<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 2, 1997.
REGISTRATION STATEMENT NO. 333-21621
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
FLAGSTAR BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MICHIGAN 6035 38-3150651
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE NUMBER)
ORGANIZATION)
2600 TELEGRAPH ROAD
BLOOMFIELD HILLS, MICHIGAN 48302-0953
(810) 338-7700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
THOMAS J. HAMMOND
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
FLAGSTAR BANCORP, INC.
2600 TELEGRAPH ROAD
BLOOMFIELD HILLS, MICHIGAN 48302-0953
(810) 338-7700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES OF COMMUNICATION TO:
MATTHEW G. ASH, ESQ. LEE MEYERSON, ESQ.
EDWARD B. CROSLAND, JR., ESQ. SIMPSON THACHER & BARTLETT
PAUL D. BORJA, ESQ. 425 LEXINGTON AVENUE
NEW YORK, NY 10017-3955
DOUGLAS D. TIMMER, ESQ. (212) 455-3675 (PHONE)
REINHART, BOERNER, VAN DEUREN, NORRIS & (212) 455-2502 (FAX)
RIESELBACH, P.C.
601 PENNSYLVANIA AVENUE, N.W., SUITE
750, NORTH
WASHINGTON, D.C. 20004-2601
(202) 393-3636 (PHONE)
(202) 393-0796 (FAX)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
===============================================================================
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, Par Value
$.01 per share........ $195,000,000 $60,000
</TABLE>
===============================================================================
(1) Includes 1,207,500 shares which the Underwriters have the option to
purchase to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the Registration Fee pursuant
to Rule 457(o) under the Securities Act of 1933, as amended.
(3) Of such Registration Fee, $54,000 was paid by the Company in connection
with the filing of the initial Registration Statement and $6,000 is paid
herewith.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
===============================================================================
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two separate prospectuses. The first
prospectus relates to a public offering of shares of Common Stock in the
United States and Canada (the "U.S. Offering"). The second prospectus relates
to a concurrent offering of shares of Common Stock outside the United States
and Canada (the "International Offering"). The prospectuses for the U.S.
Offering and the International Offering will be identical with the exception
of the outside front cover and outside back cover pages of the prospectus for
the International Offering. Such alternate pages appear in this Registration
Statement immediately following the complete prospectus for the U.S. Offering
and are labeled "Alternate Pages for International Offering Prospectus."
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated April 2, 1997
PROSPECTUS
8,050,000 SHARES
[LOGO OF FLAGSTAR BANCORP APPEARS HERE]
COMMON STOCK
Of the shares of common stock, par value $0.01 per share (the "Common
Stock"), of Flagstar Bancorp, Inc. (the "Company") offered hereby, 2,200,000
shares are being issued and sold by the Company and 5,850,000 shares are being
sold by members of the Hammond family (collectively, the "Selling
Stockholders"), who prior to this offering own 100% of the Company. The Selling
Stockholders include Thomas J. Hammond, the Chairman of the Board and Chief
Executive Officer of the Company, and Mark T. Hammond, the Vice Chairman and
President of the Company. Of the 8,050,000 shares being offered hereby,
shares are being offered initially in the United States and Canada by the U.S.
Underwriters (the "U.S. Offering") and shares are being offered initially
outside the United States and Canada by the International Managers (the
"International Offering" and, together with the U.S. Offering, the "Offering").
The initial public offering price and underwriting discounts and commissions
will be identical for both offerings. See "Underwriting." The Company was
formerly known as FSSB Holding Corporation and is the holding company and sole
stockholder of Flagstar Bank, FSB (the "Bank"), which was formerly known as
First Security Savings Bank, FSB. Following the consummation of the Offering,
the Selling Stockholders will own 5,400,000 shares of Common Stock representing
40.15% of the voting power of the Company, assuming no exercise of the U.S.
Underwriters' and International Managers' over-allotment options. See "Selling
Stockholders." The Company will not receive any of the proceeds from the sale
of the shares by the Selling Stockholders.
Prior to the Offering, there has been no public market for the Common Stock.
It is currently anticipated that the initial public offering price for the
Common Stock will be between $19 and $21 per share. See "Underwriting" for
information relating to the factors to be considered in determining the public
offering price. The Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "FLGS." See "Market for the Common Stock."
At the request of the Company, the U.S. Underwriters have reserved up to
800,000 shares of Common Stock for sale at the initial public offering price to
certain employees and customers of the Company and its affiliates.
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 10.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION"), THE FEDERAL DEPOSIT INSURANCE
CORPORATION (THE "FDIC"), THE OFFICE OF THRIFT SUPERVISION (THE "OTS") OR ANY
STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION, THE FDIC, THE OTS OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS
OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION, AND ARE NOT INSURED BY
THE FDIC OR ANY OTHER GOVERNMENTAL AGENCY.
================================================================================
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2)(3) STOCKHOLDERS(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................. $ $ $ $
- --------------------------------------------------------------------------------
Total(4).................. $ $ $ $
</TABLE>
================================================================================
(1) The Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters and International Managers (together, the "Underwriters")
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) Before deducting offering expenses payable by the Company, estimated to be
$ .
(3) Pursuant to an agreement among each of the Selling Stockholders and the
Company, the Company has agreed to pay 50% of the Underwriting Discounts
and Commissions in connection with the sale of shares of the Common Stock
in the Offering as well as all other fees and expenses incurred in
connection therewith. See "Selling Stockholders--Selling Stockholder
Agreement."
(4) The Company and the Selling Stockholders have granted to the U.S.
Underwriters a 30-day option to purchase up to an additional and
shares of Common Stock, respectively, on the same terms and conditions as
set forth above to cover over-allotments, if any. The Company and the
Selling Stockholders have granted the International Managers a similar
option to purchase up to an additional and shares of Common Stock,
respectively, to cover over-allotments, if any. If all such shares of
Common Stock are purchased, the total Price to Public, Underwriting
Discounts and Commissions, Proceeds to Company and Proceeds to Selling
Stockholders will be $ , $ , $ and $ , respectively. See
"Underwriting."
------------
The shares of Common Stock offered by this Prospectus are offered by the U.S.
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the U.S.
Underwriters and to certain further conditions. It is expected that delivery of
certificates for the shares of Common Stock will be made at the offices of
Lehman Brothers Inc., New York, New York, on or about , 1997.
------------
LEHMAN BROTHERS
PAINEWEBBER INCORPORATED
RONEY & CO.
APRIL , 1997
<PAGE>
[LOGO OF FLAGSTAR BANCORP APPEARS HERE]
[MAP OF UNITED STATES WITH EXPANDED MAP OF MICHIGAN AND WITH LOCATIONS SHOWN
OF REGIONAL WHOLESALE/CORRESPONDENT LENDING OFFICES, RETAIL LOAN ORIGINATION
OFFICES, BANK BRANCHES AND WHOLESALE/CORRESPONDENT SATELLITE OFFICES]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING
THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON
STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK, AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information, risk factors and financial
statements, including the related notes, appearing elsewhere in this
Prospectus. Unless otherwise indicated, all information in this Prospectus
assumes that the over-allotment options granted to the U.S. Underwriters and
the International Managers have not been exercised. Terms used but not defined
herein are defined elsewhere in this Prospectus.
THE COMPANY
Flagstar Bancorp, Inc., a Michigan-based thrift holding company, is one of
the largest originators of conforming single-family mortgage loans in the
United States. Formerly known as FSSB Holding Corporation, the Company is
engaged, through its principal subsidiary, the Bank, in the business of
providing a full range of retail banking services in southern Michigan and in
originating, purchasing and servicing residential mortgage loans on a
nationwide basis. For 1996, the Company ranked fourth in the United States
among thrifts in mortgage loan originations and sixteenth in total mortgage
loan production according to SMR Research Corp., and was the second largest
privately-owned mortgage originator in the United States.
Prior to this Offering, all of the Common Stock of the Company has been owned
by the Hammond family, which includes Thomas J. Hammond, the Chairman, Chief
Executive Officer and founder of the Company, and Mark T. Hammond, the Vice
Chairman and President of the Company. At December 31, 1996, the Company had
consolidated total assets of $1.3 billion, net loans of $1.1 billion, total
deposits of $624.5 million and total stockholders' equity of $78.5 million. For
the year ended December 31, 1996, the Company's net earnings were $17.0 million
and its return on average assets and return on average equity were 1.53% and
24.68%, respectively ($19.2 million, 1.73% and 27.87%, respectively, excluding
the special deposit insurance assessment imposed on September 30, 1996 on all
depository institutions insured by the Savings Association Insurance Fund (the
"SAIF")).
The Company currently operates in both the retail banking and mortgage
banking segments, with most of the Company's revenue (net interest income and
non-interest income) and earnings before income taxes attributable to the
mortgage banking segment. The Company believes that its retail banking business
provides it with a strategic advantage because it affords the Company access to
funding sources for its mortgage origination business which would not otherwise
be available. These additional funding sources include low cost retail
deposits, FHLB advances and escrowed funds. The Company benefits as compared to
mortgage originators with no retail banking operations because it has access to
a lower cost of funds and is therefore able to generate greater net interest
income. See "The Company" and "Business."
RETAIL BANKING. Through the Bank (which was formerly known as First Security
Savings Bank, FSB), the Company provides a full range of retail banking
services to consumers and small businesses in southern Michigan. The Bank
operates a network of 15 bank branches located in southern Michigan counties,
including Jackson County where it had the third largest market share with 21.8%
of total deposits as of June 1996. Beginning with the acquisition of Security
Savings Bank, F.S.B. ("Security Savings") and its seven bank branches in 1994,
the Company has focused on expanding its branch network in these markets in
order to increase its access to retail deposit funding sources. The Company
believes that this also provides a greater opportunity for cross-marketing of
consumer banking services to the Company's mortgage customers in Michigan and
for taking advantage of opportunities that the Company believes exist for
community banks in Michigan as a result of the substantial consolidation that
has occurred in the banking industry. See "Business."
MORTGAGE BANKING. The Company's mortgage banking operations, which have
historically generated substantially all of the Company's earnings, originate
residential mortgages through 41 retail loan origination offices located in
Michigan (30), California (9) and Ohio (2). In addition, the Company originates
retail
3
<PAGE>
mortgage loans on a wholesale basis through a network of approximately 1,800
independent mortgage brokers nationwide (who originate such loans using the
Company's underwriting systems and standards and close such loans using funds
advanced by the Company). This network is serviced by sixty account executives,
who are organized among 10 regional wholesale/correspondent lending offices and
nine wholesale/correspondent satellite offices. The Company also purchases
mortgage loans on a regular basis from independent mortgage lenders, commercial
banks, savings and loan associations and other financial institutions with whom
the Company has established a correspondent relationship. See "Business."
During the years ended December 31, 1996 and 1995, the Company's mortgage
loan production totaled $6.8 billion and $5.2 billion, respectively. Of these
amounts, approximately $6.1 billion was produced during the year ended December
31, 1996 through the Company's wholesale and correspondent loan production
network and $685.3 million was produced through the Company's retail network
($4.6 billion and $632.7 million, respectively, during 1995).
The Company sells a substantial portion of its loan production into the
secondary market, principally by securitizing pools of loans through programs
offered by government-sponsored enterprises such as the Federal National
Mortgage Association ("FNMA" or "Fannie Mae") and the Federal Home Loan
Mortgage Corporation ("FHLMC" or "Freddie Mac") and through sales to private
investors. In addition, the Company originates and sells loans conforming to
the underwriting criteria of the Federal Housing Authority ("FHA") and the
Department of Veterans Affairs ("VA"). Generally, the Company retains a portion
of the servicing rights to the loans that it sells, but also realizes
additional income by selling servicing rights on an individual and a bulk basis
to other mortgage servicers. At December 31, 1996 and 1995, the Company's loan
servicing portfolio totaled $4.8 billion and $6.8 billion, respectively (net of
loans subserviced for others), substantially all of which related to
conventional loans.
The Company makes extensive use of advanced technology and automated
processes in order to enhance the competitiveness and reduce the cost of its
mortgage origination operations. The Company was one of the first mortgage
lenders to utilize video conferencing for loan production. In 1996, the Company
began full-scale operational use of automated underwriting system technologies,
including Fannie Mae's Desktop UnderwriterTM and Freddie Mac's Loan
ProspectorTM (of which the Company is currently one of the largest users), and
has combined the two technologies into its LIVESM video conferencing and
underwriting system. The Company believes that the LIVESM system, which permits
a loan underwriter to interview and complete a loan application and approve a
loan for a prospective borrower in one session during a live video conference,
provides it with a significant competitive edge in writing mortgage loans. The
Company also expects that during 1997, substantially all of its mortgage loan
production will be underwritten using automated systems, which it believes will
further reduce overhead, enhance customer service and facilitate conformity of
the Company's loan production with FHLMC and FNMA underwriting guidelines.
BUSINESS STRATEGY. The Company's strategy consists of the following key
elements:
. continue to expand the Company's branch network into the demographically
desirable communities adjacent to the Company's current markets (such as
Grand Rapids and Kalamazoo, Michigan) in order to gain access to
additional low cost retail funding sources;
. cross-sell retail banking services to the Company's large Michigan base
of existing mortgage customers;
. benefit from economies of scale by increasing the size of its loan
servicing portfolio through the continued origination and purchase of
large volumes of mortgage loans on a diversified, nationwide basis;
. use the additional capital received by the Company from this Offering to
retain more of its mortgage loan production volume and mortgage servicing
rights, thereby increasing net interest income and servicing income;
. utilize advanced technology and automated processes throughout the
Company's business to improve customer service, reduce costs of loan
production and servicing and increase efficiencies; and
. outsource selected loan servicing and other functions when cost-
effective.
4
<PAGE>
RECENT OPERATING RESULTS. The Company's operations have grown significantly
over the past five years. Between year-end 1992 and year-end 1996, the
Company's annual mortgage loan production volume grew from $3.0 billion to $6.8
billion, its assets grew from $304.8 million to $1.3 billion and its loan
servicing portfolio (net of loans subserviced for others) grew from $3.1
billion to a peak of $6.8 billion at December 31, 1995 before decreasing to
$4.8 billion at December 31, 1996 as a result of significant sales of servicing
rights during 1996. Over this period, net earnings increased from $9.8 million
in 1992 to $17.0 million in 1996 ($19.2 million before the special deposit
insurance assessment imposed on September 30, 1996, on all SAIF-insured
institutions). Net earnings decreased in 1994 and 1995 compared to 1993 as a
result of several factors, including higher levels of compensation and expense
relating to expansion that the Company undertook in 1993 in response to the
record levels of refinancing activity and its acquisition of Security Savings
in 1994. This resulted in a corresponding decrease in earnings per share from
$1.65 in 1993 to $1.37 in 1995, before increasing to $1.51 in 1996. For the
three years ended December 31, 1996, 1995 and 1994, the Company reported a
return on average equity of 24.68%, 29.42% and 35.78%, respectively, and a
return on average assets of 1.53%, 1.63% and 3.19%, respectively.
Historically, the Company has incurred minimal losses from charge-offs in
connection with its residential mortgage loan production. Net charge-offs as a
percentage of average loans outstanding increased from 0.09% in 1992 to 0.13%
in 1996. Over this period, non-performing assets as a percentage of total
assets ranged from 0.94% in 1992 to a low of 0.42% in 1994 and increased to
1.25% at December 31, 1995 and to 3.16% at December 31, 1996 (down from 3.37%
at September 30, 1996). As a result of the increase in non-performing assets
during 1996, the Company increased its provision for losses from $238,000 in
1995 to $2.6 million in 1996. At December 31, 1996, the Company's allowance for
losses was equal to 0.31% of total loans and 11.43% of non-performing loans
compared to 0.23% and 19.67%, respectively, at December 31, 1995. The 1995 and
1996 increases in non-performing assets resulted primarily from increased
repurchases of delinquent residential mortgage loans from secondary market
investors. Although the Company generally does not sell loans with recourse, it
typically is required to repurchase loans, including delinquent and defaulted
loans, which were not underwritten strictly in compliance with the underwriting
standards of secondary market investors. As the volume of the Company's new
loan production has increased substantially over the past several years, the
aggregate amount of loan delinquencies and foreclosures has also increased,
thereby increasing the number of loans potentially subject to repurchase. In
addition, during 1996 two of the largest secondary market purchasers of loans
implemented automated underwriting review systems which enabled them to review
delinquent loans on a much faster basis, thereby accelerating the process of
returning to the Company loans originated in prior periods.
It has been the Company's experience that non-performing loans do not
necessarily result in an ultimate loss to the Company. Approximately 88% of the
Company's non-performing loans at December 31, 1996 were single-family
residential mortgage loans (94% at December 31, 1995), which generally
represent minimal risk of ultimate loss because of the nature of the underlying
collateral, private mortgage insurance for loans with over-80% loan-to-value
("LTV") ratios and insurance or guarantees on certain loans from the FHA and
VA. In addition, the Company may also have the right to sell the repurchased
loan back to the broker or correspondent which originated it, or to seek
indemnity from the applicable mortgage insurance company in the case of loans
which are underwritten on a contract basis for the Company by such insurers.
The Company anticipates that its level of loan repurchases and non-performing
assets may continue to be above historical levels during 1997 as a result of
the factors described above. The Company believes, however, that several
actions it has taken during 1996, including a tightening of credit standards
and the implementation of automated underwriting systems (which the Company
believes, in most cases, significantly reduce the ability of secondary market
investors to require repurchases of loans absent material misrepresentation),
should result in the level of loan repurchases declining over time. See
"Management's Discussion and Analysis of Changes in Financial Condition and
Results of Operations--Financial Condition--Allowance for Losses" and
"Business--Asset Quality."
5
<PAGE>
MANAGEMENT
The Company's senior management team consists of four individuals with
extensive experience in the financial services industry, particularly
residential mortgage loan origination. The Chairman, Chief Executive Officer
and founder, Thomas J. Hammond, has over 29 years of experience in various
aspects of residential lending and has been the Chief Executive Officer of the
Bank since its inception in 1987. Prior to organizing the Bank, Mr. Hammond
organized, owned and managed a series of financial services related companies,
including Hammond Mortgage Corporation, which was sold to Michigan National
Bank in 1981. The President, Mark T. Hammond, has worked in various positions
at the Bank for the past 10 years, including Senior Vice President of the Bank
in charge of secondary marketing and loan production and Executive Vice
President responsible for mortgage operations. Joan H. Anderson, who is
Executive Vice President in charge of mortgage loan servicing, collections and
real estate holdings, has 27 years of banking and mortgage-related experience
and has managed numerous aspects of the Bank's mortgage banking operations
since joining the Bank in 1987. Michael W. Carrie, who is Chief Financial
Officer of the Bank, has 12 years of experience in banking and mortgage
lending, both with the Bank and previously with a major regional federal
savings bank.
THE OFFERING
Common Stock offered by the 2,200,000 shares of Common Stock(1)
Company....................
Common Stock offered by the 5,850,000 shares of Common Stock(1)
Selling Stockholders.......
Common Stock to be
outstanding immediately 13,450,000 shares of Common Stock(1)(2)
after the Offering.........
Use of Proceeds.............
Substantially all of the net proceeds received by
the Company from the shares it is selling in the
Offering will be contributed to the Bank to be
used for general corporate purposes and to pro-
vide additional capital to the Bank to retain
more servicing rights and to grow and expand its
banking operations through the acquisition or es-
tablishment of new bank branches. The Company
will receive none of the proceeds from the sale
of shares of Common Stock by the Selling Stock-
holders. See "Use of Proceeds."
Nasdaq National Market FLGS
Symbol.....................
- --------
(1) Excludes up to an aggregate of 330,000 shares and 877,500 shares of Common
Stock that the Underwriters have the option to purchase from the Company
and the Selling Stockholders, respectively, to cover over-allotments, if
any. See "Underwriting."
(2) Excludes shares issuable upon exercise of options to be issued to employees
of the Company. See "Management--Certain Benefit Plans and Agreements--
Stock Option Plan."
6
<PAGE>
DIVIDEND POLICY
The Company intends, subject to its capital needs, regulatory restrictions
and other factors that its Board of Directors may deem relevant, to declare and
pay a regular quarterly dividend beginning in 1997. It is currently anticipated
that the annual amount of such dividend will be equal to approximately 2% of
the initial public offering price of the Common Stock in the Offering (which is
equal to a quarterly dividend of $0.10 per share assuming an initial public
offering price at the mid-point of the range set forth on the cover page of
this Prospectus ($20 per share)). The declaration of dividends by the Company
and the amount thereof, however, will be at the discretion of the Company's
Board of Directors. See "Risk Factors--Company's Dependence on Bank for Funding
of Dividend Payments" and "Dividend Policy."
RISK FACTORS
See "Risk Factors" for a discussion of certain material factors that should
be considered in connection with an investment in the Common Stock offered
hereby.
7
<PAGE>
SUMMARY SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table presents summary selected consolidated financial and
other data as of and for each of the five years in the period ended December
31, 1996. The information set forth below should be read in conjunction with
the Consolidated Financial Statements and the Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Consolidated Statements of Financial Condition as of December 31, 1996 and
1995, and the Consolidated Statements of Earnings for the years ended December
31, 1996, 1995 and 1994 are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest income......... $ 76,179 $ 71,304 $ 35,112 $ 29,760 $ 18,735
Interest expense........ 45,967 41,443 14,486 12,052 9,227
---------- ---------- -------- -------- --------
Net interest income..... 30,212 29,861 20,626 17,708 9,508
Provision for losses.... 2,604 238 290 644 380
---------- ---------- -------- -------- --------
Net interest income
after provision for
losses................. 27,608 29,623 20,336 17,064 9,128
Non-interest income:
Loan administration
income................ 11,859 14,248 13,261 7,786 2,340
Net gain on loan sales
and sales of mortgage
servicing rights...... 39,640 16,228 27,357 20,400 9,921
Other income........... 7,035 6,512 2,114 5,468 6,162
---------- ---------- -------- -------- --------
Total.................. 58,534 36,988 42,732 33,654 18,423
---------- ---------- -------- -------- --------
Non-interest expense:
Compensation and
benefits.............. 25,553 19,665 18,609 7,984 5,184
Other expense.......... 33,267(1) 22,051 19,010 13,308 7,298
---------- ---------- -------- -------- --------
Total.................. 58,820 41,716 37,619 21,292 12,482
---------- ---------- -------- -------- --------
Earnings before federal
income taxes........... 27,322 24,895 25,449 29,426 15,069
Provision for federal
income taxes........... 10,299 9,419 9,318 10,405 5,275
---------- ---------- -------- -------- --------
Net earnings............ $ 17,023(1) $ 15,476 $ 16,131 $ 19,021 $ 9,794
---------- ---------- -------- -------- --------
PER SHARE DATA:
Earnings per share...... $ 1.51 $ 1.37 $ 1.42 $ 1. 65 $ 0.85
Book value per share.... $ 6.97 $ 5.55 $ 4.37 $ 3.05 $ 1.45
Weighted average number
of shares outstanding.. 11,250 11,274 11,389 11,527 11,527
SUMMARY OF FINANCIAL
CONDITION:
Total assets............ $1,297,226 $1,045,094 $723,150 $467,629 $304,758
Loans receivable:
Mortgage loans
available for sale.... 840,767 620,455 205,480 389,073 218,266
Loans held for
investment............ 273,569 305,580 429,800 26,906 21,637
Less: Allowance for
losses................ (3,500) (2,102) (1,871) (901) (550)
---------- ---------- -------- -------- --------
Total loans, net....... 1,110,836 923,933 633,409 415,078 239,353
Mortgage servicing
rights................. 30,064 27,957 18,179 17,563 11,108
Deposits................ 624,485 526,974 307,624 190,761 181,171
FHLB advances........... 389,801 191,156 200,750 55,000 --
Stockholders' equity.... 78,468 62,445 49,419 35,114 16,767
PERFORMANCE RATIOS:
Return on average
assets................. 1.53%(1) 1.63% 3.19% 4.39% 3.72%
Return on average
equity................. 24.68%(1) 29.42% 35.78% 69.56% 84.78%
Interest rate spread.... 2.13% 2.36% 3.37% 3.39% 2.04%
Net interest margin..... 3.07% 3.46% 4.63% 4.55% 3.92%
Ratio of average
interest-earning assets
to average interest-
bearing liabilities.... 120% 123% 139% 137% 158%
Ratio of non-interest
expense to average
assets................. 5.28%(2) 4.39% 7.44% 4.92% 4.71%
Efficiency ratio (3).... 64.8% 60.4% 58.3% 41.5% 44.7%
Dividend payout ratio... 5.87% 12.92% 2.48% 4.21% 7.66%
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
ASSET QUALITY DATA:
Net charge-offs to
average loans
outstanding............ 0.13% 0.00% 0.08% 0.08% 0.09%
Non-performing assets to
total assets........... 3.16% 1.25% 0.42% 0.60% 0.94%
Non-performing loans to
total loans............ 2.75% 1.15% 0.27% 0.37% 0.85%
Allowance for losses to
total loans............ 0.31% 0.23% 0.29% 0.22% 0.23%
Allowance for losses to
non-performing loans .. 11.43% 19.67% 107.59% 58.17% 26.84%
CAPITAL RATIOS:
Tangible capital........ 5.58% 5.19% 5.54% 7.41% 5.35%
Core capital............ 6.01% 5.84% 6.63% 7.41% 5.35%
Total risk-based
capital................ 10.91% 10.12% 12.08% 13.84% 13.40%
Average equity-to-
average assets......... 6.19% 5.54% 8.91% 6.32% 5.14%
MORTGAGE ORIGINATION AND
SERVICING DATA:
Mortgage loans
originated or
purchased.............. $6,791,665 $5,195,605 $3,720,173 $6,220,415 $2,984,076
Mortgage loans sold..... $6,581,897 $4,760,806 $3,551,319 $6,034,828 $2,888,564
Mortgage loans serviced
for others (4)......... $4,801,581 $6,788,530 $5,691,421 $6,198,311 $3,091,399
Capitalized value of
mortgage servicing
rights (5)............. 0.63% 0.41%(6) 0.32% 0.28% 0.36%
OTHER DATA:
Full time equivalent
employees.............. 1,310 1,142 869 971 584
Number of bank
branches............... 15 13 9 1 1
Number of regional
wholesale/correspondent
lending offices........ 10 9 6 5 4
</TABLE>
- --------
(1) Includes the special deposit insurance assessment imposed during 1996 by
the FDIC on all institutions whose deposits were insured by the SAIF on
March 31, 1995. See "Regulation and Supervision of the Bank--Federal
Deposit Insurance." The Bank's assessment was $2.2 million, net of taxes.
If such assessment had not been imposed, the Company's net earnings would
have been approximately $19.2 million for the year ended December 31, 1996
and its return on average assets and return on average equity for the
period would have been 1.73% and 27.87%, respectively.
(2) Excluding the special SAIF assessment of $3.4 million, before taxes,
incurred during 1996, mentioned in footnote 1 above, such ratio would have
been 4.98%.
(3) Computed as non-interest expense (excluding amortization of core deposit
premiums) divided by the sum of net interest income and non-interest
income. Excluding the special SAIF assessment of $3.4 million, before
taxes, incurred during 1996, mentioned in footnote 1 above, such ratio
would have been 61.0% for the year ended December 31, 1996.
(4) Amount excludes loans being subserviced for others, which is servicing of
loans subsequent to the sale of the related mortgage servicing rights but
prior to their delivery to the purchasers. Loans subserviced for others
totalled $3.6 billion and $0.5 billion at December 31, 1996 and 1995,
respectively. There was no subservicing in prior years.
(5) Reflects percentage of book value of mortgage servicing rights to loans
serviced for others (excluding subservicing).
(6) Increase from prior year arises in part from the Company's adoption in May
1995 of Statement of Financial Accounting Standards No. 122, "Accounting
for Mortgage Servicing Rights," which required the capitalization of
mortgage servicing rights arising from loans originated by the Bank as well
as the continued capitalization of mortgage servicing rights purchased from
third parties.
9
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be carefully considered before investing in the Common Stock
offered hereby.
The discussion in this Prospectus contains certain forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Prospectus, including the risk factors discussed
below, should be read as being applicable to all related forward-looking
statements wherever they appear in this Prospectus. The Company's actual
results could differ materially from those discussed here. Factors that could
cause or contribute to such differences include those discussed below, as well
as those discussed elsewhere herein or in the documents incorporated by
reference herein.
EARNINGS AND ASSET VALUE DECLINES FROM INTEREST RATE FLUCTUATIONS
Changes in interest rates can have a variety of effects on the Company's
business. In particular, changes in interest rates may impact the volume of
mortgage loan originations, the interest spread on mortgage loans held for
sale, the amount of gain or loss on the sale of mortgage loans and mortgage
servicing rights and the market value of the Company's mortgage servicing
portfolio.
During periods of declining interest rates, such as occurred during 1993,
the Company typically experiences an increase in mortgage loan originations,
particularly those due to the refinancing of existing mortgages. An increase
in, or stabilization of, interest rates for an extended period of time would
adversely affect refinancing demand which could have an adverse effect on the
Company's loan origination volume.
The Company's net interest income or loss is the difference between the
interest income it earns on the loans it originates or purchases as well as on
other interest-earning assets and the interest expense it pays on its
interest-bearing liabilities to fund such interest-earning assets. The Company
principally funds its interest-earning assets from deposits and borrowings
from the FHLB. The profitability of the Company's mortgage loan originations
is in part a function of the spread between long-term interest rates (the
rates on the loans the Company holds, whether for investment or for sale in
the secondary market) and short-term interest rates (the rates at which the
Company funds such mortgage loans). Since 1994, the Company's interest rate
spread has declined from 3.37% for the year ended December 31, 1994 to 2.13%
for the year ended December 31, 1996 in large part because of the decrease in
the prevailing spread between long-term and short-term interest rates. There
can be no assurance that future changes in interest rates will not further
decrease this spread, which may adversely affect the Company's level of net
interest income.
In its retail banking operations, the Company is subject to interest rate
risk on loans held in its portfolio arising from mismatches (i.e., the
interest sensitivity gap) between the dollar amount of repricing or maturing
assets and liabilities, which is measured in terms of the ratio of the
interest rate sensitivity gap to total assets. More assets repricing or
maturing than liabilities over a given time frame is considered asset-
sensitive and is reflected as a positive gap, and more liabilities repricing
or maturing than assets over a given time frame is considered liability-
sensitive and is reflected as a negative gap. An asset-sensitive position
(i.e., a positive gap) will generally enhance earnings in a rising interest
rate environment and will negatively impact earnings in a falling interest
rate environment. A liability-sensitive position (i.e., a negative gap) will
generally enhance earnings in a falling interest rate environment and
negatively impact earnings in a rising interest rate environment. Fluctuations
in interest rates are not predictable or controllable. Although the Company
has attempted to structure its asset and liability management strategies to
mitigate the impact on net interest income of changes in market interest
rates, there can be no assurance that a sudden or significant change in
prevailing interest rates will not have a material adverse effect on the
Company's operating results. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition--Asset/Liability Management--
Interest Rate Sensitivity Analysis."
10
<PAGE>
In its mortgage banking operations, the Company is exposed to 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
significant 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 strategy utilized by
the Company is not successful, the Company's profitability may be adversely
affected. See "Business--Secondary Marketing."
The market value of, and earnings from, the Company's mortgage loan
servicing portfolio may be adversely affected by declines in interest rates.
If mortgage interest rates decline and mortgage loan prepayments therefore
increase due to refinancing activity, the income stream from the Company's
current mortgage loan servicing portfolio may decline. In that case, the
Company may be required to amortize the portfolio more quickly or reduce the
carrying value of its mortgage loan servicing portfolio, which would adversely
affect the Company's operating results and financial condition. See
"Business--Loan Servicing."
POTENTIAL LOSS OF ACCESS TO AND INCREASED COST OF FUNDING SOURCES
The Company's principal sources of funding for its operations have been
deposits placed with the Company and, to a lesser extent, borrowings from the
Federal Home Loan Bank of Indianapolis (the "FHLB") and funds held in escrow
for mortgage loan servicing purposes. Historically, the Company's cost of
funds associated with deposits has generally been lower than its cost to
borrow from the FHLB. To the extent the Company is unable to fund its asset
growth through the maintenance and growth of its deposit base, it may have to
rely to a greater extent on borrowings from the FHLB or other sources. If the
cost of non-deposit funds is higher than the cost of deposits placed with the
Company, the Company's net interest income and profitability would be
adversely affected. At December 31, 1996, the Company had a $425.0 million
line of credit with the FHLB, of which $389.8 million had been drawn and was
outstanding.
There can be no assurance that the Company will be successful in retaining
access to funds at the level or cost necessary to continue originations of
single-family mortgage loans at their current volume and level of
profitability. To the extent that the Company is not successful in maintaining
the availability of its current funding sources, by retaining existing
deposits and attracting new deposits and by maintaining its line of credit
with the FHLB, it may have to curtail its origination of single-family
mortgage loans. A reduction in the Company's origination of single-family
mortgage loans could have a material effect on the Company's gain on mortgage
loan sales and sales of mortgage servicing rights. See "Management's
Discussion and Analysis of Changes in Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business--Funding Sources."
POSSIBLE LOSS OF ACCESS TO SECONDARY MORTGAGE MARKET
The ability of the Company to continue the mortgage banking segment of its
operations, which generated a significant portion of the Company's pre-tax
earnings for the year ended December 31, 1996, and has historically generated
substantially all of the Company's earnings, is dependent upon the Company's
continued access to an active secondary market in which to sell its single-
family mortgage loans.
11
<PAGE>
The Company currently sells substantially all of the mortgage loans that it
originates through its mortgage banking operations. The Company's ability to
readily sell mortgage loans is dependent upon the availability of an active
secondary market for single-family mortgage loans, which in turn depends in
part upon the continuation of programs currently offered by Fannie Mae,
Freddie Mac and other institutional and non-institutional investors. These
entities account for a substantial portion of the secondary market in
residential mortgage loans. Some of the largest participants in the secondary
market, including Freddie Mac and Fannie Mae, are government-sponsored
enterprises whose activities are governed by federal law. Any future changes
in those laws could limit the activity of such government sponsored
enterprises or change the terms on which they acquire loans, which in turn
could adversely affect the Company's operations. The Company expects that it
will continue to remain eligible to participate in such programs but any
significant impairment of such eligibility could materially and adversely
affect its operations. Further, the criteria for loans to be accepted under
such programs may be changed from time to time by the sponsoring entity. The
profitability of participating in specific programs may vary depending on a
number of factors, including the administrative costs to the Company of
originating and purchasing qualifying loans.
There can be no assurance that the Company will continue to have ready
access to an active secondary market for the sale of its single-family
mortgage loans or that it can continue to originate the types of loans for
which such a market exists. Any significant change in the secondary market
level of activity or underwriting criteria of Fannie Mae, Freddie Mac or other
institutional or non-institutional investors could have a material adverse
effect on the Company's results of operations.
POTENTIAL LOSS FROM LOAN DELINQUENCIES AND DEFAULTS ON LOANS
From the time that the Company funds the mortgage loans it originates to the
time it sells such loans, generally 10 to 40 days, the Company is at risk for
any loan defaults. Once the Company sells the mortgage loans it originates,
the risk of loss from loan defaults and foreclosure generally passes to the
purchaser or insurer of the loans. In connection with the sale, the Company
typically makes certain representations and warranties to the purchasers and
insurers of such loans. Such representations and warranties generally relate
to the origination and servicing of loans in substantial conformance with the
laws of the state of origination and applicable investor guidelines and
program eligibility standards. The Company relies upon its underwriting
department to ascertain compliance with individual investor standards prior to
sale of the loans in the secondary market, and it relies upon its quality
control department to test sold loans on a sample basis for compliance. See
"Business--Underwriting" and "--Quality Control." The purchasers of such loans
will typically conduct a more detailed review of such loans following
acquisition to determine whether such loans were originated in compliance with
the purchaser's underwriting guidelines and program eligibility standards.
If a loan defaults and there has been a breach of the Company's
representations and warranties, the Company becomes liable for the unpaid
principal and interest on the defaulted mortgage loan and may be required to
repurchase the loan. During 1996, the Company sold approximately $6.6 billion
in single family mortgage loans in the secondary market, of which
approximately $10.4 million (0.16% of loans sold) were repurchased during
1996. Total repurchases of single family mortgage loans by the Company during
1996 of $54.8 million also included $32.7 million related to loans sold in
1995 (0.69% of such loans) and $11.7 million related to loans sold prior to
1995. Of the $54.8 million of mortgage loans repurchased during 1996, $15.0
million were non-performing at the time of repurchase, $10.1 million were non-
performing at December 31, 1996 and $3.7 million had been foreclosed and were
held as other repossessed assets at such date. These amounts represented
significant increases over 1995, when the Company repurchased an aggregate of
$4.5 million of single family residential mortgage loans. Primarily as a
result of these increases in repurchases of non-performing loans from
secondary market investors, the Company's level of non-performing assets
increased from 1.25% of total assets at December 31, 1995 to 3.16% at December
31, 1996. Although the Company increased its provision for losses from
$238,000 in 1995 to $2.6 million in 1996, its ratio of allowance for losses to
non-performing loans declined from 107.6% at December 31, 1994 to 19.7% at
December 31, 1995 and to 11.4% at December 31, 1996.
12
<PAGE>
For the reasons discussed under "Management's Discussion and Analysis of
Changes in Financial Condition and Results of Operations," the Company expects
that the level of its loan repurchases may continue to be above historical
levels during 1997. The Company has historically incurred minimal losses from
charge-offs in connection with its residential mortgage loan production and
does not expect that these increases in loan repurchases and non-performing
assets will result in materially increased levels of losses in the future (see
"Management's Discussion and Analysis of Changes in Financial Condition and
Results of Operations--Financial Condition--Allowance for Losses"); however,
there can be no assurance that this will continue to be the case.
The Company is also affected by loan delinquencies and defaults on mortgage
loans that it services. At December 31, 1996, approximately 4.16% of the loans
being serviced by the Company were delinquent (including foreclosures). Under
certain types of servicing contracts, the servicer must advance all or part of
the scheduled payments to the owner of the loan, even when loan payments are
delinquent. Also, to protect their liens on mortgaged properties, owners of
loans usually require the servicer to advance mortgage and hazard insurance
and tax payments on schedule even if sufficient escrow funds are not
available. The servicer will be reimbursed by the mortgage owner or from
liquidation proceeds for payments advanced that the servicer is unable to
recover from the mortgagor, although the timing of such reimbursement is
typically uncertain. In the interim, the servicer must absorb the cost of
funds advanced. Further, the servicer must bear the costs of attempting to
collect on delinquent and defaulted loans. The Company also foregoes servicing
income from the time a loan becomes delinquent until foreclosure, at which
time such amounts, if any, may be recovered.
GEOGRAPHIC CONCENTRATIONS IN LOAN AND SERVICING PORTFOLIO
Historically, the Company's single-family mortgage loan portfolio has been
concentrated in certain geographic regions, particularly Michigan, based upon
the location of the property collateralizing the mortgage loan. Because
borrowers of single-family mortgage loans usually reside on the collateral
property, changes in economic and business conditions in the area in which the
property is located can affect the borrower and thus have an effect on the
performance of the loan. As of December 31, 1996, approximately 38% of the
Company's single-family mortgage loans held for investment and of the mortgage
loans serviced by the Company (as measured by unpaid principal balance) were
collateralized by property located in Michigan. As a result, unfavorable or
worsened economic conditions in Michigan could have a material adverse effect
on the Company's financial condition and results of operations. Although the
Company continues to diversify its loan portfolio geographically to minimize
this risk, there can be no assurance that the Company will be successful in
this effort. See "Business--Lending."
In addition to risks associated with a geographic concentration of its loan
portfolio, the Company's results of operations can be affected by the
Company's concentration of credit to particular borrowers. The Company
currently provides warehouse lines of credit ranging up to $8.0 million to
certain mortgage companies. At December 31, 1996, the Company had issued a
total of $97.1 million in such lines of credit, under which $42.9 million in
borrowings were outstanding. Repayment of such loans is primarily dependent
upon the successful operation of the business involved and therefore could be
subject to a greater extent to adverse conditions in the economy. The Company
seeks to minimize these risks by granting warehouse lines of credit generally
to borrowers with which the Company has had substantial favorable business
experience, by monitoring each credit drawdown for prompt repayment and by
requiring collateral with a value in excess of the amount of the outstanding
borrowings. At December 31, 1996, none of these loans were non-performing or
classified. See "Business--Mortgage Banking Operations--Commercial Lending."
SEASONAL NATURE OF MORTGAGE BANKING BUSINESS
The mortgage banking industry is generally subject to seasonal trends. These
trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during
the spring and summer seasons and decline to lower levels from mid-November
through February. In addition, delinquency rates typically rise in the winter
months, which results in higher servicing costs. See Note 18 of Notes to the
Consolidated Financial Statements.
