Table of Contents
Amendment Number 1
To
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Mark One
 | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarter ended September 30, 2001 | ||
| OR | ||
 | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| Commission File No.: | 0-22353 | |
FLAGSTAR BANCORP, INC.
| Michigan | 38-3150651 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 5151 Corporate Drive, Troy, Michigan | 48098 | |
| (Address of principal executive offices) | (Zip Code) |
| Registrant’s telephone number, including area code: | (248) 312-2000 | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes No.
As of November 9, 2001, 18,956,116 shares of the registrant’s Common Stock, $0.01 par value, were issued and outstanding.
TABLE OF CONTENTS
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited condensed consolidated financial statements of the Registrant are as follows:
| Consolidated Statements of Financial Condition — September 30, 2001 (unaudited) and December 31, 2000. | |
| Unaudited Consolidated Statements of Earnings — For the three and nine months ended September 30, 2001 and 2000. | |
| Unaudited Consolidated Statements of Cash Flows — For the nine months ended September 30, 2001 and 2000. | |
| Condensed Notes to Consolidated Financial Statements. |
When used in this Form 10-Q or future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases or other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “would be”, “will allow”, “intends to”, “will likely result”, “are expected to”, “will continue”, “is anticipated”, “estimate”, “project”, or similar expressions are intended to identify “forward looking statement” within the meaning of the Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities and competitive and regulatory factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.
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Flagstar Bancorp, Inc.
Consolidated Statements of Financial Condition
(in thousands)
| At September 30, | At December 31, | |||||||||||
| Assets | 2001 | 2000 | ||||||||||
| (unaudited) | ||||||||||||
| Cash and cash equivalents | $ | 106,663 | $ | 76,679 | ||||||||
| Loans receivable | ||||||||||||
| Mortgage loans available for sale | 2,153,599 | 1,437,799 | ||||||||||
| Loans held for investment | 3,298,893 | 3,809,692 | ||||||||||
| Less: allowance for losses | (30,000 | ) | (25,000 | ) | ||||||||
| Loans receivable, net | 5,422,492 | 5,222,491 | ||||||||||
| Federal Home Loan Bank stock | 125,000 | 98,800 | ||||||||||
| Other investments | 6,739 | 4,133 | ||||||||||
| Total earning assets | 5,554,231 | 5,325,424 | ||||||||||
| Accrued interest receivable | 42,017 | 39,075 | ||||||||||
| Repossessed assets | 33,164 | 22,258 | ||||||||||
| Premises and equipment | 131,997 | 106,325 | ||||||||||
| Mortgage servicing rights | 128,706 | 106,425 | ||||||||||
| Other assets | 110,371 | 87,038 | ||||||||||
| Total assets | $ | 6,107,149 | $ | 5,763,224 | ||||||||
Liabilities and Stockholders’ Equity | ||||||||||||
Liabilities | ||||||||||||
| Retail deposit accounts | $ | 2,201,302 | $ | 1,870,731 | ||||||||
| Wholesale deposit accounts | 992,987 | 1,537,234 | ||||||||||
| Federal Home Loan Bank advances | 2,006,000 | 1,733,345 | ||||||||||
| Long term debt | 74,750 | 74,750 | ||||||||||
| Total interest bearing liabilities | 5,275,039 | 5,216,060 | ||||||||||
| Accrued interest payable | 25,927 | 46,719 | ||||||||||
| Undisbursed payments on | ||||||||||||
| loans serviced for others | 89,094 | 67,627 | ||||||||||
| Escrow accounts | 111,004 | 54,852 | ||||||||||
| Liability for checks issued | 190,501 | 48,663 | ||||||||||
| Federal income taxes payable | 63,886 | 62,390 | ||||||||||
| Other liabilities | 91,995 | 70,083 | ||||||||||
| Total liabilities | 5,847,446 | 5,566,394 | ||||||||||
Stockholders’ Equity | ||||||||||||
| Common stock — $.01 par value, | ||||||||||||
| 40,000,000 shares authorized; 20,796,742 and 20,572,985 | ||||||||||||
| shares issued; and 18,816,187 and 17,842,430 outstanding | ||||||||||||
| at September 30, 2001 and December 31, 2000, respectively | 189 | 179 | ||||||||||
| Additional paid in capital | 17,912 | 5,314 | ||||||||||
| Retained earnings | 241,602 | 191,337 | ||||||||||
| Total stockholders’ equity | 259,703 | 196,830 | ||||||||||
| Total liabilities and stockholders’ equity | $ | 6,107,149 | $ | 5,763,224 | ||||||||
The accompanying notes are an integral part of these statements.
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Flagstar Bancorp, Inc.
Unaudited Consolidated Statements of Earnings
(in thousands, except per share data)
| For the quarter ended | For the nine months ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| 2001 | 2000 | 2001 | 2000 | ||||||||||||||
Interest Income | |||||||||||||||||
| Loans | $ | 105,937 | $ | 101,211 | $ | 317,214 | $ | 268,403 | |||||||||
| Other | 2,296 | 3,213 | 11,658 | 7,335 | |||||||||||||
| Total | 108,233 | 104,424 | 328,872 | 275,738 | |||||||||||||
Interest Expense | |||||||||||||||||
| Deposits | 43,764 | 51,002 | 149,321 | 126,160 | |||||||||||||
| FHLB advances | 30,500 | 25,784 | 88,261 | 72,849 | |||||||||||||
| Other | 4,857 | 2,998 | 12,776 | 9,477 | |||||||||||||
| Total | 79,121 | 79,784 | 250,358 | 208,486 | |||||||||||||
| Net interest income | 29,112 | 24,640 | 78,514 | 67,252 | |||||||||||||
| Provision for losses | 3,086 | 2,400 | 15,077 | 8,318 | |||||||||||||
| Net interest income after provision for losses | 26,026 | 22,240 | 63,437 | 58,934 | |||||||||||||
Non-Interest Income | |||||||||||||||||
| Loan administration | (4,244 | ) | 3,530 | (9,439 | ) | 12,450 | |||||||||||
| Net gain on loan sales | 48,506 | 4,170 | 125,512 | 9,698 | |||||||||||||
| Net gain on sales of mortgage servicing rights | 737 | 5,335 | 1,907 | 11,252 | |||||||||||||
| Other fees and charges | 7,800 | 4,471 | 19,162 | 12,969 | |||||||||||||
| Total | 52,799 | 17,506 | 137,142 | 46,369 | |||||||||||||
Non-Interest Expense | |||||||||||||||||
| Compensation and benefits | 18,200 | 9,667 | 56,137 | 29,190 | |||||||||||||
| Occupancy and equipment | 10,944 | 7,930 | 29,436 | 21,402 | |||||||||||||
| General and administrative | 11,411 | 8,041 | 30,793 | 21,183 | |||||||||||||
| Total | 40,555 | 25,638 | 116,366 | 71,775 | |||||||||||||
| Earnings before federal income taxes | 38,270 | 14,108 | 84,213 | 33,528 | |||||||||||||
| Provision for federal income taxes | 13,703 | 5,088 | 30,254 | 12,124 | |||||||||||||
Net Earnings | $ | 24,567 | $ | 9,020 | $ | 53,959 | $ | 21,404 | |||||||||
Earnings per share — basic | $ | 1.33 | $ | 0.50 | $ | 2.97 | $ | 1.17 | |||||||||
Earnings per share — diluted | $ | 1.23 | $ | 0.47 | $ | 2.75 | $ | 1.14 | |||||||||
The accompanying notes are an integral part of these statements.
