased loans were $12.0 million, $3.2$6.8 million, and $1.6$4.0 million in 2003, 2002, and 2001, and 2000, respectively)respectively. All of these loans were attributed to loans originatedsold within the prior 60 monthsixty-month period, repurchased from secondary market investors, foreclosed on, and disposed of at a loss.
The following schedule provides the amount of non-performing loans repurchased attributable to the year of origination:
Repurchased Assets
Total | ||||||||||||||
non-performing | ||||||||||||||
repurchased | % of | |||||||||||||
Year | Total Loan Sales | loans | Sales | |||||||||||
(In thousands) | ||||||||||||||
1999 | $ | 12,854,514 | $ | 15,158 | 0.12 | % | ||||||||
2000 | 7,982,200 | 21,824 | 0.27 | |||||||||||
2001 | 30,879,271 | 27,627 | 0.09 | |||||||||||
2002 | 40,495,894 | 7,971 | 0.02 | |||||||||||
2003 | 51,922,757 | 1,235 | 0.00 | |||||||||||
Totals | $ | 144,134,636 | $ | 73,815 | 0.05 | % | ||||||||
At December 31, 2003 and 2002, the Company had $12.0 million and $10.4 million, respectively, of repurchased assets awaiting foreclosure.
Delinquent Loans.Residential property loans are considered to be delinquent when any payment of principal or interest is past due. While it is the goal of management to work out a satisfactory repayment schedule with
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a delinquent borrower, we will undertake foreclosure proceedings if the delinquency is not satisfactorily resolved. Our procedures regarding delinquent loans are designed to assist borrowers in meeting their contractual obligations. We customarily mail notices of past due payments to the borrower approximately 15, 30 and 45 days after the due date, and late charges are assessed in accordance with certain parameters. Our collection department makes telephone or personal contact with borrowers after a 30-day delinquency. In certain cases, we recommend that the borrower seeks credit counseling assistance and may grant forbearance if it is determined that the borrower is likely to correct a loan delinquency within a reasonable period of time. We cease the accrual of interest on loans that are more than 90 days delinquent. Such interest is recognized as income when collected. At December 31, 2002,2003, we had $147.5$105.5 million in loans that were determined to be delinquent and $81.6$58.3 million which were determined to be non-performing and for which interest accruals had ceased. Of this $81.6$58.3 million, $72.4$55.2 million, or 88.8%94.7%, pertained to single-family mortgage loans. The following table displays delinquent loans as of December 31, (in thousands):
Days Delinquent | 2003 | 2002 | ||||||
30 | $ | 32,215 | $ | 51,096 | ||||
60 | 14,920 | 14,816 | ||||||
90 | 58,334 | 68,032 | ||||||
Total | $ | 105,469 | $ | 133,944 | ||||
Repossessed Assets.Real property that we acquire as a result of foreclosure proceedings is classified as “real estate owned” until it is sold or otherwise disposed of.sold. Our Foreclosure Committee decides whether to rehabilitate the property or sell it “as is,” and whether to list the property with a broker, sell the property directly to a third party, or sell it at auction. Generally, we are able to dispose of a substantial portion of this type of real estate and other repossessed assets during each year, but we invariably acquire additional real estate and other assets through repossession in the ordinary course of business. At December 31, 2002,2003, we had $45.1$36.8 million of repossessed assets.
11Allowance for Loan Losses.The Company maintains an allowance against future losses inherent in the current investment loan portfolio. That loss allowance stands at $36.0 million at December 31, 2003. The allowance for loan losses at December 31, 2003 was recorded at a level based upon management’s assessment of relevant factors, including the types and amounts of non-performing loans, the amount of historical charge offs and anticipated loss experience on such types of loans, and the current and near-term projected economic conditions. There is no assurance that the Company will not, in any particular period, sustain loan losses that exceed the allowance, or that subsequent evaluation of the loan portfolio, in light of the factors then-prevailing, including economic conditions, the credit quality of the assets comprising the portfolio, will not require increases in the allowance for loan losses.
Secondary Marketing Reserve.The Company maintains a reserve against future losses created by the repurchase of mortgage loans previously sold to the secondary market. That loss reserve totals $10.2 million at December 31, 2003. The reserve is recorded at a level based upon management’s analysis of the potential for repurchase of loans sold during the prior sixty-month period. There is no assurance that the Company will not, in any particular period, sustain loan losses that exceed the reserve, or that subsequent evaluation, in light of the factors then-prevailing, will not require increases to the reserve.
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SOURCES OF FUNDS
We have retail deposits of $2.7 billion, municipal deposits of $0.8 billion, and wholesale deposits totaling $0.9$5.7 billion at December 31, 2002.2003. These deposits represent the principal funding source for our lending and investing activities. We also derive funds from operations, loan principal payments, loan sales, advances from the FHLB, money held in escrow, and the capital markets.
DEPOSIT ACTIVITIES.We have developed a variety of deposit products ranging in maturity from demand-type accounts to certificates with maturities of up to 10 years, and savings accounts and money market accounts. We primarily rely upon our network of branches,banking centers, their strategic location, the quality and efficiency of our customer service, and our pricing policies to attract deposits.
The following table sets forth information relating to the Company’s total deposit flows for each of the years indicated:
For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||||||||||||||||||
2002 | 2001 | 2000 | 1999 | 1998 | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||
Total deposits at the beginning of the year | $ | 3,608,103 | $ | 3,407,965 | $ | 2,260,963 | $ | 1,923,370 | $ | 1,109,933 | ||||||||||||||||||||||||||||||
Beginning deposits | $ | 4,373,889 | $ | 3,608,103 | $ | 3,407,965 | $ | 2,260,963 | $ | 1,923,370 | ||||||||||||||||||||||||||||||
Interest credited | 126,977 | 191,595 | 179,488 | 112,493 | 82,452 | 138,625 | 126,977 | 191,595 | 179,488 | 112,493 | ||||||||||||||||||||||||||||||
Net deposit increase | 638,809 | 8,543 | 967,514 | 225,100 | 730,985 | 1,167,653 | 638,809 | 8,543 | 967,514 | 225,100 | ||||||||||||||||||||||||||||||
Total deposits at the end of the year | $ | 4,373,889 | $ | 3,608,103 | $ | 3,407,965 | $ | 2,260,963 | $ | 1,923,370 | $ | 5,680,167 | $ | 4,373,889 | $ | 3,608,103 | $ | 3,407,965 | $ | 2,260,963 | ||||||||||||||||||||
BORROWINGS.The FHLB provides credit for savings institutions and other member financial institutions. As a member of the FHLB, we are required to own stock in the FHLB. We are currently authorized through a board resolution to apply for advances from the FHLB using our mortgage loans as collateral. The FHLB generally permits advances up to 50% of a company’s “adjusted assets”, which are defined as assets reduced by outstanding advances. At December 31, 2002,2003, our advances from the FHLB totaled $2.2$3.2 billion, or 37.2%44.3% of adjusted assets. Of the $2.2 billion outstanding at year-end, $2.0 million, or 0.1% of our total FHLB advances, consisted of daily borrowings which may be “put” back or paid off at our option without penalty. Refer to Note 12 of the Notes to Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary Data, herein for further discussion of our FHLB advances.
LOAN PRINCIPAL PAYMENTS.In our capacity as an investor in loans, we derive funds from the repayment of principal on the loans we hold in portfolio. Payments totaled $2.7$4.6 billion during 2002, consistent2003, an increase of $1.9 billion, or 70.4%, when compared with the $2.6$2.7 billion received in 2001.2002. This large amount of principal repayments was attributable to the continued low interest rate environment for the past two years.
LOAN SALES.As part of our mortgage bankinghome lending operation, we originate loans and then sell those loans to other investors. Sales of mortgage loans totaled $51.9 billion, or 92.1% of originations in 2003, compared to $40.5 billion, or 93.8% of originations, in 2002, compared to $30.9 billion, or 93.6% of originations, in 2001.2002. The sales recorded during 20022003 were higher than in 20012002 because of the higher origination volume in 2002.2003.
MONEY HELD IN ESCROW.As a servicer of mortgage loans for others and for that matter as the servicer of our own loans, we hold funds in escrow for investors, various insurance entities, or for the government taxing authorities. Amounts held in escrow increaseddecreased from $105.7$743.4 million at December 31, 2001,2002, to $148.2$653.7 million at December 31, 2002. This increase was caused by an increase2003. Although funds held in escrow decreased, the amount of total
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residential mortgage loans we serviced increased from $25.8 billion at December 31, 2001, to $35.4 billion at December 31, 2002.2002, to $42.0 billion at December 31, 2003. This decrease is the result of timing differences of when funds are transferred to the various investors, insurance entities, and the government taxing authorities.
CAPITAL MARKETS.Through December 31, 2002,2003, we have completed three public offerings and onethree private debt offering.offerings. These offerings provided funds that increased the regulatory capital of the Bank.
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SUBSIDIARY ACTIVITIES
We conduct business through a number of wholly-owned subsidiaries in addition to the Bank. Our additional subsidiaries include Douglas Insurance Agency, Inc. (“DIA”), Flagstar Commercial Corporation (“FCC”), Flagstar Credit Corporation (“Credit”), Flagstar Trust (“Trust”), Flagstar Title Insurance Agency, Inc. (“Title”), Flagstar Statutory Trust II (“Trust II”), Flagstar Statutory Trust III (“Trust III”), Flagstar Statutory Trust IV (“Trust IV”) and Flagstar Investment Group, Inc. (“Investment”). DIA acts as an agent for life insurance and property and casualty insurance companies. Credit participates in mortgage reinsurance agreements with various private mortgage insurance companies. FCC and Investment are inactive. Trust II is a Connecticut statutory trust that issued $25 million of trust preferred securities in a privately placed transaction completed in December 2002. Trust III and Trust IV are Delaware statutory trusts that each issued $25 million of trust preferred securities in privately placed transactions in February 2003 and March 2003, respectively. Title is a real estate title insurance agency that operates primarily in the state of Michigan.
Trust is a Delaware trust whose common stock is owned solely by the Company and in 1999 sold 2.99 million shares of trust preferred securities to the general public in an initial public offering. Trust II is a Connecticut statutory trust that issued $25 million of debt securitiesOn January 21, 2004, we notified the public in a privately placed transaction completed in December 2002. Title is a real estate title insurance agencypress release that operates primarily inwe would redeem all of the state of Michigan.preferred securities on April 30, 2004.
The Bank, our primary subsidiary, is a federally chartered, stock savings bank headquartered in Troy, Michigan. The Bank owns four subsidiaries: FSSB Mortgage Corporation (“Mortgage”), Flagstar Intermediate Holding Company (“Holding”), Mid-Michigan Service Corporation (“Mid-Michigan”), and SSB Funding Corporation (“Funding”). Mortgage, Mid-Michigan, and Funding are currently inactive subsidiaries. Holding is the parent of Flagstar Capital Corporation (“Capital”) and Flagstar LLC (“LLC”).
Flagstar Capital haswas a subsidiary of Holding and had issued publicly-owned preferred stock (NYSE: FBC-P) and iswas a real estate investment trust whose common stock iswas owned solely by Holding. Capital and LLC purchase mortgage loans from the Bank and hold them for investment purposes. On March 20,June 30, 2003, we notified the public in a press release that we would redeemredeemed all of the preferred stock on June 30, 2003.and Flagstar Capital was dissolved shortly thereafter.
LEGISLATIVE, LEGAL AND REGULATORY DEVELOPMENTS
The thrift industry is generally subject to extensive regulatory oversight. The Company, as a publicly held savings and loan holding company, and the Bank, as a federally chartered stock savings bank with deposits insured by the FDIC, are subject to a number of laws and regulations. Many of these laws and regulations have undergone significant change in recent years. These laws and regulations impose restrictions on activities, minimum capital requirements, lending and deposit restrictions and numerous other requirements. Future changes to these laws and regulations, and other new financial services laws and regulations, are likely and cannot be predicted with certainty. Future legislative or regulatory change, or changes in enforcement practices or court rulings, may have a dramatic and potentially adverse impact on the Company, the Bank, and the other subsidiaries.
FDIC.The FDIC and members of the United States Congress have recently proposed new legislation that would reform the bank deposit insurance system. This reform could merge BIF and SAIF insurance funds, increase the deposit insurance coverage limits and index future coverage limitations, among other changes. Most significantly, reform proposals could allow the FDIC to raise or lower (within certain limits) the
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currently mandated designated reserve ratio requiring the FDIC to maintain a 1.25% reserve ratio ($1.25 against $100 of insured deposits), and require certain changes in the calculation methodology. Although it is too early to predict the ultimate impact of such proposals, they could, if adopted, result in the imposition of higher deposit insurance premium costs on the Company.
Sarbanes OxleySarbanes-Oxley Act.On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 (the S-O Act)“S-O Act”) implementing legislative reforms intended to address corporate and accounting fraud. In addition to the establishment of a new accounting oversight board which will enforce auditing, quality control and independence standards, and will be funded by fees from all publicly traded companies, the law restricts provision of both auditing and consulting services by accounting firms. To ensure auditor independence,
15
certain permitted non-audit services being provided to an audit client will require preapproval by a company’s audit committee members. In addition, the audit partners must be rotated. Chief executive officers and chief financial officers, or their equivalent, are required to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement. In addition, under the S-O Act, counsel will be required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself. Longer prison terms and increased penalties will be applied to corporate executives who violate federal securities laws, the period during which certain types of suits can be brought against a company or its officers has been extended, and bonuses issued to top executives prior to restatement of a company’s financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan “blackout” periods, and loans to company executives are restricted.
The S-O Act also increases the oversight of, and codifies certain requirements relating to audit committees of public companies and how they interact with a company’s “registered public accounting firm”.firm.” Audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer. In addition, companies must disclose whether at least one member of the committee is an “audit committee financial expert” and if not, why not. Under the S-O Act, a “registered public accounting firm” is prohibited from performing statutorily mandated audit services for a company if such company’s chief executive officer, chief financial officer, comptroller, chief accounting officer, or any person serving in equivalent positions has been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date. The S-O Act also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the audit of a company’s financial statements for the purpose of rendering the financial statement’s materially misleading.
The board is determined to continue a corporate governance structure that meets or exceeds the requirements of the Sarbanes-Oxley Act.
NYSE.Also during 2002,2003, the New York Stock Exchange (the “NYSE”) proposedadopted numerous corporate governance rules intended to address a heightened public perception of shortcomings in corporate accountability among public companies generally. These rules, if adopted, would affect the Company because its common stock is listed on the NYSE under the symbol “FBC.” The proposed changesThese rules include ensuring that
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a majority of a board of directors are independent of management, establishing and publishing a code of conduct for directors and officers and requiring stockholder approval of all new stock option plans and all modifications. TheseThe Company will need to be in compliance with these new rules are still tentative in nature because they are subject to SEC review and approval, which is expected to occur later this year and would then be followed by an anticipated six-month transition period.as of the date of its 2004 annual meeting of shareholders.
USA Patriot Act.The President of the United States signed the USA PATRIOT Act into law on October 26, 2001.2002. The USA PATRIOT Act establishes a wide variety of new and enhanced ways of combating international terrorism. The provisions that affect national banks (and other financial institutions) most directly are contained in Title III of the act. In general, Title III amends current law — primarily the Bank Secrecy Act — to provide the Secretary of Treasury (“Treasury”) and other departments and agencies
16
of the federal government with enhanced authority to identify, deter, and punish international money laundering and other crimes.
Among other things, the USA PATRIOT Act prohibits financial institutions from doing business with foreign “shell” banks and requires increased due diligence for private banking transactions and correspondent accounts for foreign banks. In addition, financial institutions will have to follow new minimum verification of identity standards for all new accounts and will be permitted to share information with law enforcement authorities under circumstances that were not previously permitted. These and other provisions of the USA PATRIOT Act became effective at varying times and the Treasury and various federal banking agencies are responsible for issuing regulations to implement the new law.”
COMPETITION
Based on total assets at December 31, 2002,2003, we are the largest savings institution headquartered in Michigan. We face substantial competition in attracting deposits at our retail banking centers. Our most direct competition for deposits has historically come from other savings institutions, commercial banks and credit unions. Money market funds and full-service securities brokerage firms also provide competition in this area. The primary factors in competing for deposits are the rates offered, the quality of service, the hours of service, and the location of branch offices.banking centers.
Our competition for lending products comes principally from other savings institutions, commercial banks, mortgage companies, and other lenders. The primary factors in competing are the rates and fees charged, the efficiency and speed of the service provided, and the quality of the services provided.
PERSONNEL
At December 31, 2002,2003, we had 3,5883,512 full-time equivalent employees. The employees are not represented by a collective bargaining unit. We provide our employees with a comprehensive program of benefits, some of which are on a contributory basis, including comprehensive medical and dental plans, life insurance, disability insurance, a deferred compensation plan, and a 401K savings and investment plan. We consider our employee relations to be excellent.
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EXECUTIVE OFFICERS
Name and Age | Position(s) Held in | |
Thomas J. Hammond, | Chairman of the Board of the Company and the Bank | |
Mark T. Hammond, | Chief Executive Officer and President of the Company and the Bank | |
Michael W. Carrie, | Executive | |
Executive | ||
Robert O. Rondeau, Jr., | Executive |
Thomas J. Hammondhas served as Chairman of the Board of the Company since its formation in 1993 and the Bank since its formation in 1987. On January 1, 2002, Mr. Hammond stepped down from his position as Chief Executive Officer. Mr. Hammond is the founder of the Bank.
Mark T. Hammondhas served as President of the Company since 1997 and of the Bank since 1995. He has been employed by the Bank since 1987. On January 1, 2002, Mr. Hammond assumed the position of Chief Executive Officer. Mr. Hammond is the son of Thomas J. Hammond, the Chairman of the Board.
Michael W. Carriehas served as an Executive Director of the Company and the Bank since 2003, an Executive Vice President of the Company and the Bank since 1995, Chief Financial Officer of the Company and the Bank since 1993, and Treasurer of the Company since 1993 and the Bank since 2002.
Joan H. AndersonKirstin Hammondhas beenserved as an Executive Director of the Company and the Bank since 2003, an Executive Vice President of the Bank since 19881999 and of the Company since 1993. She has been employed by the Bank since 1987.
Kirstin Hammondhas served as an Executive Vice President of the Bank since 1998 and of the Company since 20012002 and has been employed by the Bank since 1991. Mrs. Hammond is the wife of Mark T. Hammond, the President and Chief Executive Officer, and the daughter-in-law of Thomas J. Hammond, the Chairman of the Board.
Robert O. Rondeau, Jr.has served as an Executive Director of the Company and the Bank since 2003, an Executive Vice President of the Bank since 19981999 and of the Company since 20012002 and as an employee of the Bank since 1996. Mr. Rondeau is the son-in-law of Thomas J. Hammond, the Chairman of the Board.
Additional information
We will make available our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act free of charge through our internet website at http://www.flagstar.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
16Copies of our (i) Corporate Governance Guidelines, (ii) charters for the Audit Committee, Compensation Committee, and Nominating/ Corporate Governance Committee and (iii) Code of Business Conduct and Ethics are available atwww.flagstar.com. Copies will also be provided to any stockholder upon written request to Flagstar Bancorp, Inc., Investor Relations, 5151 Corporate Drive, Troy, MI 48098. None of the information posted on our website is incorporated by reference into this Form 10K. The Company will have this information available by the date of its 2004 annual meeting of shareholders.
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We operate from 87 retail99 banking centers and 92 retail loan origination offices128 home lending centers in 2125 states. We also maintain 14 wholesale loanlending offices. We own the buildings and land for 2732 of our offices, own the building but lease the land for one of our offices, and lease the remaining 165208 offices. The buildings with leases have lease expiration dates ranging from 20032004 to 2017. At December 31, 2002,2003, the total net book value of all of our offices and land was approximately $96.3$104.7 million.
Our national headquarters facility and executive offices are located in Troy, Michigan. Substantially all of the operational support departments related to the mortgagehome lending operation are housed in this facility. The majority of the staff that supports the retail banking operation is housed at our owned facility in Jackson, Michigan.
We utilize a highly sophisticated server-based data processing system. At December 31, 2002,2003, the net book value of our computer related equipment (including both hardware and software) was approximately $38.7$65.5 million.
From time to time, we are parties to various legal proceedings incident to our business. At December 31, 2002,2003, there were no legal proceedings that we anticipate would have a material adverse effect on the Company. See Note 1618 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
No items were submitted during the fourth quarter of the year covered by this report for inclusion to be voted on by security holders through a solicitation of proxies or otherwise.
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ITEM 5. | MARKET FOR THE COMPANY’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS |
COMMON STOCK
Our common stock began trading on the New York Stock Exchange in July 2001. The trading symbol isFBC. Prior to July 2001, the common stock traded on the Nasdaq Stock Market under the symbol:FLGS. At March 17, 2003,1, 2004, there were 29,658,87660,730,466 shares of our common stock outstanding.
QUARTERLY STOCK PRICE/ DIVIDEND INFORMATION
The following table summarizes the Company’s common stock price and dividend activity for:
Highest | Lowest | Price/ | Dividends | Highest | Lowest | Price/ | Dividends | |||||||||||||||||||||||||||||||||
Closing | Closing | Closing | Earnings | Declared in | Closing | Closing | Closing | Earnings | Declared in | |||||||||||||||||||||||||||||||
Period Ending | Price(2) | Price(2) | Price(2) | Ratio(1) | the Period | Price(2) | Price(2) | Price(2) | Ratio(1) | the Period | ||||||||||||||||||||||||||||||
December 2003 | $ | 24.80 | $ | 21.01 | $ | 21.42 | 5.0x | $ | 0.150 | |||||||||||||||||||||||||||||||
September 2003 | 26.41 | 19.14 | 22.95 | 4.7x | 0.150 | |||||||||||||||||||||||||||||||||||
June 2003 | 24.71 | 13.23 | 24.45 | 5.7x | 0.100 | |||||||||||||||||||||||||||||||||||
March 2003 | 13.38 | 11.00 | 13.19 | 4.7x | 0.050 | |||||||||||||||||||||||||||||||||||
December 2002 | $ | 21.95 | $ | 17.35 | $ | 21.60 | 5.2x | $ | 0.160 | 10.98 | 8.68 | 10.80 | 5.2x | 0.080 | ||||||||||||||||||||||||||
September 2002 | 23.90 | 18.50 | 20.70 | 5.0x | 0.060 | 11.95 | 9.25 | 10.35 | 5.0x | 0.030 | ||||||||||||||||||||||||||||||
June 2002 | 25.73 | 16.26 | 23.10 | 6.7x | 0.053 | 12.87 | 8.13 | 11.55 | 6.7x | 0.027 | ||||||||||||||||||||||||||||||
March 2002 | 15.73 | 12.74 | 15.52 | 4.8x | 0.047 | 7.87 | 6.37 | 7.76 | 4.8x | 0.023 | ||||||||||||||||||||||||||||||
December 2001 | 16.07 | 12.83 | 13.42 | 7.8x | 0.047 | 8.04 | 6.42 | 6.71 | 7.8x | 0.023 | ||||||||||||||||||||||||||||||
September 2001 | 17.33 | 9.91 | 15.40 | 7.3x | 0.047 | |||||||||||||||||||||||||||||||||||
June 2001 | 11.78 | 9.09 | 9.29 | 5.8x | 0.045 | |||||||||||||||||||||||||||||||||||
March 2001 | 11.11 | 9.31 | 11.11 | 8.4x | 0.045 | |||||||||||||||||||||||||||||||||||
December 2000 | 11.17 | 4.75 | 11.11 | 10.7x | 0.045 |
(1) | Based on most recent 12 month |
(2) | The market quotations reflect inter-dealer prices, without retail markup, mark down or commission and may not necessarily represent actual transactions. |
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information with respect to securities to be issued under the Company’s equity compensation plans as of December 31, 20022003 that have been approved by stockholders.
Number of Securities | Weighted-average | Number of Securities | Number of Securities | Weighted-average | Number of Securities | |||||||||||||||||||
To Be Issued Upon | Exercise Price of | Remaining Available for | To Be Issued Upon | Exercise Price of | Remaining Available for | |||||||||||||||||||
Exercise of | Outstanding | Future Issuance Under Equity | Exercise of | Outstanding | Future Issuance Under Equity | |||||||||||||||||||
Plan Category | Outstanding Options | Options | Compensation Plans | Outstanding Options | Options | Compensation Plans | ||||||||||||||||||
1997 Stock Option Plan | 2,718,982 | $ | 11.68 | 799,689 | 5,425,870 | $ | 7.87 | 181,070 | ||||||||||||||||
2001 Stock Incentive Plan | 355,605 | 3.49 | 378,735 | |||||||||||||||||||||
2000 Incentive Stock Plan | — | — | 611,575 | |||||||||||||||||||||
Total | 3,074,587 | $ | 9.32 | 1,178,424 | 5,425,870 | $ | 7.87 | 792,645 | ||||||||||||||||
Information regarding security ownership of certain beneficial owners and management appearing under “Stock Options” in the 20032004 Proxy Statement is incorporated herein by reference.
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SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
At or for the years ended December 31, | At or for the years ended December 31, | |||||||||||||||||||||||||||||||||||||||||||
2002 | 2001 | 2000 | 1999 | 1998 | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||||||||||||||||||||
(In thousands, except per share data) | (In thousands, except per share data) | |||||||||||||||||||||||||||||||||||||||||||
Summary of Consolidated Statements of Earnings: | Summary of Consolidated Statements of Earnings: | Summary of Consolidated Statements of Earnings: | ||||||||||||||||||||||||||||||||||||||||||
Interest income | $ | 450,112 | $ | 438,771 | $ | 381,635 | $ | 238,670 | $ | 191,261 | Interest income | $ | 511,185 | $ | 450,112 | $ | 438,771 | $ | 381,635 | $ | 238,670 | |||||||||||||||||||||||
Interest expense | 263,880 | 325,041 | 290,126 | 173,732 | 137,187 | Interest expense | 308,483 | 263,880 | 325,041 | 290,127 | 173,732 | |||||||||||||||||||||||||||||||||
Net interest income | Net interest income | 186,232 | 113,730 | 91,509 | 64,938 | 54,074 | Net interest income | 202,702 | 186,232 | 113,730 | 91,508 | 64,938 | ||||||||||||||||||||||||||||||||
Provisions for losses | 28,749 | 33,197 | 10,576 | 7,296 | 18,631 | Provisions for losses | 20,081 | 27,126 | 25,572 | 5,802 | 5,184 | |||||||||||||||||||||||||||||||||
Net interest income after provisions for losses | Net interest income after provisions for losses | 157,483 | 80,533 | 80,933 | 57,642 | 35,443 | Net interest income after provisions for losses | 182,621 | 159,106 | 88,158 | 85,706 | 59,754 | ||||||||||||||||||||||||||||||||
Other income | 236,044 | 213,044 | 65,353 | 81,981 | 118,413 | Other income | 457,761 | 234,421 | 205,419 | 60,580 | 79,868 | |||||||||||||||||||||||||||||||||
Operating and administrative expenses | 222,274 | 164,710 | 100,992 | 80,430 | 86,843 | Operating and administrative expenses | 249,275 | 222,274 | 164,710 | 100,992 | 80,429 | |||||||||||||||||||||||||||||||||
Earnings before federal income tax provision | 171,253 | 128,867 | 45,294 | 59,193 | 67,013 | |||||||||||||||||||||||||||||||||||||||
Earnings before income tax provision | Earnings before income tax provision | 391,107 | 171,253 | 128,867 | 45,294 | 59,193 | ||||||||||||||||||||||||||||||||||||||
Provision for income taxes | 136,755 | 60,626 | 45,927 | 16,360 | 20,772 | |||||||||||||||||||||||||||||||||||||||
Provision for federal income taxes | 60,626 | 45,927 | 16,360 | 20,772 | 25,950 | |||||||||||||||||||||||||||||||||||||||
Earnings before a change in accounting principle | Earnings before a change in accounting principle | 110,627 | 82,940 | 28,934 | 38,421 | 41,063 | Earnings before a change in accounting principle | 254,352 | 110,627 | 82,940 | 28,934 | 38,421 | ||||||||||||||||||||||||||||||||
Cumulative effect of a change in accounting principle | Cumulative effect of a change in accounting principle | 18,716 | — | — | — | — | Cumulative effect of a change in accounting principle | — | 18,716 | — | — | — | ||||||||||||||||||||||||||||||||
Net earnings | Net earnings | $ | 129,343 | $ | 82,940 | $ | 28,934 | $ | 38,421 | $ | 41,063 | Net earnings | $ | 254,352 | $ | 129,343 | $ | 82,940 | $ | 28,934 | $ | 38,421 | ||||||||||||||||||||||
Earnings per share before a change in accounting principle | Earnings per share before a change in accounting principle | Earnings per share before a change in accounting principle | ||||||||||||||||||||||||||||||||||||||||||
Basic | $3.79 | $ | 2.99 | $ | 1.06 | $ | 1.25 | $ | 1.33 | Basic | $4.25 | $ | 1.90 | $ | 1.50 | $ | 0.53 | $ | 0.63 | |||||||||||||||||||||||||
Diluted | $3.58 | $ | 2.78 | $ | 1.05 | $ | 1.22 | $ | 1.29 | Diluted | $3.99 | $ | 1.79 | $ | 1.39 | $ | 0.53 | $ | 0.61 | |||||||||||||||||||||||||
Earnings per share from cumulative effect of a change in accounting principle | Earnings per share from cumulative effect of a change in accounting principle | Earnings per share from cumulative effect of a change in accounting principle | ||||||||||||||||||||||||||||||||||||||||||
Basic | — | $ | 0.32 | — | — | — | ||||||||||||||||||||||||||||||||||||||
Basic | $0.64 | — | — | — | — | Diluted | — | $ | 0.30 | — | — | — | ||||||||||||||||||||||||||||||||
Diluted | $0.60 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Net earnings per share — basic | Net earnings per share — basic | $4.43 | $ | 2.99 | $ | 1.06 | $ | 1.25 | $ | 1.33 | Net earnings per share — basic | $4.25 | $ | 2.22 | $ | 1.50 | $ | 0.53 | $ | 0.63 | ||||||||||||||||||||||||
Net earnings per share — diluted | Net earnings per share — diluted | $4.18 | $ | 2.78 | $ | 1.05 | $ | 1.22 | $ | 1.29 | Net earnings per share — diluted | $3.99 | $ | 2.09 | $ | 1.39 | $ | 0.53 | $ | 0.61 | ||||||||||||||||||||||||
Dividends per common share | Dividends per common share | $0.25 | $ | 0.19 | $ | 0.18 | $ | 0.16 | $ | 0.12 | Dividends per common share | $0.50 | $ | 0.12 | $ | 0.09 | $ | 0.09 | $ | 0.08 | ||||||||||||||||||||||||
Summary of Consolidated Statements of Financial Condition: | Summary of Consolidated Statements of Financial Condition: | Summary of Consolidated Statements of Financial Condition: | ||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 8,203,702 | $ | 6,623,824 | $ | 5,763,224 | $ | 4,310,039 | $ | 3,046,445 | Total assets | $ | 10,570,193 | $ | 8,212,786 | $ | 6,636,797 | $ | 5,772,623 | $ | 4,316,201 | |||||||||||||||||||||||
Loans receivable | 7,250,894 | 5,875,290 | 5,222,491 | 3,808,731 | 2,558,716 | Loans receivable | 9,599,803 | 7,287,338 | 5,911,875 | 5,242,140 | 3,824,752 | |||||||||||||||||||||||||||||||||
Mortgage servicing rights | 230,756 | 168,469 | 106,425 | 131,831 | 150,258 | Mortgage servicing rights | 260,128 | 230,756 | 168,469 | 106,425 | 131,831 | |||||||||||||||||||||||||||||||||
Total deposits | 4,373,889 | 3,608,103 | 3,407,965 | 2,260,963 | 1,923,370 | Total deposits | 5,680,167 | 4,373,889 | 3,608,103 | 3,407,965 | 2,260,963 | |||||||||||||||||||||||||||||||||
FHLB advances | 2,222,000 | 1,970,505 | 1,733,345 | 1,477,000 | 456,019 | FHLB advances | 3,246,000 | 2,222,000 | 1,970,505 | 1,733,345 | 1,477,000 | |||||||||||||||||||||||||||||||||
Stockholders’ equity | 418,946 | 291,488 | 196,830 | 185,714 | 163,852 | Stockholders’ equity | 654,683 | 418,946 | 291,488 | 196,830 | 185,714 | |||||||||||||||||||||||||||||||||
Other Financial and Statistical Data: | Other Financial and Statistical Data: | Other Financial and Statistical Data: | ||||||||||||||||||||||||||||||||||||||||||
Tangible capital ratio | 6.73% | 6.13% | 5.31% | 6.76% | 6.44% | Tangible capital ratio | 7.44 | % | 6.73 | % | 6.13 | % | 5.31 | % | 6.76 | % | ||||||||||||||||||||||||||||
Core capital ratio | 6.73% | 6.13% | 5.32% | 6.80% | 6.54% | Core capital ratio | 7.44 | % | 6.73 | % | 6.13 | % | 5.32 | % | 6.80 | % | ||||||||||||||||||||||||||||
Total risk-based capital ratio | 12.01% | 11.44% | 10.30% | 13.16% | 12.93% | Total risk-based capital ratio | 13.47 | % | 12.01 | % | 11.44 | % | 10.30 | % | 13.16 | % | ||||||||||||||||||||||||||||
Equity-to-assets ratio (at the end of the period) | 5.11% | 4.40% | 3.42% | 4.31% | 5.38% | Equity-to-assets ratio (at the end of the period) | 6.19 | % | 5.10 | % | 4.39 | % | 3.41 | % | 4.30 | % | ||||||||||||||||||||||||||||
Equity-to-assets ratio (average for the period) | 5.09% | 3.75% | 3.62% | 4.69% | 5.03% | Equity-to-assets ratio (average for the period) | 5.30 | % | 5.09 | % | 3.75 | % | 3.62 | % | 4.69 | % | ||||||||||||||||||||||||||||
Book value per share | $14.16 | $ | 10.15 | $ | 7.35 | $ | 6.41 | $ | 5.33 | Book value per share | $10.79 | $ | 7.08 | $ | 5.08 | $ | 3.68 | $ | 3.21 | |||||||||||||||||||||||||
Shares outstanding | 29,595 | 28,710 | 26,765 | 29,005 | 30,757 | Shares outstanding | 60,675 | 59,190 | 57,420 | 53,530 | 58,010 | |||||||||||||||||||||||||||||||||
Average shares outstanding | 29,175 | 27,723 | 27,345 | 30,508 | 30,757 | Average shares outstanding | 59,811 | 58,350 | 55,446 | 54,690 | 61,016 | |||||||||||||||||||||||||||||||||
Mortgage loans originated or purchased | $ | 43,192,312 | $ | 32,996,998 | $ | 9,865,152 | $ | 14,550,258 | $ | 18,852,885 | Mortgage loans originated or purchased | $ | 56,378,151 | $ | 43,192,312 | $ | 32,996,998 | $ | 9,865,152 | $ | 14,550,258 | |||||||||||||||||||||||
Mortgage loans sold | 40,495,894 | 30,879,271 | 7,982,200 | 12,854,514 | 17,803,958 | Mortgage loans sold | 51,922,757 | 40,495,894 | 30,879,271 | 7,982,200 | 12,854,514 | |||||||||||||||||||||||||||||||||
Mortgage loans serviced for others | 21,586,797 | 14,222,802 | 6,644,482 | 9,519,926 | 11,472,211 | Mortgage loans serviced for others | 30,395,079 | 21,586,797 | 14,222,802 | 6,644,482 | 9,519,926 | |||||||||||||||||||||||||||||||||
Capitalized value of mortgage servicing rights | 1.07% | 1.18% | 1.60% | 1.38% | 1.31% | Capitalized value of mortgage servicing rights | 0.86 | % | 1.07 | % | 1.18 | % | 1.60 | % | 1.38 | % | ||||||||||||||||||||||||||||
Interest rate spread | 2.74% | 1.82% | 1.76% | 1.85% | 1.85% | Interest rate spread | 2.00 | % | 2.74 | % | 1.82 | % | 1.76 | % | 1.85 | % | ||||||||||||||||||||||||||||
Net interest margin | 2.87% | 1.94% | 1.91% | 2.02% | 2.14% | Net interest margin | 2.21 | % | 2.87 | % | 1.94 | % | 1.91 | % | 2.02 | % | ||||||||||||||||||||||||||||
Return on average assets | 1.79% | 1.31% | 0.56% | 1.05% | 1.45% | Return on average assets | 2.52 | % | 1.79 | % | 1.31 | % | 0.56 | % | 1.05 | % | ||||||||||||||||||||||||||||
Return on average equity | 37.14% | 34.98% | 15.47% | 21.37% | 28.77% | Return on average equity | 47.58 | % | 37.14 | % | 34.98 | % | 15.47 | % | 21.37 | % | ||||||||||||||||||||||||||||
Efficiency ratio | 52.6% | 50.2% | 63.6% | 53.9% | 49.6% | Efficiency ratio | 37.7 | % | 52.8 | % | 51.6 | % | 66.4 | % | 55.5 | % | ||||||||||||||||||||||||||||
Net charge off ratio | 0.72% | 0.54% | 0.25% | 0.33% | 0.57% | Net charge off ratio | 0.35 | % | 0.50 | % | 0.40 | % | 0.20 | % | 0.22 | % | ||||||||||||||||||||||||||||
Ratio of allowance to investment loans | 1.25% | 1.32% | 0.66% | 1.44% | 2.68% | Ratio of allowance to investment loans | 0.53 | % | 0.95 | % | 0.88 | % | 0.38 | % | 0.95 | % | ||||||||||||||||||||||||||||
Ratio of non-performing assets to total assets | 1.54% | 1.91% | 1.49% | 1.47% | 1.97% | Ratio of non-performing assets to total assets | 1.01 | % | 1.50 | % | 1.89 | % | 1.47 | % | 1.43 | % | ||||||||||||||||||||||||||||
Ratio of allowance to non-performing loans | 61.3% | 47.9% | 39.3% | 55.0% | 53.8% | Ratio of allowance to non-performing loans | 61.7 | % | 55.5 | % | 33.8 | % | 24.6 | % | 43.7 | % | ||||||||||||||||||||||||||||
Number of retail banking centers | 87 | 71 | 52 | 35 | 28 | Number of banking centers | 99 | 87 | 71 | 52 | 35 | |||||||||||||||||||||||||||||||||
Number of retail loan origination centers | 92 | 69 | 42 | 38 | 31 | Number of home loan centers | 128 | 92 | 69 | 42 | 38 | |||||||||||||||||||||||||||||||||
Number of correspondent offices | 14 | 15 | 15 | 16 | 15 | Number of wholesale offices | 14 | 14 | 15 | 15 | 16 |
Note —
Note — | All per share data has been restated for the 2 for 1 stock split on May 15, 2003 and for the 3 for 2 stock splits completed on May 31, 2002 and July 13, 2001. |
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
PROFILE AND INTRODUCTION
Flagstar Bancorp (“Flagstar” or the “Company”) is a Michigan-based thrift holding company founded in 1993. Our stock is traded on the New York Stock Exchange under the symbol “FBC”. Our primary subsidiary is Flagstar Bank, fsb (the “Bank”) a federally chartered stock savings bank.
We report our financial condition and net earnings on a consolidated basis but report segmented operating results for both our retail banking group and our mortgage bankinghome lending group. Each operation is linked to one another in many aspects of their respective businesses but areis indeed separate.
Our Retail Banking Groupbanking group (“RBG”BG”) collects deposits from the general public and local government agencies at 8699 banking centers located throughout southern Michigan and Indiana. We also collect certificates of deposit through secondary market offerings and solicit business through our internetInternet branch located atwww.flagstar.com.www.flagstar.com. We also acquire advances from the Federal Home Loan Bank of Indianapolis. We invest these funds in a variety of consumer and commercial loan products offered to the general public.
Our primary investment vehicle is single-family mortgage loans originated or acquired by our Mortgage BankingHome Lending Group (“MBG”HLG”).
The MBGHLG acquires single-family mortgage loans on a wholesale basis nationally. We also originate single-family loans on a retail basis from 92128 offices in 2125 states. We also have mortgage loan personnel in 19 retail22 banking centers located in Michigan. Our wholesale division operates from 14 regional offices across the country. In order to originate or acquire these loans, the MBGHLG utilizes funds provided by the RBG.BG. We sell the majority of the loans we produce in the secondary market on a whole loan basis or by securitizing the loans into a mortgage-backed security.securities. Mortgage-backed securities are issued through FNMA, FHLMC, and GNMA. We sell primarily conforming originations on a servicing-retained basis and generally sell the mortgage servicing rights in a separate secondary market transaction.
We began our corporate existence as a bank in 1987 with a $3.0 million balance sheet and one banking center. Our roots come from our core operation that was once a mid-sized regional mortgage banking company. Our growth since 1987 has been extremely rapid. In late 1993,mid-1994, we signed a letter of intent to acquireacquired Security Savings Bank, ofan eight branch savings bank headquartered in Jackson, Michigan. Since that acquisition, we have been focused on growing our retail banking operation. The revenue stream created by a retail banking operation was sought to counter the cyclical operating results of our mortgagehome lending operation.
