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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 MARCH 31, 2000
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.
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(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
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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 10, 2000, 12,149,973 shares of the registrant's Common Stock,
$0.01 par value, were issued and outstanding.
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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, 2000
( unaudited ) and December 31, 1999.
Unaudited Consolidated Statements of Earnings - For the three months
ended March 31, 2000 and 1999.
Unaudited Consolidated Statements of Cash Flows - For the three months
ended March 31, 2000 and 1999.
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 MARCH 31, AT DECEMBER 31,
ASSETS 2000 1999
---------------------------------------------
(unaudited)
Cash and cash equivalents $ 61,024 $ 118,636
Loans receivable
Mortgage loans available for sale 2,797,511 2,230,381
Loans held for investment 1,581,744 1,601,350
Less: allowance for losses (23,000) (23,000)
--------------------- --------------------
Loans receivable, net 4,356,255 3,808,731
Federal Home Loan Bank stock 79,850 79,850
Other investments 1,970 -
--------------------- --------------------
Total earning assets 4,438,075 3,888,581
Accrued interest receivable 28,851 26,629
Repossessed assets 18,524 21,364
Premises and equipment 67,768 46,979
Mortgage servicing rights 134,736 131,831
Other assets 61,106 76,019
--------------------- --------------------
Total assets $ 4,810,084 $ 4,310,039
===================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Retail deposit accounts $ 1,456,226 $ 1,293,183
Wholesale deposit accounts 1,210,690 967,780
Federal Home Loan Bank advances 1,558,256 1,477,000
Junior subordinated debentures 74,750 74,750
--------------------- --------------------
Total interest bearing liabilities 4,299,922 3,812,713
Accrued interest payable 18,129 15,689
Undisbursed payments on
loans serviced for others 66,937 69,231
Escrow accounts 85,556 75,340
Liability for checks issued 48,133 30,426
Federal income taxes payable 41,434 50,238
Other liabilities 69,371 70,688
--------------------- --------------------
Total liabilities 4,629,482 4,124,325
STOCKHOLDERS' EQUITY
Common stock - $.01 par value, 40,000,000 shares authorized, 13,699,823 shares
issued and 12,329,973 and 12,891,473 shares outstanding at March 31, 2000
and December 31, 1999, respectively 123 129
Additional paid in capital 10,701 18,307
Retained earnings 169,778 167,278
--------------------- --------------------
Total stockholders' equity 180,602 185,714
--------------------- --------------------
Total liabilities and stockholders' equity $ 4,810,084 $ 4,310,039
===================== ====================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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FLAGSTAR BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
MARCH 31,
2000 1999
--------------- ---------------
INTEREST INCOME
Loans $ 74,245 $ 51,233
Other 1,691 1,196
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Total 75,936 52,429
INTEREST EXPENSE
Deposits 33,285 26,782
FHLB advances 20,178 9,436
Other 3,247 2,004
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Total 56,710 38,222
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Net interest income 19,226 14,207
Provision for losses 1,566 2,073
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Net interest income after provision for losses 17,660 12,134
NON-INTEREST INCOME
Loan administration 4,444 3,151
Net gain on loan sales 2,183 19,208
Net gain on sales of mortgage servicing rights 320 695
Other fees and charges 4,807 3,242
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Total 11,754 26,296
NON-INTEREST EXPENSE
Compensation and benefits 11,407 9,411
Occupancy and equipment 6,396 4,562
General and administrative 5,649 6,963
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Total 23,452 20,936
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Earnings before federal income taxes 5,962 17,494
Provision for federal income taxes 2,195 6,131
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NET EARNINGS $ 3,767 $ 11,363
=============== ===============
EARNINGS PER SHARE - BASIC $0.30 $0.83
=============== ===============
EARNINGS PER SHARE - DILUTED $0.30 $0.80
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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 THREE MONTHS ENDED
MARCH 31,
2000 1999
---------------------------------
OPERATING ACTIVITIES
Net earnings $3,767 11,363
