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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, 1999
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 sixty days. Yes X No .
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As of the October 29, 1999 record date, 13,127,973 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 - September 30, 1999
(unaudited) and December 31, 1998.
Unaudited Consolidated Statements of Earnings - For the three and nine
months ended September 30, 1999 and 1998.
Unaudited Consolidated Statements of Cash Flows - For the nine months ended
September 30, 1999 and 1998.
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 1999 1998
--------------------- -- --------------------
(unaudited)
Cash and cash equivalents $ 69,572 $ 75,799
Loans receivable
Mortgage loans available for sale 2,227,058 1,831,531
Loans held for investment 1,145,114 747,185
Less: allowance for losses (21,500) (20,000)
----------- -----------
Loans receivable, net 3,350,672 2,558,716
Federal Home Loan Bank stock 59,050 57,837
Other investments -- 500
----------- -----------
Total earning assets 3,409,722 2,617,053
Accrued interest receivable 23,691 24,812
Repossessed assets 23,680 22,966
Premises and equipment 38,423 31,124
Mortgage servicing rights 155,285 150,258
Other assets 65,413 124,433
=========== ===========
Total assets $ 3,785,786 $ 3,046,445
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts $ 2,118,657 $ 1,923,370
Federal Home Loan Bank advances 1,043,000 456,019
Long term debt 74,750 --
----------- -----------
Total interest bearing liabilities 3,236,407 2,379,389
Accrued interest payable 16,173 16,659
Undisbursed payments on
loans serviced for others 71,463 184,498
Escrow accounts 107,221 104,455
Liability for checks issued 42,971 65,634
Federal income taxes payable 45,784 49,265
Other liabilities 76,308 82,693
----------- -----------
Total liabilities 3,596,327 2,882,593
STOCKHOLDERS' EQUITY
Common stock - $.01 par value,
40,000,000 shares authorized, 13,697,323 and
13,670,000 shares issued and 13,597,323 and
13,670,000 shares outstanding at September 30, 1999
and December 31, 1998, respectively 136 137
Additional paid in capital 28,886 29,988
Retained earnings 160,437 133,727
----------- -----------
Total stockholders' equity 189,459 163,852
=========== ===========
Total liabilities and stockholders' equity $ 3,785,786 $ 3,046,445
=========== ===========
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,
1999 1998 1999 1998
--------------- --------------- --------------- --------------
INTEREST INCOME
Loans $ 59,009 $ 48,489 $167,683 $130,992
Other 1,225 1,129 3,643 3,012
-------- -------- -------- --------
Total 60,234 49,618 171,326 134,004
INTEREST EXPENSE
Deposits 28,614 21,134 83,792 57,377
FHLB advances 12,440 13,353 32,391 35,845
Other 3,572 1,498 8,487 4,178
-------- -------- -------- --------
Total 44,626 35,985 124,670 97,400
-------- -------- -------- --------
Net interest income 15,608 13,633 46,656 36,604
Provision for losses 1,459 4,599 4,504 12,838
-------- -------- -------- --------
Net interest income after provision for losses 14,149 9,034 42,152 23,766
NON-INTEREST INCOME
Loan administration 4,725 84 15,395 172
Net gain on loan sales 1,187 27,008 32,143 72,983
Net gain on sales of mortgage servicing rights 3,961 206 4,883 3,089
Other fees and charges 4,068 1,423 10,374 3,819
-------- -------- -------- --------
Total 13,941 28,721 62,795 80,063
NON-INTEREST EXPENSE
Compensation and benefits 8,840 8,146 27,987 18,713
Occupancy and equipment 5,450 3,799 15,235 11,878
General and administrative 2,752 7,705 15,141 22,497
-------- -------- -------- --------
Total 17,042 19,650 58,363 53,088
-------- -------- -------- --------
Earnings before federal income taxes 11,048 18,105 46,584 50,741
Provision for federal income taxes 3,844 7,800 16,318 22,500
-------- -------- -------- --------
NET EARNINGS $ 7,204 $ 10,305 $ 30,266 $ 28,241
======== ======== ======== ========
EARNINGS PER SHARE - BASIC $ 0.52 $ 0.76 $ 2.21 $ 2.07
======== ======== ======== ========
EARNINGS PER SHARE - DILUTED $ 0.51 $ 0.73 $ 2.14 $ 2.00
======== ======== ======== ========
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,
1999 1998
---------------------------------
OPERATING ACTIVITIES
Net earnings $ 30,266 $ 28,241
Adjustments to reconcile net earnings to net cash used in operating activities
Provision for losses 4,504 12,838
Depreciation and amortization 18,365 25,260
Net gain on the sale of assets (190) (712)
Net gain on loan sales (32,143) (72,983)
Gain on sales of mortgage servicing rights (3,671) (3,089)
Proceeds from sales of loans available for sale 11,164,466 12,163,995
Originations and repurchases of loans available for sale,
