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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 SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No.: 0-22353
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FLAGSTAR BANCORP, INC.
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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 November 12, 1998, 13,670,000 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 - September 30, 1998
(unaudited) and December 31, 1997.
Unaudited Consolidated Statements of Earnings - For the three and nine
months ended September 30, 1998 and 1997.
Unaudited Consolidated Statements of Cash Flows - For the nine months
ended September 30, 1998 and 1997.
Condensed Notes to Consolidated Financial Statements.
When used in this Form 10-Q or future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases or other public or
stockholder communications, or in oral statements made with the approval of an
authorized executive officer, the words or phrases "would be", "will allow",
"intends to", "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project", or similar expressions are intended to
identify "forward looking statement" within the meaning of the Private
Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
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FLAGSTAR BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
- --------------------------------------------------------------------------------
AT SEPTEMBER 30, AT DECEMBER 31,
ASSETS 1998 1997
-----------------------------------
(unaudited)
Cash and cash equivalents $ 72,149 $ 21,928
Loans receivable
Mortgage loans available for sale 1,926,178 1,197,152
Loans held for investment 750,894 463,607
Less: allowance for losses (15,150) (5,500)
----------- -----------
Loans receivable, net 2,661,922 1,655,259
Federal Home Loan Bank stock 52,500 40,025
Other investments 500 538
----------- -----------
Total earning assets 2,714,922 1,695,822
Accrued interest receivable 27,349 16,492
Repossessed assets 23,721 18,262
Premises and equipment 30,201 29,131
Mortgage servicing rights 149,367 83,845
Other assets 74,806 35,604
=========== ===========
Total assets $ 3,092,515 $ 1,901,084
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts $ 1,596,003 $ 1,109,933
Federal Home Loan Bank advances 910,500 482,378
----------- -----------
Total interest bearing liabilities 2,506,503 1,592,311
Accrued interest payable 13,127 10,555
Undisbursed payments on
loans serviced for others 93,676 45,852
Escrow accounts 105,071 43,368
Liability for checks issued 98,785 45,896
Federal income taxes payable 43,317 20,808
Other liabilities 79,913 15,677
----------- -----------
Total liabilities 2,940,392 1,774,467
STOCKHOLDERS' EQUITY
Common stock - $.01 par value,
40,000,000 shares authorized,
13,670,000 shares issued at September 30, 1998 and
December 31, 1997 137 137
Additional paid in capital 29,988 29,988
Retained earnings 121,998 96,492
----------- -----------
Total stockholders' equity 152,123 126,617
=========== ===========
Total liabilities and stockholders' equity $ 3,092,515 $ 1,901,084
=========== ===========
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 QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---------- ----------- ---------- ------------
INTEREST INCOME
Loans $ 48,489 $ 30,008 $130,992 $ 83,029
Other 1,129 703 3,012 1,760
-------- -------- -------- --------
Total 49,618 30,711 134,004 84,789
INTEREST EXPENSE
Deposits 21,134 13,646 57,377 34,982
FHLB advances 13,353 7,120 35,845 18,774
Other 1,498 246 4,178 841
-------- -------- -------- --------
Total 35,985 21,012 97,400 54,597
-------- -------- -------- --------
Net interest income 13,633 9,699 36,604 30,192
Provision for losses 4,599 1,416 12,838 3,730
-------- -------- -------- --------
Net interest income after provision for losses 9,034 8,283 23,766 26,462
NON-INTEREST INCOME
Loan administration 84 1,104 172 5,543
Net gain on loan sales 27,008 5,723 72,983 9,269
Net gain on sales of mortgage servicing rights 206 6,990 3,089 25,472
Other fees and charges 1,423 1,449 3,819 3,444
-------- -------- -------- --------
Total 28,721 15,266 80,063 43,728
NON-INTEREST EXPENSE
Compensation and benefits 8,146 5,241 18,713 19,322
Occupancy and equipment 3,799 3,296 11,878 9,773
General and administrative 7,705 5,285 22,497 16,149
-------- -------- -------- --------
Total 19,650 13,822 53,088 45,244
-------- -------- -------- --------
Earnings before federal income taxes 18,105 9,727 50,741 24,946
Provision for federal income taxes 7,800 3,533 22,500 9,090
-------- -------- -------- --------
NET EARNINGS $ 10,305 $ 6,194 $ 28,241 $ 15,856
======== ======== ======== ========
EARNINGS PER SHARE - BASIC $ 0.76 $ 0.45 $ 2.07 $ 1.25
======== ======== ======== ========
EARNINGS PER SHARE - DILUTED $ 0.73 $ 0.44 $ 2.00 $ 1.24
======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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FLAGSTAR BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---------------------------
OPERATING ACTIVITIES
Net earnings $ 28,241 $ 15,856
Adjustments to reconcile net earnings to net cash used in operating activities
Provision for losses 12,838 3,730
