SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No.: 0-22353
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FLAGSTAR BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-3150651
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2600 TELEGRAPH ROAD, BLOOMFIELD HILLS, MICHIGAN 48302-0953
- ----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 338-7700
--------------
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 X No .
------- -----
As of May 12, 1998, 13,670,000 shares of the registrant's Common
Stock, $0.01 par value, were issued and outstanding.
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 - March 31, 1998 (unaudited)
and December 31, 1997.
Unaudited Consolidated Statements of Earnings - For the three months ended
March 31, 1998 and 1997.
Unaudited Consolidated Statements of Cash Flows - For the three months
ended March 31, 1998 and 1997.
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.
2
FLAGSTAR BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
At March 31, At December 31,
Assets 1998 1997
-------------------------------------------------
Cash and cash equivalents $ 48,973 $ 21,928
Loans receivable
Mortgage loans available for sale 1,612,132 1,197,152
Loans held for investment 661,800 463,607
Less: allowance for losses (7,000) (5,500)
--------------- --------------
Loans receivable, net 2,266,932 1,655,259
Federal Home Loan Bank stock 45,025 40,025
Other investments 537 538
--------------- --------------
Total earning assets 2,312,494 1,695,822
Accrued interest receivable 19,915 16,492
Repossessed assets 16,766 18,262
Premises and equipment 29,615 29,131
Mortgage servicing rights 85,179 83,845
Other assets 50,982 35,604
--------------- --------------
Total assets $2,563,924 $1,901,084
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposit accounts $1,367,275 $1,109,933
Federal Home Loan Bank advances 721,111 482,378
--------------- --------------
Total interest bearing liabilities 2,088,386 1,592,311
Accrued interest payable 10,774 10,555
Undisbursed payments on
loans serviced for others 90,333 45,852
Escrow accounts 75,725 43,368
Liability for checks issued 69,930 45,896
Federal income taxes payable 25,522 20,808
Other liabilities 69,704 15,677
--------------- --------------
Total liabilities 2,430,374 1,774,467
STOCKHOLDERS' EQUITY
Common stock - $.01 par value,
40,000,000 shares authorized,
13,670,000 shares issued at March 31, 1998 and
December 31, 1997 137 137
Additional paid in capital 29,988 29,988
Retained earnings 103,425 96,492
--------------- --------------
Total stockholders' equity 133,550 126,617
--------------- --------------
Total liabilities and stockholders' equity $2,563,924 $1,901,084
=============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
FLAGSTAR BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands)
For the Quarter ended March 31,
1998 1997
-----------------------------------------
Interest Income
Loans $37,085 $25,472
Other 824 519
------------------- -----------------
Total 37,909 25,991
INTEREST EXPENSE
Deposits 16,729 9,736
FHLB advances 9,722 5,213
Other 478 297
------------------- -----------------
Total 26,929 15,246
------------------- -----------------
Net interest income 10,980 10,745
Provision for losses 2,621 662
=================== =================
Net interest income after provision for losses 8,359 10,083
NON-INTEREST INCOME
Loan administration 80 2,834
Net gain (loss) on loan sales 16,802 (123)
Net gain on sales of mortgage servicing rights 1,883 9,315
Other fees and charges 629 560
------------------- -----------------
Total 19,394 12,586
NON-INTEREST EXPENSE
Compensation and benefits 4,263 7,235
Occupancy and equipment 3,732 3,365
General and administrative 7,305 4,965
------------------- -----------------
Total 15,300 15,565
=================== =================
Earnings before federal income taxes 12,453 7,104
Provision for federal income taxes 4,700 2,583
------------------- -----------------
NET EARNINGS $ 7,753 $ 4,521
=================== =================
EARNINGS PER SHARE - BASIC $0.57 $0.40
=================== =================
EARNINGS PER SHARE - DILUTED $0.54 $0.40
=================== =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
Flagstar Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Quarter ended March 31,
1998 1997
-------------------------------------------
Operating Activities
Net earnings $ 7,753 $ 4,521
Adjustments to reconcile net earnings to net cash used in operating activities
Provision for losses 2,621 662
Depreciation and amortization 7,136 3,864
Net (gain) loss on the sale of assets (208) 111
Net (gain) loss on loan sales (16,802) 123
Gain on sales of mortgage servicing rights (1,883) (9,315)
Proceeds from sales of loans available for sale 3,146,811 1,245,651
Originations and repurchases of loans available for sale, net of principal (3,548,112) (1,497,159)