net of principal repayments (11,545,571) (12,838,412)
Decrease (increase) in accrued interest receivable 1,120 (10,858)
Decrease (increase) in other assets 58,040 (40,191)
(Decrease) increase in accrued interest payable (486) 2,571
(Decrease) increase in liability for checks issued (22,663) 52,889
(Decrease) increase in current federal income taxes payable (15,458) 5,697
Provision for deferred federal income taxes payable 11,977 16,813
(Decrease) increase in other liabilities (6,386) 64,234
------------ ------------
Net cash used in operating activities (337,830) (593,707)
INVESTING ACTIVITIES
Maturity of other investments 500 38
Originations of loans held for investment, net of principal repayments (397,929) (287,287)
Purchase of Federal Home Loan Bank stock (1,212) (12,475)
Proceeds from the disposition of repossessed assets 14,196 10,438
Acquisitions of premises and equipment (12,486) (5,271)
Increase in mortgage servicing rights (167,202) (161,891)
Proceeds from the sale of mortgage servicing rights 153,646 79,391
------------ ------------
Net cash used in investing activities (410,487) (377,057)
FINANCING ACTIVITIES
Net increase in deposit accounts 195,288 486,070
Net increase in Federal Home Loan Bank advances 586,980 428,122
Issuance of Junior Subordinated Debentures 74,750 --
Net (disbursement) receipt of payments of loans serviced for others (113,035) 47,824
Net receipt of escrow payments 2,766 61,703
Net proceeds from the exercise of common stock options 361 --
Common stock repurchases (1,464) --
Dividends paid to stockholders (3,556) (2,734)
------------ ------------
Net cash provided by financing activities 742,090 1,020,985
------------ ------------
Net (decrease) increase in cash and cash equivalents (6,227) (1,645)
Beginning cash and cash equivalents 75,799 21,928
------------ ------------
Ending cash and cash equivalents $ 69,572 $ 20,283
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Loans receivable transferred to repossessed assets $ 14,717 $ 15,185
============ ============
Total interest payments made on deposits and other borrowings $ 125,157 $ 94,828
============ ============
Federal income taxes paid $ 10,000 $ --
============ ============
Loans available for sale transferred to loans held for investment $ 581,203 $ --
============ ============
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, 1999.
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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,
1999 1998 1999 1998
---------------- --------------- --------------- ----------------
Return on average assets 0.76% 1.41% 1.14% 1.42%
Return on average equity 15.58% 28.15% 22.67% 27.28%
Efficiency ratio 56.58% 45.63% 52.44% 44.67%
Equity/assets ratio (average for the period) 4.89% 5.00% 5.01% 5.22%
Mortgage loans originated or purchased $ 3,043,968 $ 4,858,002 $12,257,897 $13,105,795
Mortgage loans sold $ 2,869,238 $ 4,452,304 $11,045,978 $12,016,950
Interest rate spread 1.82% 1.74% 1.82% 1.69%
Net interest margin 1.91% 2.08% 2.01% 2.06%
Charge-offs to average loans outstanding 0.18% 0.23% 0.13% 0.18%
- -----------------------------------------------------------------------------------------------------------------------------------
September 30, June 30, December 31, September 30,
1999 1999 1998 1998
---------------- --------------- --------------- ----------------
Equity-to-assets ratio 5.00% 4.93% 5.38% 4.92%
Tangible capital ratio (1) 7.91% 7.87% 6.44% 5.99%
Core capital ratio (1) 7.96% 7.93% 6.54% 6.10%
Risk-based capital ratio (1) 16.69% 15.56% 11.83% 11.43%
Total risk-based capital ratio (1) 17.77% 16.58% 12.93% 12.28%
Book value per share $ 13.93 $ 13.51 $ 11.98 $ 11.13
Average shares outstanding 13,597 13,685 13,670 13,670
Mortgage loans serviced for others $11,308,993 $11,130,708 $11,472,211 $11,250,121
Value of mortgage servicing rights 1.37% 1.36% 1.31% 1.33%
Allowance for losses to non performing loans 54.8% 57.1% 53.8% 43.2%
Allowance for losses to total loans 0.64% 0.66% 0.78% 0.57%
Non performing assets to total assets 1.66% 1.62% 1.97% 1.90%
Number of bank branches 32 31 28 26
Number of loan origination centers 37 36 31 33
Number of correspondent offices 17 15 15 15
Number of employees 1,668 1,913 1,675 1,554
- ------------
(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, 1999 were $7.2 million
($.51 per share-diluted), a $3.1 million decrease from the $10.3 million ($.73
per share-diluted) reported for the comparable 1998 period. The decrease
resulted from a $14.8 million decrease in non-interest income offset by a $3.1
million decrease in the provision for losses, a $4.0 million decrease in the
provision for federal income taxes, a $2.0 million increase in net interest
income, and a $2.6 million decrease in operating expenses.