Depreciation and amortization 25,260 12,033
Net gain on the sale of assets (712) (971)
Net gain on loan sales (72,983) (9,269)
Gain on sales of mortgage servicing rights (3,089) (25,472)
Proceeds from sales of loans available for sale 12,163,995 4,522,703
Originations and repurchases of loans available for sale, net of principal
repayments (12,838,412) (5,094,493)
Increase in accrued interest receivable (10,858) (5,647)
(Increase) decrease in other assets (40,191) 5,864
Increase in accrued interest payable 2,571 5,405
Increase in the liability for checks issued 52,889 9,268
Increase (decrease) in current federal income taxes payable 5,697 (5,160)
Provision (benefit) for deferred federal income taxes payable 16,813 (773)
Increase (decrease) in other liabilities 64,234 (1,999)
------------ -----------
Net cash used in operating activities (593,707) (568,925)
INVESTING ACTIVITIES
Maturity of other investments 38 348
Originations of loans held for investment, net of principal repayments (287,287) (127,740)
Purchase of Federal Home Loan Bank Stock (12,475) (17,200)
Proceeds from the disposition of repossessed assets 10,438 5,824
Acquisitions of premises and equipment (5,271) (6,812)
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 (161,891) (56,607)
Proceeds from the sale of mortgage servicing rights 79,391 53,650
------------ -----------
Net cash used in investing activities (377,057) (145,069)
FINANCING ACTIVITIES
Net increase in deposit accounts 486,070 387,109
Net increase in Federal Home Loan Bank advances 428,122 329,077
Net receipt (disbursement) of payments of loans serviced for others 47,824 (25,019)
Net receipt (disbursement) of escrow payments 61,703 (4,954)
Proceeds from the sale of common stock - 27,227
Dividends paid to stockholders (2,734) -
------------ -----------
Net cash provided by financing activities 1,020,985 713,440
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Net increase (decrease) in cash and cash equivalents 50,221 (554)
Beginning cash and cash equivalents 21,928 44,187
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Ending cash and cash equivalents $ 72,149 $ 43,633
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Loans receivable transferred to repossessed assets $ 15,185 $ 12,491
============ ===========
Total interest payments made on deposits and other borrowings $ 94,828 $ 49,182
============ ===========
Federal income taxes paid $ - $ 15,000
============ ===========
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, 1998.
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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 For the nine months ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
----------------- ----------------- ----------------- -----------------
(Unaudited)
(in thousands, except per share data)
Return on average assets 1.41% 1.41% 1.42% 1.34%
Return on average equity 28.15% 21.01% 27.28% 21.32%
Efficiency ratio 45.63% 54.07% 44.67% 59.90%
Average equity/assets ratio 5.00% 6.70% 5.22% 6.27%
Mortgage loans originated $ 4,858,022 $ 2,216,946 $ 13,105,795 $ 5,287,711
Mortgage loans sold $ 4,452,304 $ 1,819,691 $ 12,016,950 $ 4,518,451
Interest rate spread 1.74% 1.98% 1.69% 2.27%
Net interest margin 2.08% 2.43% 2.06% 2.83%
Charge-offs to average loans .23% .25% .18% .22%
- -------------------------------------------------------------------------------------------------------------------------------
September 30, June 30, December 31, September 30,
1998 1998 1997 1997
----------------- ----------------- ---------------- ---------------
Equity-to-assets ratio 4.92% 5.55% 6.66% 5.98%
Tangible capital ratio (1) 5.99% 5.67% 5.40% 5.49%
Core capital ratio (1) 6.10% 5.81% 5.62% 5.71%
Risk-based capital ratio (1) 11.43% 10.74% 11.22% 10.46%
Total risk-based capital ratio (1) 12.28% 11.54% 11.74% 10.83%
Book value per share $ 11.13 $10.44 $ 9.26 $ 8.89
Mortgage loans serviced for others $11,250,121 $10,375,460 $ 6,412,797 $ 4,143,352
Value of mortgage servicing rights 1.33% 1.33% 1.31% 1.25%
Allowance for losses to problem loans 43.2% 33.7% 12.4% 11.2%
Allowance for losses to total loans 0.57% 0.54% 0.33% 0.27%
Non performing assets to total assets 1.90% 2.26% 3.29% 3.04%
Number of bank branches 26 24 19 19
Number of loan origination centers 33 35 35 35
Number of correspondent offices 15 15 16 16
Number of employees 1,554 1,461 1,184 1,110
____________________
(1) Based on adjusted total assets for purposes of tangible capital and core
capital, and risk-weighted assets for purposes of the risk-based capital and the
total risk-based capital. These ratios are applicable to Flagstar Bank only.
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RESULTS OF OPERATIONS
NET EARNINGS
Net earnings for the three months ended September 30, 1998 were $10.3 million
($.73 per share-diluted), a $4.1 million increase from the $6.2 million ($.44
per share-diluted) reported in 1997. The increase resulted from a $3.9 million
increase in net interest income, a $13.5 increase in non-interest income, offset
by a $3.2 million increase in the provision for losses, a $5.8 million increase
in operating expenses, and a $4.3 million increase in the provision for federal
income taxes.