Adjustments to reconcile net earnings to net cash used in operating activities
Provision for losses 1,566 2,073
Depreciation and amortization 6,446 8,290
Net loss (gain) on the sale of assets 241 (193)
Net gain on loan sales (2,183) (19,208)
Net gain on sales of mortgage servicing rights (320) 695
Proceeds from sales of loans available for sale 1,405,103 3,990,131
Originations and repurchases of loans available for sale, net of principal repayments (2,118,943) (4,771,365)
(Increase) decrease in accrued interest receivable (2,222) 3,674
Decrease in other assets 14,589 18,999
Increase in accrued interest payable 2,441 45
Increase in the liability for checks issued 17,707 8,618
Decrease in current federal income taxes payable (6,831) (15,346)
(Benefit) provision for deferred federal income taxes payable (1,973) 11,977
(Decrease) increase in other liabilities (1,317) 3,684
-------------- ---------------
Net cash provided by operating activities (681,929) (747,953)
INVESTING ACTIVITIES
Purchase of other investments (1,970) -
Maturity of other investments - 500
Originations of loans held for investment, net of principal repayments 163,063 121,549
Proceeds from the disposition of repossessed assets 6,531 4,369
Acquisitions of premises and equipment (23,205) (4,135)
Net proceeds from the disposition of premises and equipment 6 -
Increase in mortgage servicing rights (25,441) (53,779)
Proceeds from the sale of mortgage servicing rights 19,081 61,145
-------------- ---------------
Net cash used in investing activities 138,065 129,649
FINANCING ACTIVITIES
Net increase in deposit accounts 405,954 115,028
Net increase in Federal Home Loan Bank advances 81,255 545,375
Net disbursement of payments of loans serviced for others (2,294) (70,193)
Net receipt of escrow payments 10,215 9,921
Shares of common stock repurchased (7,611) -
Dividends paid to stockholders (1,267) (1,094)
-------------- ---------------
Net cash provided by financing activities 486,252 599,037
-------------- ---------------
Net decrease in cash and cash equivalents (57,612) (19,267)
Beginning cash and cash equivalents 118,636 75,799
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Ending cash and cash equivalents $61,024 $ 56,532
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Loans receivable transferred to repossessed assets $3,870 $ 5,259
============== ===============
Total interest payments made on deposits and other borrowings $54,269 $ 38,177
============== ===============
Federal income taxes paid $11,000 $ 9,500
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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, 2000.
NOTE 2. PREFERRED SECURITIES OF A TRUST SUBSIDIARY
On April 27, 1999, the Company completed the sale of 2.99 million shares of
preferred securities issued by Flagstar Trust, a Delaware trust and subsidiary
of the Company. The securities pay interest at a rate of 9.50% per annum. The
securities are traded on the Nasdaq Stock Market under the symbol "FLGSO".
The preferred securities are generally not redeemable until April 27, 2004. On
or after that date, the securities are redeemable in whole or in part by the
Company for cash. The securities are not subject to a sinking fund or mandatory
redemption and are not convertible into any other securities of the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SELECTED FINANCIAL RATIOS
For the quarter ended
March 31, March 31,
2000 1999
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( Unaudited )
( in thousands, except per share data )
Return on average assets 0.34% 1.37%
Return on average equity 8.24% 26.99%
Efficiency ratio 74.7% 50.9%
Equity/assets ratio (average for the period) 4.19% 5.06%
Mortgage loans originated / purchased $ 1,962,624 $ 4,794,633
Mortgage loans sold $ 1,381,278 $ 3,919,993
Interest rate spread 1.80% 1.79%
Net interest margin 1.94% 1.99%
Charge-offs to average loans 0.16% 0.08%
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March 31, December 31,
2000 1999
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Equity-to-assets ratio 3.75% 4.31%
Tangible capital ratio (1) 6.03% 6.76%
Core capital ratio (1) 6.06% 6.80%
Risk-based capital ratio (1) 10.81% 12.26%
Total risk-based capital ratio (1) 11.61% 13.16%
Book value per share $ 14.65 $14.41
Shares outstanding 12,330
12,891
Mortgage loans serviced for others $ 9,569,910 $9,519,926
Value of mortgage servicing rights 1.41% 1.38%
Allowance for losses to problem loans 49.7% 55.0%
Allowance for losses to total loans 0.53% 0.60%
Non performing assets to total assets 1.35% 1.47%
Number of bank branches 38 35
Number of loan origination centers 35 38
Number of correspondent offices 15 16
Number of employees 1,627 1,627
- -----------------
(1) These ratios are applicable to Flagstar Bank.