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Flagstar Bancorp, Inc.
Unaudited Consolidated Statements of Cash Flows
(in thousands)
| For the nine months ended | |||||||||||
| September 30, | |||||||||||
| 2001 | 2000 | ||||||||||
Operating Activities | |||||||||||
| Net earnings | $ | 53,959 | $ | 21,404 | |||||||
| Adjustments to reconcile net earnings to net cash used in operating activities | |||||||||||
| Provision for losses | 15,077 | 8,318 | |||||||||
| Depreciation and amortization | 44,247 | 19,289 | |||||||||
| Net (gain) loss on the sale of assets | (885 | ) | 89 | ||||||||
| Net gain on loan sales | (125,512 | ) | (11,252 | ) | |||||||
| Net gain on sales of mortgage servicing rights | (1,907 | ) | (9,698 | ) | |||||||
| Proceeds from sales of loans available for sale | 21,030,582 | 5,442,570 | |||||||||
| Originations and repurchases of loans available for sale, net of principal repayments | (21,874,789 | ) | (6,997,109 | ) | |||||||
| Increase in accrued interest receivable | (2,942 | ) | (11,887 | ) | |||||||
| (Increase) decrease in other assets | (23,981 | ) | 15,681 | ||||||||
| (Decrease) increase in accrued interest payable | (20,792 | ) | 25,329 | ||||||||
| Increase in liability for checks issued | 141,838 | 25,349 | |||||||||
| Increase (decrease) in current federal income taxes payable | 11,453 | (10,851 | ) | ||||||||
| (Benefit) provision for deferred federal income taxes payable | (9,957 | ) | 11,977 | ||||||||
| Increase (decrease) in other liabilities | 21,913 | (415 | ) | ||||||||
| Net cash used in operating activities | (741,695 | ) | (1,471,206 | ) | |||||||
Investing Activities | |||||||||||
| Purchase of other investments | (2,606 | ) | (3,744 | ) | |||||||
| Net principal repayments on loans held for investment | 726,723 | 172,256 | |||||||||
| Purchase of Federal Home Loan Bank stock | (26,200 | ) | (18,950 | ) | |||||||
| Proceeds from the disposition of repossessed assets | 17,871 | 15,362 | |||||||||
| Acquisitions of premises and equipment | (40,174 | ) | (58,981 | ) | |||||||
| Net proceeds from the disposition of premises and equipment | 344 | 109 | |||||||||
| Increase in mortgage servicing rights | (347,848 | ) | (105,977 | ) | |||||||
| Proceeds from the sale of mortgage servicing rights | 298,058 | 136,454 | |||||||||
| Net cash provided by investing activities | 626,168 | 136,529 | |||||||||
Financing Activities | |||||||||||
| Net increase in retail deposit accounts | 330,571 | 461,024 | |||||||||
| Net (decrease) increase in wholesale deposit accounts | (544,247 | ) | 585,112 | ||||||||
| Net increase in Federal Home Loan Bank advances | 272,655 | 255,000 | |||||||||
| Net receipt (disbursement) of payments of loans serviced for others | 21,466 | (25,136 | ) | ||||||||
| Net receipt (disbursement) of escrow payments | 56,153 | (3,405 | ) | ||||||||
| Stock repurchase program | — | (13,069 | ) | ||||||||
| Net proceeds from the exercise of common stock options | 9,809 | — | |||||||||
| Tax benefit from the exercise of stock options | 2,799 | — | |||||||||
| Dividends paid to stockholders | (3,695 | ) | (3,716 | ) | |||||||
| Net cash provided by financing activities | 145,511 | 1,255,810 | |||||||||
| Net increase (decrease) in cash and cash equivalents | 29,984 | (78,867 | ) | ||||||||
| Beginning cash and cash equivalents | 76,679 | 118,636 | |||||||||
| Ending cash and cash equivalents | $ | 106,663 | $ | 39,769 | |||||||
Supplemental disclosure of cash flow information: | |||||||||||
| Loans receivable transferred to repossessed assets | $ | 29,487 | $ | 23,161 | |||||||
| Total interest payments made on deposits and other borrowings | $ | 226,339 | $ | 183,157 | |||||||
| Federal income taxes paid | $ | 27,000 | $ | 19,500 | |||||||
| Loans available for sale transferred to loans held for investment | $ | 229,566 | $ | 1,891,704 | |||||||
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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. Flagstar’s primary business consists of attracting deposits from the general public and originating or acquiring residential mortgage loans. The Company also acquires funds on a wholesale basis from a variety of sources, services a significant volume of loans for others, and to a lesser extent makes consumer loans, commercial real estate loans, and non-real estate commercial loans.
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”), 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 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 year-end audit, the results of operations for the interim period herein are not necessarily indicative of the results that may be expected for the year ending December 31, 2001.
Note 3. Significant Events
| 1. | On June 26, 2001, the Company announced a 3 for 2 split of its common stock. The split was completed on July 12, 2001. All share information on the financial statements of the Company have been adjusted accordingly. | |
| 2. | On July 13, 2001, the Company moved its stock from the Nasdaq Stock Market to the New York Stock Exchange. The stock which formerly traded under the symbol “FLGS”, is now traded under the symbol “FBC”. | |
| 3. | Flagstar Trust, a Delaware trust and subsidiary of Flagstar Bancorp, moved its preferred securities from the Nasdaq Stock Market to the New York Stock Exchange. The securities, which formerly traded under the symbol “FLGSO”, now trades under the symbol “FBC-O”. | |
| 4. | Flagstar Capital, a real estate investment trust and second tier subsidiary of Flagstar Bancorp, moved its preferred stock from the Nasdaq Stock Market to the New York Stock Exchange. The securities, which formerly traded under the symbol “FLGSP”, now trades under the symbol “FBC-P”. |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Selected Financial Ratios ( in thousands, except per share data )
| For the quarter ended | For the nine months ended | |||||||||||||||
| September | September | September | September | |||||||||||||
| 30, 2001 | 30, 2000 | 30, 2001 | 30, 2000 | |||||||||||||
| Return on average assets | 1.56 | % | 0.65 | % | 1.15 | % | 0.57 | % | ||||||||
| Return on average equity | 40.35 | % | 19.15 | % | 32.16 | % | 15.47 | % | ||||||||
| Efficiency ratio | 49.51 | % | 60.06 | % | 53.96 | % | 62.32 | % | ||||||||
| Equity/assets ratio (average for the period) | 3.88 | % | 3.41 | % | 3.59 | % | 3.68 | % | ||||||||
| Mortgage loans originated or purchased | $ | 8,332,481 | $ | 2,651,880 | $ | 21,962,863 | $ | 7,065,055 | ||||||||
| Mortgage loans sold | $ | 7,690,877 | $ | 1,942,227 | $ | 20,718,608 | $ | 5,364,332 | ||||||||