Net earnings for the nine months ended September 30, 1999 were $30.3 million
($2.14 per share-diluted), a $2.1 million increase from the $28.2 million
($2.00 per share-diluted) reported for the nine months ended September 30, 1998.
The increase resulted from a $10.1 million increase in net interest income, a
$8.3 million decrease in the provision for losses, and a $6.2 million decrease
in the provision for federal income taxes, offset by a $17.3 million decrease in
non-interest income and a $5.2 million increase in operating expenses.
NET INTEREST INCOME
Net interest income increased $2.0 million, or 14.7%, to $15.6 million for the
three months ended September 30, 1999, from $13.6 million for the 1998 period.
This increase was due to a $653.4 million increase in average interest-earning
assets between the comparable periods, offset by a $753.2 million increase in
interest-bearing liabilities necessary to fund the growth. At the same time, the
Company's interest rate spread increased from 1.74% in the 1998 period to 1.82%
for the three months ended September 30, 1999. The increased spread offset by
the $99.8 million decrease in the excess of average earning assets over average
interest-bearing liabilities resulted in an decrease in the Company's net
interest margin by 0.17% to 1.91% for the three months ended September 30, 1999
from 2.08% for the comparable 1998 period.
Net interest income increased $10.1 million, or 27.6%, to $46.7 million for the
nine months ended September 30, 1999, from $36.6 million for the comparable 1998
period. This increase was due to a $728.3 million increase in average
interest-earning assets between the comparable periods, offset by a $773.8
million increase in interest-bearing liabilities necessary to fund the growth.
The Company's interest rate spread increased from 1.69% for the 1998 period to
1.82% for the nine months ended September 30, 1999. The increased spread offset
by the $45.5 million decrease in the excess of average earning assets over
average interest-bearing liabilities, resulted in a net decrease in the
Company's net interest margin by 0.05% to 2.01% for the nine months ended
September 30, 1999 from 2.06% for the comparable 1998 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,
------------------------------------------------------------------------------------
1999 1998
-------------------------------------- ------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------------- ------------ ---------- -- ---------------- ------------- -----------
INTEREST-EARNING ASSETS: (in thousands)
Loans receivable, net $ 3,186,683 $ 59,009 7.35% $ 2,536,871 $ 48,489 7.65%
FHLB stock 59,050 1,190 8.00 52,500 1,062 8.00
Other 2,744 35 5.06 5,687 67 4.67
-------------------------- -------------------------
Total interest-earning assets 3,248,477 $ 60,234 7.36% 2,595,058 $ 49,618 7.59%
Other assets 531,999 332,968
-------------- ----------------
Total assets $ 3,780,476 $ 2,928,026
============== ================
INTEREST-BEARING LIABILITIES:
Deposits $ 2,142,661 $ 28,614 5.30% $ 1,443,179 $ 21,134 5.81%
FHLB advances 897,175 12,440 5.50 909,110 13,353 5.83
Other 154,284 3,572 9.19 88,647 1,498 6.70
-------------------------- -------------------------
Total interest-bearing liabilities 3,194,120 $ 44,626 5.54% 2,440,936 $ 35,985 5.85%
Other liabilities 401,380 340,641
Stockholders equity 184,976 146,449
-------------- ----------------
Total liabilities and
Stockholders equity $ 3,780,476 $ 2,928,026
============== ================
Net interest-earning assets $ 54,357 $ 154,122
============== ================
------------ -------------
Net interest income $ 15,608 $ 13,633
============ =============
---------- -----------
interest rate spread 1.82% 1.74%
========== ===========
Net interest margin 1.91% 2.08%
========== ===========
Ratio of average interest-
Earning assets to
Interest-bearing liabilities 102% 106%
========== ===========
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TABLE 2
AVERAGE YIELDS EARNED AND RATES PAID
Nine months ended September 30,
------------------------------------------------------------------------------------
1999 1998
-------------------------------------- ------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------------- ------------ ---------- -- ---------------- ------------- -----------
INTEREST-EARNING ASSETS: (in thousands)
Loans receivable, net $ 3,039,159 $ 167,683 7.36% $ 2,321,600 $ 130,992 7.52%
FHLB stock 58,697 3,511 8.00 48,010 2,887 8.00
Other 3,331 132 5.28 3,284 125 5.08
------------------------ -----------------------
Total interest-earning assets 3,101,187 $ 171,326 7.37% 2,372,894 $ 134,004 7.53%
Other assets 452,914 272,717
-------------- ----------------
Total assets $ 3,554,101 $ 2,645,611
============== ================
INTEREST-BEARING LIABILITIES:
Deposits $ 2,084,079 $ 83,792 5.38% $ 1,333,669 $ 57,377 5.75%
FHLB advances 794,468 32,391 5.45 811,179 35,845 5.91
Other 125,351 8,487 9.05 85,234 4,178 6.55
------------------------ -------------------------
Total interest-bearing liabilities 3,003,898 $124,670 5.55% 2,230,082 $ 97,400 5.84%
Other liabilities 372,231 277,481
Stockholders equity 177,972 138,048
-------------- ----------------
Total liabilities and
Stockholders equity $ 3,554,101 $ 2,645,611
============== ================
Net interest-earning assets $ 97,289 $ 142,812
============== ================
------------ -----------
Net interest income $ 46,656 $ 36,604
============ ===========
---------- -----------
Interest rate spread 1.82% 1.69%
========== ===========
Net interest margin 2.01% 2.06%
========== ===========
Ratio of average interest-
earning assets to
interest-bearing liabilities 103% 106%
========== ===========
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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 utilizing the average outstanding
rates).