13
<PAGE>
EXPANSION OF RETAIL BANKING BRANCHES
The Company intends to grow and expand its retail banking operations through
the acquisition or establishment of additional bank branches. This expansion
is expected to be in communities across lower Michigan. If the Company is
unable to generate a customer base within these communities because of
consumer loyalty to other financial institutions or for other reasons, the
Company will have incurred construction or building acquisition costs and
liabilities under lease agreements as well as related branch overhead expenses
without an appropriate return on its investment. See "Business--Properties"
regarding the Company's branch expansion plans.
DEPENDENCE ON KEY PERSONNEL
The growth and development of the Company to date have been largely
dependent on certain key employees, the loss of whom could have a material
adverse effect. The key employees of the Company are Thomas J. Hammond, Chief
Executive Officer; Mark T. Hammond, President; Michael W. Carrie, Executive
Vice President and Chief Financial Officer; and Joan H. Anderson, Executive
Vice President. In connection with the Offering, the Company will enter into
employment agreements with such employees. The Company does not carry "key
person" life insurance on the lives of its officers. See "Management."
HIGHLY COMPETITIVE NATURE OF RETAIL AND MORTGAGE BANKING BUSINESS
The Company competes in the retail banking business primarily with
commercial banks and thrift institutions, all of which have a substantial
presence in the same markets as the Company. Competitors for deposits include
thrift institutions, commercial banks, credit unions, full service and
discount broker dealers, and other investment alternatives, such as mutual
funds, money market funds, and savings bonds or other government securities.
The Company and its peers compete primarily on price at which products are
offered and on customer service, with the Company generally offering deposit
rates above prevailing market rates. See "Management's Discussion and Analysis
of Changes in Financial Condition and Results of Operations--Financial
Condition." In addition, the Company offers extended hours in its bank
branches to attract a retail base of deposits.
The Company competes in the mortgage banking business for mortgage
originations with thrift institutions, commercial banks, insurance companies,
and mortgage companies, many of which operate nationwide mortgage origination
networks similar to that of the Company. Primary competitive factors include
service quality, relationships with builders, mortgage brokers, real estate
brokers and investors, technology, product offerings and rates and fees. Many
of the Company's competitors are, or are affiliated with, organizations with
substantially larger asset and capital bases (including regional and multi-
national banks and bank holding companies). The Company has positioned itself
with a product mix that attracts business from mortgage companies, credit
unions and thrifts which may not have sufficient loan origination volume to
obtain preferential pricing directly in the secondary market.
COMPANY'S DEPENDENCE ON BANK FOR FUNDING OF DIVIDEND PAYMENTS
As a holding company without significant assets other than the capital stock
of the Bank, the Company's ability to pay dividends on the Common Stock and to
meet its other obligations is dependent upon the receipt of dividends from the
Bank on such capital stock. The declaration of dividends by the Bank on all
classes of its capital stock is subject to the discretion of the Board of
Directors of the Bank and to applicable regulatory limitations. At December
31, 1996, the Bank estimates that it would have at least $6.8 million
available for the payment of dividends to the Company under current OTS
regulations without prior OTS approval. See "Dividend Policy."
COMPANY'S EXPOSURE TO REGULATORY AND LEGISLATIVE CHANGES AND CIVIL LAWSUITS
The Bank, as a federally chartered savings bank, is subject to extensive
regulation, supervision and examination by the OTS and the FDIC. Such
regulation and supervision establishes a comprehensive framework
14
<PAGE>
of activities in which a savings institution may engage and is intended
primarily for the protection of depositors and the SAIF, which is administered
by the FDIC. In addition, the Company, as a registered savings and loan
holding company, is subject to the regulation and supervision of the OTS. The
regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities.
Any change in such regulation, whether by the OTS, the FDIC, the Board of
Governors of the Federal Reserve Board (the "Federal Reserve Board") or the
U.S. Congress, could have a significant impact on the Bank and its operations.
See "Regulation."
The Company's lending activities, including its mortgage banking operations,
are subject to the rules and regulations of the FHA, VA, Fannie Mae, Freddie
Mac, the Government National Mortgage Association ("GNMA") and other
regulatory agencies with respect to originating, processing, underwriting,
selling, and servicing mortgage loans. In addition, there are other federal
and state statutes and regulations affecting such activities. These rules and
regulations, among other things, impose licensing obligations on the Bank,
prohibit discrimination and establish underwriting guidelines which include
provisions for inspections and appraisals, require credit reports on
prospective borrowers and fix maximum loan amounts. Moreover, lenders such as
the Company are required annually to submit audited financial statements to
Fannie Mae, Freddie Mac, and GNMA and to comply with each regulatory entity's
own financial requirements. The Company's business is also subject to
examination by Fannie Mae, Freddie Mac and GNMA to assure compliance with
applicable regulations, policies and procedures.
Mortgage loan origination activities are subject to the provisions of
various federal and state statutes including, among others, the Equal Credit
Opportunity Act, the Federal Truth in Lending Act, the Real Estate Settlement
Procedures Act, the Fair Housing Act, and the regulations promulgated
thereunder, which, among other provisions, prohibit discrimination, prohibit
unfair and deceptive trade practices, and require the disclosure of certain
basic information to mortgagors concerning credit terms and settlement costs,
and otherwise regulate terms and conditions of credit and the procedures by
which credit is offered and administered. Many of the aforementioned
regulatory requirements are designed to protect the interests of consumers,
while others protect the owners or insurers of mortgage loans. Failure to
comply with these requirements can lead to loss of approved status,
termination of servicing contracts without compensation to the servicer,
demands for indemnification or loan repurchases, class action lawsuits and
administrative enforcement actions.
In addition, certain states require that interest be paid to mortgagors on
funds deposited by them in escrow to cover mortgage-related payments such as
property taxes and insurance premiums. Federal legislation has in the past
been introduced that would, if enacted, revise current escrow regulations and
establish a uniform escrow calculation methodology in all states. If such
federal legislation were enacted or if other states enact legislation relating
to payment of, or increases in the rate of, interest on escrow balances, or if
such legislation were retroactively applied to loans in the Company's
servicing portfolio, the Company's earnings would be adversely affected.
In recent years, mortgage originators have been subject to class action
lawsuits which allege violations of federal and state laws and regulations,
including the propriety of collecting and paying various fees and charges and
the calculation of escrow amounts. Class action lawsuits may continue to be
filed in the future against mortgage originators generally. There can be no
assurance that the Company or the Bank will not be the subject of such
lawsuits in the future. In the event of an unfavorable court judgment in such
lawsuits, if any, the Company's results of operations could be adversely
affected. See "Business--Legal Proceedings."
There are various other state and local laws and regulations affecting the
Company's operations. The Company is licensed in those states that require
licensing to originate, purchase and/or service mortgage loans.
REGULATORY LIMITATION ON STOCK OWNERSHIP
With certain limited exceptions, federal regulations prohibit a person or
company or a group of persons deemed to be "acting in concert" from, directly
or indirectly, acquiring more than 10% of any class of voting
15
<PAGE>
stock or obtaining the ability to control in any manner the election of a
majority of the directors or otherwise direct the management or policies of a
savings institution, such as the Bank, without prior notice or application to
and the approval of the OTS. See "Regulation--Regulation and Supervision of
the Company."
CONCENTRATION OF STOCK OWNERSHIP IN SELLING STOCKHOLDERS
Immediately following the Offering, the Selling Stockholders will own 40.15%
of the outstanding shares of Common Stock, or approximately 32.8% if the
Underwriters exercise the over-allotment options in full. Such ownership
percentage is based upon the anticipated sale of 5,850,000 shares of Common
Stock by the Selling Stockholders in the Offering (6,727,500 shares assuming
full exercise of the over-allotment options). The Selling Stockholders will
not purchase any shares in the Offering. Accordingly, following completion of
the Offering, the Selling Stockholders will continue to hold, in the
aggregate, a significant ownership interest in the Company and therefore will
be able to control or substantially influence the election of the Board of
Directors and thus be able to direct the Company's affairs, including
decisions regarding acquisitions and other business opportunities, the
declaration of dividends and the issuance of additional shares of Common Stock
and other securities, notwithstanding their ownership of less than a majority
of the outstanding shares of Common Stock.
DILUTION OF NEW STOCKHOLDERS THROUGH OFFERING
Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution, and present stockholders will receive a substantial
increase in the book value of their shares of Common Stock. See "Dilution."
NO PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY
Prior to the Offering, there has been no public market for the Common Stock.
There can be no assurance that an active trading market will develop or that
purchasers of the Common Stock will be able to resell their Common Stock at
prices equal to or greater than the initial public offering price, which was
determined through negotiations between the Company and the representatives of
the Underwriters and may not reflect the market price of the Common Stock
after the Offering. The development of a public market having the desirable
characteristics of depth, liquidity and orderliness depends upon the presence
in the marketplace of a sufficient number of willing buyers and sellers at any
given time, over which none of the Company, the Bank or any market maker has
any control. Accordingly, there can be no assurance that an established and
liquid market for the Common Stock will develop or be maintained. The market
price of the Common Stock could be subject to significant fluctuations in
response to the Company's operating results and other factors. In addition,
the stock market in recent years has experienced extreme price and volume
fluctuations that often have been unrelated or disproportionate to the
operating performance of individual companies. Such fluctuations, and general
economic and market conditions, may adversely affect the market price of the
Common Stock. See "Market for the Common Stock" and "Underwriting."
POTENTIAL ADVERSE EFFECT ON STOCK PRICE OF FUTURE SALES BY SELLING
STOCKHOLDERS
If the Underwriters do not exercise their over-allotment options, then the
Company will have 13,450,000 shares of Common Stock outstanding immediately
following consummation of the Offering, of which 5,400,000 shares,
representing approximately 40.15% of the outstanding shares of Common Stock,
will be owned by the Selling Stockholders, and will have reserved an
additional 1,345,000 shares of Common Stock for issuance pursuant to employee
stock option plans. Of the then-outstanding shares, the 8,050,000 shares of
Common Stock offered hereby will be freely tradable by non-affiliates of the
Company without restriction or registration under the Securities Act of 1933,
as amended (the "Securities Act"). All of the remaining 5,400,000 shares of
capital stock held by the Selling Stockholders are "restricted securities" as
that term is defined in Rule 144 promulgated under the Securities Act. None of
such securities will be eligible for sale under Rule 144 before April, 1998
and then will be available for sale subject to the volume and other
restrictions generally applicable to unregistered securities; in addition, the
holders thereof have registration rights which entitle them to require, under
certain
16
<PAGE>
circumstances, that the Company register their shares for sale to the public
at an earlier date. The Company and the Selling Stockholders have agreed not
to sell any shares of such stock or any rights to acquire such stock for a
period of at least 180 days following the date of this Prospectus without the
consent of Lehman Brothers Inc. on behalf of the Representatives and Lead
Managers. See "Selling Stockholders" and "Underwriting." Following this
Offering, sales of substantial amounts of the Common Stock in the public
market, whether under Rule 144 or otherwise, or the potential for such sales,
could adversely affect the prevailing market prices for the Company's Common
Stock and impair the Company's ability to raise capital through the sale of
additional equity securities.
RESTRICTIONS ON FUTURE ACQUISITION OF COMPANY
The Articles of Incorporation and Bylaws of the Company and applicable
provisions of the Michigan Business Corporation Act ("MBCA"), contain several
provisions that may make more difficult the acquisition of control of the
Company without the approval of the Board of Directors. Certain provisions of
the Articles of Incorporation, among other things, (i) authorize the issuance
of additional shares of Common Stock and serial preferred stock; (ii) classify
the Board of Directors into three classes, each of which will serve for
staggered three year periods; (iii) provide that a director of the Company may
be removed by the stockholders only for cause; (iv) provide that only the
Board of Directors or Chairman of the Board of the Company may call special
meetings of the stockholders; (v) provide that the stockholders may take
action only at a meeting of the stockholders; (vi) provide that the
stockholders must comply with certain advance notice procedures in order to
nominate candidates for director to the Board of Directors or to place
stockholders' proposals on the agenda for communication at stockholders
meetings; and (vii) provide that the stockholders may amend or repeal any of
the foregoing provisions of the Articles of Incorporation or Bylaws only by a
vote of 80% of the stock entitled to vote generally in the election of
directors. In addition, the Company is subject to various anti-takeover
provisions under the MBCA. See "Restrictions on Acquisition of the Company and
the Bank."
17
<PAGE>
THE COMPANY
Flagstar Bancorp, Inc., a Michigan-based thrift holding company, is one of
the largest originators of conforming single-family mortgage loans in the
United States. Formerly known as FSSB Holding Corporation, the Company is
engaged, through its principal subsidiary, the Bank, in the business of
providing a full range of retail banking services in southern Michigan and in
originating, purchasing and servicing residential mortgage loans on a
nationwide basis. For 1996, the Company ranked fourth in the United States
among thrifts in mortgage loan originations and sixteenth in total mortgage
loan production, according to SMR Research Corp., and was the second largest
privately-owned mortgage originator in the United States.
Prior to the Offering, all of the Common Stock of the Company has been owned
by the Hammond family, which includes Thomas J. Hammond, the Chairman, Chief
Executive Officer and founder of the Company, and Mark T. Hammond, the Vice
Chairman and President of the Company. At December 31, 1996, the Company had
consolidated total assets of $1.3 billion, net loans of $1.1 billion, total
deposits of $624.5 million and total stockholders' equity of $78.5 million.
The principal executive offices of the Company and the Bank are located at
2600 Telegraph Road, Bloomfield Hills, Michigan, 48302 and their telephone
number is (810) 338-7700.
USE OF PROCEEDS
The net proceeds to the Company from the Offering (after deduction of the
underwriting discounts and commissions and estimated offering expenses) are
estimated to be approximately $36.9 million, assuming an initial public
offering price at the mid-point of the range set forth on the cover of this
Prospectus ($20 per share) and assuming that the Underwriters' over-allotment
options are not exercised. The Company will not receive any of the proceeds
from the sale of Common Stock by the Selling Stockholders. Substantially all
of the net proceeds received by the Company from the shares of Common Stock it
is selling in the Offering will be contributed to the capital of the Bank to
be used for general corporate purposes and to provide additional capital to
the Bank to support growth in its businesses, including expansions in mortgage
originations and in its loan servicing portfolio and expansions in its banking
operations through the acquisition or establishment of new bank branches. See
"Business--Properties" regarding the Company's branch expansion plans and
"Business--General."
DIVIDEND POLICY
The Company intends to declare and pay dividends on its Common Stock
beginning in 1997. The declaration and payment of dividends by the Company are
subject to the discretion of the Board of Directors and will depend upon
levels of indebtedness, future earnings, capital requirements, the operating
and financial condition of the Company and its subsidiaries, and general
business conditions, as well as other factors that the Board of Directors
considers relevant. As a holding company, the Company's principal source of
funds for the payment of dividends will be dividends received from the Bank,
which are subject to certain regulatory restrictions. See "Regulation."
MARKET FOR THE COMMON STOCK
The Company's outstanding shares of Common Stock are currently held solely
by the Selling Stockholders and, prior to the Offering, there has been no
market for its capital stock. The Common Stock has been approved for quotation
on the Nasdaq National Market under the symbol "FLGS." The Company will seek
to encourage and will assist at least two market makers to establish and
maintain a market in the Common Stock in order to fulfill the requirements for
having the Common Stock quoted on the Nasdaq National Market. However, there
can be no assurance that an active and liquid trading market for the Common
Stock will develop or, if developed, will be sustained following the Offering.
18
<PAGE>
CAPITALIZATION
The following table sets forth (a) the historical capitalization of the
Company at December 31, 1996 and (b) the adjusted capitalization of the
Company at December 31, 1996 after giving effect to the Offering. The net
proceeds to the Company from the Offering (after deduction of the underwriting
discounts and commissions and estimated offering expenses) are estimated to be
approximately $36.9 million, assuming an initial public offering price at the
mid-point of the range set forth on the cover of this Prospectus ($20 per
share) and assuming that the Underwriters' over-allotment options are not
exercised. The Company will not receive any of the proceeds from the sale of
Common Stock by the Selling Stockholders. See "Selling Stockholders."
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
----------------------
HISTORICAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt (1).................................... $ 2,500 $ 2,500
------- --------
Stockholders' Equity:
Common Stock (40,000,000 shares authorized;
11,250,000 shares issued and outstanding;
13,450,000 shares issued and outstanding as
adjusted).......................................... 112 134(2)
Preferred Stock (10,000,000 shares authorized;
no shares issued or outstanding)................... -- --
Additional paid in capital.......................... 2,816 39,661(3)
Retained earnings................................... 75,540 75,540
------- --------
Total stockholders' equity........................ 78,468 115,335
------- --------
Total capitalization............................ $80,968 $117,835
======= ========
Ratio of equity to assets............................. 6.05% 8.65%
Regulatory capital ratios of the Bank:
Tangible Capital.................................... 5.58% 8.21%
Core Capital........................................ 6.01% 8.61%
Total Risk Based Capital............................ 10.91% 15.49%(4)
Book value per common share........................... $ 6.97 $ 8.58
</TABLE>
- --------
(1) Reflects FHLB advances maturing more than one year from December 31, 1996.
(2) The Company has reserved 1,345,000 shares of its Common Stock for issuance
and to be available for grants under certain compensation plans. See
"Management."
(3) Offering expenses to be paid by the Company are expected to be
approximately $7.1 million.
(4) Reflects a risk-weighting of 50% for net proceeds received by the Company
from the Offering because of an assumed investment in single-family
mortgage loans.
19
<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock as of December 31,
1996 was approximately $72.7 million or $6.46 per share. Net tangible book
value per share represents the amount of total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding.
Dilution per share to new investors purchasing Common Stock in the Offering
represents the difference between the amount per share paid and the net
tangible book value per share of Common Stock immediately after the Offering.
Shares used in the computation of per share amounts below include 11,250,000
shares outstanding immediately prior to the Offering and 2,200,000 shares to
be issued by the Company in the Offering. After giving effect to the sale of
2,200,000 shares of Common Stock offered by the Company hereby and assuming no
exercise of the over-allotment options by the Underwriters and an initial
public offering price at the mid-point of the range set forth on the cover of
this Prospectus ($20 per share) (after deducting the underwriting discount and
estimated Offering expenses), the pro forma net tangible book value of the
Company as of December 31, 1996 would have been $109.5 million or $8.14 per
share, representing an immediate increase in net tangible book value of $1.68
per share to existing stockholders and an immediate dilution of $11.86 per
share to new investors purchasing shares at the estimated public offering
price. The following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Estimated public offering price per share (1)................. $20.00
Net tangible book value per share before the Offering (2)... $6.46
Increase in net tangible book value per share attributable
to new investors........................................... 1.68
-----
Pro forma net tangible book value per share after the
Offering..................................................... 8.14
------
Dilution per share to new investors........................... $11.86
======
</TABLE>
- --------
(1) Before deducting estimated underwriting discounts and commissions and
estimated expenses of the Offering payable by the Company.
(2) Includes mortgage servicing rights and excludes core deposit intangibles.
See Notes 3 and 15 of Notes to Consolidated Financial Statements.
The following table sets forth on a pro forma basis at December 31, 1996 the
number of shares of Common Stock purchased from the Company (assuming no
exercise of the Underwriters' over-allotment options), the total consideration
paid to the Company and the average price per share paid by the existing
stockholders in 1987 and new investors purchasing shares of Common Stock in
the Offering, assuming a public offering price of $20 per share.
<TABLE>
<CAPTION>
SHARES OWNED AFTER
THE PUBLIC OFFERING TOTAL CONSIDERATION
------------------------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ---------------------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 5,400,000 40.15% $ 1,404,000 0.86% $ 0.26
New investors.......... 8,050,000 59.85% $161,000,000 99.14% $20.00
----------- ------- ------------ ------
Total................ 13,450,000 100.00% $162,404,000 100.00%
=========== ======= ============ ======
</TABLE>
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected consolidated financial and other data as of and for
each of the five years in the period ended December 31, 1996 are derived from
the Company's audited consolidated financial statements. The information set
forth below should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Consolidated Statements of
Financial Condition as of December 31, 1996 and 1995, and the Consolidated
Statements of Earnings for the years ended December 31, 1996, 1995 and 1994
are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest income............ $ 76,179 $ 71,304 $ 35,112 $ 29,760 $ 18,735
Interest expense........... 45,967 41,443 14,486 12,052 9,227
---------- ---------- -------- -------- --------
Net interest income........ 30,212 29,861 20,626 17,708 9,508
Provision for losses....... 2,604 238 290 644 380
---------- ---------- -------- -------- --------
Net interest income after
provision for losses...... 27,608 29,623 20,336 17,064 9,128
Non-interest income:
Loan administration
income................... 11,859 14,248 13,261 7,786 2,340
Net gain on loan sales and
sales of mortgage
servicing rights......... 39,640 16,228 27,357 20,400 9,921
Other income.............. 7,035 6,512 2,114 5,468 6,162
---------- ---------- -------- -------- --------
Total................... 58,534 36,988 42,732 33,654 18,423
---------- ---------- -------- -------- --------
Non-interest expense:
Compensation and
benefits................. 25,553 19,665 18,609 7,984 5,184
Other expense............. 33,267(1) 22,051 19,010 13,308 7,298
---------- ---------- -------- -------- --------
Total................... 58,820 41,716 37,619 21,292 12,482
---------- ---------- -------- -------- --------
Earnings before federal
income taxes.............. 27,322 24,895 25,449 29,426 15,069
Provision for federal
income taxes.............. 10,299 9,419 9,318 10,405 5,275
---------- ---------- -------- -------- --------
Net earnings............... $ 17,023(1) $ 15,476 $ 16,131 $ 19,021 $ 9,794
---------- ---------- -------- -------- --------
PER SHARE DATA:
Earnings per share......... $ 1.51 $ 1.37 $ 1.42 $ 1. 65 $ 0.85
Book value per share....... $ 6.97 $ 5.55 $ 4.37 $ 3.05 $ 1.45
Weighted average number of
shares outstanding........ 11,250 11,274 11,389 11,527 11,527
SUMMARY OF FINANCIAL
CONDITION:
Total assets............... $1,297,266 $1,045,094 $723,150 $467,629 $304,758
Loans receivable:
Mortgage loans available
for sale................. 840,767 620,455 205,480 389,073 218,266
Loans held for
investment............... 273,569 305,580 429,800 26,906 21,637
Less: Allowance for losses (3,500) (2,102) (1,871) (901) (550)
---------- ---------- -------- -------- --------
Total loans, net........ 1,110,836 923,933 633,409 415,078 239,353
Mortgage servicing rights.. 30,064 27,957 18,179 17,563 11,108
Deposits................... 624,485 526,974 307,624 190,761 181,171
FHLB advances.............. 389,801 191,156 200,750 55,000 --
Stockholders' equity....... 78,468 62,445 49,419 35,114 16,767
PERFORMANCE RATIOS:
Return on average assets... 1.53%(1) 1.63% 3.19% 4.39% 3.72%
Return on average equity... 24.68%(1) 29.42% 35.78% 69.56% 84.78%
Interest rate spread....... 2.13% 2.36% 3.37% 3.39% 2.04%
Net interest margin........ 3.07% 3.46% 4.63% 4.55% 3.92%
Ratio of average interest-
earning assets to average
interest-bearing liabili-
ties...................... 120% 123% 139% 137% 158%
Ratio of non-interest ex-
pense to average assets... 5.28%(2) 4.39% 7.44% 4.92% 4.71%
Efficiency ratio (3)....... 64.8% 60.4% 58.3% 41.5% 44.7%
Dividend payout ratio...... 5.87% 12.92% 2.48% 4.21% 7.66%
</TABLE>
(continued)
21
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
ASSET QUALITY DATA:
Net charge-offs to aver-
age loans outstanding.. 0.13% 0.00% 0.08% 0.08% 0.09%
Non-performing assets to
total assets........... 3.16% 1.25% 0.42% 0.60% 0.94%
Non-performing loans to
total loans............ 2.75% 1.15% 0.27% 0.37% 0.85%
Allowance for losses to
total loans............ 0.31% 0.23% 0.29% 0.22% 0.23%
Allowance for losses to
non-performing loans... 11.43% 19.67% 107.59% 58.17% 26.84%
CAPITAL RATIOS:
Tangible capital........ 5.58% 5.19% 5.54% 7.41% 5.35%
Core capital............ 6.01% 5.84% 6.63% 7.41% 5.35%
Total risk-based capi-
tal.................... 10.91% 10.12% 12.08% 13.84% 13.40%
Average equity-to-aver-
age assets............. 6.19% 5.54% 8.91% 6.32% 5.14%
MORTGAGE ORIGINATION AND
SERVICING DATA:
Mortgage loans origi-
nated or purchased..... $6,791,665 $5,195,605 $3,720,173 $6,220,415 $2,984,076
Mortgage loans sold..... $6,581,897 $4,760,806 $3,551,319 $6,034,828 $2,888,564
Mortgage loans serviced
for others (4)......... $4,801,581 $6,788,530 $5,691,421 $6,198,311 $3,091,399
Capitalized value of
mortgage servicing
rights (5)............. 0.63% 0.41%(6) 0.32% 0.28% 0.36%
OTHER DATA:
Full time equivalent em-
ployees................ 1,310 1,142 869 971 584
Number of bank branch-
es..................... 15 13 9 1 1
Number of regional
wholesale/correspondent
lending offices........ 10 9 6 5 4
</TABLE>
- --------
(1) Includes the special deposit insurance assessment imposed during 1996 by
the FDIC on all institutions whose deposits were insured by the SAIF on
March 31, 1995. See "Regulation and Supervision of the Bank--Federal
Deposit Insurance." The Bank's assessment was $2.2 million, net of taxes.
If such assessment had not been imposed, the Company's net earnings would
have been approximately $19.2 million for the year ended December 31, 1996
and its return on average assets and return on average equity for the
period would have been 1.73% and 27.87%, respectively.
(2) Excluding the special SAIF assessment of $3.4 million, before taxes,
incurred during 1996, mentioned in footnote 1 above, such ratio would have
been 4.98%.
(3) Computed as non-interest expense (excluding amortization of core deposit
premiums) divided by the sum of net interest income and non-interest
income. Excluding the special SAIF assessment of $3.4 million, before
taxes, incurred during 1996, mentioned in footnote 1 above, such ratio
would have been 61.0% for the year ended December 31, 1996.
(4) Amount excludes loans being subserviced for others, which is servicing of
loans subsequent to the sale of the related mortgage servicing rights but
prior to their delivery to the purchaser. Loans subserviced for others
totalled $3.6 billion and $0.5 billion at December 31, 1996 and 1995,
respectively. There was no subservicing in prior years.
(5) Reflects percentage of book value of mortgage servicing rights to loans
serviced for others (excluding subservicing).
(6) Increase from prior year arises in part from the Company's adoption in May
1995 of Statement of Financial Accounting Standards No. 122, "Accounting
for Mortgage Servicing Rights," which required the capitalization of
mortgage servicing rights arising from loans originated by the Bank as
well as the continued capitalization of mortgage servicing rights
purchased from third parties.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CHANGES
IN FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company serves as the holding company of the Bank and its other
subsidiaries. The Company's operations involve both mortgage banking and
retail banking. The mortgage banking segment involves the origination and
purchase of single-family residential mortgage loans on a nationwide basis,
the sale of such loans, usually on a pooled and securitized basis, in the
secondary market, and the servicing of mortgage loans for investors as well as
the Company's own loan portfolio. The retail banking segment involves
attracting deposits from the general public and originating single-family
residential mortgage loans and consumer, commercial, commercial real estate
and residential construction loans, primarily through the Company's branch
network. A significant portion of the deposits attracted by the Company
through its branch network and from wholesale sources are used to support the
mortgage banking operations.
The tables below set forth certain information for the Company's business
segments for the periods shown. Prior to June 30, 1994, the Company did not
have significant retail banking operations.
REVENUES
<TABLE>
<CAPTION>
RETAIL MORTGAGE
BANKING SEGMENT BANKING SEGMENT COMBINED
--------------- --------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Year ended:
December 31, 1996.................... $13,791 $74,955 $88,746
December 31, 1995.................... 12,390 54,459 66,849
December 31, 1994.................... 1,432 61,926 63,358
EARNINGS (LOSS) BEFORE INCOME TAXES
<CAPTION>
RETAIL MORTGAGE
BANKING SEGMENT BANKING SEGMENT COMBINED
--------------- --------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Year ended:
December 31, 1996.................... $ 3,305 (1) $24,017 $27,322
December 31, 1995.................... 3,549 21,346 24,895
December 31, 1994.................... (2,127)(2) 27,576 25,449
</TABLE>
- --------
(1) The earnings before income taxes of the retail banking segment for the
year ended December 31, 1996 were adversely affected by the one-time SAIF
assessment of $3.4 million before taxes.
(2) The retail banking segment began with the acquisition of Security Savings
on July 1, 1994. See "Business--Lending--Retail Banking Operations."
The Company's earnings are primarily dependent upon three revenue sources:
its net interest income, which is the difference between interest earned on
interest-earning assets (including loans held for sale in the Company's
mortgage banking operations as well as loans held for investment) and interest
paid on interest-bearing liabilities; fee income from servicing mortgages held
by investors; and gains realized on sales of mortgage loans and mortgage
servicing rights. These revenues are in turn significantly affected by factors
such as changes in prevailing interest rates and in the yield curve (that is,
the difference between prevailing short-term and long-term interest rates), as
well as changes in the volume of mortgage originations nationwide and
prepayments of outstanding mortgages.
Since 1993, there has been a gradual flattening of the yield curve which has
had the effect of reducing the Company's net interest spread. In order to
offset this change, the Company has pursued a strategy of expanding its retail
banking branch network in order to gain greater access to lower-cost retail
deposits and reduce its
23
<PAGE>
reliance on wholesale funding sources and other borrowings. The Company does
not use warehouse loans from commercial lending sources.
In addition, changes in prevailing interest rates have had a significant
effect on the Company's loan production volume. The Company's mortgage loan
production volume more than doubled between 1992 and 1993 (from $3.0 billion
to $6.2 billion) principally as a result of the record level of refinancing
activity that occurred in 1993 following the sudden decline in interest rates.
Excluding 1993 due to the surge in refinancing activity which occurred in that
year, the Company's mortgage loan origination volume has grown steadily and
significantly each year, from $3.0 billion in 1992 to $6.8 billion in 1996.
This in turn has contributed to the yearly growth in net interest income and
(except for 1996, when the Company sold a significant volume of mortgage
servicing rights) loan administration income, as well as the substantial gains
on loan sales and sales of mortgage servicing rights, that the Company has
been able to recognize during this period.
RESULTS OF OPERATIONS
OVERVIEW OF OPERATING RESULTS. 1996 COMPARED TO 1995. Net earnings for 1996
were $17.0 million ($1.51 per share), a 9.7% increase from the $15.5 million
($1.37 per share) reported in 1995. Excluding the effect of the one-time SAIF
assessment of $2.2 million (after-tax) in 1996, net earnings would have been
$19.2 million ($1.71 per share), a 23.9% increase over 1995. The increase
resulted from increases in net gains on loan sales and sales of mortgage
servicing rights (up $23.4 million, or 144.4%), and a $0.3 million, or 1.0%,
increase in net interest income. The increase in net interest income resulted
primarily from a 14.0% increase in average interest-earning assets reflecting
continued strong growth in the Company's loan production volume, offset in
part by a decrease in the net interest spread caused by a continued flattening
of the yield curve. These increases in net interest income and non-interest
income were offset by increases in the provision for losses, higher
compensation and benefits expenses, reflecting staff increases and merit
raises, and an increase in general and administrative expenses resulting from
increased loan production levels and expansion of the Company's branch
network.
1995 COMPARED TO 1994. Net earnings decreased by 3.7% to $15.5 million
($1.37 per share) in 1995 from $16.1 million ($1.42 per share) in 1994 as a
result of an $11.2 million reduction in the level of gains on loan sales and
sales of mortgage servicing rights ($16.2 million in 1995 compared to $27.4
million in 1994) and an increase in other non-interest expenses of $3.1
million (from $19.0 million in 1994 to $22.1 million in 1995), which more than
offset a substantial increase in net interest income (from $20.6 million to
$29.9 million) and a significant increase in loan administration income. The
reduction in part resulted from a $300.0 million decrease in the unpaid
principal balance of the mortgage loans underlying the mortgage servicing
rights sold as well as the sale of currently originated higher coupon mortgage
servicing rights sold during 1995. Mortgage loans serviced increased
significantly from $5.7 billion at December 31, 1994 to $6.8 billion at
December 31, 1995, reflecting a net retention of $1.1 billion, or 19.3%, as
compared to a net reduction of $500 million, or 8.1%, for 1994.
NET INTEREST INCOME. 1996 COMPARED TO 1995. Net interest income increased
$0.3 million, or 1.0%, to $30.2 million for the year ended December 31, 1996,
from $29.9 million for the year ended December 31, 1995. This increase was due
primarily to a $121.3 million increase in average interest-earning assets
between the comparable periods, offset in part by the related increase in
interest-bearing liabilities necessary to fund such growth. At the same time,
the Company's interest rate spread declined from 2.36% for the year ended
December 31, 1995 to 2.13% for 1996, which resulted in a decrease in the
Company's net yield on interest-earning assets to 3.07% for the year ended
December 31, 1996 from 3.46% for 1995. This decrease was caused by a slight
compression in the yield curve for interest-earning assets priced off of 10-
year and 15-year U. S. Treasury securities as compared to funding sources
priced off of the one-year U.S. Treasury security.
1995 COMPARED TO 1994. Net interest income for the year ended December 31,
1995 increased $9.3 million, or 45.1%, to $29.9 million as compared to $20.6
million for the year ended December 31, 1994. This increase was caused
primarily by substantial increases in interest-earning assets. Average
interest-earning assets were $864.0 million and $445.6 million for the years
ended December 31, 1995 and 1994, respectively. At the same time, the
Company's interest rate spread declined from 3.37% for the year ended December
31, 1994 to
24
<PAGE>
2.36% for 1995 and the net interest margin declined from 4.63% to 3.46% during
such periods. These decreases resulted primarily from the substantial growth
in the Company's average assets between 1994 and 1995. In order to fund such
growth, the Company significantly increased its use of brokered deposits,
which typically have a higher interest rate than retail deposits, and FHLB
advances, which are subject to daily repricing. The average cost of such
funding sources increased from 4.79% and 4.44%, respectively, in 1994 to 6.21%
and 6.35%, respectively, in 1995. During the same periods, the average yield
on the Company's loans increased by only 32 basis points, from 8.00% in 1994
to 8.32% in 1995. In addition, as a result of this asset growth, the ratio of
average interest-earning assets to average interest-bearing liabilities
decreased to 123% for the year ended December 31, 1995, as compared to 139%
for the year ended December 31, 1994, and the ratio of non-interest bearing
funding sources to interest-earning assets declined. The Company's interest
rate spread and net interest margin were also adversely affected by a
significant compression in the yield curve between short-term funding
liabilities and longer-term assets.
AVERAGE BALANCES, INTEREST RATES AND YIELDS. Net interest income is affected
by (i) the difference ("interest rate spread") between rates of interest
earned on interest-earning assets and rates of interest paid on interest-
bearing liabilities and (ii) the relative amounts of interest-bearing
liabilities and interest-earning assets. When the total of interest-earning
assets approximate or exceed interest-bearing liabilities, any positive
interest rate spread will generate net interest income. Financial institutions
have traditionally used interest rate spreads as a measure of net interest
income. Another indication of an institution's net interest income is its "net
yield on interest-earning assets" which is net interest income divided by
average interest-earning assets.
The following table sets forth certain information relating to the Company's
consolidated average interest-earning assets and interest-bearing liabilities
and reflects the average yield on assets and average cost of liabilities for
the periods indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of assets or liabilities, respectively,
for the periods presented. During the periods indicated, non-accruing loans,
if any, are included in the net loan category. Average balances are derived
from month-end average balances. Management does not believe that the use of
month-end average balances instead of average daily balances has caused any
material difference in the information presented.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
---------- -------- ---------- -------- -------- ---------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net.. $ 964,257 $74,588 7.74% $835,600 $69,543 8.32% $419,147 $33,533 8.00%
FHLB stock............. 18,776 1,471 7.83% 16,304 1,285 7.88% 9,534 553 5.80%
Other.................. 2,230 120 5.38% 12,098 476 3.93% 16,871 1,026 6.08%
---------- ------- -------- ------- -------- -------
Total.................. 985,263 76,179 7.73% 864,002 71,304 8.25% 445,552 35,112 7.88%
-------
Non-interest-earning
assets................ 129,005 85,686 60,254
---------- -------- --------
Total assets......... $1,114,268 $949,688 $505,806
========== ======== ========
Interest-bearing
liabilities:
Demand deposits........ $ 86,650 2,499 2.88% $ 63,844 1,824 2.86% $ 27,892 773 2.77%
Savings deposits....... 18,933 428 2.26% 10,119 228 2.25% 5,385 127 2.36%
Certificates of
deposit............... 446,808 27,504 6.16% 371,756 23,071 6.21% 169,986 8,137 4.79%
FHLB advances.......... 247,204 14,291 5.78% 237,535 15,072 6.35% 83,912 3,726 4.44%
Other.................. 21,227 1,245 5.87% 19,703 1,248 6.33% 34,267 1,723 5.03%
---------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities............ 820,822 45,967 5.60% 702,957 41,443 5.89% 321,442 14,486 4.51%
Non-interest-bearing
liabilities............ 224,484 194,128 139,278
---------- -------- --------
Total liabilities.... 1,045,306 897,085 460,720
Equity................. 68,962 52,603 45,086
---------- -------- --------
Total Liabilities and
Equity................ $1,114,268 $949,688 $505,806
========== ======== ========
Net interest-earning
assets................. $ 164,441 $161,045 $124,110
========== ======= ======== ======= ======== =======
Net interest income..... $30,212 $29,861 $20,626
======= ======= =======
Interest rate spread.... 2.13% 2.36% 3.37%
Net interest margin..... 3.07% 3.46% 4.63%
Ratio of average
interest-earning assets
to interest-bearing
liabilities............ 120% 123% 139%
</TABLE>
25
<PAGE>
RATE/VOLUME ANALYSIS. The following table analyzes net interest income in
terms of changes in the volume of interest-earning assets and interest-bearing
liabilities and changes in yields and rates. The table reflects the extent to
which changes in the interest income and interest expense are attributable to
changes in volume (changes in volume multiplied by prior year rate) and
changes in rate (changes in rate multiplied by prior year volume). Changes
attributable to the combined impact of volume and rate have been allocated
proportionately to changes due to volume and changes due to rate.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 VS. 1995 1995 VS. 1994
----------------------- -------------------------
RATE VOLUME NET RATE VOLUME NET
------- ------ ------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable, net.... $(4,907) $9,952 $5,045 $ 1,351 $34,659 $36,010
FHLB stock............... (8) 194 186 136 437 573
Other.................... 175 (531) (356) (362) (29) (391)
------- ------ ------ ------- ------- -------
Total.................. (4,740) 9,615 4,875 1,125 35,067 36,192
------- ------ ------ ------- ------- -------
INTEREST EXPENSE:
Demand deposits.......... 17 658 675 24 1,027 1,051
Savings deposits......... 1 199 200 (6) 107 101
Certificates of deposit.. (187) 4,620 4,433 2,412 12,522 14,934
FHLB advances............ (1,654) 873 (781) 1,636 9,710 11,346
Other.................... (92) 89 (3) 277 (752) (475)
------- ------ ------ ------- ------- -------
Total.................. (1,915) 6,439 4,524 4,343 22,614 26,957
------- ------ ------ ------- ------- -------
Net change in net
interest income......... $(2,825) $3,176 $ 351 $(3,218) $12,453 $ 9,235
======= ====== ====== ======= ======= =======
</TABLE>
PROVISION FOR LOSSES. 1996 COMPARED TO 1995. The provision for losses
increased to $2.6 million for 1996 from $238,000 for 1995. The Company's
determination of its provision for losses reflects its consideration of the
potential loss that may arise from loans in its portfolio or which it services
for others. See "Business--Asset Quality." The increase in the provision
reflected the increase in the level of non-performing loans to $30.6 million
at December 31, 1996, from $10.7 million at December 31, 1995, an increase of
approximately $19.9 million, or 186%, and the increase in the level of net
charge-offs to 0.13% of average loans in 1996 from 0.00% in 1995. Single
family residential mortgage loans comprised approximately $27.0 million, or
88%, of non-performing loans at December 31, 1996 compared to 94% at December
31, 1995. See "--Financial Condition--Allowance for Losses" and "Business--
Asset Quality".
26
<PAGE>
1995 COMPARED TO 1994. The provision for losses decreased to $238,000 in
1995 from $290,000 in 1994. This decrease was not significant based on the
minimal amount of net charge-offs during 1995.
NON-INTEREST INCOME. 1996 COMPARED TO 1995. Non-interest income increased
$21.5 million, or 58.1%, to $58.5 million for 1996, from $37.0 million for
1995. The majority of this increase resulted from increased net gains on loan
sales and sales of mortgage servicing rights.