| Interest rate spread | 1.90 | % | 1.84 | % | 1.68 | % | 1.81 | % | ||||||||
| Net interest margin | 2.00 | % | 1.92 | % | 1.81 | % | 1.93 | % | ||||||||
| Average common shares outstanding (2) | 18,581 | 17,883 | 18,289 | 18,368 | ||||||||||||
| Average fully diluted shares outstanding (2) | 20,000 | 19,001 | 19,710 | 18,767 | ||||||||||||
| Charge-offs to average loans outstanding | 0.22 | % | 0.19 | % | 0.24 | % | 0.19 | % | ||||||||
| September | June 30, | December | September | |||||||||||||
| 30, 2001 | 2001 | 31, 2000 | 30, 2000 | |||||||||||||
| Equity-to-assets ratio | 4.25 | % | 3.81 | % | 3.42 | % | 3.38 | % | ||||||||
| Tangible capital ratio (1) | 5.93 | % | 5.60 | % | 5.31 | % | 5.31 | % | ||||||||
| Core capital ratio (1) | 5.93 | % | 5.60 | % | 5.32 | % | 5.32 | % | ||||||||
| Risk-based capital ratio (1) | 10.19 | % | 9.67 | % | 9.53 | % | 9.65 | % | ||||||||
| Total risk-based capital ratio (1) | 11.03 | % | 10.53 | % | 10.30 | % | 10.45 | % | ||||||||
| Book value per share (2) | $ | 13.80 | $ | 12.42 | $ | 11.03 | $ | 10.67 | ||||||||
| Number of common shares outstanding (2) | 18,816 | 18,372 | 17,843 | 17,829 | ||||||||||||
| Mortgage loans serviced for others | $ | 9,784,848 | $ | 7,679,952 | $ | 6,644,482 | $ | 6,431,943 | ||||||||
| Value of mortgage servicing rights | 1.32 | % | 1.44 | % | 1.60 | % | 1.59 | % | ||||||||
| Allowance for losses to non performing loans | 38.2 | % | 45.8 | % | 39.3 | % | 50.0 | % | ||||||||
| Allowance for losses to total loans | 0.55 | % | 0.58 | % | 0.48 | % | 0.48 | % | ||||||||
| Non performing assets to total assets | 1.83 | % | 1.61 | % | 1.49 | % | 1.30 | % | ||||||||
| Number of bank branches | 68 | 63 | 52 | 48 | ||||||||||||
| Number of loan origination centers | 59 | 55 | 42 | 38 | ||||||||||||
| Number of correspondent offices | 15 | 15 | 15 | 15 | ||||||||||||
| Number of employees | 2,641 | 2,589 | 1,894 | 1,923 | ||||||||||||
(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 3 for 2 stock dividend declared on June 26, 2001 and issued on July 12, 2001.
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Results of Operations
Net Earnings
During both the three and nine month period ended September 30, 2001, the Company recorded record net earnings from operations due to the interest rate environment prevalent in 2001. The lower and falling interest rates experienced in 2001 have positively affected the Company’s mortgage banking operation. Along with the record revenues recorded by the mortgage banking operation, the expanding retail banking operation has benefited from the widening yield curve and the repricing of higher cost deposits.
Three months
Net earnings for the three months ended September 30, 2001 were $24.6 million ($1.23 per share-diluted), a $15.6 million increase from the $9.0 million ($0.47 per share-diluted) reported in 2000. The increase resulted from a $35.3 million increase in other income and a $4.5 million increase in net interest income, which was offset by a $8.6 million increase in the provision for federal income taxes, a $0.7 million increase in the provision for losses, and a $15.0 million increase in operating expenses.
Nine months
Net earnings for the nine months ended September 30, 2001 were $54.0 million ($2.75 per share-diluted), a $32.6 million increase from the $21.4 million ($1.14 per share-diluted) reported in 2000. The increase resulted from a $90.7 million increase in other income, a $11.2 million increase in net interest income, which was offset by a $18.2 million increase in the provision for federal income taxes, a $6.8 million increase in the provision for losses, and a $44.6 million increase in net operating expenses.
Net Interest Income
Three months
Net interest income continues to rise and in this quarter increased $4.5 million, or 18.3%, to $29.1 million for the three months ended September 30, 2001. This level of interest income compares positively to the $24.6 million recorded for the 2000 period. This large percentage increase net interest income was created by a $3.8 million increase in interest revenue and a $0.7 decrease in interest expense. For the first six months of this year, the Company’s earning assets have prepaid and repriced at a faster pace than the liabilities used to fund these assets. During the third quarter this trend was reversed. So in this period that the Company increased the average earning asset base by over $685 million, the Company only registered a small increase in net interest income. The Company was also required to raise liabilities over $700 million 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 2000 period.
These pricing adjustments are best shown by the increased spread reported during the current period when compared to the third quarter of 2000. Assets as a whole repriced down 0.64% while the liabilities repriced down 0.70% on a like period comparison. These decreases were reflected in the increase in the Company’s net interest margin of 0.08% to 2.00% for the three months ended September 30, 2001 from 1.92% for the comparable 2000 period.
On a sequential quarter basis, the Company reported a 0.38% increase in the interest rate spread and 0.31% increase in the interest margin. These dramatic changes were the result of the large decrease in short term rates experienced during the quarter. The Company reported a $5.0 million, 20.7% increase in net interest income during the period versus the second quarter of 2001.
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Nine months
Net interest income for the nine months ended September 30, 2001 had an increase of $11.2 million, or 16.6%, to $78.5 million. This level of interest income compares to $67.3 million recorded during the 2000 period. This increase was due to a $1.2 billion increase in average interest-earning assets between the comparable periods, offset by the $1.1 billion increase in interest-bearing liabilities necessary to fund the growth and a decreased spread achieved during the nine month comparable periods. The spread decreased 0.13% and the interest margin decreased 0.12% from the comparable third quarter in 2000.
AVERAGE YIELDS EARNED AND RATES PAID
Table 1 and Table 2 presents interest income from average earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates. Interest income from earning assets includes the amortization of net premiums and the amortization of net deferred loan origination costs. Nonaccruing loans were included in the average loan amounts outstanding.