repayments
Increase in accrued interest receivable (3,423) (520)
Increase in other assets (15,708) (9,557)
Increase in accrued interest payable 218 780
Increase (decrease) in liability for checks issued 24,033 (1,132)
Decrease in current federal income taxes payable (12,098) (8,644)
Provision (benefit) for deferred federal income taxes payable 16,813 (773)
Increase (decrease) in other liabilities 54,027 (3,272)
------------------- ------------------
Net cash used in operating activities (338,822) (274,660)
INVESTING ACTIVITIES
Maturity of other investments 1 344
Originations of loans held for investment, net of principal repayments (198,192) 32,736
Purchase of Federal Home Loan Bank Stock (5,000) (5,775)
Proceeds from the disposition of repossessed assets 3,706 1,346
Acquisitions of premises and equipment (2,019) (4,651)
Increase in mortgage servicing rights (39,677) (13,499)
Proceeds from the sale of mortgage servicing rights 34,956 20,515
------------------- ------------------
Net cash (used in) provided by investing activities (206,225) 31,016
FINANCING ACTIVITIES
Net increase in deposit accounts 257,342 142,807
Net increase in Federal Home Loan Bank advances 238,732 75,813
Net (disbursement) receipt of payments of loans serviced for others 44,481 (190)
Net receipt of escrow payments 32,357 11,962
Dividends paid to stockholders (820) -
Net cash provided by financing activities 572,092 230,392
------------------- ------------------
Net (decrease) increase in cash and cash equivalents 27,045 (13,252)
Beginning cash and cash equivalents 21,928 44,187
------------------- ------------------
Ending cash and cash equivalents $ 48,973 $ 30,935
=================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Loans receivable transferred to repossessed assets $ 2,003 $ 824
Total interest payments made on deposits and other borrowings $ 26,711 $ 14,466
Federal income taxes paid $ - $ 12,000
=================== ==================
Loans held for investment transferred to loans available for sale $ - $ -
=================== ==================
Loans available for sale transferred to loans held for investment $ - $ -
=================== ==================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
5
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, 1998.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Selected Financial Ratios
For the Quarter ended
March 31, 1998 March 31, 1997
------------------------ -------------------------
Return on average assets 1.37% 1.28%
Return on average equity 24.05% 22.85%
Efficiency ratio 41.00% 65.35%
Equity-to-assets ratio (average for the period) 5.70% 5.59%
Average shares outstanding 13,670 11,250
Mortgage loans originated or purchased $3,631,328 $1,496,298
Mortgage loans sold $3,088,417 $1,244,741
Interest rate spread 1.62% 2.52%
Net interest margin 2.19% 3.32%
Ratio of charge-offs to average loans .22% .05%
outstanding
March 31, 1998 December 31, 1997
------------------------ -------------------------
Equity-to-assets ratio 5.20% 6.66%
Tangible capital ratio (1) 6.90% 5.40%
Core capital ratio (1) 7.05% 5.62%
Risk-based capital ratio (1) 13.02% 11.22%
Total risk-based capital ratio (1) 13.47% 11.74%
Book value per share $ 9.77 $ 9.26
Shares outstanding 13,670 13,670
Mortgage loans serviced for others $6,483,836 $6,412,797
Capitalized value of mortgage servicing rights 1.31% 1.31%
Ratio of non performing assets to total assets 2.31% 3.29%
Number of bank branches 22 19
Number of loan origination centers 30 35
Number of correspondent offices 16 16
Number of employees 1,330 1,184
- -------------
(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.
7
RESULTS OF OPERATIONS
Net Earnings
Net earnings for the three months ended March 31, 1998 were $7.8 million ( $.57
per share-basic ), a $3.3 million increase from the $4.5 million ( $.40 per
share-basic ) reported in 1997. The increase resulted primarily from a $6.8
million increase in non-interest income.
NET INTEREST INCOME
Net interest income increased $.3 million, or 2.8%, to $11.0 million for the
1998 period, from $10.7 million for the 1997 period. This increase was due to a
$767.1 million increase in average interest-earning assets between the
comparable periods, offset by a $785.2 million increase in interest-bearing
liabilities necessary to fund the growth and accommodate $18.1 million of net
decrease in non-interest-bearing liabilities versus non-interest earning assets.
At the same time, the Company's interest rate spread decreased from 2.52% for
the 1997 period to 1.62% for the 1998 period. The decreased spread, along with
the $18.1 million decrease in the excess of average earning assets over average
interest-bearing liabilities, resulted in a decrease in the Company's net
interest margin of 1.19% to 2.19% for the 1998 period from 3.38% for the 1997
period.