Decisions to sell mortgage servicing rights are influenced in part by
federal regulations and OTS supervision of the Bank. Such regulations, in
part, limit the amount of mortgage servicing rights that the Bank may consider
for purposes of satisfying its minimum regulatory capital requirements. See
"Regulation--Regulation and Supervision of the Bank." Thus, sales of mortgage
servicing rights may be undertaken for regulatory purposes. In addition, sales
may also be undertaken to take advantage of market prices that exceed the
Bank's internal valuation of such rights.
1995 COMPARED TO 1994. For the year ended December 31, 1995, non-interest
income decreased $5.7 million, or 13.4%, to $37.0 million from $42.7 million
for the year ended December 31, 1994. The majority of the decrease was
attributable to a decrease in the net gains on mortgage loan sales and sales
of mortgage servicing rights, together with a slight decrease in the volume of
mortgage servicing rights sold.
LOAN ADMINISTRATION. 1996 COMPARED TO 1995. Loan administration income
decreased $2.4 million or 16.8%, to $11.9 million for 1996, from $14.3 million
for 1995. This decrease resulted primarily from a decrease in mortgage loans
serviced. At December 31, 1996, the unpaid principal balance of loans serviced
for others decreased $2.0 billion, or 29.4%, to $4.8 billion, from $6.8
billion at December 31, 1995. At December 31, 1996 and 1995, the weighted
average servicing fee on loans serviced for others was 0.289% (i.e., 28.9
basis points) and 0.287%, respectively.
1995 COMPARED TO 1994. For the year ended December 31, 1995, loan
administration income increased $1.0 million, or 7.5%, to $14.3 million from
$13.3 million for the year ended December 31, 1994. This increase was
attributable to an increase in loans being serviced at December 31, 1995, of
$1.1 billion, or 19.3%, from $5.7 billion at December 31, 1994. The weighted
average servicing fee on loans serviced for others (excluding subserviced
loans) was 0.287% at December 31, 1995 and 1994.
Loans serviced for others excludes short-term subservicing, which is the
servicing of loans subsequent to the sale of the related mortgage servicing
rights but prior to their delivery to the purchaser. At December 31, 1996 and
1995, the amount of servicing for others excluded subservicing of $3.6 billion
and $536.3 million, respectively.
NET GAIN ON LOAN SALES AND SALES OF MORTGAGE SERVICING RIGHTS. 1996 COMPARED
TO 1995. For 1996, net gain on loan sales and sales of mortgage servicing
rights increased $23.4 million, or 144.4%, to $39.6 million, from $16.2
million for 1995. This increase primarily resulted from the increased amount
of mortgage servicing rights sold. Specifically, this change resulted from a
$21.7 million increase in the gain on sale of mortgage servicing rights and a
$1.7 million increase on the gain on sale of loans. These higher levels of
gains are attributable to increases in the amount of mortgage servicing rights
and loans sold. For 1995 versus 1996, the principal balance of the loans
underlying the mortgage servicing rights sold increased from $2.3 billion to
$6.5 billion. Over the same time period, the amount of loans sold grew from
$4.8 billion to $6.6 billion.
1995 COMPARED TO 1994. For the year ended December 31, 1995, net gain on
loan sales and sales of mortgage servicing rights decreased $11.2 million, or
40.9%, to $16.2 million, from $27.4 million for 1994. This decrease was a
function of a $15.1 million decrease in the gain on sale of mortgage servicing
rights and a $3.9 million increase in the gain on sale of mortgage loans. The
decrease in the gain on sale of mortgage servicing rights was attributable to
both a $300 million decrease in the principal balance of the loans underlying
the mortgage servicing rights sold from $2.6 billion to $2.3 billion as well
as the sale of currently originated lower coupon mortgage servicing rights
during 1995. The increase in the gain on the mortgage loans sold was
27
<PAGE>
principally the result of the increase in the volume of loans sold for the
year ended 1995 of $1.2 billion, from $3.6 billion in 1994 to $4.8 billion in
1995.
Mortgage servicing rights originated or acquired by the Company are
capitalized pursuant to Statement of Financial Accounting Standards ("SFAS")
No. 122, "Accounting for Mortgage Servicing Rights," which the Company adopted
in May 1995. The value of mortgage servicing rights capitalized are
periodically evaluated in relation to the estimated discounted net future
servicing revenues. See Note 3 of Notes to Consolidated Financial Statements.
At December 31, 1996 and 1995, the estimated fair value of the mortgage
servicing rights in excess of their stated book value was approximately $23.9
million and $42.4 million, respectively. See Note 7 of Notes to Consolidated
Financial Statements.
OTHER FEES AND CHARGES. 1996 COMPARED TO 1995. For 1996, other fees and
charges, which includes certain loan fees and charges, deposit-related fees
and escrow waiver fees, increased $0.5 million, or 7.7%, to $7.0 million from
$6.5 million for 1995. This increase was a result of an overall increase in
mortgage loan originations in 1996 as compared to 1995.
1995 COMPARED TO 1994. Other fees and charges increased $4.4 million, or
209.5%, to $6.5 million for 1995 from $2.1 million for 1994. This increase was
attributable to an increase in underwriting fees in 1995 as compared to 1994
and an overall increase in mortgage loan originations in 1995.
NON-INTEREST EXPENSE. The following table sets forth components of the
Company's non-interest expense, prior to allocation of expenses related to
loan originations that are deferred pursuant to SFAS No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases." As required by SFAS No. 91, mortgage loan
fees and certain direct origination costs (principally compensation and
benefits) are capitalized and amortized rather than immediately expensed.
Certain other expenses associated with loan production, however, are not
required to be capitalized. These expense amounts are reflected on the
Company's statement of earnings net of the portion that must be capitalized
under SFAS No. 91. However, management believes that the analysis of non-
interest expense on a "gross" basis (i.e., prior to the deferral of
capitalized loan origination costs) more clearly reflects the changes in total
overhead costs associated with increased loan production. See Note 3 of Notes
to Consolidated Financial Statements for further information.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Compensation and benefits................. $ 40,524 $ 30,809 $ 25,424
Commissions............................... 12,367 11,102 9,340
Occupancy and equipment................... 12,125 8,873 7,339
Advertising............................... 943 597 1,110
Core deposit premium amortization......... 1,290 1,330 651
Federal deposit insurance premiums........ 4,435 1,122 803
Other..................................... 20,474 15,536 11,978
---------- ---------- ----------
Subtotal.............................. 92,158 69,369 56,645
Less: deferral of capitalized loan
origination costs........................ (33,338) (27,653) (19,026)
---------- ---------- ----------
Total................................. $ 58,820 $ 41,716 $ 37,619
========== ========== ==========
</TABLE>
1996 COMPARED TO 1995. Non-interest expense for 1996 increased $17.1
million, or 41.0%, to $58.8 million, from $41.7 million for 1995. The largest
contributing factors to this increase were higher compensation and benefits
and general and administrative expenses.
Compensation and benefits, excluding the capitalization of direct loan
origination costs, increased by $9.7 million, or 31.5%, to $40.5 million for
1996 from $30.8 million for 1995. The increase in compensation and
28
<PAGE>
benefits was attributable to an increase in the number of full-time equivalent
employees and increased salaries of senior management and staff . The number
of full-time equivalent employees of the Company increased to 1,310 persons at
December 31, 1996 from 1,142 persons at December 31, 1995.
Higher general and administrative expenses also contributed to the increased
non-interest expense for 1996 as compared to 1995. The increase in general and
administrative expenses reflected an increase in overall activity because of
increased mortgage loan production recorded during 1996 of $6.8 billion
compared to $5.2 billion for 1995. This increase in general and administrative
expenses was also a result of an increase in the number of the Company's bank
branches from 13 at December 31, 1995 to 15 at December 31, 1996.
In addition, general and administrative expense for 1996 reflects the one-
time special assessment imposed by the FDIC pursuant to federal legislation
adopted on such date. See "Regulation--Regulation and Supervision of the
Bank--Federal Deposit Insurance." Such assessment affected all thrifts,
including the Bank, whose deposits were insured by the SAIF administered by
the FDIC and was imposed to capitalize the SAIF to the same extent as the Bank
Insurance Fund and thereby eliminate the disparity in related premiums charged
by the two funds. Based upon notice received from the FDIC, the Bank's special
assessment totaled $3.4 million, or $2.2 million, net of tax. In 1997,
subsequent to such assessment, the Bank's annual premium expense for FDIC
deposit insurance is expected to be approximately 6.5 basis points (charged
against the Bank's insurable deposit base) as compared to 23 basis points
prior to the assessment.
1995 COMPARED TO 1994. Non-interest expense for the year ended December 31,
1995 increased $4.1 million, or 10.9%, to $41.7 million from $37.6 million for
the year ended 1994. This increase was primarily a result of increased
compensation and benefits and increased general and administrative expenses.
Compensation and benefits totaled $30.8 million, and $25.4 million for the
years ended December 31, 1995 and 1994, respectively. This increase was
primarily a result of an increase in the number of full-time equivalent
employees from 869 persons to 1,142 persons at December 31, 1994 and 1995,
respectively. Increased general and administrative expenses for 1995 were
attributable to an increase in the number of bank branches from 9 at
December 31, 1994 to 13 at December 31, 1995. The increase in general and
administrative expenses corresponded to an increase in mortgage loan
originations of $1.5 billion, or 40.5%, from $3.7 billion for 1994 to $5.2
billion for 1995.
FEDERAL INCOME TAXES. 1996 COMPARED TO 1995. Federal income tax expense for
1996 increased to $10.3 million from $9.4 million for 1995. The Company's
effective rate for 1996 was 37.7% versus 37.8% for 1995. See Note 10 of Notes
of Consolidated Financial Statements.
1995 COMPARED TO 1994. Federal income tax expense totaled $9.4 million and
$9.3 million for the years ended December 31, 1995 and 1994, respectively. The
effective rate was 37.8% and 36.6% for 1995 and 1994, respectively. The
increase in effective rate was due to a higher amount of non-deductible
expenses. See Note 10 of Notes to Consolidated Financial Statements.
FINANCIAL CONDITION
ASSETS. The Company's assets totaled $1.30 billion at December 31, 1996, an
increase of approximately $250.0 million, or 23.8%, as compared to $1.05
billion at December 31, 1995. This increase was primarily due to increases in
mortgage loans held for sale, premises and equipment, mortgage servicing
rights, and other assets, offset in part by decreases in loans held for
investment.
LOANS RECEIVABLE. Mortgage loans available for sale and mortgage loans held
for investment increased, in the aggregate, $163.0 million from $798.7 million
at December 31, 1995 to $961.7 million at December 31, 1996. Mortgage loans
available for sale increased $220.3 million, or 35.5%, to $840.8 million at
December 31, 1996, from $620.5 million at December 31, 1995. Mortgage loans
held for investment decreased $57.3 million, or 32.2%, from $178.2 million at
December 31, 1995 to $120.9 million at December 31, 1996. See "Business--
29
<PAGE>
Lending." Loans held for investment decreased $32.0 million, or 10.5%, to
$273.6 million at December 31, 1996, from $305.6 million at December 31, 1995.
Loans held for investment include both loans originated for the Company's own
portfolio through the retail banking operation and loans with characteristics
that do not conform to underwriting standards for sale as conforming loans in
the secondary market. See "Business--Lending."
ALLOWANCE FOR LOSSES. The allowance for losses totaled $3.5 million at
December 31, 1996, an increase of $1.4 million, or 66.7%, from $2.1 million at
December 31, 1995. The allowance for losses as a percentage of non-performing
loans was 11.43% and 19.67% at December 31, 1996 and 1995, respectively. The
Company's non-performing loans totaled $30.6 million and $10.7 million at
December 31, 1996 and 1995, respectively, and, as a percentage of total loans,
were 2.75% and 1.15% at December 31, 1996 and 1995, respectively. The increase
in the allowance for losses was based upon management's assessment of relevant
factors, including the types and amounts of non-performing loans, historical
and anticipated loss experience on such types of loans, and current and
projected economic conditions. Management also considered the likelihood that
the Company would be required to repurchase additional loans from secondary
market investors over the next year at levels above the Company's historical
experience, as discussed below.
The increase in non-performing loans at December 31, 1996 resulted primarily
from the repurchase of $54.8 million in mortgage loans from secondary market
investors during 1996 (compared to $4.5 million during 1995). Such loans
included approximately $10.3 million of loans sold during 1996, $32.7 million
of loans sold in 1995 and $11.8 million of loans sold prior to 1995.
Approximately $10.1 million of the loans repurchased in 1996 were non-
performing at December 31, 1996 and $3.7 million had been foreclosed and were
held as other repossessed assets. Loan repurchases are an ongoing part of the
Company's operations since all loans sold in the secondary market are
generally subject to detailed underwriting reviews by the ultimate purchaser.
Although the Company generally does not sell loans with recourse, it typically
is required to repurchase loans, including defaulted and delinquent loans,
which were not underwritten in strict compliance with the underwriting
standards of secondary market investors. As the volume of the Company's new
loan production has increased substantially over the past several years, the
aggregate amount of loan delinquencies and foreclosures has also increased,
thereby increasing the number of loans potentially subject to repurchase. In
addition, during 1996 two of the largest secondary market purchasers of loans
implemented automated underwriting review systems which enabled them to review
delinquent and other loans on a much faster basis, thereby accelerating the
process of returning to the Company loans originated in prior periods.
The Company believes that its risk of loss arising from its non-performing
loans, including loans acquired through repurchase from individual investors
after initial sale in the secondary market, has not materially increased as a
result of either the increase in repurchased loans or the overall increase in
non-performing loans. In most cases the repurchased loans were required to be
repurchased for reasons (such as failure to meet all of the secondary market
investor's criteria for mortgagor eligibility or failure to meet the
investor's program eligibility requirements) that do not significantly affect
the ultimate collectibility of such loans or significantly increase the
Company's exposure to losses. A substantial majority of the repurchased loans
are eligible for resale in the secondary market to other investors, and the
Company does not believe that the remaining repurchased loans which are
currently non-performing or which have been foreclosed present any risks of
ultimate loss that are significantly different than the Company has
historically experienced. Of the Company's $30.6 million of non-performing
loans at December 31, 1996, $27.0 million, or 88%, were single family
residential mortgage loans, which generally represent minimal risk of ultimate
loss because of the nature of the collateral securing the loans, private
mortgage insurance for loans with over-80% LTV ratios and insurance or
guarantees on certain loans from the FHA or VA. At December 31, 1996,
approximately $8.0 million of such loans were the subject of bankruptcy
proceedings by the mortgagor; however, it has been the Company's experience
that such proceedings usually result in full repayment to the Company and
present minimal risk of loss because the imposition of judicial scrutiny and
related enforcement powers supersede the less comprehensive collection methods
normally available to the Company.
30
<PAGE>
For further information regarding the Company's asset quality, see
"Business--Asset Quality".
FHLB STOCK. Holdings of FHLB stock increased from $17.8 million at December
31, 1995 to $19.7 million at December 31, 1996 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. See "Regulation--Regulation and Supervision of
the Bank--Federal Home Loan Bank System."
PREMISES AND EQUIPMENT. Premises and equipment, net of accumulated
depreciation, totaled $20.9 million at December 31, 1996, an increase of $2.9
million, or 16.1%, from $18.0 million at December 31, 1995. This increase
reflects the Company's investment in technology, along with the expansion of
the retail deposit branch offices, and the increased national presence in the
mortgage acquisition area. See "Business--Technology," "--Lending" and "--
Retail Loan Production."
MORTGAGE SERVICING RIGHTS. Mortgage servicing rights totaled $30.1 million
at December 31, 1996, an increase of $2.1 million, or 7.5%, from $28.0 million
at December 31, 1995. For the year ended December 31, 1996, $5.6 billion of
loans underlying mortgage servicing rights were originated and purchased, and
$7.6 billion were reduced through sales, prepayments, and amortization
(including a $3 billion sale of mortgage servicing rights in December 1996)
resulting in a net decrease at year-end of $2 billion. However, because of
sales during 1996 of servicing acquired during earlier periods, the mortgage
servicing portfolio at December 31, 1996 contained a greater percentage of
capitalized servicing rights which are reflected as assets on the Company's
statement of financial condition (reflecting largely servicing rights
originated after the Company's mid-1995 adoption of SFAS No. 122, "Accounting
for Mortgage Servicing Rights") than it did at December 31, 1995. See
"Business--Lending."
OTHER ASSETS. Other assets increased $32.9 million, or 158.2%, to $53.7
million at December 31, 1996, from $20.8 million at December 31, 1995. The
majority of this increase was attributable to receivables recorded in
conjunction with a $700 million sale of mortgage servicing rights during
September 1996 and a $3.0 billion sale of mortgage servicing rights in
December 1996. Upon a sale of mortgage servicing rights, the Company receives
a down payment from the purchaser equivalent to approximately 20% of the total
purchase price and records a receivable account for the balance of the
purchase price due. In connection with the sale of mortgage servicing rights
during 1996, the Company had receivables of $35.7 million at December 31,
1996. The balance due is paid upon transfer by the Company of the related
mortgage loan servicing documents, usually within 180 days after the initial
closing. See "Business--Loan Servicing."
LIABILITIES. The Company's total liabilities increased $237.3 million, or
24.1%, to $1.22 billion at December 31, 1996, from $982.7 million at December
31, 1995. This increase was primarily attributable to an increase in the
Company's deposit portfolio as well as changes in the amount of escrows held
on mortgage loans, and the amount of FHLB advances, offset in part by a
decrease in the amount of undisbursed payments on loans serviced for others
and the amount of liability for checks issued.
DEPOSITS. Deposit accounts increased $97.5 million, or 18.5%, to $624.5
million at December 31, 1996, from $527.0 million at December 31, 1995. This
increase reflects the Company's deposit growth strategy through its branch
network and its pricing strategy. The number of bank branches has increased
from 13 at December 31, 1995 to 15 at December 31, 1996. The Company's
aggressive pricing strategy attracts one-year certificates of deposit and
brokered funds. The Company relies upon both its retail customer base and
nationwide advertising of its deposit rates to attract deposits through the
pricing of deposits at up to 0.25% over the prevailing market rate. At
December 31, 1996, the Company's certificates of deposit totaled $500.6
million, with an average
31
<PAGE>
balance of $26,235 and a weighted average cost of 5.95%. Of such amount,
approximately $212.6 million were brokered deposits with a weighted average
cost of 5.88%. See "Business--Funding Sources."
FHLB ADVANCES. FHLB advances increased $198.6 million, or 103.9%, to $389.8
million at December 31, 1996, from $191.2 million at December 31, 1995. The
Company relies upon such advances as a source of funding for the origination or
purchase of loans for sale in the secondary market. See "Capitalization." 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 retail deposit base and its escrow
accounts. The increase in the outstanding balance of FHLB advances from
December 31, 1995 to December 31, 1996 was attributable to an increase in the
amount of loans held for sale. See "--Liquidity and Capital Resources."
UNDISBURSED PAYMENTS. Undisbursed payments on loans serviced for others
increased $1.4 million, or 2.3%, to $61.4 million at December 31, 1996, from
$60.0 million at December 31, 1995. The month-end average amount of these funds
was $67.3 million and $49.6 million during 1996 and 1995, respectively. These
amounts represent payments received from borrowers for interest, principal and
related loan charges, which have not been remitted. These balances fluctuate
with the size of the servicing portfolio and increase during a time of high
payoff or refinance volume.
ESCROW ACCOUNTS. The amount of funds in escrow accounts decreased $27.9
million, or 31.4%, to $61.0 million at December 31, 1996, from $88.9 million at
December 31, 1995. The average of the month end balances in these accounts was
$82.3 million and $86.5 million during 1996 and 1995, respectively. These
accounts are maintained on behalf of mortgage customers and include funds
earmarked for real estate taxes, homeowner's insurance, and other insurance
product liabilities. These balances fluctuate with the size of the servicing
for others portfolio and also depend upon the scheduled payment dates for the
related expenses.
LIABILITY FOR CHECKS ISSUED. The liability for checks issued decreased $46.0
million, or 53.6%, to $39.8 million at December 31, 1996, from $85.8 million at
December 31, 1995. This liability reflects the outstanding amount of checks the
Company has written in conjunction with acquiring mortgage loans. This account
grows or contracts in conjunction with the amount of loans that are in the
Company's mortgage pipeline.
FEDERAL INCOME TAXES PAYABLE. Federal income taxes payable increased $7.8
million, or 53.1%, to $22.5 million at December 31, 1996, from $14.7 million at
December 31, 1995. This increase was primarily attributable to the timing of
payments and an increase in the current tax liability. See Note 10 of Notes to
the Consolidated Financial Statements.
OTHER LIABILITIES. Other liabilities increased $4.0 million, or 31.0%, to
$16.9 million at December 31, 1996, from $12.9 million at December 31, 1995.
This liability primarily reflects amounts received in conjunction with
acquiring mortgage loans, but not yet applied. This account grows or contracts
in conjunction with the amount of loans that are in the Company's mortgage
pipeline.
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 the Bank. The Company's primary source
of liquidity is dividends paid by the Bank. Management of the Company believes
that dividends that may be paid by the Bank to the Company following the
Offering will provide sufficient funds for its operations and liquidity needs;
however, no assurance can be given that the Company will not have a need for
additional funds in the future.
32
<PAGE>
Further, the Bank is subject to certain regulatory limitations with respect to
the payment of dividends to the Company. See "Dividend Policy" and
"Regulation--Regulation and Supervision of the Bank--Dividend Restrictions."
The Bank is required by OTS regulations to maintain minimum levels of liquid
assets. This requirement, which may be changed at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required minimum ratio
is currently 5%. 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 ratios were 21.5%,
11.4% and 42.4% for the months ended December 31, 1996, December 31, 1995 and
December 31, 1994, respectively.
A significant source of cash flow for the Company is the sale of mortgage
loans held for sale. Additionally, the Company receives funds from net
interest income, mortgage loan servicing fees, loan principal repayments,
advances from the FHLB, deposits from customers and cash generated from
operations. Mortgage loans sold during 1996 totaled $6.6 billion, an increase
of $1.8 billion, or 37.5%, from $4.8 billion sold during 1995. This increase
in mortgage loan sales was directly attributable to the 30.7% increase in
mortgage loan originations. Mortgage loans sold during 1995 totaled $4.8
billion, compared to $3.5 billion during 1994. The fluctuation in this
activity was directly related to the amount of mortgage loan originations. The
Company sold 96.9%, 91.6% and 95.5% of its mortgage loan originations during
1996, 1995 and 1994, respectively.
The Company typically uses FHLB advances to fund its daily operational
liquidity needs and to assist in funding loan originations. The Company will
continue to use this source of funds unless a more cost-effective source of
funds becomes available. FHLB advances are used because of their flexibility.
These funds are typically borrowed for 90-day terms with no prepayment
penalty, of which $389.8 million was outstanding at December 31, 1996. 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 $425.0
million. This line is collateralized by non-delinquent mortgage loans. To the
extent the amount of retail deposits or customer escrow accounts can be
increased, the Company expects that they will eventually replace FHLB advances
as a funding source.
At December 31, 1996, the Company had outstanding rate-lock commitments to
lend $585.0 million for mortgage loans, along with outstanding commitments to
make other types of loans totaling $15.0 million. Because such commitments may
expire without being drawn upon, they do not necessarily represent future cash
commitments. Also, as of December 31, 1996, the Company had outstanding
commitments to sell $665.0 million of mortgage loans. These commitments will
be funded within 90 days. Total commercial and consumer unused collateralized
lines of credit totaled $94.8 million at December 31, 1996. Such commitments
include $97.1 million in warehouse lines of credit to various mortgage
companies, of which $42.9 million was drawn upon as of December 31, 1996.
CAPITAL RESOURCES. At December 31, 1996, the Bank exceeded all applicable
regulatory minimum capital requirements. For a detailed discussion of the
regulatory capital requirements to which the Bank is subject, and for a
tabular presentation of compliance with such requirements, see "Regulation--
Regulation and Supervision of the Bank--Capital Requirements" and Note 13 of
Notes to Financial Statements.
ASSET/LIABILITY MANAGEMENT
The Company has sought to manage its exposure to changes in interest rates
by matching more closely the effective maturities or repricing characteristics
of the Company's interest-earning assets and interest-bearing liabilities. The
matching of the Company's assets and liabilities may be analyzed by examining
the extent to which its assets and liabilities are interest rate sensitive and
by monitoring the expected effects of interest rate changes on its net
interest income.
33
<PAGE>
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If the Company's
assets mature or reprice more quickly or to a greater extent than its
liabilities, the Company's net portfolio value and net interest income would
tend to increase during periods of rising interest rates but decrease during
periods of falling interest rates. If the Company's assets mature or reprice
more slowly or to a lesser extent than its liabilities, its net portfolio
value and net interest income would tend to decrease during periods of rising
interest rates but increase during periods of falling interest rates. Because
the Company sells a significant portion of its loan production in the
secondary market, its interest rate risk is somewhat mitigated. The Company
has pursued certain strategies designed to decrease the vulnerability of its
earnings to material and prolonged changes in interest rates in connection
with its banking operations.
As part of its overall interest rate risk policy, the Company has focused on
the development of a long-term deposit base to support its asset growth as
well as its ability to sell residential mortgage loans in the secondary market
while retaining both the mortgage servicing rights and the generally non-
interest bearing escrow accounts. In addition to its deposit base and funds
from the escrow accounts, the Company also uses FHLB advances as a means to
match efficiently maturities of funding sources with the expected selling time
of the related loans. Management believes that this approach to loan
originations allows the Company to respond to customer demand while minimizing
interest rate and credit risk without significantly increasing operating
expenses.
INTEREST RATE SENSITIVITY ANALYSIS. The matching of assets and liabilities
may be analyzed by examining the extent to which such assets and liabilities
are "interest rate sensitive" and by monitoring an institution's interest rate
sensitivity "gap." An asset or liability is said to be interest rate sensitive
within a specific period if it will mature or reprice within that period. The
interest rate sensitivity "gap" is the difference between the amount of
interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within
that time period. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate sensitive
liabilities, and is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, a negative gap would be expected to
adversely affect net interest income while a positive gap would be expected to
result in an increase in net interest income, while conversely during a period
of declining interest rates, a negative gap would be expected to result in an
increase in net interest income and a positive gap would be expected to
adversely affect net interest income. At December 31, 1996, the Company's
cumulative one-year interest rate gap position was a negative $184.8 million,
or 16.33% of total interest-earning assets. This is a one-day position which
is continually changing and is not necessarily indicative of the Company's
position at any other time. The Company's current one-year gap is within the
guidelines established by management and approved by the Board of Directors.
Management considers numerous factors when establishing these guidelines,
including current interest rate margins, capital levels, and any guidelines
provided by the OTS.
Different types of assets and liabilities with the same or similar
maturities may react differently to changes in overall market rates or
conditions, and thus changes in interest rates may affect net interest income
positively or negatively even if an institution were perfectly matched in each
maturity category. Additionally, the gap analysis does not consider the many
factors accompanying interest rate moves. While the interest rate sensitivity
gap is a useful measurement and contributes toward effective asset and
liability management, it is difficult to predict the effect of changing
interest rates solely on that measure, without accounting for alterations in
the maturity or repricing characteristics of the balance sheet that occur
during changes in market interest rates. During periods of rising interest
rates, the Company's assets tend to have prepayments that are slower than
originally expected, thus increasing the negative gap position. Conversely,
during a period of falling interest rates, the Company's assets would tend to
prepay faster than originally expected thus decreasing the negative gap. In
addition, some of the Company's assets, such as adjustable rate mortgages,
have caps on the amount by which their interest rates can change in any single
period, and therefore may not reprice as quickly as liabilities in the same
maturity category.
34
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996 which are
expected to mature or reprice in each of the time periods shown.
<TABLE>
<CAPTION>
OVER ONE OVER FIVE
ONE YEAR THROUGH THROUGH TEN OVER TEN
OR LESS FIVE YEARS YEARS YEARS TOTAL
--------- ---------- ----------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS (1):
Mortgage loans held for
investment............. $ 53,454 $ 12,486 $ 8,721 $ 25,635 $ 100,296
Mortgage loans held for
sale................... 282,092 63,603 40,557 454,515 840,767
Other mortgage loans.... 17,128 -- -- -- 17,128
Construction loans...... 59,270 -- -- -- 59,270
Commercial real estate
loans.................. 7,487 6,078 -- -- 13,565
Commercial loans........ 38,533 7,669 -- -- 46,202
Consumer loans.......... 8,292 14,480 10,836 -- 33,608
FHLB stock.............. 19,725 -- -- -- 19,725
Other investments....... 387 500 -- -- 887
--------- --------- --------- --------- ----------
Total............... $ 486,368 $ 104,816 $ 60,114 $ 480,150 $1,131,448
--------- --------- --------- --------- ----------
LIABILITIES (2):
Passbook savings........ $ 8,582 $ 36,472 $ 12,157 $ -- $ 57,211
Savings certificates.... 412,477 88,136 -- -- 500,613
Demand deposits......... 66,661 -- -- -- 66,661
--------- --------- --------- --------- ----------
Total deposits.......... 487,720 124,608 12,157 -- 624,485
Other borrowings........ 387,301 2,500 -- -- 389,801
--------- --------- --------- --------- ----------
Total............... $ 875,021 $ 127,108 $ 12,157 $ -- $1,014,286
--------- --------- --------- --------- ----------
OFF-BALANCE SHEET:
Commitments to sell
loans.................. $ 605,434 $ (56,649) $ (59,408) $(489,377) $ --
Commitments to originate
loans.................. (401,588) 39,604 40,253 321,731 --
--------- --------- --------- --------- ----------
Total............... $ 203,846 $ (17,045) $ (19,155) $(167,646) $ --
--------- --------- --------- --------- ----------
Interest sensitivity
gap.................... $(184,807) $ (39,337) $ 28,802 $ 312,504 $ 117,162
========= ========= ========= ========= ==========
Cumulative gap.......... $(184,807) $(224,144) $(195,342) $ 117,162
========= ========= ========= =========
Cumulative gap as a
percentage of total
interest-earning
assets................. (16.33)% (19.81)% (17.26)% 10.36%
========= ========= ========= =========
</TABLE>
- --------
(1) Fixed-rate loans are distributed based on their contractual maturity
adjusted for projected or anticipated prepayments, and variable rate loans
are distributed based on the interest rate reset date and contractual
maturity adjusted for prepayments. Loan run-off and repricing assumes a
constant prepayment rate based on coupon rate and maturity. Based on
available published statistics, the average annual prepayment rate with
respect to conventional fixed-rate single family mortgages has been
17.70%.
(2) Assumes a decay rate for passbook savings accounts of 15%. Demand deposits
are presented in the earliest repricing period since amounts in these
accounts are subject to withdrawal on demand. Savings certificates are
distributed assuming no withdrawal prior to maturity.
EFFECT OF NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation," which defines a fair
value based method of accounting for an employee stock option or similar
equity instrument and encourages adoption of that method for all employee
stock compensation plans. However, SFAS No. 123 also allows an entity to
continue to measure compensation cost for those plans using the intrinsic
value based method currently being followed and make pro forma disclosures of
net earnings and earnings per share under the fair value based method of
accounting. This statement is effective for financial statements with fiscal
years beginning after December 15, 1995, with earlier application encouraged.
See "Management--Stock Option Plan" and "--Incentive Compensation Plan."
Implementation of SFAS No. 123
35
<PAGE>
is not expected to have a significant effect on the Company. See Note 20 of
Notes to Consolidated Financial Statements.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
125 requires that, after a transfer of financial assets, an entity recognize
the financial and servicing assets it controls and the liabilities it has
incurred, derecognize financial assets when control has been surrendered, and
derecognize liabilities when extinguished. SFAS No. 125 is intended to provide
consistent standards by which a company may distinguish transfers of financial
assets that are sales from transfers that are secured borrowings. SFAS No. 125
is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Implementation of SFAS No. 125 is not expected to have a significant effect on
the Company.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
(i) replaces the presentation of primary earnings per share ("EPS") with a
presentation of basic EPS; (ii) requires dual presentation of basic and
diluted EPS on the face of the consolidated statements of income regardless of
whether basic and diluted EPS are the same; and (iii) requires a
reconciliation of the numerator and denominator used in computing basic and
diluted EPS. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to Accounting Principles Board Opinion
No. 15. SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. Earlier application
is not permitted. SFAS No. 128 requires restatement of all prior-period EPS
data presented.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations.
Unlike most industrial companies, nearly all the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
36
<PAGE>
BUSINESS
GENERAL
Flagstar Bancorp, Inc., a Michigan-based thrift holding company, is one of
the largest originators of conforming single-family mortgage loans in the
United States. Formerly known as FSSB Holding Corporation, the Company is
engaged, through its principal subsidiary, the Bank, in the business of
providing a full range of retail banking services in southern Michigan and in
originating, purchasing and servicing residential mortgage loans on a
nationwide basis. For 1996, the Company ranked fourth in the United States
among thrifts in mortgage loan originations and sixteenth in total mortgage
loan production, according to SMR Research Corp., and was the second largest
privately-owned mortgage originator in the United States.
Prior to this Offering, all of the Common Stock of the Company has been
owned by the Hammond family, which includes Thomas J. Hammond, the Chairman,
Chief Executive Officer and founder of the Company, and Mark T. Hammond, the
Vice Chairman and President of the Company. At December 31, 1996, the Company
had consolidated total assets of $1.3 billion, net loans of $1.1 billion,
total deposits of $624.5 million and total stockholders' equity of $78.5
million. For the year ended December 31, 1996, the Company's net earnings were
$17.0 million and its return on average assets and return on average equity
were 1.53% and 24.68%, respectively ($19.2 million, 1.73% and 27.87%,
respectively, excluding the special deposit insurance assessment imposed on
September 30, 1996 on all depositary institutions insured by the SAIF).
The Company's operations involve both retail banking and mortgage banking.
The Company believes that its operations in the retail banking business
provide it with a strategic advantage in the mortgage origination business
because it affords the Company access to funding sources which would not
otherwise be available. These additional funding sources include low cost
retail deposits, FHLB advances and escrowed funds. The Company benefits as
compared to mortgage originators with no retail banking operations because it
has access to a lower cost of funds and is therefore able to generate greater
net interest income. See "The Company."
The Company did not have any significant retail banking operations prior to
1994. See "--Retail Banking Operations." For further information, see Note 17
of Notes to Consolidated Financial Statements.
BUSINESS STRATEGY
The Company's strategy consists of the following key elements:
. continue to expand the Company's branch network into demographically
desirable communities adjacent to the Company's current markets (such as
Grand Rapids and Kalamazoo, Michigan) in order to gain access to
additional low cost retail funding sources;
. cross-sell retail banking services to the Company's large Michigan base
of present mortgage customers;
. benefit from economies of scale by increasing the size of the loan
servicing portfolio through the continued origination and purchase of
large volumes of mortgage loans on a diversified, nationwide basis;
. use the additional capital received by the Company from this Offering to
retain more mortgage loan production volume and mortgage servicing
rights, thereby increasing net interest income and servicing income;
. utilize advanced technology and automated processes throughout the
Company's business to improve customer service, reduce costs of loan
production and servicing and increase efficiencies; and
.outsource selected loan servicing and other functions when cost-effective.
TECHNOLOGY
The Company makes extensive use of advanced technology and automated
processes in order to enhance the competitiveness and reduce the cost of its
mortgage origination operations. The Company was one of the
37
<PAGE>
first mortgage lenders to utilize video conferencing for loan production. In
1996, the Company began full-scale operational use of automated underwriting
system technologies, including Fannie Mae's Desktop UnderwriterTM and Freddie
Mac's Loan ProspectorTM (of which the Company is currently one of the largest
users), and has combined the two technologies into its LIVESM video
conferencing and underwriting system. The Company believes that this system,
which permits a loan underwriter to interview and complete a loan application
and approve a loan for a prospective borrower in one session during a live
video conference, will give it a significant competitive edge in writing
mortgage loans. The Company also expects that during 1997, substantially all
of its mortgage loan production will be underwritten using automated systems,
which it believes will further reduce overhead, increase customer service and
facilitate conformity with underwriting guidelines.
LENDING
The Company originates or acquires loans through its retail banking
operations or through the wholesale, correspondent and retail loan production
outlets of its mortgage banking operations. Loans are either held for
investment in the Company's portfolio or held available for sale in the
secondary market. Wholesale mortgage loan production involves the origination
of loans by a nationwide network of independent mortgage brokers with funding
provided directly by the Company (i.e., table funding) and the transfer of
such loans to the Company upon closing. Correspondent mortgage loan production
occurs through the purchase of loans by the Company from independent mortgage
lenders, commercial banks, savings and loan associations and other financial
intermediaries that originate loans in their own name using their own source
of funds. Retail mortgage loan production for mortgage banking operations
occurs through the Company's retail loan origination offices. For 1996, the
Company's combined wholesale and correspondent loan production totaled $6.1
billion and its retail loan production totaled $685.3 million.
In addition to mortgage loan production, the Company engages to a limited
extent in the origination of commercial, commercial real estate, construction
and consumer loans, primarily through its bank branches and retail loan
origination offices.
The following table sets forth selected data relating to the composition of
the Company's loan portfolio by type of loan at the dates indicated. This
table includes mortgage loans available for sale and mortgage loans held for
investment. At December 31, 1996, the Company had no concentrations of loans
exceeding 10% of total loans that are not otherwise disclosed below.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ---------------- ---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family........... $ 934,226 84.62% $784,980 85.68% $554,087 87.92% $384,819 93.36% $217,360 90.95%
Construction............ 59,270 5.37% 48,933 5.34% 25,499 4.05% 19,864 4.82% 20,181 8.44%
Consumer loans.......... 33,608 3.04% 39,331 4.29% 19,271 3.06% 11 0.00% 18 0.01%
Commercial real estate.. 13,565 1.23% 30,504 3.33% 23,383 3.71% 864 0.21% 1,199 0.50%
Commercial.............. 46,202 4.18% 8,566 0.93% 7,546 1.20% 6,167 1.50% 239 0.10%
Other mortgage.......... 17,128 0.43% 3,877 0.43% 453 0.06% 478 0.11% -- -- %
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total................ 1,103,999 100.00% 916,191 100.00% 630,239 100.00% 412,203 100.00% 238,997 100.00%
====== ====== ====== ====== ======
Add (deduct):
Deferred loan fees...... 3,179 1,621 970 1,243 680
Premiums (discounts).... 7,158 8,223 4,071 2,533 226
Allowance for losses.... (3,500) (2,102) (1,871) (901) (550)
---------- -------- -------- -------- --------
Total................ $1,110,836 $923,933 $633,409 $415,078 $239,353
========== ======== ======== ======== ========
</TABLE>
In its wholesale and correspondent lending, the Company competes nationwide
by offering a wide variety of mortgage products designed to respond to
consumer needs and tailored to address market competition. The
38
<PAGE>
Company primarily originates conforming, fixed rate 30-year mortgage loans,
which collectively represented 62.2% of its total loan production for 1996 and
65.8% for 1995. In addition, the Company offers other products, such as
adjustable-rate, 5-year and 7-year balloons and jumbo mortgages as well as
loans under various FHA and VA programs. Mortgage loans originated are
primarily for the purchase of single-family residences, although such loans
are also originated for refinancing of existing mortgages.
Approximately 78% of the mortgage loans originated during 1993 were
refinancings of outstanding mortgage loans. In 1994 and 1995, approximately
44% and 36% of loans originated, respectively, were refinancings. For the year
ended December 31, 1996, approximately 46% of loans were refinancings. The
Company's loan production has, since 1992, increased each successive year,
after excluding the unusual level of refinancing in 1993 that occurred in
response to a low level of interest rates available to consumers over an
extended period of time. To achieve these increases, the Company has expanded
its wholesale loan production division from 18 employees in 1993 to 97
employees at December 31, 1996.
In addition to single-family mortgage loans, the Company relies upon its
wholesale and correspondent loan production networks for the origination or
purchase of single-family residential construction and consumer loans. Its
retail loan production arises through its bank branches, which originate
commercial, consumer, commercial real estate and construction loans, and its
retail loan origination offices, which originate construction and home equity
loans.
Set forth below is a table summarizing the Company's loan production of
single-family mortgage loans, which comprise the bulk of its loan production,
and other loans for the periods noted.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Single-family
Retail....................................... $ 685,288 $ 632,696 $ 705,723
Wholesale.................................... 5,435,701 4,562,909 3,014,450
Correspondent................................ 670,676 -- --
---------- ---------- ----------
Total single-family........................ 6,791,665 5,195,605 3,720,173
Construction................................... 79,022 101,532 68,383
Consumer....................................... 43,354 52,199 13,389
Commercial real estate......................... 5,648 6,725 10,319
Commercial..................................... 1,412 1,681 2,580
---------- ---------- ----------
Total originations......................... $6,921,101 $5,357,742 $3,814,844
========== ========== ==========
</TABLE>
The following table sets forth the origination of single-family mortgage
loans for the periods presented by the nature of loan:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Government (GNMA).............................. $ 425,137 $ 285,293 $ 222,794
Conventional (FNMA and FHLMC).................. 6,238,174 4,831,108 3,426,620
Jumbo/Non-Conforming........................... 128,354 79,204 70,759
---------- ---------- ----------
Total originations during the period....... $6,791,665 $5,195,605 $3,720,173
========== ========== ==========
</TABLE>
The following table sets forth certain information at December 31, 1996
regarding the dollar amount of loans held for investment based on their
contractual terms to maturity, including scheduled repayments of
39
<PAGE>
principal. The table does not include any estimate of prepayments which
significantly shorten the average life of all mortgage loans and may cause the
Company's repayment experience to differ from that shown below.