Net earnings for the nine months ended September 30, 1998 were $28.2 million
($2.00 per share-diluted), a $12.3 million increase from the $15.9 million
($1.24 per share-diluted) reported in 1997. The increase resulted from a $36.4
million increase in non-interest income, a $6.4 million increase in net interest
income offset by a $9.1 million increase in the provision for losses, a $7.8
million increase in operating expenses, and a $13.4 million increase in the
provision for federal income taxes.
NET INTEREST INCOME
Net interest income increased $3.9 million, or 40.2%, to $13.6 million for the
three months ended September 30, 1998, from $9.7 million for the 1997 period.
This increase was due to a $1.0 billion increase in average interest-earning
assets between the comparable periods, offset by a $981.4 million increase in
interest-bearing liabilities necessary to fund the growth. At the same time, the
Company's interest rate spread decreased from 1.98% in the 1997 period to 1.74%
for the three months ended September 30, 1998. The decreased spread, offset in
part by a $16.3 million increase in the excess of average earning assets over
average interest-bearing liabilities, resulted in a decrease in the Company's
net interest margin by 0.35% to 2.08% for the three months ended September 30,
1998 from 2.43% for the comparable 1997 period.
Net interest income increased $6.4 million, or 21.2%, to $36.6 million for the
nine months ended September 30, 1998, from $30.2 million for the comparable 1997
period. This increase was due to a $948.5 million increase in average
interest-earning assets between the comparable periods, offset by a $941.9
million increase in interest-bearing liabilities necessary to fund the growth.
The Company's interest rate spread decreased from 2.27% for the 1997 period to
1.69% for the nine months ended September 30, 1998. The decreased spread, offset
in part by a $6.6 million increase in the excess of average earning assets over
average interest-bearing liabilities, resulted in a decrease in the Company's
net interest margin by 0.77% to 2.06% for the nine months ended September 30,
1998 from 2.83% for the comparable 1997 period.
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AVERAGE YIELDS EARNED AND RATES PAID
Table 1 and Table 2 presents interest income from average earning assets,
expressed in dollars and yields, and interest expense on average
interest-bearing liabilities, expressed in dollars and rates. Interest income
from earning assets includes the amortization of net premiums and the
amortization of net deferred loan origination costs. Nonaccruing loans were
included in the average loan amounts outstanding.
TABLE 1
Quarter ended September 30,
-------------------------------------------------------------------------------------
1998 1997
--------------------------------------- ------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS: (In thousands)
Loans receivable, net $ 2,536,871 $ 48,489 7.65% $ 1,562,114 $ 30,008 7.68%
FHLB stock 52,500 1,062 8.03 32,763 669 8.17
Other 5,687 67 4.67 2,462 34 5.52
-------------------------- -------------------------
Total interest-earning assets 2,595,058 $ 49,618 7.59% 1,597,339 $ 30,711 7.69%
Other assets 332,968 162,055
----------- -----------
Total assets $ 2,928,026 $ 1,759,394
=========== ===========
INTEREST-BEARING LIABILITIES:
Deposits $ 1,443,179 $ 21,134 5.81% $ 954,783 $ 13,646 5.67%
FHLB advances 909,110 13,353 5.83 486,181 7,120 5.81
Other 88,647 1,498 6.70 18,567 246 5.26
-------------------------- -------------------------
Total interest-bearing
liabilities 2,440,936 $ 35,985 5.85% 1,459,531 $ 21,012 5.71%
Other liabilities 340,641 181,947
Stockholders equity 146,449 117,916
----------- -----------
Total liabilities and
stockholders equity $ 2,928,026 $ 1,759,394
=========== ===========
Net interest-earning assets $ 154,122 $ 137,808
=========== ===========
-------- --------
Net interest income $ 13,633 $ 9,699
======== ========
---- ----
Interest rate spread 1.74% 1.98%
==== ====
Net interest margin 2.08% 2.43%
==== ====
Ratio of average interest-
Earning assets to
Interest-bearing liabilities 106% 109%
==== ====
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TABLE 2
AVERAGE YIELDS EARNED AND RATES PAID
Nine months ended September 30,
-------------------------------------------------------------------------------------
1998 1997
--------------------------------------- ------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS: (In thousands)
Loans receivable, net $ 2,321,600 $ 130,992 7.52% $ 1,396,010 $ 83,029 7.93%
FHLB stock 48,010 2,887 8.00 25,957 1,654 8.52
Other 3,284 125 5.08 2,448 106 5.79
------------------------- -------------------------
Total interest-earning assets 2,372,894 $ 134,004 7.53% 1,424,415 $ 84,789 7.94%
Other assets 272,717 158,200
----------- -----------
Total assets $ 2,645,611 $ 1,582,615
=========== ===========
INTEREST-BEARING LIABILITIES:
Deposits $ 1,333,669 $ 57,377 5.75% $ 841,428 $ 34,982 5.56%
FHLB advances 811,179 35,845 5.91 427,310 18,774 5.87
Other 85,234 4,178 6.55 19,451 841 5.78
------------------------- -------------------------
Total interest-bearing
liabilities 2,230,082 $ 97,400 5.84% 1,288,189 $ 54,597 5.67%
Other liabilities 277,481 193,814
Stockholders equity 138,048 99,167
----------- -----------
Total liabilities and
stockholders equity $ 2,645,611 $ 1,581,170
=========== ===========
Net interest-earning assets 142,812 $ 136,226
=========== ===========
-------- --------
Net interest income $ 36,604 $ 30,192
======== ========
---- ----
Interest rate spread 1.69% 2.27%
==== ====
Net interest margin 2.06% 2.83%
==== ====
Ratio of average interest
Earning assets to
Interest-bearing liabilities 106% 111%
==== ====
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RATE/VOLUME ANALYSIS
Table 3 and Table 4 present the dollar amount of changes in interest income and
interest expense for the components of earning assets and interest-bearing
liabilities which are presented in Tables 1 and 2. Table 3 and 4 distinguishes
between the changes related to average outstanding balances (changes in volume
while holding the initial rate constant) and the changes related to average
interest rates (changes in average rates while holding the initial balance
constant).
