FORM 10-Q
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 June 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No.: 333-21621
-----------------
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 August 13, 1997, 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 and
its wholly-owned subsidiaries are as follows:
Condensed Unaudited Consolidated Balance Sheets - June 30, 1997 and
December 31, 1996.
Condensed Unaudited Consolidated Statements of Earnings - For the
three and six months ended June 30, 1997 and 1996.
Condensed Unaudited Consolidated Statements of Cash Flows - For the
six months ended June 30, 1997 and 1996.
Notes to Condensed Consolidated Financial Statements.
2
FLAGSTAR BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands except per share data)
ASSETS June 30, 1997 December 31, 1996
------ ------------------ ---------------------
(unaudited)
Cash and cash equivalents....................................................... $ 18,272 $ 44,187
Loans receivable
Mortgage loans held for sale.............................................. 1,028,569 840,767
Loans held for investment................................................. 394,563 273,569
Less allowance for losses................................................. (4,500) (3,500)
-------------- -----------------
1,418,632 1,110,836
Federal Home Loan Bank stock.................................................... 30,225 19,725
Other investments............................................................... 542 887
-------------- -----------------
Total earning assets................................................ 1,449,399 1,131,448
Accrued interest receivable..................................................... 8,355 6,626
Repossessed assets.............................................................. 12,450 10,363
Premises and equipment.......................................................... 21,389 20,866
Mortgage servicing rights....................................................... 40,039 30,064
Other assets 46,385 53,672
-------------- -----------------
Total assets.................................................. $ 1,596,289 $ 1,297,226
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities
Deposit accounts.......................................................... $ 904,310 $ 624,485
Federal Home Loan Bank advances........................................... 417,133 389,801
--------------- -----------------
Total interest bearing liabilities.................................. 1,321,443 1,014,286
Accrued interest payable.................................................. 6,117 2,712
Undisbursed payments on loans serviced for others......................... 23,560 61,445
Escrow accounts........................................................... 62,596 61,009
Liability for checks issued............................................... 37,727 39,813
Federal income taxes payable.............................................. 16,097 22,548
Other liabilities......................................................... 13,390 16,945
--------------- -----------------
Total liabilities................................................... 1,480,929 1,218,758
Stockholders' Equity
Commonstock -- $0.01 par value, 40,000,000 shares authorized, 13,670,000
shares issued and outstanding at June 30, 1997
and 11,250,000 at December 31, 1996................................. 137 112
Additional paid in capital................................................ 30,021 2,816
Retained earnings......................................................... 85,202 75,540
--------------- -----------------
Total stockholders' equity.......................................... 115,360 78,468
--------------- -----------------
Total liabilities and stockholders' equity.................... $ 1,596,289 $ 1,297,226
================ ==================
3
FLAGSTAR BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ --------------------------------
1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited)
Interest Income
Loans...........................................................$ 27,548 $ 19,186 $ 53,021 $ 38,191
Other........................................................... 537 417 1,057 824
----------- ----------- ----------- -----------
28,085 19,603 54,078 39,015
Interest Expense
Deposits........................................................ 11,599 7,249 21,336 14,649
FHLB advances................................................... 6,441 4,239 11,654 8,226
Other........................................................... 298 331 595 668
----------- ----------- ----------- -----------
18,338 11,819 33,585 23,543
----------- ----------- ----------- -----------
Net interest income............................................. 9,747 7,784 20,493 15,472
Provision for losses............................................ 1,676 345 2,314 652
----------- ----------- ----------- -----------
Net interest income after provision for losses.................. 8,071 7,439 18,179 14,820
Non-Interest Income
Loan administration............................................. 1,791 4,053 4,439 7,837
Net gain on loan sales.......................................... 3,669 3,324 3,546 3,746
Net gain on sales of mortgage servicing rights.................. 9,167 15,319 18,482 18,394
Other fees and charges.......................................... 1,249 1,239 1,995 3,146
----------- ----------- ----------- -----------
15,875 23,935 28,462 33,123
----------- ----------- ----------- -----------
Non-Interest Expense
Compensation and benefits....................................... 6,847 7,415 14,081 13,551
Occupancy and equipment......................................... 3,113 2,727 6,477 5,327
General and administrative...................................... 5,873 3,939 10,864 8,368
----------- ----------- ----------- -----------
15,833 14,081 31,422 27,246
