The unaudited condensed consolidated financial statements of the Registrant are as follows: | | | Consolidated Statements of Financial Condition — March 31, 2004 (unaudited) and December 31, 2003. | | | | | Unaudited Consolidated Statements of Earnings — For the three months ended March 31, 2004 and 2003. | | | | | Unaudited Consolidated Statements of Cash Flows — For the three months ended March 31, 2004 and 2003. | | | | | Consolidated Statements of Stockholders’ Equity — For the three months ended March 31, 2004 (unaudited) and for the year ended December 31, 2003. | | | | | Unaudited Condensed Notes to Consolidated Financial Statements. |
This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company including statements preceded by, followed by or that include the words or phrases 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.
There are a number of important factors that could cause future results to differ materially from historical 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 in the states in which the Company does business, are less favorable than expected; (5) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions adversely affect the businesses in which the Company is engaged; (7) changes and trends in the securities markets; (8) a delayed or incomplete resolution of regulatory issues; (9) the impact of reputational risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity; and (10) the outcome of regulatory and legal investigations and proceedings.
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.
Flagstar Bancorp, Inc. Consolidated Statements of Financial Condition
(in thousands)
| | | | | | | | | | | At March 31, | | At December 31, | | | 2004
| | 2003
| | | (unaudited) | | | | | Assets | | | | | | | | | Cash and cash equivalents | | $ | 205,450 | | | $ | 148,417 | | Mortgage-backed securities held to maturity | | | 27,852 | | | | 30,678 | | Investment securities held to maturity | | | 15,196 | | | | 14,144 | | Mortgage loans available for sale | | | 2,984,776 | | | | 2,759,551 | | Loans held for investment | | | 8,105,914 | | | | 6,840,252 | | Less: allowance for losses | | | (40,814 | ) | | | (36,017 | ) | | | | | | | | | | Investment loan portfolio, net | | | 8,065,100 | | | | 6,804,235 | | | | | | | | | | | Total interest earning assets | | | 11,092,924 | | | | 9,608,608 | | Accrued interest receivable | | | 48,811 | | | | 46,883 | | Federal Home Loan Bank stock | | | 227,428 | | | | 198,356 | | Repossessed assets | | | 36,348 | | | | 36,778 | | Repurchased assets | | | 18,695 | | | | 11,956 | | Premises and equipment | | | 161,999 | | | | 161,057 | | Mortgage servicing rights | | | 261,132 | | | | 260,128 | | Other assets | | | 132,910 | | | | 98,010 | | | | | | | | | | | Total assets | | $ | 12,185,697 | | | $ | 10,570,193 | | | | | | | | | | | Liabilities and Stockholders’ Equity | | | | | | | | | Liabilities | | | | | | | | | Deposit accounts | | $ | 6,075,328 | | | $ | 5,680,167 | | Federal Home Loan Bank advances | | | 4,067,409 | | | | 3,246,000 | | Long term debt | | | 155,740 | | | | 151,100 | | | | | | | | | | | Total interest bearing liabilities | | | 10,298,477 | | | | 9,077,267 | | Accrued interest payable | | | 15,980 | | | | 20,328 | | Undisbursed payments on loans serviced for others | | | 734,497 | | | | 475,261 | | Escrow accounts | | | 250,531 | | | | 178,472 | | Liability for checks issued | | | 58,952 | | | | 27,496 | | Federal income taxes payable | | | 87,655 | | | | 73,576 | | Other liabilities | | | 67,507 | | | | 63,110 | | | | | | | | | | | Total liabilities | | | 11,513,599 | | | | 9,915,510 | | Stockholders’ Equity | | | | | | | | | Common stock — $.01 par value, 80,000,000 shares authorized; 60,832,493 and 60,675,169 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively | | | 608 | | | | 607 | | Additional paid in capital | | | 36,150 | | | | 35,394 | | Accumulated other comprehensive income | | | (2,922 | ) | | | 2,173 | | Retained earnings | | | 638,262 | | | | 616,509 | | | | | | | | | | | Total stockholders’ equity | | | 672,098 | | | | 654,683 | | | | | | | | | | | Total liabilities and stockholders’ equity | | $ | 12,185,697 | | | $ | 10,570,193 | | | | | | | | | | |
— June 30, 2004 (unaudited) and December 31, 2003.The accompanying notes are an integral part of these statements.
3
| Flagstar Bancorp, Inc. Unaudited Consolidated Statements of Earnings
(in thousands, except per share data)
| | | | | | | | | | | For the quarter ended | | | March 31,
| | | 2004
| | 2003
| | | (unaudited) | Interest Income | | | | | | | | | Loans | | $ | 129,945 | | | $ | 121,235 | | Other | | | 778 | | | | 1,493 | | | | | | | | | | | Total | | | 130,723 | | | | 122,728 | | Interest Expense | | | | | | | | | Deposits | | | 34,049 | | | | 33,895 | | FHLB advances | | | 36,742 | | | | 28,454 | | Other | | | 8,955 | | | | 8,889 | | | | | | | | | | | Total | | | 79,746 | | | | 71,238 | | | | | | | | | | | Net interest income | | | 50,977 | | | | 51,490 | | Provision for losses | | | 9,302 | | | | 7,887 | | | | | | | | | | | Net interest income after provision for losses | | | 41,675 | | | | 43,603 | | Non-Interest Income | | | | | | | | | Loan administration | | | 8,232 | | | | (25,609 | ) | Net gain on loan sales | | | 32,132 | | | | 89,247 | | Net gain on sales of mortgage servicing rights | | | 21,785 | | | | 1,261 | | Other | | | 15,932 | | | | 12,742 | | | | | | | | | | | Total | | | 78,081 | | | | 77,641 | | Non-Interest Expense | | | | | | | | | Compensation and benefits | | | 27,109 | | | | 24,915 | | Occupancy and equipment | | | 17,485 | | | | 16,109 | | General and administrative | | | 17,785 | | | | 16,547 | | | | | | | | | | | Total | | | 62,379 | | | | 57,571 | | | | | | | | | | | Earnings before federal income taxes | | | 57,377 | | | | 63,673 | | Provision for federal income taxes | | | 20,420 | | | | 22,346 | | | | | | | | | | | Net Earnings | | $ | 36,957 | | | $ | 41,327 | | | | | | | | | | | Net earnings per share – basic | | $ | 0.61 | | | $ | 0.70 | | | | | | | | | | | Net earnings per share – diluted | | $ | 0.57 | | | $ | 0.66 | | | | | | | | | | |
— For the three and six months ended June 30, 2004 and 2003.The accompanying notes are an integral part of these statements.
4
| Flagstar Bancorp, Inc. Consolidated Statements of Stockholders’ Equity
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | Additional | | Other | | | | | | Total | | | Common | | Paid in | | Comprehensive | | Retained | | Stockholders’ | | | Stock
| | Capital
| | Income
| | Earnings
| | Equity
| 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 | | | | | | | | | | | | | | | | | | | 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 | | Net earnings | | | — | | | | — | | | | — | | | | 36,957 | | | | 36,957 | | Net unrealized (loss) on derivatives | | | — | | | | — | | | | (5,095 | ) | | | — | | | | (5,095 | ) | | | | | | | | | | | | | | | | | | | | | | Total comprehensive income | | | | | | | | | | | | | | | | | | | 31,862 | | Stock options exercised and grants issued, net | | | 1 | | | | 756 | | | | — | | | | — | | | | 757 | | Dividends paid ($0.25 per share) | | | — | | | | — | | | | — | | | | (15,204 | ) | | | (15,204 | ) | | | | | | | | | | | | | | | | | | | | | | Balance (unaudited) at March 31, 2004 | | $ | 608 | | | $ | 36,150 | | | $ | (2,922 | ) | | $ | 638,262 | | | $ | 672,098 | | | | | | | | | | | | | | | | | | | | | | |
— For the six months ended June 30, 2004 (unaudited) and for the year ended December 31, 2003.The accompanying notes are an integral part of these statements.
5
| Flagstar Bancorp, Inc.
Unaudited Consolidated Statements of Cash Flows
(in thousands)
| | | | | | | | | | | For the quarter ended | | | March 31,
| | | 2004
| | 2003
| Operating Activities | | | | | | | | | Net earnings | | $ | 36,957 | | | $ | 41,327 | | Adjustments to reconcile net earnings to net cash used in operating activities | | | | | | | | | Provision for losses | | | 9,302 | | | | 7,887 | | Provision for secondary market losses | | | 8,067 | | | | 2,179 | | Depreciation and amortization | | | 28,874 | | | | 55,372 | | FHLB stock dividends | | | (2,493 | ) | | | — | | Net gain on the sale of assets | | | (510 | ) | | | (882 | ) | Net gain on loan sales | | | (24,064 | ) | | | (89,247 | ) | Net gain on sales of mortgage servicing rights | | | (21,785 | ) | | | (1,261 | ) | Proceeds from sales of loans available for sale | | | 6,407,827 | | | | 13,972,870 | | Originations and repurchases of loans available for sale, net of principal repayments | | | (7,040,349 | ) | | | (15,718,790 | ) | Increase in accrued interest receivable | | | (1,928 | ) | | | (5,145 | ) | Increase in other assets | | | (49,471 | ) | | | (7,503 | ) | (Decrease) increase in accrued interest payable | | | (4,348 | ) | | | 152 | | Increase in the liability for checks issued | | | 31,456 | | | | 21,204 | | Increase (decrease) in federal income taxes payable | | | 16,823 | | | | (7,654 | ) | Increase (decrease) in other liabilities | | | 2,566 | | | | (1,627 | ) | | | | | | | | | | Net cash used in operating activities | | | (603,082 | ) | | | (1,731,118 | ) | Investing Activities | | | | | | | | | Purchase of other investments | | | (1,052 | ) | | | (1,255 | ) | Investment in mortgage backed securities, net of principal repayments | | | 2,827 | | | | (2,099 | ) | Origination of loans held for investment, net of principal repayments | | | (863,441 | ) | | | 476,423 | | Purchase of FHLB stock | | | (26,579 | ) | | | — | | Investment in unconsolidated subsidiary | | | 4,640 | | | | — | | Proceeds from the disposition of repossessed assets | | | 19,394 | | | | 10,179 | | Acquisitions of premises and equipment | | | (9,160 | ) | | | (11,746 | ) | Proceeds from the disposition of premises and equipment | | | 63 | | | | 10 | | Increase in mortgage servicing rights | | | (83,523 | ) | | | (117,510 | ) | Proceeds from the sale of mortgage servicing rights | | | 83,529 | | | | 120,102 | | | | | | | | | | | Net cash (used in) provided by investing activities | | | (873,302 | ) | | | 474,104 | | Financing Activities | | | | | | | | | Net increase in deposit accounts | | | 395,160 | | | | 805,077 | | Issuance of junior subordinated debt | | | — | | | | 50,000 | | Net increase in Federal Home Loan Bank advances | | | 821,409 | | | | 142,597 | | Net receipt of payments of loans serviced for others | | | 259,236 | | | | 198,831 | | Net receipt of escrow payments | | | 72,059 | | | | 55,502 | | Proceeds from the exercise of common stock options | | | 757 | | | | 576 | | Dividends paid to stockholders | | | (15,204 | ) | | | (2,967 | ) | | | | | | | | | | Net cash provided by financing activities | | | 1,533,417 | | | | 1,249,616 | | | | | | | | | | | Net increase (decrease) in cash and cash equivalents | | | 57,033 | | | | (7,398 | ) | Beginning cash and cash equivalents | | | 148,417 | | | | 126,969 | | | | | | | | | | | Ending cash and cash equivalents | | $ | 205,450 | | | $ | 119,571 | | | | | | | | | | |
The accompanying notes are an integral part of these financial statements
6
Flagstar Bancorp, Inc. Unaudited Consolidated Statements of Cash Flows (continued)
(in thousands)
| | | | | | | | | | | For the quarter ended | | | March 31,
| | | 2004
| | 2003
| Supplemental disclosure of cash flow information: | | | | | | | | | Loans receivable transferred to repossessed assets | | $ | 18,396 | | | $ | 20,257 | | | | | | | | | | | Total interest payments made on deposits and other borrowings | | $ | 84,094 | | | $ | 71,085 | | | | | | | | | | | Federal income taxes paid | | $ | 3,000 | | | $ | 29,970 | | | | | | | | | | | Loans held for sale transferred to loans held for investment | | $ | 314,362 | | | $ | 779,578 | | | | | | | | | | | Supplemental disclosure of non-cash financing information: | | | | | | | | | During the quarter ended March 31, 2004, the Company recorded a net market value adjustment for interest rate swaps of ($5,095). | | | | | | | | |
— For the six months ended June 30, 2004 and 2003.The accompanying notes are an integral part of these financial statements.