TABLE 3
Quarter ended September 30,
--------------------------------------
1998 versus 1997
Increase (Decrease) due to:
Rate Volume Total
--------------------------------------
INTEREST INCOME: (In Thousands)
Loans receivable, net ($ 488) $ 18,969 $ 18,481
FHLB stock (38) 431 393
Other (24) 57 33
--------------------------------------
Total ($ 550) $ 19,457 $ 18,907
INTEREST EXPENSE:
Deposits $ 1,007 $ 6,481 $ 7,488
FHLB advances 78 6,155 6,233
Other 642 610 1,252
--------------------------------------
Total $ 1,727 $ 13,246 $ 14,973
--------------------------------------
Net change in net interest income ($ 2,277) $ 6,211 $ 3,934
======================================
TABLE 4
Nine months ended September 30,
--------------------------------------
1998 versus 1997
Increase (Decrease) due to:
Rate Volume Total
--------------------------------------
INTEREST INCOME: (In Thousands)
Loans receivable, net ($ 2,362) $ 50,325 $ 47,963
FHLB stock (62) 1,295 1,233
Other (6) 25 19
--------------------------------------
Total ($ 2,430) $ 51,645 $ 49,215
INTEREST EXPENSE:
Deposits $ 645 $ 21,750 $ 22,395
FHLB advances 69 17,002 17,071
Other 165 3,172 3,337
--------------------------------------
Total $ 879 $ 41,924 $ 42,803
--------------------------------------
Net change in net interest income ($ 3,309) $ 9,721 $ 6,412
======================================
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PROVISION fOR LOSSES
The provision for losses increased to $4.6 million for the three months ended
September 30, 1998 from $1.4 million during the same period in 1997. The
provision for losses increased to $12.8 million for the nine months ended
September 30, 1998 from $3.7 million during the same period in 1997. These
increases were recorded to increase the level of the general allowance for
losses to $15.2 million. The allowance now stands at 0.57% of loans and 43.2% of
non performing loans. The allowance stood at 0.54% and 0.33% of loans and 33.7%
and 12.4% of non performing loans at June 30, 1998 and December 31, 1997,
respectively.
Non-performing loans stood at $35.1 million at September 30, 1998, down from
$35.7 at June 30, 1998 and $44.3 million at December 31, 1997, a decrease of
1.7% and 20.8%, respectively. Net charge-offs were an annualized 0.23% and 0.18%
of average loans outstanding during the three months and nine months ended
September 30, 1998, respectively.
NON-INTEREST INCOME
During the three months ended September 30, 1998, non-interest income increased
$13.5 million, or 88.8%, to $28.7 million from $15.2 million. This increase was
attributable to an increase in net gain on loan sales, offset by a decrease in
net gain on the sales of mortgage servicing rights and a decrease in loan
administration fees.
During the nine months ended September 30, 1998, non-interest income increased
$36.4 million, or 83.3%, to $80.1 million from $43.7 million. This increase was
attributable to an increase in net gain on loan sales, offset by a decrease in
net gain on the sales of mortgage servicing rights and a decrease in loan
administration fees.
LOAN ADMINISTRATION
Loan administration fee income decreased down to $84,000 during the three months
ended September 30, 1998, from $1.1 million in the 1997 period. This decrease
resulted primarily from an increase in the amortization of mortgage servicing
rights caused by prepayments in the underlying mortgage loans. Fee income before
the amortization of servicing rights actually increased $4.7 million for the
three months ended September 30, 1998, to $8.3 million but was offset by a $5.7
million increase in amortization. At September 30, 1998, the unpaid principal
balance of loans serviced for others was $11.3 billion versus $4.1 billion
serviced at September 30, 1997 and $6.4 billion serviced at December 31, 1997.
At September 30, 1998 the weighted average servicing fee on loans serviced for
others was 0.279% (i.e., 27.9 basis points).
Loan administration fee income decreased down to $172,000 for the nine months
ended September 30, 1998, from $5.5 million for the 1997 period. This decrease
also was the result of the increase in the amortization of mortgage servicing
rights caused by prepayments in the underlying mortgage loans. Fee income before
the amortization of serving rights actually increased $7.9 million for the nine
months ended September 30, 1998, to $20.2 million but was offset by a $13.3
million increase in amortization.