TABLE 1
| Quarter ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2001 | 2000 | |||||||||||||||||||||||||||||||||||||||||||||
| Average | Yield/ | Average | Yield/ | |||||||||||||||||||||||||||||||||||||||||||
| Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||||||||||||||||||||||||
| ( in thousands ) | ||||||||||||||||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||
| Loans receivable, net | $ | 5,656,520 | $ | 105,937 | 7.49 | % | $ | 4,930,794 | $ | 101,211 | 8.14 | % | ||||||||||||||||||||||||||||||||||
| FHLB stock | 122,667 | 2,237 | 7.24 | 98,800 | 2,111 | 8.50 | ||||||||||||||||||||||||||||||||||||||||
| Other | 1,856 | 59 | 3.02 | 82,156 | 1,102 | 5.32 | ||||||||||||||||||||||||||||||||||||||||
| Total interest-earning assets | 5,781,043 | $ | 108,233 | 7.49 | % | 5,111,750 | $ | 104,424 | 8.13 | % | ||||||||||||||||||||||||||||||||||||
| Other assets | 498,779 | 417,332 | ||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 6,279,822 | $ | 5,529,082 | ||||||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||
| Retail deposits | $ | 2,196,995 | $ | 29,198 | 5.29 | % | $ | 1,704,116 | $ | 24,711 | 5.75 | % | ||||||||||||||||||||||||||||||||||
| Wholesale deposits | 1,027,860 | 14,566 | 5.64 | 1,612,096 | 26,291 | 6.47 | ||||||||||||||||||||||||||||||||||||||||
| FHLB advances | 2,164,280 | 30,500 | 5.61 | 1,578,929 | 25,784 | 6.48 | ||||||||||||||||||||||||||||||||||||||||
| Other | 238,525 | 4,857 | 8.10 | 137,561 | 2,998 | 8.65 | ||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 5,627,660 | $ | 79,121 | 5.59 | % | 5,032,701 | $ | 79,784 | 6.29 | % | ||||||||||||||||||||||||||||||||||||
| Other liabilities | 408,616 | 307,938 | ||||||||||||||||||||||||||||||||||||||||||||
| Stockholders equity | 243,546 | 188,443 | ||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and stockholders equity | $ | 6,279,822 | $ | 5,529,082 | ||||||||||||||||||||||||||||||||||||||||||
| Net interest-earning assets | $ | 153,383 | $ | 79,049 | ||||||||||||||||||||||||||||||||||||||||||
| Net interest income | $ | 29,112 | $ | 24,640 | ||||||||||||||||||||||||||||||||||||||||||
| Interest rate spread | 1.90 | % | 1.84 | % | ||||||||||||||||||||||||||||||||||||||||||
| Net interest margin | 2.00 | % | 1.92 | % | ||||||||||||||||||||||||||||||||||||||||||
| Ratio of average interest-earning assets to interest-bearing liabilities | 103 | % | 102 | % | ||||||||||||||||||||||||||||||||||||||||||
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TABLE 2
AVERAGE YIELDS EARNED AND RATES PAID
| Nine months ended September 30, | |||||||||||||||||||||||||||
| 2001 | 2000 | ||||||||||||||||||||||||||
| Average | Yield/ | Average | Yield/ | ||||||||||||||||||||||||
| Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||||||||||
| ( in thousands ) | |||||||||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||||||||
| Loans receivable, net | $ | 5,539,118 | $ | 317,214 | 7.64 | % | $ | 4,511,952 | $ | 268,403 | 7.93 | % | |||||||||||||||
| FHLB stock | 114,265 | 6,436 | 8.00 | 92,832 | 5,674 | 8.16 | |||||||||||||||||||||
| Other | 130,735 | 5,222 | 5.25 | 40,943 | 1,661 | 5.41 | |||||||||||||||||||||
| Total interest-earning assets | 5,784,118 | $ | 328,872 | 7.58 | % | 4,645,727 | $ | 275,738 | 7.92 | % | |||||||||||||||||
| Other assets | 452,870 | 368,377 | |||||||||||||||||||||||||
| Total assets | $ | 6,236,988 | $ | 5,014,104 | |||||||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||||||||
| Retail deposits | $ | 2,153,185 | $ | 91,721 | 5.69 | % | $ | 1,467,134 | $ | 59,834 | 5.45 | % | |||||||||||||||
| Wholesale deposits | 1,271,013 | 57,600 | 6.05 | % | 1,407,771 | 66,326 | 6.30 | ||||||||||||||||||||
| FHLB advances | 2,037,214 | 88,261 | 5.79 | 1,538,479 | 72,849 | 6.33 | |||||||||||||||||||||
| Other | 204,335 | 12,776 | 8.35 | 145,828 | 9,477 | 8.68 | |||||||||||||||||||||
| Total interest-bearing liabilities | 5,665,747 | $ | 250,358 | 5.90 | % | 4,559,212 | $ | 208,486 | 6.11 | % | |||||||||||||||||
| Other liabilities | 347,552 | 270,439 | |||||||||||||||||||||||||
| Stockholders equity | 223,689 | 184,453 | |||||||||||||||||||||||||
| Total liabilities and | |||||||||||||||||||||||||||
| Stockholders equity | $ | 6,236,988 | $ | 5,014,104 | |||||||||||||||||||||||
| Net interest-earning assets | $ | 118,372 | $ | 86,515 | |||||||||||||||||||||||
| Net interest income | $ | 78,514 | $ | 67,252 | |||||||||||||||||||||||
| Interest rate spread | 1.68 | % | 1.81 | % | |||||||||||||||||||||||
| Net interest margin | 1.81 | % | 1.93 | % | |||||||||||||||||||||||
| Ratio of average interest-earning assets to interest-bearing liabilities | 102 | % | 102 | % | |||||||||||||||||||||||
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RATE/VOLUME ANALYSIS
Table 3 and Table 4 present the dollar amount of changes in interest income and interest expense for the components of earning assets and interest-bearing liabilities which are presented in Tables 1 and 2. Table 3 and 4 distinguishes between the changes related to average outstanding balances (changes in volume while holding the initial rate constant) and the changes related to average interest rates (changes in average rates while holding the initial volume constant).
TABLE 3
| Quarter ended September 30, | ||||||||||||
| 2001 versus 2000 | ||||||||||||
| Increase (Decrease) due to: | ||||||||||||
| Rate | Volume | Total | ||||||||||
| Interest Income: | (in thousands) | |||||||||||
| Loans receivable, net | $ | (9,173 | ) | $ | 13,899 | $ | 4,726 | |||||
| FHLB stock | (388 | ) | 514 | 126 | ||||||||
| Other | (11 | ) | (1,032 | ) | (1,043 | ) | ||||||
| Total | $ | (9,572 | ) | $ | 13,381 | $ | 3,809 | |||||
Interest Expense: | ||||||||||||
| Retail deposits | $ | (2,559 | ) | $ | 7,046 | $ | 4,487 | |||||
| Wholesale deposits | (2,140 | ) | (9,585 | ) | (11,725 | ) | ||||||
| FHLB advances | (4,727 | ) | 9,443 | 4,716 | ||||||||
| Other | (327 | ) | 2,186 | 1,859 | ||||||||
| Total | $ | (9,753 | ) | $ | 9,090 | $ | (663 | ) | ||||
| Net change in net interest income | $ | 182 | $ | 4,290 | $ | 4,472 | ||||||
TABLE 4
| Nine months ended September 30, | ||||||||||||
| 2001 versus 2000 | ||||||||||||
| Increase (Decrease) due to: | ||||||||||||
| Rate | Volume | Total | ||||||||||
| Interest Income: | (in thousands) | |||||||||||
| Loans receivable, net | $ | (12,225 | ) | $ | 61,036 | $ | 48,811 | |||||
| FHLB stock | (137 | ) | 899 | 762 | ||||||||
| Other | (159 | ) | 3,720 | 3,561 | ||||||||
| Total | $ | (12,521 | ) | $ | 65,655 | $ | 53,134 | |||||
Interest Expense: | ||||||||||||
| Retail deposits | $ | 3,834 | $ | 28,053 | $ | 31,887 | ||||||
| Wholesale deposits | (2,342 | ) | (6,384 | ) | (8,726 | ) | ||||||
| FHLB advances | (8,295 | ) | 23,707 | 15,412 | ||||||||
| Other | (503 | ) | 3,802 | 3,299 | ||||||||
| Total | $ | (7,306 | ) | $ | 49,178 | $ | 41,872 | |||||
| Net change in net interest income | $ | (5,215 | ) | $ | 16,477 | $ | 11,262 | |||||
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Provision for Losses
Three months
The provision for losses was increased to $3.1 million for the three months ended September 30, 2001 from $2.4 million during the same period in 2000. The provision for losses in each period included only charge-offs recorded during the respective period. Net charge-offs were an annualized 0.22% and 0.19% of average loans outstanding during the three months ended September 30, 2001 and September 30, 2000, respectively.