7
| Flagstar Bancorp, Inc. Unaudited Condensed Notes to Consolidated Financial StatementsStatements.
| Computation of Net Earnings Per Share | Certification of Chief Executive Officer under Section 302 | Certification of Chief Financial Officer under Section 302 | Certification of Chief Executive Officer relating to Form 10-Q | Certification of Chief Financial Officer relating to Form 10-Q | This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company including statements preceded by, followed by or that include the words or phrases 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. There are a number of important factors that could cause future results to differ materially from historical 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 in the states in which the Company does business, are less favorable than expected; (5) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions adversely affect the businesses in which the Company is engaged; (7) changes and trends in the securities markets; (8) a delayed or incomplete resolution of regulatory issues; (9) the impact of reputational risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity; and (10) the outcome of regulatory and legal investigations and proceedings. 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. 2
Flagstar Bancorp, Inc. Consolidated Statements of Financial Condition (in thousands) | | | | | | | | | | | At June 30, | | At December 31, | | | 2004
| | 2003
| | | (unaudited) | | | | | Assets | | | | | | | | | Cash and cash equivalents | | $ | 162,645 | | | $ | 148,417 | | Mortgage-backed securities held to maturity | | | 26,150 | | | | 30,678 | | Investment securities held to maturity | | | 15,352 | | | | 14,144 | | Mortgage loans available for sale | | | 2,157,845 | | | | 2,759,551 | | Loans held for investment | | | 8,723,075 | | | | 6,840,252 | | Less: allowance for losses | | | (41,704 | ) | | | (36,017 | ) | | | | | | | | | | Investment loan portfolio, net | | | 8,681,371 | | | | 6,804,235 | | | | | | | | | | | Total interest earning assets | | | 10,880,718 | | | | 9,608,608 | | Accrued interest receivable | | | 48,372 | | | | 46,883 | | Federal Home Loan Bank stock | | | 229,804 | | | | 198,356 | | Repossessed assets | | | 38,708 | | | | 36,778 | | Repurchased assets | | | 21,936 | | | | 11,956 | | Premises and equipment | | | 162,058 | | | | 161,057 | | Mortgage servicing rights | | | 236,211 | | | | 260,128 | | Other assets | | | 185,159 | | | | 98,010 | | | | | | | | | | | Total assets | | $ | 11,965,611 | | | $ | 10,570,193 | | | | | | | | | | | Liabilities and Stockholders’ Equity | | | | | | | | | Liabilities | | | | | | | | | Deposit accounts | | $ | 6,534,492 | | | $ | 5,680,167 | | Federal Home Loan Bank advances | | | 3,633,199 | | | | 3,246,000 | | Long term debt | | | 78,678 | | | | 151,100 | | | | | | | | | | | Total interest bearing liabilities | | | 10,246,369 | | | | 9,077,267 | | Accrued interest payable | | | 21,763 | | | | 20,328 | | Undisbursed payments on loans serviced for others | | | 492,374 | | | | 475,261 | | Escrow accounts | | | 303,430 | | | | 178,472 | | Liability for checks issued | | | 27,679 | | | | 27,496 | | Federal income taxes payable | | | 83,112 | | | | 73,576 | | Other liabilities | | | 81,063 | | | | 63,110 | | | | | | | | | | | Total liabilities | | | 11,255,790 | | | | 9,915,510 | | Stockholders’ Equity | | | | | | | | | Common stock — $.01 par value, 80,000,000 shares authorized; 61,140,804 and 60,675,169 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively | | | 612 | | | | 607 | | Additional paid in capital | | | 37,786 | | | | 35,394 | | Accumulated other comprehensive income | | | 7,209 | | | | 2,173 | | Retained earnings | | | 664,214 | | | | 616,509 | | | | | | | | | | | Total stockholders’ equity | | | 709,821 | | | | 654,683 | | | | | | | | | | | Total liabilities and stockholders’ equity | | $ | 11,965,611 | | | $ | 10,570,193 | | | | | | | | | | |
The accompanying notes are an integral part of these statements. 3
Flagstar Bancorp, Inc. Unaudited Consolidated Statements of Earnings (in thousands, except per share data) | | | | | | | | | | | | | | | | | | | For the three months ended | | For the six months ended | | | June 30, | | June 30, | | | 2004
| | 2003
| | 2004
| | 2003
| Interest Income | | | | | | | | | | | | | | | | | Loans | | $ | 139,516 | | | $ | 122,949 | | | $ | 269,440 | | | $ | 244,184 | | Other | | | 698 | | | | 1,316 | | | | 1,615 | | | | 2,809 | | | | | | | | | | | | | | | | | | | Total | | | 140,214 | | | | 124,265 | | | | 271,055 | | | | 246,993 | | Interest Expense | | | | | | | | | | | | | | | | | Deposits | | | 38,813 | | | | 34,510 | | | | 72,863 | | | | 68,405 | | FHLB advances | | | 34,794 | | | | 29,088 | | | | 71,536 | | | | 57,542 | | Other | | | 7,286 | | | | 11,641 | | | | 16,358 | | | | 20,530 | | | | | | | | | | | | | | | | | | | Total | | | 80,893 | | | | 75,239 | | | | 160,757 | | | | 146,477 | | | | | | | | | | | | | | | | | | | Net interest income | | | 59,321 | | | | 49,026 | | | | 110,298 | | | | 100,516 | | Provision for losses | | | 3,603 | | | | 6,772 | | | | 12,905 | | | | 14,659 | | | | | | | | | | | | | | | | | | | Net interest income after provision for losses | | | 55,718 | | | | 42,254 | | | | 97,393 | | | | 85,857 | | Non-Interest Income | | | | | | | | | | | | | | | | | Loan administration | | | 5,589 | | | | (13,056 | ) | | | 13,822 | | | | (38,665 | ) | Net gain on loan sales | | | 7,514 | | | | 154,256 | | | | 39,645 | | | | 243,503 | | Net gain on sales of mortgage servicing rights | | | 37,248 | | | | 320 | | | | 59,033 | | | | 1,581 | | Other fees and charges | | | 20,688 | | | | 13,445 | | | | 36,620 | | | | 26,187 | | | | | | | | | | | | | | | | | | | Total | | | 71,039 | | | | 154,965 | | | | 149,120 | | | | 232,606 | | Non-Interest Expense | | | | | | | | | | | | | | | | | Compensation and benefits | | | 29,298 | | | | 29,899 | | | | 56,407 | | | | 57,255 | | Occupancy and equipment | | | 16,919 | | | | 17,299 | | | | 34,404 | | | | 33,408 | | General and administrative | | | 17,120 | | | | 18,291 | | | | 34,905 | | | | 32,397 | | | | | | | | | | | | | | | | | | | Total | | | 63,337 | | | | 65,489 | | | | 125,716 | | | | 123,060 | | | | | | | | | | | | | | | | | | | Earnings before federal income taxes | | | 63,420 | | | | 131,730 | | | | 120,797 | | | | 195,403 | | Provision for federal income taxes | | | 22,230 | | | | 46,150 | | | | 42,650 | | | | 68,496 | | | | | | | | | | | | | | | | | | | Net Earnings | | $ | 41,190 | | | $ | 85,580 | | | $ | 78,147 | | | $ | 126,907 | | | | | | | | | | | | | | | | | | | Earnings per share – basic | | $ | 0.68 | | | $ | 1.44 | | | $ | 1.29 | | | $ | 2.14 | | | | | | | | | | | | | | | | | | | Earnings per share – diluted | | $ | 0.65 | | | $ | 1.34 | | | $ | 1.22 | | | $ | 2.00 | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these statements. 4
Flagstar Bancorp, Inc. Consolidated Statements of Stockholders’ Equity (in thousands, except per share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | Additional | | Other | | | | | | Total | | | Common | | Paid in | | Comprehensive | | Retained | | Stockholders’ | | | Stock
| | Capital
| | Income
| | Earnings
| | Equity
| 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 | | Net earnings | | | — | | | | — | | | | — | | | | 78,147 | | | | 78,147 | | Net unrealized gain on derivatives | | | — | | | | — | | | | 5,036 | | | | — | | | | 5,036 | | | | | | | | | | | | | | | | | | | | | | | Total comprehensive income | | | — | | | | — | | | | 5,036 | | | | 78,147 | | | | 83,183 | | Stock options exercised and grants issued, net | | | 5 | | | | 2,392 | | | | — | | | | — | | | | 2,397 | | Dividends paid ($ 0.50 per share) | | | — | | | | — | | | | — | | | | (30,442 | ) | | | (30,442 | ) | | | | | | | | | | | | | | | | | | | | | | Balance (unaudited) at June 30, 2004 | | $ | 612 | | | $ | 37,786 | | | $ | 7,209 | | | $ | 664,214 | | | $ | 709,821 | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these statements. 5
Flagstar Bancorp, Inc. Unaudited Consolidated Statements of Cash Flows (in thousands) | | | | | | | | | | | For the six months ended June 30, | | | 2004
| | 2003
| Operating Activities | | | | | | | | | Net earnings | | $ | 78,147 | | | $ | 126,907 | | Adjustments to reconcile net earnings to net cash used in operating activities | | | | | | | | | Provision for losses | | | 12,905 | | | | 14,659 | | Provision for secondary market losses | | | 13,916 | | | | 11,908 | | Depreciation and amortization | | | 60,845 | | | | 100,950 | | FHLB stock dividends | | | (4,869 | ) | | | (1,989 | ) | Net gain on the sale of assets | | | (1,261 | ) | | | (1,145 | ) | Net gain on loan sales | | | (39,645 | ) | | | (243,503 | ) | Net gain on sales of mortgage servicing rights | | | (59,033 | ) | | | (1,581 | ) | Proceeds from sales of loans available for sale | | | 15,766,701 | | | | 32,282,455 | | Originations and repurchases of loans available for sale, net of principal repayments | | | (17,027,099 | ) | | | (33,248,147 | ) | Increase in accrued interest receivable | | | (1,489 | ) | | | (1,904 | ) | (Increase) decrease in other assets | | | (89,384 | ) | | | 1,776 | | Increase in accrued interest payable | | | 1,436 | | | | 2,138 | | Increase in the liability for checks issued | | | 183 | | | | 73,920 | | Increase in federal income taxes payable | | | 6,824 | | | | 24,519 | | Increase (decrease) in other liabilities | | | 15,352 | | | | (40,847 | ) | | | | | | | | | | Net cash used in operating activities | | | (1,266,471 | ) | | | (899,884 | ) | Investing Activities | | | | | | | | | Net change in other investments | | | (1,208 | ) | | | 985 | | Investment in mortgage backed securities, net of principal repayments | | | 4,528 | | | | 1,216 | | Origination of loans held for investment, net of principal repayments | | | (19,860 | ) | | | (122,764 | ) | Purchase of FHLB stock | | | (26,579 | ) | | | (811 | ) | Investment in unconsolidated subsidiary | | | 2,328 | | | | — | | Proceeds from the disposition of repossessed assets | | | 19,641 | | | | 22,142 | | Acquisitions of premises and equipment, net of proceeds | | | (16,772 | ) | | | (18,088 | ) | Increase in mortgage servicing rights | | | (169,475 | ) | | | (271,188 | ) | Proceeds from the sale of mortgage servicing rights | | | 207,295 | | | | 207,046 | | | | | | | | | | | Net cash used in investing activities | | | (102 | ) | | | (181,462 | ) | Financing Activities | | | | | | | | | Net increase in deposit accounts | | | 854,325 | | | | 895,574 | | Issuance of junior subordinated debt | | | — | | | | 50,000 | | Redemption of preferred securities | | | (74,750 | ) | | | — | | Net increase in Federal Home Loan Bank advances | | | 387,199 | | | | 214,122 | | Net receipt of payments of loans serviced for others | | | 17,113 | | | | 514,071 | | Net receipt of escrow payments | | | 124,959 | | | | 119,543 | | Proceeds from the exercise of common stock options | | | 2,397 | | | | 1,372 | | Net return on investment in subsidiaries | | | — | | | | (3,127 | ) | Dividends paid to stockholders | | | (30,442 | ) | | | (8,911 | ) | | | | | | | | | | Net cash provided by financing activities | | | 1,280,801 | | | | 1,782,644 | | | | | | | | | | | Net increase in cash and cash equivalents | | | 14,228 | | | | 701,298 | | Beginning cash and cash equivalents | | | 148,417 | | | | 126,969 | | | | | | | | | | | Ending cash and cash equivalents | | $ | 162,645 | | | $ | 828,267 | | | | | | | | | | | Supplemental disclosure of cash flow information: | | | | | | | | | Loans receivable transferred to repossessed assets | | $ | 20,253 | | | $ | 21,651 | | | | | | | | | | | Total interest payments made on deposits and other borrowings | | $ | 159,321 | | | $ | 144,339 | | | | | | | | | | | Federal income taxes paid | | $ | 36,000 | | | $ | 44,000 | | | | | | | | | | | Loans held for sale transferred to loans held for investment | | $ | 1,901,750 | | | $ | 779,578 | | | | | | | | | | | Supplemental disclosure of non-cash financing information: | | | | | | | | | During the six months ended June 30, 2004, the Company recorded a net market value adjustment for interest rate swaps of $5,036. | | | | | | | | |
The accompanying notes are an integral part of these statements. 6
Flagstar Bancorp, Inc. Notes to Consolidated Financial Statements 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 $12.2$12.0 billion in assets at March 31,June 30, 2004, Flagstar is the largest savings institution and 2nd 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 for investment. The Company also services a significant volume of loans for others The single-family mortgage loans originated that conform to the underwriting standards of FNMA, FHLMCFannie Mae, Freddie Mac or GNMAGinnie Mae are securitized and sold on a servicing retained basis. The out-of-market servicing rights are then sold in a separate transaction. The Company also invests in a significant amount of its mortgage 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. Basis of Presentation The accompanying consolidated unaudited financial statements of Flagstar Bancorp, Inc. (the “Company”),the Company, have been prepared in accordance with generally accepted accounting principles for interim information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by United States generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All interim amounts are subject to the year-end audit, theaudit. The results of operations for the interim period, herein, are not necessarily indicative of the results that may be expected for the full year endingended December 31, 2004. Note 3. Reclassifications Certain amounts within the accompanying consolidated financial statements and the related notes have been reclassified to conform to the 2004 presentation. Note 3.4. Critical Accounting Policies The Company has established various accounting policies that govern the application of generally accepted accounting principles in the preparation of the financial statements. Application of these accounting policies involves judgments, assumptions and assumptionsestimates by management that hashave a material impact on the carrying value of certain assets and liabilities. TheThese judgments, assumptions and assumptionsestimates are based on the Company’s historical experience and other factors that are believedmanagements believes 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. 87