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NET GAIN ON LOAN SALES
For the three months ended September 30, 1998, net gain on loan sales increased
$21.3 million, to $27.0 million, from a $5.7 million in the 1997 period. The
1998 period reflects the sale of $4.5 billion in loans versus $1.8 billion sold
in the 1997 period. The lower and falling interest rate environment in the 1998
period resulted in the large increase in mortgage loan origination volume ($4.9
billion in the 1998 period vs. $2.2 billion in the 1997 period) and the larger
gain on sale recorded after those same loans were sold.
For the nine months ended September 30, 1998, net gain on loan sales increased
$63.7 million, to $73.0 million, from $9.3 million in the comparable 1997
period. The 1998 period includes the sale of $12.0 billion in loans versus $4.5
billion sold in the 1997 period.
NET GAIN ON THE SALE OF MORTGAGE SERVICING RIGHTS
For the three months ended September 30, 1998, the net gain on the sale of
mortgage servicing rights decreased $6.8 million to $206,000, from $7.0 million
for the same period in 1997. The gain on sale of mortgage servicing rights
decreased because the $2.9 billion sale of bulk servicing rights completed in
1998 was sold without a gain versus a bulk sale of $1.3 billion in 1997 which
generated $5.7 million net gains. The 1998, servicing rights sale included newly
originated servicing rights which were capitalized at a level equal to the
current market value whereas, the 1997 sales included seasoned servicing rights
that had a book value less than the market value.
Additionally the Company sold $181.0 million and $182.1 million in loans on a
servicing released basis during the 1998 and 1997 periods, respectively.
For the nine months ended September 30, 1998, the net gain on the sale of
mortgage servicing rights decreased $22.4 million to $3.1 million, from $25.5
million for the same period in 1997. The gain on sale of mortgage servicing
rights decreased due to the sale of $5.3 billion in newly originated servicing
rights in 1998, which had a book value which equaled the sales price. The bulk
mortgage servicing rights sold in 1997 was an accumulation of $3.6 billion in
seasoned servicing rights which included rights originated prior to 1995 and the
adoption of FASB 122.
The Company also sold $829.2 million and $582.4 million in loans on a servicing
released basis during the 1998 and 1997 periods, respectively.
OTHER FEES AND CHARGES
During the three and nine months ended September 30, 1998, the Company recorded
$1.4 million and $3.8 million in other fees and charges, respectively. In the
comparable 1997 periods, the Company recorded $1.4 million and $3.4 million,
respectively. The collection and recording of these fees are dependent on the
amount of deposit accounts, the number of certain types of loans closed and the
collection of any miscellaneous fees.
13
14
NON-INTEREST EXPENSE
The following table sets forth components of the Company's non-interest expense,
along with the allocation of expenses related to loan originations that are
deferred pursuant to SFAS No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases." As required by SFAS No. 91, mortgage loan fees and certain direct
origination costs (principally compensation and benefits) are capitalized as an
adjustment to the basis of the loans originated during a period. Certain other
expenses associated with loan production, however, are not required to be
capitalized. These expense amounts are reflected on the Company's statement of
earnings. Management believes that the analysis of non-interest expense on a
"gross" basis ( i.e., prior to the deferral of capitalized loan origination
costs ) more clearly reflects the changes in non-interest expense when comparing
two periods.
Quarter ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
---------- ----------- ------------ -----------
(In thousands)
Compensation and benefits $ 13,704 $ 10,270 $ 40,918 $ 31,854
Commissions 6,862 3,895 20,013 9,802
Occupancy and equipment 3,799 3,296 11,878 9,773
Advertising 433 357 1,191 1,190
Core deposit amortization 323 323 968 968
Federal insurance premium 120 129 488 305
General and administrative 9,210 6,633 29,366 19,057
-------- -------- -------- --------
Total 34,451 24,903 104,822 72,949
Less: capitalized direct costs of loan closings (14,801) (11,081) (51,734) (27,705)
======== ======== ======== ========
Total, net $ 19,650 $ 13,822 $ 53,088 $ 45,244
======== ======== ======== ========
Efficiency ratio 45.63% 54.07% 44.67% 59.90%
Non-interest expense, excluding the capitalization of direct loan origination
costs, increased by $9.6 million, or 38.6%, to $34.5 million during the three
months ended September 30, 1998, from $24.9 million for the comparable 1997
period. These increased costs are primarily attributable to the $2.7 billion
increase (123%) in mortgage loans originated during the comparable periods. The
largest changes occurred in the amount of compensation and benefits and
commissions paid and the general and administrative expenses reported.
The increased commission expense of $3.0 million and the $3.4 million
compensation cost increase is the direct result of the increase in mortgage loan
originations during period. The majority of the $2.6 million increase in general
and administrative expenses represents increased contract underwriting costs and
other costs associated with the mortgage loan origination process. The Company
also opened two new bank branches during the quarter, and maintained seven more
branches during the 1998 quarter than the comparable 1997 period.
During the nine months ended September 30, 1998, non-interest expense, excluding
the capitalization of direct loan origination costs, increased by $31.9 million,
or 43.8%, to $104.8 million, from $72.9 million for the comparable 1997 period.