8
Table 1 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
- -------
AVERAGE YIELDS EARNED AND RATES PAID
Quarter Ended March 31,
-----------------------------------------------------------------------------------------------
1998 1997
------------------------------------------- ----------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-----------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS: ( In Millions )
Loans receivable, net $1,994,820 $37,085 7.44% $1,243,050 $25,472 8.20%
FHLB stock 40,900 807 8.00 23,419 471 8.16
Other 1,184 17 5.41 3,318 48 5.91
---------------- ---------------------------------
Total 2,036,904 $37,909 7.44% 1,269,787 $25,991 8.19%
Other assets 226,969 125,193
Total assets $2,263,873 $1,394,980
================ ==================
INTEREST-BEARING LIABILITIES:
Deposits $1,189,422 $16,729 5.70% $ 715,241 $ 9,736 5.52%
FHLB advances 661,133 9,722 5.96 356,394 5,213 5.93
Other 25,671 478 7.55 19,364 297 6.22
---------------------------------
Total interest-bearing 1,876,226 $26,929 5.82% 1,090,999 $15,246 5.67%
liabilities
Other liabilities 258,704 224,896
Stockholders equity 128,943 79,085
---------------- ------------------
Total liabilities and
stockholders equity $2,263,873 $1,394,980
================ ==================
Net interest-earning assets $ 160,678 $ 178,788
================ ==================
Net interest income $10,980 $10,745
=============== ===============
Interest rate spread 1.62% 2.52%
============ =============
Net interest margin 2.19% 3.38%
============ =============
Ratio of average interest-
earning assets to
interest-bearing liabilities 109% 116%
============ =============
9
Table 2 presents the dollar amount of changes in interest income and interest
expense for the components of earning assets and interest-bearing liabilities
which are presented in Table 1. Table 2 distinguishes between the changes
related to average outstanding balances (changes in volume while holding the
initial rate constant) and the changes related to average interest rates
(changes in average rates while holding the initial balance constant).
TABLE 2
- -------
RATE/VOLUME ANALYSIS
Quarter Ended March 31,
--------------------------------------------
1998 versus 1997
Increase (Decrease) Due To:
Rate Volume Total
--------------------------------------------
INTEREST INCOME: (In Thousands)
Loans receivable, net ($ 3,789) $15,404 $11,615
FHLB stock (16) 352 336
Other (1) (32) (33)
--------------------------------------------
Total ($ 3,806) $15,724 $11,918
INTEREST EXPENSE:
Deposits $ 918 $ 6,075 $ 6,993
FHLB advances (90) 4,599 4,509
Other 85 96 181
--------------------------------------------
Total $ 913 $10,770 $11,683
Net change in net interest income ($ 4,719) $ 4,954 $ 235
============================================
Provision for Losses
The provision for losses increased to $2.6 million in the 1998 period from
$662,000 during the same period in 1997. The increase in the provision reflects
the increase in the level of loans receivable to $2.3 billion at March 31, 1998
from $1.7 billion at December 31, 1997, a 35.3% increase. The increase in the
provision allowed management to increase the allowance for losses to $7.0
million, a $1.5 million increase from December 31, 1997. Non-performing loans
decreased $1.6 million during the quarter to $42.7 million at March 31, 1998,
from $44.3 million at December 31, 1997, a decrease of 3.6%. Net charge-offs in
the period were an annualized 0.22% of average loans outstanding versus .05% in
the 1997 period and .20% for all of 1997.
10
NON-INTEREST INCOME
During 1998, non-interest income increased $6.8 million, or 54.0%, to $19.4
million from $12.6 million. This increase was attributable to an increase in net
gain on loan sales, offset by a decrease in net gain on the sales of mortgage
servicing rights and a decrease in loan administration fees.
LOAN ADMINISTRATION
Loan administration fee income decreased $2.7 million, or 96.4%, to $80,000 for
the 1998 period, from $2.8 million for the 1997 period. This decrease resulted
primarily from an increase in the amortization of mortgage servicing rights
caused by prepayments in the underlying mortgage loans. Fee income before the
amortization of serving rights actually increased $.4 million for the three
months ended March 31, 1998, to $5.3 million but was offset by a $3.3 million
increase in amortization. At March 31, 1998, the unpaid principal balance of
loans serviced for others was $6.5 billion versus $4.2 billion serviced at
December 31, 1997. At March 31, 1998 the weighted average servicing fee on loans
serviced for others was 0.279% (i.e., 27.9 basis points).