Note 3.4. Critical Accounting Policies (continued) 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 reporting 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. The Company is required to make assumptions about future market conditions, including interest rates, in order to complete the analysis. The model calculates a fair value based upon variables, but does not, and can notcannot, take into account the actual price the specific MSR could be sold at in a fair exchange. The Company does havehas the portfolio valued by an outside valuation expert not less than annually, but interim valuations could fail to reflect any valuation changes created by a dynamic interest rate environment. Derivative Accounting In its home 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 Financial Accounting Standards Board (FASB) No. 133, theThe Company carries these commitments at fair value. The process of recording these commitments at fair value has the effect of recording a portion of the eventual gain or loss on the sale of these loans before ita sale actually happens.occurs. This estimation process may be prone to error and therefore could misstate the Company’s true financial position. Secondary Market Reserve The Company maintains a reserve against future losses created bythat may be recognized upon 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. Note 4.5. Recent Accounting Developments Staff Accounting Bulletin 105 The Securities and Exchange Commission staff recently released Staff Accounting Bulletin (SAB) 105, “Loan Commitments Accounted for as Derivative Instruments.” SAB 105 requires that a lender should not consider the expected future cash flows related to loan servicing or include any internally developed intangible assets, such as customer-related intangible assets, in determining the fair value of loan commitments accounted for as derivatives. Companies will bewere required to adopt SAB 105 effective for commitments entered into after March 31, 2004. The requirements of SAB 105 will apply to the Company’s mortgage loan interest rate lock commitments related to loans held for sale. At March 31,June 30, 2004, such commitments with a notional amount of approximately $5.6$2.6 billion were outstanding. The Company’s current accounting policy is to not record anya value for the expected MSR created upon the sale into the secondary market. The Company will adoptadopted SAB 105 at the beginning of its second quarter, and thatdoes not expect application of its guidance wouldto have noany material impact on theits results of operations or financial position of the Company. 8
Note 5. Recent Accounting Developments (continued) Proposed Stock BasedStock-Based Compensation Rule On March 31, 2004, the FASB issued a proposed Statement,Share-Based Payment, an Amendment of FASB Statements No. 123 and APB No. 95,that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise, or (b) liabilities that are based on the fair value of the enterprise’s equity instruments, or that may be settled by the issuance of such equity instruments. Under the FASB’s proposal, all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related 9
cost in the income statement. The expense of the award would generally be measured at fair value at the grant date. Current accounting guidance requires that the expense relating to so-called fixed plan employee stock options only be disclosed in the footnotes to the financial statements. The proposed Statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25,Accounting for Stock Issued to Employees. The Company is currently evaluating this proposed statement and its potential effects on its results of operations. FIN 46(R) —- Variable interest entities Management has determined that Flagstar Trust, Flagstar Statutory Trust II, Flagstar Statutory Trust III, and Flagstar Statutory Trust IV (“the Trusts”) each qualify as a variable interest entityentities under FIN 46, as revised. The Trusts issued mandatorily redeemable preferred stock to investors and loaned the proceeds to the Company. The Trusts are included in the Company’s consolidated balance sheet and statements of income as of and for the year ended December 31, 2003. Subsequent to the issuance of FIN 46 in January 2003, the FASB issued a revised interpretation, FIN 46(R)Consolidation of Variable Interest Entities, the provisions of which mustwere to be applied to certain variable interest entities by March 31, 2004. The Company adopted the provisions under the revised interpretation in the first quarter of 2004. Accordingly, the Company no longer consolidates the Trusts as of March 31, 2004. FIN 46(R) precludes consideration of the call option embedded in the preferred stock when determining if the Company has the right to a majority of the TrustsTrusts’ residual returns. The deconsolidation resulted in the investment in the common stock of the Trusts that isbeing included in other assets“other assets” as of March 31,June 30, 2004 and the corresponding increase in outstanding debt of $4.6$2.3 million. In addition, the income received on the Company’s common stock investment is included in other“other interest income.” The adoption of FIN 46(R) did not have a material impact on the Company’s financial position or results of operations. The banking regulatory agencies have not issued any guidance that would change the regulatory capital treatment for the trust-preferred securities issued by the Trust based on the adoption of FIN 46(R). However, as additional interpretations from the banking regulators related to entities such as the Trusts become available, management will reevaluate its potential impact to its Tier I capital calculation under such interpretations. Note 5.6. Stock-Based Compensation The Company has two stock incentive plans, the 1997 Stock Option Plan and the 2000 Stock Incentive Plan (collectively, the “Plans”), which provide for the granting of non-qualified stock options, incentive stock options, restricted stock awards, performance stock awards, stock bonuses and other awards to our employees (including officers and directors). Awards are granted at the average market price of our stock on the grant date, vest over varying periods generally beginning at least one year from the date of grant, and expire in either five or ten years from the date of grant. As permitted by SFAS 123,“Accounting for Stock-Based Compensation”(“SFAS 123”), Thethe Company continues to measure and recognize compensation expense using the intrinsic value method specified in Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees”(“APB 25”). 9
Note 6. Stock-Based Compensation (continued) As required under the provisions of SFAS 148,“Accounting for Stock-Based Compensation — Transition and 10
Note 5. Stock-Based Compensation (continued)
Disclosure,”the following table discloses the pro forma net income and pro forma basic and diluted earnings per share had the fair value method been applied to all stock awards for the three and six months ended March 31,June 30, 2004 and 2003: | | | | | | | | | | | | | | | | | | | | | | | | | | | For the quarter | | For the three months | | For the six months | | | Ended March 31, | | ended June 30, | | ended June 30, | | | 2004
| | 2003
| | 2004
| | 2003
| | 2004
| | 2003
| Net Earnings | | | As reported | | $ | 36,957 | | $ | 41,327 | | | $ | 41,190 | | $ | 85,580 | | $ | 78,147 | | $ | 126,907 | | Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | (718 | ) | | | (773 | ) | | | (719 | ) | | | (773 | ) | | | (1,437 | ) | | | (1,547 | ) | | | | | | | | | | | | | | | | Pro forma net earnings | | $ | 36,239 | | $ | 40,554 | | | $ | 40,471 | | $ | 84,807 | | $ | 76,710 | | $ | 125,360 | | | | | | | | | | | | | | | | | Basic earnings per share | | | As reported | | $ | 0.61 | | $ | 0.70 | | | $ | 0.68 | | $ | 1.44 | | $ | 1.29 | | $ | 2.14 | | Pro forma | | $ | 0.60 | | $ | 0.68 | | | $ | 0.66 | | $ | 1.42 | | $ | 1.26 | | $ | 2.11 | | Diluted earnings per share | | | As reported | | $ | 0.57 | | $ | 0.66 | | | $ | 0.65 | | $ | 1.34 | | $ | 1.22 | | $ | 2.00 | | Pro forma | | $ | 0.56 | | $ | 0.65 | | | $ | 0.63 | | $ | 1.32 | | $ | 1.20 | | $ | 1.97 | |
In addition, during the three months ended March 31, 2003, The Company recognized compensation expense of $357 thousand ($232 thousand,
In addition, during the three and six months ended June 30, 2003, the Company recognized compensation expense of $357,000 ($232,000, net of taxes) and $714,000 ($464,000, net of taxes), respectively, related to restricted stock awards. These expenses were included in net earnings as reported. There was no compensation expense recognized during the three and six months ended June 30, 2004 related to restricted stock awards. These expenses were included in net earnings as reported. There was no compensation expense recognized during the three months ended March 31, 2004 related to restricted stock grants.Note 6. Significant Events
1. | | On May 15, 2003, the Company completed a 2-for-1 split of its common stock. All share information on the financial statements of the Company has been adjusted accordingly. | | 2.Note 7. | | Significant Events |
1. | | On April 30, 2004 the Company redeemed all of its 9.50% preferred securities from its subsidiary Flagstar Trust (“Trust”). |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Selected Financial Ratios (in( in thousands, except per share data)data ) | | | | | | | | | | | For the quarter ended | | | | | | | | | | | | | | | | | | | March 31, | | March 31, | | For the three months ended | | For the six months ended | | | 2004
| | 2003
| | June 30, 2004
| | June 30, 2003
| | June 30, 2004
| | June 30, 2003
| Return on average assets | | | 1.31 | % | | | 1.86 | % | | | 1.37 | % | | | 3.48 | % | | | 1.34 | % | | | 2.71 | % | Return on average equity | | | 22.20 | % | | | 37.82 | % | | | 23.79 | % | | | 69.55 | % | | | 22.98 | % | | | 54.67 | % | Efficiency ratio | | | 48.33 | % | | | 44.58 | % | | | 48.6 | % | | | 31.9 | % | | | 48.5 | % | | | 36.6 | % | Equity/assets ratio (average for the period) | | | 5.90 | % | | | 4.92 | % | | Equity/assets ratio (average) | | | | 5.75 | % | | | 5.00 | % | | | 5.83 | % | | | 4.96 | % | Mortgage loans originated or purchased | | $ | 9,450,310 | | $ | 15,062,099 | | | $ | 9,001,224 | | $ | 17,488,383 | | $ | 18,451,534 | | $ | 32,550,482 | | Mortgage loans sold | | $ | 7,640,738 | | $ | 13,253,246 | | | $ | 8,085,479 | | $ | 17,287,723 | | $ | 15,726,216 | | $ | 30,540,969 | | Interest rate spread | | | 1.94 | % | | | 2.56 | % | | | 1.92 | % | | | 2.02 | % | | | 1.90 | % | | | 2.23 | % | Net interest margin | | | 2.00 | % | | | 2.64 | % | | | 2.13 | % | | | 2.21 | % | | | 2.07 | % | | | 2.41 | % | Average common shares outstanding (2) | | 60,738 | | 59,250 | | | Average fully diluted shares outstanding (2) | | 64,236 | | 62,618 | | | Average common shares outstanding | | | 60,889 | | 59,416 | | 60,814 | | 59,333 | | Average diluted shares outstanding | | | 64,055 | | 64,107 | | 64,145 | | 63,637 | | Charge-offs to average investment loans | | | 0.26 | % | | | 0.58 | % | | | 0.12 | % | | | 0.73 | % | | | 0.17 | % | | | 0.84 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, | | December 31, | | March 31, | | June 30, | | March 31, | | December 31, | | June 30, | | | 2004
| | 2003
| | 2003
| | 2004
| | 2004
| | 2003
| | 2003
| Equity-to-assets ratio | | | 5.52 | % | | | 6.19 | % | | | 4.81 | % | | | 5.93 | % | | | 5.52 | % | | | 6.19 | % | | | 5.26 | % | Core capital ratio (1) | | | 6.58 | % | | | 7.44 | % | | | 6.79 | % | | | 6.36 | % | | | 6.58 | % | | | 7.44 | % | | | 6.58 | % | Total risk-based capital ratio (1) | | | 12.01 | % | | | 13.47 | % | | | 12.33 | % | | | 11.72 | % | | | 12.01 | % | | | 13.47 | % | | | 12.17 | % | Book value per share (2) | | $ | 11.05 | | $ | 10.79 | | $ | 7.72 | | | $ | 11.61 | | $ | 11.05 | | $ | 10.79 | | $ | 8.99 | | Number of common shares outstanding (2) | | 60,832 | | 60,675 | | 59,332 | | | 61,141 | | 60,832 | | 60,675 | | 59,499 | | Mortgage loans serviced for others | | $ | 29,858,203 | | $ | 30,395,079 | | $ | 22,336,428 | | | $ | 26,667,308 | | $ | 29,858,203 | | $ | 30,395,079 | | $ | 28,953,871 | | Value of mortgage servicing rights | | | 0.87 | % | | | 0.86 | % | | | 0.81 | % | | | 0.89 | % | | | 0.87 | % | | | 0.86 | % | | | 0.73 | % | Allowance for losses to non performing loans | | | 66.1 | % | | | 61.7 | % | | | 59.7 | % | | Allowance for losses to total investment loans | | | 0.50 | % | | | 0.53 | % | | | 0.94 | % | | Allowance to non-performing loans | | | | 70.0 | % | | | 66.1 | % | | | 61.7 | % | | | 71.7 | % | Allowance to held for investment loans | | | | 0.48 | % | | | 0.50 | % | | | 0.53 | % | | | 1.03 | % | Non performing assets to total assets | | | 0.96 | % | | | 1.01 | % | | | 1.31 | % | | | 1.00 | % | | | 0.96 | % | | | 1.01 | % | | | 1.14 | % | Number of banking centers | | 100 | | 98 | | 90 | | | 103 | | 100 | | 98 | | 95 | | Number of home loan centers | | 131 | | 128 | | 101 | | | Number of wholesale offices | | 12 | | 14 | | 14 | | | Number of home lending centers | | | 137 | | 131 | | 128 | | 108 | | Number of salaried employees | | 2,502 | | 2,523 | | 2,865 | | | 2,482 | | 2,502 | | 2,523 | | 3,106 | | Number of commissioned employees | | 1,124 | | 989 | | 912 | | | 997 | | 1,124 | | 989 | | 1,004 | |
(1) Based on adjusted total assets for purposes of tangible capital and core capital, and risk-weighted assets for purposes of the risk-based capital and the total risk-based capital. These ratios are applicable to Flagstar Bank only. (2) All share data has been adjusted to reflect the 2 for 1 stock dividend issued on May 15, 2003.