These increased costs are primarily attributable to the $7.8 billion increase
(147%) in mortgage loans originated during the comparable periods. The largest
changes occurred in the amount of compensation and benefits and commissions paid
and the general and administrative expenses reported along with an increase in
the amount of occupancy and equipment expense.
The increased commission expense of $10.2 million and the $9.0 million
compensation cost increase is the direct result of the increase in mortgage loan
originations during period. The majority of the $10.3 million increase in
general and administrative expenses represents increased contract underwriting
costs and other costs associated with the mortgage loan production. The
increased amount of occupancy and equipment expense is a partly a result of the
increased equipment cost for the mortgage production operation, but also the
costs associated with the opening and maintenance of seven more bank branches
during 1998.
14
15
SEGMENT REPORTING
RETAIL BANKING OPERATIONS
The Company provides a full range of banking services to consumers and small
businesses in southern and western Michigan. The Bank operates a network of 26
bank branches. The Company has continued to focus on expanding its branch
network in order to increase its access to retail deposit funding sources. The
retail banking operation allows the Company to cross-market consumer banking
services to the Company's mortgage customers in Michigan.
MORTGAGE BANKING OPERATIONS
Flagstar's mortgage banking activities involve the origination of mortgage loans
or the purchase of mortgage loans from the originating lender. Company personnel
originate loans and conduct business from 33 loan origination centers located in
Michigan, Ohio, and Florida. Flagstar purchases mortgage loans on a wholesale
basis through a network of correspondents consisting of other banks, thrifts,
mortgage companies, and mortgage brokers. This mortgage banking network conducts
mortgage lending operations nationwide. The mortgage loans, the majority of
which are subsequently sold in the secondary mortgage market, conform to the
underwriting standards of FHLMC or FNMA.
The following tables present certain financial information concerning the
results of operations of Flagstar's retail banking and mortgage banking
operation.
TABLE 4
RETAIL BANKING OPERATIONS
At or for the quarter ended At or for the nine months ended
September 30, September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
(In thousands)
Revenues $ 9,471 $ 5,436 $ 22,761 $ 16,188
Earnings before taxes 5,868 3,088 13,367 9,204
Identifiable assets 849,814 593,279 849,814 593,279
TABLE 5
MORTGAGE BANKING OPERATIONS
At or for the quarter ended At or for the nine months ended
September 30, September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
(In thousands)
Revenues $ 46,236 $ 19,529 $ 107,259 $ 57,731
Earnings before taxes 25,590 6,639 50,727 15,741
Identifiable assets 2,300,500 1,654,086 2,300,500 1,654,086
15
16
FINANCIAL CONDITION
ASSETS
The Company's assets totaled $3.1 billion at September 30, 1998, an increase of
$1.2 billion, or 63.2%, as compared to $1.9 billion at December 31, 1997. This
increase was primarily due to increases in mortgage loans available for sale and
loans held for investment, along with increases in each and every other asset
category.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents increased from $21.9 million at December 31, 1997 to
$72.1 million at September 30, 1998
LOANS RECEIVABLE, NET
Loans receivable, net increased $1.0 billion, from $1.7 billion at December 31,
1997 to $2.7 billion at September 30, 1998.
Mortgage loans available for sale increased $729.0 million, or 60.9%, to $1.9
billion at September 30, 1998, from $1.2 billion at December 31, 1997. This
increase is attributable to Company's ability and management's decision to hold
a larger portion of its mortgage loan production for a longer period until it is
subsequently sold into the secondary market. The increased mortgage production
has to a lesser extent created a larger warehouse of mortgage loans.
Loans held for investment increased $287.3 million, or 62.0%, from $463.6
million at December 31, 1997 to $750.9 million at September 30, 1998. This
increase is attributable to the purchase of mortgage loans by Flagstar Capital
Corporation, a subsidiary of the Bank, and an increased use of commercial lines
of credit (i.e. warehouse lending) by mortgage banking companies in order to
access funds for their mortgage closings. The loans Flagstar Capital Corporation
bought from the Bank and moved to held for investment had a principal balance at
September 30, 1998 of $116.2 million. Warehouse lines utilized at September 30,
1998 totaled $226.4 million versus $77.5 million at December 31, 1997.
ALLOWANCE FOR LOSSES
The allowance for losses totaled $15.2 million at September 30, 1998, an
increase of $9.7 million, or 176.4%, from $5.5 million at December 31, 1997. The
allowance for losses as a percentage of non-performing loans was 43.2% and 12.4%
at September 30, 1998 and December 31, 1997, respectively. The Company's
non-performing loans totaled $35.1 million and $44.3 million at September 30,
1998 and December 31, 1997, respectively. The allowance for losses as a
percentage of total loans, was 0.57% and 0.33% at September 30, 1998 and
December 31, 1997, respectively. The increase in the dollar amount of the
allowance for losses was based upon management's assessment of relevant factors,
including the types and amounts of non-performing loans, historical, and
anticipated loss experience on such types of loans, and current and projected
economic conditions. During the nine months ended September 30, 1998,
non-performing assets declined $3.8 million, or 6.1%, and management increased
the allowance for losses $9.7 million, creating an 23.6% decrease in net
non-performing assets.