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RESULTS OF OPERATIONS
NET EARNINGS
Net earnings for the three months ended March 31, 2000 were $3.8 million ( $0.30
per share-diluted ), a $7.6 million decrease from the $11.4 million ( $0.80 per
share-diluted ) reported in 1999. The decrease resulted from a $14.5 million
decrease in non-interest income, a $2.5 million increase in operating expenses,
offset by a $5.0 million increase in net interest income, and a $0.5 million
decrease in the provision for losses, and a $3.9 million decrease in the
provision for federal income taxes.
NET INTEREST INCOME
Net interest income increased $5.0 million, or 35.2%, to $19.2 million for the
three months ended March 31, 2000, from $14.2 million for the comparable 1999
period. This increase was due to a $1.1 billion increase in average
interest-earning assets between the comparable periods, offset by a $1.1 billion
increase in interest-bearing liabilities necessary to fund the growth. The
increase in revenue was also aided by the increase in the Company's interest
rate spread. The spread increased from 1.79% in the 1999 period to 1.80% for the
three months ended March 31, 2000. The increased spread, offset by a $11.2
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 0.05% to 1.94% for the three months ended March 31, 2000 from
1.99% for the comparable 1999 period.
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AVERAGE YIELDS EARNED AND RATES PAID
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,
------------------------------------------------------------------------------------
2000 1999
-------------------------------------- ------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS: ( In Millions )
Loans receivable, net $ 3,895,997 $ 74,245 7.64% $ 2,839,532 $ 51,233 7.32%
FHLB stock 79,850 1,592 8.00 57,838 1,141 8.00
Other 7,254 99 5.46 3,962 55 5.55
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Total 3,983,101 $ 75,936 7.65% 2,901,332 $ 52,429 7.33%
Other assets 385,867 425,177
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Total assets $ 4,368,968 $ 3,326,509
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INTEREST-BEARING LIABILITIES:
Deposits $ 2,409,032 $ 33,285 5.54% $ 1,997,876 $ 26,782 5.44%
FHLB advances 1,333,702 20,178 6.07 697,890 9,436 5.48
Other 148,623 3,247 8.76 102,652 2,004 7.92
--------------------------- ------------------------------
Total interest-bearing liabilities 3,891,357 $ 56,710 5.85% 2,798,418 $ 38,222 5.54%
Other liabilities 294,709 359,681
Stockholders equity 182,902 168,410
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Total liabilities and
Stockholders equity $ 4,368,968 $ 3,326,509
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Net interest-earning assets $ 91,744 $ 102,914
============== ================
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Net interest income $ 19,226 $ 14,207
============ =============
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Interest rate spread 1.80% 1.79%
========== ===========
Net interest margin 1.94% 1.99%
========== ===========
Ratio of average interest-
Earning assets to
Interest-bearing liabilities 102% 104%
========== ===========
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RATE/VOLUME ANALYSIS
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 Tables 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
Three months ended March 31,
-----------------------------------------
2000 versus 1999
Increase (Decrease) due to:
Rate Volume Total
-----------------------------------------
INTEREST INCOME: (In Thousands)
Loans receivable, net $ 9,245 $ 13,767 $ 23,012
FHLB stock 1 450 451
Other (4) 48 44
-----------------------------------------
Total $ 9,242 $ 14,265 $ 23,507
INTEREST EXPENSE:
Deposits $ 2,003 $ 4,500 $ 6,503
FHLB advances 4,130 6,612 10,742
Other 859 384 1,243
-----------------------------------------
Total $ 6,992 $ 11,496 $ 18,488
-----------------------------------------
Net change in net interest income $ 2,250 $ 2,769 $ 5,019
=========================================
PROVISION FOR LOSSES
The provision for losses decreased to $1.6 million for the three months ended
March 31, 2000 from $2.1 million recorded during the same period in 1999. The
loss provision recorded in the 2000 period was utilized to offset actual
charge-offs recorded within the 2000 quarter whereas the 1999 period provision
of $2.1 million was also used to increase the level of the general allowance for
losses by $1.5 million to $21.5 million. The allowance at March 31, 2000 stands
at 0.53% of loans and 49.7% of non-performing loans. The allowance stood at
0.60% of loans and 55.0% of non-performing loans at December 31, 1999.