After 16 years in business,Today, our assets total $10.6 billion. During 2003, our BG contributed 25% of net earnings and provided an approximate return on allocated equity of 21.22%. This achievement was overshadowed by the 75% contribution by the mortgage group. The HLG returned 73.01% return on allocated equity. The overall return by the Company equaled a 47.6% return on average equity and a 2.52% return on average assets. During 2003, the Company increased its asset base has reached $8.2 billion29%, its deposit portfolio by 30%, its banking center locations by 13%, its home loan centers 39%, and we are now operating from 87 retail banking centers. During 2002, our RBG contributed over 50% of pre-tax operating earnings despite a historic origination year registeredits total equity position by the MBG. Over the past 16 years, we have grown our asset base 90% per year, our deposits 52% per year, and our retail origination offices and retail banking centers by 45% per year.56%. Our goal over the next five years is to double the number of our banking centers and loan origination officeshome lending centers and to continue to increase our market share within the markets we serve.
Toward this goal, during 2003, we will expand the banking center network by 16 new banking centers and we project the amount of new retail origination offices will expand by 24. This large expansion will allow us to continue to grow our retail deposit base and our retail loan originations.
2022
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
PROFILE AND INTRODUCTION (continued)
Toward this goal, during 2004, we expect to expand the banking center network by adding 25 new banking centers and we project the amount of new home loan centers will expand by 64. This large expansion will allow us to continue to grow our deposit base and our loan originations.
Our ability to sustain this rate of growth on a long-term basis is dependent upon a number of factors, some of which are beyond our control. For instance, our record growth in earnings in 20012002 and 20022003 was due to a significant increase in our loan sale activity. This, in turn, resulted fromThese loan sales were the result of the unusually low mortgage rate environment in the United States over a prolongedduring the period. Any sudden or prolonged increase in these rates could significantlywill reduce our income from these sales. Primarily because of interest rate movements, for instance, our loan sale income fluctuated, from $38.7 million in 1999 to $21.9$17.2 million in 2000 $199.4to $191.7 million in 2001, and $194.2$192.6 million in 2002.2002, and $357.3 million in 2003. In turn, our return on equity was affected, decliningimproving from 21.37% in 1999 to 15.47% in 2000 improving to 34.98% in 2001, and increasing again to 37.14% in 2002.2002 and increasing again to 47.58% in 2003.
Further, our operating and administrative expenses increased significantly in 20012002 and 20022003 to support our anticipated or actualthe increase in loan sale activity. While this has allowed us to develop and maintain an efficient wholesale loan operation intended to handle a large volume of loans, our ability to increase operational efficiency will become limited over time. Our efficiency ratio (the percentage of each dollar of revenue that is paid in expenses) was 53.9% in 1999, worsened to 63.6%66.4% in 2000, improving to 51.6% in 2001 and then improvedworsening to 50.2%52.8% in 2001.2002. It has since worsened again,improved to 52.6%37.7% for the year ended December 31, 2002.2003. If the volume of loans declines and we do not correspondingly reduce our operating and administrative expenses in a prompt manner, we couldwill suffer a significant reduction in net income.
RESULTS OF OPERATIONS
During 2002,2003, Flagstar enjoyed its most profitable year in its corporate existence.ever. During the year corporate records were set for every category of growth, earnings, and loan production. The Company, for the secondthird year in a row was singled out as the most profitable publicly traded financial institution with a market capitalization over $1.0 billion, from a return on average equity perspective. The Company’s return on average equity was 47.6%, 37.1% and 35.0% for the years ended December 31, 2003, 2002 and 2001, respectively.
Flagstar’s net incomeearnings totaled $129.3$254.4 million ($4.183.99 per share — diluted) for the year ended December 31, 2002,2003, compared to $82.9$129.3 million ($2.782.09 per share — diluted) in 2001,2002, and $28.9$82.9 million ($1.051.39 per share — diluted) in 2000.2001. The 20022003 earnings constituteconstituted a 56.0%96.8% increase in profitability versus 2001. 2002.
The 2001primary reason for these exceptional results were the amount of mortgage loan originations and subsequent loan sales completed during both periods. Gains on the sale of mortgage loans accounted for 54.1% and 45.8% of revenues during 2003 and 2002, respectively. Both origination volumes constituted corporate records. The origination levels were a product of the interest rate environment experienced during both periods. The lower interest rate environment prevalent during 2002 and 2003 is not expected to continue. In 2004, earnings constituteare expected to decrease as much as 40%, according to the earnings guidance previously announced by the Company. The expected reduction is based on the assumption that interest rates will rise during 2004.
In the fourth quarter of 2003, loan originations dropped 51.3% from $16.0 billion in the third quarter to $7.8 billion. In conjunction with this slowdown the Company undertook a 186.9%right-sizing of its HLG back room
23
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
support operations. This restructuring of the operation staff resulted in the removal of over 700 temporary, contract, seasonal, and full-time staff members. The Company does not intend to adjust its staff any further.
In 2003, the Company also recorded a record amount of net interest income. This achievement was the product of the 30.7% increase in profitabilitythe earning asset portfolio. In 2004, the Company expects to expand its earning asset portfolio an additional 30%. Although this growth will come from 2000.the origination of intermediate adjustable-rate mortgages and other consumer and commercial loan products, there is no guarantee that a sufficient amount of loan product will be available at yields and durations that will satisfy the Company’s asset and liability strategy. This growth in the investment loan portfolio will allow management to continue to grow the net interest income of the Company. This projected growth is expected to generate approximately $22.0 million of net revenue, an increase of approximately $0.22 per share-diluted. Management believes the funding for this expansion will come from an expansion of each of the Company’s main funding sources. There is no guarantee that management will be able to garner the needed duration specific liabilities.
At December 31, 2003, the Company’s loans serviced for others portfolio was at an all-time high of $30.4 billion. This portfolio is expected to produce positive results during 2004. In 2003, the loans serviced for others portfolio generated a net loss of $18.6 million. During the fourth quarter, the portfolio accounted for $12.5 million in net revenues. During 2004, this MSR portfolio is projected to generate over $50.5 million of net revenue, a turn-around of approximately $0.70 per share-diluted. At December 31, 2003, the MSR portfolio had a fair value $150.5 million greater than its current book value. As interest rates rise, the fair value of this portfolio increases. Over the past five years, the Company has sold 75% of the MSRs it has originated. A sale of any of this portfolio will decrease the recurring earnings attainable in the future, but will create a net gain from the sale.
SEGMENT REPORTING
The Company’s operations are broken down into two distinct business lines: mortgage bankingsegments: home lending and retail banking. Each business operates under the same banking charter, but is reported on a segmented basis for this report. Each of the business lines is complementary to each other. The retail banking operation includes the gathering of deposits and investing those deposits in duration-matched assets primarily originated by the mortgagehome lending operation. The banking operationgroup holds these loans in the investment portfolio in order to earn spread income. On the other hand, the mortgage bankinghome lending operation involves the origination, packaging, and sale of mortgage loans in order to receive transaction income inincome. The lending operation also services mortgage loans for others and sells MSRs into the form of a gain on the sale of the loan.secondary market. Funding for the mortgage bankinglending operation is provided by deposits and borrowings fromgarnered by the retail banking operation.
21
SEGMENT REPORTINGgroup.
RETAIL BANKING OPERATIONS
The Company provides a full range of banking services to consumers and small businesses in southern Michigan and Indiana. The Company operated a network of 87 retail99 banking centers at December 31, 2002.2003. Throughout 2002,2003, the Company has focused on expanding its branchbanking center network in these markets in order to increase its access to retail depositors. At June 30, 2003, the Company maintained a 4% market share in
24
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
the state of Michigan and a 2% deposit share in the state of Indiana. The retail banking operation also provides consumer banking services to the Company’s mortgagehome loan customers in both Michigan and Indiana.
In each successive period the retail banking operation has expanded its deposit portfolio and banking centers. Each new banking center has been opened on a de novo basis.basis since 1994. The result has been that each year revenues and expenses related to this operation have increased. During 20022003 and 2001,2002, revenues increased 65.7%33.1% and 38.2%65.1%, respectively, while pre-tax earnings increased 105.8%18.0% in 20022003 and 5.8%104.3% in 2001,2002, respectively. Additionally, identifiable assets increased 42.4%79.2% in 2003 and increased 44.8% in 2002, and decreased 15.4% in 2001, respectively.
The primary reason for the increases in revenue is the corresponding increases in the amount of earning assets funded by retail deposits. This increase is tied to the expansion of the banking center network. Further expansion of the deposit branchbanking center network is planned. During 20012002 and 2002,2003, the Company opened 1916 and 16 retail12 banking centers, respectively. During 2003,2004, the Company has plans to open an additional 1625 banking centers.
However, weWe do not expect that we will have an immediate increase in retail deposits by opening these new locations.facilities. Nonetheless, we believe that the growth in deposits will occur over time, with FHLB advances, municipal and other wholesale fundingfunds providing sufficient operational funding in the interim.
At December 31, 2002,2003, the Company operated 3336 banking centers in metropolitan Detroit. These banking centers had average deposits of $41.4 million. These facilities have an average maturation of 31 months. Eight of these facilities are part of our in-store program. During 2004, the Company plans to open 14 facilities in this market. There are no in-store banking centers planned in this market.
At December 31, 2003, the Company operated 8 banking centers in metropolitan Indianapolis. These banking centers had average deposits of $17.2 million. These facilities have an average maturation of 30 months. Six of these facilities are part of our in-store program. During 2004, the Company plans to open 3 new facilities in this market. There are no in-store banking centers planned in this market.
The 16 banking centers in Indiana were all opened within the past four years.
At December 31, 2003, the Company operated 35 banking centers under its in-store program. ThirtyThirty-two of these banking centers are located in Wal-Mart superstores. While 1214 of the in-store branchesbanking centers were located in Indiana, 21 were located in Michigan communities. The first of the Wal-Mart banking centers was placed in operation in September 2000. The Company expects to open fourtwo more Wal-Mart facilities three in 2003.
Fifty-two of the Company’s retail banking centers were opened within the past three years.2004. The 12 banking centers in Indiana were all opened under the Wal-Mart in-store program in the past three years. The Wal-Mart banking centers had an average deposit portfolio of only $10.6$16.3 million compared with the Companyremainder of the banking centers which had average deposits of $30.5$48.5 million. The largest in-store branch had a deposit portfolio of $47.4 million. The eight in-store banking centers in the Detroit metropolitan area had average deposits of $18.8 million while, the six in-store banking centers in the metropolitan Indianapolis marketplace had average deposits of $19.9 million. Of the 87 branches, 29 branches35 banking centers, 11 banking centers had deposits of less than $10.0 million. The average age of the in-store banking centers was 34 months at December 31, 2003.
Each of the in-store banking centers offer the same products and services to our customers as are available at our free-standing banking centers without any significant difference in operating costs. By relying upon
25
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
BANKING OPERATIONS (continued)
in-store banking centers to expand our retail branchbanking center network, we avoid the significant building costs of free-standing banking centers while obtaining marketing exposure in a high customer traffic area. The customers using our in-store banking centers are substantially the same as the customers using our free-standing banking centers.
Forty-seven of the Company’s banking centers were opened within the past three years.
Despite the Company’s growing retail banking operation and the large number of banking centers that are not mature, the retailbanking operation was responsible for 31.6% of revenues and 25.7% of pre-tax earnings in 2003. During the fourth quarter, the banking operation was responsible for 44.3% of revenues and 53.8% of pre-tax earnings. During 2002, the banking operation was responsible for 37.2% of revenues and 50.0%49.7% of pre-tax earnings in 2002. During 2001, the retail banking operation produced 32.3% of the pre-tax earnings of the Company.earnings. The retail banking operation’s identifiable assets averaged 55%70% of the Company’s total assets during 20022003 and 2001.
22
MORTGAGE BANKINGHOME LENDING OPERATIONS
The mortgage bankinghome lending operation isprovides a much more volatile source of earnings. This operation, for the most part, is reliant on the prevailing interest rate environment, which is outside the Company’s control. The Company has continued to expand its operations which is evident when one views the level of purchased money mortgage originations made in each successive year. During 2002, 2001, 2000, 1999, 1998, 1997, and 1996, the Company originated $8.1 billion, $7.1 billion, $6.1 billion, $6.2 billion, $5.4 billion, $4.1 billion, and $3.7 billion, respectively. Despite the expansion
The following table shows in purchased business, the Company’s origination volumes were extremely volatile and totaled $43.2 billion, $33.0 billion, $9.9 billion, $14.6 billion, $18.8 billion, $7.9 billion, and $6.8 billion in 2002, 2001, 2000, 1999, 1998, 1997, and 1996, respectively. This volatility in originations is created by the changes in the general interest rate environment andeach successive year the amount (in thousands) and percentage of both refinance and purchase money mortgages generated to refinance an existing mortgage loan.originated during each respective year:
Year | Originated | Purchase | % | Refinance | % | |||||||||||||||||
2003 | $ | 56,378,151 | $ | 7,272,308 | 12.9 | $49,105,843 | 87.1 | |||||||||||||||
2002 | 43,192,313 | 8,034,177 | 18.6 | 35,158,136 | 81.4 | |||||||||||||||||
2001 | 32,996,998 | 7,130,161 | 21.6 | 25,866,837 | 78.4 | |||||||||||||||||
2000 | 9,865,152 | 6,098,252 | 61.8 | 3,766,900 | 38.2 | |||||||||||||||||
1999 | 14,550,258 | 6,178,246 | 42.5 | 8,372,012 | 57.5 | |||||||||||||||||
1998 | 18,852,884 | 5,442,767 | 28.9 | 13,410,117 | 71.1 | |||||||||||||||||
1997 | 7,873,099 | 4,079,583 | 51.8 | 3,793,516 | 48.2 | |||||||||||||||||
1996 | 6,791,665 | 3,714,333 | 54.7 | 3,077,332 | 45.3 |
Flagstar’s mortgage bankinghome lending activity consists primarily of the origination or purchase of mortgage loans from the originating lender. Flagstar conducts the wholesale portion of its mortgage bankinghome lending operation through a network of correspondent lenders consisting of banks, thrifts, mortgage companies, and mortgage brokers. This mortgage banking network conducts mortgagehome lending operations nationwide. The Company also originates a significant amount of mortgage loans on a retail basis. These mortgage loans, the majority of which are subsequently sold in the secondary mortgage market, conform to the underwriting standards of FNMA, FHLMC, or GNMA.
The earnings volatility inherent in the mortgage banking operation is visually apparent in the revenues and pre-tax earnings of the operation shown below. The results show that during 2002 and 2001, revenues increased 14.3% and 163.6%, respectively, while pre-tax earnings decreased 1.8% and increased 1,359.5%, respectively. The primary cause for these large swings is the mortgage loan production completed during the periods. The future revenue, earnings, and profitability of this operation are fully dependent on production volume and the interest rate environment.
2326
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
The home lending operation was responsible for 68.4% of revenues and 74.3% of pre-tax earnings in 2003. During 2002, the home lending operation produced 50.3% of the pre-tax earnings of the Company. The home lending operation’s identifiable assets averaged 30% of the Company’s total assets during 2003 and 2002.
The home lending operation also involves the servicing of mortgage loans for others and the sale of MSRs into the secondary market. During 2003, the Company serviced a portfolio of mortgage loans that averaged $26.4 billion. The portfolio generated revenue of $104.4 million. This revenue stream was offset by the amortization of $123.0 million in previously capitalized value. During a period of falling or low interest rates, the Company must increase the amortization of the capitalized value of the portfolio because of payoffs and refinances.
The earnings volatility inherent in the home lending operation is apparent in the revenues and pre-tax earnings of the operation shown below. The results show that during 2003 and 2002, revenues increased 70.5% and 18.2%, respectively, while pre-tax earnings increased 233.4% and decreased 1.2%, respectively. During 2003, return on average attributable assets and average attributable equity was 4.14% and 73.01%, respectively. In periods of low or falling interest rates the Company will increase the amount of loan originations and subsequent sale revenue but will also increase the amount of amortization on the capitalized servicing asset. In a rising or higher interest rate, loan originations and sales will slow and the amount of amortization of the MSR asset will also slow. The net increase in the amount of net servicing revenue will not offset the amount of lost revenue from loans sales.
The future revenue, earnings, and profitability of this operation are fully dependent on production volumes, servicing portfolio balances, and the interest rate environment.
27
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
HOME LENDING OPERATIONS (continued)
The following tables present certain financial information concerning the results of operations of Flagstar’s retail banking and mortgage bankinghome lending operations. See Note 2024 of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary Data, herein.
Retail Banking Operations
At or for the years ended December 31, | At or for the years ended December 31, | |||||||||||||||||||||||
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||
Revenues | $ | 157,101 | $ | 94,820 | $ | 68,633 | $ | 208,579 | $ | 156,660 | $ | 94,900 | ||||||||||||
Earnings before taxes | 85,571 | 41,588 | 39,314 | 100,447 | 85,130 | 41,669 | ||||||||||||||||||
Identifiable assets | 4,726,346 | 3,255,673 | 3,905,526 | 8,466,397 | 4,725,609 | 3,264,606 |
Mortgage BankingHome Lending Operations
At or for the years ended December 31, | At or for the years ended December 31, | |||||||||||||||||||||||
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||
Revenues | $ | 265,175 | $ | 231,954 | $ | 88,229 | $ | 451,884 | $ | 265,043 | $ | 224,248 | ||||||||||||
Earnings before taxes | 85,682 | 87,279 | 5,980 | 290,660 | 86,123 | 87,198 | ||||||||||||||||||
Identifiable assets | 4,056,655 | 4,021,207 | 3,679,051 | 3,353,796 | 4,117,393 | 4,034,033 |
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
NET INTEREST INCOME
During each of the last three years, there has been an increased level of revenue attributable to net interest income. The level of net interest income reported by the Company is impacted primarily by the volume of average earning assets, the rate paid to acquire the required funding for those earning assets, and the general level of interest rates. During 2002, the Company recognized $186.2 million in net interest income, which represents an increase of 63.7% compared to the $113.7 million reported in 2001 which represented 44.1% of the Company’s total revenue. This increase is primarily attributable to a $636.5 million, or 10.9%, increase in average earning assets.
The 2001 total of $113.7 million in net interest income represented an increase of 24.3% when compared to the $91.5 million reported in 2000 and totaled 34.8% of 2001 revenue. The 2001 increase was primarily attributable to a $1.1 billion increase in average earning assets.
During 2002, the interest rate margin increased to 2.87%, from 1.94%. The yield earned on the Company’s earning assets decreased from 7.49% during 2001 to 6.93% in 2002 but was offset by a larger decrease in the cost of interest-bearing liabilities from 5.67% in 2001 to 4.19% during 2002.
During 2001, the interest rate margin increased to 1.94%, from 1.91%. The yield earned on the Company’s earning assets decreased from 7.97% during 2000 to 7.49% in 2001, but was offset by a decrease in the cost of interest-bearing liabilities from 6.21% in 2000 to 5.67% during 2001.
Approximately, $3.3At December 31, 2003, approximately $2.8 billion of the Company’s earning assets are long-term mortgage loans it has originated and is currently preparing to sell. These mortgage loans are sold upon their conversion to a mortgage-backed security, usually within 90 days. These loans are being funded with short-term liabilities. Typically, there is a spread between the long-term rates associated with the mortgage loans and the short-term rates associated with the funding source. During 2002,2003, the spread widened in the first half of the year but tightened as the year progressed. The spread between these mortgages and these short-term funds stood at approximately 4.00% at year-end. This arbitrage was the single largest asset that affected the Company’s interest margin.
25 2003
During 2003, the interest rate margin decreased to 2.21%, from 2.87%. The yield earned on the Company’s earning assets decreased from 6.93% during 2002 to 5.58% in 2003, a 1.35% decrease that was greater than the related decrease in the cost of interest-bearing liabilities. The cost of interest-bearing liabilities decreased from 4.19% in 2002 to 3.58% during 2003.
2002
During 2002, the interest rate margin increased to 2.87%, from 1.94%. The yield earned on the Company’s earning assets decreased from 7.49% during 2001 to 6.93% in 2002, but was offset by a decrease in the cost of interest-bearing liabilities from 5.67% in 2001 to 4.19%.
2001
During 2001, the interest rate margin was 1.94%. The yield earned on the Company’s earning assets decreased from 7.97% during 2000 to 7.49% in 2001, and was offset by a decrease in the cost of interest-bearing liabilities from 6.21% in 2001 to 5.67%.
29
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
The following table presents interest income from average earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates. Interest income from earning assets includes the amortization of net premiums and the amortization of net deferred loan origination costs. Non-accruing loans were included in the average loan amounts outstanding.
AVERAGE YIELDS EARNED AND RATES PAID
The following table presents interest income from average earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates. Interest income from earning assets includes the amortization of net premiums and the amortization of net deferred loan origination costs. Non-accruing loans were included in the average loan amounts outstanding.
For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | Average | Yield/ | Average | Yield/ | Average | Yield/ | Average | Yield/ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-earning assets: | Interest-earning assets: | Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans receivable, net | Loans receivable, net | $ | 6,190,182 | $ | 439,819 | 7.11 | % | $ | 5,639,266 | $ | 424,868 | 7.53 | % | $ | 4,642,157 | $ | 370,927 | 7.99 | % | Loans receivable, net | $ | 8,688,840 | $ | 497,406 | 5.72 | % | $ | 6,190,182 | $ | 439,819 | 7.11 | % | $ | 5,639,266 | $ | 424,868 | 7.53 | % | ||||||||||||||||||||||||||||||||||||
FHLB stock | FHLB stock | 137,881 | 8,316 | 6.03 | 115,777 | 8,580 | 7.41 | 93,275 | 7,619 | 8.17 | FHLB stock | 170,313 | 8,117 | 4.77 | 137,881 | 8,316 | 6.03 | 115,777 | 8,580 | 7.41 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | Other | 165,204 | 1,977 | 1.20 | 101,747 | 5,323 | 5.23 | 52,672 | 3,089 | 5.86 | Other | 309,084 | 5,662 | 1.83 | 165,204 | 1,977 | 1.20 | 101,747 | 5,323 | 5.23 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | Total | 6,493,267 | $ | 450,112 | 6.93 | % | 5,856,790 | $ | 438,771 | 7.49 | % | 4,788,104 | $ | 381,635 | 7.97 | % | Total | 9,168,237 | $ | 511,185 | 5.58 | % | 6,493,267 | $ | 450,112 | 6.93 | % | 5,856,790 | $ | 438,771 | 7.49 | % | ||||||||||||||||||||||||||||||||||||||||||
Other assets | Other assets | 727,423 | 458,767 | 381,302 | Other assets | 921,163 | 727,423 | 458,767 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets | Total assets | $ | 7,220,690 | $ | 6,315,557 | $ | 5,169,406 | Total assets | $ | 10,089,400 | $ | 7,220,690 | $ | 6,315,557 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: | Interest-bearing liabilities: | Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Retail deposits | $ | 3,868,902 | $ | 126,977 | 3.28 | % | $ | 3,449,462 | $ | 191,595 | 5.55 | % | $ | 2,996,489 | $ | 179,488 | 5.99 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deposits | Deposits | $ | 5,310,614 | $ | 138,625 | 2.61 | % | $ | 3,868,902 | $ | 126,977 | 3.28 | % | $ | 3,449,462 | $ | 191,595 | 5.55 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
FHLB advances | FHLB advances | 2,179,060 | 115,345 | 5.29 | 2,076,400 | 116,957 | 5.63 | 1,541,184 | 98,775 | 6.41 | FHLB advances | 2,711,119 | 127,044 | 4.69 | 2,179,060 | 115,345 | 5.29 | 2,076,400 | 116,957 | 5.63 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | Other | 250,322 | 21,558 | 8.61 | 202,633 | 16,489 | 8.14 | 137,481 | 11,863 | 8.63 | Other | 613,635 | 42,814 | 6.98 | 250,322 | 21,558 | 8.61 | 202,633 | 16,489 | 8.14 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total interest-bearing liabilities | Total interest-bearing liabilities | 6,298,284 | $ | 263,880 | 4.19 | % | 5,728,495 | $ | 325,041 | 5.67 | % | 4,675,154 | $ | 290,126 | 6.21 | % | Total interest-bearing liabilities | 8,635,368 | $ | 308,483 | 3.58 | % | 6,298,284 | $ | 263,880 | 4.19 | % | 5,728,495 | $ | 325,041 | 5.67 | % | ||||||||||||||||||||||||||||||||||||||||||
Other liabilities | Other liabilities | 574,171 | 349,933 | 307,212 | Other liabilities | 919,406 | 574,171 | 349,933 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stockholders equity | 348,235 | 237,129 | 187,040 | Stockholders equity | 534,626 | 348,235 | 237,129 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and Stockholders equity | Total liabilities and Stockholders equity | $ | 7,220,690 | $ | 6,315,557 | $ | 5,169,406 | Total liabilities and Stockholders equity | $ | 10,089,400 | $ | 7,220,690 | $ | 6,315,557 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest-earning assets | Net interest-earning assets | $ | 194,983 | $ | 128,295 | $ | 112,950 | Net interest-earning assets | $ | 532,869 | $ | 194,983 | $ | 128,295 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income | Net interest income | $ | 186,232 | $ | 113,730 | $ | 91,509 | Net interest income | $ | 202,702 | $ | 186,232 | $ | 113,730 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate spread | Interest rate spread | 2.74 | % | 1.82 | % | 1.76 | % | Interest rate spread | 2.00 | % | 2.74 | % | 1.82 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest margin | Net interest margin | 2.87 | % | 1.94 | % | 1.91 | % | Net interest margin | 2.21 | % | 2.87 | % | 1.94 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ratio of average interest- earning assets to Interest- bearing liabilities | 103 | % | 102 | % | 102 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ratio of average interest-Earning assets to Interest-bearing liabilities | Ratio of average interest-Earning assets to Interest-bearing liabilities | 106 | % | 103 | % | 102 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2630
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
RATE/ VOLUME ANALYSIS
The following table presents the dollar amount of changes in interest income and interest expense for the components of earning assets and interest-bearing liabilities that are presented in the precedingpreceeding table. The table below distinguishes between the changes related to average outstanding balances (changes in volume while holding the initial rate constant) and the changes related to average interest rates (changes in average rates while holding the initial balance constant).
RATE/VOLUME ANALYSIS
For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2002 versus 2001 | 2001 versus 2000 | 2003 versus 2002 | 2002 versus 2001 | |||||||||||||||||||||||||||||||||||||||||||||
Increase (Decrease) | Increase (Decrease) | Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||||||||
Due To: | Due To: | Due To: | Due To: | |||||||||||||||||||||||||||||||||||||||||||||
Rate | Volume | Total | Rate | Volume | Total | Rate | Volume | Total | Rate | Volume | Total | |||||||||||||||||||||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||
EARNING ASSETS: | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans receivable, net | $ | (26.0 | ) | $ | 41.0 | $ | 15.0 | $ | (25.7 | ) | $ | 79.7 | $ | 54.0 | $ | (120.1 | ) | $ | 177.7 | $ | 57.6 | $ | (26.0 | ) | $ | 41.0 | $ | 15.0 | ||||||||||||||||||||
FHLB stock | (1.9 | ) | 1.6 | (0.3 | ) | (0.9 | ) | 1.8 | 0.9 | (2.2 | ) | 2.0 | (0.2 | ) | (1.9 | ) | 1.6 | (0.3 | ) | |||||||||||||||||||||||||||||
Other | (6.6 | ) | 3.3 | (3.3 | ) | (0.6 | ) | 2.9 | 2.3 | 2.0 | 1.7 | 3.7 | (6.6 | ) | 3.3 | (3.3 | ) | |||||||||||||||||||||||||||||||
Total | $ | (34.5 | ) | $ | 45.9 | $ | 11.4 | $ | (27.2 | ) | $ | 84.4 | $ | 57.2 | $ | (120.3 | ) | $ | 181.4 | $ | 61.1 | $ | (34.5 | ) | $ | 45.9 | $ | 11.4 | ||||||||||||||||||||
INTEREST-BEARING LIABILITIES: | ||||||||||||||||||||||||||||||||||||||||||||||||
Total deposits | $ | (87.8 | ) | $ | 23.2 | $ | (64.6 | ) | $ | (13.2 | ) | $ | 25.4 | $ | 12.2 | $ | (35.7 | ) | $ | 47.3 | $ | 11.6 | $ | (87.8 | ) | $ | 23.2 | $ | (64.6 | ) | ||||||||||||||||||
FHLB advances | (7.4 | ) | 5.7 | (1.7 | ) | (16.1 | ) | 34.3 | 18.2 | (16.4 | ) | 28.1 | 11.7 | (7.4 | ) | 5.7 | (1.7 | ) | ||||||||||||||||||||||||||||||
Other | 1.2 | 4.0 | 5.2 | (1.0 | ) | 5.6 | 4.6 | (10.0 | ) | 31.3 | 21.3 | 1.2 | 4.0 | 5.2 | ||||||||||||||||||||||||||||||||||
Total | $ | (94.0 | ) | $ | 32.9 | $ | (61.1 | ) | $ | (30.3 | ) | $ | 65.3 | $ | 35.0 | $ | (62.1 | ) | $ | 106.7 | $ | 44.6 | $ | (94.0 | ) | $ | 32.9 | $ | (61.1 | ) | ||||||||||||||||||
Change in net interest income | $ | 59.5 | $ | 13.0 | $ | 72.5 | $ | 3.1 | $ | 19.1 | $ | 22.2 | $ | (58.2 | ) | $ | 74.7 | $ | 16.5 | $ | 59.5 | $ | 13.0 | $ | 72.5 | |||||||||||||||||||||||
PROVISION FOR LOAN LOSSES
During 2002,2003, the Company recorded a provision for loan losses of $8.0$20.1 million. The provision was made to accommodate losses in the current portfolio. Net charge-offs in 2003 totaled $21.8 million compared to $17.1 million and $12.2 million in excess2002 and 2001, respectively. Net charge-offs in 2003 totaled 0.35% of netaverage investment loans compared to 0.50% and 0.40% in 2002 and 2001 respectively. During 2003, the entire provision was utilized to offset the increase in loan charge-offs, for the year. This increased the allowance for losseswhereas in 2002 and 2001, $10.0 million and $13.4 million were allocated to $50.0 million at December 31, 2002. Management recorded this 19.0% addition toincrease the loan allowanceallowance.
During 2003, management reclassified the amount of losses attributable to loans repurchased from secondary market investors. These losses are due to breaches of a loan’s representations and warranties issued in conjunction with previous loan sales to a separate category of loss. These losses are now being reported within the net gain on loan sales because such losses properly offset any gains related to loan sales activity in the HLG. Accordingly, the provision for the following reasons:loan losses now includes only increases for new loans deemed uncollectible. Prior year reporting has been adjusted to reflect this change.
On the positive side of the ledger, there was a decrease of $9.6 million, or 6.1%, in total loan delinquencies at December 31 2002, and seriously delinquent loans decreased $6.1 million, or 7.0%, at December 31, 2002.
27
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
The level of the allowance for losses at December 31, 2002, was based upon management’s assessment of relevant factors, including the types and amounts of non-performing loans, the continued increase in the amount of historical charge-offs and anticipated loss experience on such types of loans, and the current economic conditions. However, no assurance can be given that the Company will not, in any particular period, sustain loan losses that exceed the allowance, or that subsequent evaluation of the loan portfolio, in light of the factors then-prevailing, including economic conditions, the credit quality of the assets comprising the portfolio and the ongoing examination process, will not require significant increases in the allowance for loan losses. See the Tables on pages 37 through 39 for additional information on the Company’s loan loss allowance and non-performing loans.
NON-INTEREST INCOME
Flagstar’s non-interest income totaled $236.0$457.8 million for the year ended December 31, 2002,2003, compared to $213.0$234.4 million in 20012002 and $65.4$205.4 million in 2000.2001. The 20022003 results constitute a 10.8%95.3% increase over 20012002 and the 20012002 results reflect a 225.7%an 14.1% increase from 2000.2001. The major change from year-to-year is due to the amount ofincreases in net gains recorded on loan sales. Unlike typical savings institutions, the gain on loan sales line item for Flagstar is the transaction fee income generated from the origination, securitization, and sale of loans completed in the mortgage banking group.
Loan Administration
The Company’s loan servicing operation produced negative net fee income from the loans it serviced for others of $4.3 million for the year ended December 31, 2002, compared to negative net fees of $14.9 million recorded in 2001, and net fees of $15.7 million in 2000. The volatility in this revenue source wasis the result of the changes in the levels of prepayment-induced amortization recorded on the mortgage servicing rights portfolio (“MSR”) and the changes in the average volume of loans serviced for others during the respective periods.
2003
During 2003, the volume of loans serviced for others averaged $26.4 billion, a 69.2% increase over the 2002 average servicing portfolio of $15.6 billion. During 2003, the Company recorded $104.4 million, or 39.5 basis points (0.395%), in fee revenue. The fee revenue recorded in 2003 was offset by $123.0 million of MSR amortization. During 2003, the amount of loan principal payments and payoffs received on serviced loans equaled $10.0 billion, a 203.0% increase over 2002’s total of $3.3 billion.
2002
During 2002, the volume of loans serviced for others averaged $15.6 billion, a 79.3% increase over the 2001 average servicing portfolio of $8.7 billion, which was an 8.8% increase over the average servicing portfolio of $8.0 billion serviced during 2000.billion. During 2002, the Company recorded $58.3 million, or 37.4 basis points (0.374%), in fee revenue versus $30.6 million recorded in 2001, and $28.8 million recorded in 2000.revenue. The fee revenue recorded in 2002 was offset by $62.6 million of MSR amortization. The Company recorded $45.5 million and $13.1 million of MSR amortization during 2001 and 2000, respectively. During 2002, the amount of loan principal payments and payoffs received on serviced loans equaled $3.3 billion, a 135.7% increase over 2001’s total of $1.4 billion.
2001
During 2001, the volume of loans serviced for others averaged $8.7 billion, an 8.8% increase over the 2000 average servicing portfolio of $8.0 billion. During 2001, the Company recorded $30.6 million, or 35.1 basis points (0.351%), in fee revenue. The fee revenue recorded in 2001 was offset by $45.5 million of MSR amortization. During 2001, the amount of loan principal payments which wasand payoffs received on serviced loans equaled $1.4 billion, a 75.0% increase over the2000’s total of $0.8 billion in payments received during 2000.billion.
Net Gain on Loan Sales
Net gains on loan sales totaled $194.2 million, $199.4 million and $21.9 million for the years ended December 31, 2002, 2001 and 2000, respectively. The amount of net gain recorded in any one period is directly affected by the amount of loans sold and the profit spread achieved.
During 2002, the volume of loans sold totaled $40.5 billion, a 31.1% increase from 2001 loan sales of $30.9 billion, and a 286.3% increase from 2000 loan sales of $8.0 billion. During 2002, the Company received
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
an average 0.48%Net Gain on Loan Sales
Unlike typical banking institutions, the gain on loan sales line item for the Company is the transaction fee income generated from the origination, securitization, and sale of loans completed by the home lending group.
The variance in the amount of gain-on-sale recognized is attributable to the volume of mortgage loans sold and the gain versus 0.65% recorded in 2001, and 0.27% recorded in 2000. Thison sale spread achieved. The volatility in the gain-on-salegain on sale spread is attributable to market pricing, which changes with demand and the general level of interest rates. As the volume of acquirable loans increases in a lower or falling interest rate environment, the Company is able to pay less to acquire loans and is then able to achieve higher spreads on the eventual sale of the acquired loans. In contrast, when interest rates rise, the volume of acquirable loans decreaseslessens and the Company is requiredforced to pay more to acquire loans without a corresponding increase in the eventualacquisition phase, thus decreasing the net gain achievable.
Also included in loan sales price. is the recording of mark to market pricing adjustments required under FASB 133 and the recording of representation and warranty adjustments recorded by the Company for losses recorded on repurchased assets previously sold to the secondary market. At December 31, 2003, the Company had forward contracts to sell mortgage-backed securities of $3.7 billion and rate lock commitments to originate mortgage loans of $2.9 billion.
The following table provides a reconciliation of the net gain on sale recorded on loans sold within the period shown for the years ended December 31, (in thousands):
2003 | 2002 | 2001 | ||||||||||
Net gain recorded | $ | 357,276 | $ | 192,612 | $ | 191,733 | ||||||
Add: FASB 133 adjustments | 10,695 | 11,110 | — | |||||||||
Add: Reps and Warranty losses | 14,160 | 4,841 | 7,625 | |||||||||
Gain recorded on loans sold | $ | 382,131 | $ | 208,563 | $ | 199,358 | ||||||
Loans sold | $ | 51,922,757 | $ | 40,495,894 | $ | 30,879,271 | ||||||
Spread achieved | 0.74 | % | 0.52 | % | 0.65 | % |
2003
During 2003, the Company repurchased $37.2 million in non-performing mortgage loans. These loans were reacquired at a smaller profit margin.loss of $12.0 million. During 2003, the Company increased the secondary market reserve $2.2 million of offset anticipated increased exposure from repurchased loans.
2002
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
During 2002, the Company repurchased $25.7 million in non-performing mortgage loans. These loans were reacquired at a loss of $6.8 million. During 2002, the Company decreased the secondary market reserve $2.0 million of offset anticipated decreased exposure from repurchased loans.
2001
During 2001, the Company repurchased $18.3 million in non-performing mortgage loans. These loans were reacquired at a loss of $4.0 million. During 2001, the Company increased the secondary market reserve $3.6 million of offset anticipated increased exposure from repurchased loans.
Net Gain on Mortgage Servicing Rights
For 2002,The volatility in the level of net gaingains on the sale of MSR totaled $14.5 million. The 2002 gain was a $12.3 million increase from the $2.2 million recorded in 2001, and a $0.1 million decrease from the $14.6 million recorded in 2000. The gain on sale of mortgage servicing rights recorded is directly affected byattributable to the amount of loan servicing rights sold and the profit spread achieved.
During 2002, the volume of MSR sold totaled $29.3 billion, a 35.6% increase versus 2001 MSR sales of $21.6 billion, which was a 116.0% increase from 2000 MSR sales of $10.0 billion. Also in 2002, the Company sold some newly originated MSR, but also sold seasoned MSR that had a book value substantially lower than the sales price of the MSR. During 2001, the Company sold predominantly newly originated MSR, which had a book value more closely approximating the current market value of the MSR sold. Again in 2000, the Company sold some newly originated MSR, but also sold seasoned MSR that had a book value substantially lower than the sales price of the MSR.
The Company sold $1.3 billion, $364.6 million and $34.0 million of loans on a servicing released basis during 2002, 2001, and 2000, respectively. The Company sold $18.5 billion, $2.2 billion, and $3.6 billion of bulk servicing sales during 2002, 2001, and 2000, respectively. The Company, during 2002, 2001, and 2000, sold $10.0 billion, $19.3 billion, and $6.4 billion of flow servicing, respectively.
The 2002 gain was 0.05% of the underlying loans sold versus 0.01% in 2001, and 0.15% in 2000. The volatilityvariance in the gain on sale spread and the volume of MSRs sold. The spread is attributable to market pricing which changes with demand and the general level of interest rates. Upon acquisition, the MSR is capitalized at the current fair value of the MSR acquired. If the MSR is sold in a flow transaction shortly after the acquisition, little to no gain is recorded on the sale. If the MSR has any seasoning at the time it is sold, the MSR capitalized in a lower interest rate environment generally will have an increased market value whereas the MSR capitalized in a higher interest rate environment will generally sell at a market price below the acquisition price.price
2003
The Company sold $2.5 billion on a servicing released basis, $12.4 billion of bulk servicing sales, and $18.3 billion of flow servicing in 2003.
The 2003 gain was 0.22% of the underlying loans sold. The Company sold $33.2 billion, or approximately 67.0% of the servicing rights originated during 2003.
2002
The Company sold $1.3 billion on a servicing released basis, $18.5 billion of bulk servicing sales, and $10.0 billion of flow servicing in 2002.
The 2002 gain was 0.05% of the underlying loans. The Company sold $29.3 billion, or approximately 74.7% of the servicing rights originated during 2002.
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
2001
The Company sold $364.6 million on a servicing released basis, $2.2 billion of bulk servicing sales, and $19.3 billion of flow servicing in 2001.
The 2001 gain was 0.01% of the underlying loans. The Company sold $21.6 billion, or approximately 70.8% of the servicing rights originated during 2001.
Other Fees and Charges
Other fees and charges which include certain miscellaneous fees, including loan fees, deposit-related fees, and escrow waiver feesfees. Additionally, income generated by Flagstar Credit, and Flagstar Title Insurance Company is reported on this line item. Fee recognition totaled $51.8 million, $31.6 million, and $26.4 million in 2003, 2002, and $13.1 million in 2002, 2001, and 2000, respectively. In each period, the total fees recorded were affected by the production volume of loans originated that were not classified as residential mortgage loans and the size of the deposit portfolio. The large increase in volume during 20022003 was primarily attributable to the recognition of fees generated from the increased volume in our mortgage loan origination process. The increased mortgage volume was the result of a lower interest rate environment during 2003.