TABLE 3
Quarter ended September 30,
-----------------------------------------
1999 versus 1998
Increase (Decrease) due to:
Rate Volume Total
-----------------------------------------
INTEREST INCOME: (In Thousands)
Loans receivable, net ($ 60,945) $ 71,465 $ 10,520
FHLB stock (1,181) 1,309 128
Other (32) 0 (32)
-----------------------------------------
Total ($ 62,158) $ 72,774 $ 10,616
INTEREST EXPENSE:
Deposits ($ 31,122) $ 38,602 $ 7,480
FHLB advances (13,076) 12,163 (913)
Other (2,584) 4,658 2,074
----------------------------------------
Total ($ 46,782) $ 55,423 $ 8,641
----------------------------------------
Net change in net interest income ($ 15,376) $ 17,351 $ 1,975
========================================
TABLE 4
Nine months ended September 30,
-----------------------------------------
1999 versus 1998
Increase (Decrease) due to:
Rate Volume Total
-----------------------------------------
INTEREST INCOME: (In Thousands)
Loans receivable, net ($ 57,136) $ 93,827 $ 36,691
FHLB stock (1,174) 1,798 624
Other (42) 49 7
-----------------------------------------
Total ($ 58,352) $ 95,674 $ 37,322
INTEREST EXPENSE:
Deposits ($ 29,959) $ 56,374 $ 26,415
FHLB advances (11,738) 8,284 (3,454)
Other (2,053) 6,362 4,309
-----------------------------------------
Total ($ 43,750) $ 71,020 $ 27,270
-----------------------------------------
Net change in net interest income ($ 14,602) $ 24,654 $ 10,052
=========================================
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PROVISION FOR LOSSES
The provision for losses was reduced to $1.5 million for the three months ended
September 30, 1999 from $4.6 million during the same period in 1998. The
provision for losses decreased to $4.5 million for the nine months ended
September 30, 1999 from $12.8 million during the same period in 1998. The
increases recorded in the 1998 periods were made in order to increase the level
of the general allowance for losses. An increase was made to the general reserve
of $3.2 million and $9.7 million for the three and nine months ended September
30, 1998, respectively. During the 1999 periods no increase was made during the
three months ended September 30, 1999 and $1.5 million was added to the reserve
during the nine month period ended September 30, 1999. The allowance, which
totals $21.5 million, is 0.64% of loans and 54.8% of non performing loans at
September 30, 1999. The allowance stood at 0.57% and 0.78% of loans and 43.2%
and 53.8% of non performing loans at September 30, 1998 and December 31, 1998,
respectively.
Non-performing loans stood at $39.2 million at September 30, 1999, up from $37.6
million at June 30, 1999, and $37.2 million at December 31, 1998, an increase of
4.3% and 5.4%, respectively. Net charge-offs were an annualized 0.18% and 0.13%
of average loans outstanding during the three months and nine months ended
September 30, 1999, respectively.
NON-INTEREST INCOME
During the three months ended September 30, 1999, non-interest income decreased
$14.8 million, or 51.6%, to $13.9 million from $28.7 million. This decrease was
primarily attributable to a decrease in net gain on loan sales offset by
increases in net gain on the sales of mortgage servicing rights, loan
administration fees, and other fees and charges.
During the nine months ended September 30, 1999, non-interest income decreased
$17.3 million, or 21.6%, to $62.8 million from $80.1 million. This decrease was
also attributable to a decrease in net gain on loan sales offset by increases in
net gain on the sales of mortgage servicing rights, loan administration fees,
and other fees and charges.
LOAN ADMINISTRATION
Net loan administration fee income increased to $4.7 million during the three
months ended September 30, 1999, from $84,000 in the 1998 period. This increase
resulted primarily from a decrease in the amortization of mortgage servicing
rights caused by a reduction in prepayments from the underlying mortgage loans.
Fee income before the amortization of serving rights increased only $0.8 million
for the three months ended September 30, 1999, to $9.1 million compared to the
1998 period. The 1999 period contained a decrease in the amortization of $3.8
million. At September 30, 1999, the unpaid principal balance of loans serviced
for others was $11.3 billion versus $11.3 billion serviced at September 30, 1998
and $11.5 billion serviced at December 31, 1998. At September 30, 1999 the
weighted average servicing fee on loans serviced for others was 0.279% (i.e.,
27.9 basis points).