<TABLE>
<CAPTION>
DUE AFTER 1 THROUGH 5
DUE BY YEARS AFTER DUE AFTER 5 YEARS
DECEMBER 31, 1997 DECEMBER 31, 1997 AFTER DECEMBER 31, 1997 TOTAL
----------------- --------------------- ----------------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans held for
investment............. $ 3,331 $16,655 $ 83,810 $103,796
Construction............ 59,270 -- -- 59,270
Consumer................ 3,115 15,578 14,915 33,608
Commercial real estate.. 2,680 10,885 -- 13,565
Commercial.............. 44,032 2,170 -- 46,202
Other mortgage.......... 2,076 10,381 4,671 17,128
-------- ------- -------- --------
Total............... $114,504 $55,669 $103,396 $273,569
======== ======= ======== ========
</TABLE>
The following table sets forth, at December 31, 1996, the dollar amount of
all loans held for investment which are due one year or more after December
31, 1997 which have predetermined interest rates and have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
PREDETERMINED FLOATING OR
RATE ADJUSTABLE RATES TOTAL
------------- ---------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans held for investment..... $ 59,724 $44,072 $103,796
Construction........................... 59,270 -- 59,270
Consumer............................... 28,107 5,501 33,608
Commercial real estate................. 7,694 5,871 13,565
Commercial............................. 11,765 34,437 46,202
Other mortgage......................... 17,128 -- 17,128
-------- ------- --------
Total.............................. $183,688 $89,881 $273,569
======== ======= ========
</TABLE>
RETAIL BANKING OPERATIONS. The Company's retail banking operations
constitute a growing part of its overall operations. The principal aspects of
retail banking include deposit-gathering and consumer, residential, and
commercial lending. The Company began to emphasize its retail banking
operations upon its acquisition in 1994 of Security Savings, a federal savings
bank located in Jackson, Michigan. Security Savings was a long standing
community institution which received its charter in 1936. At the time of
acquisition, Security Savings had approximately $226 million in assets and
seven bank branches in southern Michigan with deposits of $197.2 million.
Security Savings was merged into the Bank on February 1, 1996. As of
December 31, 1996, the Company's retail banking operations had expanded to
include 15 bank branches in southern Michigan with deposits of $360.9 million.
The Company generally has authority to originate and purchase loans
collateralized by real estate located throughout the United States. Consistent
with its emphasis on being a community-oriented financial institution, the
Company concentrates the lending activities of its retail banking operations
in the southern Michigan market areas of its bank branches.
The Company's loan originations for its retail banking operations are
derived from a number of sources, including referrals by realtors, depositors
and borrowers and advertising, as well as walk-in customers. The Company's
solicitation programs consist of advertisements in local media, in addition to
occasional participation in various community organizations and events. The
Company's loan personnel in its retail banking operations are salaried, and
the Company does not compensate these loan personnel on a commission basis for
loans originated. Loan applications are accepted at all of the Company's
branch offices.
40
<PAGE>
Under applicable law, with certain limited exceptions, outstanding loans and
extensions of credit by a savings institution to a person at one time shall
not exceed 15% of the institution's unimpaired capital and surplus. Loans and
extensions of credit fully secured by readily marketable collateral may
compose an additional 10% of unimpaired capital and surplus. Applicable law
additionally authorizes savings institutions to make loans to one borrower,
for any purpose, in an amount not to exceed $500,000 or in an amount not to
exceed the lesser of $30,000,000 or 30% of unimpaired capital and surplus to
develop residential housing, provided: (i) the purchase price of each single-
family dwelling in the development does not exceed $500,000; (ii) the savings
institution is and continues to be in compliance with its fully phased-in
regulatory capital requirements; (iii) the loans comply with applicable LTV
requirements; (iv) the aggregate amount of loans made under this authority
does not exceed 150% of unimpaired capital and surplus; and (v) the Director
of OTS, by order, permits the savings institution to avail itself of this
higher limit. Under these limits, the Company's loans to one borrower were
limited to $12.2 million at December 31, 1996. At that date, the Company had
no lending relationships in excess of the loans-to-one-borrower limit.
Interest rates charged by the Company on loans are affected principally by
competitive factors, the demand for such loans and the supply of funds
available for lending purposes. These factors are, in turn, affected by
general economic conditions, monetary policies of the federal government,
including the Federal Reserve Board, legislative tax policies and government
budgetary matters.
SINGLE-FAMILY MORTGAGE LENDING. The Company's retail banking operations have
historically focused on the origination of single-family residential real
estate loans in its market area. At December 31, 1996, single-family mortgage
loans held for investment totaled approximately $120.9 million, or 44.2% of
the Company's loans held for investment.
The Company acquired a majority of its fixed rate single-family mortgage
loans held for investment through its 1994 acquisition of Security Savings. In
each case, such loans are secured by first mortgages on single-family, owner-
occupied residential real property located in the Company's market area. At
December 31, 1996, $59.7 million, or 57.5%, of the Company's portfolio of
mortgage loans held for investment consisted of fixed-rate mortgage loans.
The Company also originates residential mortgage loans with adjustable rates
("ARMs"). As of December 31, 1996, 42.5% of single-family mortgage loans in
the Company's portfolio of mortgage loans held for investment carried
adjustable rates. Such loans are primarily for terms of 30 years, although the
Company does occasionally originate ARMs for other terms, in each case
amortized on a monthly basis with principal and interest due each month. The
interest rates on a majority of mortgages are adjusted once a year, with a
maximum adjustment of 2% per adjustment period and a maximum aggregate
adjustment of 6% over the life of the loan. Rate adjustments on the Company's
adjustable-rate loans are indexed to a rate which adjusts annually based upon
changes in the weekly average yield on U.S. Treasury securities adjusted to a
constant comparable maturity of one year, as made available by the Federal
Reserve Board, and the adjusted interest rate is equal to such Treasury rate
plus a spread (currently approximately 3%). The adjustable-rate mortgage loans
offered by the Company provide for initial rates of interest below the rates
that would prevail when the index used for repricing is applied.
The retention of adjustable-rate loans in the Company's portfolio helps
reduce the Company's exposure to increases in prevailing market interest
rates. However, there are unquantifiable credit risks resulting from potential
increases in costs to borrowers in the event of upward repricing of
adjustable-rate loans. It is possible that during periods of rising interest
rates, the risk of default on adjustable-rate loans may increase due to
increases in interest costs to borrowers. Further, although adjustable-rate
loans allow the Company to increase the sensitivity of its interest-earning
assets to changes in interest rates, the extent of this interest sensitivity
is limited by the initial fixed-rate period before the first adjustment and
the lifetime interest rate adjustment limitations. Accordingly, there can be
no assurance that yields on the Company's adjustable-rate loans will fully
adjust to compensate for increases in the Company's cost of funds.
41
<PAGE>
COMMERCIAL AND COMMERCIAL REAL ESTATE LENDING. The Company originates
commercial loans on a selected basis and in limited amounts for retention in
its portfolio. At December 31, 1996, the Company had $3.3 million in
commercial loans associated with its retail banking operations, which
comprised 1.2% of its loans held for investment and which are primarily
inventory and other business loans to small businesses in the Company's
southern Michigan market area.
Also as part of the Company's retail banking operations the Company makes
commercial real estate loans in its southern Michigan market area. At December
31, 1996, there were $13.6 million in commercial real estate loans
outstanding, which comprised 5.0% of total loans held for investment and 1.2%
of total loans.
Commercial real estate loans are generally underwritten in amounts of up to
75% of the appraised value of the underlying property. Appraisals on
properties securing commercial real estate loans originated by the Company are
performed by an independent fee appraiser designated by the Company before the
loan is made. All appraisals for commercial real estate loans are reviewed by
the Company's management.
Underwriting procedures include an analysis of the property, borrower,
market and levels of risks. Underwriting procedures require verification of
the borrower's credit history, financial statements, references and income
projections for the property. All commercial real estate loans in excess of
$500,000 must be approved by the Company's Executive Loan Committee. The
Company's commercial real estate loans are secured by the property and, in
many circumstances, require the borrower to be personally liable for all or a
portion of the loan. The Company's lending policy requires that commercial
real estate properties securing loans be inspected at least annually. In
addition, the Company reviews updated financial information regarding the
borrower on a regular basis.
Commercial and commercial real estate loans generally present a higher level
of risk than do loans secured by one- to four-family residences. This greater
risk is due to several factors, including the concentration of large amounts
of principal in a limited number of loans and borrowers, the effects of
general economic conditions on commercial properties, and the difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by commercial real estate is typically dependent upon the
successful operation of the related real estate project or business. If the
cash flow from the project or business is reduced the borrower's ability to
repay the loan may be impaired.
CONSUMER LOANS. Consumer loans originated by the Company are predominantly
loans secured by personal property, passbook loans and home equity loans. At
December 31, 1996, the Company's consumer loans totaled $33.6 million, or
12.3%, of the Company's loans held for investment of which $16.8 million were
home equity loans.
Consumer loans tend to be originated at higher interest rates than mortgage
loans and for shorter terms and, in the case of home equity loans, the Company
tends to have a junior secured position. However, consumer loans generally
involve more risk than single-family mortgage loans. Repossessed collateral
for a defaulted loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of damage, loss or depreciation, and the
remaining deficiency often does not warrant further substantial collection
efforts against the borrower. In addition, loan collections are dependent on
the borrower's continuing financial stability and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Further, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which may be
recovered. In underwriting consumer loans, the Company considers the
borrower's credit history, an analysis of the borrower's income and ability to
repay the loan, and the value of the collateral.
MORTGAGE BANKING OPERATIONS. The Company actively participates in the
mortgage banking market, ranking sixteenth in the United States in total
mortgage loan production for 1996. Mortgage banking generally involves the
origination or purchase of single-family mortgage loans for sale in the
secondary mortgage market. The secondary mortgage market and its evolution
have been significantly influenced by two government-
42
<PAGE>
sponsored enterprises, Fannie Mae and Freddie Mac, and one government agency,
GNMA. Through these entities, the United States government provides support
and liquidity to the market for residential mortgage debt.
Mortgage originators sell their loans directly to Fannie Mae and Freddie Mac
either as whole loans or, more typically, as pools of loans used to
collateralize mortgage-backed securities ("MBS") issued or guaranteed by these
entities. Similarly, the originators can issue MBS collateralized by pools of
loans that are guaranteed by GNMA. In order to arrange these sales or obtain
these guarantees, the originator must underwrite its loans to conform with
standards established by Fannie Mae and Freddie Mac or by the FHA or VA in the
case of GNMA. All loans other than FHA and VA loans are considered
conventional loans. Loans with principal balances exceeding agency guidelines,
currently those in excess of $214,600, are sold to private investors.
Mortgage bankers operate in a highly competitive market. The underwriting
guidelines and servicing requirements set by the participants in the secondary
markets are standardized. As a result, mortgage banking products (i.e.,
mortgage loans and the servicing of these loans) have become difficult to
differentiate. Therefore, mortgage bankers compete primarily on the basis of
price or service, making effective cost management essential. Mortgage bankers
generally seek to develop cost efficiencies in one of two ways: economies of
scale or specialization. Large, full-service national or regional mortgage
bankers such as the Company have sought economies of scale through an emphasis
on wholesale originations and the introduction of automated processing
systems.
The Company pursues its loan production strategy as part of its mortgage
banking operations through the Company's wholesale, correspondent and retail
loan production outlets and, to a limited extent, through direct solicitation
of commercial banks, savings associations and credit unions.
WHOLESALE LOAN PRODUCTION. Under its wholesale operations, the Company funds
mortgage loans originated by a network of approximately 1,800 independent
mortgage brokers nationwide. Approximately 1,200 of these brokers originate
mortgage loans for the Company on a monthly basis and the remainder originate
mortgage loans for the Company on a quarterly basis. This network is
maintained by the Company's approximately sixty account executives, who are
compensated through a salary and commission package, and are organized among
10 regional wholesale correspondent lending offices and nine
wholesale/correspondent satellite offices. Many of the larger brokers are
provided with loan data entry software by the Company for the entry of loan
applicant data in a format familiar to the Company's underwriters and for
transmission to the Company's automated underwriting systems for review. All
loans originated through brokers are underwritten according to the Company's
standards.
The Company's underwriters or contract representatives review the loan data
provided by the loan applicant, including the review of appropriate loan
documentation, and request additional information as necessary from the
broker. To speed the information gathering phase of underwriting and thus the
loan approval process, the Company is utilizing an interview process referred
to as LIVESM underwriting, which involves an interview of the potential
borrower directly by a Company underwriter using its proprietary combination
of computer video technology and automated underwriting technology. Currently,
the Company believes that approximately 20% of the applications generated by
its wholesale loan production network use the LIVESM technology. Loans
originated by such brokers are typically funded directly by the Company
through table funding arrangements. In most cases, the loan is closed in the
broker's name and thereafter transferred to the Company together with related
mortgage servicing rights for which the Company generally pays a servicing
release premium which is included in the loan price paid to the broker by the
Company. Broker participants in this program are prequalified on the basis of
creditworthiness, mortgage lending experience and reputation. Each broker is
subject to annual and ongoing reviews by the Company.
CORRESPONDENT LOAN PRODUCTION. In addition, the Company acquires mortgage
loans from mortgage lenders, commercial banks, savings and loan associations
and other financial intermediaries. The Company's selection of correspondents
is subject to a separate approval process with higher net worth requirements
than wholesale brokers and correspondents must use their own source of funds
to close loans. The prices of such loan
43
<PAGE>
acquisitions are separately negotiated. Warehouse lines of credit, obtained
from either the Company or other parties, may be used by the mortgage lenders
to finance their respective mortgage loan originations. At December 31, 1996,
the aggregate amount of warehouse lines of credit granted by the Company to
its correspondents was $97.1 million, of which $42.9 million was outstanding.
Independent lenders who obtain warehouse lines of credit from the Company are
not required by the terms of such lines to sell their loan production to the
Company. All loans acquired from correspondents are expected to satisfy the
Company's underwriting standards and may be subject to repurchase by the
correspondent in the event of default of the loan due to fraud or
misrepresentation in the origination process and for certain other reasons,
including the failure to satisfy underwriting requirements imposed by the
Company.
RETAIL LOAN PRODUCTION. The Company's retail loan production involves the
origination of loans through its branch network, which includes its bank
branches and its retail loan origination offices. The Company has 41 retail
loan origination offices located in southern Michigan, Ohio and California.
These retail loan origination offices originate primarily single-family
mortgage loans and, to a lesser extent, construction and home equity loans.
Such retail loan origination offices generally provide the Company with a
source of loan production at a lower cost per loan than loans acquired through
brokers or correspondents because the cost of operating such branches is more
than offset by cost savings through the Company's ability to avoid payment of
the servicing release premium for the related mortgage servicing rights.
Managers of retail loan origination offices and loan officers are compensated
solely on a commission basis as measured by loan production.
To encourage efficient loan production, the Company allows managers of
retail loan origination offices to elect to operate their respective offices
as "100% offices," subject to approval by the Company. Such offices are
treated for incentive compensation purposes as free-standing operations where
each office is responsible for its own operating expenses. Each office is
required to satisfy minimum loan production levels. The manager receives
compensation based on the office's profitability. As of December 31, 1996, 14
retail loan origination offices were operated as 100% offices.
COMMERCIAL LENDING. Warehouse lines are granted under the Company's
correspondent lending program and are a major component of the Company's
commercial lending strategy. Warehouse lines of credit are used by
correspondents to fund production of loans which for the most part are
acquired by the Company. At December 31, 1996 the aggregate amount of
warehouse lines of credit granted by the Company to its correspondents was
$97.1 million of which $42.9 million was outstanding. The Company's selection
of correspondents is subject to a separate approval process with higher net
worth requirements than wholesale brokers. All loans acquired from
correspondents are expected to satisfy the Company's underwriting standards
and may be subject to repurchases by the correspondent in the event of default
of the loan due to fraud or misrepresentation in the origination process and
for certain other reasons, including the failure to satisfy underwriting
requirements imposed by the Company.
CONSTRUCTION LENDING. The Company also engages in construction lending
involving loans to individuals for construction of one- to- four-family
residential housing primarily located within the Company's southern Michigan
market area, with such loans converting to permanent financing upon completion
of construction. At December 31, 1996, the Company's portfolio of loans held
for investment included $59.3 million of loans secured by properties under
construction, or 21.7% of loans held for investment. These loans may be
construction/permanent loans structured to become permanent loans upon the
completion of construction, or may be interim construction loans structured to
be repaid in full upon completion of construction and receipt of permanent
financing. All construction loans are secured by a first lien on the property
under construction. Loan proceeds are disbursed in increments as construction
progresses and as inspections warrant. Construction/permanent loans may have
adjustable or fixed interest rates and are underwritten in accordance with the
same terms and requirements as the Company's permanent mortgages, except the
loans generally provide for disbursement in stages during a construction
period of up to nine months, during which period the borrower is required to
make interest-only monthly payments. Monthly payments of principal and
interest commence one month from the date the loan is converted to permanent
financing. Borrowers must satisfy all credit requirements that would apply to
the Company's permanent mortgage loan financing prior to receiving
construction financing for the subject property.
44
<PAGE>
Construction financing generally is considered to involve a higher degree of
risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan is largely dependent upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction.
During the construction phase, a number of factors could result in delays and
cost overruns. If the estimate of construction costs proves to be inaccurate,
the Company may be required to advance funds beyond the amount originally
committed to permit completion of the construction. If the estimate of value
proves to be inaccurate, the Company may be confronted, at or prior to the
maturity of the loan, with a project having value which is insufficient to
assure full repayment. The ability of the borrower to sell or complete the
finished structure will depend on, among other things, demand, pricing,
availability of comparable properties and economic conditions. The Company has
sought to minimize this risk by concentrating construction lending to
qualified borrowers in the Company's southern Michigan market area, by
requiring the involvement of qualified builders, and by limiting the aggregate
amount of outstanding construction loans.
SECONDARY MARKETING
The Company sells a significant portion of the mortgage loans that it
originates or purchases through its mortgage operations while retaining the
servicing rights to such loans. During the years ended December 31, 1996 and
1995, the Company originated $6.8 billion and $5.2 billion in total mortgage
loans, respectively, and sold $6.6 billion and $4.8 billion of mortgage loans,
respectively, in the secondary market. Mortgage loans are aggregated into
pools and sold, or are sold as individual mortgage loans, to investors
principally at prices established at the time of sale or under forward sales
commitments. Conforming conventional mortgage loans are generally pooled and
exchanged under the purchase and guarantee programs sponsored by Fannie Mae
and Freddie Mac and GNMA for Fannie Mae MBS, Freddie Mac MBS or GNMA MBS,
respectively. A limited number of mortgage loans are sold to other
institutional and non-institutional investors. For the year ended December 31,
1996, a significant portion of such loans were exchanged for Fannie Mae and
Freddie Mac securities. The remainder were sold to other institutional and
non-institutional investors.
The Company exchanges and sells mortgage loans on a non-recourse basis. In
connection with the Company's loan exchanges and sales, the Company makes
representations and warranties customary in the industry relating to, among
other things, compliance with laws, regulations and program standards, and to
accuracy of information. In the event of a breach of those Company
representations and warranties, the Company typically corrects such flaws. If
the flaws cannot be corrected, the Company may be required to repurchase such
loans. See "--Allowance for Losses." In cases where loans are acquired from a
broker or correspondent and there have been material misrepresentations made
to the Company, the Company has the right to resell the flawed loan back to
the broker or correspondent. Otherwise, the Company is indemnified against
loss on such loans by the broker. In addition, the Company relies upon
contract underwriters for a portion of its loan production, and these
underwriters must indemnify the Company against loss for loans which are
eventually determined to have been flawed upon origination.
45
<PAGE>
The following table sets forth the activity in the Company's mortgage loans
available for sale and its loans held for investment in its portfolio.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
AVAILABLE FOR SALE:
Beginning balance...................... $ 620,455 $ 205,480 $ 389,073
Originations(1)........................ 6,850,277 5,251,510 3,752,650
Repurchases............................ 54,788 4,477 2,683
Sales(1)............................... (6,599,568) (4,780,198) (3,670,002)
Amortization........................... (74,683) (244,144) (161,225)
Transfers to repossessed assets or
mortgage-backed securities............ (10,502) (1,781) (1,438)
Transfers (to) from held for
investment............................ -- 185,111 (106,261)
----------- ----------- -----------
Ending balance......................... $ 840,767 $ 620,455 $ 205,480
=========== =========== ===========
HELD FOR INVESTMENT:
Beginning balance...................... $ 305,580 $ 429,800 $ 26,906
Originations(1)........................ 129,436 162,137 236,700
Amortization........................... (161,372) (101,246) (79,002)
Transfers to repossessed assets........ (75) -- (1,367)
Acquired through acquisition........... -- -- 140,302
Transfers (to) from available for
sale.................................. -- (185,111) 106,261
----------- ----------- -----------
Ending balance......................... $ 273,569 $ 305,580 $ 429,800
=========== =========== ===========
</TABLE>
- --------
(1) Originations and sales are presented at cost, including deferred loan
origination fees and costs, premiums and discounts.
The Company assesses the interest rate risk associated with outstanding
commitments that it has extended to fund loans and hedges the interest rate
risk of these commitments based upon a number of factors, including the
remaining term of the commitment, the interest rate at which the commitment
was provided, current interest rates and interest rate volatility. These
factors are monitored on a daily basis, and the Company adjusts its hedging on
a daily basis as needed. The Company hedges its "available for sale" mortgage
loan portfolio and its interest rate risk inherent in its unfunded mortgage
commitments primarily through the use of forward sale commitments. Under such
commitments, the Company enters into commitments with terms of not more than
90 days to sell these loans to Freddie Mac, Fannie Mae and GNMA. In addition,
the Company occasionally establishes futures positions in U.S. Treasury bonds
under which the Company contracts to sell notional principal contracts. At
December 31, 1996, the Company did not have any open futures positions. See
"Management's Discussion and Analysis of Changes in Financial Condition and
Results of Operations--Results of Operations--Net Gain on Loan Sales and Sales
of Mortgage Servicing Rights."
ASSET QUALITY
The Company is exposed to certain credit risks related to the value of the
collateral that secures loans held in its portfolio and the ability of
borrowers to repay their loans during the term thereof. The Company has an
asset classification committee, which is comprised of senior officers of the
Company, that closely monitors the loan and real estate owned portfolios for
potential problems on a continuing basis and reports to the Board of Directors
of the Company at regularly scheduled meetings. This committee reviews the
classification of loans and reviews the allowance for losses. The Company also
has a quality control department, the function of which is to provide the
Board of Directors of the Company with an independent ongoing review and
evaluation of the quality of the process by which lending assets are
generated.
46
<PAGE>
Non-performing assets consist of non-accrual loans and real estate owned.
Loans are usually placed on non-accrual status when the loan is past due 90
days or more, or the ability of a borrower to repay principal and interest is
in doubt. Real estate acquired by the Company as a result of foreclosure is
classified as real estate owned until such time as it is sold. The Company
generally tries to sell the property at a price no less than its net book
value, but will consider discounts where appropriate to expedite the return of
the funds to an earning status. When such property is acquired, it is recorded
at its fair value less estimated costs of sale. Any required write-down of the
loan to its appraised fair market value upon foreclosure is charged against
the allowance for losses.
The Company establishes an allowance for losses based upon a quarterly or
more frequent evaluation by management of various factors including the
estimated market value of the underlying collateral, the growth and
composition of the loan portfolio, current delinquency trends and prevailing
and prospective economic conditions, including property values, employment and
occupancy rates, interest rates and other conditions that may affect
borrowers' abilities to comply with repayment terms. If actual losses exceed
the amount of the allowance for losses, earnings could be adversely affected.
As the Company's provision for losses is based on management's assessment of
the general risk inherent in the loan portfolio based on all relevant factors
and conditions, the allowance for losses represents general, rather than
specific, reserves.
The following table sets forth information with respect to the Company's
non-performing assets at the dates indicated. No loans were recorded as
restructured loans within the meaning of SFAS No. 15 at the dates indicated.
The increase in the mortgage loan category in 1995 and 1996 is attributable
primarily to the Company's required repurchase of non-performing loans from
secondary market investors. See "Management's Discussion and Analysis of
Changes in Financial Condition and Results of Operation--Financial Condition--
Allowance for Losses."
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------
1996 1995 1994 1993 1992
------- ------- ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual
basis:
Mortgage............................... $27,017 $10,096 $1,477 $1,314 $1,179
Construction........................... 2,801 -- 140 140 650
Commercial............................. 476 464 57 88 210
Consumer............................... 327 126 65 7 10
------- ------- ------ ------ ------
Total non-performing loans............. 30,621 10,686 1,739 1,549 2,049
Real estate owned........................ 10,363 2,359 1,271 1,249 802
------- ------- ------ ------ ------
Total non-performing assets............ $40,984 $13,045 $3,010 $2,798 $2,851
======= ======= ====== ====== ======
</TABLE>
If non-accrual loans at December 31, 1996 had been current according to
their original terms and had been outstanding throughout 1996, or since
origination if originated during the year, interest income on these loans for
1996 would have been $2.7 million. Interest actually recognized on these loans
during 1996 was not significant.
At December 31, 1996, the Company did not have any loans which were not then
classified as non-accrual, and where known information about possible credit
problems of borrowers caused management to have serious concerns as to the
ability of the borrowers to comply with existing loan repayment terms. At
December 31, 1996, the Company had $3.9 million of impaired loans pursuant to
SFAS No. 114, as amended by SFAS No. 118.
Historically, the Company has incurred minimal losses from charge-offs in
connection with its residential mortgage loan production. Net charge-offs as a
percentage of average loans outstanding declined from 0.09% in
47
<PAGE>
1992 to 0.00% in 1995, and rose in 1996 to 0.13%. Over this period non-
performing assets as a percentage of total assets ranged from 0.94% in 1992 to
a low of 0.42% in 1994 and increased to 3.16% at December 31, 1996. The 1995
and 1996 increases resulted primarily from increased repurchases of delinquent
residential mortgage loans from secondary market investors. Although the
Company generally does not sell loans with recourse, it typically is required
to repurchase loans, including delinquent and defaulted loans, which were not
underwritten strictly in compliance with the underwriting standards of
secondary market investors. As the volume of the Company's new loan production
has increased over the past several years, the aggregate amount of loan
delinquencies and foreclosures has also increased, thereby increasing the
number of loans potentially subject to repurchase. In addition, during 1996
two of the largest secondary market purchasers of loans implemented automated
underwriting review systems which enabled them to review delinquent loans on a
much faster basis, thereby accelerating the process of returning to the
Company loans originated in prior periods.
The Company relies upon its underwriting department to ascertain compliance
with individual investor standards prior to sale of the loans in the secondary
market, and it relies upon its quality control department to test sold loans
on a sample basis for compliance. See "--Underwriting" and "--Quality
Control." During 1996, the Company sold approximately $6.6 billion in single
family mortgage loans in the secondary market, of which approximately $10.4
million (0.16% of loans sold) were repurchased during 1996. Total repurchases
of single family mortgage loans by the Company during 1996 of $54.8 million
also included $32.7 million related to loans sold in 1995 (0.69% of such
loans) and $11.7 million related to loans sold prior to 1995. The Company
views loan repurchases as an inherent risk of originating loans for sale in
the secondary market notwithstanding the ongoing reviews by its quality
control department. A majority of loans repurchased during 1996 were and
continue to be performing. Losses arising from repurchases depend upon whether
repurchased loans are or become non-performing and, if so, whether the Company
is able to recover all of the loan principal and interest otherwise due.
It has been the Company's experience that non-performing loans do not
necessarily result in an ultimate loss to the Company. Approximately 88% of
the Company's non-performing loans at December 31, 1996 were residential
mortgage loans (approximately 94% at December 31, 1995), which generally
represent minimal risk of ultimate loss because of the nature of the
underlying collateral, private mortgage insurance for loans with over-80% LTV
ratios and insurance or guarantees on certain loans from the FHA and VA. In
addition, the Company may also have the right to sell the repurchased loan
back to the broker or correspondent which originated it, or to seek indemnity
from the applicable mortgage insurance company in the case of loans which are
underwritten on a contract basis for the Company by such insurers.
The Company anticipates that its level of loan repurchases and non-
performing assets may continue to be above historical levels during 1997 as a
result of the factors described above. The Company believes, however, that
several actions it has taken during 1996, including a tightening of credit
standards and the implementation of automated underwriting systems (which the
Company believes, in most cases, significantly reduce the ability of secondary
market investors to require repurchase of loans absent material
misrepresentation), should result in the level of loan repurchases declining
over time.
The Company experienced an increase in its non-performing construction loans
from December 31, 1995 to December 31, 1996 from zero to $2.8 million. This
increase was related to a significant increase in the single family
residential construction loans originated in the period subsequent to December
31, 1994. During the years ended December 31, 1994 and 1995 the origination of
such loans increased from $68.4 million to $101.5 million, respectively.
Approximately two-thirds of the non-performing construction loans resulted
from one particular construction lending program. The Company has discontinued
its participation in this program and substantially all loans originated under
the program, other than those which are currently classified as non-
performing, have been paid off.
The Company's repossessed assets were $10.4 million at December 31, 1996,
compared with $2.4 million and $1.3 million at December 31, 1995 and 1994,
respectively, representing an increase of 84.6% from December 31, 1994 to
December 31, 1995, and 333.3% from December 31, 1995 to December 31, 1996. The
48
<PAGE>
increases resulted primarily from the Company's foreclosure on non-performing
loans as part of the collection process and reflects the increased levels of
non-performing loans during such periods.
The Company's allowance for losses increased to $3.5 million at December 31,
1996 from $2.1 million at December 31, 1995. The Company's ratio of allowance
for losses to non-accrual loans, however, declined to 11.43% at December 31,
1996 from 19.67% at December 31, 1995. Approximately 88.2% of the non-accrual
loans at December 31, 1996 were single-family mortgages. Historically, the
Company's experience with loan losses on single family loans held in portfolio
or repurchased from investors has been low. Management believes that the
allowance for losses is adequate to cover the losses currently inherent in the
loan portfolio. Future changes in economic conditions or interest rates,
however, could require additional reserves.
The Company's allowance for losses increased to $2.1 million at December 31,
1995 from $1.9 million at December 31, 1994. The Company's ratio of allowance
for losses to non-accrual loans, however, declined to 19.67% at December 31,
1995 from 107.59% at December 31, 1994.
The following table sets forth an analysis of the Company's consolidated
allowance for losses and ratio of net charge-offs for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994 1993 1992
------- ------ ------ ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period......... $ 2,102 $1,871 $ 901 $ 550 $ 345
Charge offs, net of recoveries(1)...... (1,206) (7) (321) (293) (175)
Provision.............................. 2,604 238 290 644 380
Provision acquired in acquisition...... -- -- 1,001 -- --
------- ------ ------ ----- -----
Balance at end of period............... $ 3,500 $2,102 $1,871 $ 901 $ 550
======= ====== ====== ===== =====
Ratio of net charge offs to average
loans outstanding during the period... 0.13% 0.00% 0.08% 0.08% 0.09%
======= ====== ====== ===== =====
</TABLE>
- --------
(1) Reflects primarily charge-offs related to single-family mortgage loans.
49
<PAGE>
The following table sets forth the breakdown of the allowance for losses by
loan category at the dates indicated. Management believes that the allowance
can be allocated by category only on an approximate basis, and therefore
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses
in any category. The unallocated portion of the allowance represents an amount
that is not specifically allocable to one of the loan portfolios. In addition
to being utilizable for future losses in the loan portfolio, such unallocated
amount may be utilized for potential losses arising from loans serviced for
others.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ------------------ ------------------ ------------------ ------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS LOANS LOANS LOANS LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage(1)............ $1,200 86.30% $ 326 86.25% $ 820 88.08% $356 93.53% $135 90.98%
Construction........... 400 5.32% 367 5.28% 191 4.01% 149 4.78% 96 8.41%
Consumer............... 300 3.02% 393 4.25% 193 3.03% -- -- % 2 0.01%
Commercial............. 200 4.15% 43 0.93% 38 1.19% 31 1.48% 1 0.10%
Commercial real
estate................ 100 1.21% 305 3.29% 234 3.69% 9 0.21% 181 0.50%
Unallocated............ 1,300 -- % 668 -- % 395 -- % 356 -- % 135 -- %
------ ------ ------ ------ ------ ------ ---- ------ ---- ------
Total allowance for
losses............... $3,500 100.00% $2,102 100.00% $1,871 100.00% $901 100.00% $550 100.00%
====== ====== ====== ====== ====== ====== ==== ====== ==== ======
</TABLE>
- --------
(1)Reflects allowance attributable to mortgage loans held for sale and held
for investment.
UNDERWRITING
The Company's mortgage loans are underwritten either in accordance with
applicable Fannie Mae, Freddie Mac or FHA/VA guidelines or with requirements
set by other investors.
All mortgage loans originated or acquired by the Company, whether through
its retail loan origination offices or through its wholesale or correspondent
networks, must satisfy the Company's underwriting standards. The Company
permits a few originating correspondent lenders operating under the Company's
delegated underwriting program to perform initial underwriting reviews. The
Company employs an automated underwriting process on most loans that is based
upon data provided through the Company's initial loan data entry software and
is available from Fannie Mae through its Desktop Underwriter(TM) software and
from Freddie Mac through its Loan Prospector(TM) software. This process
incorporates credit scoring and an appraisal evaluation system, which in turn
employs rules-based and statistical technologies to evaluate the borrower,
property and the sale of the loan in the secondary market. This process is
intended to reduce processing and underwriting time, to improve overall loan
approval productivity, to improve credit quality and to reduce potential
investor repurchase requests. Approximately one-third of loans underwritten by
the Company are initially underwritten on a contractual basis by mortgage
insurance companies, in their capacity as contract underwriters. The contract
underwriter may be required to repurchase loans that are determined not to be
in compliance with such underwriting criteria.
Loans underwritten directly by the Company are subject to a complete review
of all information prior to loan approval. This process involves the transfer
of loan data to the Company by wholesalers or correspondents using loan data
entry software provided by the Company plus certain other physical
documentation or through the physical transfer of loan files to the Company.
Further, the Company has introduced the use of video-based computer
technology, known as LIVESM, to expedite the loan approval process by allowing
its underwriters to conduct face-to-face interviews with loan applicants using
personal computers with cameras mounted on them. This equipment is installed
and can be used on an as-needed or pre-scheduled basis in the offices of
certain mortgage brokers. See "--Technology."
50
<PAGE>
To a limited extent, the Company delegates underwriting authority to select
correspondent lenders who meet financial strength, delinquency, underwriting
and quality control standards. The lenders may be required to agree to
repurchase loans that later become delinquent or to indemnify the Company from
loss.
QUALITY CONTROL
The Company maintains a quality control department that, among other things,
reviews compliance and quality assurance issues relating to loan production
and underwriting. For its production compliance process, the Company randomly
selects a statistical sample of generally at least 5% of all loans closed each
month. This review includes a credit scoring and re-underwriting of such
loans; ordering second appraisals on 10% of the sample; reverifying funds,
employment and final applications; and reordering credit reports on the entire
sample. In addition, a full underwriting review is conducted on loans that go
into default during the first twelve months from the date of origination.
Document and file reviews are also undertaken to ensure regulatory compliance.
The Company also monitors the performance of delegated underwriters through
quality assurance reports prepared by its quality control department, FHA/VA
reports and audits, reviews and audits by regulatory agencies, investor
reports and mortgage insurance company audits. Deficiencies in loans are
generally corrected; otherwise, the Company may exercise its option to require
that the loan be repurchased by the originating broker or correspondent, or
the Company may insist that the broker who originated the loan indemnify the
Company against any losses.
MORTGAGE LOAN SERVICING
The Company derives a significant portion of its revenues from the servicing
of mortgage loans for others. For the years ended December 31, 1996 and 1995,
the Company realized net servicing fee revenue from its mortgage loan
servicing operations of $11.9 million and $14.3 million, respectively, which
represented 20.3% and 38.6% of the Company's non-interest income for the
respective periods. Servicing arises in connection with mortgage loans
originated or purchased and then sold in the secondary market with mortgage
servicing rights retained.
Mortgage loan servicing includes collecting payments of principal and
interest from borrowers, remitting aggregate mortgage loan payments to
investors, accounting for principal and interest payments, holding escrow
funds for payment of mortgage related expenses such as taxes and insurance,
making advances to cover delinquent payments, inspecting the mortgaged
premises as required, contacting delinquent mortgagors, supervising
foreclosures and property dispositions in the event of unremedied defaults,
and other miscellaneous duties related to loan administration. The Company
collects servicing fees from monthly mortgage payments generally ranging from
0.25% (i.e., 25 basis points) to 0.75% (i.e., 75 basis points) of the
declining principal balances of the loans per annum. At December 31, 1996 and
December 31, 1995, the weighted average servicing fee on the servicing for
others portfolio was 0.289% and 0.287%, respectively.
The Company services mortgage loans nationwide. The geographic distribution
of the Company's servicing portfolio reflects the national scope of the
Company's originations and loan acquisitions. The Company actively monitors
the geographic distribution of its servicing portfolio to maintain a mix that
it deems appropriate to balance its risks and makes adjustments as it deems
necessary. At December 31, 1996, the Company's servicing portfolio consisted
of $6.5 million of FHA/VA servicing and $4.7 billion of conventional servicing
(excluding sub servicing). Such amounts were in addition to loans serviced by
the Company which were recorded on its books as loans receivable (i.e.,
available for sale and held for investment).
The value of the Company's mortgage servicing rights ("MSRs"), is subject to
prepayment risk in the event that declining interest rates provide borrowers
with refinancing opportunities. At December 31, 1996 and December 31, 1995,
the amounts of the MSRs recorded on the Company's books were $30.1 million and
$28.0 million, respectively, and their estimated fair values were $54.0
million and $70.4 million, respectively. For further information, see Note 7
of Notes to Consolidated Financial Statements. During the year ended December
51
<PAGE>
31,1996, the Company sold MSRs for gains amounting to $35.1 million. Also, the
Company occasionally enters into forward sale commitments of its MSRs. During
the year ended December 31, 1996, the Company sold $1.4 billion in MSRs to a
single purchaser, pursuant to a $2.0 billion commitment entered into on
October 31, 1995. In June 1996, the Company entered into a separate agreement
with another purchaser for the sale of $2.0 billion to $3.0 billion in MSRs.
Such agreement has a term through June 1997 and provides that the MSRs will be
sold at the end of each quarter in which the underlying loans are originated
(i.e., sold on a "flow basis"). In December 1996, the Company sold an
additional $2.3 billion in mortgage servicing rights that was not related to
any flow arrangement.
Gains on the sale of MSRs are affected by changes in interest rates as well
as the amount of MSRs capitalized at the time of the loan origination or
acquisition of MSRs. Purchasers of MSRs analyze a variety of factors,
including prepayment sensitivity, to assess the purchase price they are
willing to pay. Lower market interest rates prompt an increase in prepayments
as consumers refinance their mortgages at lower rates of interest. As
prepayments increase, the life of the servicing portfolio is reduced,
decreasing the servicing fee revenue that will be earned over the life of that
portfolio and the price third party purchasers are willing to pay. The fair
value of servicing is also influenced by the supply and demand of servicing
available for purchase at any point in time. Conversely, as interest rates
rise, prepayments generally decrease, resulting in an increase in the value of
the servicing portfolio as well as the gains on sales of MSRs.
The following table sets forth information regarding the mortgage loan
servicing portfolio.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995
---------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period.............. $ 6,788,530 $ 5,691,421
Add: Servicing acquisitions
Originated................................ 563,355 87,370
Purchased................................. 5,070,190 4,133,015
---------------- ----------------
Total additions......................... 5,633,545 4,220,385
---------------- ----------------
Less: Prepayments/amortizations............. 1,146,564 851,188
Sales(1).................................. 6,473,930 2,272,088
---------------- ----------------
Total reductions........................ 7,620,494 3,123,276
---------------- ----------------
Balance at end of period.................... $ 4,801,581 $ 6,788,530
================ ================
Composition at end of period:
GNMA...................................... $ 6,458 $ 7,217
Fannie Mae/Freddie Mac.................... 4,658,056 6,638,435
Other Private............................. 137,067 142,878
---------------- ----------------
Subtotal................................ 4,801,581 6,788,530
Subservicing on sold servicing rights(2).... 3,619,373 536,324
---------------- ----------------
Total servicing for others.............. $ 8,420,954 $ 7,324,854
================ ================
Loans receivable, net(3)................ $ 1,110,836 $ 923,933
================ ================
</TABLE>
- --------
(1) The actual release or transfer of servicing does not necessarily take
place during the same period as the related sale of MSRs.