29During 2003, Flagstar Credit earned $7.9 million in pre-tax revenue versus $1.8 million and $1.2 million in 2002 and 2001, respectively.
During 2003, Flagstar Title earned $2.0 million in pre-tax revenue versus $1.6 million and $0.5 million in 2002 and 2001, respectively
NON-INTEREST EXPENSE
Operating expenses, before the capitalization of direct costs of loan closings, totaled $475.8 million, $366.3 million, and $273.8 million for the years ended December 31, 2003, 2002, and 2001, respectively. The 29.9% increase in expense items in 2003 versus 2002 and the 33.8% increase in expenses between 2002 and 2001 were due to general increases in the price levels for goods and services, mortgage loan origination volume levels, and the growth of the banking operation. As the Company shifts its funding sources to more retail in nature and increases the size of the banking center network, management expects that the operating expenses associated with the banking center network will continue to increase while the cost of funds will decrease.
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
NON-INTEREST EXPENSE (continued)
OperatingNON-INTEREST EXPENSES
For the years ended December 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
(In thousands) | ||||||||||||
Compensation and benefits | $ | 175,470 | $ | 137,967 | $ | 107,671 | ||||||
Commissions | 142,406 | 102,720 | 73,366 | |||||||||
Occupancy and equipment | 67,751 | 53,711 | 39,686 | |||||||||
Advertising | 12,242 | 9,008 | 5,118 | |||||||||
Core deposit amortization | — | — | 645 | |||||||||
Federal insurance premium | 1,708 | 1,268 | 1,254 | |||||||||
State and local taxes | 10,682 | 4,709 | 5,881 | |||||||||
Other | 65,495 | 56,872 | 40,144 | |||||||||
Total | 475,759 | 366,255 | 273,765 | |||||||||
Less: capitalized direct costs of loan closings | (226,479 | ) | (143,981 | ) | (109,055 | ) | ||||||
Total, net | $ | 249,275 | $ | 222,274 | $ | 164,710 | ||||||
Efficiency ratio(1) | 37.7 | % | 52.8 | % | 51.6 | % |
(1) | Total operating and administrative expenses (excluding the amortization of the core deposit premium) divided by the sum of net interest income and non-interest income. |
2003
The Company’s gross compensation and benefits expense, before the capitalization of direct costs of loan closings, totaled $366.3$175.5 million. The 27.2% increase in 2003 is primarily attributable to normal salary increases, the employees hired at the new banking centers, and the increase in employees hired to accommodate the Company’s mortgage loan production. Total Company’s salaried employees increased 352, to 3,106 at June 30, 2003, but decreased by 231 by year end, an 8.4% decrease from December 31, 2002 and 18.8% decrease from June 30, 2003.
Commission expense, which is a variable cost associated with single-family mortgage loan production, totaled $142.4 million. Commission expense totaled 0.25% of total mortgage production in 2003.
Occupancy and equipment expense totaled $67.8 million $273.8during 2003. The continued increase in these expenses is reflective of the expansion undertaken in the Company’s deposit banking center network, along with the Company’s continuing investment in computer technology.
Advertising expense, which totaled $12.2 million and $153.3 million forduring the yearsyear ended December 31, 2002, 2001,2003, increased $3.2 million, or 35.6%, over the prior year. The increase is reflective of the expansion undertaken in the Company’s banking network.
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
The Company’s FDIC premiums increased to $1.7 million for 2003. In each successive year, Flagstar typically has paid a higher amount of insurance premiums due to its expanding deposit base.
The Company pays taxes in the various states and 2000, respectively.local communities we are located in. For the year ended December 31, 2003 the Company’s state and local taxes equaled $ 10.7 million.
Other expense is a collection of non-specific expenses incurred during the year. Other expense totaled $65.5 million during 2003. The 33.8% increasefluctuation in expense itemsthese expenses is reflective of the varied levels of mortgage production, the expansion undertaken in 2002 versus 2001the Company’s banking operation, the increased costs associated with the enlarged real estate owned portfolio, the increased amount of costs related to the increased amount of loans pending foreclosure, and the 78.6% increaseincreased amount of loans in expenses between 2001 and 2000 were due to general increases in the price levels for goods and services, mortgage loan origination volume levels, and the growth of the retail banking operation.a delinquency status.
2002
The Company’s gross compensation and benefits expense, before the capitalization of direct costs of loan closings, totaled $138.0 million, $107.7 million, and $65.3 million for the years ended December 31, 2002, 2001, and 2000, respectively.million. The 28.1% increase in 2002 is primarily attributable to normal salary increases, the employees hired at the new retail banking centers, and the increase in employees hired to accommodate the Company’s mortgage loan production. Total Company salaried employees increased by 307 full-time equivalents, a 12.5% increase, at December 31, 2002 versus December 31, 2001.
Commission expense, which is a variable cost associated with single-family mortgage loan production, totaled $102.7 million, $73.4 million, and $27.5 million during the years ended December 31, 2002, 2001, and 2000, respectively.million. Commission expense totaled 0.24%, 0.22%, and 0.28% of total mortgage production in 2002, 2001, and 2000, respectively.2002.
Occupancy and equipment expense totaled $53.7 million $39.7 million, and $29.8 million during the years ended December 31, 2002, 2001, and 2000, respectively.2002. The continued increase in this expense categorythese expenses is reflective of the expansion undertaken in the Company’s deposit branchbanking center network, along with the Company’s continuing investment in computer technology.
Advertising expense, which totaled $9.0 million during the year ended December 31, 2002, increased $3.9 million, or 76.4%, over the $5.1 million of expense incurred during the prior year. Advertising expense totaled $4.0 million in 2000. The continued increase in this expense category is reflective of the expansion undertaken in the Company’s retail banking network.
The Company’s FDIC premiums remained at $1.3 million for 2002. The premiums increased by $0.7 million in 2001 compared to the $0.6 million recorded during 2000. In each successive year, Flagstar typically has paid a higher amount of insurance premiums due to its expanding deposit base. In 2001, the expense decreased primarily due to the increases
The Company pays taxes in the non-insured jumbo deposit category.various states and local communities we are located in. For the year ended December 31, 2002 the Company’s state and local taxes equaled $4.7 million.
Other expense is a collection of non-specific expenses incurred during the respective years.year. Other expense totaled $61.6 million, $46.0 million, and $24.8$56.9 million during the years ended December 31, 2002, 2001, and 2000, respectively.2002. The fluctuation in this expense categorythese expenses is reflective of the varied levels of mortgage production, the expansion undertaken in the Company’s retail banking operation, the increased costs associated with the enlarged real estate owned portfolio, the increased amount of costs related to the increased amount of loans pending foreclosure, and the increased amount of loans in a delinquency status.
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
For the years ended December 31, | ||||||||||||
2002 | 2001 | 2000 | ||||||||||
(In thousands) | ||||||||||||
Compensation and benefits | $ | 137,967 | $ | 107,671 | $ | 65,317 | ||||||
Commissions | 102,720 | 73,366 | 27,489 | |||||||||
Occupancy and equipment | 53,711 | 39,686 | 29,829 | |||||||||
Advertising | 9,008 | 5,118 | 4,021 | |||||||||
Core deposit amortization | — | 645 | 1,290 | |||||||||
Federal insurance premium | 1,268 | 1,254 | 569 | |||||||||
Other | 61,581 | 46,025 | 24,778 | |||||||||
Total | 366,255 | 273,765 | 153,293 | |||||||||
Less: capitalized direct costs of loan closings | (143,981 | ) | (109,055 | ) | (52,301 | ) | ||||||
Total, net | $ | 222,274 | $ | 164,710 | $ | 100,992 | ||||||
Efficiency ratio(1) | 52.6% | 50.2% | 63.6% |
2001
The Company’s gross compensation and benefits expense, before the capitalization of direct costs of loan closings, totaled $107.7 million. The 64.9% increase in 2001 is primarily attributable to normal salary increases, the employees hired at the new banking centers, and the increase in employees hired to accommodate the Company’s mortgage loan production. Total Company salaried employees increased by 930 full-time equivalents, a 61.3% increase, at December 31, 2001 versus December 31, 2000.
Commission expense, which is a variable cost associated with single-family mortgage loan production, totaled $73.4 million. Commission expense totaled 0.22% of total mortgage production in 2001.
Occupancy and equipment expense totaled $39.7 million during 2001. The increase is reflective of the expansion undertaken in the Company’s deposit banking center network, along with the Company’s continuing investment in computer technology.
Advertising expense, which totaled $5.1 million during the year ended December 31, 2001, increased $1.1 million, or 27.5%, over the prior year. The increase is reflective of the expansion undertaken in the Company’s banking network.
The Company’s FDIC premiums increased by $0.7 million to $1.3 million for the year ended December 31, 2001. In each successive year, Flagstar typically has paid a higher amount of insurance premiums due to its expanding deposit base.
The Company pays taxes in the various states and local communities we are located in. For the year ended December 31, 2001 the Company’s state and local taxes equaled $5.9 million.
Other expense is a collection of non-specific expenses incurred during the year. Other expense totaled $40.1 million during 2001. The fluctuation is reflective of the varied levels of mortgage production, the expansion undertaken in the Company’s banking operation, the increased costs associated with the enlarged real estate owned portfolio, the increased amount of costs related to the increased amount of loans pending foreclosure, and the increased amount of loans in a delinquency status.
FASB 91
In accordance with generally accepted accounting principles, certain loan origination costs are capitalized and added as an adjustment of the basis of the individual loans originated. These costs are amortized as an adjustment of the loan yield over the life of the loan or expensed when the loan is sold. Accordingly, during 20022003 Flagstar deferred $144.0$226.5 million of loan origination costs, while during 20012002 and 20002001 such deferred expenses totaled $109.0$144.0 million and $52.3$109.0 million, respectively. On a per loan basis, the cost deferrals totaled $660, $526, and $494 and $703 during 2002, 2001, and 2000, respectively. The lower cost per loan recorded in2003, 2002, and 2001, reflects the efficiencies created in a higher volume environment. Likewise, in 2000, as volumes decreased, the cost per loan increased because of the initial fixed costs associated with the mortgage banking operation.respectively. The 20022003 and 20012002 numbers are also affected by inflationary increases and the increased costs associated with the Company’s shift to retail and correspondent funding versus wholesale funding, which was the predominant lending channel in 2000.2001. This shift can also be seen in the cost of commissions, which is a deferrable item. On a per loan basis, the cost deferrals totaled $415, $375, and $332 during 2003, 2002, and 2001, respectively.
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
FEDERAL INCOME TAXES
For the year ended December 31, 2002,2003, the Company’s provision for federal income taxes as a percentage of pretax earnings was 35.4%35.0%, compared to 35.4% in 2002 and 35.6% in 2001 and 36.1% in 2000.2001. For all periods presented in the Consolidated Statements of Earnings, the provision for federal income taxes varies from statutory rates primarily because of the non-deductibility of the core deposit amortization and other non-deductible corporate expenses. Refer to Note 1416 of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary Data, herein for further discussion of the Company’s federal income taxes.
FINANCIAL CONDITION
ASSETS.The Company’s assets totaled $10.6 billion at December 31, 2003, reflecting an increase of $2.4 billion over December 31, 2002. Loans available for sale decreased $0.5 billion, reflecting the decrease in the amount of recent residential mortgage loan production recorded on the Company’s books that are pending sale. The investment loan portfolio increased $2.9 billion.
LOANS AVAILABLE FOR SALE.Mortgage loans available for sale decreased $0.5 billion from $3.3 billion at December 31, 2002 to $2.8 billion at December 31, 2003. This decrease in the size of this portfolio is attributable to the decreased originations recorded in December 2003, but not sold as of December 31, 2003. During December 2003, mortgage loan originations totaled $2.6 billion, compared to $5.3 billion in December 2002. See the table below for the activity in the Company’s available for sale category over the past five years.
The Company’s loan production is inversely related to the level of long-term interest rates. As long-term rates decrease, the Company tends to originate an increasing number of mortgage loans. Likewise, as rates increase, the Company’s loan originations tend to decrease. A significant amount of the Company’s business during periods of low interest rates is derived from the refinancing of mortgage loans. Generally, the
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
FINANCIAL CONDITION
The Company’s assets totaled $8.2 billion at December 31, 2002, reflecting an increase of $1.6 billion over December 31, 2001. Loans available for sale increased $0.6 billion, reflecting the increase in the amount of recent residential mortgage loan production held on the Company’s books that is pending sale and the investment loan portfolio increased $0.8 billion. During 2002, mortgage loan originations totaled $43.2 billion, compared to $33.0 billion in 2001, and $9.9 billion in 2000. See the tables on Pages 31 and 32, which sets forth the Company’s total loan portfolio and the activity within the different loan categories for the past five years.
Our loan production is inversely related to the level of long-term interest rates. As long-term rates decrease, we tend to originate an increasing number of mortgage loans. Likewise, as such rates increase, our loan originations tend to decrease. A significant amount of our business during periods of low interest rates is derived from refinancing of mortgage loans. Generally, we haveCompany has been able to sell loans into the secondary market at a gain during periods of low or decreasing interest rates, and our profitability levels have been greatest during these periods.
LOANS AVAILABLE FOR SALE.Mortgage loans available for sale increased $0.6 billion from $2.7 billion at December 31, 2001 to $3.3 billion at December 31, 2002. This increase in the size of this portfolio is attributable to the corporate record originations recorded in December 2002, but not sold as of December 31, 2002.
LOANS AVAILABLE FOR SALE ACTIVITY SCHEDULE
For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||||||||||||||||||
DESCRIPTION: | 2002 | 2001 | 2000 | 1999 | 1998 | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||
Beginning mortgage loans available for sale | $ | 2,746,791 | $ | 1,437,799 | $ | 2,230,381 | $ | 1,831,531 | $ | 1,197,152 | $ | 3,302,212 | $ | 2,746,791 | $ | 1,437,799 | $ | 2,230,381 | $ | 1,831,531 | ||||||||||||||||||||
Mortgage loans originated, net | 43,703,804 | 33,276,507 | 9,998,948 | 14,695,761 | 19,041,414 | 55,866,218 | 43,703,804 | 33,276,507 | 9,998,948 | 14,695,761 | ||||||||||||||||||||||||||||||
Mortgage loans repurchased | 25,527 | 44,004 | 19,068 | 30,889 | 32,337 | 28,821 | 25,527 | 44,004 | 19,068 | 30,889 | ||||||||||||||||||||||||||||||
Mortgage loans sold servicing retained, net | 39,261,704 | 30,333,464 | 7,942,696 | 12,895,786 | 17,081,172 | 49,681,387 | 39,261,704 | 30,333,464 | 7,942,696 | 12,895,786 | ||||||||||||||||||||||||||||||
Mortgage loans sold servicing released, net | 1,297,372 | 364,579 | 33,952 | 86,409 | 891,907 | 2,461,326 | 1,297,372 | 364,579 | 33,952 | 86,409 | ||||||||||||||||||||||||||||||
Mortgage loan amortization/prepayments | 487,511 | 963,580 | 377,001 | 432,932 | 319,060 | |||||||||||||||||||||||||||||||||||
Mortgage loan amortization/ prepayments | 1,681,632 | 487,510 | 963,581 | 377,001 | 432,932 | |||||||||||||||||||||||||||||||||||
Mortgage loans transferred, net | 2,127,324 | 349,895 | 2,456,949 | 912,673 | 147,233 | 2,613,355 | 2,127,324 | 349,895 | 2,456,949 | 912,673 | ||||||||||||||||||||||||||||||
Ending mortgage loans available for sale | $ | 3,302,212 | $ | 2,746,791 | $ | 1,437,799 | $ | 2,230,381 | $ | 1,831,531 | $ | 2,759,551 | $ | 3,302,212 | $ | 2,746,791 | $ | 1,437,799 | $ | 2,230,381 | ||||||||||||||||||||
INVESTMENT LOAN PORTFOLIO.Loans held for investment increased, in the aggregate, $0.8$2.9 billion from $3.1 billion at December 31, 2001, to $3.9 billion at December 31, 2002.2002, to $6.8 billion at December 31, 2003. Mortgage loans alone increased $2.9 billion, or 111.5%, to $5.5 billion at December 31, 2003, from $2.6 billion at December 31,
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
increased $0.4 billion, or 18.2%, to $2.6 billion at December 31, 2002, from $2.2 billion at December 31, 2001.2002. The two tables below provide detail for the activity and the balance in the Company’s investment loan portfolio over the past five years.
INVESTMENT LOAN PORTFOLIO
At December 31, | At December 31, | |||||||||||||||||||||||||||||||||||||||||
DESCRIPTION: | DESCRIPTION: | 2002 | 2001 | 2000 | 1999 | 1998 | DESCRIPTION: | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||||
Mortgage loans | Mortgage loans | $ | 2,593,005 | $ | 2,198,888 | $ | 3,250,850 | $ | 1,169,781 | $ | 321,271 | Mortgage loans | $ | 5,478,200 | $ | 2,579,448 | $ | 2,193,473 | $ | 3,245,499 | $ | 1,162,802 | ||||||||||||||||||||
Second mortgage loans | Second mortgage loans | 214,485 | 232,466 | 168,886 | 145,075 | 43,196 | Second mortgage loans | 141,010 | 214,485 | 232,466 | 168,886 | 145,075 | ||||||||||||||||||||||||||||||
Commercial real estate loans | Commercial real estate loans | 445,270 | 314,247 | 194,653 | 143,652 | 80,858 | Commercial real estate loans | 548,392 | 445,270 | 314,247 | 194,653 | 143,652 | ||||||||||||||||||||||||||||||
Construction loans | Construction loans | 54,650 | 53,505 | 60,534 | 46,838 | 34,367 | Construction loans | 58,323 | 54,650 | 53,505 | 60,534 | 46,838 | ||||||||||||||||||||||||||||||
Warehouse lending | Warehouse lending | 558,781 | 298,511 | 66,765 | 46,222 | 235,693 | Warehouse lending | 346,780 | 558,782 | 298,511 | 66,765 | 46,222 | ||||||||||||||||||||||||||||||
Consumer loans | Consumer loans | 124,785 | 63,960 | 59,123 | 42,758 | 28,199 | Consumer loans | 259,651 | 124,785 | 63,960 | 59,123 | 42,758 | ||||||||||||||||||||||||||||||
Non-real estate commercial loans | Non-real estate commercial loans | 7,706 | 8,922 | 8,881 | 7,024 | 3,601 | Non-real estate commercial loans | 7,896 | 7,706 | 8,922 | 8,881 | 7,024 | ||||||||||||||||||||||||||||||
Total investment loan portfolio | 3,998,682 | 3,170,499 | 3,809,692 | 1,601,350 | 747,185 | Total investment loan portfolio | 6,840,252 | 3,985,126 | 3,165,084 | 3,804,341 | 1,594,371 | |||||||||||||||||||||||||||||||
Allowance for losses | Allowance for losses | (50,000 | ) | (42,000 | ) | (25,000 | ) | (23,000 | ) | (20,000 | ) | Allowance for losses | (36,017 | ) | (37,764 | ) | (27,769 | ) | (14,357 | ) | (15,216 | ) | ||||||||||||||||||||
Total investment loan portfolio (net) | Total investment loan portfolio (net) | $ | 3,948,682 | $ | 3,128,499 | $ | 3,784,692 | $ | 1,578,350 | $ | 727,185 | Total investment loan portfolio (net) | $ | 6,804,235 | $ | 3,947,362 | $ | 3,137,315 | $ | 3,789,984 | $ | 1,579,155 | ||||||||||||||||||||
INVESTMENT LOAN PORTFOLIO ACTIVITY SCHEDULE
For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||||||||||||||||||
DESCRIPTION: | 2002 | 2001 | 2000 | 1999 | 1998 | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||
Beginning | $ | 3,170,499 | $ | 3,809,692 | $ | 1,601,350 | $ | 747,185 | $ | 463,607 | $ | 3,985,126 | $ | 3,165,084 | $ | 3,804,341 | $ | 1,594,371 | $ | 733,412 | ||||||||||||||||||||
Loans originated | 586,809 | 521,506 | 393,311 | 354,277 | 176,816 | 1,901,105 | 586,809 | 521,506 | 393,311 | 354,277 | ||||||||||||||||||||||||||||||
Change in lines of credit | 331,826 | 128,310 | (79,540 | ) | 100,370 | 148,880 | 1,267,338 | 331,826 | 128,310 | (79,540 | ) | 100,370 | ||||||||||||||||||||||||||||
Loans transferred from available for sale | 2,127,324 | 349,895 | 2,456,949 | 912,673 | 147,233 | 2,613,355 | 2,127,324 | 349,895 | 2,456,949 | 912,673 | ||||||||||||||||||||||||||||||
Loan amortization/prepayments | 2,169,754 | 1,596,521 | 537,609 | 495,906 | 170,534 | |||||||||||||||||||||||||||||||||||
Loan amortization/ prepayments | 2,890,866 | 2,177,895 | 1,596,585 | 535,981 | 489,112 | |||||||||||||||||||||||||||||||||||
Loans transferred to repossessed assets | 48,022 | 42,383 | 24,769 | 17,249 | 18,817 | 35,806 | 48,022 | 42,383 | 24,769 | 17,249 | ||||||||||||||||||||||||||||||
Ending | $ | 3,998,682 | $ | 3,170,499 | $ | 3,809,692 | $ | 1,601,350 | $ | 747,185 | $ | 6,840,252 | $ | 3,985,126 | $ | 3,165,084 | $ | 3,804,341 | $ | 1,594,371 | ||||||||||||||||||||
ALLOWANCE FOR LOSSES.The allowance for loan losses totaled $50.0$36.0 million at December 31, 2002, an increase2003, a decrease of $8.0$1.8 million, or 19.0%4.8%, from $42.0$37.8 million at December 31, 2001.2002. The allowance for losses as a percentage of non-performing loans was 61.3%61.7% and 47.9%55.5% at December 31, 20022003 and 2001,2002, respectively. The Company’s non-performing loans totaled $81.6$58.3 million and $87.7$68.0 million at December 31, 20022003 and 2001,2002, respectively, and, as a percentage of investment loans, were 1.25%0.85% and 1.31%1.71% at December 31, 20022003 and 2001,2002, respectively.
The increase in the allowance for losses in 2002 was based upon management’s assessment of relevant factors, including the types and amounts of non-performing loans, the continued increase in the amount of historical charge offs and anticipated loss experience on such types of loans, and the current and projected
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
economic conditions. Additionally,The allowance for loan losses at December 31, 2003 was recorded at a level based upon management’s assessment of relevant factors, including the allowance was increased to compensate for the substantial increase intypes and amounts of non-performing loans, the amount of totalhistorical charge offs and anticipated loss experience on such types of loans, outstanding and the increase in the amount of loans which are delinquent. However,current and near-term projected economic conditions. There is no assurance can be given that the Company will not, in any particular period, sustain loan losses that exceed the allowance, or that subsequent evaluation of the loan portfolio, in light of the factors then-prevailing, including economic conditions, the credit quality of the assets comprising the portfolio, and the ongoing examination process, will not require significant increases in the allowance for loan losses. See Asset Quality and the tables on Pages 3750 through 3953 for additional information on the Company’s provision for loan losses, loan loss allowance, and non-performing loans.
FHLB STOCK.Holdings of FHLB stock increased from $128.4 million at December 31, 2001, to $150.0 million at December 31, 2002.2002, to $198.4 million at December 31, 2003. This increase was required to accommodate the Company’s increase in FHLB advances used to fund the increase in the mortgageinvestment loan portfolio. As a member of the FHLB, the Company is required to hold shares of FHLB stock in an amount at least equal to 1% of the aggregate unpaid principal balance of its mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or 1/20th of its FHLB advances, whichever is greater.
PREMISES AND EQUIPMENT.Premises and equipment, net of accumulated depreciation, totaled $161.1 million at December 31, 2003, an increase of $11.5 million, or 7.7%, from $149.6 million at December 31, 2002, an increase2002. During 2003, the Company added 12 new banking centers, continued the expansion of $10.1 million, or 7.2%, from $139.5the home loan centers, and continued to invest in computer equipment.
MORTGAGE SERVICING RIGHTS.MSR totaled $260.1 million at December 31, 2001. During 2002, the Company added 16 new banking centers to the retail banking network and continued its expansion2003, an increase of the retail origination offices along with its continued investment in technology.
MORTGAGE SERVICING RIGHTS.MSR totaled$29.3 million, from $230.8 million at December 31, 2002, an increase of $62.3 million, from $168.5 million at December 31, 2001.2002. For the year ended December 31, 2002, $39.22003, $49.5 billion of loans underlying mortgage servicing rights were originated and purchased, and $31.8$40.7 billion were reduced through sales, prepayments, and amortization resulting in a net increase in mortgage loans serviced for others of $7.4$8.8 billion from $14.2$21.6 billion to $21.6$30.4 billion at December 31, 2002.2003. The book value of the portfolio at December 31, 20022003 is 1.07%0.86% versus 1.18%1.07% at December 31, 2001.2002. The decrease in the percentage value of the portfolio is indicative of the decrease in the value of MSR at December 31, 2002.when it was originated. The portfolio at both December 31, 20022003 and 2001,2002, is primarily comprised of newly originated MSR. The portfolio at each date does not contain an impairment charge because of its recent origination to the current market rate. The service fee on loans serviced for others is 0.351%0.350%.
The fair value of the MSR is determined as of the sale date by using estimated fair values based on the results of recent sales of servicing rights, internal valuations and market pricing. Estimates of fair value include the following characteristics:variables:
• | Product type (i.e., conventional, government, balloon) | |
• | Fixed or adjustable rate of interest | |
• | Interest rate | |
• | Term (i.e. 15 or 30 years) | |
• | Anticipated prepayment speeds |
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
• | Servicing costs per loan | |
• | Discounted yield rate |
The most important assumptions used in the MSR valuation model are anticipated loan prepayment rates. During 2001,2003, these rates ranged between 10% and 15%25% on new production loans. The factors used for those assumptions are selected based on market interest rates and other market assumptions. Their reasonableness is confirmed through surveys conducted with independent brokers.third parties.
In addition, independent broker appraisals of the fair value of the MSR portfolio are obtained annually to confirm the reasonableness of the value generated by the internal valuation model.
At December 31, 2003 and 2002, the fair value of the MSR portfolio was $410.6 million and $244.5 million, respectively. At December 31, 2003, the fair value of each MSR was based upon the following weighted-average assumptions: (1) a discount rate of 8.71%12.34%; (2) an anticipated loan prepayment rate of 29.4%21.0% CPR; and (3) servicing costs per conventional loan of $40.70.$40.00 and $50.00 for each government or adjustable-rate loan.
LOANS SERVICED FOR OTHERS ACTIVITY SCHEDULE
For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||||||||||||||||||
DESCRIPTION: | 2002 | 2001 | 2000 | 1999 | 1998 | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||
Beginning loans serviced for others | $ | 14,222,802 | $ | 6,644,482 | $ | 9,519,926 | $ | 11,472,211 | $ | 6,412,797 | $ | 21,586,797 | $ | 14,222,802 | $ | 6,644,482 | $ | 9,519,926 | $ | 11,472,211 | ||||||||||||||||||||
Loans servicing originated | 39,198,521 | 30,514,703 | 7,982,201 | 12,768,105 | 16,912,051 | 49,461,431 | 39,198,521 | 30,514,703 | 7,982,201 | 12,768,105 | ||||||||||||||||||||||||||||||
Loan servicing amortization/ prepayments | 3,329,825 | 1,446,092 | 824,928 | 1,561,766 | 1,807,014 | |||||||||||||||||||||||||||||||||||
Loan amortization/ prepayments | 9,982,414 | 3,329,825 | 1,446,092 | 824,928 | 1,561,766 | |||||||||||||||||||||||||||||||||||
Loans servicing sales | 28,504,701 | 21,490,291 | 10,032,717 | 13,158,624 | 10,045,623 | 30,670,735 | 28,504,701 | 21,490,291 | 10,032,717 | 13,158,624 | ||||||||||||||||||||||||||||||
Ending loans serviced for others | $ | 21,586,797 | $ | 14,222,802 | $ | 6,644,482 | $ | 9,519,926 | $ | 11,472,211 | $ | 30,395,079 | $ | 21,586,797 | $ | 14,222,802 | $ | 6,644,482 | $ | 9,519,926 | ||||||||||||||||||||
OTHER ASSETS.Other assets increased $41.3decreased $56.6 million, or 35.9%34.0%, to $156.2$110.0 million at December 31, 2002,2003, from $114.9$166.6 million at December 31, 2001.2002. The majority of this increase was attributable to an increase inpayments received on receivables recorded in conjunction with MSR sales transacted in 2003 and 2002. Upon the sale of MSR, the Company receives a down payment from the purchaser equivalent to approximately 20% of the total purchase price and records a receivable account for the balance of the purchase price due. This recorded receivable is typically cleared within a six month time frame.
LIABILITIES.The Company’s total liabilities increased $1.5 billion, or 23.8%, to $7.8 billionAlso included in other assets are the repurchased assets acquired under representation and warranties. These assets are non-performing and totaled a net $12.0 million and a net $10.4 million in principal balance at December 31, 2003 and 2002, from $6.3 billionrespectively. The assets have been adjusted by a specific reserve of $4.1 million and $3.2 million, at December 31, 2001. This increase was attributable to2003 and 2002, respectively. During 2003 and 2002, the substantial increaseCompany repurchased $46.3 million and $34.3 million in interest bearing liabilities.non-performing loans, respectively. These loans are acquired and subsequently foreclosed upon and later sold.
DEPOSITS.Deposit accounts increased $0.8 billion, or 22.2%, to $4.4 billion at December 31, 2002, from $3.6 billion at December 31, 2001. This increase reflects the Company’s growth strategy. The deposits can be subdivided into three areas: the retail division, the municipal division, and our national accounts division.
Retail deposit accounts increased $0.3 billion, or 12.5%, to $2.7 billion at December 31, 2002, from $2.4 billion at December 31, 2001. This increase reflects the increase in the number of retail banking centers. The number of retail banking centers increased from 71 at December 31, 2001 to 87 at December 31, 2002. The Company has been aggressive in its pricing strategy when entering new markets in order to accelerate its
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
LIABILITIES.The Company’s total liabilities increased $2.1 billion, or 26.9%, to $9.9 billion at December 31, 2003, from $7.8 billion at December 31, 2002. This increase was primarily attributable to the net increase in interest bearing liabilities.
DEPOSITS.Deposit accounts increased $1.3 billion, or 29.5%, to $5.7 billion at December 31, 2003, from $4.4 billion at December 31, 2002. This increase reflects the Company’s growth strategy. The deposits can be subdivided into three areas: the consumer direct division, the municipal division, and our national accounts division.
Consumer direct deposits accounts increased $0.9 billion, or 33.3%, to $3.6 billion at December 31, 2003, from $2.7 billion at December 31, 2002. This increase reflects the increase in the number of banking centers. The number of banking centers increased from 87 at December 31, 2002 to 99 at December 31, 2003. The Company has been aggressive in its pricing strategy when entering new markets in order to accelerate its growth plan. This strategy has attracted one-year certificates of deposit and money market deposits. At December 31, 2002,2003, the Company’s retailconsumer direct certificates of deposit totaled $1.3$1.6 billion, with an average balance of $21,741$23,058 and a weighted average cost of 3.81%3.57%. The Company’s money market deposits totaled $0.6$1.3 billion, with an average cost of 2.71%1.73%. Core accounts, or saving and checking accounts, totaled 29.6%19.4% of total retail deposits.
During 2001, the Company began calling on local municipal agencies as another source for deposit funding. These deposit accounts increased $365.7$91.5 million, or 82.7%11.3%, to $899.1 million at December 31, 2003, from $807.7 million at December 31, 2002, from $442.0 million at December 31, 2001.2002. These deposits had a weighted average cost of 2.00%1.44% at December 31, 2002.2003. These deposit accounts include $752.0 million that are mainly certificates of deposit with maturities typically less than one year. These funds have been used to fund the mortgage banking operation’s pipeline of loans available for sale.year and $147.1 million in checking and savings accounts.
The national accounts division garners funds through nationwide advertising of deposit rates and through retail investment brokers located across the country. These deposit accounts increased $114.8$241.0 million, or 14.4%26.4%, to $1.2 billion at December 31, 2003, from $912.7 million at December 31, 2002, from $797.9 million at December 31, 2001.2002. These deposits had a weighted average cost of 3.91%3.09% at December 31, 2002.2003. This increase reflects management’s decision to continue to grow the Company’s asset base utilizing secondary market deposits with specific maturities.
The deposit accounts are as follows December 31, (in thousands):
2003 | 2002 | 2001 | |||||||||||
Demand accounts | $ | 390,008 | $ | 401,517 | $ | 332,843 | |||||||
Savings accounts | 314,452 | 352,155 | 801,694 | ||||||||||
MMDA | 1,320,635 | 575,411 | — | ||||||||||
Certificates of deposit | 1,602,223 | 1,324,486 | 1,233,668 | ||||||||||
Total consumer direct deposits | 3,627,318 | 2,653,569 | 2,368,205 | ||||||||||
Municipal deposits | 899,123 | 807,665 | 441,962 | ||||||||||
National accounts | 1,153,726 | 912,655 | 797,935 | ||||||||||
Total deposits | $ | 5,680,167 | $ | 4,373,889 | $ | 3,608,102 | |||||||
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $1.3 billion, $894.5 million and $249.4 million at December 31, 2003, 2002 and 2001, respectively.
INTEREST RATE SWAPS.In October 2003, the Company entered into a series of interest rate swaps to offset its exposure to rising rates. The notional amount of these swaps totaled $500.0 million. Contractually, the Company will receive a floating rate tied to LIBOR and pay a fixed rate. The swaps are categorized in two groups; the first receiving one-month LIBOR and the second receiving three-month LIBOR. These swaps have maturities ranging from three to five years. These interest rate swaps effectively act as a cash flow hedge against a rise in the cost of our municipal deposits. At December 31, 2003, the Company recorded a net market value adjustment of $2.2 million to this portfolio. The adjustment was recorded as an increase to other comprehensive income in stockholders’ equity.
FHLB ADVANCES.FHLB advances increased $0.2$1.0 billion, or 10.0%45.5%, to $3.2 billion at December 31, 2003, from $2.2 billion at December 31, 2002, from $2.0 billion at December 31, 2001.2002. The Company relies upon such advances as a source of funding for the origination or purchase of loans for sale in the secondary market.market and for providing duration specific medium-term financing. The outstanding balance of FHLB advances fluctuates from time to time depending upon the Company’s current inventory of loans available for sale and the availability of lower cost funding from its retail deposit base and its escrow accounts. The average outstanding balance of advances from the FHLB totaled $2.7 billion and $2.2 billion during 2003 and $2.1 billion during 2002, and 2001, respectively.
For the years ended December 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
Maximum outstanding at any month end | $ | 3,320,000 | $ | 2,492,000 | $ | 2,319,093 | ||||||
Average balance | 2,711,119 | 2,179,060 | 2,076,400 | |||||||||
Average interest rate | 4.69% | 5.29% | 5.63% |
LONG TERM DEBT.On April 27, 1999, the Company, through its subsidiary Trust, completed the sale of 2.99 million shares of trust preferred securities, providing gross proceeds totaling $74.8 million. The securities pay interest at a rate of 9.50% per annum. The securities are traded on the New York Stock Exchange under the symbol“FBC-O”.On January 22, 2004, the Company notified the public in a press release its intent to call the preferred securities of Trust on April 30, 2004. The Company does not intend to replace this debt.
On December 19, 2002, the Company, through its subsidiary Trust II, completed a private placement sale of trust preferred securities, providing gross proceeds totaling $25.0 million. The securities pay interest at a floating rate of 4.66%. In connection withAs part of the private placement,transaction, the Company entered into an interest rate swap agreement with the placement agent, where the Company is required to pay a fixed rate of 6.88% on a notional amount of $25 million and will receive a floating rate equal to that being paid in the Trust II securities. The interest rate swap is being accounted as a cash flow hedge per FASB 133.
ACCRUED INTEREST PAYABLE.Accrued interest payable decreased $1.2 million, or 6.6%, to $16.9 million at December 31, 2002, from $18.1 million at December 31, 2001. These amounts represent interest payments which are payable to depositors and other entities from whichOn February 19, 2003, the Company, has borrowed funds. These balances fluctuate withthrough its subsidiary Trust III, completed a private placement sale of trust preferred securities, providing gross proceeds totaling $25.0 million. The securities have an effective cost for the sizefirst five years of the interest-bearing liability portfolio. The interest bearing liability portfolio increased 17.5% during the period, but was offset by6.55% and a 148 basis point decrease in the cost of liabilities.floating rate thereafter.
3645
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
On March 19, 2003, the Company, through its subsidiary Trust IV, completed a private placement sale of trust preferred securities, providing gross proceeds totaling $25.0 million. The securities have an effective cost for the first five years of 6.75% and a floating rate thereafter.
The trust preferred securities mature in 30 years from issuance, are callable after five years, pay interest quarterly, and the interest expense is deductible for federal income tax purposes. The majority of the net proceeds from these offerings was contributed to the Bank as additional paid in capital and is includable as regulatory capital.
The Company has various financial obligations, including contractual obligations and commercial commitments, which require future cash payments. Refer to Item 8. Financial Statements Notes 3, 11, 13, 14 and 15. The following table presents the aggregate annual maturities of contractual obligations (based on final maturity dates) at December 31, 2003 (in thousands):
Less than | 1-3 | 3-5 | More than | |||||||||||||||||
1 Year | Years | Years | 5 Years | Total | ||||||||||||||||
Deposits without stated maturities | $ | 2,172,172 | $ | — | $ | — | $ | — | $ | 2,172,172 | ||||||||||
Certificates of deposits | 1,510,157 | 1,254,640 | 731,375 | 11,823 | 3,507,995 | |||||||||||||||
FHLB Advances | 250,000 | 770,000 | 1,050,000 | 1,100,000 | 3,170,000 | |||||||||||||||
Trust preferred securities | 74,750 | — | — | 75,000 | 149,750 | |||||||||||||||
Operating leases | 6,823 | 8,611 | 2,479 | 1,229 | 19,142 | |||||||||||||||
Other debt | 25 | 50 | 50 | 1,225 | 1,350 | |||||||||||||||
Total | $ | 4,013,927 | $ | 2,033,301 | $ | 1,783,904 | $ | 1,189,277 | $ | 9,020,409 | ||||||||||
ACCRUED INTEREST PAYABLE.Accrued interest payable increased $3.4 million, or 20.1%, to $20.3 million at December 31, 2003 from $16.9 million at December 31, 2002. These amounts represent interest payments that are payable to depositors and other entities from which the Company has borrowed funds. These balances fluctuate with the size of the interest-bearing liability portfolio. The interest-bearing liability portfolio increased 35.8% during the period, but was offset by a 61 basis point decrease in the cost of liabilities.
UNDISBURSED PAYMENTS.Undisbursed payments on loans serviced for others increased $364.6decreased $119.9 million, or 158.1%20.1%, to $475.3 million at December 31, 2003, from $595.2 million at December 31, 2002, from $230.6 million at December 31, 2001.2002. These amounts represent payments received from borrowers for interest, principal and related loan charges, which have not been remitted to loan investors. These balances fluctuate with the size of the servicing portfolio and increase during a time of high payoff or refinance volume. Loans serviced for others at December 31, 2002,2003, including subservicing, equaled $29.4$33.8 billion versus $20.9$29.4 billion at December 31, 2001.2002.
ESCROW ACCOUNTS.The amount of funds in escrow accounts increased $42.5$30.3 million, or 40.2%20.4%, to $178.5 million at December 31, 2003, from $148.2 million at December 31, 2002, from $105.7 million at December 31, 2001.2002. These accounts are maintained on behalf of mortgage customers and include funds earmarked for real estate taxes, homeowner’s insurance, and other insurance product liabilities. These balances fluctuate with the amount of loans serviced andserviced. The balances also dependsfluctuated during the year depending upon the scheduled payment dates for the
46
related expenses. Total residential mortgage loans serviced at December 31, 2002,2003, equaled $35.4$42.0 billion versus $25.8$35.4 billion at December 31, 2001,2002, a 37.2%18.6% increase.
LIABILITY FOR CHECKS ISSUED.The liability for checks issued decreased $23.0$96.8 million, or 15.6%77.9%, to $27.5 million at December 31, 2003, from $124.3 million at December 31, 2002, from $147.3 million at December 31, 2001.2002. This liability primarily reflects the outstanding amount of outstanding checks the Company has written to acquire mortgage loans. This account grows or contracts in conjunction with the amount of loans that are in the Company’s mortgage pipeline.
FEDERAL INCOME TAXES PAYABLE.Federal incomeIncome taxes payable decreased $4.0increased $0.1 million, or 5.2%0.1%, to $73.6 million at December 31, 2002,2003, from $77.6$73.7 million at December 31, 2001.2002. See Note 1416 of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary Data, herein.