NET GAIN ON LOAN SALES
For the 1998 period, net gain on loan sales increased $16.9 million, to $16.8
million, from a $123,000 loss in the 1997 period. The 1998 period reflects the
sale of $3.1 billion in loans versus $1.2 billion sold in the 1997 period. The
falling interest rate environment in the 1998 period resulted in the recognition
of a large gain from the sale of loans. In contrast, management believes the
interest rate environment in the 1997 period was more stable and constant which
provided a near break-even from loan sales.
NET GAIN ON THE SALE OF MORTGAGE SERVICING RIGHTS
For the period ended March 31, 1998, the net gain on the sale of mortgage
servicing rights decreased $7.4 million to $1.9 million, from $9.3 million for
the same period in 1997. The gain on sale of mortgage servicing rights decreased
due to the sale of $2.3 billion in newly originated servicing rights in 1998,
which had a book value which more closely mirrored the sales price. The bulk
mortgage servicing rights sold in 1997 was an accumulation of $650 million in
rights originated prior to 1995 and the adoption of FASB 122 and $750 million of
recently originated servicing rights.
The Company also sold $337.8 million and $254.2 million in loans on a servicing
released basis during the 1998 and 1997 periods, respectively.
OTHER FEES AND CHARGES
In the 1998 period, other fees and charges, which include certain loan fees and
charges, deposit-related fees and escrow waiver fees, increased $69,000 from the
1997 period to $629,000.
11
NON-INTEREST EXPENSE
The following table sets forth 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 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
two periods.
Quarter Ended March 31,
1998 1997
---------------- ----------------
( In thousands )
Compensation and benefits $ 12,340 $10,852
Commissions 5,906 2,681
Occupancy and equipment 3,732 3,357
Advertising 282 402
Core deposit amortization 323 323
Federal insurance premium 165 61
Other 9,993 5,747
---------------- ----------------
Total 32,743 23,423
Less: capitalized direct costs of loan
closings (17,443) (7,858)
---------------- ----------------
Total, net $ 15,300 $15,565
================ ================
Efficiency ratio(1) 41.0% 60.4%
Non-interest expense, excluding the capitalization of direct loan origination
costs, increased by $9.3 million, or 39.7%, to $32.7 million for the 1998 period
from $23.4 million for the 1997 period. These increased costs are primarily
attributable to the $2.1 billion increase (140%) in mortgage loan originated
during the comparable periods. The largest changes occurred in the amount of
compensation and benefits and commissions paid and the general and
administrative expenses reported.
The increased commission expense of $3.2 million and the $1.5 million
compensation cost increase is the direct result of the increase in mortgage loan
originations during period. The majority of the $4.3 million increase in general
and administrative expenses represents increased contract underwriting costs and
other costs associated with the mortgage loan production.
Additionally, the Company also opened three new bank branches during the
quarter, and maintained six more branches in the 1998 quarter than the
comparable 1997 period.
12
SEGMENT REPORTING
- -----------------
RETAIL BANKING OPERATIONS
The Company provides a full range of banking services to consumers and small
businesses in southern and western Michigan. The Bank operates a network of 22
bank branches. 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.
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 30 loan origination centers located in
Michigan, Ohio, and Florida. 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 FHLMC or FNMA.
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 March 31,
1997 1996
-----------------------------------------------
( In thousands )
Revenues $ 6,478 $ 5,537
Earnings before taxes 4,015 3,187
Identifiable assets 696,374 457,843
TABLE 5
- -------
Mortgage Banking Operations
At or for the quarter ended March 31,
1998 1997
----------------------------------------------
( In thousands )
Revenues $ 23,896 $ 17,794
Earnings before taxes 8,438 3,917
Identifiable assets 1,981,213 1,253,236
13
FINANCIAL CONDITION
Assets
The Company's assets totaled $2.6 billion at March 31, 1998, an increase of
$662.8 million, or 34.9%, as compared to $1.9 billion at December 31, 1997. This
increase was primarily due to increases in mortgage loans available for sale and
loans held for investment, Federal Home Loan Bank stock, accrued interest
receivable, mortgage servicing rights, cash and cash equivalents, and other
assets offset in part by a decrease in repossessed assets.
LOANS RECEIVABLE, NET
Loans receivable, net increased $611.7 million, from $1.7 billion at December
31, 1997 to $2.3 billion at March 31, 1998.