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Results of Operations Net Earnings Net earnings during the three and six month periods ended June 30, 2004, constituted a return on average equity of 23.79% and 22.98% and a return on average assets of 1.37% and 1.34%, respectively. These results were substantially down from the record net earnings of 2003, but constitute results near the top of the financial services industry. Returns in 2003, were an extraordinary 69.55% and 54.67% as of percentage of average equity and 3.48% and 2.71% of average assets, respectively. Net earnings in 2004 have been negatively impacted by the decrease in loan originations and therefore the decrease in loans sold in the secondary market. During the three and six months ended June 30, 2004, loan originations were down 48.6% and 43.3%, respectively. During this period of lower originations, management reduced the amount of salaried and commissioned personnel in its mortgage banking operation to reflect this decreased productivity. While the home lending group was downsizing its operations, the banking group added five new banking centers and increased its deposits within the banking centers $0.3 billion, or 8.3%, during the first six months of 2004. The banking group also increased its account relationships by 14,000 customers. Earnings for the three and six months ended June 30, 2004 reflect this shift in production. The banking group, which was responsible for approximately 25.1% of earnings during 2003, accounted for approximately 58.8% and 54.2% of earnings during the three and six months ended June 30, 2004. Earnings in the banking group increased approximately 32.5% in the second quarter of 2004 when compared to the first quarter of 2004 and 8.2% when compared to the last six months of 2003. The majority of these increases are attributable to the increases in the amount of attributable assets in each successive period. Three months Net earnings for the three months ended March 31,June 30, 2004 were $37.0$41.2 million ($0.570.65 per share-diluted), a $4.3$44.4 million decrease from the $41.3$85.6 million ($0.661.34 per share-diluted) reported in 2003. The decrease resulted from a $17.8$84.0 million, or 54.2%, decrease in non interest income which was partially offset by a $10.2 million increase in net interest income, a $2.2 million decrease in operating expenses, that was offset by a $22.7 million decrease in the deferral of operating expenses under FASB 91, a $0.5 million decrease in net interest income, and a $1.4 million increase in the provision for losses that was offset by a $1.9$24.0 million decrease in the provision for federal income taxes, and a $0.5$3.2 million decrease in the provision for losses. Six months Net earnings for the six months ended June 30, 2004 were $78.1 million ($1.22 per share-diluted), a $48.8 million, or 38.5% decrease from the $126.9 million ($2.00 per share-diluted) reported in 2003. The decrease resulted from an $83.5 million decrease in non interest income and a $2.6 million increase in other income.operating expenses, which was partially offset by a $9.8 million increase in net interest income, a $25.8 million decrease in the provision for federal income taxes, and a $1.8 million decrease in the provision for losses. Segment reporting Banking operations The Company provides a full range of banking services to consumers and small businesses in southern Michigan and Indiana. At March 31,June 30, 2004, the Bank operated a network of 100103 banking centers not including its Internet branch. The Company has continued to focus on expanding its branch network in order to increase its access to retail deposit funding sources.deposits. During the six months ended June 30, 2004, the Company opened five new banking centers. 12
Segment reporting (continued) Banking operations (continued) In each successive period, the banking operation has expanded its deposit portfolio and the number of banking centers. Each new banking center has been opened on a de novo basis. The result has been that each year revenues and expenses related to this operation have increased. During 2004, annualized revenues increased 10.9%14.9%, while annualized pre-tax earnings increased 13.4%33.4%. Additionally, identifiable assets associated with the banking operation increased 13.2% in13.6% during the first six months of 2004. This increase is tied to the expansion of the banking center network. Further expansion of the deposit branch network is planned. During of all 2003, the Company opened 12 banking centers. During the first quarter, two banking centers were opened. The Company has plans to open an additional 2317 banking centers during the remainder of 2004. The Company does not expect that it will have an immediate increase in retail deposits by opening these new locations. Nonetheless, the Company believes that the growth in deposits will occur over time, with FHLB advances and other sources providing sufficient funding in the interim. At March 31,June 30, 2004, the Company operated 36103 branches that serviced over 210,000 accounts totaling $3.9 billion in deposits. The average branch had deposits of $36.6 million in deposits. Of the 103 banking centers, under its in-store program. Thirty-threeeighteen are located in Indiana and eighty-five are located in Michigan. Thirty-six of thesethe banking centers are operated under our in-store program, forty-four are free standing buildings, and twenty-three of our banking centers are found in strip malls and office centers. Of the in-store banking centers, thirty-three are located in Wal-Mart superstores. While 15Fifteen of the in-store branches were located in Indiana and 21 were located in Michigan communities. The first of the Wal-Mart banking centers was placed ininto operation in June 2000. The Company expects to open one more Wal-Mart facility in 2004. Forty-two of In June 2004, the Company’s retail banking centers were opened within the past three years. The 16Company entered into an agreement to open four banking centers in Indiana were all opened inMeijer superstores within the past four years, 15 of thoseGrand Rapids market. The in-store banking centers are in-store branches. The Wal-Mart banking centers hadhave an average deposit portfolio of only $17.3$18.1 million compared with the Company average of $36.1$36.6 million. Of the 100 branches, 16 branches had deposits of less than $10.0 million compared to March 31, 2003 when 28 branches had less than $10 million in deposits.
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. The in-store facilities use a cashless electronic kiosk-operating environment that is supported by at least two customer service representatives. By relying upon in-store banking centers to expand our retail branch network, the Company avoids the significant building costs of free-standing banking centers while obtaining marketingmarket 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-standingfreestanding banking centers. Forty-one of the Company’s banking centers were opened within the past three years. Those branches have an average deposit base of $14.2 million. Banking centers opened in 2004, 2003, 2002 and 2001 have average deposits of $13.6 million, $16.9 million, $21.0 million, and $24.9 million, respectively. Of the 103 branches, 12 branches had deposits of less than $10.0 million at June 30, 2004 compared to June 30, 2003 when 26 branches had less than $10.0 million in deposits. The 18 banking centers in Indiana were all opened in the past four years and 15 of those banking centers are in-store branches. The Indiana branches have an average deposit portfolio of $18.2 million. Banking centers in the Indianapolis metropolitan area have an average balance of $22.7 million. The 85 banking centers in Michigan have an average deposit portfolio of $40.5 million and 21 of these banking centers are in-store facilities. Banking centers in the Detroit metropolitan area have an average balance of $40.3 million. All of the Detroit area banking centers were opened in the past five years. 13
Segment reporting (continued) Banking operations (continued) The Company’s Internet branch is available for customer use at www.flagstar.com. At March 31,June 30, 2004, this operation serviced $135.0$147.6 million of deposits from a national deposit base. All of our banking customers have access and options to maintain their account on-line but these deposit customers are strictly Internet based. At March 31,June 30, 2004, 95.1%95.7% of these deposits were certificates of deposit. 13
Despite the Company’s growing banking operation and the large number of banking centers that are not mature, the banking operation was responsible for 44.8%approximately 46.8% of revenues and 49.6%approximately 58.8% of pre-taxnet earnings during the three months ended March 31,June 30, 2004. During 2003, the banking operation produced 25.7%approximately 33.1% of pre-taxrevenues and 25.1% of net earnings. The following tables present certain financial information concerning the results of operations of Flagstar’s banking group. | | | | | | | | | | | | | | | | | | | At or for the three months ended | | At or for the six months | | | June 30, | | ended June 30, | | | 2004
| | 2003
| | 2004
| | 2003
| | | | | | | ( In thousands ) | | | | | Revenues | | $ | 61,004 | | | $ | 53,440 | | | $ | 118,508 | | | $ | 98,025 | | Earnings before taxes | | | 37,313 | | | | 25,811 | | | | 65,468 | | | | 50,781 | | Identifiable assets | | | 9,471,675 | | | | 5,334,839 | | | | 9,471,675 | | | | 5,334,839 | |
Home lending operation Flagstar’s home lending activities involve the origination of mortgage loans or the purchase of mortgage loans from the originating lender. The originated mortgage loans are primarily sold in the secondary market. To a lesser extent, the Company invests in a small portion of the loans originated as leverage limits allow. The Company later sells the related servicing rights in a separate transaction. Company personnel originate loans and conduct business from 131137 loan origination centers in 2126 states. Company personnel also originate loans from the Bank’s 100103 banking centers. Flagstar also purchases mortgage loans on a wholesale basis through a network of correspondents consisting of other banks, thrifts, mortgage companies, and mortgage brokers. This network includes mortgage lending operations in all 50 states. The mortgage loans, the majority of which are subsequently sold on a servicing retained basis in the secondary mortgage market,loans conform to the underwriting standards of either Freddie Mac, or Fannie Mae or Ginnie Mae. The out-of-market servicing rights are then sold in a separate transaction. The Company also invests in a significant amount of its mortgage loan production in order to maximize the Company’s leverage ability and to receive the interest spread between the earning assets and paying liabilities. The Companyhome lending operation also managesservices a large servicing portfolio of primarily conforming loans.loans for others. This portfolio, which totals $29.9totaled $26.7 billion at March 31,June 30, 2004, provides additional earnings in a rising rate environment. The mortgage servicing operation provides counter-cyclical earnings protection for the home lending operation. In its capacity as a mortgage loansloan servicer, the Company maintains escrow balances for its customers. At March 31,June 30, 2004, the Company held $985.0$795.8 million of escrow balances. The home lending operation is a much more volatile source of earnings. This operation,earnings when compared to the banking operation. Home lending, for the most part, is reliant on the prevailing interest rate environment, which is outside the Company’s control. The earnings volatility inherent in the mortgage bankinghome lending operation is visually apparent in the allocated revenues and pre-tax earnings of the operation shown below. The results show that during 2004 and 2003, revenues decreased 30.3%33.0% and increased 70.5%70.8%, respectively, while pre-tax earnings decreased 49.9%54.5% and increased 233.4%232.6%, 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. 14
Segment reporting (continued) Home lending operations (continued) The following tables present certain financial information concerning the results of operations of Flagstar’s banking and home lending operation.group. | | | | | | | | | | | | | | | | | | | | | | | | | | | Banking Operation | | Home Lending Operation | | At or for the three months | | At or for the six months | | | At or for the three months ended | | At or for the three months ended | | ended June 30, | | ended June 30, | | | 2004
| | 2003
| | 2004
| | 2003
| | 2004
| | 2003
| | 2004
| | 2003
| | | ( In thousands ) | | | ( In thousands ) | | Revenues | | $ | 57,822 | | $ | 44,495 | | $ | 78,737 | | $ | 84,636 | | | $ | 73,106 | | $ | 152,205 | | $ | 152,160 | | $ | 238,405 | | Earnings before taxes | | 28,472 | | 16,993 | | 36,405 | | 46,680 | | | 29,857 | | 105,919 | | 66,579 | | 144,662 | | Identifiable assets | | 9,579,911 | | 5,554,968 | | 3,601,146 | | 4,958,310 | | | 2,993,936 | | 4,838,145 | | 2,993,936 | | 4,838,145 | |
14
Net Interest Income Three months The Company recorded $51.0$59.3 million in net interest income for the three months ended March 31,June 30, 2004. This level of interest income decreased slightlywas an increase from the $51.5$49.0 million recorded for the comparable 2003 period. These results include a $8.0$15.9 million increase in interest revenueincome, which was offset by a $8.5$5.7 million increase in interest expense. In this sameDuring the period, that the Company increased the averageits earning asset base by over $2.4 billion, the Company registered a slight decrease in net interest income.$2.2 billion. The Company also raised $2.3$1.9 billion in average payinginterest-bearing liabilities to fund these new assets. The liabilities used for these acquisitions and the liabilities that were used to replace maturing liabilities were acquired at a substantially discounted rate compared to the liabilities used in the 2003 period. These pricing adjustments are best shown by the decreased spread reported during the current period when compared to the first quarter of 2003. Earning assets as a whole repriced down 11755 basis points while the liabilities repriced down only 5545 basis points on a like period comparison. This net decrease is reflected in the decrease in the Company’s net interest spread of 6210 basis points to 1.94%1.92% for the three months ended March 31,June 30, 2004 from 2.56%2.02% for the comparable 2003 period. It is also reflected in the decrease in the net interest margin of 648 basis points to 2.00%2.13% for the quarter ended March 31,June 30, 2004 from 2.64%2.21% for the same period in 2003.