OTHER LIABILITIES.Other liabilities increased $31.3decreased $77.0 million, or 31.4%55.0%, to $131.0$63.1 million at December 31, 2002,2003, from $99.7$140.1 million at December 31, 2001.2002. This increase is reflective of the increasedecrease in mortgage origination volume during the fourth quarter of 20022003 versus the comparable 20012002 period.
Included in other liabilities at December 31, 2002 is the liability for the preferred stock issued by Capital, a second-tier subsidiary of Flagstar Bank. In February and March of 1998, Capital offered to the public and sold 2.3 million shares of its 8.50%, non-cumulative, Series A Preferred Shares, $25 par value per share, providing net proceeds totaling $54.4 million. The preferred stock payspaid interest at a rate of 8.50% per annum. The stock iswas traded on the New York Stock Exchange under the symbol“FBC-P”.FBC-P.”On March 20,June 30, 2003, we notified the public in a press release that we would redeemredeemed all of the preferred shares on June 30, 2003.shares.
ASSET AND LIABILITY MANAGEMENT
Flagstar considers that its primary business objective is to provide stockholders the highest return possible on their investment while maintaining a certain risk posture. This objective includes the management of credit risk and interest rate risk.
Interest rate risk is managed by the Executive Investment Committee (“EIC”), which is composed of executive officers of the Company, in accordance with policies approved by the Company’s Board of Directors. The EIC formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the EIC considers the impact of projected interest rate scenarios on earnings and capital, of the current outlook on interest rates, potential changes in interest rates, the economy, liquidity, business strategies, and
37
other factors. The EIC meets monthly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and fair values of assets and liabilities, unrealized gains and losses, purchase and sale activity, loans available for sale and commitments to originate loans, and the maturities of investments, borrowings and time deposits. Any decision procedure or policy change that requires implementation is directed to the Asset and Liability Committee (“ALCO”).
The ALCO implements any directive from the EIC and meets weekly to monitor liquidity, cash flow flexibility, and deposit activity. To effectively measure and manage interest rate risk, the Company uses sensitivity analysis to determine the impact on net interest income of various interest rate scenarios, balance sheet trends, and strategies.
From these simulations, interest rate risk is quantified and appropriate strategies are developed and implemented. Additionally, duration and market value sensitivity measures are utilized when they provide
47
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
added value to the overall interest rate risk management process. The overall interest rate risk position and strategies are reviewed by executive management and the Company’s Board of Directors on an ongoing basis. The Company has traditionally managed its business to reduce its overall exposure to changes in interest rates. However, management has the latitude to increase the Company’s interest rate sensitivity position within certain limits if, in management’s judgment, the increase will enhance profitability. The Company manages its exposure to interest rates by hedging itself primarily from rising rates.
Interest rate risk generally refers to the potential volatility in net interest income resulting from changes in interest rates. Flagstar’s interest rate risk management focuses on interest rate sensitivity through the use of simulation models, in an attempt to measure and project the potential effects of various market interest rate scenarios on the Company’s balance sheet.
Flagstar, because of its high concentration of loans held for sale and its large portfolio of adjustable rate loans, generally will record higher levels of net interest income in a rising interest rate environment and will experience declining net interest income during periods of falling interest rates. This happens because the Company’s assets reprice or mature faster than the majority of the Company’s liabilities will reset or mature.
In the past, the savings and loan industry measured interest rate risk by using Gap analysis. Gap analysis is one indicator of interest rate risk. But Gap analysisrisk, however it only provides a glimpse into expected asset and liability repricing in segmented time frames.
Today the thrift industry utilizes the concept of Net Portfolio Value (“NPV”). NPV analysis provides a fair value of the balance sheet in alternative interest rate scenarios. The NPV does not take into account management intervention and assumes the new rate environment is constant and the change is instantaneous.
The following table is a summary of the changes in the Company’s NPV that are projected to result from hypothetical changes in market interest rates. NPV is the market value of assets, less the market value of liabilities, adjusted for the market value of off-balance sheet instruments. The interest rate scenarios presented in the table include interest rates at December 31, 20022003 and 20012002 and as adjusted by instantaneous parallel rate changes upward and downward of up to 300 basis points. The 20022003 and 20012002 scenarios are not comparable due to differences in the interest rate environments, including the absolute level of rates and the shape of the yield curve.
38
ASSET AND LIABILITY MANAGEMENT (continued)
The positive effect of a decline in market interest rates is reduced by the estimated effect of prepayments on the value of single-family loans and MSRs. Further, this analysis is based on the Company’s interest rate exposure at December 31, 20022003 and 2001,2002, and does not contemplate any actions the Company might undertake in response to changes in market interest rates, which could impact NPV. Each rate scenario shows unique prepayment, repricing, and reinvestment assumptions. Management derived these assumptions considering published market prepayment expectations, the repricing characteristics of individual instruments or groups of similar instruments, the Company’s historical experience, and the Company’s asset and liability management strategy. Further, this analysis assumes that certain instruments would not be affected by the changes in interest rates or would be partially affected due to the characteristics of the instruments.
There are limitations inherent in any methodology used to estimate the exposure to changes in market interest rates. It is not possible to fully model the market risk in instruments with leverage, option, or prepayment risks. Also, the Company is affected by basis risk, which is the difference in repricing characteristics of similar term rate indices. As such, this analysis is not intended to be a forecast of the effect of a change in market interest rates on the Company.
48
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
ASSET AND LIABILITY MANAGEMENT (continued)
While each analysis involves a static model approach to a dynamic operation, the NPV model is the preferred method. If an NPV rises in an up or down interest rate scenario, that would dictate an up direction for the margin in that hypothetical rate scenario. The same would be seen in a falling scenario. A perfectly matched balance sheet would possess no change in the NPV, no matter what the rate scenario. The following table presents the NPV in stated interest rate scenarios (in millions):
December 31, 2002 | December 31, 2001 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2003 | December 31, 2003 | December 31, 2002 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Scenario | Scenario | NPV | NPV% | $ Change | % Change | Scenario | NPV | NPV% | $ Change | % Change | Scenario | NPV | NPV% | $ Change | % Change | Scenario | NPV | NPV% | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
+300 | $ | 418.1 | 5.23% | $ | (302.2 | ) | (42.0 | )% | +300 | $ | 142.7 | 2.19% | $ | (452.9 | ) | (76.0 | )% | +300 | $ | 1,001.5 | 9.78% | $ | (64.4 | ) | (6.0 | )% | +300 | $ | 418.1 | 5.23% | $ | (302.2 | ) | (42.0 | )% | |||||||||||||||||||||||||||||||||||||||||
+200 | $ | 563.8 | 6.87% | $ | (156.4 | ) | (21.7 | )% | +200 | $ | 315.7 | 4.72% | $ | (280.0 | ) | (47.0 | )% | +200 | $ | 1,054.8 | 10.06% | $ | (11.1 | ) | (1.0 | )% | +200 | $ | 563.8 | 6.87% | $ | (156.4 | ) | (21.7 | )% | |||||||||||||||||||||||||||||||||||||||||
+100 | $ | 692.8 | 8.23% | $ | (27.4 | ) | (3.8 | )% | +100 | $ | 471.6 | 6.86% | $ | (124.1 | ) | (20.8 | )% | +100 | $ | 1,088.2 | 10.14% | $ | 22.4 | 2.1 | % | +100 | $ | 692.8 | 8.23% | $ | (27.4 | ) | (3.8 | )% | ||||||||||||||||||||||||||||||||||||||||||
Current | $ | 720.3 | 8.39% | Current | $ | 595.6 | 8.47% | Current | $ | 1,065.8 | 9.75% | Current | $ | 720.3 | 8.39% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
-100 | $ | 570.0 | 6.55% | $ | (150.3 | ) | (20.9 | )% | -100 | $ | 652.2 | 9.11% | $ | 56.6 | 9.5 | % | -100 | $ | 939.0 | 8.47% | $ | (126.7 | ) | (11.9 | )% | -100 | $ | 570.0 | 6.55% | $ | (150.3 | ) | (20.9 | )% |
ASSET QUALITY
The Company has consistently maintainedfocused on following a conservative posture with respect to credit risk. Mortgage lending, the Company’s primary lending focus, has historically resulted in minimal charge-offs when viewed as a percent of the Company’s origination volume. At December 31, 2002,2003, approximately 82.0%92.0% of the Company’s earning assets consisted of loans collateralized by single-family mortgage loans.
The credit quality of the Company’s commercial loan, non-single family mortgage-related consumer loan, and commercial real estate loan portfolio, which in the aggregate comprises only 18.0%5.8% of earning assets at December 31, 2002,2003, remains good. During the past three years, the Company has emphasized commercial real estate lending in its retail market area and second mortgage lending as an add-on to the Company’s national mortgage lending platform. Management plans to continue to increase the size of these loan portfolios. Management expects to achieve this growth with adherence to sound underwriting and credit standards.
39
Management believes the Company’s level of non-performing assets, which totaled $126.7$107.1 million at December 31, 2002,2003, continues to represent an acceptable level of credit risk for Flagstar. The Company, in accordance with applicable disclosure requirements, defines an asset as non-performing if it meets any of the following criteria:
1) | a loan more than 90 days past due; | |
2) | a repurchased asset pending foreclosure; or | |
3) | real estate acquired in a settlement of a loan; or | |
a restructured loan whose terms have been modified due to the borrower’s inability to pay as contractually specified, including loans the Company has classified as impaired. |
Loans are generally placed into non-accrual status when they become 90 days delinquent. Gross interest income of approximately $4.1 million, $6.5 million $6.1 million and $4.7$6.1 million would have been recorded in 2003, 2002, 2001,
49
and 2000,2001, respectively, on non-accrual loans if the loans had performed in accordance with their original terms.
NON-PERFORMING ASSETS
At December 31, | At December 31, | |||||||||||||||||||||||||||||||||||||||
2002 | 2001 | 2000 | 1999 | 1998 | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||
Non-accrual loans | $ | 81,589 | $ | 87,682 | $ | 63,620 | $ | 41,836 | $ | 37,190 | $ | 58,334 | $ | 68,032 | $ | 82,266 | $ | 58,269 | $ | 34,857 | ||||||||||||||||||||
Repurchased assets | 11,956 | 10,404 | 4,156 | 4,107 | 5,357 | |||||||||||||||||||||||||||||||||||
Real estate and other repossessed assets | 45,094 | 38,868 | 22,258 | 21,364 | 22,966 | 36,778 | 45,094 | 38,868 | 22,258 | 21,364 | ||||||||||||||||||||||||||||||
Total non-performing assets | 126,683 | 126,550 | 85,878 | 63,200 | 60,156 | 107,068 | 123,530 | 125,290 | 84,634 | 61,578 | ||||||||||||||||||||||||||||||
Less allowance for losses | (50,000 | ) | (42,000 | ) | (25,000 | ) | (23,000 | ) | (20,000 | ) | (36,017 | ) | (37,764 | ) | (27,769 | ) | (14,357 | ) | (15,216 | ) | ||||||||||||||||||||
Total non-performing assets (net of allowances) | $ | 76,683 | $ | 84,550 | $ | 60,878 | $ | 40,200 | $ | 40,156 | $ | 71,051 | $ | 85,766 | $ | 97,521 | $ | 70,277 | $ | 46,362 | ||||||||||||||||||||
Ratio of non-performing assets to total assets | 1.54% | 1.91% | 1.49% | 1.47% | 1.97% | 1.01 | % | 1.50 | % | 1.89 | % | 1.47 | % | 1.43 | % | |||||||||||||||||||||||||
Ratio of non-performing loans to investment loans | 2.05% | 2.77% | 1.67% | 2.61% | 4.98% | 0.85 | % | 1.71 | % | 2.60 | % | 1.53 | % | 2.19 | % | |||||||||||||||||||||||||
Ratio of allowances to non-performing loans | 61.28% | 47.90% | 39.30% | 54.98% | 53.78% | |||||||||||||||||||||||||||||||||||
Ratio of allowances to investment loans | 1.25% | 1.32% | 0.66% | 1.44% | 2.68% | |||||||||||||||||||||||||||||||||||
Ratio of allowance to non-performing loans | 61.74 | % | 55.51 | % | 33.76 | % | 24.64 | % | 43.65 | % | ||||||||||||||||||||||||||||||
Ratio of allowance to investment loans | 0.53 | % | 0.95 | % | 0.88 | % | 0.38 | % | 0.95 | % | ||||||||||||||||||||||||||||||
Ratio of net charge-offs to average investment loans | 0.72% | 0.54% | 0.25% | 0.33% | 0.57% | 0.35 | % | 0.50 | % | 0.40 | % | 0.20 | % | 0.22 | % |
The Company’s 20022003 year-end ratio of non-performing assets to total assets was 1.54%1.01%. The adequacy of the allowance for losses is evaluated regularly and is based upon judgements concerning the amount of risk inherent in the Company’s portfolio. At December 31, 2002, $72.42003, $55.2 million, or 88.8%94.7% of total non-performing loans were secured by residential real estate.
40
ASSET QUALITY (continued)
During 2002,2003, the Company recorded a provision for loan losses of $8.0$20.1 million in excess ofto offset net charge-offs for the year. This increased theThe allowance for losses to $50.0stood at $36.0 million at December 31, 2002. Management recorded this 19.0% addition to the loan allowance for the following reasons:
On the positive side of the ledger,2003. During 2003, there was a decrease of $9.6$28.5 million, or 6.1%21.3%, in total loan delinquencies, at December 31, 2002, and seriously delinquent loans decreased $6.1$9.7 million, or 7.0%,14.3%.
The allowance for losses at December 31, 2002.
Additionally the Company experienced an increase in losses associated with loans sold to the secondary market and later repurchased. Although all of the loans were sold on a non-recourse basis, the Company repurchased $25.5 million, $44.0 million, and $19.1 million in mortgage loans from secondary market investors during 2002, 2001, and 2000, respectively. Generally, for loans sold to the secondary market, the Company is responsible for certain representations and warranties regarding the adherence to underwriting and loan program guidelines. At December 31, 2002, the Company had sold $110.0 billion in loans to the secondary market over the previous 60 months. This volume of loan sales is $33.2 billion, or 43.2%, larger than the $76.8 billion sold in the 60 months preceding December 31, 2001. These loans were required to be repurchased because of their delinquent status or their non-compliance with the underwriting or loan program guidelines that they were initially sold under. A large portion of the charge-offs recorded by the Company ($3.8 million, $3.2 million, and $1.6 million in 2002, 2001, and 2000, respectively) were attributed to loans originated within the prior 60 month period, repurchased from secondary market investors, foreclosed on, and disposed of at a loss.
To mitigate our repurchase risk in originating loans, we employ an automated underwriting process on all loans. This process uses loan data entry software from FNMA, through its Desktop Underwriter™ system, and from FHLMC through its Loan Prospector™ system. This process is intended to reduce processing and underwriting time, to improve credit quality and to reduce potential investor repurchase requests.
The increase in the allowance for losses in 20022003 was based upon management’s assessment of relevant factors, including the types and amounts of non-performing loans, the continued increase in the amount of historical charge-offs and anticipated loss experience on such types of loans, and the current and projected economic conditions. However, no assurance can be given that the Company will not, in any particular period, sustain loan losses that exceed the allowance, or that subsequent evaluation of the loan portfolio, in light of the factors then-prevailing, including economic conditions, the credit quality of the assets comprising the portfolio and the ongoing examination process, will not require significant increases in the allowance for loan losses. See Pages 3750 through 3953 for additional information on the Company’s loan loss allowance and non-performing loans. Also refer to Notes 3 and 7 of Notes to Consolidated Financial Statements in Item 8.
4150
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Financial Statements and Supplementary Data, herein for further discussion of the Company’s policies regarding provisions for losses and allowances for uncollected interest.
NON-ACCRUAL LOANS AT DECEMBER 31, 20022003
Investment | As a % of | Investment | As a % of | |||||||||||||||||||||||||||||
Loan | Non-performing | Loan | As a % of | Loan | Non-performing | Loan | As a % of | |||||||||||||||||||||||||
Portfolio | Loans | Portfolio | Non-performing | Portfolio | Loans | Portfolio | Non-performing | |||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||
One- to four-family | $ | 2,593,005 | $ | 72,438 | 2.79 | % | 88.8 | % | $ | 5,478,200 | $ | 53,741 | 0.98 | % | 92.1 | % | ||||||||||||||||
Second mortgages | 214,485 | 3,749 | 1.75 | 4.6 | 141,010 | 831 | 0.59 | 1.4 | ||||||||||||||||||||||||
Commercial real estate | 445,270 | 3,440 | 0.77 | 4.2 | 548,392 | 2,598 | 0.47 | 4.7 | ||||||||||||||||||||||||
Construction | 54,650 | 1,518 | 2.78 | 1.9 | 58,323 | 592 | 1.02 | 0.9 | ||||||||||||||||||||||||
Warehouse lending | 558,781 | — | — | — | 346,780 | — | — | — | ||||||||||||||||||||||||
Consumer | 124,785 | 18 | 0.01 | 0.0 | 259,651 | 561 | 0.22 | 0.9 | ||||||||||||||||||||||||
Non-real estate commercial | 7,706 | 426 | 5.53 | 0.5 | 7,896 | 11 | 0.13 | 0.0 | ||||||||||||||||||||||||
Total loans | 3,998,682 | 81,589 | 2.04 | % | 100.0 | % | 6,840,252 | 58,334 | 0.85 | % | 100.0 | % | ||||||||||||||||||||
Less allowances for losses | (50,000 | ) | (50,000 | ) | (36,017 | ) | (36,017 | ) | ||||||||||||||||||||||||
Total investment loans (net of allowances) | $ | 3,948,682 | $ | 31,589 | $ | 6,804,235 | $ | 22,317 | ||||||||||||||||||||||||
We also maintainThe Company maintains a quality control department that, among other things, reviews compliance and quality assurance issues relating to loan production and underwriting. For ourthe production compliance process, we randomly select a statistical sample of at least 5% of all loans closed each month.month are randomly selected as part of the statistical sample. This review includes a credit scoring and re-underwriting of such loans; ordering second appraisals on 10% of the sample; reverifying funds, employment and final applications; and reordering credit reports on the entire sample. In addition, a full underwriting review is conducted on loans that go into default during the first 12 months from the date of origination. Document and file reviews are also undertaken to ensure regulatory compliance.
In addition, we monitorthe Company monitors the performance of delegated underwriters through internally prepared quality assurance reports, prepared by our quality control department, FHA/ VA reports and audits, reviews and audits by regulatory agencies, investor reports, and mortgage insurance company audits. Deficiencies in loans are generally corrected; otherwise, we may exercise ourthe option to require that thea loan be repurchased by the originating correspondent, or we may insist that the broker who originated the loan indemnify us against any losses.
4251
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
ALLOCATION OF THE ALLOWANCE FOR LOSSES
At December 31, | At December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2002 | 2001 | 2000 | 1999 | 1998 | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans | Loans | Loans | Loans | Loans | Loans | Loans | Loans | Loans | Loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
To Total | To Total | To Total | To Total | To Total | To Total | To Total | To Total | To Total | To Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage loans: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Available for sale | $ | — | 45.3% | $ | — | 46.4% | $ | 3,228 | 27.4% | $ | 7,112 | 58.7% | $ | 7,751 | 71.1% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Held for investment | 38,244 | 35.5% | 38,522 | 37.2% | 18,071 | 62.0% | 12,605 | 29.9% | 8,930 | 14.1% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage loans | Mortgage loans | $ | 20,347 | 80.1% | $ | 26,008 | 64.7% | $ | 24,291 | 69.3% | $ | 10,656 | 85.3% | $ | 11,933 | 72.9% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Second mortgages | Second mortgages | 2,129 | 2.1% | 3,502 | 5.4% | 236 | 7.4% | 190 | 4.4% | 260 | 9.1% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate | Commercial real estate | 6,468 | 8.0% | 2,425 | 11.2% | 975 | 9.9% | 257 | 5.1% | 552 | 9.2% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction | Construction | 2,852 | 0.7% | 153 | 0.9% | 278 | 1.1% | 183 | 1.2% | 225 | 1.3% | Construction | 2,380 | 0.8% | 2,852 | 1.4% | 153 | 1.7% | 278 | 1.6% | 183 | 2.9% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Warehouse lending | Warehouse lending | 273 | 5.1% | 385 | 14.0% | 439 | 9.4% | 959 | 1.8% | 745 | 2.9% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer | Consumer | 2,550 | 1.7% | 1,603 | 1.1% | 1,966 | 1.1% | 1,528 | 1.1% | 770 | 1.1% | Consumer | 3,705 | 3.8% | 2,550 | 3.1% | 1,603 | 2.0% | 1,966 | 1.6% | 1,528 | 2.7% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | Commercial | 42 | 0.1% | 72 | 0.2% | 51 | 0.2% | 15 | —% | 34 | 0.2% | Commercial | 715 | 0.1% | 42 | 0.2% | 72 | 0.3% | 51 | 0.2% | 15 | 0.3% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate | 2,425 | 6.1% | 975 | 5.3% | 257 | 3.7% | 552 | 3.8% | 769 | 3.1% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Warehouse lending | 385 | 7.7% | 439 | 5.0% | 959 | 1.3% | 745 | 1.2% | 1,500 | 9.1% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Second mortgages | 3,502 | 2.9% | 236 | 3.9% | 190 | 3.2% | 260 | 3.8% | 21 | —% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 50,000 | 100.0% | $ | 42,000 | 100.0% | $ | 25,000 | 100.0% | $ | 23,000 | 100.0% | $ | 20,000 | 100.0% | Total | $ | 36,017 | 100.0% | $ | 37,764 | 100.0% | $ | 27,769 | 100.0% | $ | 14,357 | 100.0% | $ | 15,216 | 100.0% | ||||||||||||||||||||||||||||||||||||||||||||||||||||
4352
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
ASSET QUALITY (continued)
ACTIVITY WITHIN THE ALLOWANCE FOR LOSSES
2002 | 2001 | 2000 | 1999 | 1998 | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||
Beginning balance | Beginning balance | $ | 42,000 | $ | 25,000 | $ | 23,000 | $ | 20,000 | $ | 5,500 | Beginning balance | $ | 37,764 | $ | 27,769 | $ | 14,357 | $ | 15,216 | $ | 12,917 | ||||||||||||||||||||||
Provision for losses | Provision for losses | 28,749 | 33,197 | 10,576 | 7,296 | 18,631 | Provision for losses | 20,081 | 27,126 | 25,572 | 5,803 | 5,184 | ||||||||||||||||||||||||||||||||
Charge-offs | Charge-offs | Charge-offs | ||||||||||||||||||||||||||||||||||||||||||
Mortgage loans | (17,883 | ) | (13,136 | ) | (8,006 | ) | (4,152 | ) | (3,741 | ) | Mortgage loans | (20,455 | ) | (14,263 | ) | (9,099 | ) | (6,092 | ) | (2,741 | ) | |||||||||||||||||||||||
Consumer loans | (1,195 | ) | (749 | ) | (381 | ) | (177 | ) | (236 | ) | Consumer loans | (884 | ) | (1,195 | ) | (660 | ) | (355 | ) | (177 | ) | |||||||||||||||||||||||
Commercial loans | (1,083 | ) | (2,521 | ) | (1 | ) | (15 | ) | (30 | ) | Commercial loans | (1,250 | ) | (1,083 | ) | (2,521 | ) | (1 | ) | (15 | ) | |||||||||||||||||||||||
Construction loans | (5 | ) | (20 | ) | (2 | ) | (6 | ) | (391 | ) | Construction loans | (313 | ) | (5 | ) | (20 | ) | (2 | ) | (6 | ) | |||||||||||||||||||||||
Other | (1,078 | ) | (429 | ) | (320 | ) | (294 | ) | — | Other | (298 | ) | (1,078 | ) | (429 | ) | (320 | ) | (294 | ) | ||||||||||||||||||||||||
Total | (21,244 | ) | (16,766 | ) | (8,684 | ) | (4,644 | ) | (4,275 | ) | Total | (23,200 | ) | (17,624 | ) | (12,729 | ) | (6,770 | ) | (3,233 | ) | |||||||||||||||||||||||
Recoveries | Recoveries | Recoveries | ||||||||||||||||||||||||||||||||||||||||||
Mortgage loans | 5 | 221 | 29 | 176 | 185 | |||||||||||||||||||||||||||||||||||||||
Mortgage loans | Mortgage loans | 641 | 5 | 221 | 29 | 176 | ||||||||||||||||||||||||||||||||||||||
Consumer loans | 78 | 255 | 97 | 21 | 78 | Consumer loans | 412 | 78 | 166 | 71 | 21 | |||||||||||||||||||||||||||||||||
Commercial loans | 412 | 182 | — | 12 | 4 | Commercial loans | 114 | 410 | 182 | — | 12 | |||||||||||||||||||||||||||||||||
Construction loans | — | — | — | 139 | — | Construction loans | — | — | — | — | 139 | |||||||||||||||||||||||||||||||||
Other | — | — | 8 | — | — | Other | 205 | — | — | 8 | — | |||||||||||||||||||||||||||||||||
Total | 495 | 569 | 108 | 348 | 144 | Total | 1,372 | 493 | 569 | 108 | 348 | |||||||||||||||||||||||||||||||||
Ending balance | Ending balance | $ | 50,000 | $ | 42,000 | $ | 25,000 | $ | 23,000 | $ | 20,000 | Ending balance | $ | 36,017 | $ | 37,764 | $ | 27,769 | $ | 14,357 | $ | 15,216 | ||||||||||||||||||||||
Net charge-off ratio | Net charge-off ratio | 0.72% | 0.54% | 0.25% | 0.33% | 0.57% | Net charge-off ratio | 0.35 | % | 0.50 | % | 0.40 | % | 0.20 | % | 0.22 | % |
ACTIVITY WITHIN THE SECONDARY MARKET RESERVE
2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Beginning balance | $ | 9,084 | $ | 12,972 | $ | 9,399 | $ | 6,162 | $ | 5,527 | ||||||||||
Provision for losses | 8,716 | (671 | ) | 5,490 | 3,732 | 1,407 | ||||||||||||||
Charge-offs, net | (7,546 | ) | (3,217 | ) | (1,917 | ) | (495 | ) | (772 | ) | ||||||||||
Ending balance | $ | 10,254 | $ | 9,084 | $ | 12,972 | $ | 9,399 | $ | 6,162 | ||||||||||
REPURCHASED ASSETS
Since the majority of all the loans the Company originates are sold to the secondary market, the Company must provide assurances to the market that the data relied upon in the sales process is accurate, the loans have been originated under proper guidelines, and there was no fraudulent data delivered. From time to time, the Company must repurchase loans it had previously sold to the market because of these representations even though the loans were sold on a non-recourse basis. The Company repurchased $46.3 million,
53
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
$34.3 million, and $47.0 million in mortgage loans from secondary market investors during 2003, 2002, and 2001, respectively. At December 31, 2003, the Company had sold $144.1 billion in loans to the secondary market over the previous 60 months. This volume of loan sales is $34.1 billion, or 31.0%, larger than the $110.0 billion sold in the 60 months preceding December 31, 2002. The repurchased loans were acquired because of their delinquent status. The Company recorded charge-offs of $12.0 million, $6.8 million, and $4.0 million in 2003, 2002, and 2001, respectively. These charge-offs were attributed to loans originated and sold within the prior sixty-month period, repurchased from secondary market investors, foreclosed on, and disposed of at a loss.
Repurchases are expected to be 0.08% of all loan sales. It is expected that the Company will have the exposure for these repurchases for a period of 60 months from origination. Periods of lower rates and higher refinance volume have shown less exposure to repurchase requirements than periods of higher rates and less refinance volume. The Company’s experience has been a net loss of 25.8% on all non-performing loans repurchased. During the fourth quarter of 2003, the Company reclassified $10.3 million of its allowance for losses to a secondary market reserve. At December 31, 2003 and 2002, the Company had $16.1 million and $13.6 million in repurchased assets that has a specific reserve of $4.1 million and $3.2 million associated with them, respectively. The Company has a reserve for future repurchases of $10.3 million and $9.1 million at December 31, 2003 and 2002, respectively. Any increase in the secondary market reserve is charged as an offset to net loan sale gains.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary sources of funds are customer deposits, loan repayments and sales, advances from the FHLB, cash generated from operations, and customer escrow accounts. Additionally, during the past six years, the Company and its affiliates have issued securities in fourfive separate offerings to the capital markets, generating over $180$207 million in gross proceeds. While these sources are expected to continue to be available to provide funds in the future, the mix and availability of funds will depend upon future economic and market conditions. Flagstar does not foresee any difficulty in meeting its liquidity requirements.
Loan principal repayments totaled $2.7$4.6 billion during 2002,2003, representing an increase of $0.1$1.9 billion, or 3.8%70.4%, compared to 2001.2002. This increase was attributable to the lower interest rate environment experienced during 2002,2003, which created an increase in the amount of loan refinancings and loan payoffs.
Sales of mortgage loans totaled $40.5$51.9 billion in principal balance during 2002,2003, compared to $30.9$40.5 billion in 2001.2002. The sales recorded during 20022003 were higher than in 20012002 due to the increased loan origination volume. During 20012002 and 2002,2003, the Company sold 93.6%92.0% and 93.8%93.6%, respectively, of the loans originated.
Customer deposits increased $0.8$1.3 billion, or 22.2%29.5%, and totaled $4.4$5.7 billion at December 31, 2002.2003. The increase is directly attributable to the Company’s aggressive growth strategy as discussed above.
44During 2003, the Company increased its borrowings from the FHLB by $1.0 billion, or 45.5%. The Company utilizes FHLB advances to provide the duration matched funding required in its asset liability management strategies.
54
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
During 2002, the Company increased its borrowings from the FHLB by $0.2 billion, or 10.0%. The Company utilizes FHLB advances to assist in duration matched funding needs required in its asset liability management strategies.
The Company paid a quarterly cash dividend of $0.047$0.05 on its common stock on February 28, 2002, $0.053January 15, 2003 and April 15, 2003, $0.10 on May 17, 2002June 30, 2003 and a $0.06$0.15 on August 15, 2002,September 30, 2003 and November 29, 2002.
Stockholders’ equity increased $127.4 million to $418.9 million at December 31, 2002, an increase of 43.7% over December 31, 2001. This level of stockholders’ equity represented 5.11% of total assets at December 31, 2002.2003.
On December 19, 2002, the Company, through its subsidiary Trust II, completed thea private placement sale of 1.0 million shares oftrust preferred securities, issued by Flagstar Statutory Trust II, a Connecticut trust and subsidiary of the Company.providing gross proceeds totaling $25.0 million. The securities pay interest at a floating rate of 4.66%. As part of the private placement, the Company entered into an interest rate swap agreement with the placement agent, where the Company is required to pay a fixed rate of 6.88% on a notional amount of $25 million and will receive a floating rate equal to three-month LIBOR plus 3.25% per annum.that being paid in the Trust II securities.
On February 19, 2003, the Company, through its subsidiary Trust III, completed a private placement sale of trust preferred securities, providing gross proceeds totaling $25.0 million. The securities reprice quarterly.have an effective cost for the first five years of 6.55%.
On March 19, 2003, the Company, through its subsidiary Trust IV, completed a private placement sale of trust preferred securities, providing gross proceeds totaling $25.0 million. The securities were sold in a pooled transaction to a private investor and are not traded on a securities exchange. The preferred securities are generally not redeemable until December 19, 2007. On or after that date,have an effective cost for the securities are redeemable in whole or in part by the Company for cash. The securities are not subject to a sinking fund or mandatory redemption and are not convertible into any other securitiesfirst five years of the Company.6.75%.
The board of directors of the Company adopted a Stock Repurchase Program on September 21, 1999. The Company repurchased a total of 1.2 million shares totaling $12.1 million during 1999. These shares were repurchased at a weighted price of $9.97 per share. During 2000, the Company repurchased an additional 1.5 million shares. The total amount of shares repurchased by the Company equaled 13.1% of the outstanding shares prior to the commencement of the program. The repurchased shares have been used in connection with employee benefit plans, and other general corporate purposes.
The board of directors of the Company adopted another Stock Repurchase Program on October 29, 2002. The Company wasis empowered to repurchase up to $25.0 million worth of outstanding common stock. No shares have been repurchased under this plan. If the Company repurchases shares, the repurchased shares will be available for later reissue in connection with future stock dividends, dividend reinvestment plans, employee benefit plans, and other general corporate purposes.
On June 26, 2001,May 31, 2002, the Company announcedcompleted a 3-for-2 split of its common stock. The split was completed on July 12, 2001. All share information on the financial statements of the Company has been adjusted accordingly.
On July 13, 2001,May 15, 2003, the Company movedcompleted a 2-for-1 split of its stockcommon stock. All share information on the financial statements of the Company has been adjusted accordingly.
At December 31, 2003, the Company had outstanding rate-lock commitments to lend $2.9 billion in mortgage loans, along with outstanding commitments to make other types of loans totaling $142.1 million. Because such commitments may expire without being drawn upon, they do not necessarily represent future cash commitments. Also, as of December 31, 2003, the Company had outstanding commitments to sell $3.7 billion of mortgage loans. These commitments will be funded within 90 days. Total commercial and consumer unused collateralized lines of credit totaled $2.0 billion at December 31, 2003. Such commitments include $1.6 billion in unused warehouse lines of credit to various mortgage companies at December 31, 2003.
The Company is expanding its banking operations through the Michigan and Indiana and is expecting to open 25 new banking centers and 64 new home loan centers during 2004. The expansion of the banking network is funded from the Nasdaq Stock MarketCompany’s ongoing operations and reduces the Company’s capital resources. The Company expects that the new banking centers will be profitable in 12 to 18 months, and until that time, the New York Stock Exchange. The stock, that formerly traded undernew banking centers will increase the symbol “FLGS”, is now traded under the symbol “FBC”. Flagstar Trust, a Delaware trust and subsidiaryCompany’s costs of Flagstar Bancorp, also moved its preferred securities from the Nasdaq Stock Market to the New York Stock Exchange. The securities, which formerly traded under the symbol “FLGSO”, now trade under the symbol “FBC-O”. Flagstar Capital, a real estate investment trust and third-tier subsidiary of Flagstar Bancorp, also moved its preferred stock from the Nasdaq Stock Market to the New York Stock Exchange. The preferred stock, which formerly traded under the symbol “FLGSP”, now trades under the symbol “FBC-P”.operation.
4555
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
On May 12, 2002, the Company announced a 3-for-2 split of its common stock. The split was completed on May 31, 2002. All share information on the financial statements of the Company has been adjusted accordingly.
At December 31, 2002, the Company had outstanding rate-lock commitments to lend $7.3 billion in mortgage loans, along with outstanding commitments to make other types of loans totaling $92.7 million. Because such commitments may expire without being drawn upon, they do not necessarily represent future cash commitments. Also, as of December 31, 2002, the Company had outstanding commitments to sell $6.4 billion of mortgage loans. These commitments will be funded within 90 days. Total commercial and consumer unused collateralized lines of credit totaled $758.4 million at December 31, 2002. Such commitments include $580.3 million in unused warehouse lines of credit to various mortgage companies at December 31, 2002.
The Company is expanding its retail operations through the Michigan and Indiana and is slated to open 16 new banking centers and 24 new loan origination offices during 2003. The expansion of the retail banking network is funded from the Company’s ongoing operations and reduces the Company’s capital resources. The Company expects that the new retail banking centers will be profitable in 12 to 18 months, and until that time, the new banking centers will increase the Company’s costs of operation.
ACCOUNTING AND REPORTING DEVELOPMENTS
RECENTLY ISSUED ACCOUNTING STANDARDS
In JuneNovember 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45), which covers guarantees such as standby letters of credit, performance guarantees, and direct or indirect guarantees of the indebtedness of others, but not guarantees of funding. FIN 45 requires a guarantor to recognize, at the inception of a guarantee, a liability in the amount equal to the fair value of the obligation undertaken in issuing the guarantee, and requires disclosure about the maximum potential payments that might be required, as well as the collateral or other recourse obtainable. The recognition and measurement provisions of FIN 45 were effective on a prospective basis after December 31, 2002, and its adoption by the Company on January 1, 2003 has not had a material impact on the Company’s consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46 (“FIN 46), “Consolidation of Variable Interest Entities”, which addresses consolidation by business enterprises of variable interest entities that possess certain characteristics as defined within the interpretation. However, in December 2003, the FASB issued Interpretation No. 46(R) (“FIN 46(R)”), which revises FIN 46 and is intended to clarify some of the provisions of FIN 46 and to exempt certain entities from its requirements. FIN 46(R) requires the deconsolidation of trust preferred security subsidiaries. FIN 46(R) grants the companies the option to adopt its provisions as of the end of the first period ending after December 31, 2003 or elect to defer until the first period ending after March 15, 2004. As of December 31, 2003, the Company has decided to defer the application of FIN 46(R) until March 15, 2004. Management believes the adoption of FIN 46(R) in the first quarter of 2004 will have an immaterial impact on the financial statements.
On April 30, 2003, the FASB issued SFAS No. 146, “Accounting149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (SFAS 149) which is effective for Costs Associated with Exithedging relationships entered into or Disposal Activities,” which addressesmodified after June 30, 2003. SFAS 149 amends and clarifies financial accounting and reporting for costs associated with exit or disposal activities. Underderivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 146, such costs will be recognized when the liability is incurred, rather than at the date of commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application permitted. Management is currently evaluating the impact of the133. The adoption of SFAS No. 146this rule did not have a material impact on itsthe Company’s results of operations or financial statements.condition.
In October 2002,On May 15, 2003, the FASB issued SFASStatement of Financial Accounting Standards (SFAS) No. 147, “Acquisitions of150, “Accounting for Certain Financial Institutions, an amendmentInstruments with Characteristics of FASB Statements No. 72both Liabilities and 144Equity” (SFAS 150) and FASB Interpretation No. 9,” which addresseswas effective May 31, 2003 for all new and modified financial instruments and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. SFAS 150 changes the accounting for purchases of certain financial institutions.instruments that, under previous guidance, issuers could account for as equity. SFAS No. 147 is effective October 1, 2002, with early application permitted.150 requires that those instruments be classified as liabilities (or assets in some circumstances). The Company does not have any goodwill that was subject to Statement No. 72 and thereforeadoption of this rule had no impact on the provisionsCompany’s results of Statement No. 147 required no change in classificationoperations or treatment of recorded goodwill.financial condition.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123,” which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.
4656
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
The Company has adopted the requirements of SFAS No. 123 in January 2000 and SFAS No. 148 effective December 31, 2002 with no material effect on its financial statements.
IMPACT OF INFLATION AND CHANGING PRICES.The Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike most industrial companies, nearly all the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
4757
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
In its mortgage bankinghome lending operations, the Company is exposed to market risk in the form of interest rate risk from the time the interest rate on a mortgage loan application is committed to by the Company through the time the Company sells or commits to sell the mortgage loan. On a daily basis, the Company analyzes various economic and market factors and, based upon these analyses, projects the amount of mortgage loans it expects to sell for delivery at a future date. The actual amount of loans sold will be a percentage of the number of mortgage loans on which the Company has issued binding commitments (and thereby locked in the interest rate) but has not yet closed (“pipeline loans”) to actual closings. If interest rates change in an unanticipated fashion, the actual percentage of pipeline loans that close may differ from the projected percentage. The resultant mismatching of commitments to fund mortgage loans and commitments to sell mortgage loans may have an adverse effect on the results of operations in any such period. For instance, a sudden increase in interest rates can cause a higher percentage of pipeline loans to close than projected. To the degree that this is not anticipated, the Company will not have made commitments to sell these additional pipeline loans and may incur losses upon their sale as the market rate of interest will be higher than the mortgage interest rate committed to by the Company on such additional pipeline loans. To the extent that the hedging strategies utilized by the Company are not successful, the Company’s profitability may be adversely affected.
CRITICAL ACCOUNTING POLICIES.POLICIES
The Company has established various accounting policies that govern the application of generally accepted accounting principles in the preparation of the financial statements. The significant accounting policies of the Company are discussed in the footnotes to the consolidated financial statements. Application of these accounting policies involves judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities. The judgments and assumptions are based on historical experience and other factors that are believed to be reasonable under the circumstances.
The Company believes that the following topics involve critical areas of the Company’s operations and the accounting policies associated with these areas requires the most significant judgments, assumptions and estimates.
Allowance for Loan Losses.The allowance for loan losses represents management’s estimate of credit losses inherent in the Company’s investment loan portfolio at the report date. The estimate is a composite of a variety of factors including past experience, collateral value, and the general economy. The allowance includes a specific portion, a formula driven portion, and a general nonspecific portion. The collection and ultimate recovery of the book value of the collateral, in most cases, is beyond the Company’s control.
Mortgage Servicing Rights.Determining the fair value of mortgage servicing rights involves a calculation of the present value of a set of market driven and MSR specific cash flows. We are forced to make conclusions about future market conditions including interest rates in order to complete the analysis. Our model calculates a fair value based upon variables but does not and can not take into account the actual price our specific MSR could be sold at in a fair exchange. We do allow the portfolio to be valued by an outside valuation expert not less than annually but interim valuations could become materially misstated.