Loan administration fee income increased to $15.4 million for the nine months
ended September 30, 1999, from $172,000 for the 1998 period. This increase also
was the result of the decrease in the amortization of mortgage servicing rights
caused by the decrease in prepayments on the underlying mortgage loans. Fee
income before the amortization of serving rights actually increased only $7.4
million for the nine months ended September 30, 1999, to $27.6 million from
$20.2 million for the comparable 1998 period.
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NET GAIN ON LOAN SALES
For the three months ended September 30, 1999, net gain on loan sales decreased
$25.8 million, to $1.2 million, from $27.0 million in the 1998 period. The 1999
period reflects the sale of $2.9 billion in loans versus $4.5 billion sold in
the 1998 period. The higher and rising interest rate environment in the 1999
period resulted in a smaller mortgage loan origination volume ($3.0 billion in
the 1999 period vs. $4.9 billion in the 1998 period) and a smaller or narrower
gain on sale spread recorded when the loans were sold.
For the nine months ended September 30, 1999, net gain on loan sales decreased
$40.9 million, to $32.1 million, from $73.0 million in the comparable 1998
period. The 1999 period includes the sale of $11.0 billion in loans versus $12.0
billion sold in the 1998 period. For the nine month period ended September 30,
1999, the higher and rising interest rate environment not only resulted in a
smaller or narrower gain on sale spread recorded when the loans were sold but a
smaller mortgage loan origination volume ($12.3 billion in the 1999 period vs.
$13.1 billion in the 1998 period).
NET GAIN ON THE SALE OF MORTGAGE SERVICING RIGHTS
For the three months ended September 30, 1999, the net gain on the sale of
mortgage servicing rights increased $3.8 million to $4.0 million, from $206,000
for the same period in 1998. The gain on sale of mortgage servicing rights
increased due to the final reconciliation of over $7.0 billion in MSR
transferred during July. This transfer and reconciliation, which constituted a
sale price of over $100 million, accounted for $3.8 million of the increase.
Additionally, the Company sold $181.0 million in loans on a servicing released
basis during the 1998 period.
For the nine months ended September 30, 1999, the net gain on the sale of
mortgage servicing rights increased $1.8 million to $4.9 million, from $3.1
million for the same period in 1998. The gain on sale of mortgage servicing
rights increased due to the final reconciliation of over $7.0 billion in MSR
transferred during July. This transfer and reconciliation, which constituted a
sale price of over $110 million, accounted for $3.8 million of the $4.9 million
recorded in 1999. In 1998, the Company sold $3.6 billion in seasoned servicing
rights which included rights originated prior to 1995 and the adoption of FASB
122.
The Company also sold $70.6 million and $829.2 million in loans on a servicing
released basis during the 1999 and 1998 periods, respectively.
OTHER FEES AND CHARGES
During the three and nine months ended September 30, 1999, the Company recorded
$4.1 million and $10.4 million in other fees and charges, respectively. In the
comparable 1998 periods, the Company recorded $1.4 million and $3.8 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.
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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
periods.
Quarter ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
------------- -------------- ------------- ---------------
(In thousands)
Compensation and benefits $ 14,852 $ 13,704 $ 46,590 $ 40,918
Commissions 6,492 6,862 21,841 20,013
Occupancy and equipment 5,450 3,799 15,235 11,878
Advertising 833 433 2,052 1,191
Core deposit amortization 322 323 967 968
Federal insurance premium 336 120 943 488
General and administrative 5,933 9,210 23,886 29,366
-------- -------- -------- --------
Total 34,218 34,451 111,514 104,822
Less: capitalized direct costs of loan closings (17,176) (14,801) (53,151) (51,734)
-------- -------- -------- --------
Total, net $ 17,042 $ 19,650 $ 58,363 $ 53,088
======== ======== ======== ========
Efficiency ratio 56.58% 45.63% 52.44% 44.67%
Non-interest expense, excluding the capitalization of direct loan origination
costs, increased by $0.2 million, or 0.6%, to $34.2 million during the three
months ended September 30, 1999, from $34.5 million for the comparable 1998
period. Although the overall decreases in costs were modest, the makeup of the
expenses varied greatly. The largest changes occurred in the amount of
compensation and benefits paid, occupancy and equipment charges, and the general
and administrative expenses reported.
The majority of the $3.3 million decrease in general and administrative expenses
and the $1.2 million increase in compensation and benefits represents a shift
from contract underwriting costs to internalization of the underwriting
function. The other increases are reflective of the other costs associated with
the mortgage loan origination process. The Company also opened one new bank
branch during the quarter, and maintained six more branches during the 1999
quarter than the comparable 1998 period. These new offices also accounted for
the increased occupancy and equipment costs of $1.7 million during the 1999
period.