(2) Reflects mortgage servicing rights sold by the Company but as to which the
purchaser has not yet taken delivery. The Company's costs of subservicing
are generally equivalent to the fees charged by the Company for this
service.
(3) Represents loans which the Company also services, including loans
available for sale.
52
<PAGE>
The Company originates and purchases MSRs nationwide. The geographic
distribution of the Company's MSR portfolio reflects the national scope of the
Company's mortgage loan originations and acquisitions. The ten largest states
accounted for 79.57% of the total number of mortgage loans serviced and 79.17%
of the dollar value of the mortgage loans serviced, at December 31, 1996,
while the largest volume by state was Michigan with 42.76% and 38.11% of the
mortgage loans serviced by number and value, respectively.
The Company's mortgage servicing portfolio includes servicing for adjustable
rate, balloon payment and fixed rate fully amortizing loans. At December 31,
1996, 13.5% of the mortgage servicing rights related to adjustable rate loans,
which had a weighted average coupon rate of 8.078%; 21.5% related to fixed
rate balloon payment loans, which had a weighted average coupon rate of
7.120%; and the remaining 65.0% related to fixed rate fully amortizing loans,
which had a weighted average coupon rate of 8.381%. At that date, the
Company's mortgage servicing portfolio had an aggregate weighted average
coupon rate of 8.069%. The following table sets forth, as of December 31,
1996, the percentage of fixed-rate, single-family mortgage loans being
serviced for others by the Company, by interest rate category.
<TABLE>
<CAPTION>
COUPON RANGE PERCENTAGE OF PORTFOLIO
------------ -----------------------
<S> <C>
Less than 7.00%................................. 4.88%
7.00--8.00%.................................... 18.16%
8.01--9.00%.................................... 61.55%
9.01--10.00%................................... 13.77%
10.01--11.00%................................... 1.39%
11.01--12.00%................................... 0.18%
12.01% & above.................................. 0.07%
------
100.00%
======
</TABLE>
The following table sets forth information regarding the mortgage loan
servicing portfolio, broken down by state.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-----------------------------------------------------------
NUMBER OF PERCENTAGE OF TOTAL PERCENTAGE OF
MORTGAGE LOANS NUMBER OF MORTGAGE TOTAL DOLLAR
SERVICED LOANS SERVICED AMOUNT AMOUNT
-------------- ------------------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Michigan........... 24,842 42.76% $1,829,500 38.11%
California......... 2,346 4.04% 334,500 6.97%
Ohio............... 4,210 7.25% 296,000 6.17%
Illinois........... 2,887 4.97% 286,700 5.97%
Florida............ 3,210 5.53% 232,600 4.84%
Texas.............. 2,872 4.94% 224,700 4.68%
Colorado........... 1,946 3.35% 201,300 4.19%
Maryland........... 1,449 2.49% 156,400 3.26%
Georgia............ 1,547 2.66% 126,200 2.63%
Washington......... 921 1.58% 112,900 2.35%
Virginia........... 872 1.50% 97,600 2.03%
New York........... 658 1.13% 68,200 1.42%
Oregon............. 582 1.00% 63,500 1.32%
Minnesota.......... 849 1.46% 63,500 1.32%
Indiana............ 815 1.40% 62,700 1.31%
Missouri........... 794 1.37% 53,900 1.12%
New Jersey......... 501 0.86% 53,100 1.11%
Utah............... 498 0.86% 50,000 1.04%
Wisconsin.......... 494 0.85% 39,300 0.82%
Tennessee.......... 567 0.98% 38,700 0.81%
Other.............. 5,239 9.02% 409,700 8.53%
------ ------ ---------- ------
Total............ 58,099 100.00% $4,801,000 100.00%
====== ====== ========== ======
</TABLE>
53
<PAGE>
At December 31, 1996, the Company was servicing 58,099 loans with an
aggregate unpaid principal balance of $4.8 billion (excluding subservicing).
Of such loans, 3.28% were delinquent and an additional 0.88% were in
foreclosure. The following table presents certain information regarding the
percentage of delinquent single family mortgage loans as of the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
30--59 Days Past Due....................................... 2.52% 1.77% 0.81%
60--89 Days Past Due....................................... 0.51% 0.24% 0.09%
90+ days Past Due.......................................... 0.25% 0.14% 0.02%
Loans in foreclosure....................................... 0.88% 0.40% 0.23%
----- ----- -----
Total.................................................. 4.16% 2.55% 1.15%
===== ===== =====
</TABLE>
The Company is materially affected by loan delinquencies and defaults on
loans that it services for others. Under a portion of its servicing contracts,
the Company must advance all or part of the scheduled payments to the owner of
the loan, even when loan payments are delinquent. At December 31, 1996, the
Company's delinquency rates on loans serviced for Freddie Mac and Fannie Mae
were 3.46% and 4.88%, respectively. Also, to protect their liens on mortgage
properties, owners of loans usually require a servicer to advance scheduled
mortgage and hazard insurance and tax payments even if sufficient escrow funds
are not available. The Company is generally reimbursed by the mortgage owner
or from liquidation proceeds for payments advanced that the servicer is unable
to recover from the mortgagor, although the timing of such reimbursement is
typically uncertain. In the interim, the Company absorbs the cost of funds
advanced during the time the advance is outstanding. Further, the Company
bears the costs of collection activities on delinquent and defaulted loans.
FUNDING SOURCES
The Company funds its operations through its retail deposit base, brokered
deposits, the funds available in escrow accounts held in connection with its
mortgage loan servicing operations, and FHLB advances. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources." Following the Offering, the Company intends
to continue to rely upon these sources of funds, in addition to the net
proceeds received by it from the Offering, to finance its operations.
Deposits are a significant source of the Company's funds for lending,
investment activities and general operational purposes. In addition to
deposits, the Company derives funds from loan principal and interest
repayments, sales of loans, mortgage loan servicing income and sales of
mortgage servicing rights.
The Company attracts deposits principally from its primary market area in
southern Michigan by offering a variety of deposit instruments, including
checking accounts, money market accounts, regular savings accounts and
certificates of deposit. Deposit terms vary according to the minimum balance
required and the interest rate. Maturities, terms, service fees and withdrawal
fees are established on a periodic basis. Management of the Company generally
reviews its deposit mix and pricing on a daily basis. In determining the
characteristics of its deposit accounts, the Company considers the rates
offered by competing institutions in the Company's market areas, the
acquisition of brokered funds, liquidity requirements, growth goals and
federal regulations.
The Company competes for deposits with other institutions in its market area
and nationwide (through print advertisements and a commercial wire service) by
offering deposit instruments that are competitively priced and by providing
customer service through convenient and attractive offices, knowledgeable and
efficient staff and hours of service that meet customers' needs. Most of the
Company's depositors are Michigan residents.
54
<PAGE>
Among deposits which the Company attracts and retains are brokered deposits,
which are pools of deposits purchased from a broker acting as an agent for
depositors seeking the highest certificate of deposit rates offered by insured
financial institutions. At December 31, 1996, the Company had $500.6 million
in certificates of deposit, of which $212.6 million, or 42.5%, were brokered
deposits. Because brokered deposits are inherently interest-rate sensitive,
the Company is subject to the risk of a significant outflow of funds in the
event of a sudden increase in interest rates. Further, the Company's net
earnings may be adversely affected by attempts by the Company to match
interest rates to stem any such outflow of funds. The Company believes that
this risk is appropriately mitigated by the availability of its $425.0 million
FHLB line of credit at December 31, 1996 (increased to $650 million as of
February 1997), as to which its maximum outstanding month-end balance for the
year ended December 31, 1996 was $389.8 million. A FHLB line of credit is
adjusted quarterly and is generally computed as 50% of an institution's total
assets, less outstanding FHLB advances. Based upon the Company's current cost
of its funds, the Company does not believe that reliance on the FHLB as a
short-term replacement funding source would have a significant adverse effect
on its financial condition. For the year ended December 31, 1996, the average
cost of funds for the Company's deposits, including brokered deposits, and its
FHLB advances were 5.51% and 5.78%, respectively. Further, the Company
believes its reliance on brokered funds will diminish as the Company develops
its retail deposit base through its existing and future branch network.
The following table sets forth by account types the aggregate amount and
weighted average rate of the Company's deposits.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Transaction Accounts:
Non-interest-bearing
deposits.............. $ 36,688 --% $ 10,927 --% $ 12,818 --%
Interest-bearing depos-
its................... 29,973 3.56% 29,239 3.05% 49,226 2.96%
-------- -------- --------
Subtotal............. 66,661 1.60% 40,166 2.22% 62,044 2.35%
Savings accounts......... 57,211 4.30% 38,094 2.25% 9,744 2.25%
Certificates of deposit.. 500,613 5.95% 448,714 6.27% 235,836 5.47%
-------- -------- --------
Total deposits....... $624,485 5.34% $526,974 5.73% $307,624 4.74%
======== ==== ======== ==== ======== ====
</TABLE>
The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of December 31, 1996.
<TABLE>
<CAPTION>
MATURITY PERIOD CERTIFICATES OF DEPOSIT
--------------- -----------------------
(IN THOUSANDS)
<S> <C>
Three months or less............................... $142,516
Over three through six months...................... 128,583
Over six through 12 months......................... 141,378
Over 12 months..................................... 88,136
--------
Total............................................ $500,613
========
</TABLE>
The Company considers all its certificates of deposit to be highly interest-
rate sensitive regardless of amount.
Deposits have historically been the primary source of funds for the
Company's lending and general operating activities. However, the Company also
utilizes the FHLB to provide both short-term and long-term borrowings and also
relies to a limited extent on short-term reverse repurchases of pools of
single-family mortgage loans for advance funding of securitized loans.
55
<PAGE>
The Company's principal source of borrowings has been FHLB advances. The
Company is authorized to use advances from the FHLB to supplement its supply
of funds and to satisfy deposit withdrawal requirements. The Federal Home Loan
Bank System functions as a twelve-bank central reserve bank providing credit
for savings institutions and certain other member financial institutions. As a
member of the Federal Home Loan Bank System, the Company is required to own
stock in the FHLB and is authorized to apply for advances, which are made
pursuant to several different programs with their own interest rates and range
of maturities. Advances from the FHLB are secured by the Company's stock in
the FHLB and a portion of the Company's mortgage loan portfolio.
The following table sets forth certain information regarding the borrowings
of the Company as of or for the period indicated.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB Advances
Balance outstanding at period-end.. $ 389,801 $ 191,156 $200,750
Maximum outstanding at any month-
end............................... $ 389,801 $ 315,000 $200,750
Monthly average balance............ $ 247,204 $ 237,535 $ 83,912
Average interest rate.............. 5.78% 6.35% 4.44%
</TABLE>
See Note 9 of Notes to Consolidated Financial Statements for additional
information.
EMPLOYEES
As of December 31, 1996, the Company and its subsidiaries had 1,310 full-
time equivalent employees, none of whom were represented by a collective
bargaining agreement. Management of the Company and the Bank considers their
relationship with such employees to be satisfactory.
PROPERTIES
The Company's principal executive offices are located at 2600 Telegraph
Road, Bloomfield Hills, Michigan 48302 in leased facilities. At December 31,
1996, the Company maintained 15 bank branches, 41 retail loan origination
offices, 10 regional wholesale/correspondent lending offices, nine
wholesale/correspondent satellite offices, a mortgage loan servicing center,
and three corporate operations offices. Other than six of the bank branches
and one of the retail loan origination offices, the Company or the Bank leased
their operating premises. In January 1997, the Company acquired one of the
leased premises which was serving at the time as its retail banking
headquarters and as a bank branch. See Note 6 of Notes to Consolidated
Financial Statements. From December 1996 through March 1997, the Company
entered into eleven agreements to lease or acquire property to be used for
future bank branch locations in Michigan in connection with the Company's
overall plan for expansion of its retail banking operations. See "Business--
Business Strategy."
SUBSIDIARY ACTIVITIES
The Company conducts business through a number of wholly-owned subsidiaries
in addition to the Bank. The additional subsidiaries of the Company include
Douglas Insurance Agency, Inc. ("DIA"), FSSB Real Estate Development
Corporation ("REDC"), Mortgage Video Network, Inc. ("Video") and First
Security Investment Group, Inc. ("Investment"). Of the additional
subsidiaries, DIA, REDC and Investment are presently active. DIA acts as an
agent for life insurance and property and casualty insurance companies. REDC
owns a single parcel of undeveloped commercial real estate in northern Oakland
County, Michigan which it currently has a contract to sell. REDC does not
conduct any other business.
The Bank, the Company's primary subsidiary, is a federally chartered, stock
savings bank headquartered in Bloomfield Hills, Michigan. The Bank owns five
subsidiaries: FSSB Mortgage Corporation ("Mortgage"), Boston Credit
Corporation ("BCC"), Mortgage Affiliated Services, Inc. ("MAS"), Mid-Michigan
Service
56
<PAGE>
Corporation ("Mid-Michigan") and SSB Funding Corporation ("Funding").
Mortgage, BCC and Funding are currently inactive subsidiaries. MAS provides
appraisal and document preparation services, primarily in conjunction with the
Bank's loan closings. Mid-Michigan is engaged in the business of leasing and
sub-leasing commercial real estate. Mid-Michigan leases the premises of the
Bank's regional headquarters located in Jackson, Michigan from a third party
and subleases the premises to the Bank.
LEGAL PROCEEDINGS
From time to time, the Company and its subsidiaries are parties to various
legal proceedings incident to its business. At December 31, 1996, there were
no legal proceedings which management anticipates would have a material
adverse effect on the Company. See Note 12 of Notes to Consolidated Financial
Statements.
57
<PAGE>
REGULATION
GENERAL
The Bank is chartered as a federal savings bank under the Home Owners' Loan
Act, as amended (the "HOLA"), which is implemented by regulations adopted and
administered by the OTS. As a federal savings bank, the Bank is subject to
regulation, supervision and regular examination by the OTS. Federal banking
laws and regulations control, among other things, the Bank's required
reserves, investments, loans, mergers and consolidations, payment of dividends
and other aspects of the Bank's operations. The deposits of the Bank are
insured by the SAIF administered by the FDIC to the maximum extent provided by
law ($100,000 for each depositor). In addition, the FDIC has certain
regulatory and examination authority over OTS-regulated savings institutions
and may recommend enforcement actions against savings institutions to the OTS.
The supervision and regulation of the Bank is intended primarily for the
protection of the deposit insurance fund and the Bank's depositors rather than
for holders of the Company's stock or for the Company as the holder of the
stock of the Bank.
As a savings and loan holding company, the Company is registered with and is
subject to OTS regulation and supervision under the HOLA. The Company also is
required to file certain reports with, and otherwise comply with the rules and
regulations of, the Commission under the federal securities laws.
The following discussion is intended to be a summary of certain statutes,
rules and regulations affecting the Bank and the Company. A number of other
statutes and regulations have an impact on their operations. The following
summary of applicable statutes and regulations does not purport to be complete
and is qualified in its entirety by reference to such statutes and
regulations.
REGULATION AND SUPERVISION OF THE BANK
PROPOSED LEGISLATION. Legislation introduced in the United States Congress
in 1997 would, if enacted, require all federal savings institutions (such as
the Bank) to convert to a national bank or a state commercial bank, savings
bank or savings association charter and would require all savings and loan
holding companies (such as the Company) to become bank holding companies or
"financial services" holding companies. The proposed legislation includes
limited grandfather provisions for business activities of federal savings
institutions that do not conform to applicable banking regulations. Holding
companies that were formerly savings and loan holding companies would not be
subject to any additional activity restrictions so long as their subsidiaries
continued to comply with certain lending restrictions currently applicable to
federal thrifts and were not acquired by another company.
In addition, the Deposit Insurance Funds Act of 1996, enacted on September
30, 1996, requires the Secretary of the Treasury to submit a report to the
Congress by March 31, 1997, providing a detailed analysis of the issues
related to and recommendations for a common charter for savings institutions
and banks. It is anticipated that further legislation affecting the federal
thrift charter will be introduced simultaneously with or shortly after
submission of the Treasury report.
Based upon an analysis of the current provisions of the legislation proposed
to date, the management of the Company does not believe that the enactment of
such legislation would have a material adverse effect on its financial
condition or results of operations.
BUSINESS ACTIVITIES. The Bank derives its lending and investment powers from
the HOLA and the regulations of the OTS thereunder. Under these laws and
regulations, the Bank may invest in mortgage loans secured by residential and
commercial real estate, commercial and consumer loans, certain types of
commercial paper and debt securities, and certain other assets. The Bank may
also establish service corporations that may engage in activities not
otherwise permissible for the Bank, including certain real estate equity
investments and securities and insurance brokerage. These investment powers
are subject to various limitations.
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<PAGE>
REGULATORY CAPITAL AND RESERVE REQUIREMENTS. The OTS has adopted capital
adequacy regulations that require savings institutions such as the Bank to
meet three minimum capital standards: a "core" capital requirement of 3% of
adjusted total assets, a "tangible" capital requirement of 1.5% of adjusted
total assets, and a "risk-based" capital requirement of 8% of total risk-based
capital to total risk-weighted assets. In addition, the OTS has adopted
regulations imposing certain restrictions on savings institutions that have a
total risk-based capital ratio of less than 8%, a ratio of Tier 1 capital to
risk-weighted assets of less than 4% or a ratio of Tier 1 capital to total
assets of less than 4% (or 3% if the institution is rated Composite 1 under
the CAMEL examination rating system). See "--Prompt Corrective Regulatory
Action."
Certain MSRs need not be deducted in computing core and tangible capital.
Generally, the lower of 90% of the fair market value of readily marketable
MSRs, or the current unamortized book value as determined under GAAP may be
included in core and tangible capital up to a maximum of 50% of core capital
computed before the deduction of any disallowed qualifying intangible assets.
At December 31, 1996, the Bank's core capital included $35.9 million of core
deposit intangibles and MSRs, which comprised 46.1% of its core capital.
The risk-based capital requirement is measured against risk-weighted assets,
which equal the sum of each asset and the credit-equivalent amount of each
off-balance sheet item after being multiplied by an assigned risk weight,
which range from 0% to 100% as assigned by the OTS capital regulations based
on the risks the OTS believes are inherent in the type of asset. Comparable
risk weights are assigned to off-balance sheet assets.
The OTS risk-based capital regulation also includes an IRR component that
requires savings institutions with greater than normal IRR, when determining
compliance with the risk-based capital requirements, to maintain additional
total capital. The OTS has, however, indefinitely deferred enforcement of its
IRR requirements.
The table below sets forth the Bank's compliance with its regulatory capital
requirements at December 31, 1996.
<TABLE>
<CAPTION>
THE BANK'S CAPITAL CAPITAL REQUIREMENTS EXCESS CAPITAL
-------------------- ---------------------- ---------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- --------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital........ $ 72,094 5.58% $ 19,365 1.50% $52,729 4.08%
Core capital............ 77,899 6.01% 38,904 3.00% 38,995 3.01%
Total risk-based
capital................ 81,086 10.91% 59,458 8.00% 21,628 2.91%
</TABLE>
Pursuant to regulations of the Federal Reserve Board, all FDIC-insured
depository institutions must maintain average daily reserves against their
transaction accounts. No reserves are required to be maintained on the first
$4.3 million of transaction accounts, and reserves equal to 3% must be
maintained on the next $52.0 million of transaction accounts, plus reserves
equal to 10% on the remainder. These percentages are subject to adjustment by
the Federal Reserve Board. Because required reserves must be maintained in the
form of vault cash or in a non-interest-bearing account at a Federal Reserve
Bank, the effect of the reserve requirement is to reduce the amount of the
institution's interest-earning assets. As of December 31, 1996, the Bank met
its reserve requirements.
FEDERAL DEPOSIT INSURANCE. The Bank is required to pay assessments based on
a percentage of its insured deposits to the FDIC for insurance of its deposits
by the SAIF.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), the FDIC established a risk-based assessment system for
determining the deposit insurance assessments to be paid by insured depository
institutions. The assessment rate depends on the capital category and
supervisory category to which an institution is assigned. For the first nine
months of 1996, the assessment rate for SAIF-insured institutions ranged from
0.23% of deposits for well-capitalized institutions in the highest supervisory
subgroup, to 0.31% of deposits for undercapitalized institutions in the lowest
supervisory subgroup. The Bank was a "well-capitalized" institution as of
December 31, 1996.
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<PAGE>
In late 1995, the FDIC amended the risk-based assessment schedule for
depository institutions with deposits insured by the Bank Insurance Fund
("BIF"), resulting in a significant reduction in FDIC assessments for BIF-
insured but not SAIF-insured institutions. In response to this assessment
disparity, the Deposit Insurance Funds Act of 1996 (the "1996 Act"), enacted
on September 30, 1996, amended the Federal Deposit Insurance Act (the "FDI
Act") in several ways to recapitalize the SAIF and reduce the disparity
between the assessment rates for the BIF and the SAIF. The 1996 Act authorized
the FDIC to impose a special assessment on all institutions with SAIF-
assessable deposits in the amount necessary to recapitalize the SAIF to the
required reserve ratio of 1.25%. SAIF-insured institutions on November 27,
1996 paid a special assessment equal to 65.7 basis points per $100 of each
institution's SAIF-assessable deposits as of March 31, 1995. The 1996 Act
provides the amount of the special assessment that will be deductible for
federal income tax purposes for the taxable year in which the special
assessment is paid. Based on the foregoing, the Bank recorded an expense for
the special assessment in 1996 of $3.4 million, or $2.2 million net of tax. In
view of the recapitalization of the SAIF, in December 1996 the FDIC reduced
the assessment rate for SAIF-assessable deposits for periods beginning on
October 1, 1996. As a result, the insurance assessment rates for SAIF-insured
institutions, like the Bank, were set at 18 to 27 basis points for the last
quarter of 1996 and zero to 27 basis points for the first half of 1997. In
addition, SAIF-insured institutions will be required, until December 31, 1999,
to pay assessments to the FDIC at the annual rate of 6.6 basis points to help
fund interest payments on certain bonds issued by the Financing Corporation
("FICO"), an agency of the federal government established to recapitalize the
predecessor to the SAIF. During this period, BIF member banks will be assessed
for payment of the FICO obligations at the annual rate of 1.3 basis points.
After December 31, 1999, BIF and SAIF members will be assessed at the same
rate for FICO obligations.
The 1996 Act also provides that the FDIC cannot assess regular insurance
assessments for the SAIF or the BIF unless required to maintain or to achieve
the designated reserve ratio of 1.25%, except for such assessments on those
institutions that are not classified as "well-capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational
or compliance weaknesses. The Bank is classified as "well-capitalized" and has
not been found by the OTS to have such supervisory weaknesses. Accordingly,
assuming that the designated reserve ratio is maintained by the SAIF after the
collection of the special SAIF assessment, the Bank, as long as it maintains
its capital and supervisory status, will pay substantially lower FDIC
assessments compared to those paid by the Bank in recent years.
QUALIFIED THRIFT LENDER TEST. The HOLA and OTS regulations require all
savings institutions to meet a Qualified Thrift Lender ("QTL") test. Under the
HOLA's QTL test, a savings institution is required to maintain at least 65% of
its "portfolio assets" in certain "Qualified Thrift Investments" in at least
nine months of the most recent 12-month period. Under OTS implementing
regulations, portfolio assets are defined as total assets less intangibles,
property used by a savings institution in its business and liquidity
investments in an amount not exceeding 20% of assets. Qualified Thrift
Investments consist of (i) loans, equity positions or securities related to
domestic, residential real estate or manufactured housing and (ii) 50% of the
dollar amount of residential mortgage loans subject to sale under certain
conditions. In addition, subject to a 20% of portfolio assets limit, savings
institutions are able to treat as Qualified Thrift Investments 200% of their
investments in loans to finance "starter homes" and loans for construction,
development or improvement of housing and community service facilities or for
financing small business in "credit needy" areas.
A savings institution that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. An
initial failure to qualify as a QTL results in a number of sanctions,
including the imposition of certain operating restrictions and a restriction
on obtaining additional advances from its Federal Home Loan Bank. If a savings
institution does not requalify under the QTL test within the three-year period
after it fails the QTL test, it would be required to terminate any activity
not permissible for a national bank and repay as promptly as possible any
outstanding advances from its Federal Home Loan Bank. In addition, the holding
company of such an institution, such as the Company, would similarly be
required to register as a bank holding company with the Federal Reserve Board.
See "--Regulation and Supervision of the Company." At December 31, 1996, the
Bank qualified as a QTL.
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<PAGE>
Legislation enacted into law on September 30, 1996 made certain amendments
to the HOLA that significantly liberalize the QTL test. First, the new law
permits loans to small businesses, student loans and credit card loans to be
counted as Qualified Thrift Investments without percentage limits. The current
10% limit on all other loans to households is eliminated by the new law, and
such loans may now be counted toward the QTL test within the 20% of portfolio
assets limit. Second, the statute amends the QTL test to provide that a
savings institution may be considered a QTL either (i) by satisfying the
HOLA's QTL requirements or (ii) by qualifying as a "domestic building and loan
association" as defined under the Internal Revenue Code of 1986, as amended
(the "Code"). In order for a savings institution to be defined as a domestic
building and loan association under the Code, at least 60% of its total assets
must consist of: (a) cash; (b) obligations of the United States, a state or a
political subdivision thereof or obligations of a corporation that is an
instrumentality of any of the foregoing, except for certain obligations the
interest on which is excludable from gross income; (c) obligations of a state-
chartered deposit insurance corporation; (d) loans secured by deposits in the
institution; (e) loans secured by, or for the improvement of, residential real
property or real property used for church purposes; (f) loans secured by, or
for the improvement of, urban real property qualifying under specified federal
government programs; (g) loans secured by an interest in educational, health
or welfare institutions or facilities; (h) property acquired through the
liquidation of defaulted loans described in clauses (e), (f) or (g); (i)
educational loans; (j) property used by the institution in the conduct of its
business and (k) most interests in real estate mortgage investment conduits.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDI Act, as amended by FDICIA and
the Riegle Community Development and Regulatory Improvement Act of 1994,
requires the OTS, together with the other federal bank regulatory agencies, to
prescribe standards, by regulation or guideline, relating to internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate risk exposure, asset growth, asset quality,
earnings, stock valuation, and compensation, fees and benefits and such other
operational and managerial standards as the agencies deem appropriate. The OTS
and the federal bank regulatory agencies adopted, effective August 9, 1995, a
set of guidelines prescribing safety and soundness standards pursuant to the
statute. The safety and soundness guidelines establish general standards
relating to internal controls and information systems, internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth,
and compensation, fees and benefits. In general, the guidelines require, among
other things, appropriate systems and practices to identify and manage the
risks and exposures specified in the guidelines. The guidelines prohibit
excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal stockholder.
In addition, on July 10, 1995, the OTS and the federal bank regulatory
agencies proposed guidelines for asset quality and earnings standards. Under
the proposed standards, a savings institution would be required to maintain
systems, commensurate with its size and the nature and scope of its
operations, to identify problem assets and prevent deterioration in those
assets as well as to evaluate and monitor earnings and ensure that earnings
are sufficient to maintain adequate capital and reserves. Management believes
that the asset quality and earnings standards, in the form proposed by banking
agencies, would not have a material effect on the operations of the Bank.
PROMPT CORRECTIVE REGULATORY ACTION. Under FDICIA, the federal banking
regulators are required to take prompt corrective action in respect of
depository institutions that do not meet certain minimum capital requirements,
including a leverage limit and a risk-based capital requirement. All
institutions, regardless of their capital levels, are restricted from making
any capital distribution or paying any management fees that would cause the
institution to become undercapitalized. As required by FDICIA, banking
regulators, including the OTS, have issued regulations that classify insured
depository institutions by capital levels and provide that the applicable
agency will take various prompt corrective actions to resolve the problems of
any institution that fails to satisfy the capital standards.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulations currently impose
limitations upon capital distributions by savings institutions, such as cash
dividends, payments to repurchase or otherwise acquire its
61
<PAGE>
shares, payments to stockholders of another institution in a cash-out merger
and other distributions charged against capital. A savings institution must
give notice to the OTS at least 30 days before payment of a proposed capital
distribution, and capital distributions in excess of specified earnings or by
certain institutions are subject to approval by the OTS. A savings institution
that has capital in excess of all regulatory capital requirements before and
after a proposed capital distribution and that is not otherwise restricted in
making capital distributions, may, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year equal to the
greater of (a) 100% of its net earnings to date during the calendar year plus
the amount that would reduce by one-half its "surplus capital ratio" (the
excess capital over its fully phased-in capital requirements) at the beginning
of the calendar year, or (b) 75% of its net earnings for the previous four
quarters. Any additional capital distributions would require prior OTS
approval. The OTS has proposed regulations that would simplify the existing
procedures governing capital distributions by savings institutions.
In addition to the foregoing, earnings of the Bank appropriated to bad debt
reserves and deducted for federal income tax purposes are not available for
payment of dividends or other distributions to the Company without payment of
taxes at the then current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions.
REAL ESTATE LENDING STANDARDS. Under joint regulations of the federal
banking agencies, including the OTS, savings institutions must adopt and
maintain written policies that establish appropriate limits and standards for
extensions of credit that are secured by liens or interests in real estate or
are made for the purpose of financing permanent improvements to real estate.
These policies must establish loan portfolio diversification standards,
prudent underwriting standards, including loan-to-value limits, that are clear
and measurable, loan administration procedures and documentation, approval and
reporting requirements. An institution's real estate lending policy must
reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies (the "Interagency Guidelines") that have been adopted by the federal
bank regulators. The Interagency Guidelines, among other things, call upon
depository institutions to establish internal loan-to-value limits for real
estate loans that are not in excess of the loan-to-value limits specified in
the Interagency Guidelines for the various types of real estate loans. The
Interagency Guidelines state that it may be appropriate in individual cases to
originate or purchase loans with loan-to-value ratios in excess of the
supervisory loan-to-value limits.
FEDERAL CONSUMER CREDIT AND NON-DISCRIMINATION REGULATION. The Company's
mortgage lending activities are subject to the provisions of various federal
and state statutes, including, among others, the Truth in Lending Act, the
Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act, the
Fair Housing Act and the regulations promulgated thereunder. These statutes
and regulations, among other things, prohibit discrimination on the basis of
race, gender or other designated characteristics, prohibit unfair and
deceptive trade practices, require the disclosure of certain basic information
to mortgage borrowers concerning credit terms and settlement costs, and
otherwise regulate terms and conditions of credit and the procedures by which
credit is offered and administered. Each of the foregoing statutes provides
for various administrative, civil and, in limited circumstances, criminal
enforcement procedures, and violations thereof may also lead to class actions
seeking actual and/or punitive damages.
The Bank attempts in good faith to comply with the provisions of these
statutes and their implementing regulations, however, the provisions are
complex and even inadvertent non-compliance could result in liability to the
Bank. The Bank currently has a staff of 40 persons in the consumer compliance
area, including many with extensive experience and/or training, and has
devoted significant resources to attempt to assure that the lending activities
continue to demonstrate material compliance with all applicable statutes,
regulations and rules. During the past several years numerous individual
claims, purported class actions and federal enforcement proceedings have been
commenced against a number of financial institutions alleging that one or more
of these provisions have been violated. While the Bank has incurred no
material detriment as a result of these actions, there can be no assurance
that one or more aspects of its lending program will not be found to have been
in violation of these statutes.
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<PAGE>
TRANSACTIONS WITH AFFILIATES. The Bank is subject to restrictions imposed by
federal law on extensions of credit to, and certain other transactions with,
the Company and other affiliates, and on investments in the stock or other
securities thereof. Such restrictions prevent the Company and such other
affiliates from borrowing from the Bank unless the loans are secured by
specified collateral, and require such transactions to have terms comparable
to terms of arms-length transactions with third persons. Further, such secured
loans and other transactions and investments by the Bank are generally limited
in amount as to the Company and as to any other affiliate to 10% of the Bank's
capital and surplus and as to the Company and all other affiliates to an
aggregate of 20% of the Bank's capital and surplus. These regulations and
restrictions may limit the Company's ability to obtain funds from the Bank for
its cash needs, including funds for acquisitions and for payment of dividends,
interest and operating expenses. The Bank's ability to extend credit to its
directors, executive officers, and 10% stockholders, as well as to entities
controlled by such persons, is governed by the requirements of Sections 22(g)
and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve
Board thereunder.
LIQUIDITY REQUIREMENTS. The Bank is required by OTS regulation to maintain
an average daily balance of liquid assets (cash, certain time deposits,
bankers' acceptances, highly rated corporate debt and commercial paper,
securities of certain mutual funds, and specified United States government,
state or federal agency obligations) equal to the monthly average of not less
than a specified percentage (currently 5%) of its net withdrawable savings
deposits plus short-term borrowings. The average daily liquidity ratio of the
Bank for the month ended December 31, 1996 was 21.5%. The Bank is also
required to maintain average daily balances of short-term liquid assets at a
specified percentage (currently 1%) of the total of its net withdrawable
savings accounts and borrowings payable in one year or less. The Bank was in
compliance with the 1% requirement at December 31, 1996. Monetary penalties
may be imposed for failure to meet liquidity requirements.
BRANCHING. Subject to certain limitations, the HOLA and the OTS regulations
currently permit federally chartered savings institutions such as the Bank to
establish branches in any state of the United States. The authority to
establish such branches is available (a) in states that expressly authorize
branches of savings institutions located in another state or (b) to a federal
savings institution that qualifies as a "domestic building and loan
association" under the Code. See "--Qualified Thrift Lender Test." The
authority for a federal savings institution to establish an interstate branch
network would facilitate a geographic diversification of the institution's
activities. This authority under the HOLA and the OTS regulations preempts any
state law purporting to regulate branching by federal savings institutions.
However, recently proposed federal legislation could, if enacted, restrict the
Bank's ability to open branches in states other than Michigan.
FEDERAL HOME LOAN BANK SYSTEM. The Federal Home Loan Bank System consists of
12 district Federal Home Loan Banks subject to supervision and regulation by
the Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks
provide a central credit facility primarily for member institutions. As a
member of the FHLB, the Bank is required to acquire and hold shares of capital
stock in the FHLB in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Bank was in compliance
with this requirement, with an investment in FHLB stock at December 31, 1996
of $19.7 million. Long-term FHLB advances may only be made for the purpose of
providing funds for residential housing finance. At December 31, 1996, the
Bank had total advances of $389.8 million outstanding from the FHLB.
REGULATION AND SUPERVISION OF THE COMPANY
The Company is a savings and loan holding company under the HOLA and, as
such, is subject to OTS regulation, supervision and examination. In addition,
the OTS has enforcement authority over the Company and its non-savings
institution subsidiaries and may restrict or prohibit activities that are
determined to represent a serious risk to the safety, soundness or stability
of the Bank or any other subsidiary savings institution.
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<PAGE>
Under the HOLA, a savings and loan holding company may not (i) acquire, with
certain exceptions, more than 5% of a non-subsidiary savings institution or a
non-subsidiary savings and loan holding company; or (ii) acquire or retain
control of a depository institution that is not insured by the FDIC.
As a unitary savings and loan holding company, the Company generally is not
subject to any restriction as to the types of business activities in which it
may engage, provided that the Bank continues to satisfy the QTL test. See "--
Regulation and Supervision of the Bank--Qualified Thrift Lender Test." Upon
any non-supervisory acquisition by the Company of another savings institution
that is held as a separate subsidiary, the Company would become a multiple
savings and loan holding company and would be subject to limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under the Bank Holding Company Act, subject to the prior approval of
the OTS, and to other activities authorized by OTS regulation.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Board of Directors of the Company currently consists of the same
individuals who serve as directors of the Bank. The Board of Directors of the
Company is divided into three classes. Directors of the Company each serve for
three year terms or until their successors are elected and qualified, with
one-third of the directors being elected at each annual meeting of
shareholders. The term of each director of the Company expires at the same
time as such person's term as a director of the Bank. Messrs. Bortels, Ellman,
Nichols and Bazzy and Ms. McGuire have submitted their resignations as members
of the Board of Directors of the Company effective upon consummation of the
Offering. They will remain directors of the Bank. Messrs. Elsea, Isbister,
Kersten, Kojaian and Carrie have been elected to replace such resigning
directors, effective upon consummation of the Offering. See "--Newly Elected
Directors."
The executive officers of the Company also serve as executive officers of
the Bank. Since the formation of the Company, none of the Company's executive
officers or directors have received compensation from the Company in their
capacity as such.
The following table sets forth the name, age and position with the Company
of each person who is an executive officer or director of the Company or a
newly elected director and also sets forth the expiration of each director's
term.
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE(1) POSITION WITH THE COMPANY TO EXPIRE
- ---- ------ ------------------------- -------------
<S> <C> <C> <C>
Thomas J. Hammond....... 53 Chairman and Chief Executive Officer 1999
Mark T. Hammond......... 31 Vice Chairman and President 1998
Joan H. Anderson........ 46 Director and Executive Vice
President 1999
Mary Kay McGuire........ 40 Director, Senior Vice President and 2000
Secretary
Ronald I. Nichols, 62 Director
Sr. ................... 2000
James D. Coleman........ 49 Director 2000
Charles Bazzy........... 67 Director 1998
William B. Bortels...... 62 Director 1998
Harry S. Ellman......... 49 Director 1999
NEWLY ELECTED DIRECTORS:
Richard S. Elsea........ 67 Director 2000
James D. Isbister....... 59 Director 1998
John Kersten............ 55 Director 1998
C. Michael Kojaian...... 35 Director 1999
Michael W. Carrie....... 42 Director, Executive Vice President 2000
and
Chief Financial Officer
</TABLE>
- --------
(1) As of December 31, 1996
The following sets forth the business experience and other information for
each of the current directors of the Company.
THOMAS J. HAMMOND has served as Chairman of the Board of Directors and Chief
Executive Officer of the Company since its formation in 1993 and served as
President from 1993 to January 1997. He has served as Chairman of the Board of
Directors and Chief Executive Officer of the Bank since the Bank's formation
in 1987 and served as President of the Bank from 1987 to September 1995. Mr.
Hammond has over 29 years of experience in the mortgage lending industry.
After earning a BSBA and an MBA in finance, Mr. Hammond
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began his career as a Staff Financial Analyst for Ford Motor Company in 1966.
Prior to founding the Bank in 1987, Mr. Hammond formed and managed a series of
companies in the financial services industry, including Hammond Mortgage
Corporation, Seller's & Homeowner's Uniform Receipt of Equity, Inc. and First
Security Mortgage Corporation (formerly known as Oak Hills Mortgage
Corporation) dating back to 1969. Mr. Hammond founded Hammond Mortgage
Corporation, a residential mortgage brokerage firm, in 1969. This company did
business nationwide and operated branches in eight different states and was
one of the country's largest FHA mortgage lenders prior to being sold to
Michigan National Bank in 1981. It eventually became known as Independence One
and is now part of Norwest Mortgage, Inc. Mr. Hammond is the father of Mark T.
Hammond, the Vice Chairman and President of the Company and the Bank.
MARK T. HAMMOND has been Vice-Chairman of the Board of Directors and
President of the Company since January 1997. Previously, Mr. Hammond served as
the Company's Vice President from its formation in 1993 through April 1994 and
then as its Executive Vice President from April 1994 through January 1997. He
has also served as President of the Bank since September 1995. He has served
as a member of the Bank's Board of Directors since 1991 and as its Vice
Chairman since 1993. He has also served as Executive Vice President of the
Bank from 1991 to September 1995 in charge of mortgage operations, wholesale
lending and construction lending. From 1989 to 1991, he served as the Bank's
Senior Vice President in charge of secondary marketing and mortgage
production. Mr. Hammond was a loan officer in 1987 for the Bank, worked part-
time in the financial services industry from 1982 to 1986 and is a graduate of
Wharton Business School. Mr. Hammond was responsible for the national
expansion of the Bank's loan production offices and has played a lead role in
the development and implementation of new technology for the Bank. Mr. Hammond
recently served on one of Fannie Mae's regional advisory councils. Mr. Hammond
is the son of Thomas J. Hammond, the Chairman and Chief Executive Officer of
the Company and the Bank.
JOAN H. ANDERSON has been Executive Vice President of the Company since
1994. She has been a Director of the Company since January 1997 and a Director
of the Bank since 1987. She also serves as the Bank's Executive Vice President
in charge of mortgage loan servicing, collections and real estate holdings, a
position she has occupied since 1988. Ms. Anderson served as a Senior Vice
President of the Bank from 1987 to 1988. Prior to that time, she held various
positions with mortgage lending companies owned by Thomas J. Hammond and has
worked in the financial services industry since 1970.