Derivative Accounting.In its mortgage bankinghome lending operation, the Company enters into commitments to originate loans at certain prices and rates. The Company also sells forward mortgage-backed securities into the secondary market. In accordance with FASB 133, the Company carries these commitments at market value.
58
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued) |
The process of recording these commitments at fair value has the effect of recording the eventual gain or loss on the sale of these loans before it actually happens. This estimation process may be prone to error and therefore could misstate the Company’s true position.
Secondary Marketing Reserve.The Company maintains a reserve against future losses created by the repurchase of mortgage loans previously sold to the secondary market. The reserve is recorded at a level based upon management’s analysis of the potential for repurchase of loans sold during the prior sixty-month period. There is no assurance that the Company will not, in any particular period, sustain loan losses that exceed the reserve, or that subsequent evaluation, in light of the factors then-prevailing, will not require increases to the reserve.
4859
Index to Consolidated Financial Statements
Report of Independent Certified Public Accountants | ||||
Consolidated Statements of Financial Condition as of December 31, | ||||
Consolidated Statements of Earnings for the years ended December 31, 2003, 2002 | ||||
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2003, 2002, | ||||
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, | ||||
Notes to the Consolidated Financial Statements |
4960
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
We have audited the accompanying consolidated statements of financial condition of Flagstar Bancorp, Inc. and Subsidiaries as of December 31, 20022003 and 2001,2002, and the related consolidated statements of earnings, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2002.2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Flagstar Bancorp, Inc. and Subsidiaries as of December 31, 20022003 and 2001,2002, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 2002,2003, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 3 to the consolidated financial statements, the Company implemented Derivatives Implementation Group Issue Number C 13 (DIG 13)C13) pertaining to Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” on September 30, 2002.
/s/ GRANT THORNTON LLP
5061
Flagstar Bancorp, Inc.
At December 31, | At December 31, | ||||||||||||||||||||
2002 | 2001 | 2003 | 2002 | ||||||||||||||||||
Assets | Assets | Assets | |||||||||||||||||||
Cash and cash equivalents | Cash and cash equivalents | $ | 126,969 | $ | 110,447 | Cash and cash equivalents | $ | 148,417 | $ | 126,969 | |||||||||||
Mortgage backed securities | 39,110 | — | |||||||||||||||||||
Other investments | 11,766 | 7,949 | |||||||||||||||||||
Mortgage backed securities held to maturity | Mortgage backed securities held to maturity | 30,678 | 39,110 | ||||||||||||||||||
Investment securities held to maturity | Investment securities held to maturity | 14,144 | 11,766 | ||||||||||||||||||
Mortgage loans available for sale | Mortgage loans available for sale | 3,302,212 | 2,746,791 | Mortgage loans available for sale | 2,759,551 | 3,302,212 | |||||||||||||||
Investment loan portfolio | Investment loan portfolio | 6,840,252 | 3,985,126 | ||||||||||||||||||
Investment loan portfolio | 3,998,682 | 3,170,499 | Less: allowance for losses | (36,017 | ) | (37,764 | ) | ||||||||||||||
Less: allowance for losses | (50,000 | ) | (42,000 | ) | |||||||||||||||||
Investment loan portfolio, net | 6,804,235 | 3,947,362 | |||||||||||||||||||
Investment loan portfolio, net | 3,948,682 | 3,128,499 | |||||||||||||||||||
Federal Home Loan Bank stock | Federal Home Loan Bank stock | 150,000 | 128,400 | Federal Home Loan Bank stock | 198,356 | 150,000 | |||||||||||||||
Total earning assets | 7,451,770 | 6,011,639 | Total earning assets | 9,806,964 | 7,450,450 | ||||||||||||||||
Accrued interest receivable | Accrued interest receivable | 43,279 | 40,008 | Accrued interest receivable | 46,883 | 43,279 | |||||||||||||||
Repossessed assets | 45,094 | 38,868 | |||||||||||||||||||
Premises and equipment | 149,630 | 139,529 | |||||||||||||||||||
Repossessed assets, net | Repossessed assets, net | 36,778 | 45,094 | ||||||||||||||||||
Premises and equipment, net | Premises and equipment, net | 161,057 | 149,630 | ||||||||||||||||||
Mortgage servicing rights | Mortgage servicing rights | 230,756 | 168,469 | Mortgage servicing rights | 260,128 | 230,756 | |||||||||||||||
Other assets | Other assets | 156,204 | 114,864 | Other assets | 109,966 | 166,608 | |||||||||||||||
Total assets | $ | 8,203,702 | $ | 6,623,824 | Total assets | $ | 10,570,193 | $ | 8,212,786 | ||||||||||||
Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | |||||||||||||||||||
Liabilities | Liabilities | Liabilities | |||||||||||||||||||
Deposits | Deposits | $ | 4,373,889 | $ | 3,608,103 | Deposits | $ | 5,680,167 | $ | 4,373,889 | |||||||||||
Federal Home Loan Bank advances | Federal Home Loan Bank advances | 2,222,000 | 1,970,505 | Federal Home Loan Bank advances | 3,246,000 | 2,222,000 | |||||||||||||||
Long term debt | Long term debt | 99,750 | 74,750 | Long term debt | 151,100 | 99,750 | |||||||||||||||
Total interest bearing liabilities | 6,695,639 | 5,653,358 | Total interest bearing liabilities | 9,077,267 | 6,695,639 | ||||||||||||||||
Accrued interest payable | Accrued interest payable | 16,850 | 18,081 | Accrued interest payable | 20,328 | 16,850 | |||||||||||||||
Undisbursed payments on loans serviced for others | Undisbursed payments on loans serviced for others | 595,206 | 230,585 | Undisbursed payments on loans serviced for others | 475,261 | 595,206 | |||||||||||||||
Escrow accounts | Escrow accounts | 148,194 | 105,716 | Escrow accounts | 178,472 | 148,194 | |||||||||||||||
Liability for checks issued | Liability for checks issued | 124,293 | 147,287 | Liability for checks issued | 27,496 | 124,293 | |||||||||||||||
Federal income taxes payable | Federal income taxes payable | 73,582 | 77,584 | Federal income taxes payable | 73,576 | 73,582 | |||||||||||||||
Other liabilities | Other liabilities | 130,992 | 99,725 | Other liabilities | 63,110 | 140,076 | |||||||||||||||
Total liabilities | 7,784,756 | 6,332,336 | Total liabilities | 9,915,510 | 7,793,840 | ||||||||||||||||
Commitments and Contingencies | Commitments and Contingencies | — | — | Commitments and Contingencies | — | — | |||||||||||||||
Stockholders’ Equity | Stockholders’ Equity | Stockholders’ Equity | |||||||||||||||||||
Common stock – $.01 par value, 40,000,000 shares authorized, 29,594,627 shares issued and outstanding at December 31, 2002; 32,686,240 shares issued and 28,709,866 shares outstanding at December 31, 2001. | 296 | 287 | |||||||||||||||||||
Common stock — $.01 par value, 80,000,000 shares authorized, 60,675,169 shares issued and outstanding at December 31, 2003; 59,189,254 shares issued and outstanding at December 31, 2002 | Common stock — $.01 par value, 80,000,000 shares authorized, 60,675,169 shares issued and outstanding at December 31, 2003; 59,189,254 shares issued and outstanding at December 31, 2002 | 607 | 592 | ||||||||||||||||||
Additional paid in capital | Additional paid in capital | 29,443 | 21,953 | Additional paid in capital | 35,394 | 29,147 | |||||||||||||||
Accumulated other comprehensive income | Accumulated other comprehensive income | 2,173 | — | ||||||||||||||||||
Retained earnings | Retained earnings | 389,207 | 269,248 | Retained earnings | 616,509 | 389,207 | |||||||||||||||
Total stockholders’ equity | 418,946 | 291,488 | Total stockholders’ equity | 654,683 | 418,946 | ||||||||||||||||
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 10,570,193 | $ | 8,212,786 | ||||||||||||||||
Total liabilities and stockholders’ equity | $ | 8,203,702 | $ | 6,623,824 | |||||||||||||||||
The accompanying notes are an integral part of these statements.
5162
Flagstar Bancorp, Inc.
For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||||||
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |||||||||||||||||||||||
Interest Income | Interest Income | Interest Income | ||||||||||||||||||||||||||
Loans and mortgage backed securities | Loans and mortgage backed securities | $ | 439,819 | $ | 424,868 | $ | 370,927 | Loans and mortgage backed securities | $ | 497,406 | $ | 439,819 | $ | 424,868 | ||||||||||||||
Other | Other | 10,293 | 13,903 | 10,708 | Other | 13,779 | 10,293 | 13,903 | ||||||||||||||||||||
Total | 450,112 | 438,771 | 381,635 | Total | 511,185 | 450,112 | 438,771 | |||||||||||||||||||||
Interest Expense | Interest Expense | Interest Expense | ||||||||||||||||||||||||||
Deposits | Deposits | 126,977 | 191,595 | 179,488 | Deposits | 138,625 | 126,977 | 191,595 | ||||||||||||||||||||
FHLB advances | FHLB advances | 115,345 | 116,957 | 98,775 | FHLB advances | 127,044 | 115,345 | 116,957 | ||||||||||||||||||||
Other | Other | 21,558 | 16,489 | 11,863 | Other | 42,814 | 21,558 | 16,489 | ||||||||||||||||||||
Total | 263,880 | 325,041 | 290,126 | Total | 308,483 | 263,880 | 325,041 | |||||||||||||||||||||
Net interest income | Net interest income | 186,232 | 113,730 | 91,509 | Net interest income | 202,702 | 186,232 | 113,730 | ||||||||||||||||||||
Provision for losses | Provision for losses | 28,749 | 33,197 | 10,576 | Provision for losses | 20,081 | 27,126 | 25,572 | ||||||||||||||||||||
Net interest income after provision for losses | Net interest income after provision for losses | 157,483 | 80,533 | 80,933 | Net interest income after provision for losses | 182,621 | 159,106 | 88,158 | ||||||||||||||||||||
Non-Interest Income | Non-Interest Income | Non-Interest Income | ||||||||||||||||||||||||||
Loan administration | Loan administration | (4,278 | ) | (14,940 | ) | 15,753 | Loan administration | (18,660 | ) | (4,278 | ) | (14,940 | ) | |||||||||||||||
Net gain on loan sales | Net gain on loan sales | 194,235 | 199,358 | 21,930 | Net gain on loan sales | 357,276 | 192,612 | 191,733 | ||||||||||||||||||||
Net gain on sales of mortgage servicing rights | Net gain on sales of mortgage servicing rights | 14,474 | 2,231 | 14,574 | Net gain on sales of mortgage servicing rights | 67,302 | 14,474 | 2,231 | ||||||||||||||||||||
Other fees and charges | Other fees and charges | 31,613 | 26,395 | 13,096 | Other fees and charges | 51,843 | 31,613 | 26,395 | ||||||||||||||||||||
Total | 236,044 | 213,044 | 65,353 | Total | 457,761 | 234,421 | 205,419 | |||||||||||||||||||||
Non-Interest Expense | Non-Interest Expense | Non-Interest Expense | ||||||||||||||||||||||||||
Compensation and benefits | Compensation and benefits | 102,465 | 75,255 | 44,166 | Compensation and benefits | 104,310 | 102,465 | 75,255 | ||||||||||||||||||||
Occupancy and equipment | Occupancy and equipment | 53,711 | 39,685 | 29,306 | Occupancy and equipment | 65,033 | 53,711 | 39,685 | ||||||||||||||||||||
General and administrative | General and administrative | 66,098 | 49,770 | 27,520 | General and administrative | 79,932 | 66,098 | 49,770 | ||||||||||||||||||||
Total | 222,274 | 164,710 | 100,992 | Total | 249,275 | 222,274 | 164,710 | |||||||||||||||||||||
Earnings before tax provision and cumulative effect of a change in accounting principle | Earnings before tax provision and cumulative effect of a change in accounting principle | 171,253 | 128,867 | 45,294 | Earnings before tax provision and cumulative effect of a change in accounting principle | 391,107 | 171,253 | 128,867 | ||||||||||||||||||||
Provision for federal income taxes | Provision for federal income taxes | 60,626 | 45,927 | 16,360 | Provision for federal income taxes | 136,755 | 60,626 | 45,927 | ||||||||||||||||||||
Earnings before cumulative effect of a change in accounting principle | Earnings before cumulative effect of a change in accounting principle | 110,627 | 82,940 | 28,934 | Earnings before cumulative effect of a change in accounting principle | 254,352 | 110,627 | 82,940 | ||||||||||||||||||||
Cumulative effect of a change in accounting principle | Cumulative effect of a change in accounting principle | 18,716 | — | — | Cumulative effect of a change in accounting principle | — | 18,716 | — | ||||||||||||||||||||
Net Earnings | Net Earnings | $ | 129,343 | $ | 82,940 | $ | 28,934 | Net Earnings | $ | 254,352 | $ | 129,343 | $ | 82,940 | ||||||||||||||
Earnings per share before cumulative effect of a change in accounting principle | Earnings per share before cumulative effect of a change in accounting principle | Earnings per share before cumulative effect of a change in accounting principle | ||||||||||||||||||||||||||
Basic | $ | 3.79 | $ | 2.99 | $ | 1.06 | Basic | $ | 4.25 | $ | 1.90 | $ | 1.50 | |||||||||||||||
Diluted | $ | 3.58 | $ | 2.78 | $ | 1.05 | Diluted | $ | 3.99 | $ | 1.79 | $ | 1.39 | |||||||||||||||
Earnings per share from a cumulative effect of a change in accounting principle | Earnings per share from a cumulative effect of a change in accounting principle | Earnings per share from a cumulative effect of a change in accounting principle | ||||||||||||||||||||||||||
Basic | $ | 0.64 | — | — | Basic | $ | — | $ | 0.32 | $ | — | |||||||||||||||||
Diluted | $ | 0.60 | — | — | Diluted | $ | — | $ | 0.30 | $ | — | |||||||||||||||||
Earnings per share | Earnings per share | Earnings per share | ||||||||||||||||||||||||||
Basic | $ | 4.43 | $ | 2.99 | $ | 1.06 | Basic | $ | 4.25 | $ | 2.22 | $ | 1.50 | |||||||||||||||
Diluted | $ | 4.18 | $ | 2.78 | $ | 1.05 | ||||||||||||||||||||||
Diluted | $ | 3.99 | $ | 2.09 | $ | 1.39 | ||||||||||||||||||||||
The accompanying notes are an integral part of these statements.
5263
Flagstar Bancorp, Inc.
Additional | Total | |||||||||||||||
Common | Paid in | Retained | Stockholders’ | |||||||||||||
Stock | Capital | Earnings | Equity | |||||||||||||
Balance at January 1, 2000 | $ | 290 | $ | 18,146 | $ | 167,278 | $ | 185,714 | ||||||||
Net earnings | — | — | 28,934 | 28,934 | ||||||||||||
Dividends paid ($0.18 per share) | — | — | (4,875 | ) | (4,875 | ) | ||||||||||
Common stock reissued | — | 211 | — | 211 | ||||||||||||
Common stock repurchased | (23 | ) | (13,132 | ) | — | (13,155 | ) | |||||||||
Balance at December 31, 2000 | 267 | 5,225 | 191,337 | 196,829 | ||||||||||||
Net earnings | — | — | 82,940 | 82,940 | ||||||||||||
Stock options exercised | 20 | 16,728 | — | 16,748 | ||||||||||||
Dividends paid ($0.183 per share) | — | — | (5,029 | ) | (5,029 | ) | ||||||||||
Balance at December 31, 2001 | 287 | 21,953 | 269,248 | 291,488 | ||||||||||||
Net earnings | — | — | 129,343 | 129,343 | ||||||||||||
Stock options exercised | 9 | 4,881 | — | 4,890 | ||||||||||||
Tax benefit from stock options exercised | — | 2,609 | — | 2,609 | ||||||||||||
Dividends paid ($0.25 per share) | — | — | (9,384 | ) | (9,384 | ) | ||||||||||
Balance at December 31, 2002 | $ | 296 | $ | 29,443 | $ | 389,207 | $ | 418,946 | ||||||||
Accumulated | |||||||||||||||||||||
Additional | Other | Total | |||||||||||||||||||
Common | Paid in | Comprehensive | Retained | Stockholders’ | |||||||||||||||||
Stock | Capital | Income | Earnings | Equity | |||||||||||||||||
Balance at January 1, 2001 | $ | 534 | $ | 4,958 | $ | — | $ | 191,337 | $ | 196,829 | |||||||||||
Net earnings | — | — | — | 82,940 | 82,940 | ||||||||||||||||
Stock options exercised | 40 | 11,248 | — | — | 11,288 | ||||||||||||||||
Tax benefit from stock-based compensation | — | 5,460 | — | — | 5,460 | ||||||||||||||||
Dividends paid ( $0.09 per share) | — | — | — | (5,029 | ) | (5,029 | ) | ||||||||||||||
Balance at December 31, 2001 | 574 | 21,666 | 269,248 | 291,488 | |||||||||||||||||
Net earnings | — | — | — | 129,343 | 129,343 | ||||||||||||||||
Stock options exercised | 18 | 4,872 | — | — | 4,890 | ||||||||||||||||
Tax benefit from stock based compensation | — | 2,609 | — | — | 2,609 | ||||||||||||||||
Dividends paid ( $0.12 per share) | — | — | — | (9,384 | ) | (9,384 | ) | ||||||||||||||
Balance at December 31, 2002 | 592 | 29,147 | 389,207 | 418,946 | |||||||||||||||||
Net earnings | — | — | — | 254,352 | 254,352 | ||||||||||||||||
Net unrealized gain on derivatives | — | — | 2,173 | — | 2,173 | ||||||||||||||||
Total comprehensive income | — | — | 2,173 | 254,352 | 256,525 | ||||||||||||||||
Issuance costs of Flagstar Capital Preferred Stock | — | (3,127 | ) | — | — | (3,127 | ) | ||||||||||||||
Stock options exercised and grants issued, net | 15 | 429 | — | — | 444 | ||||||||||||||||
Tax benefit from stock-based compensation | — | 8,945 | — | — | 8,945 | ||||||||||||||||
Dividends paid ( $0.50 per share) | — | — | — | (27,050 | ) | (27,050 | ) | ||||||||||||||
Balance at December 31, 2003 | $ | 607 | $ | 35,394 | $ | 2,173 | $ | 616,509 | $ | 654,683 | |||||||||||
The accompanying notes are an integral part of these statements.
5364
Flagstar Bancorp, Inc.
For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||||||
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |||||||||||||||||||||||
Operating Activities | Operating Activities | Operating Activities | ||||||||||||||||||||||||||
Net earnings | Net earnings | $ | 129,343 | $ | 82,940 | $ | 28,934 | Net earnings | $ | 254,352 | $ | 129,343 | $ | 82,940 | ||||||||||||||
Adjustments to net earnings to net cash used in operating activities | Adjustments to net earnings to net cash used in operating activities | Adjustments to net earnings to net cash used in operating activities | ||||||||||||||||||||||||||
Provision for losses | 28,749 | 33,197 | 10,576 | Provision for losses | 20,081 | 27,126 | 25,572 | |||||||||||||||||||||
Depreciation and amortization | 88,142 | 65,713 | 26,249 | Depreciation and amortization | 154,149 | 88,142 | 65,713 | |||||||||||||||||||||
Net gain on the sale of assets | (3,496 | ) | (1,286 | ) | (576 | ) | Net gain on the sale of assets | (3,787 | ) | (3,495 | ) | (1,286 | ) | |||||||||||||||
Net gain on loan sales | (194,235 | ) | (199,358 | ) | (21,930 | ) | Net gain on loan sales | (357,276 | ) | (192,612 | ) | (191,733 | ) | |||||||||||||||
Net gain on sales of mortgage servicing rights | (14,474 | ) | (2,231 | ) | (14,574 | ) | Net gain on sales of mortgage servicing rights | (67,302 | ) | (14,474 | ) | (2,231 | ) | |||||||||||||||
Proceeds from sales of loans available for sale | 41,227,759 | 31,376,503 | 8,104,472 | Proceeds from sales of loans available for sale | 53,006,843 | 41,226,136 | 31,368,879 | |||||||||||||||||||||
Origination and repurchase of loans, net of principal repayments | (43,716,268 | ) | (32,836,032 | ) | (9,746,909 | ) | Origination and repurchase of loans, net of principal repayments | (54,720,261 | ) | (43,716,268 | ) | (32,836,032 | ) | |||||||||||||||
Increase in accrued interest receivable | (3,271 | ) | (934 | ) | (12,446 | ) | Increase in accrued interest receivable | (3,603 | ) | (3,271 | ) | (934 | ) | |||||||||||||||
Increase in other assets | (41,342 | ) | (28,476 | ) | (12,313 | ) | Decrease (increase) in other assets | 54,514 | (47,592 | ) | (28,525 | ) | ||||||||||||||||
(Decrease) increase in accrued interest payable | (1,231 | ) | (28,638 | ) | 31,030 | Increase (decrease) in accrued interest payable | 3,478 | (1,231 | ) | (28,638 | ) | |||||||||||||||||
(Decrease) increase liability for checks issued | (22,994 | ) | 98,624 | 18,237 | Decrease liability for checks issued | (96,797 | ) | (22,994 | ) | 98,624 | ||||||||||||||||||
Increase (decrease) in federal income taxes payable | 17,781 | (5,323 | ) | 22,109 | (Decrease) increase in federal income taxes payable | (19,077 | ) | 7,703 | (5,323 | ) | ||||||||||||||||||
(Benefit) provision for deferred federal income taxes | (21,783 | ) | 25,977 | (9,957 | ) | Provision (benefit) for deferred federal income taxes | 20,241 | (11,705 | ) | 25,977 | ||||||||||||||||||
Increase (decrease) in other liabilities | 31,266 | 29,641 | (605 | ) | (Decrease) increase in other liabilities | (76,966 | ) | 27,379 | 33,214 | |||||||||||||||||||
Net cash used in operating activities | (2,496,054 | ) | (1,389,683 | ) | (1,577,703 | ) | Net cash used in operating activities | (1,831,411 | ) | (2,507,813 | ) | (1,393,783 | ) | |||||||||||||||
Investing Activities | Investing Activities | Investing Activities | ||||||||||||||||||||||||||
Net change in other investments | (3,817 | ) | (3,816 | ) | (4,133 | ) | Net change in investment securities | (2,378 | ) | (3,817 | ) | (3,815 | ) | |||||||||||||||
Investment in mortgage backed securities | (39,110 | ) | — | — | Net change in mortgage backed securities | 8,432 | (39,110 | ) | — | |||||||||||||||||||
Origination of portfolio loans, net of principal repayments | 1,235,075 | 933,317 | 217,030 | Origination of portfolio loans, net of principal repayments | (299,500 | ) | 1,246,834 | 937,417 | ||||||||||||||||||||
Purchase of Federal Home Loan Bank stock | (21,600 | ) | (29,600 | ) | (18,950 | ) | Purchase of Federal Home Loan Bank stock | (48,356 | ) | (21,600 | ) | (29,600 | ) | |||||||||||||||
Proceeds from the disposition of repossessed assets | 40,626 | 24,210 | 23,119 | Proceeds from the disposition of repossessed assets | 48,707 | 40,627 | 24,210 | |||||||||||||||||||||
Acquisitions of premises and equipment | (34,542 | ) | (53,138 | ) | (72,182 | ) | Acquisitions of premises and equipment | (43,257 | ) | (35,682 | ) | (52,694 | ) | |||||||||||||||
Proceeds from the disposition of premises and equipment | (1,140 | ) | 445 | 518 | Increase in mortgage servicing rights | (497,340 | ) | (478,456 | ) | (488,829 | ) | |||||||||||||||||
Increase in mortgage servicing rights | (478,456 | ) | (488,829 | ) | (137,956 | ) | Proceeds from the sale of mortgage servicing rights | 412,252 | 368,045 | 383,484 | ||||||||||||||||||
Proceeds from the sale of mortgage servicing rights | 368,045 | 383,484 | 164,863 | |||||||||||||||||||||||||
Net cash (used in) provided by investing activities | (421,440 | ) | 1,076,841 | 770,173 | ||||||||||||||||||||||||
Net cash provided by investing activities | 1,065,081 | 766,073 | 172,309 | |||||||||||||||||||||||||
Financing Activities | Financing Activities | Financing Activities | ||||||||||||||||||||||||||
Net increase in deposit accounts | 765,787 | 200,137 | 1,147,003 | Net increase in deposit accounts | 1,306,278 | 765,786 | 200,137 | |||||||||||||||||||||
Net increase in Federal Home Loan Bank advances | 251,495 | 232,160 | 256,345 | Net increase in Federal Home Loan Bank advances | 1,024,000 | 251,495 | 237,160 | |||||||||||||||||||||
Proceeds from the issuance of long term debt | 25,000 | — | — | Proceeds from the issuance of long term debt | 51,350 | 25,000 | — | |||||||||||||||||||||
Net receipt (disbursement) of payments of loans serviced for others | 364,620 | 162,959 | (1,604 | ) | Net (disbursement) receipt of payments of loans serviced for others | (119,946 | ) | 364,620 | 162,959 | |||||||||||||||||||
Net receipt (disbursement) of escrow payments | 42,478 | 50,864 | (20,488 | ) | Net receipt of escrow payments | 30,278 | 42,478 | 50,864 | ||||||||||||||||||||
Proceeds from the exercise of stock options | 7,499 | 11,287 | 211 | Proceeds from the exercise of stock options | 444 | 4,890 | 5,827 | |||||||||||||||||||||
Common stock repurchased | — | — | (13,155 | ) | Tax benefit from stock based compensation | 8,945 | 2,609 | 5,460 | ||||||||||||||||||||
Dividends paid to stockholders | (9,384 | ) | (5,029 | ) | (4,875 | ) | Dividends paid to stockholders | (27,050 | ) | (9,384 | ) | (5,029 | ) | |||||||||||||||
Net cash provided by financing activities | 1,447,495 | 657,378 | 1,363,437 | Net cash provided by financing activities | 2,274,299 | 1,447,494 | 657,378 | |||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | 16,522 | 33,768 | (41,957 | ) | ||||||||||||||||||||||||
Net increase in cash and cash equivalents | Net increase in cash and cash equivalents | 21,448 | 16,522 | 33,768 | ||||||||||||||||||||||||
Beginning cash and cash equivalents | Beginning cash and cash equivalents | 110,447 | 76,679 | 118,636 | Beginning cash and cash equivalents | 126,969 | 110,447 | 76,679 | ||||||||||||||||||||
Ending cash and cash equivalents | Ending cash and cash equivalents | $ | 126,969 | $ | 110,447 | $ | 76,679 | Ending cash and cash equivalents | $ | 148,417 | $ | 126,969 | $ | 110,447 | ||||||||||||||
Supplemental disclosure of cash flow information: | Supplemental disclosure of cash flow information: | Supplemental disclosure of cash flow information: | ||||||||||||||||||||||||||
Loans receivable transferred to repossessed assets | $ | 43,317 | $ | 55,791 | $ | 24,769 | Loans receivable transferred to repossessed assets | $ | 36,901 | $ | 43,317 | $ | 55,791 | |||||||||||||||
Total interest payments made on deposits and other borrowings | $ | 262,649 | $ | 353,680 | $ | 259,096 | Total interest payments made on deposits and other borrowings | $ | 305,005 | $ | 262,649 | $ | 353,680 | |||||||||||||||
Federal income taxes paid | $ | 72,000 | $ | 27,000 | $ | 11,000 | Federal income taxes paid | $ | 130,500 | $ | 72,000 | $ | 27,000 | |||||||||||||||
Loans available for sale transferred to held for investment | $ | 2,127,224 | $ | 349,895 | $ | 2,456,949 | Loans available for sale transferred to held for investment | $ | 2,613,355 | $ | 2,127,224 | $ | 349,895 | |||||||||||||||
Supplemental disclosures of non-cash financing information: During 2003, the Company recorded a net market value adjustment for interest rate swaps of $3,120 and issuance costs from the redemption of Flagstar Capital Preferred Stock of ($3,127).
The accompanying notes are an integral part of these statements.
5465
Flagstar Bancorp, Inc.
Note 1 – Nature of Business
Flagstar Bancorp, Inc. (“Flagstar” or the “Company”), is the holding company for Flagstar Bank, fsb (the “Bank”), a federally chartered stock savings bank founded in 1987. With $8.2$10.6 billion in assets at December 31, 2002,2003, Flagstar is the largest savings institution and second largest banking institution headquartered in Michigan.
Flagstar is a consumer-oriented financial services organization. The Company’s principal business is obtaining funds in the form of deposits and borrowings and investing those funds in various types of loans. The acquisition or origination of single family mortgage loans is the Company’s primary lending activity. The Company also originates consumer loans, commercial real estate loans, and non-real estate commercial loans.
The mortgage loans aremay be securitized and sold in order to generate mortgage servicing rights. The Company may also invests in a significant amount of its loan production in order to maximize the Company’s leverage ability and to receive the interest spread between earning assets and paying liabilities. The Company also acquires funds on a wholesale basis from a variety of sources and services a significant volume of loans for others.
The Bank is a member of the Federal Home Loan Bank System (“FHLB”) and is subject to regulation, examination and supervision by the Office of Thrift Supervision (“OTS”) and the Federal Deposit Insurance Corporation (“FDIC”). The Bank’s deposits are insured by the FDIC through the Savings Association Insurance Fund (“SAIF”).
Note 2 – Corporate Structure
The Company conducts business through a number of wholly-owned subsidiaries in addition to the Bank. The additional subsidiaries of the Company include Douglas Insurance Agency, Inc. (“DIA”), Flagstar Commercial Corporation (“FCC”), Flagstar Credit Corporation (“Credit”), Flagstar Trust (“Trust”), Flagstar Statutory Trust II (Trust II), Flagstar Statutory Trust III (“Trust III”), Flagstar Statutory Trust IV (“Trust IV”), Flagstar Title Company (“Title”), and Flagstar Investment Group, Inc. (“Investment”). DIA acts as an agent for life insurance and property and casualty insurance companies. Credit participates in mortgage reinsurance agreements with various private mortgage insurance companies. FCC and Investment are inactive. Trust is a Delaware trust whose common stock is owned solely by the Company and in 2000 sold 2.99 million shares of preferred securities to the general public in an initial public offering. Trust II is a Connecticut trust whose common stock is owned solely by the Company and in 2002 sold $25.0 million of trust preferred securities in a private transaction. Trust III and Trust IV are Delaware statutory trusts that each issued $25 million of trust preferred securities in privately placed transactions in February 2003 and March 2003, respectively. Title iswas a real estate title insurance agency, which operatesoperated in the state of Michigan.Michigan, but was closed during December 2003.
Flagstar Trust (“Trust”) issued 2.99 million shares of publicly-owned preferred securities (NYSE :FBC-O) in April of 1999. Trust is a Delaware trust whose common stock is solely owned by the Company. On January 21, 2004, we announced our intent to redeem all of the securities on April 30, 2004.
The Bank, the Company’s primary subsidiary, is a federally chartered, stock savings bank headquartered in Troy, Michigan. The Bank owns four subsidiaries: FSSB Mortgage Corporation (“Mortgage”), Intermediate
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Note 2 – Corporate Structure (continued)
Holding Company (“Holding”), Mid-Michigan Service Corporation (“Mid-Michigan”), and SSB Funding Corporation (“Funding”). Mortgage, Mid-Michigan, and Funding are currently inactive subsidiaries. Holding is the parent of Flagstar Capital Corporation (“Capital”) and Flagstar LLC (“LLC”). LLC purchases mortgage loans from the Bank and holds them for investment.
55
Capital has(“Capital”) had issued publicly-owned preferred stock (NYSE : (NYSE:FBC-P) and iswas a real estate investment trust whose common stock iswas owned solely by Holding. Capital and LLC purchasepurchased mortgage loans from the Bank and holdheld them for investment purposes. On March 20,June 30, 2003 we notified the public in a press release that we would redeemredeemed all of the preferred shares on June 30, 2003.of Capital and the company was dissolved shortly thereafter.
Note 3 – Summary of Significant Accounting Policies
The following summarizes the significant accounting policies of the Company, which are applied in the preparation of the accompanying consolidated financial statements.statements, conform to accounting principals generally accepted in the United States and are generally practiced within the banking industry.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the Bank, and their subsidiaries. All significant intercompany balances and transactions have been eliminated.
Statement of Cash Flowsand Cash Equivalents
For purposesCash on hand, cash items in the process of collection, and amounts due from correspondent banks and the statements ofFederal Reserve Bank are included in cash flows,and cash equivalents.
Investment Securities Held to Maturity
Investment securities held to maturity are those securities which the Company considers its investmenthas the ability and management has the positive intent to hold to maturity. Investment securities held to maturity are stated at cost, adjusted for amortization of premium and accretion of discount. Declines in overnight depositsthe fair value of securities below their cost that are deemed to be cash equivalents.other than temporary, are reflected in earnings as realized losses.
Loans
Loans originated are designated to be part of the investment loan portfolio or available for sale during the origination process. Mortgage loans available for sale are carried at the lower of aggregate cost or estimated market value. Management periodically reviews the portfolio and makes necessary adjustments for market value. Loans are stated net of deferred loan origination fees or costs and loans in process. Interest Income on loans is recognized on the accrual basis based on the principal balance outstanding. Net unrealized losses are recognized in a valuation allowance that is charged to earnings. Gains or losses recognized upon the sale of loans are determined using the specific identification method. The investment loan portfolio is carried at
67
amortized cost. The Company has both the intent and the ability to hold all loans held for investment for the foreseeable future.
Delinquent Loans
Residential property loans are considered to be delinquent when any payment of principal or interest is past due. While it is the goal of management to work out a satisfactory repayment schedule with a delinquent borrower, we will undertake foreclosure proceedings if the delinquency is not satisfactorily resolved. Our procedures regarding delinquent loans are designed to assist borrowers in meeting their contractual obligations. We customarily mail notices of past due payments to the borrower approximately 15, 30 and 45 days after the due date, and late charges are assessed in accordance with certain parameters. Our collection department makes telephone or personal contact with borrowers after a 30-day delinquency. In certain cases, we recommend that the borrower seeks credit counseling assistance and may grant forbearance if it is determined that the borrower is likely to correct a loan delinquency within a reasonable period of time. We cease the accrual of interest on loans that are more than 90 days delinquent. Such interest is recognized as income when collected.
Allowance for Loan Losses
Management believes the allowance is maintained at a level adequate to absorb losses inherent in the investment loan portfolio. Management determines the adequacy of the allowance by applying currently anticipated loss ratios to the risk ratings of loans both individually and by category. The projected loss ratios incorporate such factors as recent loss experience, current economic conditions, the risk characteristics of the various categories and concentrations of loans, transfer risk and other pertinent factors.
Loans which are deemed uncollectible are charged off and deducted from the allowance. The provision for losses and recoveries on loans previously charged off are added to the allowance. In addition, a specific provision is made for expected loan losses to reduce the recorded balances of loans receivable to their estimated net realizable value. Such specific provision is based on management’s estimate of net realizable value considering the current operating or sales environment. These estimates of collateral value are
56
particularly susceptible to market changes that could result in adjustments to the results of earnings in the future. Recovery of the carrying value of such loans or such loan or the underlying collateral is dependent to a great extent on economic, operating, and other conditions that may be beyond the Company’s control. The Company considers its residential mortgage loan portfolio to represent a pool of smaller balance, homogeneous loans. Commercial, commercial real estate, construction, second mortgage, warehouse loan, and consumer loan portfolios are specifically reviewed for impairment.
The Company considers a loan impaired when it is probable, in the opinion of management, that interest and principal may not be collected according to the contractual terms of the loan agreement. Consistent with this definition, the Company considers all non-accrual loans (with exception of residential mortgages) to be impaired. Impaired loans that have risk characteristics that are unique to an individual borrower, are evaluated on a loan-by-loan basis. However, impaired loans that have risk characteristics in common with
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Note 3 – Summary of Significant Accounting Policies (continued)
other impaired loans, (such as loan type, geographical location, or other characteristics that would cause the ability of the borrowers to meet contractual obligations to be similarly affected by changes in economic or other conditions), are aggregated and historical statistics, such as average recovery period and average amount recovered, along with a composite effective interest rate are used as a means of measuring those impaired loans. Loan impairment is measured by estimating the expected future cash flows and discounting them at the respective effective interest rate or by valuing the underlying collateral.
There is no assurance that the Company will not, in any particular period, sustain loan losses that exceed the allowance, or that subsequent evaluation, in light of the factors then-prevailing, will not require increases to the allowance.
Loan Origination Fees, Commitment Fees and Related CostsFHLB Stock
The Bank owns investments in the Federal Home Loan fees receivedBank. No ready market exists for the stock and it has no quoted market value. The stock is redeemable at par and is carried at cost.
Repurchased Assets
Although all of the loans sold to the secondary market are accounteddone so on a non-recourse basis, the Company repurchased $46.3 million and $34.3 million in mortgage loans from secondary market investors during 2003 and 2002 respectively. Generally, for loans sold to the secondary market, the Company is responsible for certain representations and warranties regarding the adherence to underwriting and loan program guidelines. At December 31, 2003, the Company had sold $144.1 billion in accordanceloans to the secondary market over the previous 60 months. This volume of loan sales is $34.1 billion, or 31.0%, larger than the $110.0 billion sold in the 60 months preceding December 31, 2002. A repurchase may be required because of a loan’s delinquent status or its non-compliance with SFAS No. 91, “Accountingthe underwriting or loan program guidelines that it was initially sold under. Losses attributable to these repurchased loans were $12.0 million, $6.8 million, and $4.0 million in 2003, 2002, and 2001, respectively. All of these loans were sold within the prior sixty-month period, repurchased from secondary market investors, foreclosed on, and sold at a loss.
Secondary Marketing Reserve
The Company maintains a reserve against future losses created by the repurchase of mortgage loans previously sold to the secondary market. That loss reserve totals $10.3 million and $9.1 million at December 31, 2003 and 2002, respectively. The reserve is recorded at a level based upon management’s analysis of the potential for Non-Refundable Fees and Costs Associated with Originatingrepurchase of loans sold during the prior sixty-month period. There is no assurance that the Company will not, in any particular period, sustain loan losses that exceed the reserve, or Acquiring Loans and Initial Direct Coststhat subsequent evaluation, in light of Leases”. Mortgage loan fees and certain direct origination costs are capitalized. On loans available for sale, the net fee or costfactors then-prevailing, will not require increases to the reserve. The secondary marketing reserve is recognized at the time the loan is sold. For the investment loan portfolio, the deferred amount is accounted forclassified as an adjustmentother liabilities.
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Repossessed Assets
Repossessed assets include one-to-four family residential property, commercial property, and one-to-four family homes under construction. Repossessed assets include properties acquired through foreclosure that are transferred at fair value, less estimated selling costs, which represents the new recorded basis of the property. Subsequently, properties are evaluated and any additional declines in value are recorded in current period earnings. The amount the Company ultimately recovers from foreclosed assets may differ substantially from the net carrying value of these assets because of future market factors beyond the Company’s control.
Federal Income Taxes
The Company accounts for income taxes on the asset and liability method. Deferred tax assets and liabilities are recorded based on the difference between the tax bases of assets and liabilities and their carrying amounts
57
for financial reporting purposes. Current taxes are measured by applying the provisions of enacted tax laws to taxable income to determine the amount of taxes receivable or payable.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Land is carried at historical cost. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets as follows:
Office buildings – 31 years | |
Computer hardware and software – 3 to 5 years | |
Furniture, fixtures and equipment – 5 to 7 years | |
Automobiles – 3 years |
Repairs and maintenance costs are expensed in the period they are incurred, unless they are covered by a maintenance contract, which is expensed equally over the stated term of the contract. The Company enters into contract when it is cost effective. Repairs and maintenance costs are included as part of occupancy and equipment expenses.
Mortgage Servicing Rights
The Company purchases and originates mortgage loans for sale to the secondary market, and sells the loans on either a servicing retained or servicing released basis. Servicing rights are recognized as assets at the time the loan is sold. The capitalized cost of loanretained servicing rights is amortized in proportion to, and over the period of, estimated net future servicing revenue. The expected period of the estimated net servicing income is based, in part, on the expected prepayment period of the underlying mortgages.
Mortgage servicing rights are periodically evaluated for impairment. For purposes of measuring impairment, mortgage-servicing rights are stratified based on predominant risk characteristics of the underlying serviced loans. These risk characteristics include loan type (fixed or adjustable rate), term (15 year, 20 year, 30 year or balloon), interest rate and date of loan acquisition. Impairment represents the excess of amortized cost of an individual stratum over its estimated fair value, and is recognized through a valuation allowance.
Fair values for individual stratum are based on the present value of estimated future cash flows using a discount rate commensurate with the risks involved. Estimates of fair value include assumptions about prepayment, default and interest rates, and other factors, which are subject to change over time. Changes in
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these underlying assumptions could cause the fair value of mortgage servicing rights, and the related valuation allowance, to change significantly in the future.