The current allowance was not increased during the three months ended September 30, 2001. It is management’s belief that the current reserves are adequate to offset the inherent risk associated with the Company’s loan portfolio. The held for investment loan portfolio decreased 5.7% during the three month period ended September 30, 2001. The allowance, which totals $30.0 million, is 0.55% of total loans and 38.2% of non-performing loans.
Nine months
The provision for losses was $15.1 million for the nine months ended September 30, 2001 compared with $8.3 million during the same period in 2000. The provision for losses in the 2001 period included a $5.0 million increase in the allowance for losses of whereas the 2000 period included a $2.0 million increase. Net charge-offs were an annualized 0.24% and 0.19% of average loans outstanding during the nine months ended September 30, 2001 and September 30, 2000, respectively.
Non-Interest Income
Three months
During the three months ended September 30, 2001, non-interest income increased $35.3 million to $52.8 million from $17.5 million. This increase was primarily attributable to an increase in net gain on loan sales and other fees and charges, offset by a decrease in the net gain on the sales of mortgage servicing rights and net loan administration fees.
Nine months
During the nine months ended September 30, 2001, non-interest income increased $90.7 million to $137.1 million from $46.4 million. This increase was primarily attributable to an increase in net gain on loan sales and other fees and charges, offset by a decrease in the net gain on the sales of mortgage servicing rights and net loan administration fees.
| Loan Administration |
Three months
Net loan administration fee income decreased to a negative $4.2 million during the three months ended September 30, 2001, from $3.5 million in the 2000 period. This $7.7 million decrease was the result of the $8.9 million increase in the amortization of the mortgage servicing rights (“MSR”). This amortization increase was recorded to adjust for the increased prepayment on the underlying mortgage loans serviced for others. Fee income before the amortization of servicing rights actually increased $1.1 million for the three months ended September 30, 2001, to $7.5 million compared to the $6.4 million recorded in the 2000 period. This increase in the gross fee income was the result of a larger portfolio of serviced loans during the 2001 period.
Nine months
Net loan administration fee income for the nine months ended September 30, 2001 decreased to a negative $9.4 million from $12.5 million recorded in the 2000 period. This $21.9 million decrease also was the result of the increased amortization of mortgage servicing rights. MSR amortization equaled $29.4 million during the 2001 period versus $10.2 million during the comparable 2000 period. Gross fee income, before the amortization of serving rights, decreased $2.7 million for the nine months ended September 30, 2001 to $20.0 million, from $22.7 million for the comparable 2000 period. This decrease in gross fee income was the result of the smaller portfolio of serviced loans during the 2001 period.
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At September 30, 2001, the unpaid principal balance of loans serviced for others is $9.8 billion versus $7.7 billion serviced at June 30, 2001, and $6.6 billion serviced at December 31, 2000. At September 30, 2000, the unpaid principal balance of loans serviced for others was $6.4 billion versus $8.4 billion serviced at June 30, 2000 and $9.5 billion serviced at December 31, 1999. The weighted average servicing fee on loans serviced for others at September 30, 2001 was 0.286% (i.e., 28.6 basis points). The weighted average age of the loans serviced for others portfolio at September 30, 2001 was 13 months old.
| Net Gain on Loan Sales |
Three months
For the three months ended September 30, 2001, net gain on loan sales increased $44.3 million, to $48.5 million, from $4.2 million in the 2000 period. The 2001 period reflects the sale of $7.7 billion in loans versus $2.2 billion sold in the 2000 period. The higher interest rate environment in the 2000 period resulted in a smaller mortgage loan origination volume ($8.3 billion in the 2001 period vs. $2.7 billion in the 2000 period) and a smaller or narrower gain on sale spread (63 basis points in the 2001 period versus 19 basis points in the 2000 period) recorded when the loans were sold.
Nine months
For the nine months ended September 30, 2001, net gain on loan sales increased $115.8 million, to $125.5 million, from $9.7 million in the 2000 period. The 2001 period reflects the sale of $20.7 billion in loans versus $5.4 billion sold in the 2000 period. For the nine month period ended September 30, 2001, the lower interest rate environment also resulted in a larger or wider gain on sale spread recorded (61 basis points in the 2001 period versus 18 basis points in the 2000 period) when the loans were sold.
| Net Gain on the Sale of Mortgage Servicing Rights |
Three months
For the three months ended September 30, 2001, the net gain on the sale of mortgage servicing rights decreased from $5.3 million during the 2000 period to $737,000. The gain on sale of mortgage servicing rights decreased because the Company sold a $2.0 billion seasoned bulk servicing package in the 2000 period and did not have such a sale of seasoned loans in the 2001 period. During 2001, the Company sold $5.1 billion of newly originated servicing rights on a flow basis. During 2000, the Company also sold $1.7 billion of servicing rights on a flow basis for a minimal profit.
Nine months
For the nine months ended September 30, 2001, the net gain on the sale of mortgage servicing rights decreased $9.4 million to $1.9 million, from $11.3 million for the same period in 2000. The gain on sale of mortgage servicing rights decreased due to the sale of $3.6 billion of seasoned servicing rights in 2000. During 2001, the Company only recorded a minimal gain on a bulk servicing sale of $2.2 billion in mortgage servicing rights. During 2001, the Company sold a total of $16.4 billion in servicing versus the $20.7 billion of mortgage servicing rights originated. In 2000, the Company sold $7.8 billion and originated $5.4 billion in mortgage servicing rights.
| Other Fees and Charges |
Three months
During the three months ended September 30, 2001, the Company recorded $7.8 million in other fees and charges. In the comparable 2000 period, the Company recorded $4.5 million. The collection and recording of these fees are dependent on the amount of deposit accounts, the number of certain types of loans closed and the collection of any miscellaneous fees. During the 2001 period, the Company originated $30.2 million of commercial loans versus $3.3 million in the comparable 2000 period.
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Nine months
During the nine months ended September 30, 2001, the Company recorded $19.2 million in other fees and charges. In the comparable 2000 period, the Company recorded $13.0 million. The collection and recording of these fees are dependent on the amount of deposit accounts, the number of certain types of loans closed and the collection of any miscellaneous fees. During the 2001 period, the Company originated $126.7 million of commercial loans versus $51.2 million in the comparable 2000 period.