Mortgage loans available for sale increased $414.9 million, or 43.9%, to $1.6
billion at March 31, 1998, from $1.2 billion at December 31, 1997. This increase
is attributable to the increased leverage ability provided by the increase in
regulatory capital provided by the proceeds received by Flagstar Capital
Corporation, a second tier subsidiary, from its sale of preferred stock and the
Company's decision to hold larger portions of its mortgage loan production for
longer periods until sold into the secondary market.
Loans held for investment increased $198.2 million, or 42.8%, from $463.6
million at December 31, 1997 to $661.8 million at March 31, 1998. This increase
is attributable to the purchase of mortgage loans by Flagstar Capital
Corporation, a subsidiary of the Bank, and an increased use of warehouse lines
of credit by mortgage banking companies in order to access funding for their
mortgage closings. Flagstar Capital Corporation bought mortgage loans with a
principal balance at March 31, 1998 of $109.7 million. Warehouse lines used at
March 31, 1998 totaled $185.0 million versus $77.5 million at December 31, 1997.
ALLOWANCE FOR LOSSES
The allowance for losses totaled $7.0 million at March 31, 1998, an increase of
$1.5 million, or 27.3%, from $5.5 million at December 31, 1997. The allowance
for losses as a percentage of non-performing loans was 16.41% and 12.41% at
March 31, 1998 and December 31, 1997, respectively. The Company's non-performing
loans totaled $42.7 million and $44.3 million at March 31, 1998 and December 31,
1997, respectively. The allowance for losses as a percentage of total loans, was
.31% and .33% at March 31, 1998 and December 31, 1997, respectively. The
increase in the dollar amount of the allowance for losses was based upon
management's assessment of relevant factors, including the types and amounts of
non-performing loans, historical, and anticipated loss experience on such types
of loans, and current and projected economic conditions. During the quarter
ended March 31, 1998, non-performing assets declined $3.2 million, or 5.1%, and
management increased the allowance for losses $1.5 million, creating an 8.2%
decrease in net non-performing assets.
ACCRUED INTEREST RECEIVABLE
Accrued interest receivable increased from $16.5 million at December 31, 1997 to
$19.9 million at March 31, 1998 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 decreased from $18.3 million at December 31, 1997 to $16.8
million at March 31, 1998 as the Company's non-performing loans were foreclosed
upon by the Bank. This 8.2% decrease is the direct result of the decrease in the
amount of non-performing loans and loan repurchases made during the period.
14
FHLB Stock
Holdings of FHLB stock increased from $40.0 million at December 31, 1997 to
$45.0 million at March 31, 1998 as the Company's total mortgage loan portfolio
increased. 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, home purchase contracts and similar
obligations at the beginning of each year, or 1/20th of its FHLB advances,
whichever is greater.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights totaled $85.2 million at March 31, 1998, an increase
of $1.4 million, or 1.7%, from $83.8 million at December 31, 1997. During the
quarter ended March 31, 1998, the Company capitalized $39.7 million, amortized
$5.3 million, and sold $33.0 million in mortgage servicing rights.
OTHER ASSETS
Other assets increased $15.4 million, or 43.3%, to $51.0 million at March 31,
1998, from $35.6 million at December 31, 1997. The majority of this increase was
attributable to the receivable recorded in conjunction with the sale of mortgage
servicing rights completed in February 1998. Upon a sale of mortgage servicing
rights, the Company receives a down payment from the purchaser equivalent to
approximately 20% of the total purchase price and records a receivable account
for the balance of the purchase price due. In connection with the sale of
mortgage servicing rights, the Company had receivables of $33.6 million at March
31, 1998. The balance due is paid upon transfer by the Company of the related
mortgage loan servicing documents, usually within 180 days after the sale date.
LIABILITIES
The Company's total liabilities increased $655.9 million, or 37.0%, to $2.4
billion at March 31, 1998, from $1.8 billion at December 31, 1997. This increase
was attributable to an increase in every category of liability account.
DEPOSIT ACCOUNTS
Deposit accounts increased $257.3 million, or 23.2%, to $1.4 billion at March
31, 1998, from $1.1 billion at December 31, 1997. This increase reflects the
Company's deposit growth strategy through both its branch network and the
secondary market. The number of bank branches increased from 19 at December 31,
1997 to 22 at March 31, 1998. The bank branches have generated $54.8 million in
new deposits, an annualized 43.1% growth rate, since December 31, 1997. At March
31, 1998, the Company's certificates of deposit totaled $1.2 billion, or 85.7%
of total deposits. These certificates carry an average balance of $51,964 and a
weighted average cost of 5.96%. Approximately $803.3 million of the certificates
of deposit were brokered deposits or deposits garnered through secondary markets
and carried a weighted average cost of 5.88%.