----------- ----------- ----------- -----------
Earnings before federal income taxes............................ 8,113 17,293 15,219 20,697
Provision for federal income taxes.............................. 2,973 6,231 5,557 7,378
----------- ----------- ----------- -----------
Net Earnings....................................................$ 5,141 $ 11,062 $ 9,662 $ 13,319
=========== =========== =========== ===========
Earnings per common share.......................................$ 0.40 $ 0.99 $ 0.80 $ 1.19
=========== =========== =========== ===========
4
FLAGSTAR BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands except share data)
Six Months Ended June 30,
----------------------------------------
1997 1996
---- ----
(unaudited)
Operating Activities
Net earnings...................................................... $ 9,662 $ 13,319
Adjustments to reconcile net earnings to net
cash used in operating activities
Provision for losses........................................ 2,314 652
Depreciation and amortization............................... 7,839 7,558
Net (gain) loss on the sale of assets....................... (633) 11
Net gain on loan sales................................... (3,546) (3,746)
Net gain on sales of mortgage servicing rights.............. (15,518) (18,394)
(Benefit) provision for deferred federal
income taxes............................................ (773) 3,415
Proceeds from sales of loans held for sale.................. 2,700,741 3,908,589
Originations and repurchases of loans held for
sale, net of principal repayments..................... (2,903,477) (4,083,031)
Increase in accrued interest receivable..................... (1,729) (210)
Decrease in other assets.................................... 6,123 227
Increase in accrued interest payable........................ 3,405 184
Decrease in liability for checks issued..................... (2,086) (17,413)
(Decrease) increase in federal taxes payable................ (5,679) 1,758
Decrease in other liabilities .............................. (3,555) (4,413)
--------------- ---------------
Net cash used in operating activities................. (209,876) (191,494)
Investing Activities
Maturity of other investments..................................... 345 406
Purchase of other investments.................................... - (500)
Originations of loans held for investment,
net of principal repayments................................ (108,425) 140,666
Purchase of Federal Home Loan Bank Stock.......................... (10,500) (2,700)
Proceeds from the disposition of repossessed assets............... 2,802 52
Acquisitions of premises and equipment............................ (6,034) (4,955)
Proceeds from the disposition of premises and
equipment................................................. 2,733 -
Proceeds from the disposition of real estate held
for investment............................................ 735 -
Increase in mortgage servicing rights............................. (31,841) (36,669)
Proceeds from the sale of mortgage servicing rights............... 36,058 39,502
--------------- ---------------
Net cash (used) provided by investing activities............ (114,127) 135,802
Financing Activities
Net increase in deposit accounts.................................. 279,824 6,202
Net increase in Federal Loan Bank advances........................ 27,332 55,970
Net increase in escrow accounts................................... 1,587 14,672
Net (disbursement) receipt of payments
of loans serviced for others..................................... (37,885) (8,596)
Net proceeds from the issuance of common stock.................... 27,230 -
Dividends paid to stockholders.................................... - (1,000)
--------------- ---------------
Net cash provided by financing activities................ 298,088 67,248
--------------- ---------------
Net increase (decrease) in cash and cash equivalents.............. (25,917) 11,556
Beginning cash and cash equivalents............................... 44,187 29,119
--------------- ---------------
Ending cash and cash equivalents..................................... $ 18,272 $ 40,675
=============== ===============
Supplemental disclosure of cash flow information:
Loans receivable transferred to repossessed assets................ $ 4,601 $ 2,455
=============== ===============
Total interest payments made on deposits
and other borrowings.............................................. $ 30,179 $ 23,358
=============== ===============
Federal income taxes paid......................................... $ 12,000 $ 2,300
=============== ===============
5
FLAGSTAR BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business
------------------
Flagstar Bancorp, Inc. is a non-diversified, unitary thrift
holding company. The Company provides retail banking services
in southern Michigan and mortgage lending services nationwide.
Note 2. Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements
of Flagstar Bancorp, Inc. (the "Company"), and its
subsidiaries, 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,
1997.
Note 3. Initial Public Offering
-----------------------
On April 30, 1997, the Company's common stock began trading on
the Nasdaq Stock Market under the symbol "FLGS" on a
"when-issued" basis. On May 5, 1997, the Company sold
2,200,000 shares of its Common Stock as part of the initial
public offering of 5,000,000 shares of Common Stock, including
2,800,000 shares sold by the stockholders of the Company. On
May 12, 1997, the Company sold an additional 220,000 shares of
its Common Stock in connection with the exercise, by the
underwriters in the initial public offering, of an option to
acquire additional shares equal to not more than 10% of the
shares sold in the initial public offering. The net proceeds
received by the Company totaled approximately $27.2 million.