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 for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of 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.
| Quarter ended September | Nine months ended | |||||||||||||||
| 30, | September 30, | |||||||||||||||
| 2001 | 2000 | 2001 | 2000 | |||||||||||||
| ( in thousands ) | ||||||||||||||||
| Compensation and benefits | $ | 26,999 | $ | 16,288 | $ | 76,751 | $ | 45,959 | ||||||||
| Commissions | 21,189 | 7,669 | 53,844 | 19,556 | ||||||||||||
| Occupancy and equipment | 10,944 | 7,929 | 29,436 | 21,402 | ||||||||||||
| Advertising | 947 | 1,440 | 3,423 | 3,185 | ||||||||||||
| Core deposit amortization | — | 323 | 645 | 968 | ||||||||||||
| Federal insurance premium | 482 | 147 | 821 | 396 | ||||||||||||
| General and administrative | 11,419 | 8,392 | 32,554 | 22,231 | ||||||||||||
| Total | 71,980 | 42,188 | 197,474 | 113,697 | ||||||||||||
| Less: capitalized direct costs of loan closings | (31,425 | ) | (16,550 | ) | (81,108 | ) | (41,922 | ) | ||||||||
| Total, net | $ | 40,555 | $ | 25,638 | $ | 116,366 | $ | 71,775 | ||||||||
| Efficiency ratio | 49.51 | % | 60.06 | % | 53.96 | % | 62.32 | % | ||||||||
The following are the major changes affecting the quarterly income statement;
| • | The retail banking operation conducted business from 20 more facilities at September 30, 2001 than at September 30, 2000. | |
| • | The Company conducted business from 21 more retail loan origination offices at September 30, 2001 than at September 30, 2000. | |
| • | The mortgage banking operation originated $8.3 billion in residential mortgage loans during the 2001 quarter versus $2.7 billion in the comparable 2000 quarter. | |
| • | The Company moved its national headquarters in October 2000. This move consolidated the operations of three leased facilities into one owned facility. | |
| • | The Company employed 2,113 salaried employees at September 30, 2001 versus 1,418 salaried employees at September 30, 2000. | |
| • | Company employed 95 full-time national account executives at September 30, 2001 versus 90 at September 30, 2000. | |
| • | The Company employed 433 full-time retail loan originators at September 30, 2001 versus 257 at September 30, 2000. |
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Three months
Non-interest expense, excluding the capitalization of direct loan origination costs, increased $29.8 million to $72.0 million during the three months ended September 30, 2001, from $42.2 million for the comparable 2000 period. This large increase in costs is for the most part explained above, but further explanation follows.
The largest changes occurred in compensation and benefits, commissions, occupancy and equipment, and general and administrative expenses reported.
The increased compensation and benefits expense of $10.7 million is the direct result of the increased personnel count which was required to support the additional banking centers and retail loan centers and to accommodate the growth in loan originations during the period.
The increased commission expense of $13.5 million is the direct result of the increased mortgage loan originations during the period. During the 2001 period commissions were 25 basis points of loan originations versus 29 basis points during the 2000 period.
The majority of the $3.0 million increase in occupancy and equipment costs are directly attributable to the extensive facility expansion and the equipment required to accommodate the increased staff.
The increase in general and administrative expense is reflective of the increased mortgage loan originations and the increased number of banking centers in operation during the period.
During the three months ended September 30, 2001, the Company capitalized direct loan origination costs of $31.4 million, an increase of $14.8 million from $16.6 million for the comparable 2000 period. The 2001 deferral equates to a capitalization of $566 per loan versus $826 per loan in the 2000 period.
Nine months
During the nine months ended September 30, 2001, non-interest expense, excluding the capitalization of direct loan origination costs, increased by $83.8 million to $197.5 million, from $113.7 million for the comparable 2000 period. The increased costs are also attributable to the above mentioned changes. The largest increases occurred in the amounts of compensation and benefits, commissions, general and administrative expenses, and occupancy and equipment costs reported.
The increased compensation and benefits expense of $30.8 million is the direct result of the increased personnel count which was required to support the additional banking centers and retail loan centers and to accommodate the growth in loan originations during the period.
The increased commission expense of $34.2 million is the direct result of the increased mortgage loan originations during the period. During the 2001 period commissions were 25 basis points of loan originations versus 28 basis points during the 2000 period.
The majority of the $8.0 million increase in occupancy and equipment costs are directly attributable to the extensive facility expansion and the equipment required to accommodate the increased staff.
The increase in general and administrative expense is reflective of the increased mortgage loan originations and the increased number of banking centers in operation during the period.
During the nine months ended September 30, 2001, the Company capitalized direct loan origination costs of $81.1 million, an increase of $39.2 million, from $41.9 million for the comparable 2000 period. The 2001 deferral equates to a capitalization of $547 per loan versus $782 per loan in the 2000 period.
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SEGMENT REPORTING
RETAIL BANKING OPERATIONS
The Company provides a full range of banking services to consumers and small businesses in southern Michigan and Indiana. At September 30, 2001, the Bank operated a network of 68 banking centers. The Company has continued to focus on expanding its branch network in order to increase its access to retail deposit funding sources. The retail banking operation allows the Company to cross-market consumer banking services to the Company’s mortgage customers in Michigan and Indiana.
MORTGAGE BANKING OPERATIONS
Flagstar’s mortgage banking activities involve the origination of mortgage loans or the purchase of mortgage loans from the originating lender. Company personnel originate loans and conduct business from 59 loan origination centers located primarily in Michigan. Flagstar purchases mortgage loans on a wholesale basis through a network of correspondents consisting of other banks, thrifts, mortgage companies, and mortgage brokers. This mortgage banking network conducts mortgage lending operations nationwide. The mortgage loans, the majority of which are subsequently sold in the secondary mortgage market, conform to the underwriting standards of Freddie Mac or Fannie Mae, or both.
The following tables present certain financial information concerning the results of operations of Flagstar’s retail banking and mortgage banking operation.
Table 4
Retail Banking Operations
| At or for the quarter ended | At or for the nine months | |||||||||||||||
| September 30, | ended September 30, | |||||||||||||||
| 2001 | 2000 | 2001 | 2000 | |||||||||||||
| ( In thousands ) | ||||||||||||||||
| Revenues | $ | 26,033 | $ | 18,124 | $ | 66,865 | $ | 52,993 | ||||||||
| Earnings before taxes | 13,282 | 9,979 | 29,825 | 30,104 | ||||||||||||
| Identifiable assets | 3,399,840 | 3,366,924 | 3,399,840 | 3,366,924 | ||||||||||||
Table 5
Mortgage Banking Operations
| At or for the quarter ended | At or for the nine months | |||||||||||||||
| September 30, | ended September 30, | |||||||||||||||
| 2001 | 2000 | 2001 | 2000 | |||||||||||||
| ( In thousands ) | ||||||||||||||||
| Revenues | $ | 55,878 | $ | 24,021 | $ | 148,791 | $ | 60,628 | ||||||||
| Earnings before taxes | 24,988 | 4,129 | 54,389 | 3,424 | ||||||||||||
| Identifiable assets | 3,674,727 | 2,271,718 | 3,674,727 | 2,271,718 | ||||||||||||
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Financial Condition
Assets
The Company’s assets totaled $6.1 billion at September 30, 2001, an increase of $0.3 billion, or 5.2%, as compared to $5.8 billion at December 31, 2000. This increase was primarily due to an increase in earning assets at September 30, 2001 but, encompassed increases in the majority of asset categories.
| Cash and cash equivalents |
Cash and cash equivalents increased from $76.7 million at December 31, 2000 to $106.7 million at September 30, 2001.
| Loans receivable, net |
Loans receivable, net at September 30, 2001 was up $0.2 million from December 31, 2000. The September increase included a $715.8 million increase in mortgage loans held for sale, a $148.8 million increase in warehouse loans, a $91.7 increase in commercial real estate loans, and a 60.4 million increase in second mortgage loans, offset by an $808.0 decrease in mortgage loans held for investment.