FHLB ADVANCES
-------------
FHLB advances increased $238.7 million, or 49.5%, to $721.1 million at March 31,
1998, from $482.4 million at December 31, 1997. The Company relies upon such
advances as a source of funding 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.
15
UNDISBURSED PAYMENTS ON LOANS SERVICED FOR OTHERS
Undisbursed payments on loans serviced for others increased $44.4 million, or
96.7%, to $90.3 million at March 31, 1998, from $45.9 million at December 31,
1997. 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.
ESCROW ACCOUNTS
Customer escrow accounts increased $32.3 million, or 74.4%, to $75.7 million at
March 31, 1998, from $43.4 million at December 31, 1997. 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.
LIABILITY FOR CHECKS ISSUED
Liability for checks issued increased $24.0 million, or 52.3%, to $69.9 million
at March 31, 1998, from $45.9 million at December 31, 1997. These amounts
represent checks issued to acquire mortgage loans which have not cleared for
payment. These balances fluctuate with the size of the mortgage pipeline,
increasing in lower interest rate scenarios and decreasing during a time when
loan origination volume is down.
FEDERAL INCOME TAXES PAYABLE
Federal income taxes payable increased $4.7 million, or 22.6%, to $25.5 million
at March 31, 1998, from $20.8 million at December 31, 1997. This decrease was
primarily attributable to the timing of payments and a decrease in the current
tax liability.
OTHER LIABILITIES
Other liabilities increased $54.0 million, or 343.9%, to $69.7 million at March
31, 1998, from $15.7 million at December 31, 1997. This increase was primarily
attributable to the issuance of $57.5 million of preferred stock by Flagstar
Capital Corporation, a second tier subsidiary of the Company.
16
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Liquidity refers to the ability or the financial flexibility to manage future
cash flows 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
other than that of its wholly owned subsidiary, Flagstar Bank, FSB.
The Bank is required by the Office of Thrift Supervision ("OTS") regulations to
maintain minimum levels of liquid assets. This requirement, which may be changed
at the discretion of the OTS depending upon economic conditions and deposit
flows, is based upon a percentage of deposits and short-term borrowings. The
required minimum ratio is currently 5.00%. While the Bank's liquidity ratio
varies from time to time, the Bank has generally maintained liquid assets
substantially in excess of the minimum requirements. The Bank's average daily
liquidity ratio was 17.77% for the month ended March 31, 1998.
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 March 31, 1998 totaled $3.1
billion, an increase of $1.9 billion, or 158.3% from $1.2 billion sold during
the same period in 1997. This increase in mortgage loan sales was attributable
to the 140.0% increase in mortgage loan originations. The Company sold 85.0% and
83.2% of its mortgage loan originations during the three month periods ended
March 31, 1998 and 1997, 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. These funds are
typically borrowed for 90-day terms with no prepayment penalty. The Company had
$721.1 million outstanding at March 31, 1998. 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 $1.1 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 March 31, 1998, the Company had outstanding rate-lock commitments to lend
$1.8 billion in mortgage loans, along with outstanding commitments to make other
types of loans totaling $47.0 million. Because such commitments may expire
without being drawn upon, they do not necessarily represent future cash
commitments. Also, as of March 31, 1998, the Company had outstanding commitments
to sell $1.6 billion of mortgage loans. These commitments will be funded within
90 days. Total commercial and consumer unused lines of credit totaled $130.0
million at March 31, 1998. Such commitments include $274.8 million in warehouse
lines of credit to various mortgage companies, of which $185.0 million was drawn
upon as of March 31, 1998.
CAPITAL RESOURCES.
At March 31, 1998, the Bank exceeded all applicable bank regulatory minimum
capital requirements. The Company is not subject to any such requirements.
ITEM 3. MARKET RISK
Management believes there has been no material change in either interest rate
risk or market risk since the December 31, 1997.
17
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
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 (SEC Use only)
(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: May 12, 1998 /s/ Mark T. Hammond
-------------------
Mark T. Hammond
Vice Chairman of the Board and
President
(Duly Authorized Officer)
/s/ Michael W. Carrie
---------------------
Michael W. Carrie
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
19