6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Selected Financial Ratios
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited)
Return on average assets........................... 1.30% 3.86% 1.30% 2.42%
Return on average equity........................... 20.55% 66.88% 21.55% 42.59%
Interest rate spread............................... 2.35% 1.99% 2.46% 1.96%
Net interest margin................................ 2.81% 3.06% 3.08% 3.07%
Efficiency ratio................................... 60.53% 43.38% 63.53% 55.40%
Bank Regulatory Capital Ratios
At June 30, 1997 At December 31, 1996
---------------- --------------------
% of Assets % of Assets
----------- -----------
Equity-to-assets ratio................................ 7.23% 6.05%
Tangible capital (1).................................. 6.89% 5.58%
Core capital (1)...................................... 7.19% 6.01%
Total risk-based capital (1).......................... 13.46% 10.91%
(1) Based on adjusted total assets for purposes of tangible capital and core
capital requirements, and risk-weighted assets for purposes of the
risk-based capital requirement. These ratios are applicable to
Flagstar Bank only.
Results of Operations
Net Earnings
Three months ended June 30, 1997 compared to the three months ended June
30, 1996
Net earnings for the 1997 period were $5.1 million ($.40 per share), a 54.1%
decrease from the $11.1 million ($.99 per share) reported in 1996. The decrease
resulted from an $8.0 million decrease in non-interest income, a $1.7 million
increase in non interest expense, and a $1.4 million increase in the provision
for losses, offset in part by a $1.9 million increase in net interest income.
Six months ended June 30, 1997 compared to the six months ended June 30,
1996
Net earnings decreased by 27.1% to $9.7 million ($.80 per share) in 1997 from
$13.3 million ($1.19 per share) in the same period in 1996. These decreased
earnings were a result of a $4.6 million reduction in non-interest income, a
$1.6 million increase in the provision for losses, and an increase in
non-interest expenses of $4.2 million, which offset the $5.0 million increase in
net interest income.
7
Net Interest Income
Three months ended June 30, 1997 versus the three months ended June 30,
1996.
Net interest income increased $1.9 million, or 24.4%, to $9.7 million for the
1997 period, from $7.8 million for the 1996 period. This increase was due
primarily to a $257.3 million increase in average interest-earning assets
between the comparable periods, offset by a $124.8 million increase in
interest-bearing liabilities necessary to fund such growth. At the same time,
the Company's interest rate spread increased from 2.04% for the 1996 period to
2.35% for the 1997 period. The increased spread, offset by a $67.7 million
decrease in the excess of average earning assets over average interest-bearing
liabilities, resulted in a decrease in the Company's net yield on
interest-earning assets of .21% to 2.81% for the 1997 period from 3.02% for the
1996 period.
Six months ended June 30, 1997 versus the six months ended June 30, 1996.
Net interest income for the period ended June 30, 1997 increased $5.0 million,
or 32.3%, to $20.5 million as compared to $15.5 million for the period ended
June 30, 1996. This increase was caused primarily by a $322.7 million increase
in average interest-earning assets between the comparable periods. Average
interest-earning assets increased to $1.3 billion for the six months ended June
30, 1997 from $1.0 billion for the six months ended June 30, 1996. At the same
time, the Company's interest rate spread increased from 1.96% in the 1996 period
to 2.46% in the 1997 period. Its net interest margin increased from 3.07% in the
1996 period to 3.08% in the 1997 period.
As a result of the asset growth experienced by the Company, the ratio of average
interest-earning assets to average interest-bearing liabilities decreased to
111% for the period ended June 30, 1997, as compared to 123% for the period
ended June 30, 1996. This decrease occurred as a result of the Company funding
the asset growth with interest-bearing liabilities. The Company's interest rate
spread was also positively affected by an increase in the spread between
short-term funding liabilities and longer-term assets.
Average Balances, Interest Rates and Yields.
Net interest income is affected by (i) the difference ("interest rate spread")
between rates of interest earned on interest-earning assets and rates of
interest paid on interest-bearing liabilities and (ii) the relative amounts of
interest-bearing liabilities and interest-earning assets. When the total of
interest-earning assets approximate or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. Financial
institutions have traditionally used interest rate spreads as a measure of net
interest income. Another indication of an institution's net interest income is
its "net yield on interest-earning assets" or " net interest margin" which is
net interest income divided by average interest-earning assets.
The following tables set forth certain information relating to the Company's
consolidated average interest-earning assets and interest-bearing liabilities
and reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of assets or liabilities, respectively,
for the periods presented. During the periods indicated, non-accruing loans, are
included in the net loan category. Average balances are derived from daily
averages as well as month-end averages, wherever available. Management does not
believe that the use of month-end average balances instead of average daily
balances has caused any material difference in the information presented.