Mortgage loans available for sale increased $715.8 million, or 49.8%, to $2.2 billion at September 30, 2001, from $1.4 billion at December 31, 2000. This increase is primarily attributable to the record amount of loan production originated during the third quarter. At September 30, 2001, the majority of these loans were originated within the two weeks prior to the end of the quarter.
Loans held for investment decreased $510.8 million, or 13.4%, from $3.8 billion at December 31, 2000 to $3.3 billion at September 30, 2001. This decrease is primarily attributable to the increase in mortgage loan refinances. Despite that $510.8 million decrease, there were substantial increases in most of the non residential mortgage balances. These increases included a $60.4 million increase in second mortgage loans, a $91.7 million increase in commercial real estate loans, a $1.4 million increase in commercial loans, and a $4.8 million increase in consumer loans.
Additionally, the Company had issued lines of credit to its warehouse customers through the commercial loan department totaling $215.6 million at September 30, 2001, up 222.8% from $66.8 million of utilized warehouse lines of credit at December 31, 2000. Approved warehouse lines of credit at September 30, 2001 totaled $491.9 million.
| Loans held for investment: | September 30, 2001 | June 30, 2001 | December 31, 2000 | September 30, 2000 | |||||||||||||
| Single Family Mortgage | $ | 2,442,943 | $ | 2,668,224 | $ | 3,250,850 | $ | 2,798,714 | |||||||||
| Second Mortgage | 229,261 | 209,824 | 168,886 | 134,644 | |||||||||||||
| Construction | 50,429 | 49,700 | 60,534 | 56,373 | |||||||||||||
| Commercial Real Estate | 286,445 | 256,167 | 194,653 | 185,712 | |||||||||||||
| Commercial | 10,318 | 10,321 | 8,881 | 9,408 | |||||||||||||
| Warehouse | 215,620 | 244,347 | 66,765 | 57,779 | |||||||||||||
| Consumer | 63,877 | 60,675 | 59,123 | 56,961 | |||||||||||||
| Total | $ | 3,298,893 | $ | 3,499,258 | $ | 3,809,692 | $ | 3,299,591 | |||||||||
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| Allowance for losses |
The allowance for losses totaled $30.0 million at September 30, 2001, an increase of $5.0 million, or 20.0%, from $25.0 million at December 31, 2000. This increase was recorded because of the $14.9 million, or 23.4%, increase in delinquent loans, the increased charge-offs of $3.8 million (60.3%), and the continued trend of economic uncertainty.
The allowance for losses as a percentage of non-performing loans was 38.2% and 39.3% at September 30, 2001 and December 31, 2000, respectively. The Company’s non-performing loans totaled $78.5 million and $63.6 million at September 30, 2001 and December 31, 2000, respectively. The allowance for losses as a percentage of total loans, was 0.55% and 0.48% at September 30, 2001 and December 31, 2000, 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 condition.
| FHLB stock |
Holdings of FHLB stock increased from $98.8 million at December 31, 2000 to $125.0 million at September 30, 2001. These increases were made to comply with the member rules as set down by the FHLB. 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. During the quarter ended September 30, 2001, the FHLB advance total reached $2.3 billion creating the need for the increased stock balance.
| Accrued interest receivable |
Accrued interest receivable increased from $39.1 million at December 31, 2000 to $42.0 million at September 30, 2001 as the Company’s total loan portfolio increased. The Company typically collects loan interest in the following month after it is earned.
| Repossessed assets |
Repossessed assets increased from $22.3 million at December 31, 2000 to $33.2 million at September 30, 2001. This increase was caused by a greater amount of loans in a foreclosed status which are yet to be sold.
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Mortgage servicing rights
Mortgage servicing rights totaled $128.7 million at September 30, 2001, an increase of $22.3 million, or 21.0%, from $106.4 million reported at December 31, 2000. During the nine months ended September 30, 2001, the Company capitalized $347.8 million, amortized $32.4 million, and sold $293.1 million in mortgage servicing rights. The principal balance of the loans serviced for others stands at $9.8 billion at September 30, 2001 versus $6.6 billion at December 31, 2000. The capitalized value of the mortgage servicing rights was 1.32% and 1.60% at September 30, 2001 and December 31, 2000, respectively.
| Activity of Mortgage Loans Serviced for Others( in thousands): |
| Three months ended | Three months ended | ||||||||
| September 30, 2001 | September 30, 2000 | ||||||||
| Beginning balance | $ | 7,679,952 | $ | 8,402,411 | |||||
| Loans sold | 7,690,877 | 1,942,227 | |||||||
| Subtotal | 15,370,829 | 10,344,638 | |||||||
| Loans sold servicing released | 118,452 | 9,326 | |||||||
| Servicing sold (flow basis) | 5,118,225 | 1,671,913 | |||||||
| Servicing sold (bulk basis) | 2,039,734 | ||||||||
| Subtotal | 5,236,677 | 3,720,973 | |||||||
| Amortization | 349,304 | 191,722 | |||||||
| Ending balance | $ | 9,784,848 | $ | 6,431,943 | |||||
| Nine months ended | Nine months ended | ||||||||
| September 30, 2001 | September 30, 2000 | ||||||||
| Beginning balance | $ | 6,644,482 | $ | 9,519,926 | |||||
| Loans sold | 20,718,608 | 5,364,332 | |||||||
| Subtotal | 27,363,090 | 14,884,258 | |||||||
| Loans sold servicing released | 295,455 | 14,173 | |||||||
| Servicing sold (flow basis) | 14,267,918 | 3,878,754 | |||||||
| Servicing sold (bulk basis) | 2,162,097 | 3,641,238 | |||||||
| Subtotal | 16,725,470 | 7,534,165 | |||||||
| Amortization | 862,772 | 918,130 | |||||||
| Ending balance | $ | 9,784,848 | $ | 6,431,943 | |||||
Other assets
Other assets increased $23.4 million, or 26.9%, to $110.4 million at September 30, 2001, from $87.0 million at December 31, 2000. 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 nine months ended September 30, 2001. 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.
Liabilities
The Company’s total liabilities increased $0.2 billion, or 3.6%, to $5.8 billion at September 30, 2001, from $5.6 billion at December 31, 2000. The majority of this increase was found in the liability for checks issued and increased amount of escrow accounts serviced by the Company.