On a sequential quarter basis, the Company reported a 222 basis point increasedecrease in the interest rate spread and 2013 basis point increase in the interest margin. The Company reported a $6.6$8.3 million, or 14.9%16.3% increase in net interest income during the current period versus the fourthfirst quarter of 2003.2004. Six months The Company recorded $110.3 million in net interest income for the six months ended June 30, 2004. This level of interest income is an increase from the $100.5 million recorded for the comparable 2003 period. These results include a $24.1 million increase in interest income, which was offset by a $14.3 million increase in interest expense. In this period, the Company increased the average earning asset base by over $2.3 billion. The Company also raised $2.1 billion in average interest-bearing liabilities to fund these new assets. The liabilities used for these acquisitions and the liabilities that were used to replace maturing liabilities were acquired at a discounted rate compared to the liabilities used in the 2003 period. During the six months ended June 30, 2004, the Company reported a decrease of 33 basis points in the interest rate spread and a decrease of 34 basis points in the interest margin. Earning assets as a whole repriced down 81 basis points, while the liabilities repriced down only 48 basis points on a like period comparison. 15
Average Yields Earned and Rates PaidAVERAGE YIELDS EARNED AND RATES PAID
The following table presentstables present 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. NonaccruingNon-accruing loans were included in the average loan amounts outstanding. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Quarter ended March 31,
| | Three months ended June 30,
| | | 2004
| | 2003
| | 2004
| | 2003
| | | Average | | Yield/ | | Average | | Yield/ | | Average | | Yield/ | | Average | | Yield/ | | | Balance
| | Interest
| | Rate
| | Balance
| | Interest
| | Rate
| | Balance
| | Interest
| | Rate
| | Balance
| | Interest
| | Rate
| | | ( in thousands ) | | | ( in thousands ) | | Interest-earning assets: | | | Loans receivable, net | | $ | 10,204,771 | | $ | 129,945 | | | 5.12 | % | | $ | 7,640,659 | | $ | 121,235 | | | 6.43 | % | | $ | 11,013,067 | | $ | 139,516 | | | 5.07 | % | | $ | 8,377,789 | | $ | 122,949 | | | 5.87 | % | Other | | 57,358 | | 778 | | 5.46 | | 270,312 | | 1,493 | | 2.24 | | | 135,182 | | 698 | | 2.06 | | 520,029 | | 1,316 | | 1.01 | | | | | | | | | | | | | | | | | | | | | Total interest-earning assets | | 10,262,129 | | $ | 130,723 | | | 5.12 | % | | 7,910,971 | | $ | 122,728 | | | 6.29 | % | | 11,148,249 | | $ | 140,214 | | 5.03 | | 8,897,818 | | $ | 124,265 | | 5.58 | | Other assets | | 1,027,429 | | 963,099 | | | 904,299 | | 943,024 | | | | | | | | | | | | | Total assets | | $ | 11,289,558 | | $ | 8,874,070 | | | $ | 12,052,548 | | $ | 9,840,842 | | | | | | | | | | | | | Interest-bearing liabilities: | | | Deposits | | $ | 5,860,340 | | $ | 34,049 | | | 2.34 | % | | $ | 4,973,298 | | $ | 33,895 | | | 2.76 | % | | $ | 6,400,013 | | $ | 38,813 | | | 2.44 | % | | $ | 5,244,464 | | $ | 34,510 | | | 2.64 | % | FHLB advances | | 3,656,265 | | 36,742 | | 4.04 | | 2,206,651 | | 28,454 | | 5.23 | | | 3,632,353 | | 34,794 | | 3.85 | | 2,401,081 | | 29,088 | | 4.86 | | Other | | 579,497 | | 8,955 | | 6.21 | | 571,424 | | 8,889 | | 6.31 | | | 408,607 | | 7,286 | | 7.17 | | 843,096 | | 11,641 | | 5.54 | | | | | | | | | | | | | | | | | | | | | Total interest-bearing liabilities | | 10,096,102 | | $ | 79,746 | | | 3.18 | % | | 7,751,373 | | $ | 71,238 | | | 3.73 | % | | 10,440,973 | | $ | 80,893 | | | 3.11 | % | | 8,488,641 | | $ | 75,239 | | | 3.56 | % | Other liabilities | | 527,536 | | 685,659 | | | 919,153 | | 859,992 | | Stockholders equity | | 665,920 | | 437,038 | | | 692,422 | | 492,209 | | | | | | | | | | | | | Total liabilities and Stockholders equity | | $ | 11,289,558 | | $ | 8,874,070 | | | Total liabilities and stockholders equity | | | $ | 12,052,548 | | $ | 9,840,842 | | | | | | | | | | | | | Net interest-earning assets | | $ | 166,027 | | $ | 159,598 | | | $ | 707,276 | | $ | 409,177 | | | | | | | | | | | | | | | | | | | | | | | | Net interest income | | $ | 50,977 | | $ | 51,490 | | | $ | 59,321 | | $ | 49,026 | | | | | | | | | | | | | | | | | | | | | | | | Interest rate spread | | | 1.94 | % | | | 2.56 | % | | | 1.92 | % | | | 2.02 | % | | | | | | | | | | | | Net interest margin | | | 2.00 | % | | | 2.64 | % | | | 2.13 | % | | | 2.21 | % | | | | | | | | | | | | Ratio of average interest- | | | Earning assets to Interest-bearing liabilities | | | 102 | % | | | 102 | % | | Ratio of average interest- earning assets to interest-bearing liabilities | | | | 107 | % | | | 105 | % | | | | | | | | | | | |
16
Rate/Volume AnalysisAVERAGE YIELDS EARNED AND RATES PAID
| | | | | | | | | | | | | | | | | | | | | | | | | | | Six months ended June 30,
| | | 2004
| | 2003
| | | Average | | | | | | Yield/ | | Average | | | | | | Yield/ | | | Balance
| | Interest
| | Rate
| | Balance
| | Interest
| | Rate
| | | | | | | | | | | (in thousands ) | | | | | | | | | | | | | Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | Loans receivable, net | | $ | 10,608,919 | | | $ | 269,440 | | | | 5.08 | % | | $ | 8,009,224 | | | $ | 244,184 | | | | 6.10 | % | Other | | | 96,270 | | | | 1,615 | | | | 3.36 | | | | 395,171 | | | | 2,809 | | | | 1.42 | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest-earning assets | | | 10,705,189 | | | $ | 271,055 | | | | 5.06 | % | | | 8,404,395 | | | $ | 246,993 | | | | 5.87 | % | Other assets | | | 964,245 | | | | | | | | | | | | 954,669 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | $ | 11,669,434 | | | | | | | | | | | $ | 9,359,064 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | Deposits | | $ | 6,130,176 | | | $ | 72,863 | | | | 2.39 | % | | $ | 5,109,935 | | | $ | 68,405 | | | | 2.70 | % | FHLB advances | | | 3,644,309 | | | | 71,536 | | | | 3.95 | | | | 2,303,802 | | | | 57,542 | | | | 5.04 | | Other | | | 450,764 | | | | 16,358 | | | | 7.30 | | | | 707,260 | | | | 20,530 | | | | 5.85 | | | | | | | | | | | | | | | | | | | | | | | | | | | Total interest-bearing liabilities | | | 10,225,249 | | | $ | 160,757 | | | | 3.16 | % | | | 8,120,997 | | | $ | 146,477 | | | | 3.64 | % | Other liabilities | | | 764,084 | | | | | | | | | | | | 773,790 | | | | | | | | | | Stockholders equity | | | 680,101 | | | | | | | | | | | | 464,277 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities and Stockholders equity | | $ | 11,669,434 | | | | | | | | | | | $ | 9,359,064 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net interest-earning assets | | $ | 479,940 | | | | | | | | | | | $ | 283,398 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net interest income | | | | | | $ | 110,298 | | | | | | | | | | | $ | 100,516 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate spread | | | | | | | | | | | 1.90 | % | | | | | | | | | | | 2.23 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Net interest margin | | | | | | | | | | | 2.07 | % | | | | | | | | | | | 2.41 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Ratio of average interest-earning assets to interest-bearing liabilities | | | | | | | | | | | 105 | % | | | | | | | | | | | 103 | % | | | | | | | | | | | | | | | | | | | | | | | | | |
17
RATE/VOLUME ANALYSIS The following table presentstables present the dollar amount of changes in interest income and interest expense for the components of earning assets and interest-bearing liabilities whichthat are presented above. The table distinguishestables distinguish 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 initialending volume constant). | | | | | | | | | | | | | | | | | | | | | | | | | | | Quarter ended March 31,
| | Three months ended June 30,
| | | 2004 versus 2003 | | 2004 versus 2003 | | | Increase (Decrease) due to: | | Increase (Decrease) due to: | | | Rate
| | Volume
| | Total
| | Rate
| | Volume
| | Total
| | | (in thousands) | | | (in thousands) | Interest Income: | | | Loans receivable, net | | $ | (32,508 | ) | | $ | 41,218 | | $ | 8,710 | | | $ | (22,106 | ) | | $ | 38,673 | | $ | 16,567 | | Other | | 478 | | | (1,193 | ) | | | (715 | ) | | 354 | | | (972 | ) | | | (618 | ) | | | | | | | | | | | | | | | | Total | | $ | (32,030 | ) | | $ | 40,025 | | $ | 7,995 | | | $ | (21,752 | ) | | $ | 37,701 | | $ | 15,949 | | Interest Expense: | | | Deposits | | $ | (5,967 | ) | | $ | 6,121 | | $ | 154 | | | $ | (3,324 | ) | | $ | 7,627 | | $ | 4,303 | | FHLB advances | | | (10,666 | ) | | 18,954 | | 8,288 | | | | (9,254 | ) | | 14,960 | | 5,706 | | Other | | | (61 | ) | | 127 | | 66 | | | 1,663 | | | (6,018 | ) | | | (4,355 | ) | | | | | | | | | | | | | | | | Total | | $ | (16,694 | ) | | $ | 25,202 | | $ | 8,508 | | | $ | (10,915 | ) | | $ | 16,569 | | $ | 5,654 | | | | | | | | | | | | | | | | | Net change in net interest income | | $ | (15,336 | ) | | $ | 14,823 | | $ | (513 | ) | | $ | (10,837 | ) | | $ | 21,132 | | $ | 10,295 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Six months ended June 30,
| | | 2004 versus 2003 | | | Increase (Decrease) due to: | | | Rate
| | Volume
| | Total
| | | | | | | (in thousands) | | | | | Interest Income: | | | | | | | | | | | | | Loans receivable, net | | $ | (54,035 | ) | | $ | 79,291 | | | $ | 25,256 | | Other | | | 928 | | | | (2,122 | ) | | | (1,194 | ) | | | | | | | | | | | | | | Total | | $ | (53,107 | ) | | $ | 77,169 | | | $ | 24,062 | | Interest Expense: | | | | | | | | | | | | | Deposits | | $ | (9,315 | ) | | $ | 13,773 | | | $ | 4,458 | | FHLB advances | | | (19,787 | ) | | | 33,781 | | | | 13,994 | | Other | | | 3,330 | | | | (7,502 | ) | | | (4,172 | ) | | | | | | | | | | | | | | Total | | $ | (25,772 | ) | | $ | 40,052 | | | $ | 14,280 | | | | | | | | | | | | | | | Net change in net interest income | | $ | (27,335 | ) | | $ | 37,117 | | | $ | 9,782 | | | | | | | | | | | | | | |
Provision for Losses
The provision for losses was increased to $9.3 million for the three months ended March 31, 2004 from $7.9 million during the same period in 2003. The provision for losses in the 2004 period included charge-offs of $4.5 million and an increase in the general allowance for loan losses of $4.8 million. The provision for losses in the 2003 period included charge-offs of $5.5 million and an increase in the general allowance for loan losses of $2.4 million. Net charge-offs were an annualized 0.26% and 0.58% of average investment loans outstanding during the three months ended March 31, 2004 and March 31, 2003, respectively.
The allowance for loan losses was increased 13.3% during the three months ended March 31, 2004 because of the 19.1% increase in the Company’s investment loan portfolio and the increase of 21.0% in the non-mortgage loan portfolio. Over the past quarter, the Company has grown its non-single family loan portfolio by $243.8 million.
It is management’s belief that the current reserves are adequate to offset the inherent risk associated with the Company’s investment loan portfolio. The investment loan portfolio increased $1.3 billion, or 19.1%, during the three month period ended March 31, 2004. The allowance, which totals $40.8 million, is 0.50% of the investment loan portfolio and 66.1% of non-performing loans.
1718
Non-Interest IncomeProvision for Losses
Three months During the three months ended MarchJune 30, 2004, the Company’s provision for losses was $3.6 million. This is a 47.1% decrease from the $6.8 million recorded in the comparable 2003 period and a 61.3% decrease from the $9.3 million recorded in the prior quarter. Net charge-offs during the three months ended June 30, 2004 were an annualized 0.12% of average investment loans outstanding. Comparatively, net charge-offs were an annualized 0.73% during the three months ended June 30, 2003. At each period end, management believes that the allowance was at a level that would offset the inherent risks associated with the Company’s loan portfolio. The loan portfolio increased 27.9% from December 31, 2003 to June 30, 2004. The Company’s increase in its general reserves between these two dates constituted an increase of $5.7 million, or 15.8%. Non-performing loans increased $1.3 million, or 2.2%, since December 31, 2003. The allowance, which now totals $41.7 million, is 0.48% of loans held for investment and 70.0% of non-performing loans. Six months During the six months ended June 30, 2004, non-interest income increased $0.5the Company’s provision for losses was $12.9 million. This is a 12.2% decrease from the $14.7 million to $78.1 million from $77.6 millionrecorded in the comparable 2003 period. Despite the insignificant increase in the total of non-interest income, the individual components had significant variations. In addition to having a rate environment that would be considered volatile during the first quarter of 2004, the overall general level of interest ratesNet charge-offs were higher than the first quarter of 2003. The volatility of the rates and the higher rate environment slowed the amount of mortgage loan refinances generatedan annualized 0.17% in the 2004 period and also hinderedversus 0.84% in the amount of overall mortgage loan production. This slowdown negatively affected the amount of loan sale gains achieved but increased the amount of loan servicing income and increased the profits on the sales of mortgage servicing rights. During 2004, the Company also had increased the amount of fee income from deposits but this increase was offset by a decrease in loan fee income.2003 period. Non-Interest Income Loan Administration Three months Net loan administration fee income increased to $8.2$5.6 million during the three months ended March 31,June 30, 2004, from a negative $25.6$13.1 million in the 2003 period. This $33.8$18.7 million increase between the comparable periods was the result of the $27.0$13.5 million decrease in the amortization of the mortgage servicing rights (“MSR”) along withand the $6.8$5.2 million increase in the amount of gross servicing fee revenue.fees received. This decreased amortization decrease resulted from the anticipated decrease in the amount was recorded because of the slowdown in prepayment activity on the underlying mortgage loans. Loan amortization or prepaymentloans serviced for others. The increase in the gross fee revenue was $2.1 billion during the three months ended March 31, 2003 versus only $1.8 billion during the three months ended March 31, 2004. The increased fee revenueresult of a larger portfolio of serviced loans during the 2004 periodperiod. Six months Net loan administration fee income for the six months ended June 30, 2004 increased to $13.8 million from a negative $38.7 million recorded in the 2003 period. This $52.5 million increase similarly was the result of the Company’s decision to hold adecrease in the amortization of mortgage servicing rights offset by increased servicing revenue. MSR amortization equaled $45.1 million during the 2004 period versus $85.6 million during the comparable 2003 period. Gross fee income, before the amortization of serving rights, was $58.9 million for the six months ended June 30, 2004 and $46.9 million for the comparable 2003 period. This increase in gross fee income was the result of the larger servicing portfolio.portfolio of serviced loans during the 2004 period. At March 31,June 30, 2004, the unpaid principal balance of loans serviced for others was $26.7 billion versus $29.9 billion versusserviced at March 31, 2004 and $30.4 billion serviced at December 31, 2003, and $22.3 billion serviced at March 31, 2003. The weighted average servicing fee on loans serviced for others at March 31,June 30, 2004 was 0.351%0.348% (i.e., 35.134.8 basis points). The weighted average age of the loans serviced for others portfolio at March 31,June 30, 2004 was 11 months old.12 months. 19
Non-Interest Income (continued) Net Gain on Loan Sales As previously stated, one of the Company’s operating strategies involves the origination of mortgage loans on a national basis, the sale of those loans on a servicing retained basis, and then the strategic sale of the created servicing rights. Typically, as the supply of available loans in the marketplace increases, the Company is able to acquire these loans at a lower price. Inversely, as interest rates rise or are stable but at higher levels, the amount of available loans are less and the competing companies must originate at decreased margins to applicable secondary market resale prices in order to maintain production levels. Management has historically maintained a profitable spread between the price at which it acquires loans versus the price level at which the loans can be sold in the secondary market. There can be no assurances that the Company will be able to maintain this profitability level in the future. Three months For the three months ended March 31,June 30, 2004, net gain on loan sales decreased $57.1$146.8 million, to $32.1$7.5 million, from $89.2$154.3 million in the 2003 period. The 2004 period reflects the sale of $7.6$8.1 billion in loans versus $13.3$17.3 billion sold in the 2003 period. The higherA lower interest rate environment in the 20042003 period resulted in a lowerlarger mortgage loan origination volume ($9.517.5 billion in the 2003 period vs. $9.0 billion in the 2004 period vs. $15.1 billion in the 2003 period) and a smallerlarger or narrowerwider gain on sale spread (44(96 basis points in the 20042003 period versus 8017 basis points in the 20032004 period) recorded when the loans were sold. Six months For the six months ended June 30, 2004, net gain on loan sales were $39.6 million versus $243.5 million in the comparable 2003 period. The higher2004 period includes the sale of $15.7 billion in loans versus $30.5 billion sold in the 2003 period. For the six month period ended June 30, 2003, the lower interest rate environment also resulted in a larger or wider gain on sale spread recorded (88 basis points in the 2003 period versus 30 basis points in the 2004 period allowed a lesser amount of refinances (70% inperiod) when the 2004 period vs. 88% in the 2003 period). 18
The table below discloses the amount of adjustments made to the gain on sale numbers for items unrelated to the individual loans were sold.