Financial Instruments and Derivatives
The Company enters into certain financial instruments with off-balance sheet risk in the ordinary course of business to reduce its exposure to changes in interest rates. The Company uses traditional financial instruments such as interest rate lock commitments and forward sales commitments for this purpose. The Company policy allows the use of interest rate futures, interest rate swaps, or other hedging instruments to manage its exposure to interest rate risk. The Company does not retain interests in the loans it sells, nor does it enter into more volatile financial instruments such as leveraged derivatives or structured notes.
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Note 3 – Summarychanges in the fair value of Significant Accounting Policies (continued)an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in current earnings during the period of the change in fair values. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item (i.e. the ineffective portion), if any, is recognized in current earnings during the period of change.
The Company implemented Statement of Financial Accounting Standards No. 133, as amended, effective January 1, 2001. The cumulative effect of the adoption of Statement 133 was not material. On September 30, 2002, the Company implemented Derivatives Implementation Group Issue Number C13C 13 (DIG C 13). The implementation required the Company to record a $18.7 million after-tax cumulative change in accounting principle. At
Preferred Stock of a Subsidiary
In February and March of 1998, Flagstar Capital Corporation offered to the public and sold 2,300,000 shares of its 8.50%, non-cumulative, Series A Preferred Shares, $25 par value per share, providing gross proceeds totaling $57.5 million. The Series A Preferred Shares were traded on the New York Stock Exchange under the symbol“FBC-P”.Capital used the net proceeds raised from the offering of the Series A Preferred Shares
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to acquire mortgage loans from the Bank. Capital was a real estate investment trust for federal income tax purposes.
On June 30, 2003, we redeemed all of the preferred shares of Capital and dissolved the company shortly thereafter.
Preferred Securities of Flagstar Trust
On April 27, 1999, the Company completed the sale of 2.99 million shares of trust preferred securities issued by Flagstar Trust, a Delaware trust and subsidiary of the Company. The securities pay interest at a rate of 9.50% per annum. The securities are traded on the New York Stock Exchange under the symbol“FBC-O”.
The preferred securities are generally not redeemable until April 27, 2004. On or after that date, the securities are redeemable in whole or in part by the Company for cash. The securities are not subject to a sinking fund or mandatory redemption and are not convertible into any other securities of the Company.
On January 21, 2004, the Company announced its intent to redeem all of the preferred securities at $25.00 per share plus accrued interest.
Preferred Securities of Flagstar Trust II
On December 19, 2002, the Company completed the sale of 1.0 million shares of trust preferred securities issued by Flagstar Statutory Trust II, a Connecticut trust and subsidiary of the Company. The securities pay interest at a rate equal to three month LIBOR plus 3.25% per annum. The securities reprice quarterly. The securities were sold in a pooled transaction to a private investor and are not traded on a securities exchange.
As part of the transaction, the Company entered into an interest rate swap with the placement agent, whereby the Company is required to pay 6.88% fixed rate on a notional amount of $25 million and will receive a floating rate equal to three month LIBOR plus 3.25%. The swap matures on December 26, 2007.
The preferred securities are generally not redeemable until December 26, 2007. On or after that date, the securities are redeemable in whole or in part by the Company for cash. The securities are not subject to a sinking fund or mandatory redemption and are not convertible into any other securities of the Company.
Preferred Securities of Flagstar Trust III
On February 19, 2003, the Company completed the sale of 1.0 million shares of trust preferred securities issued by Flagstar Statutory Trust III, a Delaware trust and subsidiary of the Company. The securities pay interest at an effective rate of 6.55% per annum, for the first five years and a floating rate thereafter. The securities were sold in a pooled transaction to a private investor and are not traded on a securities exchange.
The preferred securities are generally not redeemable until February 26, 2008. On or after that date, the securities are redeemable in whole or in part by the Company for cash. The securities are not subject to a sinking fund or mandatory redemption and are not convertible into any other securities of the Company.
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Preferred Securities of Flagstar Trust IV
On March 19, 2003, the Company completed the sale of 1.0 million shares of trust preferred securities issued by Flagstar Statutory Trust IV, a Delaware trust and subsidiary of the Company. The securities pay interest at an effective rate of 6.75% per annum, for the first five years and a floating rate thereafter. The securities were sold in a pooled transaction to a private investor and are not traded on a securities exchange.
The preferred securities are generally not redeemable until March 26, 2008. On or after that date, the securities are redeemable in whole or in part by the Company for cash. The securities are not subject to a sinking fund or mandatory redemption and are not convertible into any other securities of the Company.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income is the sum of net income plus the change in the fair market value of the interest rate swaps classified as cash flow hedges, net of tax. The change in the fair market value of the interest rate swaps as December 31, 2002,2003 was $2.2 million after a tax adjustment of $1.1 million. There were no components of accumulated other comprehensive income in 2002.
Federal Income Taxes
The Company accounts for federal income taxes on the Company’s adjustmentasset and liability method. Deferred tax assets and liabilities are recorded based on the difference between the tax bases of assets and liabilities and their carrying amounts for forward commitmentsfinancial reporting purposes. Current taxes are measured by applying the provisions of enacted tax laws to taxable income to determine the amount of taxes receivable or payable. The Company files a consolidated federal income tax return on a calendar year basis.
Loan Origination Fees, Commitment Fees and interest rate lock commitments requiredRelated Costs
Loan fees received are accounted for in accordance with SFAS No. 91, “Accounting for Non-Refundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases”. Mortgage loan fees and certain direct origination costs are capitalized. On loans available for sale, the net fee or cost is recognized at the time the loan is sold. For the investment loan portfolio, the deferred amount is accounted for as an $18.0 pre-tax adjustment to 2002 pre-tax earnings.interest income in a manner that approximates the interest method.
Loan Sales
The Company sells its available for sale mortgage loans to secondary market investors on a non-recourse basis. At the time of the sale, the Company makes certain representations and warranties to the investor. Should an investor determine that a breach of such representation or warranty has occurred, the Company may be required to repurchase the loan from the investor. Such representations and warranties generally relate to the fact that the loan has been underwritten in accordance with the investor’s guidelines and that the loan conforms to the laws of the state of origination. Gain or loss on the sales of loans is recognized upon the execution of a binding contract and receipt of a minimum down payment.
Preferred Stock of a Subsidiary
In February and March of 1998, Flagstar Capital Corporation offered to the public and sold 2,300,000 shares of its 8.50%, non-cumulative, Series A Preferred Shares, $25 par value per share, providing gross proceeds totaling $57.5 million. The Series A Preferred Shares are traded on the New York Stock Exchange under the symbol“FBC-P”. Capital used the net proceeds raised from the offering of the Series A Preferred Shares to acquire mortgage loans from the Bank. Capital is a real estate investment trust for federal income tax purposes. The net proceeds received by Capital qualify as regulatory capital, with certain limitations as defined by regulation. The Series A Preferred Shares are recorded on the books of the Company as a minority interest and are included in other liabilities. Dividends paid on the Series A Preferred Shares are deductible for tax purposes and included in interest expense — other.
On March 20, 2003, we notified the public in a press release that we would redeem all of the preferred shares on June 30, 2003.
Preferred Securities of Flagstar Trust
On April 27, 1999, the Company completed the sale of 2.99 million shares of preferred securities issued by Flagstar Trust, a Delaware trust and subsidiary of the Company. The securities pay interest at a rate of 9.50% per annum. The securities are traded on the New York Stock Exchange under the symbol“FBC-O”.
The preferred securities are generally not redeemable until April 27, 2004. On or after that date, the securities are redeemable in whole or in part by the Company for cash. The securities are not subject to a sinking fund or mandatory redemption and are not convertible into any other securities of the Company.
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Preferred Securities of Flagstar Trust IIAdvertising costs
On December 19, 2002,Advertising costs are expensed in the Company completed the sale of 1.0 million shares of preferred securities issued by Flagstar Statutory Trust II, a Connecticut trust and subsidiary of the Company. The securities pay interest at a rate equal to three month LIBOR plus 3.25% per annum. The securities reprice quarterly. The securities were sold in a pooled transaction to a private investorperiod they are incurred and are not traded on a securities exchange.
The preferred securities are generally not redeemable until December 26, 2007. On or after that date, the securities are redeemable in whole or inincluded as part by the Company for cash. The securities are not subject to a sinking fund or mandatory redemptionof general and are not convertible into any other securities of the Company.
Interest Rate Swap
On December 19, 2002, the Company entered into an interest rate swap whereas the Company is required to pay 6.88% fixed rate on a notional amount of $25administrative expenses. Advertising expenses totaled $12.2 million, $9.0 million and will receive a floating rate equal to three month LIBOR plus 3.25%. The swap matures on$5.1 million for the years ended December 26, 2007. The counterparty to the swap is a primary dealer. The interest rate swap is being accounted as a cash flow hedge in accordance with FASB 133.31, 2003, 2002 and 2001, respectively.
Stock Repurchase Program
On September 21, 1999, the Board of Directors of Flagstar Bancorp, Inc. adopted the Company’s Stock Repurchase Program. The program allowed management to repurchase up to $15 million of the Company’s common stock by September 30, 2000. The repurchased shares will be reserved for later reissue in connection with future stock dividends, dividend reinvestment plans, employee benefit plans, and other general corporate purposes. On January 26, 2000, the Company announced the completion of the first repurchase program and the approval of an additional 1.5 million shares to be repurchased. Through December 31, 2000, the Company had repurchased a total of 2,732,025 shares, including the above mentioned 1.2 million shares, for a total price of $25.2 million. The shares were repurchased at a weighted price of $9.24 per share.
The Board of Directors of the Company adopted anothera Stock Repurchase Program on October 29, 2002. The Company was empowered to repurchase up to $25.0 million worth of outstanding common stock. No shares have been repurchased under this plan. If the Company repurchases shares, the repurchased shares will be available for later reissue in connection with future stock dividends, dividend reinvestment plans, employee benefit plans, and other general corporate purposes.
Stock Split
On June 26, 2001, the Company announced a 3 for 2 split of its common stock. The split was completed on July 12, 2001. All share information on the financial statements of the Company have been adjusted accordingly.
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Note 3 – Summary of Significant Accounting Policies (continued)
On May 12, 2002, the Company announced a 3 for 2 split of its common stock. The split was completed on May 31, 2002. All share information on the financial statements of the Company has been adjusted accordingly.
Stock Exchange Move
On July 13, 2001, the Company moved its stock from the Nasdaq Stock Market to the New York Stock Exchange. The stock that formerly traded under the symbol “FLGS”, is now traded under the symbol “FBC”. Flagstar Trust, a Delaware trust and subsidiary of Flagstar Bancorp, moved its preferred securities from the Nasdaq Stock Market to the New York Stock Exchange. The securities, which formerly traded under the symbol “FLGSO”, now trades under the symbol “FBC-O”. Flagstar Capital, a real estate investment trust and third-tier subsidiary of Flagstar Bancorp, moved its preferred stock from the Nasdaq Stock Market to the New York Stock Exchange. The securities, which formerly traded under the symbol “FLGSP”, now trades under the symbol “FBC-P”.
Stock-Based Compensation
The Company adopted SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) for transactions entered into during 1996 and thereafter. The Company elected to remain with the former method of accounting and has made the pro forma disclosures of net earnings and earnings per share as if the fair value method provided for in SFAS No. 123 had been adopted. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123,” which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has adopted the requirements of SFAS No. 148 effective December 31, 2002 with no material effect on its financial statements. The Company does not plan a change to the fair value based method of accounting for stock-based employee compensation and has included the disclosure requirements of SFAS No. 148 in the accompanying Notes to the Financial Statements.
At December 31, 2003, the company has two stock-based employee compensation plans, which are described more fully in Note 26. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees,and related Interpretations. No stock-based employee compensation cost related to the Stock Option Plan is reflected in net income, as all options granted under the Option Plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123,
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Accounting for Stock-Based Compensation, to stock-based employee compensation. (in thousands, except per share data):
For the years ended | |||||||||||||
December 31, | |||||||||||||
2003 | 2002 | 2001 | |||||||||||
Net Earnings | |||||||||||||
As reported | $ | 254,352 | $ | 129,343 | $ | 82,940 | |||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | 3,283 | 1,489 | 807 | ||||||||||
Pro forma net earnings | $ | 251,069 | $ | 127,854 | $ | 82,133 | |||||||
Basic earnings per share | |||||||||||||
As reported | $ | 4.25 | $ | 2.22 | $ | 1.50 | |||||||
Pro forma | $ | 4.20 | $ | 2.19 | $ | 1.48 | |||||||
Diluted earnings per share | |||||||||||||
As reported | $ | 3.99 | $ | 2.09 | $ | 1.39 | |||||||
Pro forma | $ | 3.94 | $ | 2.07 | $ | 1.38 |
The fair value of each option grant is estimated using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in 2003, 2002, and 2001, respectively: dividend yield of 2.20%, 1.60% and 1.60%; expected volatility of 57.25%, 44.29%, and 50.08%; a risk-free rate of 2.84%, 4.13%, and 5.11%; an expected life of 5.0 years; and a fair value per option of $6.37, $9.13 and $6.04.
Earnings Per Share
Basic earnings per share excludes dilution and is computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock or resulted in the issuance of common stock that could then share in the earnings of the Company.
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Note 3 – Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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Note 3 – Summary of Significant Accounting Policies (continued)
The financial condition and results of operations of the Company are dependent to a significant degree upon appraisals of loan collateral, evaluations of creditworthiness of borrowers and assumptions about future events and economic conditions affecting interest rates. Recent history has demonstrated that these estimates and assumptions are subject to rapid change and such changes can materially affect the reported financial position and results of operations of the Company. Significant accounts where use of these estimates are more susceptible to change in the near term include the allowance for loan loss, the value of loans available for sale, and the fair value of mortgage servicing rights.rights, the fair value of derivatives, valuation of repossessed assets, secondary marketing reserves and fair value of financial instruments.
Reclassifications
Certain amounts within the accompanying consolidated financial statements and the related notes have been reclassified to conform to the 20022003 presentation.
Recently Issued Accounting Standards
In JuneNovember 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45), which covers guarantees such as standby letters of credit, performance guarantees, and direct or indirect guarantees of the indebtedness of others, but not guarantees of funding. FIN 45 requires a guarantor to recognize, at the inception of a guarantee, a liability in the amount equal to the fair value of the obligation undertaken in issuing the guarantee, and requires disclosure about the maximum potential payments that might be required, as well as the collateral or other recourse obtainable. The recognition and measurement provisions of FIN 45 were effective on a prospective basis after December 31, 2002, and its adoption by the Company on January 1, 2003 has not had a material impact on the Company’s consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities”, which addresses consolidation by business enterprises of variable interest entities that possess certain characteristics as defined within the interpretation. However, in December 2003, the FASB issued Interpretation No. 46(R) (“FIN 46(R)”), which revises FIN 46 and is intended to clarify some of the provisions of FIN 46 and to exempt certain entities from its requirements. FIN 46(R) requires the deconsolidation of trust preferred security subsidiaries. FIN 46(R) grants the companies the option to adopt its provisions as of the end of the first period ending after December 31, 2003 or elect to defer until the first period ending after March 15, 2004. As of December 31, 2003, the Company has decided to defer the application of FIN 46(R) until March 15, 2004. Management believes the adoption of FIN 46(R) in the first quarter of 2004 will not have a material impact on the financial statements.
On April 30, 2003, the FASB issued SFAS No. 146, “Accounting149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (SFAS 149) which is effective for Costs Associated with Exithedging relationships entered into or Disposal Activities,” which addressesmodified after June 30, 2003. SFAS 149 amends and clarifies financial accounting and reporting for costs associated with exit or disposal activities. Under SFAS No. 146, such costs will be recognized when the liability is incurred, rather than at the date of commitment to an exit plan. SFAS No. 146 is effectivederivative instruments, including certain derivative instruments embedded in other contracts and for exit or disposal activities that are initiated after December 31, 2002, with early application permitted. Management is currently evaluating the impact of the adoption of SFAS No. 146 on its financial statements.hedging
In October 2002, the FASB issued SFAS No. 147, “Acquisitions of Certain Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9,” which addresses accounting for purchases of certain financial institutions. SFAS No. 147 is effective October 1, 2002, with early application permitted. The Company does not have any goodwill that was subject to Statement No. 72 and therefore the provisions of Statement No. 147 required no change in classification or treatment of recorded goodwill.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123,” which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.
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Note 3 – Summary of Significant Accounting Policies (continued)
activities under SFAS 133. The Company has adoptedadoption of this rule did not have a material impact on the requirementsCompany’s results of SFAS No. 123 in January 2000 and SFAS No. 148 effective December 31, 2002 with no material effect on itsoperations or financial statements.
Subsequent Events
Flagstar Trust IIIcondition.
On February 19,May 15, 2003, the Company completedFASB issued Statement of Financial Accounting Standards (SFAS) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (SFAS 150) and was effective May 31, 2003 for all new and modified financial instruments and otherwise was effective at the sale of $25.0 million of preferred securities issued by Flagstar Statutory Trust III, a Delaware trust and subsidiarybeginning of the Company. The securities pay interest at a rate equal to 6.55%first interim period beginning after June 15, 2003. SFAS 150 changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS 150 requires that those instruments be classified as liabilities (or assets in some circumstances). The securities were sold in a pooled transaction to a private investor and are not tradedadoption of this rule had no impact on a securities exchange.
The preferred securities are generally not redeemable until 2008. Onthe Company’s results of operations or after that date, the securities are redeemable in whole or in part by the Company for cash. The securities are not subject to a sinking fund or mandatory redemption and are not convertible into any other securities of the Company.
Flagstar Trust IV
On March 19, 2003, the Company completed the sale of $25.0 million of preferred securities issued by Flagstar Statutory Trust IV, a Delaware trust and subsidiary of the Company. The securities pay interest at a rate equal to 6.75%. The securities were sold in a pooled transaction to a private investor and are not traded on a securities exchange.
The preferred securities are generally not redeemable until 2008. On or after that date, the securities are redeemable in whole or in part by the Company for cash. The securities are not subject to a sinking fund or mandatory redemption and are not convertible into any other securities of the Company.
Flagstar Capital
On March 20, 2003, the Company announced its intent to redeem the Series A 8.50% preferred stock of Flagstar Capital on June 30, 2003. The stock will be redeemed at $25 per share.
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Note 4 – InvestmentMortgage-Backed Securities
The investment securities portfolio is summarized as follows (in thousands):
2002 | 2001 | ||||||||||||||||
Amortized | Fair | Amortized | Fair | ||||||||||||||
Type | Cost | Value | Cost | Value | |||||||||||||
Mutual funds | $ | 9,355 | $ | 9,355 | $ | 6,089 | $ | 6,089 | |||||||||
U.S. Treasury Bonds | 661 | 661 | — | — | |||||||||||||
M.S.H.D.A. Bonds | 1,750 | 1,790 | 1,860 | 1,893 | |||||||||||||
Total | $ | 11,766 | $ | 11,806 | $ | 7,949 | $ | 7,982 | |||||||||
These securities are held Held to maturity. The Company has invested in these securities because of interim investment strategies in trust subsidiaries, collateral requirements required in swap and deposit transactions, and CRA investment requirements.
Note 5 – Mortgage-backed SecuritiesMaturity
At December 31, 2002,2003, the Company had invested $39.1$30.7 million in mortgage-backed securities. The single-family loans underlying these securities were originated by the Company. The exchange was made by the Company to allow for additional credit enhancements. These securities had a fair value equal to $41.5$31.8 million at December 31, 2003. At December 31, 2002, the Company had invested $39.1 million in mortgage-backed securities, which had a fair value equal to $41.5 million. The mortgage-backed securities have a maturity ranging from 2004 through 2029.
At December 31, 2003 $5.4 million of these mortgage-backed securities were pledged as collateral in an interest rate swap transaction completed in connection with the issuance of floating rate preferred securities by Flagstar Statutory Trust II (See Note 3).
Note 5 – Investment Securities Held to Maturity
The investment securities portfolio is summarized as follows at December 31, (in thousands):
2003 | 2002 | ||||||||||||||||
Amortized | Fair | Amortized | Fair | ||||||||||||||
Type | Cost | Value | Cost | Value | |||||||||||||
Mutual Funds | $ | 13,494 | $ | 13,494 | $ | 9,355 | $ | 9,355 | |||||||||
U.S. Treasury Bonds | 650 | 651 | 661 | 661 | |||||||||||||
M.S.H.D.A. Bonds | — | — | 1,750 | 1,790 | |||||||||||||
Total | $ | 14,144 | $ | 14,145 | $ | 11,766 | $ | 11,806 | |||||||||
These securities are classified as held to maturity. The Company has invested in these securities because of interim investment strategies in trust subsidiaries, collateral requirements required in swap and deposit transactions, and CRA investment requirements. U.S. Treasury bonds in the amount of $550,000 are pledged as collateral in association of the issuance of the trust preferred securities issued by Trust II at December 31, 2003 and 2002.
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Note 6 – Loans Available for Sale
At December 31, 2002,2003, the Company had invested $3.3$2.8 billion in loans that it is in the process of selling into the secondary market. These loans had a fair value equal to $3.4$2.8 billion. The majority of these loans were originated or acquired in December 2002.2003. During December 2002,2003, the Company originated or acquired $5.3$2.6 billion in mortgage loans. At December 31, 2001,2002, the Company had invested $2.7$3.3 billion in similar loans. The loans at December 31, 20012002 had a fair value of $2.8$3.4 billion.
64Note 7 – Investment Loan Portfolio
The investment loan portfolio is summarized as follows (in thousands):
December 31, | |||||||||
2003 | 2002 | ||||||||
Mortgage loans | $ | 5,478,200 | $ | 2,579,448 | |||||
Second mortgage loans | 141,010 | 214,485 | |||||||
Commercial real estate loans | 548,392 | 445,270 | |||||||
Construction loans | 58,323 | 54,650 | |||||||
Warehouse lending | 346,780 | 558,782 | |||||||
Consumer loans | 259,651 | 124,785 | |||||||
Commercial loans | 7,896 | 7,706 | |||||||
Total | 6,840,252 | 3,985,126 | |||||||
Less allowance for losses | (36,017 | ) | (37,764 | ) | |||||
Total | $ | 6,804,235 | $ | 3,947,362 | |||||
Activity in the allowance for losses is summarized as follows (in thousands):
For the years ended | ||||||||||||
December 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
Balance, beginning of period | $ | 37,764 | $ | 27,769 | $ | 14,357 | ||||||
Provision charged to earnings | 20,081 | 27,126 | 25,572 | |||||||||
Charge-offs, net of recoveries | (21,828 | ) | (17,131 | ) | (12,160 | ) | ||||||
Balance, end of period | $ | 36,017 | $ | 37,764 | $ | 27,769 | ||||||
The Company has no commitments to make additional advances on restructured or other non-performing loans. Loans on which interest accruals have been discontinued totaled approximately $58.3 million at December 31, 2003 and $81.6 million at December 31, 2002. Such interest is recognized as income when collected. Interest that would have been accrued on such loans totaled approximately $4.1 million, $6.5 million, and $6.1 million during 2003, 2002, and 2001, respectively. There are no loans greater than 90 days past due still accruing interest at December 31, 2003 and 2002.
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Note 7 – Investment Loan Portfolio (continued)
The investment loan portfolio is summarized as follows (in thousands):
December 31, | |||||||||
2002 | 2001 | ||||||||
Mortgage loans | $ | 2,593,005 | $ | 2,198,888 | |||||
Second mortgage loans | 214,485 | 232,466 | |||||||
Commercial real estate loans | 445,270 | 314,247 | |||||||
Commercial loans | 7,706 | 8,922 | |||||||
Construction loans | 54,650 | 53,505 | |||||||
Warehouse lending | 558,781 | 298,511 | |||||||
Consumer loans | 124,785 | 63,960 | |||||||
Total | 3,998,682 | 3,170,499 | |||||||
Less allowance for losses | (50,000 | ) | (42,000 | ) | |||||
Total | $ | 3,948,682 | $ | 3,128,499 | |||||
Activity in the allowance for losses is summarized as follows (in thousands):
For the years ended December 31, | ||||||||||||
2002 | 2001 | 2000 | ||||||||||
Balance, beginning of period | $ | 42,000 | $ | 25,000 | $ | 23,000 | ||||||
Provision charged to earnings | 28,749 | 33,197 | 10,576 | |||||||||
Charge-offs, net of recoveries | (20,749 | ) | (16,197 | ) | (8,576 | ) | ||||||
Balance, end of period | $ | 50,000 | $ | 42,000 | $ | 25,000 | ||||||
The Company has no commitments to make additional advances on restructured or other non-performing loans. Loans on which interest accruals have been discontinued totaled approximately $81.6 million at December 31, 2002 and $87.7 million at December 31, 2001. Interest that would have been accrued on such loans totaled approximately $6.5 million, $6.1 million, and $4.7 million during 2002, 2001, and 2000, respectively.
At December 31, 2002,2003, the recorded investment in impaired loans pursuant to SFAS No. 114, totaled $9.2$4.6 million and the average outstanding balance for the year ended December 31, 20022003 was $10.7$5.4 million. No allowance for losses was required on these loans because the measured values of the loans exceeded the recorded investments in the loans. Interest income recognized on impaired loans during the yearyears ended December 31, 2003, 2002 and 2001, was not significant. At December 31, 2001,2002, the recorded investment in impaired loans totaled $11.2$9.2 million and the average outstanding balance for the year ended December 31, 2001,2002, was $7.3$10.7 million.
65Note 8 – FHLB Stock
Holdings of FHLB stock totaled $198.4 million and $150.0 million at December 31, 2003 and 2002, respectively. As a member of the FHLB, the Company is required to hold shares of FHLB stock in an amount at least equal to 1% of the aggregate unpaid principal balance of its mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or 1/20th of its FHLB advances, whichever is greater. Dividends received on the stock equaled $8.1 million, $8.3 million and $8.6 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Note 9 – Repurchased Assets
Since the majority of all the loans the Company originates are sold to the secondary market, the Company must provide assurances to the market that the data relied upon in the sales process is accurate, the loans have been originated under proper guidelines, and there is was no fraudulent data delivered. From time to time, the Company must repurchase loans it had previously sold to the market because of these representations even though the loans were sold on a non-recourse basis.
Net assets repurchased pending foreclosure totaled $12.0 million and $10.4 million at December 31, 2003 and 2002, respectively. Net repurchased assets are classified as other assets.
Activity in the secondary market reserve is summarized as follows (in thousands):
For the years ended | ||||||||||||
December 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
Balance, beginning of period | $ | 9,084 | $ | 12,972 | $ | 9,399 | ||||||
Provision charged to earnings | 8,716 | (671 | ) | 5,490 | ||||||||
Charge-offs, net of recoveries | (7,546 | ) | (3,217 | ) | (1,917 | ) | ||||||
Balance, end of period | $ | 10,254 | $ | 9,084 | $ | 12,972 | ||||||
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Note 10 – | Repossessed Assets |
Repossessed assets include the following (in thousands):
December 31, | ||||||||
2003 | 2002 | |||||||
One-to-four family properties | $ | 36,649 | $ | 42,921 | ||||
Commercial properties | 129 | 2,173 | ||||||
Repossessed assets, net | $ | 36,778 | $ | 45,094 | ||||
Note 11 – | Premises and Equipment |
Premises and equipment balances are as follows (in thousands):
December 31, | |||||||||
2003 | 2002 | ||||||||
Land | $ | 21,577 | $ | 14,182 | |||||
Office buildings | 92,262 | 88,250 | |||||||
Computer hardware and software | 103,523 | 84,567 | |||||||
Furniture, fixtures and equipment | 45,538 | 35,736 | |||||||
Automobiles | 370 | 374 | |||||||
Total | 263,270 | 223,109 | |||||||
Less accumulated depreciation | (102,213 | ) | (73,479 | ) | |||||
$ | 161,057 | $ | 149,630 | ||||||
Depreciation expense amounted to approximately $31.1 million, $25.5 million, and $19.5 million for the years ended December 31, 2003, 2002 and 2001, respectively.
The Company conducts a portion of its business from leased facilities. Lease rental expense totaled approximately $9.0 million, $7.2 million and $6.2 million for the years ended December 31, 2003, 2002 and 2001, respectively. The following outlines the Company’s minimum contractual lease obligations as of December 31, 2003 (in thousands):
2004 | $ | 6,823 | ||
2005 | 5,405 | |||
2006 | 3,206 | |||
2007 | 1,755 | |||
2008 | 724 | |||
Thereafter | 1,229 | |||
Total | $ | 19,142 | ||
80
Note 812 – Repossessed Assets
Repossessed assets include the following (in thousands):
December 31, | ||||||||
2002 | 2001 | |||||||
One-to-four family | $ | 42,921 | $ | 38,389 | ||||
Commercial properties | 2,173 | 479 | ||||||
Repossessed assets, net | $ | 45,094 | $ | 38,868 | ||||
Note 9 — Premises and Equipment
Premises and equipment balances are as follows (in thousands):
December 31, | |||||||||
2002 | 2001 | ||||||||
Land | $ | 14,182 | $ | 12,924 | |||||
Office buildings | 88,250 | 64,589 | |||||||
Computer hardware and software | 84,567 | 72,600 | |||||||
Furniture, fixtures and equipment | 35,736 | 39,359 | |||||||
Automobiles | 374 | 487 | |||||||
Total | 223,109 | 189,926 | |||||||
Less accumulated depreciation | (73,479 | ) | (50,430 | ) | |||||
Premises and equipment, net | $ | 149,630 | $ | 139,529 | |||||
Depreciation expense amounted to approximately $25.5 million, $19.5 million, and $11.7 million for the years ended December 31, 2002, 2001 and 2000, respectively.
The Company conducts a portion of its business from leased facilities. Lease rental expense totaled approximately $7.2 million, $6.2 million and $7.4 million for the years ended December 31, 2002, 2001 and 2000, respectively. The following outlines the Company’s minimum contractual lease obligations as of December 31, 2002 (in thousands):
2002 | $ | 6,659 | ||
2003 | 4,903 | |||
2004 | 3,594 | |||
2005 | 2,031 | |||
2006 | 1,164 | |||
Thereafter | 1,279 | |||
Total | $ | 19,630 | ||
66
Note 10 — Mortgage Servicing Rights
NotMortgage loans serviced for others are not included in the accompanying consolidated financial statements are mortgage loans serviced for others.statements. The unpaid principal balances of these loans at December 31, 20022003 and 2001,2002, are summarized as follows (in thousands):
December 31, | December 31, | |||||||||||||||
Mortgage loans serviced for: | 2002 | 2001 | 2003 | 2002 | ||||||||||||
FHLMC and FNMA | $ | 21,476,796 | $ | 14,071,944 | $ | 30,347,804 | $ | 21,476,796 | ||||||||
MSHDA | — | 65,823 | ||||||||||||||
FHLBI | 34,667 | 82,926 | ||||||||||||||
GNMA | 483 | 1,494 | 173 | 483 | ||||||||||||
Other investors | 109,518 | 83,541 | 12,435 | 26,592 | ||||||||||||
Total | $ | 21,586,797 | $ | 14,222,802 | $ | 30,395,079 | $ | 21,586,797 | ||||||||
In addition and notNot included in the above totals are $7.8$3.4 billion and $6.7$7.8 billion of mortgage loans at December 31, 2003 and 2002, and 2001, respectively. These loansrespectively, that are being serviced on a temporary basis in connection with the sale of mortgage servicing rights.
Custodial accounts maintained in connection with the above mortgage servicing rights (including the above mentioned subservicing) were approximately $693.6$565.0 million and $296.4$693.6 million at December 31, 20022003 and 2001,2002, respectively. These amounts include payments for principal, interest, taxes, and insurance collected on behalf of the individual investor.
The following is an analysis of the changes in mortgage servicing rights (in thousands):
For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |||||||||||||||||||
Balance, beginning of period | $ | 168,469 | $ | 106,425 | $ | 131,831 | $ | 230,756 | $ | 168,469 | $ | 106,425 | ||||||||||||
Capitalization | 478,456 | 488,829 | 157,824 | 497,340 | 478,456 | 488,829 | ||||||||||||||||||
Sales | (353,571 | ) | (381,253 | ) | (170,157 | ) | (344,950 | ) | (353,571 | ) | (381,253 | ) | ||||||||||||
Amortization | (62,598 | ) | (45,532 | ) | (13,073 | ) | (123,018 | ) | (62,598 | ) | (45,532 | ) | ||||||||||||
Balance, end of period | $ | 230,756 | $ | 168,469 | $ | 106,425 | $ | 260,128 | $ | 230,756 | $ | 168,469 | ||||||||||||
At December 31, 2003, 2002, 2001, and 2000,2001, the estimated fair value of the mortgage loan servicing portfolio was $410.6 million, $244.5 million $244.3 million, and $110.1$244.3 million, respectively.
6781
Note 1113 – Deposit Accounts
The retail deposit accounts are as follows (in thousands):
December 31, | December 31, | |||||||||||||||||
2002 | 2001 | 2003 | 2002 | |||||||||||||||
Demand accounts | Demand accounts | $ | 401,517 | $ | 332,843 | Demand accounts | $ | 390,008 | $ | 401,517 | ||||||||
Savings accounts | Savings accounts | 352,155 | 801,694 | Savings accounts | 314,452 | 352,155 | ||||||||||||
MMDA | MMDA | 575,411 | — | MMDA | 1,320,635 | 575,411 | ||||||||||||
Retail certificates of deposit | 1,324,486 | 1,233,668 | ||||||||||||||||
Certificates of deposit | Certificates of deposit | 1,602,223 | 1,324,486 | |||||||||||||||
Total consumer direct deposits | 3,627,318 | 2,653,569 | ||||||||||||||||
Municipal deposits | Municipal deposits | 899,123 | 807,665 | |||||||||||||||
National accounts | National accounts | 1,153,726 | 912,655 | |||||||||||||||
Total retail deposits | 2,653,569 | 2,368,205 | Total deposits | $ | 5,680,167 | $ | 4,373,889 | |||||||||||
Municipal deposits | 807,665 | 441,962 | ||||||||||||||||
Wholesale deposits | 912,655 | 797,935 | ||||||||||||||||
Total deposits | $ | 4,373,889 | $ | 3,608,102 | ||||||||||||||
The Municipal deposits listed in this table include $752.0 million that are certificates of deposit with maturities typically less than one year and $147.1 million in checking and savings accounts.
Non-interest-bearing deposits included in the demand accounts balances at December 31, 20022003 and 2001,2002, were approximately $232.2$512.3 million and $150.8$232.2 million, respectively.
The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $894.5 million$1.3 billion and $249.4$894.5 million at December 31, 2003 and 2002, and 2001, respectively. The following table indicates the schedule maturities for certificates of deposit with a minimum denomination of $100,000 (in thousands):
2003 | 2002 | |||||||
Three months or less | $ | 454,294 | $ | 441,575 | ||||
Over three months to six months | 160,002 | 126,051 | ||||||
Over six months to twelve months | 253,035 | 116,095 | ||||||
One to two years | 158,764 | 96,235 | ||||||
Thereafter | 265,745 | 114,507 | ||||||
Total | $ | 1,291,840 | $ | 894,463 | ||||
82
Note 13 – Deposit Accounts (continued)
The following schedules indicate the scheduled maturities of the Company’s certificates of deposit by acquisition channel as of December 31, 20022003 (in thousands):
Retail
December 31, | ||||
2002 | ||||
Three months or less | $ | 164,778 | ||
Over three through six months | 95,444 | |||
Over six through twelve months | 211,989 | |||
One to two years | 371,736 | |||
Thereafter | 480,539 | |||
Total | $ | 1,324,486 | ||
68
National accounts
December 31, | ||||
2002 | ||||
Three months or less | $ | 102,656 | ||
Over three through six months | 32,279 | |||
Over six through twelve months | 135,945 | |||
One to two years | 186,390 | |||
Thereafter | 455,385 | |||
Total | $ | 912,655 | ||
Municipal
December 31, | Consumer | National | ||||||||||||||||||
2002 | Direct | Municipal | accounts | Total | ||||||||||||||||
Three months or less | $ | 584,550 | ||||||||||||||||||
Over three through six months | 115,751 | |||||||||||||||||||
Over six through twelve months | 75,356 | |||||||||||||||||||
Twelve months or less | $ | 586,938 | $ | 700,699 | $ | 222,520 | $ | 1,510,157 | ||||||||||||
One to two years | 30,089 | 432,292 | 23,881 | 334,233 | 790,406 | |||||||||||||||
Two to three years | 218,160 | 25,310 | 220,764 | 464,234 | ||||||||||||||||
Three to four years | 260,482 | 2,156 | 273,161 | 535,799 | ||||||||||||||||
Four to five years | 92,528 | — | 103,048 | 195,576 | ||||||||||||||||
Thereafter | 1,919 | 11,823 | — | — | 11,823 | |||||||||||||||
Total | $ | 807,665 | $ | 1,602,223 | $ | 752,046 | $ | 1,153,726 | $ | 3,507,995 | ||||||||||
Note 12 —14 – FHLB Advances
The following indicates certain information related to the FHLB advances (in thousands):
For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |||||||||||||||||||
Maximum outstanding at any month end | $ | 2,492,000 | $ | 2,319,093 | $ | 1,800,764 | $ | 3,320,000 | $ | 2,492,000 | $ | 2,319,093 | ||||||||||||
Average balance | 2,179,060 | 2,076,400 | 1,541,184 | 2,711,119 | 2,179,060 | 2,076,400 | ||||||||||||||||||
Average interest rate | 5.29% | 5.63% | 6.41% | 4.69 | % | 5.29 | % | 5.63 | % |
69
The Company has the authority and approval from the FHLB to utilize a total of $3.0$4.5 billion in collateralized borrowings. Advances at December 31, 2002,2003, totaled $2.2$3.3 billion and carried a weighted rate of 5.29%4.25%. The following outlines the Company’s advance maturity dates as of December 31, 20022003 (in millions):
2003 | $ | 450.0 | ||
2004 | 250.0 | |||
2005 | 520.0 | |||
2006 | 50.0 | |||
Thereafter | 950.0 | |||
Total | $ | 2,220.0 | ||
2004 | $ | 250 | |||
2005 | 520 | ||||
2006 | 250 | ||||
2007 | 400 | ||||
2008 | 650 | ||||
Thereafter | 1,100 | ||||
Total | $ | 3,170 | |||
The remaining $2.0$76.0 million are daily adjustable rate advances. Pursuant to collateral agreements with the FHLB, advances are collateralized by non-delinquent single-family residential mortgage loans.
Note 13 – Long Term Debt
Flagstar Trust
On April 27, 1999, the Company completed the sale of 2.99 million shares of preferred securities issued by Flagstar Trust, a Delaware trust and subsidiary of the Company. The securities pay interest at a rate of 9.50% per annum. The securities are traded on the New York Stock Exchange under the symbol“FBC-O”.
The preferred securities are generally not redeemable until April 27, 2004. On or after that date, the securities are redeemable in whole or in part by the Company for cash. The securities are not subject to a sinking fund or mandatory redemption and are not convertible into any other securities of the Company.
After the sale of the preferred securities, the Company issued junior subordinated debentures to Trust totaling $74.8 million. The debentures pay interest at 9.5% per annum.
Flagstar Statutory Trust II
On December 19, 2002, the Company completed the sale of 1.0 million shares of preferred securities issued by Flagstar Statutory Trust II, a Connecticut trust and subsidiary of the Company. The securities pay interest at a rate equal to three-month LIBOR plus 3.25% per annum. The securities reprice quarterly. The securities were sold in a pooled transaction to a private investor and are not traded on a securities exchange.
The preferred securities are generally not redeemable until December 2007. On or after that date, the securities are redeemable in whole or in part by the Company for cash. The securities are not subject to a sinking fund or mandatory redemption and are not convertible into any other securities of the Company.