Non-performing loans stood at $46.3 million at March 31, 2000, up slightly from
$41.8 at December 31, 1999, an increase of 10.8%. Net charge-offs were an
annualized 0.16% of average loans outstanding during the three months ended
March 31, 2000.
NON-INTEREST INCOME
During the three months ended March 31, 2000, non-interest income decreased
$14.5 million, or 55.1%, to $11.8 million versus the $26.3 million recorded
during the three months ended March 31, 1999. This decrease was attributable to
a decrease in net gain on loan sales and a decrease in net gain on the sales of
mortgage servicing rights, offset by an increase in other fees and charges and
an increase in loan administration revenues.
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LOAN ADMINISTRATION
Net loan administration fee revenue increased to $4.4 million during the three
months ended March 31, 2000, from $3.2 million in the comparable 1999 period.
This increase resulted primarily from a decrease in the amount of the
amortization recorded for mortgage servicing rights. This decrease was caused by
a general slow down in the rate of prepayment on the underlying mortgage loans.
Fee income before the amortization of servicing rights actually decreased $1.3
million for the three months ended March 31, 2000, to $8.2 million, but was
offset by a $2.6 million decrease in amortization. At March 31, 2000, the unpaid
principal balance of loans serviced for others was $9.5 billion versus $10.5
billion serviced at March 31, 1999 and $9.5 billion serviced at December 31,
1999. At March 31, 2000 the weighted average servicing fee on loans serviced for
others was 0.281% (i.e., 28.1 basis points).
NET GAIN ON LOAN SALES
For the three months ended March 31, 2000, net gain on loan sales decreased
$17.0 million, to $2.2 million, from $19.2 million in the 1999 period. The 2000
period reflects the sale of $1.4 billion in loans versus $3.9 billion sold in
the 1999 period. The stable interest rate environment in the 1999 period
resulted in a larger profit margin (49 bps. versus 15 bps.) and the lower
interest rate environment during 1999 influenced the increased mortgage loan
origination volume ($2.0 billion in the 2000 period versus $4.8 billion in the
1999 period) which allowed the Company to sell more loans and thus creating more
revenue in the 1999 period.
NET GAIN ON THE SALE OF MORTGAGE SERVICING RIGHTS
For the three months ended March 31, 2000, the net gain on the sale of mortgage
servicing rights decreased $375,000 to $320,000 from $695,000 for the same
period in 1999. The 2000 gain on sale of mortgage servicing rights included the
bulk flow sale of FNMA / FHLMC servicing rights totaling $1.0 billion which were
sold with a gain of only $39,000 and the bulk flow servicing sales of $85.1
million of GNMA servicing rights which generated a $281,000 gain. The 1999 gain
on sale of mortgage servicing rights included the bulk flow sale of FNMA / FHLMC
servicing rights totaling $4.2 billion which were sold with a gain of only
$49,000 and bulk flow servicing sales of $126.2 million of GNMA servicing rights
which generated a $342,000 gain.
Additionally the Company sold $23.1 million in loans on a servicing released
basis during the 1999 period.
OTHER FEES AND CHARGES
During the three months ended March 31, 2000, the Company recorded $4.8 million
in other fees and charges. In the comparable 1999 period, the Company recorded
$3.2 million. The fees reflected in this revenue line are fees collected on
deposit accounts, certain types of non-residential mortgage loans, consumer
loans, and miscellaneous fees collected for various customer service functions.
These fees are not deferred, unlike the various fee income generated in the
mortgage origination process. The timing and predictability of these fees in the
future is uncertain.