MARY KAY MCGUIRE has been Secretary of the Company since its formation in
1993 and has been a Senior Vice President of the Company since 1994. She has
been a Director of the Company since January 1997 and a Director of the Bank
since September 1987. She has also served as the Bank's Secretary since its
formation in 1987, and Senior Vice President of the Bank in charge of human
resources, purchasing and facilities management since 1988 and advertising
since 1996. She also served as a Vice President of the Bank from 1987 to 1988.
Prior to that time, Ms. McGuire served with Mr. Thomas Hammond since 1977 and
has worked in the financial services industry since 1974.
RONALD I. NICHOLS, SR. has served as a Director of the Company since its
formation in 1993 and as a Director of the Bank since 1988. He has been
President of Nichols Sales Associates, Inc. located in Bloomfield Hills,
Michigan since 1969.
DR. JAMES D. COLEMAN has been a Director of the Company since its formation
in 1993 and a Director of the Bank since its formation in 1987. He has served
as Director of Emergency Services of Emergicare Physicians since 1979, which
provides emergency room staffing for Oakwood Hospital on a contract basis. He
also serves as Vice-Chief of the Foundation Board of Directors of Oakwood
Hospital located in Dearborn, Michigan.
CHARLES BAZZY has served as a Director of the Company since its formation in
1993 and as a Director of the Bank since 1988. He has been a manufacturer's
sales representative for and principal of Charles Bazzy & Associates located
in Bloomfield Hills, Michigan. Prior to 1988, he was a planning and
development manager for Ford Motor Company and was with Ford Motor Company for
33 years.
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WILLIAM B. BORTELS has been a Director of the Company since January 1997 and
a Director of the Bank since 1991. He has been a self-employed single-family
home builder in Brighton, Michigan since 1964.
HARRY S. ELLMAN has served as a Director of the Company since January 1997
and a Director of the Bank since 1990. He has been a title insurance agent and
attorney with Fidelity Title Co. located in Bingham Farms, Michigan since
1987. He is also a member of the State Bar of Michigan, the Building Industry
Association of Southeast Michigan and is a past chairman of the Income
Producing Committee of the Mortgage Bankers' Association.
NEWLY ELECTED DIRECTORS
Upon consummation of the Offering, the resignations of Messrs. Bortels,
Ellman, Nichols and Bazzy and Ms. McGuire will be effective and the election
of Messrs. Elsea, Isbister, Kersten, Kojaian and Carrie to replace them as
members of the Board of Directors of the Company will also be effective. The
following sets forth the business experience and other information for each of
the newly elected directors of the Company.
RICHARD S. ELSEA has been affiliated with Real Estate One, Inc., a
residential brokerage company based in Detroit, Michigan since 1954. Mr. Elsea
currently owns and is President of Real Estate One, which is one of Michigan's
largest real estate brokerage companies. Mr. Elsea has over 40 years
experience in the family real estate brokerage business and has held various
positions on local and Michigan boards of Realtors as well as with other real
estate related organizations. Mr. Elsea also serves on the board of The Realty
Alliance, a national real estate organization consisting of many of the
nation's largest real estate companies.
JAMES D. ISBISTER has been Vice Chairman of Shire Laboratories since March
1997. Prior to assuming his current position, Mr. Isbister was Chief Executive
Officer and Chairman of Pharmavene, Inc. since 1990 and 1995, respectively.
Mr. Isbister has been Senior Vice President of the National Blue Cross and
Blue Shield Association and Deputy Director of the National Institute of
Mental Health. Mr. Isbister was appointed by President Ford to the position of
Associate Director for Management of the U.S. International Communication
Agency and was appointed by President Carter as the First Director of the U.S.
Alcohol, Drug Abuse and Mental Health Administration. Mr. Isbister is the
father-in-law of Mark T. Hammond.
JOHN KERSTEN has owned and been President of Century 21 Town and Country
Real Estate since 1980. Century 21 Town and Country Real Estate, which is
based in Sterling Heights, Michigan, is one of Michigan's largest real estate
brokerage companies. Mr. Kersten has also served as President of several
local and Michigan real estate associations, the Michigan Multiple Listing
Service and is the current President of the Detroit Metro Brokers Council.
C. MICHAEL KOJAIAN has served as the Executive Vice President from 1989 to
1996 and as President and as a Director since January 1, 1997 of the Kojaian
Companies, a midwestern based real estate development and asset management
organization which owns and operates several million square feet of office,
industrial and retail properties. Mr. Kojaian has also been a Director of
Grubb & Ellis, a publicly traded full-service commercial real estate firm,
since December 1996. Grubb & Ellis completed over 13,000 real estate
transactions and managed over 84 million square feet of commercial office
space throughout the nation during 1996. Mr. Kojaian has also been a director
of DOTT Industries, a specialized manufacturer of automotive components with
domestic and international operations since 1991.
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MICHAEL W. CARRIE has served as the Company's Executive Vice President and
Chief Financial Officer since January 1997. He served as Treasurer of the
Company from 1993 to 1997. He has also served as Chief Financial Officer of
the Bank since 1993, and as its Executive Vice President in charge of
financial planning, financial accounting, cash management, investor reporting,
regulatory accounting, loan funding and information services since 1995. From
1993 to 1995 he served as Senior Vice President of the Bank. From 1985 until
1993, he served as Vice President and Manager of Financial Analysis of a major
regional federal savings bank. From July 1994 to February 1996, Mr. Carrie
also served as a director of Security Savings after its acquisition by the
Company.
KEY EMPLOYEES OF THE BANK
The Bank has 14 Senior Vice Presidents or First Vice Presidents, many of
which have been with the Bank since its formation in 1987. The Senior Vice
Presidents in charge of treasury management, administration, risk management
and underwriting previously worked for Hammond Mortgage Company, Thomas
Hammond's prior company, during the 1970's. Only one senior officer has
resigned from the Bank in the last ten years.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company generally meets on a monthly basis, as
needed. The Board of Directors of the Bank holds regular monthly meetings and
special meetings as needed. During the year ended December 31, 1996, the
Company's and the Bank's Boards each met 12 times. No director attended fewer
than 75% in the aggregate of the total number of such Board meetings held
while such director was a member during the year ended December 31, 1996 and
the total number of meetings held by committees on which such director served
during such year.
The Company's full Board of Directors acts as a nominating committee for the
annual selection of its nominees for election as directors of the Company.
While the Board of Directors will consider nominees recommended by
stockholders, it has not actively solicited recommendations from the Company's
stockholders for nominees nor, subject to the procedural requirements set
forth in the Company's Restated Articles and Bylaws, established any
procedures for this purpose. The Company's Board of Directors met once in its
capacity as the nominating committee during 1996.
The Bank's full Board of Directors acts as a compensation committee for both
the Company and the Bank and met 12 times in this capacity during 1996 to
examine the performance and approve the compensation of the officers.
The Bank's Audit Committee consists of directors Coleman (Chairman), Bazzy
and Bortels and performs the functions of the Company's and the Bank's
respective audit committees. The Audit Committee is responsible for reviewing
the Company's and the Bank's auditing programs, overseeing the quarterly
regulatory reporting process, overseeing internal compliance audits as
necessary, receiving and reviewing the results of each external audit,
reviewing management's response to auditors' recommendations, and reviewing
management's reports on cases of financial misconduct by employees, officers
or directors. The Audit Committee met four times in 1996.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the cash and
noncash compensation for each of the last three years awarded to or earned by
certain executive officers of the Company for services rendered in all
capacities to the Company and its subsidiaries.
<TABLE>
<CAPTION>
OTHER ANNUAL
COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) COMPENSATION
- --------------------------- ---- ---------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Thomas J. Hammond........ 1996 $1,000,000(2) $793,580 -- $49,300(5)
Chairman of the Board 1995 529,600 737,102 -- 56,340(6)
and Chief Executive 1994 529,600 616,301 -- 43,580(7)
Officer
Mark T. Hammond(3)....... 1996 $ 405,002 $ 12,600 -- $23,418(5)
Vice Chairman of the
Board and President 1995 298,369 12,779 -- 32,491(6)
1994 276,694 17,450 -- 23,683(7)
Michael W. Carrie(4)..... 1996 $ 204,314 $ 8,568 -- $11,700(5)
Executive Vice President
and Chief Financial 1995 160,640 8,042 -- 18,900(6)
Officer 1994 147,577 5,143 -- 8,477(7)
Joan H. Anderson......... 1996 $ 149,450 $ 10,080 -- $27,300(5)
Executive Vice President
and Director 1995 137,169 10,989 -- 23,978(6)
1994 120,738 27,450 -- 20,988(7)
</TABLE>
- --------
(1) Executive officers of the Company receive certain perquisites and other
personal benefits. In each case, the amount of such benefits received by
each executive officer in each of the years 1996, 1995 and 1994 did not
exceed $50,000 or 10% of such executive officer's salary and bonus.
(2) In conjunction with the adoption of the 1997 Incentive Compensation Plan,
Thomas J. Hammond's salary will be at an annual rate of $600,000 following
the Offering. See "Certain Benefit Plans and Agreements--Incentive
Compensation Plan."
(3) Mark T. Hammond was elected President of the Company and the Bank in
September 1995.
(4) Michael W. Carrie joined the Company and the Bank in January 1993 as Chief
Financial Officer. He assumed his current position as Executive Vice
President in November 1995.
(5) Includes payments to Thomas J. Hammond, Mark T. Hammond, Michael W. Carrie
and Joan H. Anderson of $13,200, $14,400, $0 and $14,400, respectively,
for Board fees, $4,500, $3,219, $4,500 and $4,500, respectively, in 401(k)
contributions, and $31,600, $5,799, $7,200 and $8,400, respectively, in
term life insurance premium equivalent payments.
(6) Includes payments to Thomas J. Hammond, Mark T. Hammond, Michael W. Carrie
and Joan H. Anderson of $25,200, $25,200, $9,600 and $15,600,
respectively, for Board fees, $4,500, $3,500, $4,500 and $2,378,
respectively, in 401(k) contributions and $26,640, $3,791, $4,800 and
$6,000, respectively, in term life insurance premium equivalent payments
for such persons.
(7) Includes payments to Thomas J. Hammond, Mark T. Hammond, Michael W. Carrie
and Joan H. Anderson of $17,400, $17,400, $4,000 and $13,400,
respectively, for Board fees, $4,500, $4,500, $2,077 and $3,988,
respectively, in 401(k) contributions, and $21,680, $1,783, $2,400 and
$3,600, respectively, in term life insurance premium equivalent payments.
DIRECTOR COMPENSATION
Directors of the Company presently do not receive compensation in their
capacities as such. Following the Offering, directors of the Company who are
not also directors of the Bank are expected to be compensated to the same
extent as Bank directors. In addition, they will be eligible to participate in
the Stock Option Plan. See "--Certain Benefit Plans and Agreements--Stock
Option Plan." Directors of the Bank receive fees of $1,200 for each meeting
attended. During 1996, directors' fees for each director of the Bank totaled
$14,400 plus a $1,200 bonus. The directors do not receive any additional
compensation for serving on committees.
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CERTAIN BENEFIT PLANS AND AGREEMENTS
In connection with the Offering and subject to its successful completion,
the Boards of Directors of the Company and the Bank have approved various
incentive or other plans and several employment agreements.
BASIS FOR AWARDS OF BENEFITS AND COMPENSATION. The Company's and the Bank's
Boards of Directors have evaluated and approved the terms of the employment
agreements and other benefits described below. In their review of the benefits
and compensation of the executive officers and the terms of the employment
agreements and severance agreements, the Boards of Directors considered a
number of factors, including the experience, tenure and ability of the
executive officers, their performance during their tenure and the various
legal and regulatory requirements regarding the levels of compensation which
may be paid to employees of savings associations. Where appropriate, these
plans have been approved by the Company's stockholders.
STOCK OPTION PLAN. The 1997 Employees and Directors Stock Option Plan (the
"Option Plan") will be effective upon the successful completion of the
Offering. The purpose of the Option Plan is to provide an additional incentive
to directors and employees by facilitating their purchase of Common Stock. The
Option Plan has a term of 10 years from the date of its approval by the
Company's stockholders, after which no awards may be made. Pursuant to the
Option Plan, a number of shares equal to 10% of the shares of Common Stock
that are to be outstanding immediately following the Offering (without giving
effect to the exercise of the over-allotment options), would be reserved for
future issuance by the Company, in the form of newly issued or treasury shares
or shares held in a grantor trust, upon exercise of stock options ("Options").
Options are collectively referred to herein as "Awards." If Awards should
expire, become unexercisable or be forfeited for any reason without having
been exercised or having become vested in full, the shares of Common Stock
subject to such Awards would, unless the Option Plan shall have been
terminated, be available for the grant of additional Awards under the Option
Plan.
The Option Plan will be administered by a committee of at least two non-
employee directors of the Company who are designated by the Board of Directors
(the "Option Committee"). The Option Committee will select the employees to
whom Awards are to be granted, the number of shares to be subject to such
Awards, and the terms and conditions of such Awards (provided that any
discretion exercised by the Option Committee must be consistent with the terms
of the Option Plan).
It is intended that Options granted under the Option Plan will constitute
both incentive stock options ("ISOs") and non-incentive stock options ("non-
ISOs"). ISOs are options that comply with certain restrictions pursuant to
Section 422 of the Code and thereby provide favorable tax treatment to
recipients, although they do not result in tax deductions to the Company
unless participants fail to comply with Section 422 of the Code. Non-ISOs are
stock options that fail to qualify as ISOs, either at the time of grant or
upon exercise.
The exercise price for ISOs may not be less than 100% of the fair market
value of the shares on the date of the grant. Non-ISOs may be granted with any
exercise price of 50% or more of the fair market value of the shares on the
date of grant, although a recipient will recognize taxable income upon the
receipt of a non-ISO with an exercise price that is substantially less than
its fair market value. The Plan permits the Option Committee to impose
transfer restrictions, such as a right of first refusal, on the Common Stock
that optionees may purchase.
No Option will be exercisable earlier than one year following the Offering
or later than ten years from the date it is granted (five years in the case of
non-employee directors) unless a shorter period is provided by the Option
Committee; provided, however, that in the case of any employee who owns more
than 10% of the outstanding Common Stock at the time an ISO is granted, the
option price for the ISO shall not be less than 110% of the fair market value
of the shares on the date of the grant and the ISO shall not be exercisable
after the expiration of five years from the date it is granted unless a
shorter period is provided.
An otherwise unexpired Option shall, unless otherwise determined by the
Option Committee, cease to be exercisable upon (i) an employee's termination
of employment for "just cause" (as defined in the Option Plan), (ii) the date
three months after an employee terminates service for a reason other than
death or disability, (iii) the date one year after an employee terminates
service due to disability, or (iv) the date two years after termination
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of such service due to the employee's death. Options granted to non-employee
directors will automatically expire one year after termination of service on
the Board of Directors (two years in the event of death). Effective upon
consummation of the Offering, Thomas Hammond, Mark Hammond, Joan Anderson and
Michael Carrie will be granted options under the Option Plan to acquire,
respectively, 400,000 shares, 250,000 shares, 45,000 shares, and 65,000 shares
of Common Stock.
The Company will receive no monetary consideration for the granting of
Awards under the Option Plan and will receive no monetary consideration other
than the Option exercise price for each share issued to optionees upon the
exercise of Options. The Option exercise price may be paid in cash or Common
Stock. The exercise of Options will be subject to such terms and conditions
established by the Option Committee as are set forth in a written agreement
between the Option Committee and the optionee (to be entered into at the time
an Award is granted). No Award is assignable or transferable except by will or
the laws of descent and distribution, although, limited transfers, principally
to immediate family members, would be permitted if a pending change in the law
is approved.
EMPLOYEE STOCK ACQUISITION PLAN. The Flagstar Bancorp, Inc. 1997 Employee
Stock Acquisition Plan ("Purchase Plan") will be effective upon the successful
completion of the Offering. The purpose of the Purchase Plan is to encourage
broad-based ownership by employees of the Company and, as a result, to provide
an incentive for employees at all levels to contribute to the profitability
and success of the Company. The Purchase Plan will enable the Company to offer
a convenient means for the employees who might not otherwise own Common Stock
to purchase and hold the Common Stock, and through the partial refund feature
of the Purchase Plan, to provide a meaningful inducement to participate.
The Purchase Plan will be administered by the Board of Directors. All
employees of the Company, its subsidiaries or affiliates who work 20 hours per
week or more with at least 12 months of continuous employment and all
directors will be eligible to participate.
Under the Purchase Plan, eligible participants would be free to purchase
from any third party and on the open market shares of the Common Stock and,
upon providing evidence of the purchase to the Company, the employees would
receive a payment from the Company equal to 15% of the full price of the
shares. No employee would receive such reimbursement for total purchases in
any one year in excess of 7% of the employee's gross income from the Company
in the prior calendar year. Costs related to the sale of such shares will be
borne by the individuals. Participants in the Purchase Plan will be asked to
sign a statement acknowledging that they are aware of the condition of the
Purchase Plan that the shares so purchased may not be sold for a period of one
year.
Participants will be entitled, with respect to Common Stock acquired under
the Purchase Plan, to the same rights and distributions as are other holders
of the Common Stock. The Purchase Plan has not been designed to comply with
the requirements of Section 423 of the Code with respect to "employee stock
purchase plans." As a result, participants in the Purchase Plan will likely be
taxed for federal income tax purposes in the year the refund is received by
them. Costs incurred by the Company pursuant to the Purchase Plan are expected
to be deductible as an expense by the Company.
INCENTIVE COMPENSATION PLAN. The Flagstar Bancorp, Inc. 1997 Incentive
Compensation Plan (the "Incentive Compensation Plan") is to be effective upon
the successful completion of the Offering. The Incentive Compensation Plan
will be unfunded and benefits will be payable only in the form of cash from
the Company's general assets. The purposes of the Incentive Compensation Plan
will be to attract and retain the best available personnel for positions of
substantial responsibility with the Company and to provide additional
incentives to employees of the Company in the event the Company achieves
certain financial performance goals indicative of its profitability and
stability.
The Incentive Compensation Plan will be administered by a committee (the
"Incentive Compensation Committee") consisting of the Company's Compensation
Committee. The Incentive Compensation Committee will decide, from year to
year, which employees of the Company will be eligible to participate in the
Incentive Compensation Plan and the size of the bonus pool. The plan year of
the Incentive Compensation Plan will
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correspond to the Company's fiscal year. Directors who are not employees may
not participate in the Incentive Compensation Plan.
Each employee who is eligible to receive a bonus at the end of a plan year
will receive a bonus equal to a specified percentage of his or her base salary
adjusted by a mathematical formula which reflects aspects of the Company's
results for that year. However, the Incentive Compensation Committee may, in
its discretion, by resolution adopted before the first day of any plan year,
change said percentage. The aggregate amount of bonuses payable for any plan
year will be proportionately reduced to the extent that the payment would
cause the Bank to cease to be a "well-capitalized" institution. For 1997, the
Incentive Compensation Plan provides for bonuses to be tied to return on
equity, return on assets, deposit growth, CAMELS rating and the volume of loan
originations.
DEFERRED COMPENSATION PLAN. The 1997 Deferred Compensation Plan (the
"Plan"), to be effective upon the completion of the Offering, is intended to
permit employees and directors to defer the current receipt of income until
such time as funds or assets are distributed in the future. Employees may
elect to defer up to 25 percent of annual compensation and directors may defer
their entire compensation. Funds deferred remain the property of the Bank or
the Company and subject to the claims of the creditors of the Bank or the
Company in the event of default. However, the funds will be placed in a trust
with an independent trustee and the individual participants may direct that
their deferred amounts be invested in stock of the Company purchased on the
open market. Upon withdrawal, the participant will have the option of
receiving the stock or the proceeds of its sale at the then market price. All
withdrawals from the Plan trust would then be taxable as ordinary income.
EMPLOYMENT AGREEMENTS. The Company and the Bank intend to enter into
separate employment agreements pursuant to which Thomas J. Hammond would serve
as Chairman and Chief Executive Officer of the Company and the Bank and Mark
T. Hammond would serve as President of the Company and the Bank. In such
capacities, Messrs. Hammond and Hammond are responsible for overseeing all
operations of the Company and the Bank, and for implementing the policies
adopted by the Boards of Directors. In addition, the Company and the Bank
intend to enter into separate employment agreements with Mr. Carrie in his
capacity as Executive Vice President and Chief Financial Officer and Ms.
Anderson in her capacity as Executive Vice President of the Company. All such
employment agreements are referred to herein collectively as "Employment
Agreements" and all persons who will enter into such Employment Agreements are
referred to herein as "Employees."
The Boards of Directors of the Company and the Bank each believe that the
Employment Agreements assure fair treatment of the Employees in relation to
their career with the Company and the Bank by providing them with a limited
form of financial security while committing such persons to future employment
with the Company and the Bank for the term of their respective agreements. In
the event that any Employee prevails over the Company or the Bank in a legal
dispute as to an Employment Agreement, he or she will be reimbursed for his or
her legal and other expenses.
The Employment Agreements will become effective upon successful completion
of the Offering. The terms of the agreements will be three years. Each
agreement will provide for an annual base salary equal to the Employee's
existing base salary rate in effect on the date of the completion of the
Offering, except that Thomas Hammond's base compensation shall be at an annual
rate of $600,000. On each anniversary date from the date of commencement of
the Employment Agreements, the term of the Employee's employment under the
Employment Agreements will be extended for an additional one-year period
beyond the then effective expiration date, upon a determination by the Board
of Directors that the performance of the Employee has met the required
performance standards and that such Employment Agreements should be extended.
The Employment Agreements provide the Employee with a salary review by the
Board of Directors not less often than annually, as well as with inclusion in
any discretionary bonus plans, retirement and medical plans, customary fringe
benefits, vacation and sick leave.
The Employment Agreements will terminate upon the Employee's death or
disability, and are terminable by the Company or the Bank for "just cause" as
defined in the Employment Agreements. In the event of
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termination for just cause, no severance benefits are available. If the
Company or the Bank terminates the Employee without just cause, the Employee
will be entitled to a continuation of his or her salary and benefits from the
date of termination through the remaining term of such Employee's Employment
Agreement, plus an additional 12-month period, and, at the Employee's
election, either cash in an amount equal to the cost with certain limitations
to the Employee of obtaining health, life, disability, and other benefits
which the Employee would have been eligible to participate in through the
Employment Agreement's expiration date or continued participation in such
benefits plans through the agreement's expiration date, provided the Employee
continued to qualify for participation therein. If the Employment Agreements
are terminated due to the Employee's "disability" (as defined in the
Employment Agreements), the Employee will be entitled to a continuation of his
or her salary and benefits for up to 180 days following such termination. In
the event of the Employee's death during the term of the Employment Agreement,
his or her estate will be entitled to receive his or her salary through the
last day of the calendar month in which the Employee's death occurred. The
Employee is able to terminate voluntarily his or her Employment Agreement by
providing 90 days' written notice to the Boards of Directors of the Bank and
the Company, in which case the Employee is entitled to receive only his
compensation, vested rights and benefits up to the date of termination.
The Employment Agreements contain provisions stating that in the event of
the Employee's involuntary termination of employment in connection with, or
within one year after, any change in control of the Bank or the Company, other
than for "just cause," the Employee will be paid within 10 days of such
termination an amount equal to the difference between (i) 2.99 times his or
her "base amount," as defined in Section 280G(b)(3) of the Code, and (ii) the
sum of any other parachute payments, as defined under Section 280G(b)(2) of
the Code, that the Employee receives on account of the change in control.
"Control" generally refers to the acquisition, by any person or entity, of the
ownership or power to vote more than 25% of the Bank's or the Company's voting
stock, the control of the election of a majority of the Bank's or the
Company's directors, or the exercise of a controlling influence over the
management or policies of the Bank or the Company. In addition, under the
Employment Agreements, a change in control occurs when, during any consecutive
two-year period, directors of the Company or the Bank at the beginning of such
period cease to constitute at least a majority of the Board of Directors of
the Company or the Bank. The amount determined using the foregoing formula
would also be paid (i) in the event of an Employee's voluntary termination of
employment within 30 days following a change in control, or (ii) in the event
of the Employee's voluntary termination of employment within one year
following a change in control, upon the occurrence, or within 90 days
thereafter, of certain specified events following the change in control, which
have not been consented to in writing by the Employee, including (i) the
requirement that the Employee perform his or her principal executive functions
more than 30 miles from his or her primary office, (ii) a reduction in the
Employee's base compensation as then in effect, (iii) a reduction in the
Employee's compensation and benefits, including material vacation, fringe
benefits, stock option and retirement plans, (iv) the assignment to the
Employee of duties and responsibilities which are other than those normally
associated with his or her position with the Bank and the Company, (v) a
material reduction in the Employee's authority and responsibility, and (vi) in
the case of an employee who is also a director, the failure to re-elect the
Employee to the Company's or the Bank's Board of Directors. The Employment
Agreements with the Bank provide that within five business days of a change in
control, the Bank shall fund, or cause to be funded, a trust in the amount of
2.99 times the Employee's "base amount," that will be used to pay the Employee
amounts owed to him upon termination, other than for just cause, within one
year of the change in control. The aggregate payments that would be made to
Messrs. Thomas J. Hammond, Mark T. Hammond and Carrie and Ms. Anderson,
assuming termination of employment under the foregoing circumstances at
January 1, 1997, would be approximately $3.0 million, $851,000, $476,000 and
$438,000, respectively. These provisions may have an anti-takeover effect by
making it more expensive for a potential acquirer to obtain control of the
Company. For more information regarding anti-takeover matters, see
"Description of Capital Stock."
WHOLE LIFE INSURANCE POLICY. The Bank also pays the premiums of variable
whole life insurance policies which are available to all officers of the
Company and the Bank. The beneficiary of each such policy is the estate
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of the officer, except that the Bank is the beneficiary to the extent of all
premiums paid by the Bank for such policy.
THRIFT PLAN. The Bank maintains a defined contribution plan for its
employees which is designed to qualify under Sections 401(a) and 401(k) of the
Code (the "Thrift Plan"). The Thrift Plan permits each participant to make
before-tax contributions, through regular salary reduction, in amounts ranging
up to 6% of the participant's annual salary, not to exceed $9,500 in total
annual contributions. The Bank makes matching contributions up to 3% of each
eligible participant's monthly salary. Participants are at all times 100%
vested in their entire account balances under the Thrift Plan attributed to
their contributions, and vest 100% after seven years as to the Bank's
contribution. The Thrift Plan is intended to comply with all the rights and
protection afforded employees pursuant to the Employee Retirement Income
Security Act of 1974, as amended.
TRANSACTIONS WITH MANAGEMENT
The Company, through the Bank, offers loans to its directors, officers and
employees. These loans currently are made in the ordinary course of business
with the same collateral, interest rates and underwriting criteria as those of
comparable transactions prevailing at the time and do not involve more than
the normal risk of collectibility or present other unfavorable features. Under
federal law, the Bank's loans to directors and executive officers are required
to be made on substantially the same terms, including interest rates, as those
prevailing for comparable transactions and must not involve more than the
normal risk of repayment or present other unfavorable features. At December
31, 1996, all of the Bank's loans to directors and executive officers
satisfied these requirements.
The Company has, since 1991, leased space for its headquarters in a building
owned by a limited partnership, of which one-third is owned by C. Michael
Kojaian, who has been elected to the Company's Board of Directors effective
upon consummation of the Offering. Mr. Kojaian is also the President, a
director and one-third owner of the Kojaian Companies which is the general
partner of the owner and manager of the building. During 1996, the Company
paid approximately $1.8 million to the limited partnership as lessor and
expects to pay approximately $1.8 million to the lessor during 1997.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of the date hereof, outstanding capital stock of the Company consists of
11,250,000 shares of the Common Stock, which entitles the holder thereof to
one vote per share on each matter on which the stockholders of the Company are
entitled to vote.
The following table sets forth information, as of the date of this
Prospectus, regarding persons who own more than 5% of the Common Stock.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK COMMON STOCK PERCENTAGE
NAME OF BENEFICIAL OWNER OWNED BEFORE OFFERING OWNED BEFORE OFFERING
- ------------------------ ---------------------- -----------------------
<S> <C> <C>
Thomas J. Hammond............... 7,257,066(1) 64.51%
Janet G. Hammond................ 7,257,066(1) 64.51%
Mark T. Hammond................. 1,330,978(2) 11.83%
Catherine H. Rondeau............ 1,330,978(2) 11.83%
Carrie C. Langdon............... 1,330,978(2) 11.83%
</TABLE>
- --------
(1) Mr. Hammond and Mrs. Hammond, who are husband and wife, each disclaim
beneficial ownership of all the shares of Common Stock held by the other.
In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is deemed to be the beneficial owner, for purposes of this table,
of any shares of the Common Stock if he or she has or shares voting or
investment power with respect to such security, or has a right to acquire
beneficial ownership at any time within 60 days from the date of such
determination. As used herein, "voting power" is the power to vote or
direct the voting of shares and "investment power" is the power to dispose
or direct the disposition of shares.
(2) Mark T. Hammond, Catherine H. Rondeau and Carrie C. Langdon are the
children of Thomas and Janet Hammond.
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<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information, as of the most recent
practicable date, regarding each class of equity securities of the Company or
the Bank beneficially owned by their directors and certain of the executive
officers and by all of the directors and executive officers of the Company and
the Bank as a group.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK OWNED PERCENTAGE OF TOTAL COMMON
NAME OF BENEFICIAL OWNER BEFORE THE OFFERING STOCK OWNED BEFORE THE OFFERING
- ------------------------ ---------------------------- -------------------------------
<S> <C> <C>
Thomas J. Hammond....... 7,257,066(1)(2) 64.51%
Mark T. Hammond......... 1,330,978(2) 11.83%
Michael W. Carrie....... -- *
Joan H. Anderson........ -- *
Mary Kay McGuire........ -- *
Harry S. Ellman......... -- *
Ronald I. Nichols, Sr. . -- *
James D. Coleman........ -- *
William B. Bortels...... -- *
Charles Bazzy........... -- *
Directors and Executive
Officers as a Group
(10 persons)........... 8,588,044 76.34%
</TABLE>
- --------
*Less than 1%
(1) Includes 1,325,919 shares of Common Stock held by Mr. Hammond's wife,
Janet G. Hammond, and as to which Mr. Hammond disclaims beneficial
ownership. For the definition of "beneficial ownership," see the table
under "--Security Ownership of Certain Beneficial Owners."
(2) Includes shares held directly or by trust. Thomas J. Hammond is the father
of Mark T. Hammond.
LIABILITY OF DIRECTORS; INDEMNIFICATION
The Company's Restated Articles of Incorporation contain a provision,
authorized by the MBCA, designed to eliminate in certain circumstances the
personal liability of directors for monetary damages to the Company or its
stockholders for breach of their fiduciary duty as directors. This provision,
however, does not limit the liability of any director who breached his duty of
loyalty to the Company or its stockholders, failed to act in good faith,
obtained an improper personal benefit or paid a dividend or approved a stock
repurchase or redemption that was prohibited under Michigan law. This
provision will not limit or eliminate the rights of the Company or any
stockholder to seek an injunction or any other nonmonetary relief in the event
of a breach of a director's duty of care. In addition, this provision applies
only to claims against a director arising out of his role as a director and
does not relieve a director from liability unrelated to his fiduciary duty of
care or from a violation of statutory law such as certain liabilities imposed
on a director under the federal securities laws.
The Company's Restated Articles of Incorporation and Restated Bylaws also
provide that the Company shall indemnify all directors and officers of the
Company to the full extent permitted by the MBCA. Under the provisions of the
MBCA, any director or officer who, in his capacity as such, is made or
threatened to be made a party to any suit or proceeding, may be indemnified if
the Board determines such director or officer acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company or its stockholders.
Officers and directors are covered within specified monetary limits by
insurance against certain losses arising from claims made by reason of their
being directors or officers of the Company or of the Company's subsidiaries
and the Company's officers and directors are indemnified against such losses
by reason of their being or having been directors or officers of another
corporation, partnership, joint venture, trust or other enterprise at the
Company's or its subsidiaries' request.
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<PAGE>
SELLING STOCKHOLDERS
The Selling Stockholders consist of Thomas J. Hammond, his wife Janet G.
Hammond, and their children Mark T. Hammond, Catherine H. Rondeau and Carrie
C. Langdon. The Selling Stockholders own all of the outstanding Common Stock
of the Company as of the date of this Prospectus and have, collectively, owned
all of the outstanding shares of Common Stock of the Company since its
formation.
As of the date hereof, outstanding Common Stock of the Company consisted of
11,250,000 shares. The following table sets forth information, as of the date
of this Prospectus, regarding the ownership of the Company's Common Stock by
the Selling Stockholders, the stock which they will respectively beneficially
own following the Offering (assuming that the over-allotment options are not
exercised) and their current respective positions with the Company or the
Bank, if any.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF SHARES OF COMMON STOCK
COMMON STOCK PERCENT OWNED COMMON COMMON STOCK PERCENT OWNED
NAME OF BENEFICIAL OWNED BEFORE BEFORE THE STOCK OWNED AFTER THE AFTER THE
OWNER THE OFFERING(3) OFFERING OFFERED HEREBY OFFERING OFFERING(4)(5)
------------------ --------------- ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Thomas J. Hammond(1).... 5,931,147 52.72% 3,084,195 2,846,952 21.17%
Janet G. Hammond........ 1,325,919 11.79% 689,478 636,441 4.73%
Mark T. Hammond(2)...... 1,330,978 11.83% 692,109 638,869 4.75%
Catherine H. Rondeau.... 1,330,978 11.83% 692,109 638,869 4.75%
Carrie C. Langdon....... 1,330,978 11.83% 692,109 638,869 4.75%
---------- ------ --------- --------- -----
11,250,000 100.00% 5,850,000 5,400,000 40.15%
========== ====== ========= ========= =====
</TABLE>
- --------
(1) Thomas J. Hammond is Chairman and Chief Executive Officer of the Company
and the Bank.
(2) Mark T. Hammond is Vice Chairman and President of the Company and the
Bank.
(3) Except as otherwise disclosed above, includes shares owned directly by
directors and executive officers of the Company as well as shares held by
their spouses and children and by trusts as to which certain directors and
executive officers are trustees.
(4) Reflects 13,450,000 shares of Common Stock to be outstanding following the
Offering, assuming that the over-allotment option is not exercised. See
"Underwriting."
(5) Such ownership percentage reflects the fact that there will be no
purchases by the Selling Stockholders of any shares in the Offering.
CERTAIN ARRANGEMENTS CONCERNING THE SELLING STOCKHOLDERS
The following summary of certain material provisions of the Underwriting
Agreements and the Selling Stockholders Agreement does not purport to be
complete and is qualified in its entirety by reference to the Underwriting
Agreements and the Selling Stockholders Agreement, respectively, each of which
is an exhibit to the Registration Statement of which this Prospectus forms a
part.
Pursuant to the U.S. underwriting agreement relating to the offering of
shares of Common Stock in the United States and Canada (the "U.S. Underwriting
Agreement"), the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part, among the Company, the Bank,
the Selling Stockholders and each of the underwriters named under the caption
"Underwriting" herein (the "U.S. Underwriters"), for whom Lehman Brothers
Inc., PaineWebber Incorporated and Roney & Co. are acting as representatives
(the "Representatives"), and the international underwriting agreement relating
to the offering of shares of Common Stock outside of the United States and
Canada (the "International Underwriting Agreement"), and together with the
U.S. Underwriting Agreement, the "Underwriting Agreements"), the form of which
is filed as an exhibit to the Registration Statement of which this Prospectus
forms a part, among the Company, the Bank, the Selling Stockholders and each
of the international managers named under the caption "Underwriting" herein
(the "International Managers", and together with the U.S. Underwriters, the
"Underwriters"), for whom Lehman Brothers International (Europe), PaineWebber
Incorporated and Roney & Co. are acting as the lead
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<PAGE>
managers (the "Lead Managers"), each Selling Stockholder has agreed to sell
52% of their respective shares of Common Stock (or such additional amount as
may be necessary to satisfy a proportionate amount of the Underwriters' over-
allotment options) in conjunction with the Company's sale of newly issued
shares pursuant to the Offering (the "Offered Common Stock"). In consideration
of the obligations assumed by the Selling Stockholders, the Company has agreed
in the Underwriting Agreements and the Selling Stockholders Agreement that the
expenses of the Offering in excess of one half of the Underwriters' fee with
respect to all Common Stock to be sold in the Offering will be paid by the
Company. The Selling Stockholders have also agreed not to offer, sell or
otherwise dispose of any of the remaining shares of Common Stock which they
hold for a period of 180 days following the date of this Prospectus without
the prior written consent of Lehman Brothers Inc. on behalf of the
Representatives and the Lead Managers. See "Underwriting."
Pursuant to the Selling Stockholders Agreement, the Company is obligated, at
any time beginning one year after the completion of the Offering, upon the
demand of the holder(s) of a majority of the shares of Common Stock then held
by the Selling Stockholders, to file and use its best efforts to cause to
become effective promptly, a registration statement under the Securities Act
with respect to shares of Common Stock then held by such Selling Stockholders.
The Company is also obligated to take action to keep such registration
statement effective (subject to occasional periods of suspension of such
effectiveness as necessary) until the first to occur of (i) the date on which
all shares of Common Stock registered thereunder have been sold or (ii) the
date on which such registration under the Securities Act is no longer required
to sell such shares without restriction. In connection with the Selling
Stockholders Agreement, each of the Selling Stockholders and the Company have
made certain representations and warranties.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 40,000,000 shares of the Common Stock and
10,000,000 shares of serial preferred stock, par value $0.01 per share. Prior
to the Offering, 11,250,000 shares of the Common Stock have been issued and
are outstanding and none of the serial preferred stock has been issued. The
Company currently expects to issue 2,200,000 additional shares of Common Stock
in the Offering (or 2,530,000 additional shares if the Underwriters exercise
their over-allotment option) and no shares of serial preferred stock. The
Company has reserved for future issuance under the Option Plan an amount of
authorized but unissued shares of Common Stock equal to 10% of the shares
outstanding after the Offering.
THE CAPITAL STOCK OF THE COMPANY WILL REPRESENT NONWITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE
FDIC.
COMMON STOCK
VOTING RIGHTS. Each share of the Common Stock will have the same relative
rights and will be identical in all respects with every other share of the
Common Stock. The holders of the Common Stock will possess exclusive voting
rights in the Company, except to the extent that shares of serial preferred
stock issued in the future may have voting rights, if any. Each holder of
shares of the Common Stock will be entitled to one vote for each share held of
record on all matters submitted to a vote of holders of shares of the Common
Stock except to the extent voting rights may be diminished as discussed in
"Restrictions on Acquisition of the Company."
DIVIDENDS. The Company may pay dividends on its capital stock if, as and
when declared by the Board of Directors, subject to compliance with
limitations imposed by law. See "Dividend Policy." The holders of Common Stock
will be entitled to receive and share equally in such dividends as may be
declared by the Board of Directors out of funds legally available therefor. If
the Company issues serial preferred stock, the holders thereof may have a
priority over the holders of the Common Stock with respect to the receipt of
dividends.
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<PAGE>
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Company, each holder of its Common Stock would be entitled to receive,
after payment or provision for payment of all debts and liabilities of the
Company, a pro rata portion of all assets of the Company. If any serial
preferred stock is issued, the holders thereof may have a priority over the
holders of the Common Stock in the distribution of the Company's assets in a
liquidation or dissolution of the Company.
RESTRICTIONS ON ACQUISITION OF THE COMMON STOCK. See "Restrictions on the
Acquisition of the Company and the Bank" and "Certain Anti-Takeover Provisions
in the Restated Articles of Incorporation and Restated Bylaws" for discussions
of the limitations on the acquisition of shares of the Common Stock.
OTHER CHARACTERISTICS. Holders of the Common Stock will not have preemptive
rights with respect to any additional shares of the Common Stock which may be
issued in the future. The Common Stock is not subject to call for redemption.
Upon payment of the public offering price for the Common Stock, all such stock
will be duly authorized, fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR. Registrar and Transfer Company, Cranford, New
Jersey, will act as transfer agent and registrar for the Common Stock.
ISSUANCE OF ADDITIONAL SHARES. Except as may be allowed or required under
the Company's Stock Option Plan or Employee Stock Purchase Plan, the Company
has no present plans, proposals, arrangements or understandings to issue
additional shares of authorized Common Stock or serial preferred stock. In the
future, the authorized but unissued and unreserved shares of Common Stock will
be available for general corporate purposes, including but not limited to,
possible issuance as stock dividends, in connection with mergers or
acquisitions, under a cash dividend reinvestment or stock purchase plan, in a
public or private offering, or pursuant to future employee benefit plans.
Normally, no stockholder approval would be required for the issuance of these
additional shares, although certain transactions or employee benefit plans may
otherwise be required to be approved by the Company's stockholders.