| | | | | | | | | | | 2004
| | 2003
| Net gain recorded | | $ | 32,132 | | | $ | 89,247 | | Add: FASB 133 adjustments | | | (6,704 | ) | | | 7,423 | | Add: Reps and Warranty losses | | | 8,067 | | | | 9,806 | | | | | | | | | | | Gain realized on loans sold | | $ | 33,495 | | | $ | 106,476 | | | | | | | | | | | Loans sold | | $ | 7,640,738 | | | $ | 13,253,246 | | Spread achieved | | | 0.44 | % | | | 0.80 | % |
| | | | | | | | | | | | | | | | | | | For the three months ended | | For the six months ended | | | June 30, | | June 30, | | | 2004
| | 2003
| | 2004
| | 2003
| Net gain on loan sales | | $ | 7,514 | | | $ | 154,256 | | | $ | 39,645 | | | $ | 243,503 | | Plus: FASB 133 adjustment | | | 159 | | | | 5,881 | | | | (6,545 | ) | | | 13,304 | | Plus: Secondary Market Reserve | | | 5,849 | | | | 5,396 | | | | 13,916 | | | | 11,908 | | | | | | | | | | | | | | | | | | | Gain on loan sales | | $ | 13,522 | | | $ | 165,533 | | | $ | 47,016 | | | $ | 268,715 | | Loans sold | | $ | 8,085,479 | | | $ | 17,287,723 | | | $ | 15,726,216 | | | $ | 30,540,969 | | Sales spread | | | 0.17 | % | | | 0.96 | % | | | 0.30 | % | | | 0.88 | % |
Derivative Accounting In its home 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. The process of recording these fair value adjustments has the effect of adjusting current period sales up or down. Although the Company utilizes published fair value estimates in its valuation process, the estimation process may be prone to error and therefore could misstate the Company’s true position. At March 31,June 30, 2004, the Company had commitments to originate $5.6$2.6 billion of single-family mortgage loans. The Company also had commitments to sell $4.5$2.7 billion of mortgage-backed securities. These net positions had a net positive effectmarket value of $13.7$13.5 million. During the threesix months ended March 31,June 30, 2004, the Company’s position increased $6.7$6.5 million from the $7.0 million recorded at December 31, 2003. 20
Non-Interest Income (continued) Net Gain on Loan Sales (continued) Secondary Marketing Reserve When the Company sells loans 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 maintains a reserve against future losses created by the repurchase of mortgage loans previously sold to the secondary market. The secondary market 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 thethis reserve, or that subsequent evaluation, in light of the factors then-prevailing, will not require increases to the reserve. During the threesix months ended March 31,June 30, 2004, the Company repurchased $25.7 million in non-performing mortgage loans from secondary market investors. During 2003, the Company repurchased $30.1$43.9 million in non-performing mortgage loans from secondary market investors. At March 31,June 30, 2004, the Company had sold $138.4$153.4 billion in loans to the secondary market over the previous 60 months. The repurchased loans were acquired because Based on its analysis of their subsequent non-performing status. Repurchasesloan repurchase data, management believes that repurchases are expected to be 0.08%0.113% 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.the time of sale. Periods of lower rates and higher refinance volume have shown less exposure to repurchase requirements than periods of higher rates and lesslower refinance volume. The Company’s experience has been a net loss of 17.5%17.0% on all non-performingforeclosed loans repurchased.and repurchases. Any increase in the secondary market reserve is charged as an offset to net loan sale gains.
The Company recorded net charge-offs of $6.4$4.9 million and $11.3 million related to secondary market repurchases in the three and six months ended March 31, 2004.June 30, 2004, respectively. At March 31,June 30, 2004, the Company had a reserve of $12.0$12.9 million for future losses related to secondary market repurchases. 19
Net Gain on the Sale of Mortgage Servicing Rights As previously stated, one of the Company’s operating strategies involves the strategic sale of organically created servicing rights. Typically, the Company enters into a flow sale agreement to sell a portion of its newly originated MSR. The Company will then sell the remaining portion of its MSR on a strategic basis in a bulk sale transaction as conditions warrant. The Company continually monitors the marketplace for sale opportunities versus the value the Company can create by retaining a larger portfolio of MSR. The Company is limited in the amount of MSR it can hold for regulatory purposes and is also limited on an operational basis to the amount of loans the Company can service. Management has historically maintained a profitable spread between the price at which it acquires MSR and the price level at which the MSR can be sold in the secondary market. Management also has not been required to record a valuation adjustment to the MSR for impairment because of its policy of selling substantially all of the MSR it originates. Impairment in a MSR portfolio is typically created by a sudden and unexpected change in the interest rate environment. Since the interest rate environment is beyond the control of management, there can be no assurances made that the Company will be able to avoid an impairment charge in the future. 21
Non-Interest Income (continued) Net Gain on the Sale of Mortgage Servicing Rights (continued) Three months The Company sold MSR with underlying loans totaling $6.4$8.6 billion during the 2004 period versus $10.4$7.8 billion during the 2003 period. The Company sold a $4.0$4.8 billion in bulk servicing packagepackages in the 2004 period versus a $4.9$1.0 billion package in the 2003 period. During 2004, the Company sold the servicing rights to $2.1$3.6 billion of newly originated loans on a flow basis and $290.1 million$0.2 billion of loans on ain servicing released basis.transactions. During 2003, the Company sold $5.1$6.2 billion of newly originated servicing rights on a flow basis and $428.8 million$0.6 billion of loans on ain servicing released basis.transactions. For the three months ended March 31,June 30, 2004, the net gain on the sale of mortgage servicing rights increased from $1.3$0.3 million during the 2003 period to $21.8$37.2 million. The gain on sale in the 2004 period was higher than the gain recorded in the 2003 period because of the wide spread between the basis in the MSR sold and the sales price received for the MSR. The MSR was originated in a period when the market value was nearlyless than half the value it became in the period of sale. Six months For the six months ended June 30, 2004, the net gain on the sale of mortgage servicing rights increased $57.4 million to $59.0 million, from $1.6 million for the same period in 2003. The MSRgain on sale of mortgage servicing rights increased due to the sale of $8.8 billion of seasoned servicing rights in 2004 versus the sale of $5.0 billion during 2003. During 2004, the Company sold a total of $15.0 billion in servicing versus the 2004 bulk sale had a basis$15.7 billion of 1.01% versus an aggregated sales price of 1.52%mortgage servicing rights originated. In 2003, the Company sold $18.2 billion and the 2004 flow sales had a basis of 1.01% versus an average sales price of 1.41%.originated $30.5 billion in mortgage servicing rights. Other Three months During the three months ended March 31,June 30, 2004, the Company recorded $15.9$20.7 million in other income. In the comparable 2003 period, the Company recorded $12.7$13.4 million. The major difference between the two periods is found in the deposit fees collected. During 2004 the Company collected $3.2 million in deposit fees versus $0.3 million collected in the comparable 2003 period. This increase is attributable to the automated check processing and overdraft protection program instituted in the fourth quarter of 2003.
Net loan fees collected during the three months ended March 31, 2004 totaled $4.1 million compared to $4.6 million collected during the comparable 2003 period. This decrease is the result of a decrease in loan production of $5.5 billion to $9.6 billion for the quarter ended March 31, 2004, compared to $15.1 in the same 2003 period.
During the three months ended March 31, 2004, the Company recorded $2.6 million in dividends received on FHLB stock, compared to the $2.1 million received during the three months ended March 31, 2003. The increase was a result of the increased balance of FHLB stock owned. At March 31, 2004 the Company owned $227.4 million and at March 31, 2003 the Company owned $150.0 million.
20
The Company also recorded $1.0 million and $1.1 million in subsidiary income for the quarters ended March 31, 2004 and 2003, respectively.
The collection and recording of these fees are dependent on the amount of deposit accounts, the number of certain types of loans closed, the amount of earnings recorded in certain subsidiaries, and the collection of any miscellaneous fees. The major difference between the two periods is found in the deposit and loan fees collected. During the three months ended June 30, 2004 the Company collected $3.0 million in deposit fees versus $0.5 million collected in the comparable 2003 period. This increase is attributable to the automated check processing and overdraft protection program instituted in the fourth quarter of 2003. Net loan fees collected during the three months ended June 30, 2004 totaled $6.0 million compared to $4.8 million collected during the comparable 2003 period. This increase is the result of an increase in the production and subsequent sale of brokered loans. 22
Non-Interest Income (continued) Other (continued) Six months During the six months ended June 30, 2004, the Company recorded $36.6 million in other income. In the comparable 2003 period, the Company recorded $26.2 million. The collection and recording of these fees are dependent on the amount of deposit accounts, the number of certain types of loans closed, the amount of earnings recorded in certain subsidiaries, and the collection of any miscellaneous fees. The major difference between the two periods is found in the deposit fees collected. During the six months ended June 30, 2004 the Company collected $6.2 million in deposit fees versus $0.8 million collected in the comparable 2003 period. This increase is attributable to the automated check processing and overdraft protection program instituted in the fourth quarter of 2003. Net loan fees collected during the six months ended June 30, 2004 totaled $10.1 million compared to $9.4 million collected during the comparable 2003 period. This increase is the result of an increase in the production and subsequent sale of brokered loans. During the six months ended June 30, 2004, the Company recorded $4.9 million in dividends received on FHLB stock, compared to the $4.1 million received during the six months ended June 30, 2003. The increase was a result of the increased balance of FHLB stock owned. At June 30, 2004 the Company owned $229.8 million and at June 30, 2003 the Company owned $152.8 million. Non-Interest Expense The following table sets forth the components of the Company’s non-interest expense, along with the allocation of expenses related to loan originations that are deferred pursuant to SFAS No. 91, “Accounting“Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.Leases.” As required by SFAS No. 91, mortgage loan fees and certain direct origination costs (principally compensation and benefits) are capitalized as an adjustment to the basis of the loans originated during a period. Certain other expenses associated with loan production, however, are not required or allowed to be capitalized. These expense amounts are reflected on the Company’s statement of earnings. Management believes that the analysis of non-interest expense on a “gross” basis (i.e., prior to the deferral of capitalized loan origination costs) more clearly reflects the changes in non-interest expense when comparing periods. | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended March 31, | | Three months ended June 30, | | Six months ended June 30, | | | 2004
| | 2003
| | 2004
| | 2003
| | 2004
| | 2003
| | | ( in thousands ) | | ( in thousands ) | | Compensation and benefits | | $ | 38,437 | | $ | 39,661 | | | $ | 40,306 | | $ | 49,435 | | $ | 78,743 | | $ | 94,096 | | Commissions | | 23,668 | | 41,945 | | | 28,389 | | 40,827 | | 52,058 | | 77,772 | | Occupancy and equipment | | 17,918 | | 16,109 | | | 17,340 | | 17,299 | | 35,257 | | 33,408 | | Advertising | | 2,391 | | 3,245 | | | 2,407 | | 3,446 | | 4,797 | | 6,691 | | Federal insurance premium | | 262 | | 569 | | | 250 | | 605 | | 513 | | 1,174 | | General and administrative | | 16,752 | | 15,717 | | | 16,038 | | 21,239 | | 32,790 | | 36,956 | | | | | | | | | | | | | | | | | Total | | 99,428 | | 117,246 | | | 104,730 | | 132,851 | | 204,158 | | 250,097 | | Less: capitalized direct costs of loan closings | | | (37,049 | ) | | | (59,675 | ) | | Less: capitalized loan costs | | | | (41,393 | ) | | | (67,362 | ) | | | (78,442 | ) | | | (127,037 | ) | | | | | | | | | | | | | | | | Total, net | | $ | 62,379 | | $ | 57,571 | | | $ | 63,337 | | $ | 65,489 | | $ | 125,716 | | $ | 123,060 | | | | | | | | | | | | | | | | | Efficiency ratio | | | 48.33 | % | | | 44.58 | % | | | 48.6 | % | | | 31.9 | % | | | 48.5 | % | | | 36.6 | % |
23
Non-Interest Expense (continued) Three months The following are the major changes affecting the quarterly income statement: •§ | | The retail banking operation conducted business from 108 more facilities at March 31,June 30, 2004 than at March 31,June 30, 2003. | | •§ | | The Company conducted business from 3029 more retail loan origination offices at March 31,June 30, 2004 than at March 31,June 30, 2003. | | •§ | | The home lending operation originated $9.5$9.0 billion in residential mortgage loans during the 2004 quarter versus $15.1$17.5 billion in the comparable 2003 quarter. | | •§ | | The Company employed 2,5022,482 salaried employees at March 31,June 30, 2004 versus 2,8653,106 salaried employees at March 31,June 30, 2003. | | •§ | | The Company employed 128135 full-time national account executives at March 31,June 30, 2004 versus 119121 at March 31,June 30, 2003. | | •§ | | The Company employed 996862 full-time retail loan originators at March 31,June 30, 2004 versus 793883 at March 31,June 30, 2003. | | •§ | | The Company changed its policy on evaluating personnel salaries on the respective employees anniversary date and changed it to a calendar basis. The annual increases for salaried employees were received on January 1, 2004. |
21
Non-Interest Expense (continued)
Non-interest expense, excluding the capitalization of direct loan origination costs, decreased $17.8$28.2 million to $99.4$104.7 million during the three months ended March 31,June 30, 2004, from $117.2$132.9 million for the comparable 2003 period. This large decrease in costs is for the most part explained above, but further explanation follows. The decreased compensation and benefits expense of $1.3$9.1 million is the direct result of the decreased personnel count utilized in the home lending operation offset by the salary increases given to the remaining employees and the staff that was required to support the additional banking centers. The largest change occurred in commissions paid to the commissioned sales staff. On a year over year basis, there was a $18.2$12.4 million decrease. This is the direct result of the decreased mortgage loan originations during the period. During the 2004 period commissions were 25.031.5 basis points of loan originations versus 27.823.3 basis points during the 2003 period. The majority of the $1.8 million increase in occupancy and equipment costs are directly attributable to the extensive facility expansion.