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| Retail deposit accounts |
Retail deposit accounts increased $0.3 billion, or 15.8%, to $2.2 billion at September 30, 2001, from $1.9 billion at December 31, 2000. This increase reflects the deposit growth strategy being implemented in the Company’s banking center network. The number of banking centers increased from 52 at December 31, 2000 to 68 at September 30, 2001. At September 30, 2001, the Company’s retail certificates of deposit totaled $1.3 billion, or 58.0% of total retail deposits. These certificates carry an average balance of $20,679 and a weighted average cost of 5.65%. During the fourth quarter, the Company has $374.0 million of these certificates that carry a rate of 6.26% maturing. The Company expects to renew the majority of these accounts at a rate which is 250 basis points less than the current rate.
| Retail deposits |
| September 30, 2001 | December 31, 2000 | ||||||||||||||||||||||||||
| Balance | Rate | % | Balance | Rate | % | ||||||||||||||||||||||
DDA: | |||||||||||||||||||||||||||
| Non-interest bearing | $ | 12,922 | 0.06 | % | 0.59 | % | $ | 9,209 | 0.01 | % | 0.49 | % | |||||||||||||||
| Interest bearing | 7,452 | 2.53 | 0.34 | 6,852 | 2.04 | 0.37 | |||||||||||||||||||||
| Interest bearing (tiered) | 193,948 | 4.44 | 8.80 | 99,315 | 4.59 | 5.31 | |||||||||||||||||||||
| Business | 43,067 | 0.12 | 1.96 | 43,292 | 0.15 | 2.31 | |||||||||||||||||||||
| Total | 257,389 | 3.37 | 11.69 | 156,668 | 3.00 | 8.48 | |||||||||||||||||||||
Savings: | |||||||||||||||||||||||||||
| Statement | 21,827 | 3.38 | 0.99 | 14,226 | 3.02 | 0.76 | |||||||||||||||||||||
| Statement plus | 646,297 | 4.57 | 29.36 | 325,885 | 5.33 | 17.42 | |||||||||||||||||||||
| Total | 668,124 | 4.54 | 30.35 | 340,111 | 5.24 | 18.18 | |||||||||||||||||||||
| Certificates of deposits | 1,275,789 | 5.65 | 57.96 | 1,371,952 | 6.67 | 73.34 | |||||||||||||||||||||
| Total retail deposits | $ | 2,201,302 | 5.04 | % | 100.00 | % | $ | 1,870,731 | 6.09 | % | 100.00 | % | |||||||||||||||
| Wholesale deposit accounts |
Wholesale deposit accounts decreased $0.5 billion, or 33.3%, to $1.0 billion at September 30, 2001, from $1.5 billion at December 31, 2000. This decrease reflects the Company’s strategy to reduce its reliance on higher costing secondary market certificates of deposit. The Company has emphasized the use of lower costing retail deposits and advances from the FHLB which are more sensitive to the current interest rate environment.
These deposits are made up entirely of certificates of deposit garnered through the secondary market. At September 30, 2001, the portfolio of certificates of deposit had a weighted cost of 5.56%. During the fourth quarter, the Company has $324.0 million of these certificates which carry a rate of 5.45% maturing. The Company does not expect to renew these accounts.
| FHLB advances |
FHLB advances increased $0.3 billion, or 17.6%, to $2.0 billion at September 30, 2001, from $1.7 million at December 31, 2000. The Company relies upon these advances as a funding source for the origination or purchase of loans, which are later sold into the secondary market. The outstanding balance of FHLB advances fluctuates from time to time depending upon the Company’s current inventory of loans held for sale and the availability of lower cost funding from its deposit base and its escrow accounts.
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| Long term debt |
On April 30, 1999, the Company issued $74.8 million of 9.50% preferred securities to the general public in an initial public offering. The securities were issued by the Company’s subsidiary, Flagstar Trust, a Delaware trust. The preferred securities mature in 30 years, pay interest quarterly, and the interest expense is deductible for federal income tax purposes. The net proceeds from the offering 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 $21.8 million, or 32.4%, to $89.1 million at September 30, 2001, from $67.3 million at December 31, 2000. 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 September 30, 2001 is reflective of the refinance environment currently being experienced by the Company.
| Escrow accounts |
Customer escrow accounts increased $56.1 million, or 102.2%, to $111.0 million at September 30, 2001, from $54.9 million at December 31, 2000. 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 $141.8 million, or 291.2%, to $190.5 million at September 30, 2001, from $48.7 million at December 31, 2000. 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. The large increase at September 2001 is indicative of the large production volumes recorded by the Company during the period.
| Federal income taxes payable |
Federal income taxes payable increased $1.5 million, or 2.4%, to $63.9 million at September 30, 2001, from $62.4 million at December 31, 2000. This increase is attributable to the increase in the deferred tax liability created by timing differences in the recognition of revenue from a financial statement basis and a federal income tax basis.
| Other liabilities |
Other liabilities increased $21.9 million, or 31.2%, to $92.0 million at September 30, 2001, from $70.1 million at December 31, 2000. This increase was caused by an increase in accrued liabilities associated with the increased employee count and the large mortgage production volume.
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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 three months ended September 30, 2001 totaled $7.7 billion, an increase of $5.8 billion from the $1.9 billion sold during the same period in 2000. This increase in mortgage loan sales was attributable to the $5.6 billion increase in mortgage loan originations during the quarter. The Company sold 92.8% and 70.4% of its mortgage loan originations during the three month periods ended September 30, 2001 and 2000, respectively.
Mortgage loans sold during the nine months ended September 30, 2001 totaled $20.7 billion, and increase of $15.3 billion from the $5.4 billion sold during the same period in 2000. This increase in mortgage loan sales was attributable to the $15.0 billion increase in mortgage loan originations. The Company sold 94.1% and 76.1% of its mortgage loan originations during the nine month periods ended September 30, 2001 and 2000, 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 $2.0 billion outstanding at September 30, 2001. 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 $2.5 billion. 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 September 30, 2001, the Company had outstanding rate-lock commitments to lend $4.1 billion in mortgage loans, along with outstanding commitments to make other types of loans totaling $76.5 million. Because such commitments may expire without being drawn upon, they do not necessarily represent future cash commitments. Also, at September 30, 2001, the Company had outstanding commitments to sell $3.3 billion of mortgage loans. These commitments will be funded within 90 days. Total commercial and consumer unused lines of credit totaled $374.3 million at September 30, 2001. Such commitments include $269.1 million of unused warehouse lines of credit to various mortgage companies. The Company had advanced $215.6 million at September 30, 2001.
| Capital Resources. |
At September 30, 2001, the Bank exceeded all applicable bank regulatory minimum capital requirements. The Company is not subject to any such requirements.
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Item 3. 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, 2000.
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PART II — OTHER INFORMATION
| Item 1. | Legal Proceedings | |
| None. | ||
| Item 2. | Changes in Securities | |
| None. | ||
| Item 3. | Defaults upon Senior Securities | |
| None. | ||
| Item 4. | Submission of Matters to a Vote of Security Holders | |
| (a) The 2001 Annual Meeting of Shareholders of the Company was held on May 7, 2001. | ||
| (b) Not applicable | ||
| Item 5. | Other Information | |
| None. | ||
| Item 6. | Exhibits and Reports on Form 8-K | |
| (a) Exhibits | ||
| Exhibit 11. Computation of Net Earnings per Share | ||
| (b) Reports on Form 8-K | ||
| None |
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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: | March 26, 2002 | /S/ Thomas J. Hammond Thomas J. Hammond Chairman of the Board and Chief Executive Officer (Duly Authorized Officer) | ||
| /S/ Michael W. Carrie Michael W. Carrie Executive Vice President (Principal Accounting Officer) |
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Exhibit Index
| Exhibit | ||||
| Number | Description | |||
| 11 | Computation of Net Earnings per Share | |||