8
For the three months ended June 30,
-----------------------------------------------------------------------------------
1997 1996
--------------------------------------- ------------------------------------------
Amount Interest % Amount Interest %
======================================= ==========================================
Interest-earning assets:
Loans receivable, net $1,363,413 $27,549 8.08% $995,115 $19,117 7.71%
FHLB stock 26,263 514 7.85% 18,533 367 8.03%
Other 1,563 23 5.89% 2,259 34 6.02%
-------------------------- ------------------------------
Total 1,269,787 25,991 8.08% 1,012,508 19,518 7.71%
Non interest-earning assets 194,157 126,367
-------------- -------------
Total assets $1,585,396 $1,125,969
============== =============
Interest-bearing liabilities:
Demand deposits $60,187 $342 2.27% $42,693 $225 2.14%
Savings deposits 71,754 798 3.94% 58,284 440 3.06%
Certificates of deposit 699,058 10,460 6.03% 426,480 6,732 6.40%
FHLB advances 433,646 6,441 5.93% 288,151 3,987 5.61%
Other 19,538 298 6.22% 22,149 338 6.19%
-------------------------- ------------------------------
Total interest-bearing liabilities: 962,571 15,246 5.67% 837,757 11,722 5.67%
Non interest-bearing liabilities 201,135 226,374
-------------- -------------
Total liabilities: 1,284,183 1,064,131
Equity 100,078 61,838
-------------- -------------
Total liabilities and equity $1,585,396 $1,125,969
============== =============
Net interest-earning assets $107,056 $174,751
============ =================
Net interest income $9,747 $7,796
============ =================
============== ============
Interest rate spread 2.35% 2.04%
============== ============
Net interest margin 2.81% 3.02%
============== ============
Ratio of average interest earning
assets to interest bearing
liabilities 108% 121%
============== ============
9
For the six months ended June 30,
----------------------------------------------------------------------------------
1997 1996
------------------------------------------ ---------------------------------------
Amount Interest % Amount Interest %
========================================== =======================================
Interest-earning assets:
Loans receivable, net $1,303,564 $53,021 8.13% $988,083 $38,191 7.73%
FHLB stock 25,957 985 7.65% 18,982 753 8.00%
Other 2,461 72 5.90% 2,259 71 6.34%
------------------------- ------------------------------
Total 1,331,982 54,078 8.12% 1,009,324 39,015 7.73%
Non interest-earning assets 158,200 91,833
---------- ------------
Total assets $1,490,182 $1,101,157
========== ============
Interest-bearing liabilities:
Demand deposits $65,715 $684 2.10% $37,552 $382 2.05%
Savings deposits 67,764 1,418 4.22% 61,704 1,032 3.37%
Certificates of deposit 648,119 19,234 5.98% 432,109 13,234 6.18%
FHLB advances 395,028 11,654 5.95% 269,743 8,226 6.15%
Other 19,451 595 6.17% 22,149 668 6.08%
------------------------- ------------------------------
Total interest-bearing liabilities: 1,196,077 33,585 5.66% 823,257 23,542 5.77%
Non interest-bearing liabilities 204,430 215,354
---------- ------------
Total liabilities: 1,400,507 1,038,611
Equity 89,675 62,546
---------- ------------
Total liabilities and equity $1,490,182 $1,101,157
========== ============
Net interest-earning assets $135,905 $186,067
========== ============
Net interest income $20,493 $15,473
========== ==========
========== =========
Interest rate spread 2.46% 1.96%
========== =========
Net interest margin 3.08% 3.07%
========== =========
Ratio of average interest earning
assets to interest bearing
liabilities 111% 123%
========== =========
10
Rate/Volume Analysis
The following table analyzes net interest income in terms of changes in the
volume of interest-earning assets and interest-bearing liabilities and changes
bin yields and rates. The table reflects the extent to which changes in the
interest income and interest expense are attributable to changes in volume
(changes in volume multiplied by prior year rate) and changes in rate (changes
in rate multiplied by prior year volume). Changes attributable to the combined
impact of volume and rate have been allocated proportionately to changes due to
volume and changes due to rate.
For The Period Ended June 30,
Three Months Six Months
1997 vs. 1996 1997 vs. 1996
Rate Volume Net Rate Volume Net
--------------------------------------- ---------------------------------
(In thousands)
--------------
Interest Income:
Loans receivable, net............................ $2,524 $5,839 $8,363 $ 2,636 $12,194 $14,830
FHLB stock....................................... 30 97 127 (45) 277 232
Other............................................ 3 (11) (8) (5) 6 1
------------------------------------ --------------------------------------
Total..................................... 2,558 5,924 8,482 2,586 12,477 15,063
Interest Expense:
Demand deposits.................................. 64 (7) 57 16 286 302
Savings deposits................................. 919 (286) 633 287 99 386
Certificates of deposit.......................... (337) 3,998 3,661 (621) 6,621 6,000
FHLB advances.................................... (753) 2,954 2,201 (396) 3,824 3,428
Other............................................ 12 (45) (33) 8 (81) (73)
------------------------------------ --------------------------------------
Total..................................... (96) 6,615 6,519 (706) 10,749 10,043
==================================== ======================================
Net change in net interest income................ $2,654 $(691) $1,963 $3,291 $1,729 $ 5,020
==================================== ======================================
Provision for Losses
Three months ended June 30, 1997 versus the three months ended June 30,
1996
The provision for losses increased to $1.7 million in the 1997 period from
$345,000 in same period in 1996. The increase in the provision reflects the
increase in the level of non-performing loans to $42.0 million at June 30, 1997,
from $37.6 million at March 31, 1997, an increase of approximately $4.4 million,
or 11.7%, and the increase in the level of net charge-offs to 0.36% (annualized)
of average loans outstanding in the 1997 period from 0.00% in the 1996 period.