During the nine months ended September 30, 1999, non-interest expense, excluding
the capitalization of direct loan origination costs, increased by $6.7 million,
or 6.4%, to $111.5 million, from $104.8 million for the comparable 1998 period.
The largest changes occurred in the increased amounts of compensation and
benefits, commissions, and occupancy and equipment charges offset by the large
decrease in general and administrative expenses. Additionally, there was a
modest increase in the amount of federal insurance premiums and advertising
expenses recorded during the 1999 period.
14
15
NON-INTEREST EXPENSE (CONT'D)
The increased commission expense of $1.8 million is the direct result of the
change in compensation packages made available to retail loan officers and
wholesale account executives. Retail loan officers increasingly took advantage
of the Company's "net branch" program which affords the loan officer a larger
commission component in exchange for a greater role in the management of the
branch office along with an acceptance of responsibility for the branch office's
variable expenses. Members of the wholesale account executive group have been
increasingly changed to a total commission based compensation package from their
former salary plus commission compensation package. These changes have increased
commissions for the nine months ended September 30, 1999 from 0.15% of mortgage
originations to 0.18% of mortgage loan originations
The $5.7 million increase in compensation costs for the nine months ended
September 30, 1999 primarily resulted from the larger employee count during the
period and also the annual adjustments afforded employees during 1999 along with
increased underwriting employee compensation costs due to the internalization of
the operation offset in part by the decreased compensation paid to wholesale
account executives.
The majority of the $5.5 million decrease in general and administrative expenses
represents decreased contract underwriting costs, due to internalization, offset
by increases in other costs associated with the mortgage loan production, along
with the increased costs associated with the new bank branches. The increased
occupancy and equipment expense of $3.3 million along with the increased
advertising costs are also associated with the opening and maintenance of the
additional six bank branches operated during 1999.
FEDERAL INCOME TAXES
For the three months ended September 30, 1999, the provision for federal income
taxes decreased $4.0 million to $3.8 million, from $7.8 million for the same
period in 1998. The provision was 34.8% and 43.1% of pretax earnings for the
periods ended September 30, 1999 and 1998, respectively. During the 1998 period,
the Company had accrued its taxes payable assuming that the provision for losses
would be a nondeductible item for book purposes. The Company adjusted its
accrual in the fourth quarter of 1998 to bring the accrued payable to
approximately 35% of pretax earnings for all of 1998.
For the nine months ended September 30, 1999, the provision for federal income
taxes decreased $6.2 million to $16.3 million, from $22.5 million for the same
period in 1998. The provision was 35.0% and 44.3% of pretax earnings for the
periods ended September 30, 1999 and 1998, respectively. During 1998, the
Company had accrued its taxes payable assuming that the provision for losses
would be a nondeductible item for book purposes. The Company adjusted its
accrual in the fourth quarter of 1998 to bring the accrued payable to
approximately 35% of pretax earnings for all of 1998.
15
16
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 32
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 37 loan origination centers located
predominantly in Michigan. Flagstar purchases mortgage loans on a wholesale
basis through a network of correspondents consisting of other banks, thrifts,
mortgage companies, and mortgage brokers. This mortgage banking network conducts
mortgage lending operations nationwide. A majority of the mortgage loans, 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,
1999 1998 1999 1998
--------------- --------------- ---------------- --------------
(In thousands)
Revenues $ 14,798 $ 9,471 $ 43,377 $ 22,761
Earnings before taxes 11,275 5,868 31,845 13,367
Identifiable assets 1,476,456 849,814 1,476,456 849,814
TABLE 5
MORTGAGE BANKING OPERATIONS
At or for the quarter ended At or for the nine months ended
September 30, September 30,
1999 1998 1999 1998
--------------- --------------- ---------------- --------------
(In thousands)
Revenues $ 14,751 $ 46,236 $ 66,074 $107,259
Earnings before taxes (227) 25,590 14,739 50,727
Identifiable assets 2,600,096 2,300,500 2,600,096 2,300,500
16
17
FINANCIAL CONDITION
ASSETS
The Company's assets totaled $3.8 billion at September 30, 1999, an increase of
$0.8 billion, or 26.7%, as compared to $3.0 billion at December 31, 1998. This
increase was primarily due to increases in mortgage loans available for sale and
loans held for investment offset in part by a decrease in other assets.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents decreased from $75.8 million at December 31, 1998 to
$69.6 million at September 30, 1999
LOANS RECEIVABLE, NET
Loans receivable, net increased $792.0 million, from $2.6 billion at December
31, 1998 to $3.4 billion at September 30,
1999.
Mortgage loans available for sale increased $395.5 million, or 21.6%, to $2.2
billion at September 30, 1999, from $1.8 billion at December 31, 1998. This
increase is attributable to Company's ability to hold larger portions of its
mortgage loan production for longer periods until sold into the secondary
market.