Interest Rate Swap
On December 19, 2002, the Company entered into an interest rate swap whereas the Company is required to pay 6.88% fixed rate on a notional amount of $25 million and will receive a floating rate equal to three month
7083
Note 1315 – Long Term Debt (continued)
The following table presents long-term debt at December 31, (in thousands):
2003 | 2002 | |||||||||
Junior subordinated notes related to trust preferred securities | ||||||||||
Fixed 9.50% to be redeemed 2004(1) | $ | 74,750 | $ | 74,750 | ||||||
Floating 3 month LIBOR plus 3.25%(2) (4.42% at December 31, 2003), matures 2032 | 25,000 | 25,000 | ||||||||
Fixed 6.55%(3), matures 2033 | 25,000 | — | ||||||||
Fixed 6.75%(3), matures 2033 | 25,000 | — | ||||||||
Subtotal | 149,750 | 99,750 | ||||||||
Other Debt | ||||||||||
Fixed 7.00% due 2013 | 1,350 | — | ||||||||
Total long-term debt | $ | 151,100 | $ | 99,750 | ||||||
(1) | On January 21, 2004, the Company announced its intent to redeem all of the preferred securities of Flagstar Trust on April 30, 2004. The securities will be redeemed at $25.00 per share plus accrued interest. |
(2) | As part of the transaction, the Company entered into an interest rate swap with the placement agent, whereas the Company is required to pay 6.88% fixed rate on a notional amount of $25 million and will receive a floating rate equal to three month LIBOR plus 3.25%. The swap matures on December 26, 2007. |
(3) | After five years the rate converts to a variable rate equal to 3 month LIBOR plus 3.25%. |
The following table presents the aggregate annual maturities of long-term debt obligations (based on final maturity dates) at December 31, 2003 (in thousands):
2004 | $ | 74,775 | ||||
2005 | 25 | |||||
2006 | 25 | |||||
2007 | 25 | |||||
2008 | 25 | |||||
Thereafter | 76,225 | |||||
Total | $ | 151,100 | ||||
84
LIBOR plus 3.25%. The swap matures in December 2007. The counterparty
Note 1416 – Federal Income Taxes
The totalTotal federal income tax provision (benefit) is allocated as follows (in thousands):
For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |||||||||||||||||||
Income from operations | $ | 60,626 | $ | 45,927 | $ | 16,360 | $ | 136,755 | $ | 60,626 | $ | 45,927 | ||||||||||||
Cumulative effect of a change in accounting principle | 10,078 | — | — | — | 10,078 | — | ||||||||||||||||||
Stockholders’ equity, for the tax benefit from stock-based compensation | (2,609 | ) | 5,460 | — | (8,945 | ) | (2,609 | ) | (5,460 | ) | ||||||||||||||
Stockholders’ equity, for the tax effect of Other Comprehensive Income | 1,170 | — | — | |||||||||||||||||||||
$ | 68,095 | $ | 51,387 | $ | 16,360 | $ | 128,980 | $ | 68,095 | $ | 40,467 | |||||||||||||
Components of the provision for federal income taxes consistsfrom operations consist of the following (in thousands):
For the years ended December 31, | ||||||||||||
2002 | 2001 | 2000 | ||||||||||
Current provision/(benefit) | $ | 82,409 | $ | 19,950 | $ | 26,317 | ||||||
Deferred provision/(benefit) | (21,783 | ) | 25,977 | (9,957 | ) | |||||||
$ | 60,626 | $ | 45,927 | $ | 16,360 | |||||||
For the years ended December 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
Current provision | $ | 118,854 | $ | 82,409 | $ | 19,950 | ||||||
Deferred provision (benefit) | 17,901 | (21,783 | ) | 25,977 | ||||||||
$ | 136,755 | $ | 60,626 | $ | 45,927 | |||||||
The Company’s effective tax rate differs from the statutory federal tax rate. The following is a summary of such differences (in thousands):
For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||||
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |||||||||||||||||||||
Provision at statutory federal income tax rate | Provision at statutory federal income tax rate | $ | 59,939 | $ | 45,103 | $ | 15,853 | Provision at statutory federal income tax rate | $ | 136,888 | $ | 59,939 | $ | 45,103 | ||||||||||||
Increase (decrease) resulting from: | Increase (decrease) resulting from: | Increase (decrease) resulting from: | ||||||||||||||||||||||||
Amortization of deposit premium | — | 226 | 452 | Amortization of deposit premium | — | — | 226 | |||||||||||||||||||
Other, net | 687 | 598 | 55 | Other, net | (133 | ) | 687 | 598 | ||||||||||||||||||
Provision at effective federal income tax rate | Provision at effective federal income tax rate | $ | 60,626 | $ | 45,927 | $ | 16,360 | Provision at effective federal income tax rate | $ | 136,755 | $ | 60,626 | $ | 45,927 | ||||||||||||
85
Note 16 – Federal Income Taxes (continued)
The details of the net tax return on a calendar year basis. Historically,liability are as follows (in thousands):
December 31, | ||||||||
2003 | 2002 | |||||||
Deferred tax assets: | ||||||||
Allowance for loan and other losses | $ | 22,146 | $ | 22,558 | ||||
Non-accrual interest | 935 | 1,462 | ||||||
Purchase accounting valuation adjustments | 39 | 33 | ||||||
Reserve for foreclosure losses | 3,934 | 3,901 | ||||||
Mark-to-market adjustments on earning assets | 3,427 | 13,681 | ||||||
Deferred compensation plan | 1,921 | — | ||||||
Other | 1,687 | 2,820 | ||||||
34,089 | 44,455 | |||||||
Deferred tax liabilities: | ||||||||
Mark-to-market adjustment – forward commitments | (2,446 | ) | (6,189 | ) | ||||
Unrealized hedging gains | (1,170 | ) | — | |||||
Deferred loan costs and fees | (5,048 | ) | (3,150 | ) | ||||
Tax bad debt reserves | — | (313 | ) | |||||
Premises and equipment | (5,866 | ) | (5,769 | ) | ||||
Mortgage loan servicing rights | (91,045 | ) | (80,765 | ) | ||||
Other | (653 | ) | (1,337 | ) | ||||
(106,228 | ) | (97,523 | ) | |||||
Net deferred tax liability | (72,139 | ) | (53,068 | ) | ||||
Current federal income taxes payable | (1,437 | ) | (20,514 | ) | ||||
Income taxes payable | $ | (73,576 | ) | $ | (73,582 | ) | ||
Through December 31, 2003, the Company has taken into taxable income approximately $5.4 million of previously deducted tax bad debt reserves. A deferred tax liability had determinedbeen provided relative to these reserves. The Company has not provided deferred income taxes for the Bank’s pre-1988 tax bad debt reserves of approximately $4 million because it is not anticipated that this temporary difference will reverse in the foreseeable future. Such reserves would only be taken into taxable income if the Bank, or a successor institution, liquidates, redeems shares, pays dividends in excess of earnings and profits, or ceases to qualify as a bank for tax purposes.
Note 17 – Employee Benefit Plans
The Company maintains a 401(k) plan for its deduction for bad debts based on the reserve method in lieu of the specific charge-off method.employees. Under the reserve method, theplan, eligible employees may contribute up to 60% of their annual compensation up to a maximum of $12,000 annually. The Company had established and maintainedcurrently provides a reserve for bad debts against which actual loan losses are charged. Asmatching contribution up to 3% of an employee’s annual compensation up to a qualifying thrift institution, the Company had calculatedmaximum of
7186
its addition$6,000. Participants that meet certain criteria are able to its bad debt reserve under either, (1) the “percentage of taxable income” method or (2) the “experience” method. The Company used the percentage of taxable income method in determining its bad debt reserve addition through its 1996 tax year.
The details of the net tax liability are as follows (in thousands):
December 31, | ||||||||
2002 | 2001 | |||||||
Deferred tax assets: | ||||||||
Book bad debt reserves | $ | 22,558 | $ | 14,945 | ||||
Delinquent interest | 1,462 | 2,135 | ||||||
Purchase accounting valuation adjustments | 33 | 159 | ||||||
Capitalized foreclosure costs | 3,901 | 2,254 | ||||||
Mark-to-market adjustments on earning assets | 13,681 | — | ||||||
Other | 2,820 | 845 | ||||||
Total | 44,455 | 20,338 | ||||||
Deferred tax liabilities: | ||||||||
Mark-to-market adjustment – forward commitments | (6,189 | ) | — | |||||
Deferred fees | (3,150 | ) | (2,674 | ) | ||||
Tax bad debt reserves | (313 | ) | (627 | ) | ||||
Premises and equipment | (5,769 | ) | (7,158 | ) | ||||
Mortgage loan servicing rights | (80,765 | ) | (58,961 | ) | ||||
Mark-to-market adjustments on earning assets | — | (15,692 | ) | |||||
Other | (1,337 | ) | — | |||||
Total | (97,523 | ) | (85,112 | ) | ||||
Net deferred tax liability | (53,068 | ) | (64,773 | ) | ||||
Current payable | (20,514 | ) | (12,811 | ) | ||||
Net tax liability | $ | (73,582 | ) | $ | (77,584 | ) | ||
The bad debt reserves, maintained for tax purposes and accumulated after 1987, became subject to recapture into taxable income as part of the 1996 tax legislation change. Base year reserves (generally pre-1987 bad debt reserves) will not be recaptured unless the Company, or a successor institution, liquidates, redeems shares or pays a dividend in excess of earnings and profits. The recapture is taken ratably over six years beginning in 1996. The Company deferred the recapture an additional two years because it met certain residential lending requirements during the tax years beginning before January 1, 1998.
Income taxes have been provided for the $4.9 million temporary difference between the allowance for losses and the increase in the bad debt reserve maintained for tax purposes since the 1987 base year. The Company began recapturing this difference in 1998 using a six-year recapture period. As of December 31, 2002, the Company had approximately $0.9 million in tax bad debt reserves yet to be recaptured.
72
Note 15 – Employee Benefits
The Company maintains a 401(k) plan for its employees. Under the plan, eligible employees may contribute up to 6% ofcatch-up their annual compensationcontributions up to a maximum of $11,000$14,000 annually. The Company currently provides a matching contribution up to 3% of an employee’s annual compensation up to a maximum of $5,500. The Company’s contributions vest at a rate such that an employee is fully vested after five years of service. The Company’s contributions to the plan for the years ended December 31, 2003, 2002, 2001, and 20002001 were approximately $3.5 million, $3.1 million, $1.6 million, and $1.1$1.6 million, respectively. The Company may also make discretionary contributions to the plan; however, none has been made.
The Company offers a deferred compensation plan to employees. The deferred compensation plan allows employees to defer up to 25% of their annual compensation and directors to defer all of their compensation. Funds deferred remain the property of the Company. The Company has invested $5.2 million in Company Owned Life Insurance (“COLI”) in order to offset its liability in its deferred compensation program. At December 31, 2003, the Company had a deferred liability to the participants of the compensation plan totaling $5.5 million.
Note 1618 – Contingencies
The Company is involved in certain lawsuits incidental to its operations. Management, after review with its legal counsel, is of the opinion that settlement of such litigation will not have a material effect on the Company’s financial condition.
A substantial part of the Company’s business has involved the origination, purchase, and sale of mortgage loans. During the past several years, numerous individual claims and purported consumer class action claims were commenced against a number of financial institutions, their subsidiaries and other mortgage lending institutions generally seeking civil statutory and actual damages and rescission under the federal Truth in Lending Act (the “TILL”), as well as remedies for alleged violations of various state unfair trade practices laws restitution or unjust enrichment in connection with certain mortgage loan transactions.
The Company has a substantial mortgage loan servicing portfolio and maintains escrow accounts in connection with this servicing. During the past several years, numerous individual claims and purported consumer class action claims were commenced against a number of financial institutions, their subsidiaries and other mortgage lending institutions generally seeking declaratory relief that certain of the lenders’ escrow account servicing practices violate the Real Estate Settlement Practices Act and breach the lenders’ contracts with borrowers. Such claims also generally seek actual damages and attorney’s fees.
In addition to the foregoing, mortgage lending institutions have been subjected to an increasing number of other types of individual claims and purported consumer class action claims that relate to various aspects of the origination, pricing, closing, servicing, and collection of mortgage loans and that allege inadequate disclosure, breach of contract, or violation of state laws. Claims have involved, among other things, interest rates and fees charged in connection with loans, interest rate adjustments on adjustable rate loans, timely release of liens upon payoffs, the disclosure and imposition of various fees and charge, and the placing of collateral protection insurance.
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While the Company has had various claims similar to those discussed above asserted against it, management does not expect these claims to have a material adverse effect on the Company’s financial condition, results of operations, or liquidity.
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Note 1719 – Regulatory Capital Requirements
Flagstar Bank, fsb is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.
Quantitative measures that have been established by regulation to ensure capital adequacy require the Bank to maintain minimum capital amounts and ratios (set forth in the table below). The Bank’s primary regulatory agency, the Office of Thrift Supervision (“OTS”), requires that the Bank maintain minimum ratios of tangible capital (as defined in the regulations) of 1.5%, core capital (as defined) of 3.0%, and total risk-based capital (as defined) of 8.0%. The Bank is also subject to prompt corrective action capital requirement regulations set forth by the FDIC. The FDIC requires the Bank to maintain a minimum of Tier 1 total and core capital (as defined) to risk-weighted assets (as defined), and of core capital (as defined) to adjusted tangible assets (as defined). Management believes, as of December 31, 2002,2003, that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 20022003 and 2001,2002, the most recent guidelines from the OTS categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
7488
Note 1719 – Regulatory Capital Requirements (continued)
as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.
To Be Well | To Be Well | |||||||||||||||||||||||||||||||||||||||||||||||||
Capitalized | Capitalized | |||||||||||||||||||||||||||||||||||||||||||||||||
Under Prompt | For Capital | Under Prompt | ||||||||||||||||||||||||||||||||||||||||||||||||
Corrective | Adequacy | Corrective Action | ||||||||||||||||||||||||||||||||||||||||||||||||
For Capital | Action | Actual | Purposes | Provisions | ||||||||||||||||||||||||||||||||||||||||||||||
Actual | Adequacy Purposes | Provisions | ||||||||||||||||||||||||||||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2003: | As of December 31, 2003: | |||||||||||||||||||||||||||||||||||||||||||||||||
Tangible capital (to tangible assets) | $ | 784,652 | 7.4% | $ | 158,276 | 1.5% | N/A | N/A | ||||||||||||||||||||||||||||||||||||||||||
Core capital (to adjusted tangible assets) | 784,652 | 7.4% | 316,553 | 3.0% | $ | 527,588 | 5.0% | |||||||||||||||||||||||||||||||||||||||||||
Tier I capital (to risk weighted assets) | 784,652 | 12.9% | N/A | N/A | 365,066 | 6.0% | ||||||||||||||||||||||||||||||||||||||||||||
Total capital (to risk weighted assets) | 819,015 | 13.5% | 486,622 | 8.0% | 608,278 | 10.0% | ||||||||||||||||||||||||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2002: | As of December 31, 2002: | As of December 31, 2002: | ||||||||||||||||||||||||||||||||||||||||||||||||
Tangible capital (to tangible assets) | $ | 551,219 | 6.7% | $ | 122,857 | 1.5% | N/A | N/A | Tangible capital (to tangible assets) | $ | 551,219 | 6.7% | $ | 122,857 | 1.5% | N/A | N/A | |||||||||||||||||||||||||||||||||
Core capital (to adjusted tangible assets) | 551,219 | 6.7% | 245,715 | 3.0% | $ | 409,524 | 5.0% | Core capital (to adjusted tangible assets) | 551,219 | 6.7% | 245,715 | 3.0% | $ | 409,524 | 5.0% | |||||||||||||||||||||||||||||||||||
Tier I capital (to risk weighted assets) | 551,219 | 11.0% | N/A | N/A | 300,264 | 6.0% | Tier I capital (to risk weighted assets) | 551,219 | 11.0% | N/A | N/A | 300,264 | 6.0% | |||||||||||||||||||||||||||||||||||||
Total capital (to risk weighted assets) | 601,110 | 12.0% | 400,344 | 8.0% | 500,440 | 10.0% | Total capital (to risk weighted assets) | 601,110 | 12.0% | 400,344 | 8.0% | 500,440 | 10.0% | |||||||||||||||||||||||||||||||||||||
As of December 31, 2001: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Tangible capital (to tangible assets) | $ | 405,877 | 6.1% | $ | 99,279 | 1.5% | N/A | N/A | ||||||||||||||||||||||||||||||||||||||||||
Core capital (to adjusted tangible assets) | 405,877 | 6.1% | 198,559 | 3.0% | $ | 330,931 | 5.0% | |||||||||||||||||||||||||||||||||||||||||||
Tier I capital (to risk weighted assets) | 405,877 | 10.4% | N/A | N/A | 234,913 | 6.0% | ||||||||||||||||||||||||||||||||||||||||||||
Total capital (to risk weighted assets) | 447,765 | 11.4% | 313,209 | 8.0% | 391,511 | 10.0% |
Note 1820 – Concentrations of Credit
Properties collateralizing mortgage loans receivable were geographically disbursed throughout the United States. As of December 31, 2002,2003, approximately 19.1%19.3% of these properties are located in Michigan (measured by principal balance), and another 56.8%49.6% were located in the states of Arizona, New York, California Wisconsin,(20.9%), Colorado (6.5%), Washington (5.1%), Florida (5.1%), Texas (4.5%), Illinois (4.2%) and Ohio Washington, Florida, Texas, Massachusetts, and Illinois.(3.3%). No other state contains more than 2%3% of the properties collateralizing these loans.
Note 1921 – Related Party Transactions
The Company has and expects to have in the future, transactions with the Company’s directors and principal officers. Such transactions were made in the ordinary course of business and included extensions of credit, and professional services. With respect to the extensions of credit, all were made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers and did not, in management’s opinion, involve more than normal risk of collectibility or present other unfavorable features. At December 31, 2003, the balance of the loans attributable to directors and principal officers totaled $6.4 million, with the unused lines of credit totaling $14.9 million. At December 31, 2002, the balance of loans attributable to directors and principal officers totaled $20.6 million, with unused lines of credit totaling $5.8 million.
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Note 22 – Derivative Financial Instruments
Available for sale loans and interest rate lock commitments
The Bank has interest rate exposure relative to its inventory of available for sale loans and its committed pipeline. The mortgage loan inventory is comprised of mortgage loans held by the Bank pending sale. The mortgage loan inventory is generally held on to for less than 30 days. The committed pipeline is comprised of loan applications in process where the Bank has provided an interest rate lock commitment (“IRLC”) for a specified period, generally from 7 to 60 days.
The Bank’s loan production consists primarily of fixed rate mortgages. Fixed rate mortgages, like other fixed rate debt instruments, are subject to a loss in value when market interest rates rise. The Bank is exposed to such losses from the time an IRLC is made to an applicant (or financial intermediary) to the time the related mortgage loan is sold. To manage this risk of loss, the Bank utilizes derivatives, primarily forward sales of mortgage loans. Certain of these transactions qualify as “fair value” hedges under SFAS 133. (See the following section titled “Accounting for Risk Management Activities” for further discussion.)
The Bank ensures that substantially all fixed rate mortgage loan inventory held for sale is covered at all times through corresponding forward sale commitments of mortgage loans.
The interest rate risk management of the committed pipeline is complicated by the fact that the ultimate percentage of applications that close within the terms of the IRLC is variable. The probability that the loan will fund within the terms of the IRLC is driven by a number of factors, in particular the change, if any, in mortgage rates subsequent to the lock date. In general, the probability increases if mortgage rates rise, and decreases if mortgage rates fall. This is due primarily to the relative attractiveness, or unattractiveness, of current mortgage rates compared to the applicant’s committed rate. The probability that a loan will fund within the terms of the IRLC also is influenced by the source of the applications, age of the applications, purpose for the loans (purchase or refinance), and the application approval rate. The Bank has developed closing ratio estimates (“Fallout Ratios”) using its historical data that take into account all of these variables, as well as renegotiations of rate and point commitments that tend to occur when mortgage rates fall. The Fallout Ratios are utilized to estimate the quantity of loans that will fund within the terms of the IRLCs.
To manage the interest rate risk associated with the committed pipeline, the Bank enters into forward sales of mortgage loans. As a general rule, the Bank enters into forward sales of mortgage loans in an amount equal to the portion of the committed pipeline expected to close, assuming no change in mortgage rates. The Bank reviews its committed pipeline and mortgage inventory risk profiles on a daily basis.
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The following table summarizes the balance or notional amounts, as applicable, of mortgage loan inventory, committed pipeline and the related derivatives instruments at December 31, 2003.
December 31, | ||||||||
2003 | 2002 | |||||||
(In millions) | ||||||||
Mortgage loans inventory | $ | 2,760 | $ | 3,302 | ||||
Committed pipeline | 2,885 | 7,206 | ||||||
Forward sales commitments | 3,699 | 6,419 |
Accounting Issues
In general, the risk management activities connected with 95% or more of the fixed rate mortgage inventory has qualified as a “fair value” hedge under SFAS 133. The Bank recognized pre-tax losses of $10.7 million and pre-tax losses of $11.1 million, representing the ineffective portion of such fair value hedges of mortgage inventory, for the years ended December 31, 2003 and 2002, respectively. This amount along with the change in the fair value of the derivative instruments that were not designated as hedge instruments under SFAS 133 are included in gain on sale of loans in the statement of earnings. The derivative instruments that did not qualify as a hedge under SFAS 133 were primarily those used to manage the interest rate risk related to a portion of the Bank’s adjustable rate and non-conforming mortgage inventory.
IRLCs are derivative instruments as defined by SFAS 133. As such, IRLCs are recorded at fair value with changes in fair value recognized in current period earnings (as a component of gain on sale of loans). The Bank estimates the fair value of an IRLC based on the change in estimated fair value of the underlying mortgage loan and the probability that the mortgage loan will fund within the terms of the IRLC. The change in fair value of the underlying mortgage loan is based upon quoted MBS prices. The change in fair value of the underlying mortgage loan is measured from the lock date. Therefore, at the time of issuance the estimated fair value of an IRLC is zero. (Subsequent to issuance, the value of an IRLC can be either positive or negative, depending on the change in value of the underlying mortgage loan). The Fallout Ratios are utilized to estimate the quantity of mortgage loans that will fund within the terms of the IRLCs. Because IRLCs are derivatives under SFAS 133, the associated risk management activities of the committed pipeline do not qualify for hedge accounting under SFAS 133. The “freestanding” derivative instruments that are used to manage the interest rate risk in the committed pipeline are marked to fair value and recorded as a component of gain on sale of loans in the statement of earnings.
Duration-matched Funding
In order to lengthen the effective duration of the funding source utilized for the acquisition of intermediate adjustable rate mortgages, the Company entered into a series of interest-rate swap contracts. The Interest rate swap contracts are agreements in which two parties periodically exchange floating-rate payments for fixed-rate payments based on a designated market rate or index and are applied to a specified notional
91
amount until a stated maturity. The hedged portfolio of certificates of deposit are primarily based on one-month LIBOR or three-month LIBOR. These contracts enable the Bank to convert a portion of its floating-rate, short-term certificate of deposits (30 to 180 days) to a fixed-rate, long-term source of deposits (36 to 60 months). The interest rate swap contracts are structured such that payments are based on a specified notional amount ($500 million) in which the Bank will pay a fixed-rate and will receive floating-rate payments. These transactions are designed as cash flow hedges under SFAS 133. The average interest rates as of December 31, 2003 for the fixed-rate and the floating-rate are 2.97% and 1.32%, respectively. At December 31, 2003, the hedge ineffectiveness was not significant.
Counterparty Credit Risk
The Bank is exposed to credit loss in the event of non-performance by the counterparties to its various derivative financial instruments. The Company manages this risk by selecting only well-established, financially strong counterparties, spreading the credit risk among many such counterparties, and by placing contractual limits on the amount of unsecured credit risk from any single counterparty.
Note 23 – Fair Value of Financial Instruments
SFAS No. 107 issued by the Financial Accounting Standards Board, “Disclosures about Fair Value of Financial Instruments”, requires the disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial condition, where it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Because assumptions used in these valuation techniques are inherently subjective in nature, the estimated fair values cannot always be substantiated by comparison to independent market
75
quotes and, in many cases, the estimated fair values could not necessarily be realized in an immediate sale or settlement of the instrument.
The fair value estimates presented herein are based on relevant information available to management as of December 31, 20022003 and 2001.2002. Management is not aware of any factors that would significantly affect these estimated fair value amounts. As these reporting requirements exclude certain financial instruments and all non-financial instruments, the aggregate fair value amounts presented herein do not represent management’s estimate of the underlying value of the Company. Additionally, such amounts exclude intangible asset values such as the value of core deposit intangibles.
The following methods and assumptions were used by the Company to estimate the fair value of each class of financial instruments and certain non-financial instruments for which it is practicable to estimate that value:
Cash and cash equivalents:The carrying amount of cash and cash equivalents approximates fair value.
Loans receivable:This portfolio consists of mortgage loans available for sale and investment, collateralized commercial lines of credit, commercial real estate loans, builder development project loans, consumer credit obligations, and single-family home construction loans. Mortgage loans available for sale and investment are
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valued using fair values attributable to similar mortgage loans. The fair value of the other loans are valued based on the fair value of obligations with similar credit characteristics.
Other investments:Investment securities:The carrying amount of other investments approximates fair value.
FHLB stock:No secondary market exists for FHLB stock. The stock is bought and sold at par by the FHLB. The recorded value, therefore, is the fair value. The amount of stock required to be purchased is based on total assets and is determined annually.
Deposit Accounts:The fair value of demand deposits and savings accounts approximates the carrying amount. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits with similar remaining maturities.
FHLB Advances:Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of the existing debt.
Long Term Debt:The preferred securities of Flagstar Trust are traded on the New York Stock Exchange under the symbol“FBC-O”. The trust preferred securities of Trust II, Trust III and Trust IV are classified here.
Other Liabilities:Included in other liabilities is the preferred stock of Flagstar Capital This preferred stock is traded on the New York Stock Exchange under the symbol“FBC-P”.
Mortgage Servicing Rights: See Note 3 for a description of the method used to value the mortgage servicing rights.
Financial instruments with off-balance-sheet risk:The fair value of financial futures contracts, forward delivery contracts and fixed-rate commitments to extend credit are based on current market prices.
7693
Note 1923 – Fair Value of Financial Instruments (continued)
The following tables set forth the fair value of the Company’s financial instruments (in thousands):
December 31, | December 31, | |||||||||||||||||||||||||||||||||
2002 | 2001 | 2003 | 2002 | |||||||||||||||||||||||||||||||
Carrying | Fair | Carrying | Fair | Carrying | Fair | Carrying | Fair | |||||||||||||||||||||||||||
Value | Value | Value | Value | Value | Value | Value | Value | |||||||||||||||||||||||||||
Financial instruments: | Financial instruments: | Financial instruments: | ||||||||||||||||||||||||||||||||
Assets: | Assets: | |||||||||||||||||||||||||||||||||
Cash and cash equivalents | Cash and cash equivalents | $ | 126,969 | $ | 126,969 | $ | 110,447 | $ | 110,447 | Cash and cash equivalents | $ | 148,417 | $ | 148,417 | $ | 126,969 | $ | 126,969 | ||||||||||||||||
Mortgage loans available for sale | Mortgage loans available for sale | 3,302,212 | 3,372,210 | 2,746,791 | 2,761,711 | Mortgage loans available for sale | 2,759,551 | 2,796,657 | 3,302,212 | 3,372,210 | ||||||||||||||||||||||||
Investment loans portfolio and MBS | 4,037,792 | 4,212,710 | 3,170,499 | 3,282,667 | ||||||||||||||||||||||||||||||
Investment loan portfolio and MBS | Investment loan portfolio and MBS | 6,870,930 | 6,920,606 | 4,024,236 | 4,212,710 | |||||||||||||||||||||||||||||
FHLB stock | FHLB stock | 150,000 | 150,000 | 128,400 | 128,400 | FHLB stock | 198,356 | 198,356 | 150,000 | 150,000 | ||||||||||||||||||||||||
Other investments | Other investments | 11,766 | 11,766 | 7,949 | 7,949 | Other investments | 14,144 | 14,145 | 11,766 | 11,806 | ||||||||||||||||||||||||
Liabilities: | Liabilities: | |||||||||||||||||||||||||||||||||
Retail deposits: | Retail deposits: | Retail deposits: | ||||||||||||||||||||||||||||||||
Demand deposits and savings accounts | (1,329,083 | ) | (1,333,346 | ) | (1,134,537 | ) | (1,134,537 | ) | Demand deposits and savings accounts | (2,025,095 | ) | (2,025,095 | ) | (1,329,083 | ) | (1,333,346 | ) | |||||||||||||||||
Certificates of deposit | (1,324,486 | ) | (1,366,539 | ) | (1,233,668 | ) | (1,256,744 | ) | Certificates of deposit | (1,602,223 | ) | (1,634,582 | ) | (1,324,486 | ) | (1,366,539 | ) | |||||||||||||||||
Municipal deposits | Municipal deposits | (807,665 | ) | (800,682 | ) | (441,962 | ) | (447,053 | ) | Municipal deposits | (899,123 | ) | (890,062 | ) | (807,665 | ) | (800,682 | ) | ||||||||||||||||
Wholesale certificates of deposit | Wholesale certificates of deposit | (912,655 | ) | (912,358 | ) | (797,935 | ) | (807,126 | ) | Wholesale certificates of deposit | (1,153,726 | ) | (1,164,243 | ) | (912,655 | ) | (912,358 | ) | ||||||||||||||||
FHLB advances | FHLB advances | (2,222,000 | ) | (2,380,233 | ) | (1,970,505 | ) | (2,065,125 | ) | FHLB advances | (3,246,000 | ) | (3,326,498 | ) | (2,222,000 | ) | (2,380,233 | ) | ||||||||||||||||
Long Term Debt | Long Term Debt | (99,750 | ) | (99,750 | ) | (74,750 | ) | (75,647 | ) | Long Term Debt | (151,100 | ) | (151,500 | ) | (99,750 | ) | (99,750 | ) | ||||||||||||||||
Other liabilities | Other liabilities | (54,373 | ) | (54,373 | ) | (54,373 | ) | (57,960 | ) | Other liabilities | — | — | (54,373 | ) | (54,373 | ) | ||||||||||||||||||
Off-balance sheet items: | Off-balance sheet items: | |||||||||||||||||||||||||||||||||
Forward delivery contracts | Forward delivery contracts | — | (63,354 | ) | — | (9,374 | ) | Forward delivery contracts | (19,563 | ) | (19,563 | ) | (63,354 | ) | (63,354 | ) | ||||||||||||||||||
Commitments to extend credit | Commitments to extend credit | — | 8,781 | — | 33,305 | Commitments to extend credit | 14,440 | 14,440 | 8,781 | 8,781 | ||||||||||||||||||||||||
Non-financial instruments: | ||||||||||||||||||||||||||||||||||
Unrealized gains on mortgage | ||||||||||||||||||||||||||||||||||
Servicing rights (see Note 10) | — | 13,714 | — | 75,803 | ||||||||||||||||||||||||||||||
Interest rate swaps | Interest rate swaps | 3,343 | 3,343 | — | — |
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The Company enters into certain financial instruments with off-balance-sheet risk in the ordinary course of business to reduce its exposure to changes in interest rates. The Company utilizes only traditional financial instruments for this purpose and does not enter into instruments such as leveraged derivatives or structured notes. The financial instruments used for hedging interest rate risk include financial futures contracts and forward delivery contracts. The Company sells its loans in forward delivery contracts because the price
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Note 23 – Fair Value of Financial Instruments (continued)
volatility is eliminated. A hedge is an attempt to reduce risk by creating a relationship whereby any losses on the hedged asset or liability are expected to be counterbalanced in whole or part by gains on the hedging financial instrument. Thus, market risk resulting from a particular off-balance-sheet instrument is normally offset by other on or off-balance-sheet transactions. The Company seeks to manage credit risk by limiting the total amount of arrangements outstanding, both by counterparty and in the aggregate, by monitoring the size and maturity structure of the financial instruments, by assessing the creditworthiness of the counterparty, and by applying uniform credit standards for all activities with credit risk.
Financial Instruments with Off-Balance-Sheet Risk
Notional principal amounts indicated in the following table represent the extent of the Company’s involvement in particular classes of financial instruments and generally exceed the expected future cash requirements relating to the instruments.
December 31, | December 31, | |||||||||||||||
2002 | 2001 | 2003 | 2002 | |||||||||||||
(In millions) | (In millions) | |||||||||||||||
Forward delivery contracts | $ | 6,419 | $ | 2,628 | $ | 3,699 | $ | 6,419 | ||||||||
Commitments to extend credit | 7,299 | 3,130 | 3,027 | 7,299 |
All of the Company’s financial instruments with off-balance sheet risk expire within one year.
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There were no Treasury futures contracts entered into during the years ended December 31, 2002, and 2001. Gains or losses on futures transactions are recorded on the specific identification method in response to adjustments in the fair market valueNote 23 – Fair Value of the instruments.Financial Instruments (continued)
Forward Delivery Contracts:Forward delivery contracts are entered into to exchange mortgage loans for mortgage backed securities and to sell mortgage-backed securities:
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Note 19 – Fair Value of Financial Instruments (continued)
Forward Delivery Contracts
Forward Delivery Contracts:Forward delivery contracts are entered into to exchange mortgage loans for mortgage backed securities and to sell mortgage-backed securities:
December 31, | ||||||||||
2002 | 2001 | |||||||||
(In millions) | ||||||||||
Mortgage loan type: | ||||||||||
Fixed | $ | 6,417 | $ | 2,628 | ||||||
Balloon | 2 | — | ||||||||
Variable | — | — | ||||||||
Total | $ | 6,419 | $ | 2,628 | ||||||
December 31, | |||||||||
2003 | 2002 | ||||||||
(In millions) | |||||||||
Mortgage loan type: | |||||||||
Fixed | $ | 3,677 | $ | 6,417 | |||||
Balloon | — | 2 | |||||||
Variable | 22 | — | |||||||
Total | $ | 3,699 | $ | 6,419 | |||||
Commitments to Extend Credit:The Company’s exposure to credit loss for commitments to extend credit is represented by the contractual amount of those agreements. The Company uses the same credit policies in making funding commitments as it does for on-balance-sheet instruments. These commitments generally have fixed expiration dates or other termination clauses. Because commitments may expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements.
December 31, | |||||||||||||||||
December 31, | 2003 | 2002 | |||||||||||||||
2002 | 2001 | ||||||||||||||||
(In millions) | (In millions) | ||||||||||||||||
Single family mortgage | $ | 7,206 | $ | 3,065 | Single family mortgage | $ | 2,885 | $ | 7,206 | ||||||||
Other | 93 | 65 | Other | 142 | 93 | ||||||||||||
Total | $ | 7,299 | $ | 3,130 | Total | $ | 3,027 | $ | 7,299 | ||||||||
Fixed | $ | 6,967 | $ | 2,504 | Fixed | $ | 2,300 | $ | 6,967 | ||||||||
Variable | 332 | 626 | Variable | 727 | 332 | ||||||||||||
Total | $ | 7,299 | $ | 3,130 | |||||||||||||
Total | $ | 3,027 | $ | 7,299 | |||||||||||||
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Note 2024 – Segment Information
The CompanyCompany’s operations can beare broken down into two business segments: home lending and banking. Each business operates under the same banking charter, but is reported on a segmented basis for this report. Each of the business lines is complementary to each other. The banking operation includes the gathering of deposits and investing those deposits in duration-matched assets primarily originated by the home lending operation. The banking group holds these loans in the investment portfolio in order to earn spread income. On the other hand, the home lending operation involves the origination, packaging, and sale of mortgage loans in order to receive transaction income. The lending operation also services mortgage loans for others and sells MSRs into a mortgagethe secondary market. Funding for the lending operation is provided by deposits and borrowings garnered by the banking and a retail banking operation. group.
Following is a presentation of financial information by business for the period indicated.
For the year ended December 31, 2002 | ||||||||||||||||
Retail | Mortgage | |||||||||||||||
Banking | Banking | |||||||||||||||
Operation | Operation | Eliminations | Combined | |||||||||||||
(In thousands) | ||||||||||||||||
Revenues | $ | 157,101 | $ | 265,175 | $ | — | $ | 422,276 | ||||||||
Earnings before income taxes | 85,571 | 85,682 | — | 171,253 | ||||||||||||
Depreciation and amortization | 13,267 | 74,851 | — | 88,118 | ||||||||||||
Capital expenditures | 12,413 | 23,208 | — | 35,621 | ||||||||||||
Identifiable assets | 4,726,346 | 4,056,655 | (579,299 | ) | 8,203,702 | |||||||||||
Intersegment income (expense) | 9,252 | (9,252 | ) | — | — |
For the year ended December 31, 2001 | ||||||||||||||||||||||||||||||||
For the year ended December 31, 2003 | ||||||||||||||||||||||||||||||||
Retail | Mortgage | Home | ||||||||||||||||||||||||||||||
Banking | Banking | Banking | Lending | |||||||||||||||||||||||||||||
Operation | Operation | Eliminations | Combined | Operation | Operation | Eliminations | Combined | |||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||
Revenues | $ | 94,820 | $ | 231,954 | $ | — | $ | 326,774 | $ | 208,579 | $ | 451,884 | $ | — | $ | 660,463 | ||||||||||||||||
Earnings before income taxes | 41,588 | 87,279 | — | 128,867 | 100,447 | 290,660 | — | 391,107 | ||||||||||||||||||||||||
Depreciation and amortization | 4,470 | 61,239 | — | 65,709 | 7,023 | 147,111 | — | 154,134 | ||||||||||||||||||||||||
Capital expenditures | 8,064 | 44,672 | — | 52,736 | 18,671 | 23,872 | — | 42,543 | ||||||||||||||||||||||||
Identifiable assets | 3,255,673 | 4,021,207 | (653,056 | ) | 6,623,824 | 8,466,397 | 3,353,796 | (1,250,000 | ) | 10,570,193 | ||||||||||||||||||||||
Intersegment income (expense) | 2,046 | (2,046 | ) | — | — | 12,327 | (12,327 | ) | — | — |
8097
For the year ended December 31, 2000 | ||||||||||||||||||||||||||||||||
For the year ended December 31, 2002 | ||||||||||||||||||||||||||||||||
Retail | Mortgage | Home | ||||||||||||||||||||||||||||||
Banking | Banking | Banking | Lending | |||||||||||||||||||||||||||||
Operation | Operation | Eliminations | Combined | Operation | Operation | Eliminations | Combined | |||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||
Revenues | $ | 68,633 | $ | 88,229 | $ | — | $ | 156,862 | $ | 156,660 | $ | 263,993 | $ | — | $ | 420,653 | ||||||||||||||||
Earnings before income taxes | 39,314 | 5,980 | — | 45,294 | 85,130 | 86,123 | — | 171,253 | ||||||||||||||||||||||||
Depreciation and amortization | 3,505 | 22,588 | — | 26,093 | 13,267 | 74,851 | — | 88,118 | ||||||||||||||||||||||||
Capital expenditures | 10,617 | 60,459 | — | 71,076 | 12,413 | 23,208 | — | 35,621 | ||||||||||||||||||||||||
Identifiable assets | 3,905,526 | 3,679,051 | (1,821,353 | ) | 5,763,224 | 4,725,609 | 4,117,393 | (630,216 | ) | 8,212,786 | ||||||||||||||||||||||
Intersegment income (expense) | 1,756 | (1,756 | ) | — | — | 9,252 | (9,252 | ) | — | — |
For the year ended December 31, 2001 | ||||||||||||||||
Home | ||||||||||||||||
Banking | Lending | |||||||||||||||
Operation | Operation | Eliminations | Combined | |||||||||||||
(In thousands) | ||||||||||||||||
Revenues | $ | 94,900 | $ | 224,249 | $ | — | $ | 319,149 | ||||||||
Earnings before income taxes | 41,669 | 87,198 | — | 128,867 | ||||||||||||
Depreciation and amortization | 4,470 | 61,239 | — | 65,709 | ||||||||||||
Capital expenditures | 8,064 | 44,672 | — | 52,736 | ||||||||||||
Identifiable assets | 3,264,606 | 4,034,033 | (661,842 | ) | 6,636,797 | |||||||||||
Intersegment income (expense) | 2,048 | (2,048 | ) | — | — |
Revenues are comprised of net interest income (before the provision for credit losses) and non-interest income. Non-interest expenses are fully allocated to each segment. The intersegment income (expense) consists of interest expense incurred for intersegment borrowing.
Note 2125 – Earnings Per Share
The following is a reconciliation of the numerator and denominator of the basic and diluted earnings per share calculation for the year ended December 31, 20022003 (in thousands):
Earnings | Average Shares | Per Share | Earnings | Average Shares | Per Share | |||||||||||||||||||
(Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount | |||||||||||||||||||
Basic earnings | $ | 110,627 | $ | 3.79 | ||||||||||||||||||||
Earnings from the cumulative effect of a change in accounting principle | 18,716 | 0.64 | ||||||||||||||||||||||
Basic earnings | 129,343 | 29,175 | $ | 4.43 | $ | 254,352 | 59,811 | $ | 4.25 | |||||||||||||||
Effect of options | — | 1,756 | (0.25 | ) | — | 3,920 | (0.26 | ) | ||||||||||||||||
Diluted earnings | $ | 129,343 | 30,931 | $ | 4.18 | $ | 254,352 | 63,731 | $ | 3.99 | ||||||||||||||
8198
In 2003, the Company had 207,000 options that were classified as anti-dilutive and are excluded from the EPS calculations.
The following is a reconciliation of the numerator and denominator of the basic and diluted earnings per share calculation for the year ended December 31, 2002 (in thousands):
Earnings | Average Shares | Per Share | ||||||||||
(Numerator) | (Denominator) | Amount | ||||||||||
Basic earnings | $ | 110,627 | $ | 1.90 | ||||||||
Earnings from the cumulative effect of a change in accounting principle | 18,716 | 0.32 | ||||||||||
Basic earnings | 129,343 | 58,350 | $ | 2.22 | ||||||||
Effect of options | — | 3,512 | (0.13 | ) | ||||||||
Diluted earnings | $ | 129,343 | 61,862 | $ | 2.09 | |||||||
In 2002, the Company had 1.4 million options that were classified as anti-dilutive and are excluded from the EPS calculations.