Single family residential mortgage loans represented approximately 94% of
non-performing loans at June 30, 1997 compared to 90% at March 31, 1997.
Six months ended June 30, 1997 versus the six months ended June 30, 1996
The provision for losses increased to $2.3 million for the 1997 period from
$652,000 for the same period in 1996. The Company's determination of its
provision for losses reflects its consideration of the potential loss that may
arise from loans in its portfolio or which it services for others. The increase
in the provision reflected the increase in the level of non-performing loans to
$42.0 million at June 30, 1997, from $30.6 million at December 31, 1996, an
increase of approximately $11.4 million, or 37.3%, and the increase in the level
of net charge-offs to 0.20% (annualized) of average loans outstanding in the
1997 period from 0.00% in the 1996 period. Single family residential mortgage
loans represented approximately $39.6 million, or 94%, of non-performing loans
at June 30, 1997 compared to 88% at December 31, 1996. See Allowance for Losses.
11
Non-Interest Income
Three months ended June 30, 1997 versus the three months ended June 30,
1996
During 1997, non-interest income decreased $8.0 million, or 33.5%, to $15.9
million from $23.9 million. The majority of this decrease was attributable to a
decrease in loan administration fees and net gains on sales of mortgage
servicing rights.
Six months ended June 30, 1997 versus the six months ended June 30, 1996
Non-interest income decreased $4.6 million, or 13.9%, to $28.5 million in the
1997 period, from $33.1 million for the 1996 period. The majority of this
decrease resulted from decreased loan administration and other fees and charges
during the 1997 period.
Loan Administration
Three months ended June 30, 1997 versus the three months ended June 30,
1996
Loan administration fee income decreased $2.3 million, or 56.1%, to $1.8 million
for the 1997 period, from $4.1 million for the 1996 period. This decrease
resulted primarily from a decrease in mortgage loans serviced for others caused
by the sales of mortgage servicing rights completed in the fourth quarter of
1996 and the first quarter of 1997. At June 30, 1997, the unpaid principal
balance of loans serviced for others was $4.0 billion versus $6.7 billion at
June 30, 1996. At June 30, 1997 and 1996, the weighted average servicing fee on
loans serviced for others was 0.283% (i.e., 28.3 basis points) and 0.284%,
respectively.
Six months ended June 30, 1997 versus the six months ended June 30, 1996
Loan administration fee income decreased $3.4 million, or 43.6%, to $4.4 million
for the 1997 period, from $7.8 million for the 1996 period. This decrease also
was the result of a decrease in the amount of mortgage loans serviced for
others.
12
Net Gain on Loan Sales
Three months ended June 30, 1997 versus the three months ended June 30,
1996
For the 1997 period, net gain on loan sales increased $345,000, to $3.7 million,
from $3.3 million in the 1996 period. Although, the 1997 period reflects the
sale of $1.5 billion in loans versus $1.8 billion sold in the 1996 period, the
interest rate environment in the 1996 period was more volatile, which created
more mismatches in the Company's hedging and resulted in the recognition of a
smaller gain. In contrast, the interest rate environment in the 1997 period was
more stable.
Six months ended June 30, 1997 versus the six months ended June 30, 1996
For the 1997 period, net gain on loan sales reported was $18.5 million versus
$18.4 million in the 1996 period. The 1997 period contained the sale of $2.7
billion in loans versus $3.9 billion sold in the 1996 period. The Company's
ability to recognize more gain in 1997 despite the reduced sale volume is
reflective of the more stable interest rate environment in 1997 and the
Company's effective hedging.
Net Gain on Sales of Mortgage Servicing Rights
Three months ended June 30, 1997 versus the three months ended June 30,
1996
For the period ended June 30, 1997, net gain on sales of mortgage servicing
rights decreased $6.1 million, or 39.9%, to $9.2 million, from $15.3 million for
same period in 1996. The gain on sale of mortgage servicing rights decreased due
to, a $600 million, or 40.0%, decrease in the underlying principal balance of
the mortgage servicing rights sold, from $1.5 billion in June 1996 to $922
million in June 1997.