Loans held for investment increased $397.9 million, or 53.3%, from $747.2
million at December 31, 1998 to $1.1 billion at September 30, 1999. This
increase is attributable to the purchase of mortgage loans by Flagstar Capital
Corporation, a subsidiary of the Bank, the origination or reclassification of
loans held for sale to the investment portfolio offset by a decreased use of
commercial lines of credit (i.e. warehouse lending) by mortgage banking
companies. The loans Flagstar Capital Corporation bought from the Bank and moved
to held for investment had a principal balance of $25.1 million. The amount of
loans originated or reclassified to the investment portfolio totaled $581.2
million. Warehouse lines used at September 30, 1999 totaled $57.2 million versus
$235.7 million at December 31, 1998.
ALLOWANCE FOR LOSSES
The allowance for losses totaled $21.5 million at September 30, 1999, an
increase of $1.5 million, or 7.5%, from $20.0 million at December 31, 1998. The
allowance for losses as a percentage of non-performing loans was 54.8% and 53.8%
at September 30, 1999 and December 31, 1998, respectively. The Company's
non-performing loans totaled $39.2 million and $37.2 million at September 30,
1999 and December 31, 1998, respectively. The allowance for losses as a
percentage of total loans, was 0.64% and 0.78% at September 30, 1999 and
December 31, 1998, 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, 1999,
non-performing loans increased $2.0 million, or 5.4%, and management increased
the allowance for losses $1.5 million, creating a 2.9% increase in net
non-performing loans.
FHLB STOCK
Holdings of FHLB stock increased from $57.8 million at December 31, 1998 to
$59.1 million at September 30, 1999 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.
17
18
ACCRUED INTEREST RECEIVABLE
Accrued interest receivable decreased from $24.8 million at December 31, 1998 to
$23.7 million at September 30, 1999 as the Company's total loan portfolio
increased. The Company typically collects loan interest in the following month
after it is earned. This 4.4% decrease is considered immaterial.
REPOSSESSED ASSETS
Repossessed assets increased from $23.0 million at December 31, 1998 to $23.7
million at September 30, 1999 as the Company's non-performing loans were
foreclosed upon by the Bank. This 3.0% increase is considered immaterial.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights totaled $155.3 million at September 30, 1999, an
increase of $5.0 million, or 3.3%, from $150.3 million at December 31, 1998.
During the nine months ended September 30, 1999, the Company capitalized $167.2
million, amortized $12.2 million, and sold $150.0 million in mortgage servicing
rights. The principal balance of the loans serviced for others stands at $11.3
billion at September 30, 1999 versus $11.5 billion at December 31, 1998. The
capitalized value of the mortgage servicing rights was 1.37% and 1.31% value at
September 30, 1999 and December 31, 1998, respectively.
OTHER ASSETS
Other assets decreased $59.0 million, or 47.4%, to $65.4 million at September
30, 1999, from $124.4 million at December 31, 1998. The majority of this
decrease was attributable to the collection of receivables previously recorded
in conjunction with the sale of residential mortgage loan servicing rights
completed on December 31, 1998 offset by similar receivables recorded for sales
completed during the nine months ended September 30, 1999. Upon the sale of the
residential mortgage loans 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 $713.7 million, or 24.8%, to $3.6
billion at September 30, 1999, from $2.9 billion at December 31, 1998. This
increase was attributable to an increase in deposits, FHLB advances, and long
term debt offset by large decreases in undisbursed payments and checks issued
along with minor decreases in other liabilities, federal income tax payable,
escrow accounts, and accrued interest payable.
DEPOSIT ACCOUNTS
Deposit accounts increased $195.3 million, or 10.2%, to $2.1 billion at
September 30, 1999, from $1.9 billion at December 31, 1998. 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 28 at
December 31, 1998 to 32 at September 30, 1999. The bank branches have generated
$372.0 million in new deposits, an annualized 59.9% growth rate, since December
31, 1998. At September 30, 1999, the Company's certificates of deposit totaled
$1.6 billion, or 77.0% of total deposits. These certificates carry an average
balance of $45,830 and a weighted average cost of 5.65%. Approximately $900.0
million of the certificates of deposit were brokered deposits or deposits
garnered through the secondary markets and carried a weighted average cost of
5.55%.
18
19
FHLB ADVANCES
FHLB advances increased $587.0 million, or 128.7%, to $1.0 billion at September
30, 1999, from $456.0 million at December 31, 1998. The Company relies upon such
advances as a source of funding for the origination or purchase of loans which
are later sold into the secondary market. The outstanding balance of FHLB
advances fluctuates from time to time depending upon the Company's current
inventory of loans held for sale and the availability of lower cost funding from
its deposit base and its escrow accounts.
LONG TERM DEBT
On April 30, 1999, the Company issued $74.8 million of 9.50% preferred
securities to the general public in an initial public offering. The securities
were issued by the Company's subsidiary, Flagstar Trust, a Delaware trust. The
preferred securities mature in 30 years, pay interest quarterly, and the
interest expense is deductible for federal income tax purposes. The net proceeds
from the offering was contributed to Flagstar Bank as additional paid in capital
and is included as regulatory capital.