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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 Statement of Financial Accounting Standards ("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,
2000 1999
------------- --------------
( In thousands )
Compensation and benefits $ 15,056 $ 15,700
Commissions 5,088 6,748
Occupancy and equipment 6,396 4,562
Advertising 769 853
Core deposit amortization 322 323
Federal insurance premium 123 300
General and administrative 6,098 10,419
------------- --------------
Total 33,852 38,905
Less: capitalized direct costs of loan closings (10,400) (17,969)
------------- --------------
Total, net $ 23,452 $ 20,936
============= ==============
Efficiency ratio 74.7% 50.9%
Non-interest expense, excluding the capitalization of direct loan origination
costs, decreased by $5.0 million, or 12.9%, to $33.9 million during the three
months ended March 31, 2000, from $38.9 million for the comparable 1999 period.
The decreased costs are primarily attributable to the $2.8 billion decrease
(58.3%) in mortgage loans originated during the comparable periods. The largest
change occurred in the amount of general and administrative expenses but there
were decreases reported in every category except occupancy and equipment which
experienced a 39.1% increase associated with the retail banking expansion.
The decreased commission expense of $1.6 million and the $4.3 million decrease
in general and administration expenses were attributable for the most part to
the decreased mortgage loan production levels.
The $0.6 million decrease in compensation and benefits costs was attributable to
a decrease of 309 non-commissioned employees in the 2000 period versus the 1999
period. This employee cutback occurred in response to the decreased loan
production volume experienced during the quarter and is net of the increase in
staff required to operate the Company's eight new bank branches that were in
operation during the 2000 quarter. These new branches accounted for the $1.8
million increase in occupancy and equipment cost during the comparable periods.
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SEGMENT REPORTING
The following tables present certain financial information concerning the
results of operations of Flagstar's retail banking and mortgage banking
operations.
TABLE 4
RETAIL BANKING OPERATIONS
At or for the quarter ended
March 31,
2000 1999
--------------- --------------
( In thousands )
Revenues $ 17,257 $ 13,713
Earnings before taxes 11,381 9,694
Identifiable assets 1,624,799 1,138,423
TABLE 5
MORTGAGE BANKING OPERATIONS
At or for the quarter ended
March 31,
2000 1999
---------------- --------------
( In thousands )
Revenues $ 13,723 $ 26,790
(Loss) earnings before taxes (5,419) 7,800
Identifiable assets 3,198,899 3,014,558
RETAIL BANKING OPERATIONS
The Company provides a full range of banking services to consumers and small
businesses in southern Michigan. The Bank operates a network of 38 bank
branches. The Company has focused on expanding its deposit 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.
During the quarter ended March 31, 2000, the Company recorded approximately
$11.4 million in earnings before tax from this operation. This total equated to
a $1.7 million, or 17.5%, increase in earnings versus the comparable 1999
period. Additionally, this earnings result is up 12.9% from the previous
quarter. During the quarter, the earnings generated in the retail banking
operation offset the losses generated in the mortgage banking operation and
provided the Company with a positive profit margin.
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 35 loan origination centers located
primarily in Michigan. Flagstar purchases mortgage loans on a wholesale basis
through a national network of correspondents consisting of other banks, thrifts,
mortgage companies, and mortgage brokers.
Additionally, this segment of the Company's operations includes the mortgage
servicing operation. The Company serviced $9.5 billion in mortgage loans for
others at March 31, 2000.
The mortgage banking operation recorded a pre-tax loss of $5.4 million during
the three months ended March 31, 2000. The loss can be attributable to, among
other things, the 58.3% reduction in mortgage loan production, the reduced gain
on sale spread achieved on sold loans (15 bps. vs. 49 bps.), and the decreased
volume of loans serviced for others. This loss compares to the $7.8 million
pre-tax profit reported in the comparable 1999 period. This loss occurred
despite a 6.7% increase in attributable assets during the 2000 period versus the
1999 period.
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FINANCIAL CONDITION
ASSETS
The Company's assets totaled $4.8 billion at March 31, 2000, an increase of $0.5
billion, or 11.6%, as compared to $4.3 billion at December 31, 1999. This
increase was primarily due to an large increase in mortgage loans available for
sale.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents decreased from $118.6 million at December 31, 1999 to
$61.0 million at March 31, 2000.
LOANS RECEIVABLE, NET
Loans receivable, net increased $547.6 million, from $3.8 billion at December
31, 1999 to $4.4 billion at March 31, 2000.