Six months ended June 30, 1997 versus the six months ended June 30, 1996
For the 1997 period, net gain on sales of mortgage servicing rights were
reported at $18.5 million versus $18.4 million in the 1996 period. The 1997
period contained the sale of $2.3 billion in bulk sales and $400 million in
loans sold servicing released (i.e., a total of $2.7 billion) versus the $2.8
billion sold in bulk sales and $516 million in loans sold servicing released
(i.e., a total of $3.3 billion) in the 1996 period.
Other Fees and Charges
Three months ended June 30, 1997 versus the three months ended June 30,
1996
In the 1997 period, other fees and charges, which includes certain loan fees and
charges, deposit-related fees and escrow waiver fees, remained unchanged from
the 1996 period at $1.2 million.
Six months ended June 30, 1997 versus the six months ended June 30, 1996
Other fees and charges decreased $1.1 million, or 35.5%, to $2.0 million for the
1997 period from $3.1 million for same period in 1996. This decrease was
attributable to the 22.5% decrease in loan production completed during the
comparable periods.
13
Non-Interest Expense
The following table sets forth components of the Company's non-interest expense,
prior to 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 and amortized rather
than immediately expensed. 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 net of the portion that
must be capitalized under SFAS No. 91. However, 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
total overhead costs associated with increased loan production.
For the period ended June 30,
Three months Six months
1997 1996 1997 1996
---- ---- ---- ----
(In thousands)
--------------
Compensation and benefits................................... $ 10,725 $ 10,639 $ 21,584 $ 20,164
Commissions................................................. 3,226 2,952 5,907 6,561
Occupancy and equipment..................................... 3,113 3,126 6,477 5,327
Advertising................................................. 431 175 833 444
Core deposit premium amortization........................... 323 323 645 645
Federal deposit insurance premiums.......................... 115 456 176 860
General and administrative.................................. 6,690 4,699 12,424 9,254
------ ------ ------- -----
Subtotal...................................... 24,623 22,370 48,046 43,255
Less: deferral of capitalized loan origination costs........ (8,766) (6,931) (16,624) (16,009)
------- ------- -------- --------
Total......................................... $ 15,857 $ 15,439 $ 31,422 $ 27,246
======== ======== ======== ========
Three months ended June 30, 1997 versus the three months ended June 30,
1996
Non-interest expense, excluding the capitalization of direct loan origination
costs, increased by $2.2 million, or 9.8%, to $24.6 million for the 1997 period
from $22.4 million for the 1996 period. The largest change occurred in the
amount of general and administrative expenses reported. The increase totaled
$2.0 million, and represented increased contract underwriting costs which were
offset in part by increased underwriting fees received and reported under other
income.
14
Six months ended June 30, 1997 versus the six months ended June 30, 1996
Non-interest expense, before the capitalization of direct loan origination
costs, increased $4.7 million, or 10.9%, to $48.0 million from $43.3 million for
the same period in 1996. This increase was primarily a result of increased
compensation and benefits of $1.4 million, increased general and administrative
expenses of $3.1 million, and increased occupancy and equipment costs of $1.2
million, offset by decreases in commissions on loan originations and deposit
insurance premiums.
Compensation and benefits totaled $21.6 million, and $20.2 million for the 1997
and 1996 periods, respectively. This increase was primarily a result of an
increase in the average number of full-time equivalent
employees.
Increased general and administrative expenses and occupancy and equipment
expenses for 1997 were attributable to an increase in the number of bank
branches from 13 in 1996 to 19 at June 30, 1997 and regional correspondent
centers from 10 in 1996 to 13 in 1997. Additionally, increased contract
underwriting costs which were offset in part by increased underwriting fees
received and reported under other income.
Financial Condition
Assets
The Company's assets totaled $1.596 billion at June 30, 1997, an increase of
approximately $299 million, or 23.1%, as compared to $1.297 billion at December
31, 1996. This increase was primarily due to increases in mortgage loans held
for sale, loans held for investment, Federal Home Loan Bank stock, mortgage
servicing rights, offset in part by decreases in cash and cash equivalents and
other assets.
Loans Receivable
Mortgage loans available for sale and loans held for investment increased,
$307.8 million from $1.114 billion at December 31, 1996 to $1.424 billion at
June 30, 1997. Mortgage loans available for sale increased $187.8 million, or
22.3%, to $1.029 billion at June 30, 1997, from $840.8 million at December 31,
1996. Loans held for investment increased $121.0 million, or 44.2%, from $273.6
million at December 31, 1996 to $394.6 million at June 30, 1997. Loans held for
investment include loans originated for the Company's own portfolio through both
the retail banking operation and the wholesale mortgage banking operation and
loans with characteristics that do not conform to underwriting standards for
sale as conforming loans in the secondary market.