The decrease in general and administrative expense is reflective of the decreased mortgage loan originations offset by the increased number of banking centers in operation during the period. During the three months ended March 31,June 30, 2004, the Company capitalized direct loan origination costs of $37.0$41.4 million, a decrease of $22.7$26.0 million from $59.7$67.4 million for the comparable 2003 period. The 2004 deferral equates to a capitalization of $692$796 per loan versus $655$636 per loan in the 2003 period. 2224
| | Non-Interest Expense (continued) Six months During the six months ended June 30, 2004, non-interest expense, excluding the capitalization of direct loan origination costs, decreased by $45.9 million, or 18.4%, to $204.2 million, from $250.1 million for the comparable 2003 period. The decreased costs are primarily attributable to the same items as mentioned above in the “three month” section, but further explanation follows. The decreased compensation and benefits expense of $15.4 million, or 16.4%, is the direct result of the decreased personnel count utilized in the home lending operation, offset by the salary increases given to the remaining employees and the new staff that was required to support the additional banking centers. The decreased commission expense of $25.7 million, or 33.0%, is the direct result of the 43.3% decrease in mortgage loan originations during the period. During the 2004 and 2003 periods, commissions were 28.2 and 23.9 basis points of loan originations, respectively. The $1.9 million increase in occupancy and equipment costs is directly attributable to the 18.2% increase in operating facilities and the equipment required to accommodate the increased staff. The decrease in general and administrative expense is reflective of the decreased mortgage loan originations, offset by the increased number of banking centers in operation during the period. During the six months ended June 30, 2004, the Company capitalized direct loan origination costs of $78.4 million, a decrease of $48.6 million, or 38.3%, from $127.0 million for the comparable 2003 period. The 2004 deferral equates to a capitalization of $743 per loan versus $644 per loan in the 2003 period. 25
|
Assets The Company’s assets totaled $12.2$12.0 billion at March 31,June 30, 2004, an increase of $1.6$1.4 billion, or 15.1%13.2%, as compared to $10.6 billion at December 31, 2003. This increase was primarily due to an increase in earning assets at March 31,June 30, 2004. Cash and cash equivalents Cash and cash equivalents increased from $148.4 million at December 31, 2003 to $205.5$162.6 million at March 31,June 30, 2004. Mortgage-backed securities held to maturity Mortgage-backed securities decreased from $30.7 million at December 31, 2003 to $27.9$26.1 million at March 31,June 30, 2004. The net decrease was attributed to payoffs received. There were no additions to thereceived, which was offset slightly by a small purchase of $1.1 million in June of 2004. The purchase was for CRA investment purposes. This portfolio in the three months ended March 31, 2004. This portfolioalso includes loans originated by the Company and securitized for credit enhancement reasons. Investment securities held to maturity The Company’s investment portfolio increased 9.2%, from $14.1 million at December 31, 2003 to $15.2$15.4 million at March 31,June 30, 2004. The investment portfolio is limited to a small portfolio of contractually required collateral, regulatory required collateral, and reinvestments made by non-bank subsidiaries. Loans available for sale Mortgage loans available for sale increased $0.2decreased $0.6 billion, or 7.1%21.4%, to $3.0$2.2 billion at March 31,June 30, 2004, from $2.8 billion at December 31, 2003. This slight increasedecrease is primarily attributable to the increasedecrease in loan production originated during MarchJune versus December. At March 31,June 30, 2004, the majority of these loans were originated within the two weeks prior to the end of the quarter. The majority of these loans will be sold or exchanged for mortgage-backed securities and sold in the secondary market within the next 45 days. Investment loan portfolio The investment loan portfolio at March 31,June 30, 2004 increased $1.3$1.9 billion from December 31, 2003. The increase included a $1.0$1.9 billion increase in single-family mortgage loans and a $0.2 billion increase$109.5 million decrease in warehouse loans. | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2004
| | December 31, 2003
| | March 31, 2003
| | June 30, 2004
| | December 31, 2003
| | June 30, 2003
| Loans held for investment: | | | Single family mortgage | | $ | 6,503,734 | | $ | 5,478,200 | | $ | 2,888,122 | | | Single-family mortgage | | | $ | 7,369,787 | | $ | 5,478,200 | | $ | 3,110,502 | | Second mortgage | | 135,298 | | 141,010 | | 191,253 | | | 133,769 | | 141,010 | | 170,511 | | Construction | | 60,369 | | 58,323 | | 51,032 | | | 67,793 | | 58,323 | | 44,877 | | Commercial real estate | | 589,906 | | 548,392 | | 452,295 | | | 575,458 | | 548,392 | | 475,705 | | Warehouse | | 520,120 | | 346,780 | | 525,080 | | | 237,343 | | 346,780 | | 841,877 | | Commercial | | 8,156 | | 7,896 | | 9,377 | | | 8,250 | | 7,896 | | 8,343 | | Consumer | | 288,331 | | 259,651 | | 152,417 | | | 330,675 | | 259,651 | | 188,791 | | | | | | | | | | | | | | | | | Total | | $ | 8,105,914 | | $ | 6,840,252 | | $ | 4,269,576 | | | $ | 8,723,075 | | $ | 6,840,252 | | $ | 4,840,606 | | | | | | | | | | | | | | | | |
2326
Allowance for losses The allowance for losses totaled $40.8$41.7 million at March 31,June 30, 2004 and $36.0 million at December 31, 2003, respectively. The allowance for losses as a percentage of non-performing loans was 66.1%70.0% and 61.7% at March 31,June 30, 2004 and December 31, 2003, respectively. The Company’s non-performing loans totaled $61.8$59.6 million and $58.3 million at March 31,June 30, 2004 and December 31, 2003, respectively. The allowance for losses as a percentage of investment loans was 0.50%0.48% and 0.53% at March 31,June 30, 2004 and December 31, 2003, respectively. The allowance for losses is considered adequate based upon management’s assessment of relevant factors, including the types and amounts of non-performing loans, historical, and current loss experience on such types of loans, and the current economic environment. The following table provides the amount of delinquent loans at the date listed. At March 31,June 30, 2004, 81.9%88.1% of all delinquent loans were loans where the Company had a first lien position on residential real estate. | | | | | | | | | | | | | | | | | | | | | | | March 31, | | December 31, | | March 31, | | | Days Delinquent
| | 2004
| | 2003
| | 2003
| | | | 30 | | | $ | 33,089 | | | $ | 32,215 | | | $ | 23,046 | | | | | 60 | | | | 10,390 | | | | 14,920 | | | | 11,868 | | | | | 90 | | | | 61,762 | | | | 58,334 | | | | 81,346 | | | | | | | | | | | | | | | | | | | | | Total | | $ | 105,241 | | | $ | 105,469 | | | $ | 116,260 | | | | | | | | | | | | | | | | | | | | | Investment loans | | $ | 8,105,914 | | | $ | 6,840,252 | | | $ | 4,269,576 | | | | | | | | | | | | | | | | | | | | | Delinquency % | | | 1.30 | % | | | 1.54 | % | | | 2.72 | % | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | June 30, | | | | | | June 30, | Days Delinquent
| | 2004
| | December 31, 2003
| | 2003
| 30 | | $ | 29,529 | | | $ | 32,215 | | | $ | 31,150 | | 60 | | | 15,639 | | | | 14,920 | | | | 13,380 | | 90 | | | 59,556 | | | | 58,334 | | | | 56,266 | | | | | | | | | | | | | | | Total | | $ | 104,724 | | | $ | 105,469 | | | $ | 100,796 | | | | | | | | | | | | | | | Investment loans | | $ | 8,723,075 | | | $ | 6,840,252 | | | $ | 4,840,606 | | | | | | | | | | | | | | | Delinquency % | | | 1.20 | % | | | 1.54 | % | | | 2.08 | % | | | | | | | | | | | | | |
Accrued interest receivable Accrued interest receivable increased from $46.9 million at December 31, 2003 to $48.8$48.4 million at March 31,June 30, 2004 as the Company’s total loan portfolio increased. The Company typically collects loan interest in the following month after it is earned. FHLB stock Holdings of FHLB stock increased from $198.4 million at December 31, 2003 to $227.4$229.8 million at March 31,June 30, 2004. As a member of the FHLB, the Bank is required to hold shares of FHLB stock in an amount at least equal to 1% of the aggregate unpaid principal balance of its home mortgage loans, or 5% of its outstanding FHLB advances, whichever is greater. Repossessed assets Repossessed assets decreasedincreased from $36.8 million at December 31, 2003 to $36.3$38.7 million at March 31,June 30, 2004. This decreaseincrease was caused by a lessergreater amount of loans in a foreclosed status that are yet to be sold. Repurchased assets Since the majority of all the loansWhen the Company originates are sold tosells loans in 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. The Company repurchased $25.7$43.9 million in non-performing mortgage loansassets from secondary market investors during the threesix months ended March 31,June 30, 2004, and $30.1 million in all of 2003, respectively. The repurchased assets were acquired because of their subsequent non-performing status. These repurchases were primarily attributed to sales completed within the prior sixty-month period.
Net repurchased assets increased $6.7$9.9 million, or 55.8%82.5%, to $18.7$21.9 million at March 31,June 30, 2004, from $12.0 million at December 31, 2003. 2427
Premises and Equipment Premises and equipment increased from $161.1 million at December 31, 2003 to $162.1 million at June 30, 2004. This increase was primarily caused by the increase in five banking centers offset by normal depreciation. Mortgage servicing rights Mortgage servicing rights totaled $261.1$236.2 million at March 31,June 30, 2004, an increasea decrease of $1.0$23.9 million from the $260.1 million reported at December 31, 2003. During the threesix months ended March 31,June 30, 2004, the Company capitalized $83.5$169.5 million, amortized $20.8$45.1 million, and sold $61.7$148.3 million in mortgage servicing rights. The principal balance of the loans serviced for others stands at $29.9$26.7 billion at March 31,June 30, 2004 versus $30.4 billion at December 31, 2003. The capitalized value of the mortgage servicing rights was 0.87%0.89% and 0.86% at June 30, 2004 and December 31, 2003, respectively. Activity of Mortgage Loans Serviced for Others (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended | | Three months ended | | Three months ended | | Six months ended | | | March 31, 2004
| | March 31, 2003
| | June 30, 2004
| | June 30, 2003
| | June 30, 2004
| | June 30, 2003
| Beginning balance | | $ | 30,395,079 | | $ | 21,586,797 | | | $ | 29,858,203 | | $ | 22,336,428 | | $ | 30,395,079 | | $ | 21,586,797 | | Loans sold | | 7,640,738 | | 13,253,246 | | | 8,085,479 | | 17,287,723 | | 15,726,216 | | 30,540,969 | | | | | | | | | | | | | | | | | Subtotal | | 38,035,817 | | 34,840,043 | | | 37,943,682 | | 39,624,151 | | 46,121,295 | | 52,127,766 | | Loans sold servicing released | | 290,096 | | 428,775 | | | Servicing released sales | | | 206,448 | | 611,884 | | 496,544 | | 1,042,943 | | Servicing sold (flow basis) | | 2,069,122 | | 5,112,120 | | | 3,587,110 | | 6,181,436 | | 5,656,232 | | 11,302,746 | | Servicing sold (bulk basis) | | 3,998,836 | | 4,855,925 | | | 4,806,014 | | 980,683 | | 8,804,850 | | 5,856,924 | | | | | | | | | | | | | | | | | Subtotal | | 6,358,054 | | 10,396,820 | | | 8,599,572 | | 7,774,003 | | 14,957,626 | | 18,202,613 | | Amortization | | 1,819,560 | | 2,106,795 | | | 2,676,802 | | 2,896,277 | | 4,496,361 | | 4,971,282 | | | | | | | | | | | | | | | | | Ending balance | | $ | 29,858,203 | | $ | 22,336,428 | | | $ | 26,667,308 | | $ | 28,953,871 | | $ | 26,667,308 | | $ | 28,953,871 | | | | | | | | | | | | | | | | |
At March 31,June 30, 2004, the fair value of the MSR was approximately $312.4$346.2 million based on an internal valuation model, which utilized an average discounted cash flow equal to 11.34%11.72%, an average cost to service of $40.00 per conventional loan and $50.00$70.00 per government or adjustable rate loan, and a weighted constant prepayment assumption equal to 29.1%13.7%. The portfolio contained 222,351200,296 loans, had a weighted rate of 5.99%5.96%, a weighted remaining term of 299294 months, and had been seasoned eleventwelve months. Other assets Other assets increased $34.9$87.2 million, or 35.6%89.0%, to $132.9$185.2 million at March 31,June 30, 2004, from $98.0 million at December 31, 2003. The majority of this increase was attributable to the recording of receivables in conjunction with the sale of residential mortgage loan servicing rights completed during the threesix months ended March 31,June 30, 2004. Upon the sale of the mortgage servicing rights a receivable is recorded for a portion of the sale proceeds. The balance due is paid within 180 days after the sale date. 2528
Liabilities The Company’s total liabilities increased $1.6$1.4 billion, or 16.2%14.1%, to $11.5$11.3 billion at March 31,June 30, 2004, from $9.9 billion at December 31, 2003. The majority of this increase was found in the Company’s interest bearing liabilities. Deposit accounts Deposit accounts increased $0.4$0.8 billion to $6.1$6.5 billion at March 31,June 30, 2004, from $5.7 billion at December 31, 2003. Demand deposit accounts decreased $22.3$39.3 million to $367.7$350.7 million at March 31,June 30, 2004, from $390.0 million at December 31, 2003. Savings deposit accounts decreased $0.2increased $193.8 million to $314.3$508.3 million at March 31,June 30, 2004, from $314.5 million at December 31, 2003. Money market deposits increased $0.1 billiondecreased $70.8 million to $1.4$1.2 billion at March 31,June 30, 2004, from $1.3 billion at December 31, 2003. The municipal deposit channel now totals $1.1$1.2 billion. The account totals increased $0.2$0.3 billion during the threesix months ended March 31,June 30, 2004. These deposits have been garnered from local government units within the Company’s retail market area. Wholesale deposit accounts remained the sameincreased $0.2 billion to $1.4 billion at June 30, 2004, from $1.2 billion at March 31, 2004 and December 31, 2003. These deposits have a weighted maturity of 2422.4 months and are used for interest rate risk management. Deposit Portfolio (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2004 | | December 31, 2003 | | June 30, 2004 | | December 31, 2003 | | | Balance
| | Rate
| | %
| | Balance
| | Rate
| | %
| | Balance
| | Rate