Mortgage loans available for sale increased $567.1 million, or 25.4%, to $2.8
billion at March 31, 2000, from $2.2 billion at December 31, 1999. This increase
is attributable to the Company's ability and management's decision to hold a
larger portion of its mortgage loan production for a longer period in order to
take advantage of the spread income the Company can earn. These loans will
subsequently be sold into the secondary market.
Loans held for investment decreased $19.7 million, or 1.2%, from $1.601 billion
at December 31, 1999 to $1.582 billion at March 31, 2000. This decrease is
primarily attributable to a large decrease in the amount of mortgage loans held
for investment offset in part by increases in second mortgage loans and
commercial real estate loans.
ALLOWANCE FOR LOSSES
The allowance for losses totaled $23.0 million at March 31, 2000, unchanged from
December 31, 1999. The allowance for losses as a percentage of non-performing
loans was 49.7% and 55.0% at March 31, 2000 and December 31, 1999, respectively.
The Company's non-performing loans totaled $46.3 million and $41.8 million at
March 31, 2000 and December 31, 1999, respectively. The allowance for losses as
a percentage of total loans, was 0.53% and 0.60% at March 31, 2000 and December
31, 1999, respectively. 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.
FHLB STOCK
Holdings of FHLB stock remained unchanged at $79.9 million at March 31, 2000. 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.
ACCRUED INTEREST RECEIVABLE
Accrued interest receivable increased from $26.6 million at December 31, 1999 to
$28.9 million at March 31, 2000. This asset will fluctuate as the size of the
earning asset portfolio increases or decreases.
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REPOSSESSED ASSETS
Repossessed assets decreased from $21.4 million at December 31, 1999 to $18.5
million at March 31, 2000. During the first quarter, the Company sold $6.7
million of owned real estate assets and foreclosed upon an additional $3.9
million in seriously delinquent loans.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights totaled $134.7 million at March 31, 2000, an increase
of $2.9 million, or 2.2%, from $131.8 million at December 31, 1999. During the
three months ended March 31, 2000, the Company capitalized $25.5 million,
amortized $3.8 million, and sold $18.8 million in mortgage servicing rights. The
principal balance of the loans serviced for others stands at $9.5 billion at
March 31, 2000 versus $9.5 billion at December 31, 1999. The capitalized value
of the mortgage servicing rights was 1.41% and 1.38% of the underlying principal
balance at March 31, 2000 and December 31, 1999, respectively.
OTHER ASSETS
Other assets decreased $14.9 million, or 19.6%, to $61.1 million at March 31,
2000, from $76.0 million at December 31, 1999. The majority of this decrease was
attributable to the receipt of receivables recorded in conjunction with the sale
of mortgage servicing rights completed in 1999. 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 $505.2 million, or 12.2%, to $4.6
billion at March 31, 2000, from $4.1 billion at December 31, 1999. This increase
was primarily attributable to an increase in total paying liabilities.
RETAIL DEPOSIT ACCOUNTS
Retail deposit accounts increased $163.0 million, or 12.6%, to $1.5 billion at
March 31, 2000, from $1.3 billion at December 31, 1999. This increase reflects
the Company's retail deposit growth strategy and its branch network expansion
strategy. The number of bank branches increased from 35 at December 31, 1999 to
38 at March 31, 2000.
At March 31, 2000, the Company's retail certificates of deposit totaled $963.0
million, or 66.1% of total retail deposits. These certificates carry an average
balance of $19,839 and a weighted average cost of 6.01%.
WHOLESALE DEPOSIT ACCOUNTS
Wholesale deposit accounts increased $242.9 million, or 25.1%, to $1.2 billion
at March 31, 2000, from $967.8 million at December 31, 1999. This increase
reflects the Company's need to fund the asset growth achieved in the first
quarter. Wholesale funds are used as an alternate source of funding until retail
deposits can be gathered at more attractive rates. At March 31, 2000, the
Company's wholesale deposits consist entirely of certificates of deposit which
carry a weighted rate of 5.99% and a weighted maturity of 16.3 months.