15
Allowance for Losses
The allowance for losses totaled $4.5 million at June 30, 1997, an increase of
$1.0 million, or 28.6%, from $3.5 million at December 31, 1996. The allowance
for losses as a percentage of non-performing loans was 10.70% and 11.43% at June
30, 1997 and December 31, 1996, respectively. The Company's non-performing loans
totaled $42.0 million and $30.6 million at June 30, 1997 and December 31, 1996,
respectively. The allowance for losses as a percentage of total loans, was .32%
and .31% at June 30, 1997and December 31, 1996, 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. Management also
considered the increasing size of the loan portfolio and the likelihood that the
Company would be required to repurchase additional loans from secondary market
investors over the next year at levels above the Company's historical
experience, as discussed below.
The increase in non-performing loans at June 30, 1997 from the amount at
December 31, 1996 resulted primarily from the repurchase of $38.5 million in
mortgage loans from secondary market investors during the first six months of
1997. Approximately $13.7 million of the loans repurchased in 1997 were
non-performing and $2.7 million went directly to a real estate owned status when
repurchased. Loan repurchases are an ongoing part of the Company's operations
since all loans sold in the secondary market are generally subject to detailed
underwriting reviews by the ultimate purchaser. Although the Company generally
does not sell loans with recourse, it typically is required to repurchase loans,
including defaulted and delinquent loans, which were not underwritten in strict
compliance with the underwriting standards of secondary market investors. As the
volume of the Company's new loan production has increased substantially over the
past several years, the aggregate amount of loan delinquencies and foreclosures
has also increased, thereby increasing the number of loans potentially subject
to repurchase.
The Company believes that its risk of loss arising from its non-performing
loans, including loans acquired through repurchase from individual investors
after initial sale in the secondary market, has not materially increased as a
result of either the increase in repurchased loans or the overall increase in
non-performing loans. In most cases the repurchased loans were required to be
repurchased for reasons (such as failure to meet all of the secondary market
investor's criteria for mortgagor eligibility or failure to meet the investor's
program eligibility requirements) that do not significantly affect the ultimate
collectibility of such loans or significantly increase the Company's exposure to
losses. A portion of the repurchased loans are eligible for resale in the
secondary market to other investors, and the Company does not believe that the
remaining repurchased loans which are currently non-performing or which have
been foreclosed present any risks of ultimate loss that are significantly
different than the Company has historically experienced. Of the Company's $42.0
million of non-performing loans at June 30, 1997, $39.6 million, or 94.3%, were
single family residential mortgage loans, which generally represent minimal risk
of ultimate loss because of the nature of the collateral securing the loans, the
presence of private mortgage insurance for loans with over-80% LTV ratios and
the presence of insurance or guarantees on certain loans from the FHA or VA. At
June 30, 1997, approximately $6.3 million of such loans were the subject of
bankruptcy proceedings by the mortgagor; however, it has been the Company's
experience that such proceedings usually result in full repayment to the Company
and present minimal risk of loss because the imposition of judicial scrutiny and
related enforcement powers supersede the less comprehensive collection methods
normally available to the Company.
FHLB Stock
Holdings of FHLB stock increased from $19.7 million at December 31, 1996 to
$30.2 million at June 30, 1997 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.
16
Mortgage Servicing Rights
Mortgage servicing rights totaled $40.0 million at June 30, 1997, an increase of
$9.9 million, or 32.9%, from $30.1 million at December 31, 1996. For the six
months ended June 30, 1997, $2.3 billion of loans underlying mortgage servicing
rights were originated and purchased, and $2.5 billion were sold, prepaid, or
amortized resulting in a net decrease of $765.2 million. However, because sales
of servicing rights completed in 1997contained a larger percentage of underlying
loans which were acquired during earlier periods, the mortgage servicing
portfolio at June 30, 1997 contained a greater percentage of recently originated
and capitalized servicing rights than at December 31, 1996.
Other Assets
Other assets decreased $7.3 million, or 13.6%, to $46.4 million at June 30,
1997, from $53.7 million at December 31, 1996. The majority of this decrease was
attributable to the collection of receivables recorded in conjunction with the
sales of mortgage servicing rights completed during 1996. 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 $30.8 million at June 30, 1997. The balance due is paid upon
transfer by the Company of the related mortgage loan servicing documents,
usually within 180 days after the initial closing.
Liabilities
The Company's total liabilities increased $262.1 million, or 21.5%, to $1.481
billion at June 30, 1997, from $1.219 billion at December 31, 1996. This
increase was primarily attributable to an increase in the Company's deposit
accounts, Federal Home Loan Bank advances, offset in part by a decrease in the
amount of undisbursed payments on loans serviced for others and the amount of
federal income taxes payable.