SERIAL PREFERRED STOCK
None of the authorized shares of serial preferred stock of the Company will
be issued in or outstanding following the Offering and the Board of Directors
has no present plans, proposals, arrangements or understandings to issue such
shares. The Board of Directors of the Company is authorized to issue serial
preferred stock and to fix and state voting powers, designations, preferences
or other special rights of such shares and the qualification, limitations and
restrictions thereof, subject to no prior stockholder approval. If and when
issued, the serial preferred stock is likely to rank prior to the Common Stock
as to dividend rights, liquidation preferences or both, and may have full or
limited voting rights. The Board of Directors, without the approval of the
holders of the Common Stock, may issue serial preferred stock with voting and
other rights which could adversely affect the voting power of the holders of
the Common Stock.
RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE BANK
CHANGE IN BANK CONTROL ACT AND SAVINGS INSTITUTION HOLDING COMPANY PROVISIONS
OF HOME OWNERS' LOAN ACT
Federal laws and regulations contain a number of provisions which affect the
acquisition of insured institutions such as the Bank, and a savings
institution holding company such as the Company. The Change in Bank Control
Act provides that no person, acting directly or indirectly or through or in
concert with one or more persons, may acquire control of a savings association
unless the OTS has been given 60 days' prior written notice and the OTS does
not issue a notice disapproving the proposed acquisition. In addition, certain
provisions of the HOLA provide that no company may acquire control of a
savings association holding company without the prior approval of the OTS.
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<PAGE>
Pursuant to applicable regulations, control of a savings association or its
holding company is conclusively deemed to have been acquired by, among other
things, the acquisition of more than 25% of any class of voting stock of a
savings association or its holding company or the ability to control the
election of a majority of the directors of either entity. Moreover, control is
presumed to have been acquired, subject to rebuttal, upon the acquisition of
more than 10% of any class of voting stock, or more than 25% of any class of
stock, of a savings association or its holding company, where one or more
enumerated "control factors" are also present in the acquisition. The OTS may
prohibit an acquisition of control if it finds, among other things, that (i)
the acquisition would result in a monopoly or substantially lessen
competition, (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the savings association, or (iii) the
competence, experience, or integrity of the acquiring person indicates that it
would not be in the interest of the depositors or the public to permit the
acquisition of control by such person.
MICHIGAN ANTI-TAKEOVER STATUTES
Michigan has enacted several statutes which impose restrictions on
acquisition of the Company. Chapter 7A of the MBCA is applicable to certain
corporations organized under the laws of Michigan including the Company.
Subject to certain exceptions, Chapter 7A provides that a corporation shall
not engage in any business combination with any "interested stockholder"
unless an advisory statement is given by the board of directors and the
combination is approved by a vote of at least 90% of the votes of each class
of stock entitled to vote, and at least two-thirds of the votes of each class
of stock entitled to vote other than the voting shares owned by the interested
stockholder. However, these statutory requirements do not apply if, prior to
the date that an interested stockholder first becomes an interested
stockholder, the board of directors by resolution approves or exempts such
business combinations generally or a particular combination from the
requirements of the MBCA. Furthermore, the voting requirement does not apply
to a business combination if: (a) specified fair price criteria are met, as
described below; (b) the consideration to be given to the stockholders is in
cash or in the form the interested stockholder paid for shares of the same
class or series; and (c) between the time the interested stockholder becomes
an interested stockholder and before the consummation of a business
combination the following conditions are met: (1) any preferred stock
dividends are declared and paid on their regular date; (2) the annual dividend
rate of stock other than preferred stock is not reduced and is raised if
necessary to reflect any transaction which reduces the number of outstanding
shares; (3) the interested stockholder does not receive any financial
assistance or tax advantage from the corporation other than proportionally as
a stockholder; (4) the interested stockholder does not become the beneficial
owner of any additional shares of the corporation; and (5) at least five years
have elapsed. An "interested stockholder" is generally defined to mean any
person that: (a) is the owner of 10% or more of the outstanding voting stock
of such corporation, or (b) is an affiliate of a corporation and was the owner
of 10% or more of the outstanding voting stock of the corporation at any time
within two years immediately prior to the relevant date.
Chapter 7A's fair price criteria include the following: (a) the aggregate
amount of the cash and market value of the noncash consideration to be
received by the holders of common stock is at least as much as the higher of
(1) the highest price the interested stockholder paid for stock of the same
class or series within the two-year period immediately prior to the
announcement date of the combination proposal, and (2) the market value of
stock of the same class or series on the announcement date or on the
determination date; and (b) the aggregate amount of the cash and market value
of the noncash consideration to be received by holders of stock other than
common stock is at least as much as the highest of (1) the highest price the
interested stockholder paid for the same class or series within the two-year
period immediately prior to the announcement date of the combination proposal,
(2) the highest preferential amount per share to which the holders of such
stock are entitled in the event of any liquidation, dissolution, or winding up
of the corporation, and (3) the market value of stock of the same class or
series on the announcement date or on the determination date.
Under certain circumstances, Chapter 7A may make it more difficult for an
"interested stockholder" to effect various business combinations with a
corporation for a five-year period, although the stockholders may elect that
the Company not be governed by this section, upon the affirmative vote of 90%
of the outstanding
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<PAGE>
voting shares and two thirds of the shares not owned by the interested
stockholder. The Company's stockholders have taken no action to exclude the
Company from restrictions imposed under Chapter 7A of the MBCA and the
Restated Articles of Incorporation include these provisions by reference. It
is anticipated that the provisions of Chapter 7A may encourage companies
interested in acquiring the Company to negotiate in advance with the Board of
Directors.
Chapter 7B of the MBCA is also applicable to certain corporations organized
under the laws of Michigan including the Company. Subject to certain
exceptions, Chapter 7B provides that once a person proposes to make or makes a
"control share acquisition" and delivers an acquiring person statement to the
corporation, the stockholders must vote on whether the control shares may
exercise voting rights. Such rights are granted only by resolution approved by
both (a) a majority of the votes cast by holders entitled to vote and a
majority of any class entitled to vote, and (b) a majority of the votes cast
and a majority of any class entitled to vote excluding the interested shares.
"Control shares" means shares which, if voted, would have voting power when
added together with all other shares a person either owns or directs the
exercise, within the following ranges: (a) at least 20% but less than 33 1/3%
of all voting power; (b) at least 33 1/3% but less than a majority of all
voting power; or (c) a majority of all voting power. An acquisition of shares
is not considered a control share acquisition under certain circumstances,
including where the acquisition is part of a merger or share exchange if the
corporation is a party to the agreement of merger or share exchange.
If authorized by the corporation's articles of incorporation or bylaws (i)
control shares acquired in a control share acquisition with respect to which
no acquiring person statement has been filed may be redeemed by the
corporation at any time more than 60 days after the end of the control share
acquisition at "fair value;" and (ii) control shares acquired in a control
share acquisition which are not accorded full voting rights may be redeemed by
the corporation at "fair value." Unless provided otherwise in the
corporation's articles of incorporation or bylaws, in the event that control
shares acquired in a control share acquisition are accorded full voting rights
and the acquiring person has acquired a majority of all voting power of the
corporation, the shareholders of the corporation, other than the acquiring
person, have dissenters' rights.
Under certain circumstances, Chapter 7B may make it more difficult for an
"acquiring person" to exercise control over a corporation due to the
limitations placed on that person's ability to vote the control shares,
although the corporation may, before any such control share acquisition, elect
not to be governed by this chapter by adopting an amendment to the
corporation's articles of incorporation or bylaws. The Company's Restated
Articles of Incorporation and Restated Bylaws do not exclude the Company from
the provisions of Chapter 7B of the MBCA and the Restated Articles of
Incorporation incorporate its current provisions by reference. The Company's
Restated Articles of Incorporation also include provisions authorizing a
forced redemption of control shares under certain circumstances as specified
by Chapter 7B. It is anticipated that the provisions of Chapter 7B may
encourage acquiring persons interested in obtaining control over the Company
to negotiate in advance with the Board of Directors.
Section 1368 of the MBCA, which is applicable to corporations organized
under the laws of Michigan including the Company, prohibits a corporation from
purchasing, either directly or indirectly, any of its shares that are listed
on a national securities exchange from any person who holds at least 3% of its
shares unless one of the following conditions is met: (a) the corporation
makes an equivalent offer to all other holders of the same shares; (b) the
purchase is authorized in advance by the stockholders entitled to vote
thereon; (c) the purchase meets the requirements of the articles of
incorporation for such a purchase; (d) the shares are beneficially owned by
the person for at least two years prior to the purchase date; (e) the purchase
is made on the open market; (f) the purchase price is not more than the
average market price of the shares during the 30 business days prior to the
purchase date; or (g) the purchase is otherwise authorized by the MBCA. Under
certain circumstances, Section 368 prevents a stockholder from selling his
shares back to the corporation at a premium within two years of that
stockholder's purchase of the shares unless one of the other conditions is
met. However, the stockholders may approve such a purchase by the corporation
or the corporation may include in its articles of incorporation lesser
requirements for such a transaction. The Company's Restated Articles of
Incorporation do not contain any
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provisions exempting the Company from the provisions of Section 368 of the
MBCA. It is anticipated that the provisions of Section 368 may discourage
persons from obtaining quantities of the Company's stock for the sole purpose
of eliciting a premium from the Company in a resale of those shares.
CERTAIN ANTI-TAKEOVER PROVISIONS IN THE RESTATED
ARTICLES OF INCORPORATION AND RESTATED BYLAWS
The following discussion is a general summary of certain provisions of the
Restated Articles of Incorporation ("Restated Articles") and Restated Bylaws
of the Company which may be deemed to have an "anti-takeover" effect. The
description of these provisions is necessarily general and reference should be
made in each case to the Restated Articles and Restated Bylaws of the Company,
which are incorporated herein by reference.
In addition to discouraging a takeover attempt which a majority of the
stockholders of the Company might determine to be in their best interest or in
which the stockholders of the Company might receive a premium over the current
market prices for their shares, the effect of these provisions may render the
removal of management more difficult. It is thus possible that incumbent
officers and directors might be able to retain their positions (at least until
their term of office expires) even though a majority of the stockholders
desire a change.
CLASSIFIED BOARD OF DIRECTORS
Article IX of the Restated Articles provides that the Board of Directors is
to be divided into three classes which shall be as nearly equal in number as
possible. Under Article IX, the directors in each class serve for terms of
three years and until their respective successors are elected and qualified,
with approximately one-third of the directors elected each year. Article X
provides that a director may be removed only by the affirmative vote of the
holders of at least 80% of the outstanding shares entitled to vote and only
for cause.
A classified Board of Directors could make it more difficult for
stockholders to change a majority, whereas a majority of a non-classified
board could be changed in one year. In the absence of the provisions of the
Restated Articles classifying the Board, all of the directors would be elected
each year.
Management of the Company believes that the staggered election of directors
tends to promote continuity of management because only one-third of the Board
of Directors are subject to election each year. Staggered terms help to ensure
that, at any one time, approximately two-thirds of the Board will be comprised
of persons who have at least one year's experience as directors of the
Company. In addition, the use of staggered terms moderates the pace of changes
in the Board of Directors by extending the minimum time required to elect a
majority of directors from one to two years.
AVAILABILITY OF SERIAL PREFERRED STOCK
The Company's Restated Articles authorize the issuance of up to 10,000,000
shares of serial preferred stock, which may be issued with rights and
preferences that could impede an acquisition. This preferred stock, none of
which has yet been issued by the Company, together with authorized but
unissued shares of common stock (the Restated Articles authorize the issuance
of up to 40,000,000 shares of the Common Stock), could also represent
additional capital stock required to be purchased by the acquirer.
ADVANCE NOTICE REQUIREMENT FOR NOMINATIONS
Article VII of the Company's Restated Articles provides that any stockholder
desiring to make a nomination for the election of directors or a proposal for
new business at a meeting of stockholders must submit written notice to the
Secretary of the Company not fewer than 30 or more than 60 days in advance of
the meeting. Management believes that it is in the best interests of the
Company and its stockholders to provide sufficient time to enable management
to disclose to stockholders information about a dissident slate of nominations
for
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<PAGE>
directors. This advance notice requirement may also give management time to
solicit its own proxies in an attempt to defeat any dissident slate of
nominations should management determine that doing so is in the best interest
of stockholders generally. Similarly, adequate advance notice of stockholder
proposals will give management time to study such proposals and to determine
whether to recommend to the stockholders that such proposals be adopted.
SIZE OF BOARD OF DIRECTORS; FILLING OF VACANCIES
Article IX of the Company's Restated Articles provide that the number of
directors of the Company (exclusive of directors, if any, to be elected by the
holders of any to-be-issued shares of preferred stock of the Company) should
not be fewer than 7 or more than 11 as shall be provided from time to time in
accordance with the Company's Restated Bylaws. Additionally, the power to
determine the number of directors within these numerical limitations and the
power to fill vacancies, whether occurring by reason of an increase in the
number of directors or by resignation, is vested in the Company's Board of
Directors. The overall effect of such provisions may be to prevent a person or
entity from immediately acquiring control of the Company through an increase
in the number of the Company's directors and election of his, or its nominees
to fill the newly created vacancies.
AMENDMENT OF BYLAWS
Article XVI of the Company's Restated Articles provides that the Company's
Bylaws may be amended by the affirmative vote of either two-thirds of the
Company's Board of Directors or the holders of at least 80% of the outstanding
shares of the Company's stock entitled to vote generally in the election of
directors. Absent this provision, Michigan law provides that a corporation's
bylaws may be amended by the holders of a majority of the voting power of the
corporation present and entitled to vote at a duly held meeting. The Company's
Restated Bylaws contain numerous provisions concerning its governance, such as
fixing the number of directors and determining the number of directors
constituting a quorum. By reducing the ability of a potential corporate raider
to make changes in the Company's Bylaws and to reduce the authority of the
Board or Directors or impede its ability to manage the Company, this provision
of the Restated Articles could have the effect of discouraging a tender offer
or other takeover attempt where the ability to make fundamental changes
through bylaw amendments is an important element of the takeover strategy of
the acquirer.
AMENDMENT OF ARTICLES
Article XVII of the Company's Restated Articles provides that specified
provisions contained in the Restated Articles may not be repealed or amended
except by an affirmative vote of at least 80% of the outstanding shares of the
Company's stock entitled to vote generally in the election of directors;
provided, however, that such provisions may be repealed or amended upon a
majority of stockholder vote if first approved by a majority of the continuing
Directors, as defined in Article XVII. This requirement exceeds the majority
vote of stockholders present and entitled to vote that it would otherwise be
required by Michigan law for the repeal or amendment of a provision of the
Restated Articles. The specific provisions for which an 80% vote is required
by Article XVII are (i) Article VI providing for cumulative voting in the
election of directors; (ii) Article VII requiring written notice to the
Company of nominations for the election of directors and new business
proposals, quorum requirements and the calling of special meetings; (iii)
Article VIII eliminating the power of stockholders to act by written consent
without a meeting; (iv) Article IX governing the number of the Company's Board
of Directors, the filling of vacancies on the Board of Directors and
classified terms of the Board of Directors; (v) Article X governing the
removal of directors; (vi) Article XI providing for the indemnification of
directors, officers, employees and agents of the Company; (vii) Article XII
pertaining to the elimination of the liability of the directors to the Company
and its stockholders for monetary damages, with certain exceptions, for breach
of fiduciary duty; (viii) Article XIV providing for the applicability to the
Company of Section 7A of the MBCA, which restricts business combinations
involving the Company and "interested stockholders;" (ix) Article XV providing
for the applicability to the Company of Section 7B of the MBCA, which
eliminates voting rights of persons who hold 20%, 33 1/3% and a majority of
all outstanding shares of Common Stock unless
82
<PAGE>
stockholder approval is received at each such level; and (x) Article XVI and
Article XVIII governing the required stockholder vote for amending the
Restated Bylaws and Restated Articles of the Company. See "Restrictions on
Acquisition of the Company and the Bank--Michigan Anti-Takeover Statutes."
BENEFIT PLANS
In addition to the provisions of the Company's Restated Articles and
Restated Bylaws described above, certain benefit plans of the Company and the
Bank contain provisions that also may discourage hostile takeover attempts
which the Boards of Directors of the Company and the Bank might conclude are
not in the best interests of the Company, the Bank or the Company's
stockholders. For a description of the benefit plans and the provisions of
such plans relating to changes in control of the Company or the Bank, see
"Management--Certain Benefit Plans and Agreements."
THE PURPOSE AND EFFECT OF THE ANTI-TAKEOVER PROVISIONS IN THE COMPANY'S
RESTATED ARTICLES AND RESTATED BYLAWS
The Boards of Directors of the Company and the Bank believe that the
provisions described above reduce the Company's vulnerability to takeover
attempts and certain other transactions which have not been negotiated with
and approved by its Board of Directors. These provisions also assist the
Company and the Bank in the orderly deployment of the net proceeds of the
Offering into productive assets during the initial period after the Offering.
The Boards of Directors of the Company and the Bank believe these provisions
are in the best interests of the Bank and of the Company and its stockholders.
In the judgment of the Boards of Directors of the Company and the Bank, the
Company's Board is in the best position to consider all relevant factors and
to negotiate for what is in the best interests of the stockholders and the
Company's other constituents. Accordingly, the Boards of Directors of the
Company and the Bank believe that it is in the best interests of the Company
and its stockholders to encourage potential acquirers to negotiate directly
with the Company's Board of Directors and that these provisions encourage such
negotiations and discourage nonnegotiated takeover attempts. It is also the
view of the Board of Directors that these provisions should not discourage
persons from proposing a merger or other transaction at prices reflective of
the true value of the Company and which is in the best interests of all
stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts which
have not been negotiated with and approved by the Board of Directors present
to stockholders the risk of a takeover on terms which may be less favorable
than might otherwise be available. A transaction which is negotiated and
approved by the Board of Directors, on the other hand, can be carefully
planned and undertaken at an opportune time in order to obtain maximum value
for the Company and stockholders, with due consideration given to matters such
as the management and business of the acquiring corporation and maximum
strategic development of the Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above then
current market prices, such offers are sometimes made for less than all the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an
enterprise which is under different management and whose objectives may not be
similar to those of the remaining stockholders. The concentration of control
that could result from a tender offer or other takeover attempt could also
deprive the Company's remaining stockholders of the benefits of having the
Common Stock quoted on the Nasdaq National Market and of certain protective
provisions of the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
Despite the belief of the Company as to the benefits to stockholders of
these provisions of the Company's Restated Articles and Restated Bylaws, these
provisions may also have the effect of discouraging a future takeover attempt
which would not be approved by the Company's Board of Directors, but pursuant
to which the
83
<PAGE>
stockholders may receive a substantial premium for their shares over then
current market prices. As a result, stockholders who might desire to
participate in such a transaction may not have any opportunity to do so. Such
provisions will also render the removal of the Company's Board of Directors
and management more difficult and may tend to stabilize the Company's stock
price, thus limiting gains which might otherwise be reflected in price
increases due to a potential merger or acquisition. The Board of Directors,
however, has concluded that the potential benefits of these provisions
outweigh the possible disadvantages. Pursuant to applicable law, at any annual
or special meeting of its stockholders, the Company may adopt additional
provisions to its Restated Articles regarding the acquisition of its equity
securities that would be permitted to a Michigan corporation. The Company does
not presently intend to propose the adoption of further restrictions on the
acquisition of the Company's equity securities.
UNDERWRITING
Under the terms of, and subject to the conditions contained in, the U.S.
Underwriting Agreement, the U.S. Underwriters have severally agreed to
purchase from the Company and the Selling Stockholders, and the Company and
the Selling Stockholders have agreed to sell to each U.S. Underwriter, the
aggregate number of shares of Common Stock set forth opposite the name of each
such U.S. Underwriter below:
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
----------------- ---------
<S> <C>
Lehman Brothers Inc................................................
PaineWebber Incorporated...........................................
Roney & Co., L.L.C. ...............................................
---------
Total............................................................
=========
Under the terms of, and subject to the conditions contained in, the
International Underwriting Agreement, the International Managers have
severally agreed to purchase from the Company and the Selling Stockholders,
and the Company and the Selling Stockholders have agreed to sell to each
International Manager, the aggregate number of shares of Common Stock set
forth opposite the name of each such International Manager below:
<CAPTION>
NUMBER
INTERNATIONAL MANAGERS OF SHARES
---------------------- ---------
<S> <C>
Lehman Brothers International (Europe).............................
PaineWebber International (U.K.) Ltd. .............................
Roney & Co., L.L.C. ...............................................
---------
Total............................................................
=========
</TABLE>
The Company and the Selling Stockholders have been advised by the
Representatives and the Lead Managers that the U.S. Underwriters and the
International Managers propose to offer the shares to the public at the
initial public offering price set forth on the cover page of this Prospectus,
and to certain dealers at such price less a selling concession not in excess
of $ per share. The U.S. Underwriters and the International Managers may
allow, and such dealers may re-allow, a concession not in excess of $ per
share to certain other Underwriters or to certain other brokers or dealers.
After the initial offering to the public, the offering price and other selling
terms may be changed by the Representatives and the Lead Managers.
84
<PAGE>
The Underwriting Agreements provide that the obligations of the several U.S.
Underwriters and the International Managers, respectively, to pay for and
accept delivery of the shares of Common Stock offered hereby are subject to
certain conditions and that if any of the above shares of Common Stock are
purchased by the U.S. Underwriters pursuant to the U.S. Underwriting Agreement
or by the International Managers pursuant to the International Underwriting
Agreement, all the shares of Common Stock agreed to be purchased by either the
U.S. Underwriters or the International Managers, as the case may be, pursuant
to their respective Underwriting Agreements, must be so purchased. The initial
public offering price and underwriting discounts and commissions for the U.S.
Offering and the International Offering are identical. The closing of the U.S.
Offering is a condition to the closing of the International Offering. The
closing of the International Offering is a condition to the closing of the
U.S. Offering.
At the request of the Company, the U.S. Underwriters initially have reserved
up to 800,000 shares of Common Stock for sale at the initial public offering
price to certain employees and customers of the Company and its affiliates who
have expressed an interest in purchasing such shares. The number of shares of
Common Stock available for sale to the general public will be reduced to the
extent such persons purchase such reserved shares. Any such reserved shares
which are not so purchased will be offered by the U.S. Underwriters to the
general public on the same basis as the other shares offered thereby.
The Company and the Bank (subject to certain restrictions), jointly and
severally, and the Selling Stockholders, jointly and severally, have agreed in
the Underwriting Agreements to indemnify the U.S. Underwriters and the
International Managers against certain liabilities, including liabilities
under the Securities Act, and to contribute to payments that the U.S.
Underwriters and the International Managers may be required to make in respect
thereof.
The Company and the Selling Stockholders have granted to the U.S.
Underwriters a 30-day option to purchase up to an additional and shares
of Common Stock, respectively, on the same terms and conditions as set forth
above to cover over-allotments, if any. The Company and the Selling
Stockholders have granted the International Managers a similar option to
purchase up to an additional and shares of Common Stock, respectively,
to cover over-allotments, if any. To the extent that such option is exercised,
each Underwriter will be committed, subject to certain conditions, to purchase
a number of the additional shares of Common Stock proportionate to such
Underwriter's initial commitment as indicated in the preceding tables.
The U.S. Underwriters and the International Managers have entered into an
Agreement Between U.S. Underwriters and International Managers pursuant to
which each U.S. Underwriter has agreed that, as part of the distribution of
the shares of Common Stock (plus any of the shares of Common Stock to cover
over-allotments) offered in the U.S. Offering, (a) it is not purchasing any of
such shares of Common Stock for the account of anyone other than a U.S. or
Canadian Person (as defined below) and (b) it has not offered or sold, and
will not offer, sell, resell or deliver, directly or indirectly, any of such
shares of Common Stock outside the United States or Canada or to anyone other
than a U.S. or Canadian Person. In addition, pursuant to the same agreement,
each International Manager has agreed that, as part of the distribution of the
shares of Common Stock (plus any of the shares of Common Stock to cover over-
allotments) offered in the International Offering, (a) it is not purchasing
any of such shares of Common Stock for the account of any U.S. or Canadian
Person and (b) it has not offered or sold, and will not offer, sell, resell or
deliver, directly or indirectly, any of such shares of Common Stock in the
United States or Canada or to any U.S. or Canadian Person. Each International
Manager has also agreed that it will offer to sell shares of Common Stock only
in compliance with all relevant requirements of any applicable laws.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Underwriting Agreements and the
Agreement Between U.S. Underwriters and International Managers, including (i)
certain purchases and sales between the U.S. Underwriters and the
International Managers, (ii) certain offers, sales, resales, deliveries or
distributions in or through investment advisors or other persons exercising
investment discretion, (iii) purchases, offers or sales by a U.S. Underwriter
who is also acting as an
85
<PAGE>
International Manager or by an International Manager who is also acting as a
U.S. Underwriter and (iv) other transactions specifically approved by the
Representatives and the Lead Managers. As used herein, (a) the term "United
States" means the United States of America (including the District of
Columbia) and its territories, its possessions and other areas subject to its
jurisdiction, (b) the term "Canada" means Canada, its provinces, territories
and possessions and other areas subject to its jurisdiction and (c) the term
"U.S. or Canadian Person" means any resident or citizen of the United States
or Canada, any corporation, partnership or other entity created or organized
in or under the laws of the United States or Canada or any political
subdivision thereof or any estate or trust, the income of which is subject to
United States federal income taxation or Canadian income taxation regardless
of its source (other than a foreign branch of any U.S. or Canadian Person),
and includes any United States or Canadian branch of a person who is not
otherwise a U.S. or Canadian Person.
Pursuant to the Agreement Between U.S. Underwriters and International
Managers, sales may be made between the U.S. Underwriters and the
International Managers of such number of shares of Common Stock as may be
mutually agreed upon. Unless otherwise agreed, the price of any shares of
Common Stock so sold shall be the public offering price as then in effect for
the shares of Common Stock being sold by the U.S. Underwriters and the
International Managers, less the selling concession allocable to such shares
of Common Stock. To the extent that there are sales between the U.S.
Underwriters and the International Managers pursuant to the Agreement Between
U.S. Underwriters and International Managers, the number of shares of Common
Stock initially available for sale by the U.S. Underwriters or by the
International Managers may be more or less than the amount appearing on the
cover page of this Prospectus.
This Prospectus is not, and under no circumstances is to be construed as, an
advertisement or a public offering of shares of Common Stock in Canada or any
province or territory thereof. Any offer or sale of shares of Common Stock in
Canada may only be made pursuant to an exemption from the requirement to file
a prospectus in the province or territory of Canada in which such offer or
sale is made.
Each International Manager has represented and agreed that (i) it has not
offered or sold and prior to the date six months after the latest closing date
will not offer or sell any shares of Common Stock to persons in the United
Kingdom except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995; (ii)
it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 ("1986 Act") with respect to anything done by it
in relation to the shares of Common Stock in, from or otherwise involving the
United Kingdom; and (iii) it has only issued or passed on, and will only issue
and pass on to any person in the United Kingdom, any investment advertisement
(within the meaning of the 1986 Act) relating to the shares of Common Stock if
that person falls within Article II(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 or is a person to whom
such document may otherwise lawfully be issued or passed on.
No action has been taken or will be taken in any jurisdiction by the
Company, the Selling Stockholders or the Underwriters that would permit a
public offering of shares of Common Stock in any jurisdiction where action for
that purpose is required, other than the United States. Persons into whose
possession this Prospectus comes are required by the Company, the Selling
Stockholders and the Underwriters to inform themselves about, and to observe
any restrictions as to, the offering of shares of Common Stock offered
pursuant to the Offering and the distribution of this Prospectus.
Purchasers of shares of Common Stock offered hereby may be required to pay
stamp taxes and other charges in accordance with the laws and practices of the
country of purchase in addition to the offering price set forth on the cover
page hereof.
The Representatives and the Lead Managers have informed the Company that the
U.S. Underwriters and the International Managers do not intend to confirm
sales to any accounts over which they exercise discretionary authority.
86
<PAGE>
The Selling Stockholders, who presently own 100% of the outstanding shares
of Common Stock, have agreed not to offer, sell or otherwise dispose of their
remaining shares held after the Offering, with certain limited exceptions, for
a period of 180 days after the date of this Prospectus without the prior
written consent of Lehman Brothers Inc. on behalf of the Representatives and
the Lead Managers. Except for Common Stock to be sold in this Offering and
except for the Common Stock that may be issued pursuant to the Option Plan
(see "Management--Certain Benefit Plans and Agreements--Stock Option Plan"),
the Company has agreed not to offer, sell, contract to sell or otherwise issue
any Common Stock or other capital stock prior to the expiration of 180 days
from the date of this Prospectus without the prior written consent of Lehman
Brothers Inc. on behalf of the Representatives and the Lead Managers.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price will be negotiated among the Company,
the Selling Stockholders and the Representatives and the Lead Managers. Among
the factors to be considered in determining the initial public offering price
of the Common Stock, in addition to the prevailing market conditions, are the
Company's historical performance, capital structure, estimates of the business
potential and earnings prospects of the Company, an assessment of the
Company's management, consideration of the above factors in relation to the
market values of the companies in related businesses and other factors deemed
relevant. The initial public offering price set forth on the cover page of
this Prospectus should not, however, be considered an indication of the actual
value of the Common Stock. Such price will be subject to change as a result of
market conditions and other factors. There can be no assurance that an active
trading market will develop for the Common Stock or that the Common Stock will
trade in the public market subsequent to the Offering at or above the initial
public offering price.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase shares of Common
Stock. As an exception to these rules, the Representatives and the Lead
Managers are permitted to engage in certain transactions that stabilize the
price of the Common Stock. Such transactions may consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the Common
Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the Representatives
and the Lead Managers may reduce that short position by purchasing Common
Stock in the open market. The Representatives and the Lead Managers also may
elect to reduce any short position by exercising all or part of the over-
allotment options described herein.
The Representatives and the Lead Managers also may impose a penalty bid on
certain Underwriters and selling group members. This means that if the
Representatives or the Lead Managers purchase shares of Common Stock in the
open market to reduce the Underwriters' short position or to stabilize the
price of the Common Stock they may reclaim the amount of the selling
concession from the Underwriters and selling group members who sold those
shares as part of this Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
this Offering.
Neither the Company, the Selling Stockholders nor any of the Underwriters
makes any representation or prediction as to the direction or magnitude of any
effect that the transactions described above may have on the price of the
Common Stock. In addition, neither the Company, the Selling Stockholders nor
any of the Underwriters makes any representation that the Representatives or
Lead Managers will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
87
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby and certain other legal
matters will be passed upon for the Company by Reinhart, Boerner, Van Deuren,
Norris & Rieselbach, P.C., Washington, D.C. Certain legal matters relating to
Michigan law will be passed upon for the Company by Albert J. Gladner, Esq.,
First Vice President and General Counsel of the Bank. Certain legal matters
will be passed upon for the Underwriters by Simpson Thacher & Bartlett (a
partnership which includes professional corporations), New York, New York.
Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C., and Simpson Thacher
& Bartlett will rely as to matters of Michigan law upon the opinion of Mr.
Gladner.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1996
and 1995 and for each of the three years in the period ended December 31, 1996
included in this Prospectus have been audited by Grant Thornton LLP,
independent certified public accountants, and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby
(together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement"). This Prospectus, which forms a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement, certain parts of which have been omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock offered hereby, reference is made
to the Registration Statement. Statements contained in this Prospectus as to
the contents of any contract, agreement or other document are not necessarily
complete, although all material terms of such documents have been addressed in
this Prospectus, and in each instance, reference is made to the copy of the
document filed as an exhibit to the Registration Statement. The Registration
Statement may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices at Suite 1400, Northwest
Atrium Center, 500 West Madison Street, Chicago, Illinois 60661, and 7 World
Trade Center (13th Floor), New York, New York 10048. Copies of such material
can also be obtained from the Commission at prescribed rates through its
Public Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549.
The Commission maintains a World Wide Web site on the Internet that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of such
site is "http://www.sec.gov."
The Company is not currently subject to the informational requirements of
the Exchange Act. As a result of the Offering, the Company will become subject
to the informational requirements of the Exchange Act. The Company will
fulfill its obligations with respect to such requirements by filing periodic
reports and other information with the Commission. In addition, the Company
intends to furnish to its stockholders annual reports containing consolidated
financial statements examined by an independent public accounting firm.
88
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants....................... F-2
Consolidated Statements of Financial Condition as of December 31, 1996
and 1995................................................................ F-3
Consolidated Statements of Earnings for the Years Ended December 31,
1996, 1995 and 1994..................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994........................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994..................................................... F-6
Notes to Consolidated Financial Statements............................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Flagstar Bancorp, Inc.
We have audited the accompanying consolidated statements of financial
condition of Flagstar Bancorp, Inc. and Subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of earnings, stockholders
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain a reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Flagstar Bancorp, Inc. and Subsidiaries as of December 31, 1996 and 1995,
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
As described in notes 3 and 7, in May 1995, the Company adopted Statement of
Financial Accounting Standards No. 122, "Accounting for Certain Mortgage
Servicing Rights".
Grant Thornton LLP
Detroit, Michigan
March 3, 1997
F-2
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
ASSETS 1996 1995
------ ---------- ----------
<S> <C> <C>
Cash and cash equivalents.............................. $ 44,187 $ 29,119
Loans receivable
Mortgage loans held for sale......................... 840,767 620,455
Loans held for investment............................ 273,569 305,580
Less allowance for losses............................ (3,500) (2,102)
---------- ----------
1,110,836 923,933
Federal Home Loan Bank stock........................... 19,725 17,800
Other investments...................................... 887 818
---------- ----------
Total earning assets............................... 1,131,448 942,551
Accrued interest receivable............................ 6,626 4,307
Repossessed assets..................................... 10,363 2,359
Premises and equipment................................. 20,866 17,958
Mortgage servicing rights.............................. 30,064 27,957
Other assets........................................... 53,672 20,843
---------- ----------
Total assets....................................... $1,297,226 $1,045,094
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities
Deposit accounts..................................... $ 624,485 $ 526,974
Federal Home Loan Bank advances...................... 389,801 191,156
---------- ----------
Total interest bearing liabilities................. 1,014,286 718,130
Accrued interest payable............................. 2,712 2,215
Undisbursed payments on loans serviced for others.... 61,445 60,012
Escrow accounts...................................... 61,009 88,863
Liability for checks issued.......................... 39,813 85,849
Federal income taxes payable......................... 22,548 14,655
Other liabilities.................................... 16,945 12,925
---------- ----------
Total liabilities.................................. 1,218,758 982,649
Commitments and Contingencies (Notes 4, 6, 7, 12 and
16)................................................... -- --
Stockholders' Equity
Common stock--$0.01 par value, 40,000,000 shares
authorized, 11,250,000 shares issued and outstanding
at December 31, 1996 and 1995....................... 112 112
Additional paid in capital........................... 2,816 2,816
Retained earnings.................................... 75,540 59,517
---------- ----------
Total stockholders' equity......................... 78,468 62,445
---------- ----------
Total liabilities and stockholders' equity......... $1,297,226 $1,045,094
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
INTEREST INCOME
Loans................................................. $74,588 $69,543 $33,533
Other................................................. 1,591 1,761 1,579
------- ------- -------
76,179 71,304 35,112
INTEREST EXPENSE
Deposits.............................................. 30,431 25,123 9,037
FHLB advances......................................... 14,291 15,072 3,726
Other................................................. 1,245 1,248 1,723
------- ------- -------
45,967 41,443 14,486
------- ------- -------
Net interest income................................... 30,212 29,861 20,626
Provision for losses.................................. 2,604 238 290
------- ------- -------
Net interest income after provision for losses........ 27,608 29,623 20,336
NON-INTEREST INCOME
Loan administration................................... 11,859 14,248 13,261
Net gain on loan sales and sales of mortgage servicing
rights............................................... 39,640 16,228 27,357
Other fees and charges................................ 7,035 6,512 2,114
------- ------- -------
58,534 36,988 42,732
------- ------- -------
NON-INTEREST EXPENSE
Compensation and benefits............................. 25,553 19,665 18,609
Occupancy and equipment............................... 12,126 9,062 7,340
General and administrative............................ 21,141 12,989 11,670
------- ------- -------
58,820 41,716 37,619
------- ------- -------
Earnings before federal income taxes.................. 27,322 24,895 25,449
Provision for federal income taxes.................... 10,299 9,419 9,318
------- ------- -------
NET EARNINGS.......................................... $17,023 $15,476 $16,131
======= ======= =======
Earnings per common share............................. $ 1.51 $ 1.37 $ 1.42
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID IN UNREALIZED RETAINED STOCKHOLDERS'
STOCK CAPITAL GAINS EARNINGS EQUITY
------ ---------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1994...................... $115 $2,885 $ 126 $31,988 $35,114
Net earnings............. -- -- -- 16,131 16,131
Sale of marketable
securities.............. -- -- (126) -- (126)
Stock repurchase......... (2) (56) -- (1,242) (1,300)
Dividends paid ($0.04 per
share).................. -- -- -- (400) (400)
---- ------ ----- ------- -------
Balance at December 31,
1994...................... 113 2,829 -- 46,477 49,419
Net earnings............. -- -- -- 15,476 15,476
Stock repurchase......... (1) (13) -- (436) (450)
Dividends paid ($0.18 per
share).................. -- -- -- (2,000) (2,000)
---- ------ ----- ------- -------
Balance at December 31,
1995...................... 112 2,816 -- 59,517 62,445
Net earnings............. -- -- -- 17,023 17,023
Dividends paid ($0.09 per
share).................. -- -- -- (1,000) (1,000)
---- ------ ----- ------- -------
Balance at December 31,
1996...................... $112 $2,816 $ -- $75,540 $78,468
==== ====== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities
Net earnings............................ $ 17,023 $ 15,476 $ 16,131
Adjustments to reconcile net earnings to
net cash (used in) provided by
operating activities
Provision for losses................... 2,604 238 290
Depreciation and amortization.......... 17,287 11,072 9,022
Net gain on the sale of assets......... (187) (493) (569)
Net gain on loan sales and sales of
mortgage servicing rights............. (39,640) (16,228) (27,357)
(Benefit) provision for deferred
federal income taxes.................. (773) 3,415 2,813
Proceeds from sales of loans held for
sale.................................. 6,604,080 4,783,070 3,668,870
Originations and repurchases of loans
held for sale, net of principal
repayments............................ (6,830,382) (5,011,843) (3,594,108)
Increase in accrued interest
receivable............................ (2,319) (1,214) (1,027)
Increase in other assets............... (34,369) (8,896) (670)
Increase in accrued interest payable... 497 1,254 343
Increase (decrease) in liability for
checks issued......................... (46,037) 46,496 (7,421)
Increase in federal taxes payable...... 8,666 3,750 1,628
Increase (decrease) in other
liabilities........................... 4,020 8,326 (722)
Decrease in unrealized gains........... -- -- (126)
----------- ----------- -----------
Net cash (used in) provided by
operating activities................ (299,530) (165,577) 67,097
Investing Activities
Cash used to acquire Security Savings
Bank, FSB, (Security), net of cash
received............................... -- -- (23,869)
Principal repayments from assets
acquired from Security................. -- -- 3,251
Proceeds from the disposition of assets
acquired from Security................. -- -- 74,300
Net decrease in liabilities acquired
from Security.......................... -- -- (2,918)
Principal repayment from other
investments............................ 31 32 --
Maturity of other investments........... 400 -- --
Purchase of other investments........... (500) -- --
Originations of loans held for
investment, net of principal
repayments............................. 31,936 (60,891) (157,698)
Principal repayments from mortgage-
backed securities...................... -- -- 163
Proceeds from the sale of mortgage-
backed securities...................... -- -- 5,176
Purchase of Federal Home Loan Bank
Stock.................................. (1,925) (5,034) (2,438)
Proceeds from the disposition of
repossessed assets..................... 1,813 675 1,796
Net decrease in real estate held for
investments............................ -- -- 5
Acquisitions of premises and equipment.. (7,596) (6,632) (6,591)
Proceeds from the disposition of
premises and equipment................. -- -- 37
Increase in mortgage servicing rights... (63,499) (31,106) (15,616)
Proceeds from the sale of mortgage
servicing rights....................... 85,203 29,040 38,183
----------- ----------- -----------
Net cash provided by (used in)
investing activities................ 45,863 (73,916) (86,219)
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Financing Activities
Net increase (decrease) in deposit
accounts........................... $ 97,511 $218,984 $(80,478)
Net increase (decrease) in Federal
Loan Bank advances................. 198,645 (9,594) 140,750
Net receipt (disbursement) of
payments of loans serviced for
others............................. 1,433 25,023 (22,213)
Net (disbursement) receipt of escrow
payments........................... (27,854) 10,993 33
Stock repurchase.................... -- (450) (1,300)
Dividends paid to stockholders...... (1,000) (2,000) (400)
-------- -------- --------
Net cash provided by financing
activities...................... 268,735 242,956 36,392
-------- -------- --------
Net increase in cash and cash
equivalents......................... 15,068 3,463 17,270
Beginning cash and cash equivalents.. 29,119 25,656 8,386
-------- -------- --------
Ending cash and cash equivalents..... $ 44,187 $ 29,119 $ 25,656
======== ======== ========
Supplemental disclosure of cash flow
information:
Loans receivable transferred to
repossessed assets................. $ 10,577 $ 1,781 $ 1,367
======== ======== ========
Total interest payments made on
deposits and other borrowings...... $ 45,470 $ 40,189 $ 14,139
======== ======== ========
Federal income taxes paid........... $ 2,300 $ 2,500 $ 6,280
======== ======== ========
Loans held for investment
transferred to loans held for
sale............................... $ -- $185,111 $ --
======== ======== ========
Loans held for sale transferred to
loans held for investment.......... $ -- $ -- $106,261
======== ======== ========
Loans held for sale transferred to
mortgage-backed securities......... $ -- $ -- $ 1,438
======== ======== ========
Supplemental schedule of
acquisitions:
Flagstar Bank, FSB acquired Security Savings Bank, FSB, in
Jackson, Michigan at the close of business June 30, 1994 (Note
15).