| | %
| | Balance
| | Rate
| | %
| Demand deposits | | $ | 367,665 | | | 0.95 | % | | | 6.1 | % | | $ | 390,008 | | | 0.70 | % | | | 6.9 | % | | $ | 350,743 | | | 0.87 | % | | | 5.4 | % | | $ | 390,008 | | | 0.70 | % | | | 6.9 | % | Savings deposits | | 314,265 | | 1.16 | | 5.2 | | 314,452 | | 1.21 | | 5.5 | | | 508,327 | | 1.81 | | 7.8 | | 314,452 | | 1.21 | | 5.5 | | Money market deposits | | 1,394,527 | | 1.87 | | 22.9 | | 1,320,635 | | 1.73 | | 23.3 | | | 1,249,775 | | 2.11 | | 19.1 | | 1,320,635 | | 1.73 | | 23.3 | | Certificates of deposits | | 1,670,647 | | 3.52 | | 27.5 | | 1,602,223 | | 3.57 | | 28.2 | | | 1,810,812 | | 3.47 | | 27.7 | | 1,602,223 | | 3.57 | | 28.2 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total retail deposits | | 3,747,104 | | 2.46 | | 61.7 | | 3,627,318 | | 2.39 | | 63.9 | | | 3,919,657 | | 2.59 | | 60.0 | | 3,627,318 | | 2.39 | | 63.9 | | Municipal deposits | | 1,125,887 | | 1.42 | | 18.5 | | 899,123 | | 1.44 | | 15.8 | | | 1,187,367 | | 1.61 | | 18.2 | | 899,123 | | 1.44 | | 15.8 | | Wholesale deposits | | 1,202,336 | | 2.93 | | 19.8 | | 1,153,726 | | 3.09 | | 20.3 | | | 1,427,468 | | 2.79 | | 21.8 | | 1,153,726 | | 3.09 | | 20.3 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total deposits | | $ | 6,075,327 | | | 2.36 | % | | | 100.0 | % | | $ | 5,680,167 | | | 2.38 | % | | | 100.0 | % | | $ | 6,534,492 | | | 2.46 | % | | | 100.0 | % | | $ | 5,680,167 | | | 2.38 | % | | | 100.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | |
FHLB advances FHLB advances increased $0.9$0.4 billion to $4.1$3.6 billion at March 31,June 30, 2004, from $3.2 billion at December 31, 2003. The Company has historically relied upon these advances as aan additional funding source for the origination or purchase of loans, which later are later sold into the secondary market. The Company has moved toward renewing all of its maturing advances into medium term debt, which provides a better lines up as fundingstrategic match of maturities for the Company’s held for investment portfolio. The Company has an approved line of credit with the FHLB of $4.5$4.9 billion, at March 31,June 30, 2004. 2629
Long term debt On April 30, 1999, the Company issued $74.8 million of 9.50% preferred securities to the general public through the Company’s subsidiary, Flagstar Trust, a Delaware trust. These securities were called for redemption and redeemed on April 30, 2004. On December 19, 2002, the Company issued $25.0 million of preferred securities through a privately issued pooled transaction. These securities have an effective cost for the first five years of 6.88%. The securities were issued by the Company’s subsidiary, Flagstar Statutory Trust II, a Connecticut trust. On February 19, 2003, the Company issued $25.0 million of preferred securities through a privately issued pooled transaction. These securities have an effective cost for the first five years of 6.55%. The securities were issued by the Company’s subsidiary, Flagstar Statutory Trust III, a Delaware trust. On March 19, 2003, the Company issued $25.0 million of preferred securities through a privately issued pooled transaction. These securities have an effective cost for the first five years of 6.75%. The securities were issued by the Company’s subsidiary, Flagstar Statutory Trust IV, a Delaware trust. The 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 net proceeds from these offerings were contributed to Flagstar Bank as additional paid-in capital and are included as regulatory capital. Undisbursed payments on loans serviced for others Undisbursed payments on loans serviced for others increased $260.2$17.1 million to $735.5$492.4 million at March 31,June 30, 2004, from $475.3 million at December 31, 2003. These amounts represent payments received from borrowers for interest, principal and related loan charges, which have not been remitted to the respective investors. These balances fluctuate with the size of the servicing portfolio and increase during a time of high payoff or refinance volume. The large increase at March 31, 2004 is reflective of the refinance environment currently being experienced by the Company. During the threesix months ended March 31,June 30, 2004, the Company received $1.8$4.5 billion in prepaymentsscheduled payments and amortizationspayoffs on serviced loans. Escrow accounts Customer escrow accounts increased $72.0$124.9 million to $250.5$303.4 million at March 31,June 30, 2004, from $178.5 million at December 31, 2003. These amounts represent payments received from borrowers for taxes and insurance payments, which have not been remitted to the tax authorities or insurance providers. These balances fluctuate with the size of the servicing portfolio and during the year before and after the remittance of scheduled payments. A large amount of escrow payments are made in July and December to local school and municipal agencies. Liability for checks issued Liability for checks issued increased $31.5$0.2 million to $59.0$27.7 million at March 31,June 30, 2004, from $27.5 million at December 31, 2003. These amounts represent checks issued to acquire mortgage loans that have not cleared for payment. These balances fluctuate with the size of the mortgage pipeline. Federal income taxes payable Federal income taxes payable increased $14.1$9.5 million to $87.7$83.1 million at March 31,June 30, 2004, from $73.6 million at December 31, 2003. This increase is attributable to the increase in the deferred tax liability created by timingtemporary differences in the recognition of revenue from a financial statement basis versus a federal income tax basis offset by the estimated paymentpayments made during the quarter.year. 2730
Other liabilities Other liabilities increased $4.4$18.0 million to $67.5$81.1 million at March 31,June 30, 2004, from $63.1 million at December 31, 2003. This increase was caused by changes in the timing of the payment of liabilities associated with the employee payroll and the Company’s mortgage production. Also included in other liabilities is the secondary market reserve. This reserve was established to offsetabsorb losses expected to be recognized upon the repurchase of non-performing loans that were sold to the secondary market in this period and prior periods. Secondary Market Reserve Since the majority of all theWhen 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.
The Company repurchased $30.1 million in non-performing mortgage loansassets from secondary market investors during all of 2003. At March 31,June 30, 2004, the Company had sold $138.4$153.4 billion in loans to the secondary market over the previous 60 months. During the threesix months ended March 31,June 30, 2004 the Company charged off a net $6.4$11.3 million and increased the reserve $8.1$13.9 million. The Company recorded charge-offs of $7.5 million during 2003. AllSubstantially all of 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. RepurchasesBased on its analysis of loan repurchase data, management believes that repurchases are expected to be 0.08%0.113% 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.the date of sale. Periods of lower rates and higher refinance volume have shown less exposure to repurchase requirements than periods of higher rates and lesslower refinance volume. The Company’s experience has been a net loss of 17.5%17.0% on all non-performingforeclosed loans, repurchased.including repurchases.
The Company has set-up a reserve for future repurchases of $12.0$12.9 million and $10.3 million at March 31,June 30, 2004 and December 31, 2003, respectively. Any increase in the secondary market reserve is charged as an offset to net loan sale gains. 2831
Liquidity and Capital Resources Liquidity Liquidity refers to the ability or the financial flexibility to manage future cash flows in order to meet the needs of depositors and borrowers and fund operations on a timely and cost-effective basis. The Company has no other significant business than that of its wholly owned subsidiary, Flagstar Bank, FSB. A significant source of cash flow for the Company is the sale of mortgage loans held for sale. Additionally, the Company receives funds from loan principal repayments, advances from the FHLB, deposits from customers and cash generated from operations. Mortgage loans sold during the threesix months ended March 31,June 30, 2004 totaled $7.6$15.7 billion, a decrease of $5.7$14.8 billion from the $13.3$30.5 billion sold during the same period in 2003. This decrease in mortgage loan sales was attributable to the $5.6$14.1 billion decrease in mortgage loan originations during the quarter.period. The Company sold 80.9%84.9% and 88.0%93.6% of its mortgage loan originations during the three monthsix-month periods ended March 31,June 30, 2004 and 2003, respectively. The Company typically uses FHLB advances to fund its daily operational liquidity needs and to assist in funding loan originations. The Company will continue to use this source of funds until a more cost-effective source of funds becomes available. FHLB advances are used because of their flexibility. The Company had $4.1$3.6 billion outstanding at March 31,June 30, 2004. Such advances are repaid with the proceeds from the sale of mortgage loans held for sale. The Company currently has an authorized line of credit equal to $4.5$4.9 billion, at March 31,June 30, 2004. This line is collateralized by non-delinquent mortgage loans. To the extent that the amount of retail deposits or customer escrow accounts can be increased, the Company expects to replace FHLB advances. At March 31,June 30, 2004, the Company had outstanding rate-lock commitments to lend $5.6$2.6 billion in mortgage loans, along with outstanding commitments to make other types of loans totaling $189.9$189.2 million. Because such commitments may expire without being drawn upon, they do not necessarily represent future cash commitments. Also, at March 31,June 30, 2004, the Company had outstanding commitments to sell $4.5$2.7 billion of mortgage loans.mortgage-backed securities. These commitments will be funded within 90 days. Total commercial and consumer unused lines of credit totaled $1.8$2.1 billion at March 31,June 30, 2004. Such commitments include $1.4$1.7 billion of unused warehouse lines of credit to various mortgage companies. The Company had advanced $520.1$237.3 million at March 31,June 30, 2004. Capital Resources At March 31,June 30, 2004, the Bank exceeded all applicable bank regulatory minimum capital requirements. The Company is not subject to any such requirements. 2932
Item 3. Quantitative and Qualitative Disclosures about Market Risk In its mortgage banking 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. Management believes there has been no material change in either interest rate risk or market risk since December 31, 2003. Item 4. Controls and Procedures (a)Disclosure Controls and Procedures.A review and evaluation was performed by the Company’s principal executive and financial officers regarding the effectiveness of the Company’s disclosure controls and procedures as of March 31,June 30, 2004, pursuant to Rule 13a-15(b) of the Securities Act of 1934. Based on that review and evaluation, the principal executive and financial officers have concluded that the Company’s current disclosure controls and procedures, as designed and implemented, are effective. (b)Changes in Internal Controls.Control over Financial Reporting.During the quarter ended March 31,June 30, 2004, there has not been any change in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Act of 1934 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. 3033
PART II —– OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities, usesUse of Proceeds and Issuer Purchases of Equity Securities None. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders (a) Not applicableThe 2004 Annual Meeting of Shareholders of the Company was held on June 1, 2004.
(b) Not applicable
(a) | | The following directors were re-elected for a term of two years: |
| | | | | | | | | | | For
| | Withheld
| Thomas J. Hammond | | | 45,726,898 | | | | 11,984,073 | | Kirstin A. Hammond | | | 45,707,216 | | | | 12,004,755 | | Charles Bazzy | | | 55,510,271 | | | | 2,201,700 | | Michael Lucci Sr. | | | 45,817,429 | | | | 11,894,542 | | Frank D’Angelo | | | 56,997,886 | | | | 714,085 | | Robert DeWitt | | | 56,995,096 | | | | 716,875 | |
(b) | | The following directors were re-elected for a term of one year: |
| | | | | | | | | | | For
| | Withheld
| Mark T. Hammond | | | 45,772,587 | | | | 11,939,384 | |
Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a)
| | | Exhibit 11. | | Computation of Net Earnings per Share | | | | Exhibit 31.1 | | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | | | | Exhibit 31.2 | | Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | | | | Exhibit 32.1 | | Certification of Chief Executive Officer relating to Form 10-Q for the period ended March 31,June 30, 2004. | | | | Exhibit 32.2 | | Certification of Chief Financial Officer relating to Form 10-Q for the period ended March 31,June 30, 2004. |
(b) Reports on Form 8-K
i. | | The Company filed a Form 8-K on January 21, 2004 to furnish its earnings release for the quarter and year ended December 31, 2003. | | | | ii. | | The Company filed a Form 8-K on January 21, 2004 to announce the redemption of its Trust Preferred Securities on April 30, 2004. | | | | iii. | | The Company filed a Form 8-K on April 21,July 19, 2004 to furnish its earnings release for the quarter ended March 31,June 30, 2004. |
3134
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | | | FLAGSTAR BANCORP, INC. | | | | Date: May 10,August 6, 2004 | | /S/s/ Mark T. Hammond | | | | | | Mark T. Hammond | | | President and | | | Chief Executive Officer | | | (Duly Authorized Officer) | | | | | | /S/s/ Michael W. Carrie | | | | | | Michael W. Carrie | | | Executive Director, Treasurer and | | | Chief Financial Officer | | | (Principal Accounting Officer) |
3235
EXHIBIT INDEXExhibit Index
| | | Exhibit No.
| | Description
| Exhibit 11. | | Computation of Net Earnings per Share | | | | Exhibit 31.1 | | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | | | | Exhibit 31.2 | | Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | | | | Exhibit 32.1 | | Certification of Chief Executive Officer relating to Form 10-Q for the period ended March 31,June 30, 2004. | | | | Exhibit 32.2 | | Certification of Chief Financial Officer relating to Form 10-Q for the period ended March 31,June 30, 2004. |
3336
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