Deposit accounts
Deposit accounts increased $279.8 million, or 44.8%, to $904.3 million at June
30, 1997, from $624.5 million at December 31, 1996. This increase reflects the
Company's deposit growth strategy through both its branch network and the
secondary market. The number of bank branches has increased from 15 at December
31, 1996 to 19 at June 30, 1997. At June 30, 1997, the Company's certificates of
deposit totaled $773.2 million, with an average balance of $20,833 and a
weighted average cost of 6.06%. Approximately $430.3 million of the certificates
of deposit were brokered deposits or deposits garnered through secondary markets
and carried a weighted average cost of 5.97%.
17
FHLB Advances
FHLB advances increased $27.3 million, or 7.0%, to $417.1 million at June 30,
1997, from $389.8 million at December 31, 1996. 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.
Undisbursed Payments
Undisbursed payments on loans serviced for others decreased $37.8 million, or
61.6%, to $23.6 million at June 30, 1997, from $61.4 million at December 31,
1996. 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 decrease during a time of low payoff or refinance volume.
Federal Income Taxes Payable
Federal income taxes payable decreased $6.4 million, or 28.4%, to $16.1 million
at June 30, 1997, from $22.5 million at December 31, 1996. This decrease was
primarily attributable to the timing of payments and a decrease in the current
tax liability.
18
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").
The Company's primary source of liquidity is dividends paid by the Bank.
Management of the Company believes that dividends that may be paid by the Bank
to the Company will provide sufficient funds for its operations and liquidity
needs; however, no assurance can be given that the Company will not have a need
for additional funds in the future. Further, the Bank is subject to certain
regulatory limitations with respect to the payment of dividends to the Company.
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 direction 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 6.81% for the month ended June 30, 1997.
A significant source of cash flow for the Company is the sale of mortgage loans
held for sale. Additionally, the Company receives funds from net interest
income, mortgage loan servicing fees, loan principal repayments, advances from
the FHLB, deposits from customers and cash generated from operations. Mortgage
loans sold during the three months ended June 30, 1997 totaled $1.5 billion, a
decrease of $346 million, or 19.2% from $1.8 billion sold during the same period
in 1996. This decrease in mortgage loan sales was attributable to the 8.6%
decrease in mortgage loan originations and the $187.8 million increase in the
amount of mortgage loans available for sale. The Company sold 92.4% and 104.5%
of its mortgage loan originations during the three month periods ended June 30,
1997 and 1996, 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 unless 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
$465.6 million outstanding at June 30, 1997. 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 $650 million. 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 June 30, 1997, the Company had outstanding rate-lock commitments to lend
$736.2 million for mortgage loans, along with outstanding commitments to make
other types of loans totaling $14.4 million. Because such commitments may expire
without being drawn upon, they do not necessarily represent future cash
commitments. Also, as of June 30, 1997, the Company had outstanding commitments
to sell $849.0 million of mortgage loans. These commitments will be funded
within 90 days. Total commercial and consumer unused collateralized lines of
credit totaled $ 116.7 million at June 30, 1997. Such commitments include $111.3
million in warehouse lines of credit to various mortgage companies, of which
$33.5 million was drawn upon as of June 30, 1997.
Capital Resources.
At June 30, 1997, the Bank exceeded all applicable bank regulatory minimum
capital requirements, the Company is not subject to any such requirements.
19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are involved in various claims and legal
actions arising in the ordinary course of business. Management currently is not
aware of any material legal proceedings to which the Company or any of its
subsidiaries is a party or to which any of their property is subject.
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) An annual meeting of the Company was held on April 29, 1997.
(b) Directors elected at the annual meeting were James D.
Isbister, John Kersten, Michael Kojaian, Michael W. Carrie,
and Richard S. Elsea. The election of these directors became
effective upon consummation of the Company's initial public
offering on May 5, 1997. Directors continuing in office after
the annual meeting were Thomas J. Hammond, Mark T. Hammond,
Joan H. Anderson, Mary Kay McGuire, Ronald I. Nichols, Sr.,
James D. Coleman, Charles Bazzy, William B. Bortels, and
Harry S. Ellman. Ms McGuire and Messrs. Nichols, Bazzy,
Bortels, and Ellman resigned from the Board of Directors
effective upon consummation of the Company's initial public
offering on May 5, 1997.
(c) The only matter considered at the annual meeting was the
election of directors. James D. Isbister, John Kersten,
Michael Kojaian, Michael W. Carrie, and Richard S. Elsea, as
nominees for directors, each received 11,250,000 votes for,
no votes against, and no votes were withheld in connection
with their election to the Board of Directors. There were no
abstentions or broker non-votes.
(d) Not applicable.
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
20
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: August 14, 1997 /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)
21