FEDERAL HOME LOAN BANK ADVANCES
FHLB advances increased $81.3 million, or 5.5%, to $1.6 billion at March 31,
2000, from $1.5 billion at December 31, 1999. The weighted rate on the FHLB
advances was 6.23% at March 31, 2000. The Company relies upon such advances as a
source of funding for the origination or purchase of mortgage 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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ACCRUED INTEREST PAYABLE
Accrued interest payable increased $2.4 million, or 15.3%, to $18.1 million at
March 31, 2000, from $15.7 million at December 31, 1999. The Company typically
pays interest on a one month lag. The size of this asset fluctuates as the
Company's deposit portfolio and other interest paying liabilities increase or
decrease.
UNDISBURSED PAYMENTS ON LOANS SERVICED FOR OTHERS
Undisbursed payments on loans serviced for others decreased $2.3 million, or
3.3%, to $66.9 million at March 31, 2000, from $69.2 million at December 31,
1999. 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.
This decrease resulted from the continued slow down in the rate of prepayment on
the mortgage loans being serviced for others.
ESCROW ACCOUNTS
Customer escrow accounts increased $10.3 million, or 13.7%, to $85.6 million at
March 31, 2000, from $75.3 million at December 31, 1999. 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 $17.7 million, or 58.2%, to $48.1 million
at March 31, 2000, from $30.4 million at December 31, 1999. 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 seasonally while decreasing
during a time when loan origination volume is down.
FEDERAL INCOME TAXES PAYABLE
Federal income taxes payable decreased $8.8 million, or 17.5%, to $41.4 million
at March 31, 2000, from $50.2 million at December 31, 1999. This decrease is
attributable to the payment of $11.0 million in current taxes and the $2.2
million increase in the tax liability attributable to the first quarter
earnings.
OTHER LIABILITIES
Other liabilities decreased $1.3 million, or 1.8%, to $69.4 million at March 31,
2000, from $70.7 million at December 31, 1999. This decrease is attributable to
decreases in accrued accounts payable relating to compensation and mortgage loan
production.
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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
concerns 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 4.00%. 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
liquidity ratio was 4.8% for the quarter ended March 31, 2000.
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, 2000 totaled $1.4
billion, a decrease of $2.5 billion, or 64.1% from $3.9 billion sold during the
same period in 1999. This decrease in mortgage loan sales was attributable to
the 58.3% decrease in mortgage loan originations. The Company sold 70.0% and
81.3% of its mortgage loan originations during the three month periods ended
March 31, 2000 and 1999, 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 terms that are less than one year with no prepayment
penalty. The Company had $1.6 billion outstanding at March 31, 2000. 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 $1.8
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, 2000, the Company had outstanding rate-lock commitments to lend
$651.6 million in mortgage loans, along with outstanding commitments to make
other types of loans totaling $21.6 million. Because such commitments may expire
without being drawn upon, they do not necessarily represent future cash
commitments. Also, at March 31, 2000, the Company had outstanding commitments to
sell $585.0 million of mortgage loans. These commitments will be funded within
90 days. The Company has issued warehouse lines of credit to various mortgage
companies totaling $317.8 million, of which $41.7 million was advanced at March
31, 2000. The Company also has other unused commercial and consumer lines of
credit totaling $71.8 million at March 31, 2000.
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CAPITAL RESOURCES
At March 31, 2000, the Bank exceeded all applicable bank regulatory minimum
capital requirements. The Company is not subject to any such requirements.
STOCK BUYBACK
The board of directors of Flagstar Bancorp released data on April 3, 2000 which
stated that the Company has repurchased a total of 561,500 shares, or
approximately 4.4% of the outstanding shares at January 1, 2000. These shares
were repurchased at a weighted price of $13.56 per share.
The repurchased shares were acquired under the Company's Stock Repurchase
Program adopted on September 21, 1999. The program allows management to
repurchase up to 2.0 million shares of the Company's common stock by September
30, 2000. The repurchased shares will be reserved for later reissue in
connection with future stock dividends, dividend reinvestment plans, employee
benefit plans, and other general corporate purposes.
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, 1999.
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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
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11. Computation of Net Earnings per Share
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, 2000 /S/ Thomas J. Hammond
---------------------
Thomas J. Hammond
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
/S/ Michael W. Carrie
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Michael W. Carrie
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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Exhibit Index
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Exhibit No. Description
- ----------- -----------
11 Computation of Net Earnings per Share
27 Financial Data Schedule