FHLB STOCK
Holdings of FHLB stock increased from $40.0 million at December 31, 1997 to
$52.5 million at September 30, 1998 as the Company's total mortgage loan
portfolio increased. As a member of the FHLB, the Bank is required to hold
shares of FHLB stock in an amount at least equal to 1% of the aggregate unpaid
principal balance of its home mortgage loans, home purchase contracts and
similar obligations at the beginning of each year, or 1/20th of its FHLB
advances, whichever is greater.
16
17
ACCRUED INTEREST RECEIVABLE
Accrued interest receivable increased from $16.5 million at December 31, 1997 to
$27.3 million at September 30, 1998 as the Company's total loan portfolio
increased. The Company typically collects loan interest in the following month
after it is earned.
REPOSSESSED ASSETS
Repossessed assets increased from $18.3 million at December 31, 1997 to $23.7
million at September 30, 1998 as the Company's non-performing loans were
foreclosed upon by the Bank. This 29.5% increase is the direct result of the
20.8% decrease in the amount of non-performing loans.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights totaled $149.4 million at September 30, 1998, an
increase of $65.6 million, or 78.3%, from $83.8 million at December 31, 1997.
During the nine months ended September 30, 1998, the Company capitalized $161.9
million, amortized $20.1 million, and sold $76.3million in mortgage servicing
rights. The principal balance of the loans serviced for others stands at $11.3
billion at September 30, 1998 versus $6.4 billion at December 31, 1997. The
capitalized value of the mortgage servicing rights was 1.33% and 1.31% of the
underlying principal balance at September 30, 1998 and December 31, 1997,
respectively.
OTHER ASSETS
Other assets increased $39.2 million, or 110.1%, to $74.8 million at September
30, 1998, from $35.6 million at December 31, 1997. The majority of this increase
was attributable to the receivables recorded in conjunction with the sale of
mortgage servicing rights completed during the three months ended September 30,
1998. 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 $1.1 billion, or 61.1%, to $2.9
billion at September 30, 1998, from $1.8 billion at December 31, 1997. This
increase was attributable to an increase in every liability account category.
DEPOSIT ACCOUNTS
Deposit accounts increased $486.1 million, or 43.8%, to $1.6 billion at
September 30, 1998, from $1.1 billion at December 31, 1997. This increase
reflects the Company's deposit growth strategy through both its branch network
and the secondary market. The number of bank branches increased from 19 at
December 31, 1997 to 26 at September 30, 1998. The bank branches have generated
$195.1 million in new deposits, an annualized 51.1% growth rate, since December
31, 1997. At September 30, 1998, the Company's certificates of deposit totaled
$1.4 billion, or 87.5% of total deposits. These certificates carry an average
balance of $50,896 and a weighted average cost of 5.89%. Approximately $891.8
million of the certificates of deposit were brokered deposits or deposits
garnered through the secondary markets and carried a weighted average cost of
5.81%.
FEDERAL HOME LOAN BANK ADVANCES
FHLB advances increased $428.1 million, or 88.7%, to $910.5 million at September
30, 1998, from $482.4 million at December 31, 1997. The Company relies upon such
advances as a source of funding for the origination or purchase of 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.
17
18
ACCRUED INTEREST PAYABLE
Accrued interest payable increased from $10.6 million at December 31, 1997 to
$13.1 million at September 30, 1998 as the Company's interest bearing
liabilities increased. The Company typically pays interest on a one month lag.
UNDISBURSED PAYMENTS ON LOANS SERVICED FOR OTHERS
Undisbursed payments on loans serviced for others increased $47.8 million, or
104.1%, to $93.7 million at September 30, 1998, from $45.9 million at December
31, 1997. These amounts represent payments received from borrowers for interest,
principal and related loan charges, which have not been remitted to the
respective investors. These balances fluctuate with the size of the servicing
portfolio and increase during a time of high payoff or refinance volume.
ESCROW ACCOUNTS
Customer escrow accounts increased $61.7 million, or 142.2%, to $105.1 million
at September 30, 1998, from $43.4 million at December 31, 1997. These amounts
represent payments received from borrowers for taxes and insurance payments,
which have not been remitted to the tax authorities or insurance providers.
These balances fluctuate with the size of the servicing portfolio and during the
year before and after the remittance of scheduled payments.
LIABILITY FOR CHECKS ISSUED
Liability for checks issued increased $52.9 million, or 115.3%, to $98.8 million
at September 30, 1998, from $45.9 million at December 31, 1997. These amounts
represent checks issued to acquire mortgage loans which have not cleared for
payment. These balances fluctuate with the size of the mortgage pipeline,
increasing in lower interest rate scenarios and decreasing during a time when
loan origination volume is down.
FEDERAL INCOME TAXES PAYABLE
Federal income taxes payable increased $22.5 million, or 108.2%, to $43.3
million at September 30, 1998, from $20.8 million at December 31, 1997. This
increase is primarily attributable to the timing of payments for current taxes
and an increase in the deferred tax liability.