UNDISBURSED PAYMENTS ON LOANS SERVICED FOR OTHERS
Undisbursed payments on loans serviced for others decreased $113.0 million, or
61.2%, to $71.5 million at September 30, 1999, from $184.5 million at December
31, 1998. 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
substantial change is attributable to the general slowdown in the refinance
volume experienced in the mortgage servicing portfolio.
ESCROW ACCOUNTS
Customer escrow accounts increased $2.7 million, or 2.6%, to $107.2 million at
September 30, 1999, from $104.5 million at December 31, 1998. 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 decreased $22.6 million, or 34.5%, to $43.0 million
at September 30, 1999, from $65.6 million at December 31, 1998. 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.
FEDERAL INCOME TAXES PAYABLE
Federal income taxes payable decreased $3.5 million, or 7.1%, to $45.8 million
at September 30, 1999, from $49.3 million at December 31, 1998. This decrease is
attributable to the payment of taxes during the nine months ended September 30,
1999 offset by an increase in the deferred tax liability created through
operations.
OTHER LIABILITIES
Other liabilities decreased $6.4 million, or 7.7%, to $76.3 million at September
30, 1999, from $82.7 million at December 31, 1998. This decrease is deemed
immaterial.
19
20
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
than that of its wholly owned subsidiary, Flagstar Bank, FSB.
The Bank is required by the Office of Thrift Supervision ("OTS") regulations to
maintain minimum levels of liquid assets. This requirement, which may be changed
at the discretion of the OTS depending upon economic conditions and deposit
flows, is based upon a percentage of deposits and short-term borrowings. The
required minimum ratio is currently 5.00%. While the Bank's liquidity ratio
varies from time to time, the Bank has generally maintained liquid assets
substantially in excess of the minimum requirements. The Bank's average daily
liquidity ratio was 6.62% for the quarter ended September 30, 1999.
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, 1999 totaled
$2.9 billion, a decrease of $1.6 billion, or 35.6% from $4.5 billion sold during
the same period in 1998. This decrease in mortgage loan sales was attributable
to the 38.8% decrease in mortgage loan originations during the quarter. The
Company sold 94.3% and 91.6% of its mortgage loan originations during the three
month periods ended September 30, 1999 and 1998, respectively.
Mortgage loans sold during the nine months ended September 30, 1999 totaled
$11.0 billion, a decrease of $1.0 billion, or 8.3% from $12.0 billion sold
during the same period in 1998. This decrease in mortgage loan sales was
attributable to the 6.1% decrease in mortgage loan originations. The Company
sold 90.1% and 91.7% of its mortgage loan originations during the nine month
periods ended September 30, 1999 and 1998, 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 $1.0 billion outstanding at September 30, 1999. 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 $1.5
billion. This line is collateralized by non-delinquent mortgage loans. To the
extent that the amount of retail deposits or customer escrow accounts can be
increased, the Company expects to replace FHLB advances.
At September 30, 1999, the Company had outstanding rate-lock commitments to lend
$693.6 billion in mortgage loans, along with outstanding commitments to make
other types of loans totaling $30.6 million. Because such commitments may expire
without being drawn upon, they do not necessarily represent future cash
commitments. Also, at September 30, 1999, the Company had outstanding
commitments to sell $978.3 million of mortgage loans. These commitments will be
funded within 90 days. Total commercial and consumer unused lines of credit
totaled $375.0 million at September 30, 1999. Such commitments include $377.3
million in warehouse lines of credit to various mortgage companies, of which
$52.7 million was advanced at September 30, 1999.
CAPITAL RESOURCES.
At September 30, 1999, the Bank exceeded all applicable bank regulatory minimum
capital requirements. The Company is not subject to any such requirements.
20
21
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 these vendors have provided the Company
with a certification of compliance. The Company began reviewing its year 2000
conversion needs in mid-1996 and has utilized two project committees to monitor
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
was executed. The Company has not spent any significant amounts with outside
contractors relative to the completion of these tasks. Therefore, costs did not
represent any material incremental costs, but rather has represented the
redeployment of existing technology resources. The Company presently believes
that all year 2000 compliance issues have been resolved. 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.
STOCK BUYBACK
The board of directors of Flagstar Bancorp released data on October 27, 1999
which stated that the Company has repurchased a total of 571,850 shares, or
approximately 4.2 % of its outstanding shares. These shares were repurchased at
a weighted price of $14.94 per share. The repurchased shares totaled
approximately 9.1% of the stock currently available for purchase but not owned
by Flagstar's founders, executive management, and directors. Flagstar insiders
and affiliates collectively own over 50% of the Company's outstanding common
shares.
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 $15 million 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, 1998.
21
22
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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23
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 12, 1999 /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)
23
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
Exhibit 11 Computation of Net Earnings per Share
Exhibit 27 Financial Data Schedule