The following is a reconciliation of the numerator and denominator of the basic and diluted earnings per share calculation for the year ended December 31, 2001 (in thousands):
Earnings | Average Shares | Per Share | Earnings | Average Shares | Per Share | |||||||||||||||||||
(Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount | |||||||||||||||||||
Basic earnings | $ | 82,940 | 27,723 | $ | 2.99 | $ | 82,940 | 55,446 | $ | 1.50 | ||||||||||||||
Effect of options | — | 2,097 | (0.21 | ) | — | 4,194 | (0.11 | ) | ||||||||||||||||
Diluted earnings | $ | 82,940 | 29,820 | $ | 2.78 | $ | 82,940 | 59,640 | $ | 1.39 | ||||||||||||||
The following is a reconciliation ofIn 2001, the numerator and denominator of the basic and diluted earnings per share calculation for the year ended December 31, 2000 (in thousands):
Earnings | Average Shares | Per Share | ||||||||||
(Numerator) | (Denominator) | Amount | ||||||||||
Basic earnings | $ | 28,934 | 27,346 | $ | 1.06 | |||||||
Effect of options | — | 313 | (0.01 | ) | ||||||||
Diluted earnings | $ | 28,934 | 27,659 | $ | 1.05 | |||||||
Note 2226 – Stock Option and Purchase Plans, and other Compensation Plans
In 1997, Flagstar’s Board of Directors adopted resolutions to implement various stock option and purchase plans and deferred and incentive compensation plans in conjunction with the IPO common stock offering.
�� Stock Option Plan
The purpose of the Stock Option Plan (“Option Plan”) is to provide an additional incentive to directors and employees by facilitating their purchase of Common Stock. The Option Plan has a term of 10 years from the date of its approval in April 1997, after which no awards may be made. The Option Plan was amended in 1999 and again in 2002.
99
The Option Plan is accounted for in accordance with the provisions of APB No. 25, “Accounting for Stock Issued to Employees” and the Company has adopted the disclosure requirements of SFAS No. 123.123, “Accounting for Stock Based Compensation” which was amended by SFAS No. 148.
No compensation has been recognized forThe following table summarizes the Option Plan. Had compensation costs foractivity that occurred in the Option Plan been determined based on the fair value of the options at the grant date consistent with the method of SFASyears ended December 31, 2003, 2002 and 2001:
Weighted | ||||||||
Average | Number | |||||||
Exercise Price | of Options | |||||||
Options outstanding at January 1, 2001 | $ | 2.92 | 7,817,500 | |||||
Granted | 4.97 | 1,129,950 | ||||||
Exercised | 2.97 | (3,654,224 | ) | |||||
Canceled | 4.33 | (80,552 | ) | |||||
Options outstanding at December 31, 2001 | 3.31 | 5,212,674 | ||||||
Granted | 11.79 | 1,603,000 | ||||||
Exercised | 3.16 | (1,345,563 | ) | |||||
Canceled | 3.69 | (28,937 | ) | |||||
Options outstanding at December 31, 2002 | 5.84 | 5,441,174 | ||||||
Granted | 14.64 | 1,099,094 | ||||||
Exercised | 4.13 | (1,033,951 | ) | |||||
Canceled | 8.41 | (80,447 | ) | |||||
Options outstanding at December 31, 2003 | 7.87 | 5,425,870 | ||||||
82100
No. 123, the Company’s earnings per share for the year ended December 31, 2002, 2001, and 2000 would have been as follows (in thousands, except per share data):
2002 | 2001 | 2000 | |||||||||||
Net Earnings | |||||||||||||
As reported | $ | 129,343 | $ | 82,940 | $ | 28,934 | |||||||
Pro forma | $ | 127,854 | $ | 82,133 | $ | 28,616 | |||||||
Basic earnings per share | |||||||||||||
As reported | $ | 4.43 | $ | 2.99 | $ | 1.06 | |||||||
Pro forma | $ | 4.38 | $ | 2.96 | $ | 1.04 | |||||||
Diluted earnings per share | |||||||||||||
As reported | $ | 4.18 | $ | 2.78 | $ | 1.05 | |||||||
Pro forma | $ | 4.13 | $ | 2.75 | $ | 1.03 |
The fair value of each option grant is estimated using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in 2002, 2001, and 2000, respectively: dividend yield of 1.60%; expected volatility of 44.29%, 50.08%, and 49.91%; a risk-free rate of 4.13%, 5.11%, and 6.23%; an expected life of 5.0 years; and a fair value per option of $9.13, $6.04, and $3.98.
83
The following table summarizes the activity that occurred in the years ended December 31, 2002, 2001, 2000, 1999, 1998, and 1997:
Weighted | Number | |||||||
Average | of | |||||||
Grant Price | Options | |||||||
Options outstanding at January 1, 1997 | $ | — | — | |||||
Granted | 5.78 | 2,493,675 | ||||||
Canceled | 5.78 | (23,625 | ) | |||||
Options outstanding at December 31, 1997 | 5.78 | 2,470,050 | ||||||
Granted | 9.49 | 208,480 | ||||||
Canceled | 5.78 | (47,250 | ) | |||||
Options outstanding at December 31, 1998 | 6.07 | 2,631,280 | ||||||
Granted | 10.71 | 1,015,950 | ||||||
Exercised | 5.85 | (67,102 | ) | |||||
Canceled | 8.90 | (22,270 | ) | |||||
Options outstanding at December 31, 1999 | 7.38 | 3,557,858 | ||||||
Granted | 4.13 | 1,109,025 | ||||||
Exercised | 5.78 | (34,875 | ) | |||||
Returned | 10.80 | (708,525 | ) | |||||
Canceled | 9.73 | (14,737 | ) | |||||
Options outstanding at December 31, 2000 | 5.84 | 3,908,746 | ||||||
Granted | 9.93 | 564,975 | ||||||
Exercised | 5.95 | (1,827,114 | ) | |||||
Canceled | 8.67 | (40,275 | ) | |||||
Options outstanding at December 31, 2001 | $ | 6.61 | 2,606,332 | |||||
Granted | 23.59 | 799,900 | ||||||
Exercised | 6.33 | (672,782 | ) | |||||
Canceled | 7.38 | (14,468 | ) | |||||
Options outstanding at December 31, 2002 | $ | 11.68 | 2,718,982 | |||||
84
Note 22 – Stock Option and Purchase Plans, and other Compensation Plans (continued)
The following information pertains to the stock options issued pursuant to the Option Plan but not exercised at December 31, 2002:2003:
Weighted Average | Number | Weighted Average | Number | |||||||||||||||||||||||||
Number of Options | Remaining | Exercisable at | Number of Options | Remaining | Exercisable at | |||||||||||||||||||||||
Outstanding at | Contractual | December 31, | Outstanding at | Contractual | December 31, | |||||||||||||||||||||||
Grant Price | Grant Price | December 31, 2002 | Life (years) | 2002 | Grant Price | December 31, 2003 | Life (years) | 2003 | ||||||||||||||||||||
$ | 3.51 | 236,194 | 7.50 | 46,420 | 1.76 | 355,013 | 6.50 | 107,375 | ||||||||||||||||||||
3.92 | 674,697 | 5.00 | 165,913 | 1.96 | 999,563 | 4.00 | 329,063 | |||||||||||||||||||||
5.78 | 76,500 | 1.34 | 76,500 | 2.89 | 77,022 | 0.34 | 77,022 | |||||||||||||||||||||
6.40 | 116,867 | 7.06 | 15,617 | 3.20 | 183,738 | 6.06 | 48,734 | |||||||||||||||||||||
8.64 | 18,295 | 5.05 | 18,295 | 4.32 | 20,744 | 4.05 | 20,744 | |||||||||||||||||||||
9.55 | 23,700 | 5.70 | 23,700 | 4.77 | 16,200 | 4.70 | 16,200 | |||||||||||||||||||||
9.73 | 180,000 | 8.06 | — | 4.83 | 330,958 | 7.06 | 60,954 | |||||||||||||||||||||
10.03 | 363,937 | 6.57 | 10,125 | 5.01 | 647,745 | 5.57 | 125,409 | |||||||||||||||||||||
10.59 | 220,692 | 6.49 | 97,198 | 5.29 | 221,646 | 5.49 | 221,646 | |||||||||||||||||||||
10.64 | 1,800 | 6.39 | 1,800 | 5.32 | 1,800 | 5.39 | 1,800 | |||||||||||||||||||||
12.13 | 7,200 | 6.13 | 7,200 | 6.06 | 9,000 | 5.13 | 9,000 | |||||||||||||||||||||
21.13 | 5,400 | 0.33 | 5,400 | 11.80 | 1,472,531 | 6.66 | 539,682 | |||||||||||||||||||||
23.61 | 793,700 | 7.66 | — | 12.27 | 882,934 | 9.21 | — | |||||||||||||||||||||
24.72 | 206,976 | 9.50 | — | |||||||||||||||||||||||||
2,718,982 | 468,168 | |||||||||||||||||||||||||||
5,425,870 | 1,557,629 | |||||||||||||||||||||||||||
Stock Purchase Plan |
Stock Purchase Plan
Under the Employee Stock Purchase Plan (“Purchase Plan”), eligible participants, upon providing evidence of a purchase of the Company’s common shares from any third party on the open market, receive a payment from the Company equal to 15% of the share price. The Purchase Plan includes limitations on the maximum reimbursement to a participant during a year. The Purchase Plan has not been designed to comply with the requirements of the Internal Revenue Code with respect to employee stock purchase plans. During 2003, 2002 2001 and 2000,2001, respectively, the Company spent approximately $43,900, $42,500, $19,000, and $27,000$19,000 on the Purchase Plan.
Incentive Compensation Plan |
The Incentive Compensation Plan (“Incentive Plan”) is administered by the compensation committee of the Company’s Board of Directors. Each year they decide which employees of the Company will be eligible to participate in the Incentive Plan and the size of the bonus pool. During 2003, 2002 and 2001 all six members of the executive management team were included in the Incentive Plan. During 2002, theThe Company spent $3.3$5.4 million,
101
Note 26 – Stock Option and Purchase Plans, and other Compensation Plans (continued)
$3.3 million and $2.0 million on the Incentive Plan.Plan for the years ended December 31, 2003, 2002 and 2001, respectively.
Incentive Stock Plan |
85Under the 2000 Incentive Stock Plan (“Stock Plan”), participants are issued common shares of the Company stock as compensation. The Company incurred expenses of approximately $833,000, $1.0 million and $618,000 on the Stock Plan, during 2003, 2002 and 2001, respectively. The Stock Plan was approved by the Company’s Board of Directors on June 19, 2000.
Note 27 – Quarterly Financial Data (Unaudited)
The following table represents summarized data for each of the quarters in 2003, 2002, and 2001 (in thousands, except earnings per share data) (certain per share results have been adjusted to conform the 2003 presentation):
2003 | ||||||||||||||||
First | Second | Third | Fourth | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
Interest income | $ | 124,792 | $ | 126,323 | $ | 135,185 | $ | 124,885 | ||||||||
Interest expense | 71,238 | 75,239 | 81,494 | 80,512 | ||||||||||||
Net interest income | 53,554 | 51,084 | 53,691 | 44,373 | ||||||||||||
Provision for losses | 7,887 | 6,772 | 3,355 | 2,067 | ||||||||||||
Net interest income after provision for losses | 45,667 | 44,312 | 50,336 | 42,306 | ||||||||||||
Loan administration | (25,609 | ) | (13,056 | ) | 7,462 | 12,543 | ||||||||||
Net gain on loan sales | 89,247 | 154,256 | 91,665 | 22,108 | ||||||||||||
Net gain on MSR sales | 1,261 | 320 | 44,619 | 21,102 | ||||||||||||
Other non-interest income | 10,678 | 11,387 | 11,655 | 18,123 | ||||||||||||
Non-interest expense | 57,571 | 65,489 | 65,963 | 60,252 | ||||||||||||
Earnings before income taxes | 63,673 | 131,730 | 139,774 | 59,930 | ||||||||||||
Provision for income taxes | 22,346 | 46,150 | 49,000 | 19,259 | ||||||||||||
Net earnings | $ | 41,327 | $ | 85,580 | $ | 90,774 | $ | 36,671 | ||||||||
Basic earnings per share | $ | 0.70 | $ | 1.44 | $ | 1.51 | $ | 0.60 | ||||||||
Diluted earnings per share | $ | 0.66 | $ | 1.34 | $ | 1.42 | $ | 0.57 | ||||||||
102
Note 27 – Quarterly Financial Data (Unaudited) (continued)
2002 | |||||||||||||||||
First | Second | Third | Fourth | ||||||||||||||
Quarter | Quarter | Quarter | Quarter | ||||||||||||||
Interest income | $ | 114,821 | $ | 109,152 | $ | 113,175 | $ | 112,964 | |||||||||
Interest expense | 65,663 | 62,622 | 67,050 | 68,545 | |||||||||||||
Net interest income | 49,158 | 46,530 | 46,125 | 44,419 | |||||||||||||
Provision for losses | 7,768 | 3,183 | 6,462 | 9,713 | |||||||||||||
Net interest income after provision for losses | 41,390 | 43,347 | 39,663 | 34,706 | |||||||||||||
Loan administration | 780 | 5,508 | (793 | ) | (9,773 | ) | |||||||||||
Net gain on loan sales | 50,418 | 24,711 | 42,385 | 75,098 | |||||||||||||
Net gain on MSR sales | 650 | 10,179 | 2,935 | 710 | |||||||||||||
Other non-interest income | 6,457 | 5,840 | 7,262 | 12,054 | |||||||||||||
Non-interest expense | 60,268 | 48,772 | 50,305 | 62,929 | |||||||||||||
Earnings before tax provision and cumulative effect of a change in accounting principle | 39,427 | 40,813 | 41,147 | 49,866 | |||||||||||||
Provision for income taxes | 13,904 | 14,395 | 14,527 | 17,800 | |||||||||||||
Earnings before a cumulative effect of a change in accounting principle | 25,523 | 26,418 | 26,620 | 32,066 | |||||||||||||
Cumulative effect of a change in accounting principle | — | — | 18,716 | — | |||||||||||||
Net earnings | $ | 25,523 | $ | 26,418 | $ | 45,336 | $ | 32,066 | |||||||||
Earnings per share before cumulative effect of a change in accounting principle | |||||||||||||||||
Basic | $ | 0.45 | $ | 0.45 | $ | 0.45 | $ | 0.55 | |||||||||
Diluted | $ | 0.42 | $ | 0.43 | $ | 0.43 | $ | 0.51 | |||||||||
Earnings per share from cumulative effect of a change in accounting principle | |||||||||||||||||
Basic | — | — | $ | 0.32 | — | ||||||||||||
Diluted | — | — | $ | 0.30 | — | ||||||||||||
Net earnings per share — Basic | $ | 0.45 | $ | 0.45 | $ | 0.77 | $ | 0.55 | |||||||||
Net earnings per share — Diluted | $ | 0.42 | $ | 0.43 | $ | 0.73 | $ | 0.51 | |||||||||
103
2001 | ||||||||||||||||
First | Second | Third | Fourth | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
Interest income | $ | 112,075 | $ | 108,564 | $ | 108,233 | $ | 109,899 | ||||||||
Interest expense | 86,761 | 84,476 | 79,121 | 74,683 | ||||||||||||
Net interest income | 25,314 | 24,088 | 29,112 | 35,216 | ||||||||||||
Provision for losses | 4,074 | 4,105 | 1,180 | 16,213 | ||||||||||||
Net interest income after provision for losses | 21,240 | 19,983 | 27,932 | 19,003 | ||||||||||||
Loan administration | 581 | (5,776 | ) | (4,244 | ) | (5,501 | ) | |||||||||
Net gain on loan sales | 26,122 | 47,072 | 46,600 | 71,939 | ||||||||||||
Net gain on MSR sales | 1,428 | (258 | ) | 737 | 324 | |||||||||||
Other non-interest income | 4,699 | 6,663 | 7,800 | 7,233 | ||||||||||||
Non-interest expense | 35,312 | 40,498 | 40,555 | 48,345 | ||||||||||||
Earnings before income taxes | 18,758 | 27,186 | 38,270 | 44,653 | ||||||||||||
Provision for income taxes | 6,861 | 9,690 | 13,703 | 15,673 | ||||||||||||
Net earnings | $ | 11,897 | $ | 17,496 | $ | 24,567 | $ | 28,980 | ||||||||
Basic earnings per share | $ | 0.23 | $ | 0.32 | $ | 0.45 | $ | 0.50 | ||||||||
Diluted earnings per share | $ | 0.21 | $ | 0.30 | $ | 0.41 | $ | 0.47 | ||||||||
Deferred Compensation Plan
The Deferred Compensation Plan allows employees to defer up to 25% of their annual compensation and directors to defer all of their compensation. Funds deferred remain the property of The Company and are placed in a trust. Participants may direct that their deferred amounts be invested in stock of The Company. Upon withdrawal, the participant has the option of receiving the stock or the proceeds of its sale at the market price at the time of withdrawal. There were no participants in this plan.
Incentive Stock Plan
Under the 2001 Restricted Stock Plan (“Stock Plan”), participants are issued common shares of the Company stock as compensation. The Company incurred expenses of approximately $1.0 million and $618,000 on the Stock Plan, during 2002 and 2001, respectively. The Stock Plan was approved by the Company’s Board of Directors on June 19, 2000.
86104
Note 23 – Quarterly Financial Data (Unaudited)
The following table represents summarized data for each of the quarters in 2002, 2001, and 2000 (in thousands, except earnings per share data)(certain per share results have been adjusted to conform the 2002 presentation):
2002 | ||||||||||||||||
Fourth | Third | Second | First | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
Interest income | $ | 112,963 | $ | 113,175 | $ | 109,152 | $ | 114,821 | ||||||||
Interest expense | 68,544 | 67,050 | 62,622 | 65,663 | ||||||||||||
Net interest income | 44,419 | 46,125 | 46,530 | 49,158 | ||||||||||||
Provision for losses | 10,118 | 6,868 | 3,589 | 8,174 | ||||||||||||
Net interest income after provision for losses | 34,301 | 39,257 | 42,941 | 40,984 | ||||||||||||
Loan administration | (9,773 | ) | (793 | ) | 5,508 | 780 | ||||||||||
Net gain on loan sales | 75,503 | 42,791 | 25,117 | 50,824 | ||||||||||||
Net gain on MSR sales | 710 | 2,935 | 10,179 | 650 | ||||||||||||
Other non-interest income | 12,054 | 7,262 | 5,840 | 6,457 | ||||||||||||
Non-interest expense | 62,929 | 50,305 | 48,772 | 60,268 | ||||||||||||
Earnings before tax provision and cumulative effect of a change in accounting principle | 49,866 | 41,147 | 40,813 | 39,427 | ||||||||||||
Provision for federal income taxes | 17,800 | 14,527 | 14,395 | 13,904 | ||||||||||||
Earnings before a cumulative effect of a change in accounting principle | 32,066 | 26,620 | 26,418 | 25,523 | ||||||||||||
Cumulative effect of a change in accounting principle | — | 18,716 | — | — | ||||||||||||
Net earnings | $ | 32,066 | $ | 45,336 | $ | 26,418 | $ | 25,523 | ||||||||
87
2002 | |||||||||||||||||
Fourth | Third | Second | First | ||||||||||||||
Quarter | Quarter | Quarter | Quarter | ||||||||||||||
Earnings per share before cumulative effect of a change in accounting principle | |||||||||||||||||
Basic | $ | 1.09 | $ | 0.91 | $ | 0.90 | $ | 0.89 | |||||||||
Diluted | $ | 1.03 | $ | 0.87 | $ | 0.85 | $ | 0.83 | |||||||||
Earnings per share from cumulative effect of a change in accounting principle | |||||||||||||||||
Basic | — | $ | 0.64 | — | — | ||||||||||||
Diluted | — | $ | 0.60 | — | — | ||||||||||||
Net earnings per share — Basic | $ | 1.09 | $ | 1.55 | $ | 0.90 | $ | 0.89 | |||||||||
Net earnings per share — Diluted | $ | 1.03 | $ | 1.47 | $ | 0.85 | $ | 0.83 | |||||||||
88
2001 | ||||||||||||||||
Fourth | Third | Second | First | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
Interest income | $ | 109,899 | $ | 108,233 | $ | 108,564 | $ | 112,075 | ||||||||
Interest expense | 74,683 | 79,121 | 84,476 | 86,761 | ||||||||||||
Net interest income | 35,216 | 29,112 | 24,088 | 25,314 | ||||||||||||
Provision for losses | 18,120 | 3,086 | 6,011 | 5,980 | ||||||||||||
Net interest income after provision for losses | 17,096 | 26,026 | 18,077 | 19,334 | ||||||||||||
Loan administration | (5,501 | ) | (4,244 | ) | (5,776 | ) | 581 | |||||||||
Net gain on loan sales | 73,846 | 48,506 | 48,978 | 28,028 | ||||||||||||
Net gain on MSR sales | 324 | 737 | (258 | ) | 1,428 | |||||||||||
Other non-interest income | 7,233 | 7,800 | 6,663 | 4,699 | ||||||||||||
Non-interest expense | 48,345 | 40,555 | 40,498 | 35,312 | ||||||||||||
Earnings before income taxes | 44,653 | 38,270 | 27,186 | 18,758 | ||||||||||||
Provision for federal income taxes | 15,673 | 13,703 | 9,690 | 6,861 | ||||||||||||
Net earnings | $ | 28,980 | $ | 24,567 | $ | 17,496 | $ | 11,897 | ||||||||
Basic earnings per share | $ | 1.01 | $ | 0.89 | $ | 0.64 | $ | 0.45 | ||||||||
Diluted earnings per share | $ | 0.95 | $ | 0.82 | $ | 0.60 | $ | 0.41 | ||||||||
89
2000 | ||||||||||||||||
Fourth | Third | Second | First | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
Interest income | $ | 105,897 | $ | 104,424 | $ | 95,378 | $ | 75,936 | ||||||||
Interest expense | 81,640 | 79,784 | 71,992 | 56,710 | ||||||||||||
Net interest income | 24,247 | 24,640 | 23,386 | 19,226 | ||||||||||||
Provision for losses | 2,258 | 2,400 | 4,352 | 1,566 | ||||||||||||
Net interest income after provision for losses | 21,999 | 22,240 | 19,034 | 17,660 | ||||||||||||
Loan administration | 3,303 | 3,530 | 4,476 | 4,444 | ||||||||||||
Net gain on loan sales | 12,232 | 4,170 | 3,345 | 2,183 | ||||||||||||
Net gain on MSR sales | 3,323 | 5,335 | 5,596 | 320 | ||||||||||||
Other non-interest income | 126 | 4,471 | 3,692 | 4,807 | ||||||||||||
Non-interest expense | 29,216 | 25,638 | 22,686 | 23,452 | ||||||||||||
Earnings before income taxes | 11,767 | 14,108 | 13,457 | 5,962 | ||||||||||||
Provision for federal income taxes | 4,237 | 5,088 | 4,840 | 2,195 | ||||||||||||
Net earnings | $ | 7,530 | $ | 9,020 | $ | 8,617 | $ | 3,767 | ||||||||
Basic earnings per share | $ | 0.28 | $ | 0.34 | $ | 0.31 | $ | 0.13 | ||||||||
Diluted earnings per share | $ | 0.28 | $ | 0.33 | $ | 0.31 | $ | 0.13 | ||||||||
90
Note 2428 – Holding Company Only Financial Statements
The following are unconsolidated financial statements for the Company. These condensed financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto.
Flagstar Bancorp, Inc.
December 31, | December 31, | |||||||||||||||||||
2002 | 2001 | 2003 | 2002 | |||||||||||||||||
Assets | Assets | Assets | ||||||||||||||||||
Cash and cash equivalents | $ | 3,353 | $ | 4,367 | Cash and cash equivalents | $ | 2,475 | $ | 3,353 | |||||||||||
Investment in subsidiaries | 516,473 | 357,949 | Investment in subsidiaries | 799,961 | 516,473 | |||||||||||||||
Deferred tax benefit | 1,158 | 7,813 | Deferred tax benefit | 4 | 1,158 | |||||||||||||||
Other assets | 3,790 | 2,508 | Other assets | 4,910 | 3,790 | |||||||||||||||
Total assets | $ | 524,774 | $ | 372,637 | Total assets | $ | 807,350 | $ | 524,774 | |||||||||||
Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | ||||||||||||||||||
Liabilities | Liabilities | Liabilities | ||||||||||||||||||
Junior subordinated debentures | $ | 102,836 | $ | 77,062 | Junior subordinated debentures | $ | 154,390 | $ | 102,836 | |||||||||||
Total interest paying liabilities | 102,836 | 77,062 | Total interest paying liabilities | 154,390 | 102,836 | |||||||||||||||
Other liabilities | 2,992 | 4,087 | Other liabilities | 450 | 2,992 | |||||||||||||||
Total liabilities | 105,828 | 81,149 | Total liabilities | 154,840 | 105,828 | |||||||||||||||
Stockholders’ Equity | Stockholders’ Equity | Stockholders’ Equity | ||||||||||||||||||
Common stock | 296 | 191 | Common stock | 607 | 592 | |||||||||||||||
Additional paid in capital | 29,443 | 22,049 | Additional paid in capital | 35,394 | 29,147 | |||||||||||||||
Retained earnings | 389,207 | 269,248 | Retained earnings | 616,509 | 389,207 | |||||||||||||||
Total stockholders’ equity | 418,946 | 291,488 | Total stockholders’ equity | 652,510 | 418,946 | |||||||||||||||
Total liabilities and stockholders’ equity | $ | 524,774 | $ | 372,637 | Total liabilities and stockholders’ equity | $ | 807,350 | $ | 524,774 | |||||||||||
91105
Flagstar Bancorp, Inc.
For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||||||
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |||||||||||||||||||||||
Income | Income | Income | ||||||||||||||||||||||||||
Dividends from subsidiaries | $ | 6,000 | $ | 8,000 | $ | 23,379 | Dividends from subsidiaries | $ | 24,000 | $ | 6,000 | $ | 8,000 | |||||||||||||||
Interest | 234 | 220 | 220 | Interest | 1,515 | 234 | 220 | |||||||||||||||||||||
Total | 6,234 | 8,220 | 23,599 | Total | 25,515 | 6,234 | 8,220 | |||||||||||||||||||||
Expenses | Expenses | Expenses | ||||||||||||||||||||||||||
Interest | 7,353 | 7,321 | 7,321 | Interest | 13,107 | 7,353 | 7,321 | |||||||||||||||||||||
General and administrative | 809 | 1,459 | 591 | General and administrative | 1,683 | 809 | 1,459 | |||||||||||||||||||||
Total | 8,162 | 8,780 | 7,912 | Total | 14,790 | 8,162 | 8,780 | |||||||||||||||||||||
Earnings before undistributed earnings of subsidiaries | Earnings before undistributed earnings of subsidiaries | (1,928 | ) | (560 | ) | 15,687 | Earnings before undistributed earnings of subsidiaries | 10,725 | (1,928 | ) | (560 | ) | ||||||||||||||||
Equity in undistributed earnings of subsidiaries | Equity in undistributed earnings of subsidiaries | 128,503 | 80,505 | 10,287 | Equity in undistributed earnings of subsidiaries | 238,981 | 128,503 | 80,505 | ||||||||||||||||||||
Earnings before federal income tax benefit | Earnings before federal income tax benefit | 126,575 | 79,945 | 25,974 | Earnings before federal income tax benefit | 249,706 | 126,575 | 79,945 | ||||||||||||||||||||
Federal income tax benefit | Federal income tax benefit | (2,768 | ) | (2,995 | ) | (2,960 | ) | Federal income tax benefit | (4,646 | ) | (2,768 | ) | (2,995 | ) | ||||||||||||||
Net earnings | Net earnings | $ | 129,343 | $ | 82,940 | $ | 28,934 | Net earnings | $ | 254,352 | $ | 129,343 | $ | 82,940 | ||||||||||||||
92106
Flagstar Bancorp, Inc.
For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||||||
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |||||||||||||||||||||||
Operating Activities | Operating Activities | Operating Activities | ||||||||||||||||||||||||||
Net earnings | Net earnings | $ | 129,343 | $ | 82,940 | $ | 28,934 | Net earnings | $ | 254,352 | $ | 129,343 | $ | 82,940 | ||||||||||||||
Adjustments to reconcile net earnings to net cash provided by operating activities | Adjustments to reconcile net earnings to net cash provided by operating activities | Adjustments to reconcile net earnings to net cash provided by operating activities | ||||||||||||||||||||||||||
Equity in undistributed earnings | (128,503 | ) | (80,505 | ) | (10,287 | ) | Equity in undistributed earnings | (238,981 | ) | (128,503 | ) | (80,505 | ) | |||||||||||||||
Change in other assets | (723 | ) | 227 | 9 | Change in other assets | (1,130 | ) | (723 | ) | 227 | ||||||||||||||||||
Provision for deferred tax benefit | 6,655 | (2,995 | ) | (2,960 | ) | Provision for deferred tax benefit | 1,154 | 6,655 | (2,995 | ) | ||||||||||||||||||
Change in other liabilities | (1,095 | ) | 4,053 | (63 | ) | Change in other liabilities | (2,542 | ) | (1,095 | ) | 4,053 | |||||||||||||||||
Net cash provided by operating activities | 5,677 | 3,720 | 15,633 | Net cash provided by operating activities | 12,853 | 5,677 | 3,720 | |||||||||||||||||||||
Investing Activities | Investing Activities | Investing Activities | ||||||||||||||||||||||||||
Net change in other investments | (561 | ) | — | — | Net change in other investments | 10 | (561 | ) | — | |||||||||||||||||||
Net change in investment in subsidiaries | (30,019 | ) | (11,576 | ) | (1,092 | ) | Net change in investment in subsidiaries | (47,634 | ) | (30,019 | ) | (11,576 | ) | |||||||||||||||
Net cash used in investment activities | (30,580 | ) | (11,576 | ) | (1,092 | ) | Net cash used in investment activities | (47,624 | ) | (30,580 | ) | (11,576 | ) | |||||||||||||||
Cash Flows From Financing Activities | Cash Flows From Financing Activities | Cash Flows From Financing Activities | ||||||||||||||||||||||||||
Provides from the issuance of junior subordinated debentures | 25,774 | — | — | Proceeds from the issuance of junior subordinated debentures | 51,554 | 25,774 | — | |||||||||||||||||||||
Net proceeds from common stock issued | — | 417 | — | Net proceeds from common stock issued | — | — | 417 | |||||||||||||||||||||
Proceeds from exercise of stock options | 4,890 | 10,869 | 212 | Proceeds from exercise of stock options and grants issued | 444 | 4,890 | 10,869 | |||||||||||||||||||||
Tax benefit from stock options exercised | 2,609 | 5,460 | — | Tax benefit from stock options exercised | 8,945 | 2,609 | 5,460 | |||||||||||||||||||||
Common stock repurchased | — | — | (13,155 | ) | Dividends paid | (27,050 | ) | (9,384 | ) | (5,029 | ) | |||||||||||||||||
Dividends paid | (9,384 | ) | (5,029 | ) | (4,875 | ) | ||||||||||||||||||||||
Net cash provided by financing activities | 33,893 | 23,889 | 11,717 | |||||||||||||||||||||||||
Net cash provided by (used in) financing activities | 23,889 | 11,717 | (17,818 | ) | ||||||||||||||||||||||||
Net (decrease) increase in cash and cash equivalents | Net (decrease) increase in cash and cash equivalents | (1,014 | ) | 3,862 | (3,277 | ) | Net (decrease) increase in cash and cash equivalents | (878 | ) | (1,014 | ) | 3,862 | ||||||||||||||||
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | 4,367 | 505 | 3,782 | Cash and cash equivalents at beginning of period | 3,353 | 4,367 | 505 | ||||||||||||||||||||
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 3,353 | $ | 4,367 | $ | 505 | Cash and cash equivalents at end of period | $ | 2,475 | $ | 3,353 | $ | 4,367 | ||||||||||||||
93107
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
None.ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that such disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission.
The information contained under the section captioned “Proposal 1 –— Election of Directors” in the Company’s Proxy Statement for the Company’s 20032004 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference. Reference is also made to the information appearing in Part I –— “Executive Officers,” which is incorporated herein by reference.
The information required by this Item pursuant to Item 405 of Regulation S-K will appear under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement, which section is incorporated herein by reference.
Information required by this Item pursuant to Item 401(h) and 401(i) of Regulation S-K relating to an audit committee financial expert and identification of the Audit Committee of our Board of Directors will appear under the heading “Meetings and Committees and Compensation of Directors” in our Proxy Statement, which section is incorporated herein by reference.
We have adopted a written code of ethics that applies to our principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions. Our code of ethics, which also applies to our directors and all of our officers and employees, can be found on our web site, which is located at www.flagstar.com. We intend to make all required disclosures concerning any amendments to, or waivers from, our code of ethics on our web site.
ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this item is incorporated herein by reference to the sections of the Proxy Statement captioned “Meetings and Committees and Compensation of Directors”, “Executive Compensation and Other Benefits”, “Report of the Compensation Committee”, and “Stock Performance Graph”.
108
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to the section of the Proxy Statement captioned “Outstanding Voting Securities.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the section of the Proxy Statement captioned “Election of Directors”, “Meetings and Committees and Compensation of Directors” and “Certain Transactions”.
(a) Evaluation of Disclosure Controls and Procedures.ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES We maintain disclosure controls and procedures (as defined in Securities Exchange Act 1934 Rules 13a-14(c) and 15d-14(c)) that are designed to ensure that
The information required to be disclosed in our Exchange Act reportsby this item is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Within 90 days priorincorporated herein by reference to the date of this annual report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operationsection of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.Proxy Statement captioned “Independent Auditors”.
(b) Changes in Internal Controls. There have not been any significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and, therefore, no corrective actions were taken.
94109
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS |
(a) The following documents are filed as a part of this report:
Exhibit No. | Description | |||
1. | Financial Statements. | |||
The following consolidated financial statements of the Company are included | ||||
Management’s Report | ||||
Report of Independent Certified Public Accountant | ||||
Consolidated Statements of Financial Condition — December 31, | ||||
Consolidated Statements of Earnings for the years ended December 31, 2003, 2002, | ||||
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, | ||||
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2003, 2002, | ||||
Notes to Consolidated Financial Statements | ||||
| Restated Certificate of Incorporation of the | |||
3.2 | Bylaws of the |
incorporated herein by reference). | ||||
10.1 | Form of Employment Agreements separately entered into between Flagstar Bank and each of Messrs. Thomas Hammond, Mark Hammond, Rondeau, and Carrie and Mrs. Hammond and Mrs. Anderson (previously filed as Exhibit 10.4 to the Company’s Form S-1 Registration Statement and incorporated herein by reference). | |||
10.2 | First Amended Employee Stock Option and Appreciation Rights Plan of Flagstar Bank, as amended and restated (previously filed as Exhibit 10.5 to the Company’s Form S-1 Registration Statement and incorporated herein by reference). | |||
10.3 | Deferred Compensation Plan of Flagstar Bank (previously filed as Exhibit 10.7 to the Company’s Form S-1 Registration Statement and incorporated herein by reference). | |||
10.4 | Flagstar Bancorp, Inc. 1997 Employees and Directors Stock Option Plan as amended (previously filed as Exhibit 10.2 to the Company’s Form S-1 Registration Statement, and incorporated herein by reference). | |||
10.5 | Flagstar Bank 401(k) Plan (previously filed as Exhibit 4.1 to the Company’s Form S-3 Registration Statement, dated April 30, 1999, and incorporated herein by reference). | |||
10.6 | Flagstar Bancorp, Inc. 2000 Stock Incentive Plan as amended (previously filed as Exhibit 4.1 to the Company’s Form S-3 Registration Statement, dated May 30, 2002, and incorporated herein by reference). | |||
21. | List of Subsidiaries of the | |||
31.1 | Certification of Chief Executive Officer | |||
31.2 | Certification of Chief Financial Officer | |||
32.1 | Section 906 Certification, as furnished by the Chief Executive Officer pursuant to SEC. Release No. 34-47551 | |||
32.2 | Section 906 Certification, as furnished by the Chief Financial Officer pursuant to SEC. Release No. 34-47551 |
110
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS (continued) |
(b) Other than certain information furnished as Regulation F-D disclosure under Items 9 and 12 of Form 8-K, the Company submitted no Current Reports on Form 8-K during the fourth Quarter of 2003, and therefore does not include any such reports as exhibits to this Annual Report on Form 10-K.
Flagstar Bancorp, Inc., will furnish to any stockholder a copy of any of the exhibits listed above upon written request and upon payment of a specified reasonable fee, which fee shall be equal to the Company’s reasonable expenses in furnishing the exhibit to the stockholder. Requests for exhibits and information regarding the applicable fee should be directed to: Michael W. Carrie, Executive Vice President,Director, at the address of the principal executive offices set forth on the cover of this Report on Form 10-K.
(b) Reports on Form 8-K.
None.
95111
Pursuant to the requirements of Section 13 or 15(d)15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 31, 2003.12, 2004.
FLAGSTAR BANCORP, INC. |
By: | /s/ MARK T. HAMMOND |
Mark T. Hammond | |
President, and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 31, 2003.12, 2004.
SIGNATURE | TITLE | |||
By: | /s/ THOMAS J. HAMMOND Thomas J. Hammond | Chairman of the Board | ||
By: | /s/ MARK T. HAMMOND Mark T. Hammond | Vice Chairman of the Board, President, and Chief Executive Officer | ||
By: | /s/ MICHAEL W. CARRIE Michael W. Carrie | Director, Executive | ||
By: | /s/ KIRSTIN A. HAMMOND Kirstin A. Hammond | Executive | ||
By: | /s/ ROBERT O. RONDEAU, JR. Robert O. Rondeau, Jr. | Executive | ||
By: | /s/ CHARLES BAZZY Charles Bazzy | Director | ||
By: | /s/ JAMES D. COLEMAN James D. Coleman | Director | ||
By: | /s/ | Director | ||
By: | /s/ | Director | ||
By: | /s/ C. MICHAEL KOJAIAN C. Michael Kojaian | Director | ||
By: | /s/ | |||
John R. Kersten | Director |
96
SECTION 302 CERTIFICATION
I, Mark T. Hammond certify that:
Date: March 31, 2003
97
SECTION 302 CERTIFICATION
I, Michael W. Carrie certify that:
Date: March 31, 2003
98112
EXHIBIT INDEX
EXHIBIT NO. | ||||
DESCRIPTION | ||||
1. | Financial Statements. | |||
The following consolidated financial statements of the Company are included this Form 10-K under Item 8: | ||||
Management’s Report | ||||
Report of Independent Certified Public Accountant | ||||
Consolidated Statements of Financial Condition — December 31, | ||||
Consolidated Statements of Earnings for the years ended December 31, 2003, 2002, | ||||
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, | ||||
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2003, 2002, | ||||
Notes to Consolidated Financial Statements | ||||
Restated Certificate of Incorporation of the Company (previously filed as Exhibit 3.1 to the Company’s Form S-1 Registration Statement and incorporated herein by reference). | ||||
3.2 | Bylaws of the Company (previously filed as Exhibit 3.2 to the Company’s Form S-1 Registration Statement and incorporated herein by reference). | |||
10.1 | Form of Employment Agreements separately entered into between Flagstar Bank and each of Messrs. Thomas Hammond, Mark Hammond, Rondeau, and Carrie and Mrs. Hammond and Mrs. Anderson (previously filed as Exhibit 10.4 to the Company’s Form S-1 Registration Statement and incorporated herein by reference). | |||
First Amended Employee Stock Option and Appreciation Rights Plan of Flagstar Bank, as amended and restated (previously filed as Exhibit 10.5 to the Company’s Form S-1 Registration Statement and incorporated herein by reference). | ||||
Deferred Compensation Plan of Flagstar Bank (previously filed as Exhibit 10.7 to the Company’s Form S-1 Registration Statement and incorporated herein by reference). | ||||
10.4 | Flagstar Bancorp, Inc. 1997 Employees and Directors Stock Option Plan as amended (previously filed as Exhibit 10.2 to the Company’s Form S-1 Registration Statement, and incorporated herein by reference). | |||
10.5 | Flagstar Bank 401(k) Plan (previously filed as Exhibit 4.1 to the Company’s Form S-3 Registration Statement, dated April 30, 1999, and incorporated herein by reference). | |||
10.6 | Flagstar Bancorp, Inc. 2000 Stock Incentive Plan as amended (previously filed as Exhibit 4.1 to the Company’s Form S-3 Registration Statement, dated May 30, 2002, and incorporated herein by reference). | |||
21. | List of Subsidiaries of the Company. | |||
31.1 | Certification of Chief Executive Officer | |||
31.2 | Certification of Chief Financial Officer |
113
EXHIBIT NO. | DESCRIPTION | |||
32.1 | Section 906 Certification, as furnished by the Chief Executive Officer pursuant to SEC. Release No. 34-47551 | |||
Section 906 Certification, as furnished by the Chief Financial Officer pursuant to SEC. Release No. 34-47551 |
99(b) Other than certain information furnished as Regulation F-D disclosure under Items 9 and 12 of Form 8-K, the Company submitted no Current Reports on Form 8-K during the fourth Quarter of 2003, and therefore does not include any such reports as exhibits to this Annual Report on Form 10-K.
114