OTHER LIABILITIES
Other liabilities increased $64.2 million, or 408.9%, to $79.9 million at
September 30, 1998, from $15.7 million at December 31, 1997. This increase was
primarily attributable to the issuance of $57.5 million of preferred stock by
Flagstar Capital Corporation, a second tier subsidiary of the Company and an
increase in accrued accounts payable relating to compensation and mortgage loan
production.
18
19
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Liquidity refers to the ability or the financial flexibility to manage future
cash flows to meet the needs of depositors and borrowers and fund operations on
a timely and cost-effective basis. The Company has no other significant business
other than that of its wholly owned subsidiary, Flagstar Bank, FSB.
The Bank is required by the Office of Thrift Supervision ("OTS") regulations to
maintain minimum levels of liquid assets. This requirement, which may be changed
at the discretion of the OTS depending upon economic conditions and deposit
flows, is based upon a percentage of deposits and short-term borrowings. The
required minimum ratio is currently 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 daily
liquidity ratio was 11.51% for the month ended September 30, 1998.
A significant source of cash flow for the Company is the sale of mortgage loans
held for sale. Additionally, the Company receives funds from loan principal
repayments, advances from the FHLB, deposits from customers and cash generated
from operations.
Mortgage loans sold during the three months ended September 30, 1998 totaled
$4.5 billion, an increase of $2.7 billion, or 150.0% from $1.8 billion sold
during the same period in 1997. This increase in mortgage loan sales was
attributable to the 123% increase in mortgage loan originations. The Company
sold 91.8% and 81.8% of its mortgage loan originations during the three month
periods ended September 30, 1998 and 1997, respectively.
Mortgage loans sold during the nine months ended September 30, 1998 totaled
$12.0 billion, an increase of $7.5 billion, or 166.7% from $4.5 billion sold
during the same period in 1997. This increase in mortgage loan sales was
attributable to the 147% increase in mortgage loan originations. The Company
sold 91.6% and 84.9% of its mortgage loan originations during the nine month
periods ended September 30, 1998 and 1997, respectively.
The Company typically uses FHLB advances to fund its daily operational liquidity
needs and to assist in funding loan originations. The Company will continue to
use this source of funds until a more cost-effective source of funds becomes
available. FHLB advances are used because of their flexibility. These funds are
typically borrowed for terms that are less than one year with no prepayment
penalty. The Company had $910.5 million outstanding at September 30, 1998. Such
advances are repaid with the proceeds from the sale of mortgage loans held for
sale. The Company currently has an authorized line of credit equal to $1.3
billion. This line is collateralized by non-delinquent mortgage loans. To the
extent that the amount of retail deposits or customer escrow accounts can be
increased, the Company expects to replace FHLB advances.
At September 30, 1998, the Company had outstanding rate-lock commitments to lend
$1.5 billion in mortgage loans, along with outstanding commitments to make other
types of loans totaling $18.4 million. Because such commitments may expire
without being drawn upon, they do not necessarily represent future cash
commitments. Also, at September 30, 1998, the Company had outstanding
commitments to sell $2.7 billion of mortgage loans. These commitments will be
funded within 90 days. The Company has issued warehouse lines of credit to
various mortgage companies totaling $415.3 million, of which $226.4 million was
advanced at September 30, 1998. The Company also has other unused commercial and
consumer lines of credit totaling $35.2 million at September 30, 1998.
19
20
CAPITAL RESOURCES
At September 30, 1998, the Bank exceeded all applicable bank regulatory minimum
capital requirements. The Company is not subject to any such requirements.
YEAR 2000
As with other companies, many of the Company's computer programs and other
applications were originally designed to recognize calendar years by their last
two digits. Calculations performed using these truncated fields will not work
properly with dates from the year 2000 and beyond. Many of the systems utilized
by the Company are vendor-supplied, and almost all of these vendors have
provided the Company with a certification of compliance or have given a
completion date within the first quarter of 1999. The Company began reviewing
its year 2000 conversion needs mid-1996 and has two project committees that are
monitoring the status of these conversions. A comprehensive review to identify
the systems affected by this issue was completed and an implementation plan was
compiled and is currently being executed. The Company has not and does not
expect to spend any significant amounts with outside contractors relative to the
completion of these tasks. Therefore, costs do not represent any material
incremental costs, but rather will represent the redeployment of existing
technology resources. The Company presently believes that with the planned
modifications to existing systems and vendor delivery of millennium-compliant
systems, all year 2000 compliance issues will be resolved no later than the end
of the first quarter of 1999. Additionally, the Company believes that any
related costs will not have a material impact on the operations, cash flows, or
financial condition of future periods.
ITEM 3. MARKET RISK
Management believes there has been no material change in either interest rate
risk or market risk since December 31, 1997.
20
21
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
21
22
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: November 13, 1998 /s/ Thomas J. Hammond
---------------------
Thomas J. Hammond
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
/s/ Michael W. Carrie
---------------------
Michael W. Carrie
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
22
23
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
11 Computation of Net Earnings
per Share
27 Financial Data Schedule