Security Savings Bank Acquisition
Cash paid for common stock.......... $ 25,729
Fair value of assets acquired,
including $77,538 which were
subsequently disposed.............. $225,934
Fair value of liabilities acquired,
including $2,918 which were
subsequently repaid................ 209,241
--------
Fair value of net assets acquired... 16,693
--------
Core deposit premium................ $ 9,036
========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--NATURE OF BUSINESS
Flagstar Bancorp, Inc. and Subsidiaries (formerly FSSB Holding Corporation)
("Company") is a non-diversified, unitary thrift holding company. The Company
provides retail banking services in southern Michigan and mortgage lending
services nationwide.
NOTE 2--CORPORATE STRUCTURE
The following is a listing of the subsidiaries of the Company:
Flagstar Bank, FSB ("Flagstar") (formerly First Security Savings Bank,
FSB) is a federally chartered stock savings bank and a member of the
Federal Home Loan Bank System ("FHLB").
Security Savings Bank, FSB ("Security") is a federally chartered stock
savings bank and a member of the Federal Home Loan Bank System ("FHLB").
Flagstar acquired the stock of Security on June 30, 1994. This acquisition
was accounted for using the purchase method of accounting. For regulatory
reporting purposes, Flagstar and Security (the "Banks") filed a
consolidated Thrift Financial Report ("TFR").
Security owned two subsidiaries, Mid Michigan Service Corporation
("MMSC") and SSB Funding Corporation ("Funding"). MMSC is a Michigan
corporation utilized to lease Security's main office facility and Funding
is a finance subsidiary, which is currently inactive.
On February 1, 1996, Security was merged with and into Flagstar Bank,
FSB. The consolidation took place to take advantage of name recognition and
operating efficiencies.
Flagstar owns two other subsidiaries, Boston Credit Corporation ("BCC")
and Mortgage Affiliated Services, Inc. ("MAS"). BCC is currently inactive
and MAS is an appraisal and document preparation company.
The Company owns five other subsidiaries, FSSB Real Estate Development
Corporation ("REDC"), Douglas Insurance Agency ("DIA"), FSSB Mortgage
Corporation ("Mortgage"), Mortgage Video Network, Inc. ("Video"), and First
Security Investment Group, Inc. ("Investment") whose results of operations
are not significant. During the first quarter of 1996, FSSB Mortgage
Corporation was made a part of Flagstar. This organizational change did not
have a significant impact on the operations of the Company.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following summarizes the significant accounting policies of the Company
and subsidiaries (collectively referred to as the Company) applied in the
preparation of the accompanying consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company.
All significant intercompany balances and transactions have been eliminated.
Statement of Cash Flows
For purposes of the statements of cash flows, the Company considers its
investment in overnight deposits to be cash equivalents.
Loans Receivable
The Company originates loans which are designated to be held for investment
or sale during the origination process. Mortgage loans held for sale are
carried at the lower of aggregate cost or estimated market value.
F-8
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Management periodically reviews the portfolio and makes necessary adjustments
for market value. Net unrealized losses are recognized in a valuation
allowance by charges to earnings. Gains or losses recognized upon the sale of
loans are determined using the specific identification method. Mortgage loans
held for investment are carried at amortized cost. The Company has both the
intent and the ability to hold all mortgage loans held for investment for the
foreseeable future.
Allowance for Losses
The allowance is maintained at a level adequate to absorb losses inherent in
the loan portfolio. Management determines the adequacy of the allowance by
applying projected loss ratios to the risk ratings of loans both individually
and by category. The projected loss ratios incorporate such factors as recent
loss experience, current economic conditions, the risk characteristics of the
various categories and concentrations of loans, transfer risk and other
pertinent factors.
Loans which are deemed uncollectible are charged off and deducted from the
allowance. The provision for losses and recoveries on loans previously charged
off are added to the allowance. In addition, specific provision is made for
expected loan losses to reduce the recorded balances of loans receivable to
their estimated net realizable value. Such specific provision is based on
management's estimate of net realizable value considering the current and
anticipated operating or sales environment. These estimates of collateral
value are particularly susceptible to market changes that could result in
adjustments to the results of earnings in the future. Recovery of the carrying
value of such loans or the underlying collateral is dependent to a great
extent on economic, operating and other conditions that may be beyond the
Company's control.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
114 (as amended by SFAS No. 118), "Accounting by Creditors for Impairment of a
Loan," effective January 1, 1995, which addresses the accounting by creditors
for the impairment of certain loans. The provisions of SFAS 114 do not apply
to large groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment and loans that are measured at fair value or at the
lower of cost or fair value. The Company considers its residential mortgage
loan portfolio to represent a pool of smaller balance homogeneous loans.
Commercial, commercial real estate, construction and consumer loan portfolios
are specifically reviewed for impairment. The adoption had no effect on the
recorded allowance for losses.
The Company considers a loan impaired when it is probable, in the opinion of
management, that interest and principal may not be collected according to the
contractual terms of the loan agreement. Consistent with this definition, the
Company considers all non-accrual loans (with the exception of residential
mortgages) to be impaired. Impaired loans which have risk characteristics that
are unique to an individual borrower, are evaluated on a loan-by-loan basis.
However, impaired loans that have risk characteristics in common with other
impaired loans, (such as loan type, geographical location, or other
characteristics that would cause the ability of the borrowers to meet
contractual obligations to be similarly affected by changes in economic or
other conditions), are aggregated and historical statistics, such as average
recovery period and average amount recovered, along with a composite effective
interest rate are used as a means of measuring those impaired loans. Loan
impairment is measured by estimating the expected future cash flows and
discounting them at the respective effective interest rate or by valuing the
underlying collateral.
Loan Origination Fees, Commitment Fees and Related Costs
Loan fees received are accounted for in accordance with SFAS No. 91,
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases." Mortgage loan fees and
certain direct origination costs are capitalized. On loans held for sale, the
net fee or cost is
F-9
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
recognized at the time the loan is sold. For mortgage loans held for
investment, the deferred amount is accounted for as an adjustment to interest
income using a method that approximates the interest method.
Repossessed Assets
Repossessed assets include one-to-four family residential property,
commercial property, and one-to-four family homes under construction. At the
date of foreclosure, real estate properties acquired in settlement of loans
are recorded at the lower of cost or net realizable value. Valuations are
periodically performed by management, and a charge to earnings is made if the
carrying value of a property exceeds its estimated fair value. Costs of
holding repossessed assets, principally taxes and legal fees, are expensed as
incurred.
Federal Income Taxes
The Company accounts for income taxes on the asset and liability method.
Deferred tax assets and liabilities are recorded based on the difference
between the tax bases of assets and liabilities and their carrying amounts for
financial reporting purposes. Current taxes are measured by applying the
provisions of enacted tax laws to taxable income to determine the amount of
taxes receivable or payable.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Land is carried at historical cost. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets as follows:
Office buildings--31 years
Computer hardware and software--3 to 5 years
Furniture, fixtures and equipment--5 to 7 years
Automobiles--3 years
During March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
This Statement requires that long-lived assets and goodwill related to those
assets to be held and used by an entity and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company adopted SFAS No. 121 effective January 1, 1996. Adoption of this
Statement did not have an impact on the financial condition or results of
operations of the Company.
Mortgage Servicing Rights
Mortgage servicing rights ("MSR") represent the cost of acquiring the right
to service mortgage loans. These costs are initially capitalized and
subsequently amortized in proportion to, and over the period of, the estimated
net loan servicing income.
In May 1995, the Company adopted SFAS No. 122, "Accounting for Mortgage
Servicing Rights." This requires the capitalization of a mortgage servicing
asset for every origination whether it be originated or purchased. SFAS No.
122 also dictates prescribed rules for the amortization, periodic valuation,
and the required valuation adjustment. Prior to adoption, a value was
capitalized for purchased mortgage servicing rights. This capitalization was
in accordance with SFAS Statement of Financial Accounting Standards No. 65,
"Accounting for Certain Mortgage Banking Practices."
The value of the mortgage servicing rights are periodically evaluated in
relation to the estimated discounted net future servicing revenues. The
portfolio is aggregated into stratifications based on loan term and type, and
note rate. Estimates of remaining loan lives and prepayment rates are
incorporated into this analysis. Changes in
F-10
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
these estimates could materially change the estimated fair value and any
valuation allowance. Valuation adjustments are recorded when the fair value of
the servicing asset is less than the amortized book value on a stratum basis.
Any valuation adjustment is recorded as an offset to the asset.
Loan Sales
The Company sells its held for sale mortgage loans to secondary market
investors on a non-recourse basis. At the time of the sale, the Company makes
certain representations and warranties to the investors. Should an investor
determine that a breach of such representations or warranties occurs, the
Company may be required to repurchase loans from the investor. Such
representations and warranties generally relate to the fact that the loans
have been underwritten in accordance with the investor's underwriting
guidelines and that the loans conform to the laws of the state of origination.
Gain or loss on the sale of such loans is recognized upon consummation of the
sale.
Earnings Per Share
Earnings per share is calculated by dividing net earnings by the weighted
average number of common shares outstanding.
After giving effect to the stock split referred to in Note 20, the weighted
average shares outstanding for computing earnings per share was 11,250,000,
11,274,047 and 11,388,617 for the years ended December 31, 1996, 1995 and
1994, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The financial condition of a financial services company, and to some extent,
its operating performance, is dependent to a significant degree upon estimates
and appraisals of value, evaluations of creditworthiness and assumptions about
future events and economic conditions. Recent history has demonstrated that
these estimates, appraisals, evaluations and assumptions are subject to rapid
change, and that such changes can materially affect the reported financial
condition of a financial services company and its financial performance, and
may result in restrictions on an institution's ability to continue to operate
in its customary manner.
Reclassifications
Certain amounts within the accompanying consolidated financial statements
and the related notes have been reclassified to conform to the 1996
presentation.
Recently Issued Accounting Standards
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This statement defines a fair value based method of accounting
for an employee stock option or similar equity instrument and encourages
adoption of that method for all employee stock compensation plans. However, it
also allows an entity to continue to measure compensation cost for those plans
using the intrinsic value based method currently being followed and make pro
forma disclosures of net earnings and earnings per share under the fair value
based method of accounting. This statement is effective for financial
statements with fiscal years beginning
F-11
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
after December 15, 1995, with earlier application encouraged. At December 31,
1996, the Company had no stock-based compensation plans. (See Note 20).
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement requires that, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities
it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. This statement is
effective for transfers and servicing of financial assets and extinguishment
of liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. Management
believes that implementation of this pronouncement should have no material
effect on the consolidated financial statements.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
replaces the presentation of primary earnings per share ("EPS") with a
presentation of basic EPS, requires dual presentation of basic and diluted EPS
on the face of the statement of earnings regardless of whether basic and
diluted EPS are the same, and requires a reconciliation of the numerator and
denominator used in computing basic and diluted EPS. Basic EPS excludes
dilution and is computed by dividing earnings available to common stockholders
by the weighted average number of common shares outstanding for the period.
Diluted EPS is computed similarly to fully diluted EPS pursuant to APB Opinion
15. Diluted EPS reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then shared in
the earnings of the entity. This Statement is effective for financial
statements issued for periods ending after December 15, 1997, including
interim periods, earlier application is not permitted, and requires
restatement of all prior-period EPS data presented.
NOTE 4--LOANS RECEIVABLE
The loan portfolio is summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
---------- --------
<S> <C> <C>
Held for sale--mortgage loans............................. $ 840,767 $620,455
Held for investment
Mortgage loans.......................................... 120,924 178,246
Commercial real estate loans............................ 13,565 30,504
Commercial loans........................................ 46,202 8,566
Construction loans...................................... 59,270 48,933
Consumer loans.......................................... 33,608 39,331
---------- --------
273,569 305,580
---------- --------
1,114,336 926,035
Less allowance for losses................................. (3,500) (2,102)
---------- --------
Total................................................. $1,110,836 $923,933
========== ========
</TABLE>
F-12
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Activity in the allowance for losses is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Balance, beginning of period...................... $ 2,102 $1,871 $ 901
Allowance for losses of Security at date of
acquisition...................................... -- -- 1,001
Provision charged to earnings..................... 2,604 238 290
Charge-offs, net of recoveries.................... (1,206) (7) (321)
------- ------ ------
Balance, end of period............................ $ 3,500 $2,102 $1,871
======= ====== ======
</TABLE>
The Company has no commitments to make additional advances on restructured
or other nonperforming loans. Loans on which interest accruals have been
discontinued totaled approximately $30.6 million at December 31, 1996, $10.7
million at December 31, 1995 and $1.7 million at December 31, 1994. Interest
that would have been accrued on such loans totaled approximately $2,668,000,
$862,000 and $245,000 at December 31, 1996, 1995, and 1994, respectively.
At December 31, 1996 the recorded investment in impaired loans pursuant to
SFAS No. 114, totaled $3.9 million and the average outstanding balance for the
year ended December 31, 1996 was $3.1 million. No additional allowance for
losses was required on these loans because the measured values of the loans
exceeded the recorded investments in the loans. Interest income recognized on
impaired loans during the year ended December 31, 1996, was not significant.
At December 31, 1995, the Company had no recorded investment in impaired
loans.
NOTE 5--REPOSSESSED ASSETS
Repossessed assets include the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
------- ------
<S> <C> <C>
One-to-four family............................................ $10,133 $2,179
Commercial properties......................................... 230 180
------- ------
Repossessed assets............................................ $10,363 $2,359
======= ======
</TABLE>
NOTE 6--PREMISES AND EQUIPMENT
Premises and equipment balances are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- -------
<S> <C> <C>
Land...................................................... $ 3,330 $ 3,330
Office buildings.......................................... 2,643 2,312
Computer hardware and software............................ 15,421 10,941
Furniture, fixtures and equipment......................... 11,045 8,460
Automobiles............................................... 571 568
-------- -------
33,010 25,611
Less accumulated depreciation............................. (12,144) (7,653)
-------- -------
Premises and equipment, net............................... $ 20,866 $17,958
======== =======
</TABLE>
F-13
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation expense amounted to approximately $4.6 million, $3.1 million
and $2.1 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company maintains 15 deposit branches, 28 loan centers, nine
correspondent service centers, a loan servicing center, and three corporate
operation centers. Seven of the deposit branches and one of the loan
production facilities are owned by the Company. Lease rental expense totaled
approximately $4.1 million, $3.3 million and $3.1 million for the years ended
1996, 1995 and 1994, respectively. The following outlines the Company's
minimum contractual lease obligations as of December 31, 1996 (in thousands):
<TABLE>
<S> <C>
1997.................................. $2,603
1998.................................. 1,834
1999.................................. 1,357
2000.................................. 1,079
2001.................................. 463
------
Total............................... $7,336
======
</TABLE>
During January 1997, the Company exercised its option under an existing
lease agreement to purchase land and a building in Jackson County, Michigan
for $3.0 million.
The Company has committed to the development of additional software and
systems to be utilized in the mortgage banking segment. The amount committed
to the project amounted to approximately $1.8 million, of which approximately
$500,000 was paid during 1996.
NOTE 7--MORTGAGE SERVICING RIGHTS
Not included in the accompanying consolidated financial statements are
mortgage loans serviced for others. The unpaid principal balances of these
loans, including subservicing of approximately $3.6 billion and $536.3 million
at December 31, 1996 and 1995, respectively, are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ----------
<S> <C> <C>
Mortgage loans serviced for:
FHLMC and FNMA...................................... $4,658,056 $6,638,435
MSHDA............................................... 47,505 31,055
GNMA................................................ 6,458 7,217
Other investors..................................... 3,708,935 648,147
---------- ----------
$8,420,954 $7,324,854
========== ==========
</TABLE>
Custodial accounts maintained in connection with the above mortgage
servicing rights were approximately $106.3 million and $131.4 million at
December 31, 1996 and 1995, respectively. These amounts include payments for
principal, interest, taxes, and insurance collected on behalf of the
individual investor.
As discussed in Note 3, the Company adopted SFAS 122 in May 1995. The effect
of the adoption was to increase earnings by approximately $1.5 million before
taxes for 1995 or $0.13 per share.
F-14
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is an analysis of the changes in the mortgage servicing rights
(in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Balance, beginning of period.................... $ 27,957 $ 18,179 $17,563
Additions....................................... 63,499 31,106 15,616
Sales........................................... (50,075) (15,684) (9,475)
Amortization.................................... (11,317) (5,644) (5,525)
-------- -------- -------
Balance, end of period.......................... $ 30,064 $ 27,957 $18,179
======== ======== =======
</TABLE>
At December 31, 1996 and 1995, the estimated fair value of the mortgage loan
servicing portfolio was approximately $54.0 million and $70.4 million,
respectively. The estimated fair value in excess of book value was
approximately $23.9 million and $42.4 million at December 31, 1996 and 1995,
respectively.
During October 1995, Flagstar committed to sell $2.0 billion of mortgage
servicing rights to a large national bank during 1996. The commitment required
quarterly installment sales of new production mortgage servicing rights. The
first installment was made in December 1995.
During 1996, Flagstar committed to sell $2.0 to $3.0 billion of mortgage
servicing rights during 1996 and 1997 to a major mortgage servicing company.
The commitment requires quarterly installment sales of new production mortgage
servicing rights. Flagstar has fulfilled $1.4 billion of this commitment, and
all of the October 1995 commitment, as of December 31, 1996.
NOTE 8--DEPOSIT ACCOUNTS
The deposit accounts are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
<S> <C> <C>
Demand, NOW and money market accounts..................... $ 66,661 $ 40,166
Savings accounts.......................................... 57,211 38,094
Certificate of deposit.................................... 500,613 448,714
-------- --------
Total deposit accounts.................................. $624,485 $526,974
======== ========
</TABLE>
Noninterest-bearing deposits included in the demand, NOW and money market
accounts balances at December 31, 1996 and 1995 were approximately $36.7
million and $10.9 million, respectively.
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $279.5 million and $223.4 million at December
31, 1996 and 1995, respectively.
F-15
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following indicates the scheduled maturities of the Company's
certificates of deposit as of December 31, 1996 (in thousands):
<TABLE>
<S> <C>
Three months or less............................................... $142,516
Over three through six months...................................... 128,583
Over six through twelve months..................................... 141,378
One to two years................................................... 54,645
Thereafter......................................................... 33,491
--------
Total............................................................ $500,613
========
</TABLE>
Interest expense on deposit accounts is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Demand, NOW and money market accounts................ $ 2,499 $ 1,824 $ 773
Passbook savings..................................... 428 228 127
Certificates of deposit.............................. 27,504 23,071 8,137
------- ------- ------
Total.............................................. $30,431 $25,123 $9,037
======= ======= ======
</TABLE>
NOTE 9--FHLB ADVANCES
The following indicates certain information related to the FHLB advances (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Maximum outstanding at any month end........... $389,801 $315,000 $200,750
Average monthly balance........................ 247,204 237,535 83,912
Average interest rate.......................... 5.78% 6.35% 4.44%
</TABLE>
Flagstar has the authority and approval from the FHLB to utilize a total of
$425 million in collateralized borrowings. Advances at December 31, 1996
principally mature during 1997 and 1998. Pursuant to collateral agreements
with the FHLB, advances are collateralized by non-delinquent single-family
residential mortgage loans.
NOTE 10--FEDERAL INCOME TAXES
Components of the provision for federal income taxes consists of the
following (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Current provision.................................... $11,072 $6,004 $6,505
Deferred (benefit) provision......................... (773) 3,415 2,813
------- ------ ------
$10,299 $9,419 $9,318
======= ====== ======
</TABLE>
F-16
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's effective tax rates differ from the statutory federal tax
rates. The following is a summary of such differences (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Provision at statutory federal income tax rate....... $ 9,563 $8,713 $8,907
Increase resulting from:
Amortization of deposit premium.................... 450 450 225
Other, net......................................... 286 256 186
------- ------ ------
Provision at effective federal income tax rate....... $10,299 $9,419 $9,318
======= ====== ======
</TABLE>
The details of the net tax liability are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Mark-to-market adjustments on earning assets.......... $ 1,130 $ 1,031
Interest not accrued.................................. 934 255
Other................................................. 218 9
-------- --------
Total............................................... 2,282 1,295
-------- --------
Deferred tax liabilities:
Deferred fees......................................... (1,112) (567)
Bad debt reserves..................................... (704) (1,246)
Mortgage loan servicing rights........................ (10,199) (9,724)
Purchase accounting valuation adjustments............. (555) (835)
Premises and equipment................................ (885) (463)
Other................................................. (268) (674)
-------- --------
Total............................................... (13,723) (13,509)
-------- --------
Net deferred tax liability.............................. (11,441) (12,214)
Currently payable....................................... (11,107) (2,441)
-------- --------
Net tax liability....................................... $(22,548) $(14,655)
======== ========
</TABLE>
The Company files a consolidated federal income tax return on a calendar
year basis. Through its tax year ended December 31, 1995, Flagstar has
determined its deduction for bad debts based on the reserve method in lieu of
the specific charge-off method. Under the reserve method, Flagstar has
established and maintained a reserve for bad debts against which actual loan
losses are charged. As a qualifying thrift institution, Flagstar has
calculated its addition to its bad debt reserve under either, (1) the
"percentage of taxable income" method or (2) the "experience" method. Flagstar
used the percentage of taxable income method in determining its bad debt
reserve addition for its 1995 and 1994 tax years.
During August 1996, the President signed the Small Business Job Protection
Act of 1996 ("the Jobs Act") which contains certain provisions that require
all savings banks and thrifts to account for bad debts for income tax
reporting purposes in the same manner as banks. The effect on a large thrift
such as Flagstar is that it must change its tax method of accounting for
determining its allowable bad debt deduction from the reserve method to the
specific charge-off method. Consequently, the bad debt deduction based on a
percentage of taxable income or the experience method is no longer allowed for
years beginning after December 31, 1995.
F-17
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The bad debt reserves maintained for tax purposes and accumulated after 1987
are subject to recapture as part of the change. Base year reserves (generally
pre-1988 bad debt reserves) will not be recaptured unless Flagstar, or a
successor institution, liquidates, redeems shares or pays a dividend in excess
of earnings and profits.
The recapture of the post 1987 reserves will generally be taken into account
ratably over six years beginning with the 1996 tax year. Flagstar may defer
the recapture up to an additional two years if it meets certain residential
lending requirements during tax years beginning before January 1, 1998. Income
taxes have been provided for the temporary difference between the allowance
for losses and the increase in the bad debt reserve maintained for tax
purposes since the 1987 base year. The cumulative amount of this difference at
December 31, 1995 was approximately $3.5 million for Flagstar. As a result of
the Jobs Act, the cumulative difference of $3.5 million will be recaptured.
Management believes that Flagstar has met the conditions of the residential
lending requirements which allow deferral of the recapture of the reserve
during 1996. The Jobs Act had no effect on the base year reserves of Flagstar.
Consequently, Flagstar has not provided deferred taxes of approximately $1.4
million on the balance of its tax bad debt reserves as of the 1987 base year.
NOTE 11--EMPLOYEE BENEFITS
The Company maintains a 401(k) plan for its employees. Under the plan,
eligible employees may contribute up to 6% of their compensation up to a
maximum of $9,000 annually. The Company currently provides a matching
contribution up to 3% of an employee's annual compensation. The Company's
contributions vest at a rate such that an employee is fully vested after seven
years of service. The Company's contributions to the plan for the years ended
December 31, 1996, 1995 and 1994 were approximately $594,000, $493,000 and
$371,000, respectively. The Company may also make discretionary contributions
to the plan; however, none have been made.
NOTE 12--CONTINGENCIES
The Company is involved in certain lawsuits incidental to its operations.
Management, after review with its legal counsel, is of the opinion that
settlement of such litigation will not have a material effect on the Company's
financial condition.
A substantial part of the Company's business has involved the origination,
purchase, and sale of mortgage loans. During the past several years, numerous
individual claims and purported consumer class action claims were commenced
against a number of financial institutions, their subsidiaries, and other
mortgage lending institutions generally seeking civil statutory and actual
damages and rescission under the federal Truth in Lending Act (the "TILA"), as
well as remedies for alleged violations of various state unfair trade
practices laws and restitution or unjust enrichment in connection with certain
mortgage loan transactions.
The Company has a substantial mortgage loan servicing portfolio and
maintains escrow accounts in connection with this servicing. During the past
several years, numerous individual claims and purported consumer class action
claims were commenced against a number of financial institutions, their
subsidiaries, and other mortgage lending institutions generally seeking
declaratory relief that certain of the lenders' escrow account servicing
practices violate the Real Estate Settlement Practices Act and breach the
lenders' contracts with borrowers. Such claims also generally seek actual
damages and attorney's fees.
In addition to the foregoing, mortgage lending institutions have been
subjected to an increasing number of other types of individual claims and
purported consumer class action claims that relate to various aspects of the
origination, pricing, closing, servicing, and collection of mortgage loans and
that allege inadequate disclosure, breach of contract, or violation of state
laws. Claims have involved, among other things, interest rates and fees
charged in connection with loans, interest rate adjustments on adjustable-rate
mortgage loans, timely release of
F-18
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
liens upon loan payoffs, the disclosure and imposition of various fees and
charges, and the placing of collateral protection insurance.
While the Company has had various claims similar to those discussed above
asserted against it, management does not expect these claims to have a
material adverse effect on the Company's financial condition, results of
operations, or liquidity.
NOTE 13--REGULATORY MATTERS
The Financial Institutions Reform Recovery and Enforcement Act of 1989
("FIRREA"), which instituted major reforms in the operation and supervision of
the savings and loan industry, contains provisions for capital standards.
These standards require savings institutions to have a minimum regulatory
tangible capital (as defined in the regulation) equal to 1.50% of adjusted
total assets and a minimum 3.00% core capital (as defined) of adjusted total
assets. Additionally, savings institutions are required to meet a total risk-
based capital requirement of 8.00%.
Flagstar is also subject to the provisions of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). FDICIA includes significant
changes to the legal and regulatory environment for insured depository
institutions, including reductions in insurance coverage for certain kinds of
deposits, increased supervision by the Federal regulatory agencies, increased
reporting requirements for insured institutions, and new regulations
concerning reporting on internal controls, accounting and operations.
FDICIA's prompt corrective action regulations define specific capital
categories based on an institutions' capital ratios. The capital categories,
in declining order, are "well" capitalized, "adequately capitalized",
"undercapitalized", "significantly undercapitalized", and "critically
undercapitalized." Institutions categorized as "undercapitalized" or worse are
subject to certain restrictions, including the requirement to file a capital
plan with OTS, and increased supervisory monitoring, among other things. Other
restrictions may be imposed on the institution either by the OTS or by the
FDIC, including requirements to raise additional capital, sell assets, or sell
the entire institution.
The following chart delineates the categories as defined in the FDICIA
legislation:
<TABLE>
<CAPTION>
TIER 1 TOTAL
RISK- RISKED-
CORE BASED BASED
CAPITAL CAPITAL CAPITAL
-------------- -------------- --------------
<S> <C> <C> <C>
"Well capitalized"...... 5.0% 6.0% 10.0%
"Adequately
capitalized"........... 4.0% 4.0% 8.0%
"Undercapitalized"...... Less than 4.0% Less than 4.0% Less than 8.0%
"Significantly
undercapitalized"...... Less than 3.0% Less than 3.0% Less than 6.0%
</TABLE>
At December 31, 1996, Flagstar's consolidated Core, Tier 1 risk-based, and
Total risk-based capital ratios were 6.01%, 10.48% and 10.91%, respectively.
These ratios place Flagstar in the "well capitalized" category.
F-19
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a calculation of Flagstar's consolidated regulatory capital
at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
TIER 1 TOTAL
RISK- RISK-
GAAP BASED TANGIBLE CORE BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
GAAP capital, as reported.......... $77,899 $77,899 $77,899 $77,899 $77,899
Nonallowed assets:
Core deposit premium............. (5,805)
Other assets..................... (313)
Additional capital items:
General valuation allowance...... 3,500
------- ------- ------- -------
Regulatory capital................. $77,899 72,094 77,899 81,086
=======
Minimum capital requirement %...... 1.50% 3.00% 8.00%
Minimum capital requirement $...... 19,365 38,904 59,458
------- ------- -------
Regulatory capital--excess......... $52,729 $38,995 $21,628
======= ======= =======
</TABLE>
At December 31, 1995, Flagstar's consolidated Core, Tier 1 risk-based, and
Total risk-based capital ratios were 5.84%, 9.83% and 10.12%, respectively.
These ratios place Flagstar in the "well capitalized" category.
The following is a calculation of Flagstar's consolidated regulatory capital
at December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
TIER 1 TOTAL
RISK- RISK-
GAAP BASED TANGIBLE CORE BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
GAAP capital, as reported.......... $61,003 $61,003 $61,003 $61,003 $61,003
Nonallowed assets:
Core deposit premium............. (7,095)
Other assets..................... (306)
Additional capital items:
General valuation allowance...... 2,102
------- ------- ------- -------
Regulatory capital................. $61,003 53,908 61,003 62,799
=======
Minimum capital requirement %...... 1.50% 3.00% 8.00%
Minimum capital requirement $...... 15,566 31,346 49,655
------- ------- -------
Regulatory capital--excess......... $38,342 $29,657 $13,144
======= ======= =======
</TABLE>
The OTS risk-based capital regulation also includes an interest rate risk
(IRR) component that requires savings institutions with greater than normal
IRR, when determining compliance with the risk-based capital requirements, to
maintain additional total capital. The OTS has, however, indefinitely deferred
enforcement of its IRR requirements. Under the regulation, a savings
institution's IRR is measured in terms of the sensitivity of its "net
portfolio value" to changes in interest rates. A savings institution is
considered to have a "normal" level of IRR exposure if the decline in its net
portfolio value after an immediate 200 basis point increase or decrease in
market interest rates is less than 2% of the current estimated economic value
of its assets. If the OTS determines in the future to enforce the regulation's
IRR requirements, a savings institution with a greater than normal IRR would
be required to deduct from total capital, for purposes of calculating its
risk-based capital
F-20
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
requirement, an amount equal to one half the difference between the
institution's measured IRR and 2%, multiplied by the economic value of the
institution's total assets. Management does not believe that this regulation,
when enforced, will have a material impact on Flagstar.
The United States Congress has passed legislation that resulted in an
assessment on all Savings Association Insurance Fund ("SAIF") insured deposits
in order to recapitalize the SAIF. This one-time assessment amounted to
approximately 66 basis points on SAIF assessable deposits held as of March 31,
1995. The assessment amounted to approximately $3.4 million and was charged to
earnings during the third quarter of 1996.
NOTE 14--CONCENTRATIONS OF CREDIT
Properties collateralizing loans receivable are geographically disbursed
throughout the United States. As of December 31, 1996, approximately 38% of
these properties are located in Michigan (measured by principal balance), and
another 43% are located in the states of California, Colorado, Ohio, Florida,
Illinois, Texas, Maryland, Washington, Virginia, and Georgia. No other state
contains more than 2% of the properties collateralizing these loans.
NOTE 15--CORPORATE ACQUISITION
Flagstar entered into a definitive agreement on November 16, 1993 to acquire
all of the outstanding stock of Security Savings Bank, FSB of Jackson,
Michigan for $35 per share or approximately $25.9 million. As part of this
agreement, Security maintained its corporate identity and became an operating
subsidiary of Flagstar. The completion of this acquisition was finalized on
June 30, 1994, at the close of business. Had Security been a part of the
Company for all of 1994, the Company's earnings would have been reduced by
$581,000 or $0.05 per share.
In conjunction with Flagstar's acquisition of Security, a deposit premium
was capitalized in the amount of $9.0 million. This premium, which is included
in other assets, is being amortized over seven years on a straight-line
method. The premium, net of amortization, totals $5.8 million and $7.1 million
at December 31, 1996 and 1995, respectively. Amortization of the deposit
premium amounted to approximately $1.3 million, $1.3 million and $650,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
NOTE 16--FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 issued by the Financial Accounting Standards Board,
"Disclosures about Fair Value of Financial Instruments", requires the
disclosure of fair value information about financial instruments, whether or
not recognized in the statement of financial condition, where it is
practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Because assumptions used in these valuation techniques
are inherently subjective in nature, the estimated fair values cannot always
be substantiated by comparison to independent market quotes and, in many
cases, the estimated fair values could not necessarily be realized in an
immediate sale or settlement of the instrument.
The fair value estimates presented herein are based on relevant information
available to management as of December 31, 1996 and 1995. Management is not
aware of any factors that would significantly affect these estimated fair
value amounts. As these reporting requirements exclude certain financial
instruments and all non-financial instruments, the aggregate fair value
amounts presented herein do not represent management's estimate of the
underlying value of the Company. Additionally, such amounts exclude intangible
asset values such as the value of core deposit intangibles.
F-21
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following methods and assumptions were used by the Company to estimate
the fair value of each class of financial instruments and certain non-
financial instruments for which it is practicable to estimate that value:
Cash and cash equivalents: The carrying amount of cash and cash
equivalents approximates fair value.
Loans receivable: This portfolio consists of single family mortgage loans
held for sale and investment, collateralized commercial lines of credit,
commercial real estate loans, builder development project loans, consumer
credit obligations, and single family home construction loans. Mortgage
loans held for sale and investment are valued using fair values
attributable to similar mortgage loans. The fair value of the other loans
are valued based on the fair value of obligations with similar credit
characteristics.
Other investments: The carrying amount of other investments approximates
fair value.
Federal Home Loan Bank stock: No secondary market exists for Federal Home
Loan Bank (FHLB) stock. The stock is bought and sold at par by the FHLB.
The recorded value, therefore, is the fair value. The amount of stock
required to be purchased is based on total assets and is determined
annually.
Deposit Accounts: The fair value of demand deposits and savings accounts
approximates the carrying amount. The fair value of fixed-maturity
certificates of deposit is estimated using the rates currently offered for
deposits with similar remaining maturities.
Federal Home Loan Bank Advances: Rates currently available to the Company
for debt with similar terms and remaining maturities are used to estimate
the fair value of the existing debt.
Mortgage Servicing Rights: See Note 3 for a description of the method
used to value the mortgage servicing rights.
Financial instruments with off-balance-sheet risk: The fair value of
financial futures contracts, forward delivery contracts and fixed rate
commitments to extend credit are based on current market prices.
The following tables set forth the fair value of the Company's financial
instruments (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1996 1995
----------------- --------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Financial instruments:
Assets:
Cash and cash equivalents......... $ 44,187 $ 44,187 $ 29,119 $ 29,119
Mortgage loans held for sale...... 840,767 850,455 620,455 621,585
Loans held for investment......... 270,069 274,158 305,580 308,702
Other investments................. 887 887 818 818
Federal Home Loan Bank stock...... 19,725 19,725 17,800 17,800
Liabilities:
Deposits:
Demand deposits and savings
accounts......................... $123,872 $123,872 $ (78,260) $ (78,260)
Certificates of deposit........... 500,613 500,718 (448,714) (451,500)
FHLB advances....................... 389,801 389,635 (191,156) (190,800)
Off-balance sheet items:
Forward delivery contracts.......... -- (9,868) -- (9,366)
Commitments to extend credit........ -- 5,362 -- 1,789
Non-financial instruments:
Unrealized gains on mortgage
servicing rights (see Note 7)...... -- 23,900 -- 42,400
</TABLE>
F-22
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company enters into certain financial instruments with off-balance-sheet
risk in the ordinary course of business to reduce its exposure to changes in
interest rates. The Company utilizes only traditional financial instruments
for this purpose and does not enter into instruments such as leveraged
derivatives or structured notes. The financial instruments used for hedging
interest rate risk include financial futures contracts and forward delivery
contracts. A hedge is an attempt to reduce risk by creating a relationship
whereby any losses on the hedged asset or liability are expected to be
counterbalanced in whole or part by gains on the hedging financial instrument.
Thus, market risk resulting from a particular off-balance-sheet instrument is
normally offset by other on or off-balance-sheet transactions. The Company
seeks to manage credit risk by limiting the total amount of arrangements
outstanding, both by counterparty and in the aggregate, by monitoring the size
and maturity structure of the financial instruments, by assessing the
creditworthiness of the counterparty, and by applying uniform credit standards
for all activities with credit risk.
Financial Instruments with Off-Balance-Sheet Risk
Notional principal amounts indicated in the following table represent the
extent of the Company's involvement in particular classes of financial
instruments and generally exceed the expected future cash requirements
relating to the instruments.
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1995
---- ----
(IN MILLIONS)
<S> <C> <C>
Forward delivery contracts........................................ $665 $511
Commitments to extend credit...................................... 695 489
</TABLE>
All of the Company's financial instruments with off-balance sheet risk
expire within one year.
Financial Futures Contracts: There were no Treasury futures contracts
outstanding at December 31, 1996 or 1995. Gains or losses on futures
transactions are recorded on the specific identification method in response to
adjustments in the fair market value of the instruments. During 1996, 1995 and
1994, the Company recorded losses on financial futures amounting to
approximately $90,000, $1.3 million and $400,000, respectively.
Forward Delivery Contracts: Forward delivery contracts are entered into to
sell single family mortgage loans:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1995
---- ----
(IN MILLIONS)
<S> <C> <C>
Types
Fixed............................................................ $633 $470
Balloon.......................................................... 23 30
Variable......................................................... 9 11
---- ----
$665 $511
==== ====
</TABLE>
Substantially all forward delivery contracts are entered into with the
FHLMC, FNMA or GNMA.
Commitments to Extend Credit: The Company's exposure to credit loss for
commitments to extend credit is represented by the contractual amount of those
agreements. The Company uses the same credit policies in making funding
commitments as it does for on-balance-sheet instruments. These commitments
generally have fixed expiration dates or other termination clauses. Because
commitments may expire without being drawn upon, the total contract amounts do
not necessarily represent future cash requirements.
F-23
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1995
---- ----
(IN MILLIONS)
<S> <C> <C>
Single family...................................................... $585 $409
Other.............................................................. 110 80
---- ----
Total............................................................ $695 $489
==== ====
Fixed.............................................................. $670 $459
Variable........................................................... 25 30
---- ----
Total............................................................ $695 $489
==== ====
</TABLE>
NOTE 17--SEGMENT INFORMATION
The Company operates in two industry segments. The two industry segments are
mortgage banking and retail banking. Following is a presentation of financial
information by business segment for the period indicated (in thousands).
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
----------------------------------------------
RETAIL MORTGAGE
BANKING BANKING
SEGMENT SEGMENT ELIMINATIONS COMBINED
--------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Revenues....................... $ 13,791 $ 74,955 $ -- $ 88,746
Earnings before income taxes... 3,305 24,017 -- 27,322
Depreciation and amortization
of intangibles................ 1,589 15,698 -- 17,287
Capital expenditures........... 312 7,284 -- 7,596
Identifiable assets............ 387,201 1,112,676 (202,651) 1,297,226
Intersegment income (expense).. 14,186 (14,186) -- --
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
----------------------------------------------
RETAIL MORTGAGE
BANKING BANKING
SEGMENT SEGMENT ELIMINATIONS COMBINED
--------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Revenues....................... $ 12,390 $ 54,459 $ -- $ 66,849
Earnings before income taxes... 3,549 21,346 -- 24,895
Depreciation and amortization
of intangibles................ 1,728 9,344 -- 11,072
Capital expenditures........... 1,665 4,967 -- 6,632
Identifiable assets............ 307,620 782,802 (45,328) 1,045,094
Loans transferred to (from).... (185,111) 185,111 -- --
Intersegment income (expense).. (4,153) 4,153 -- --
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1994
----------------------------------------------
RETAIL MORTGAGE
BANKING BANKING
SEGMENT SEGMENT ELIMINATIONS COMBINED
--------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Revenues....................... $ 1,432 $ 61,926 $ -- $ 63,358
Earnings (loss) before income
taxes......................... (2,127) 27,576 -- 25,449
Depreciation and amortization
of intangibles................ 746 8,276 -- 9,022
Capital expenditures........... 664 5,927 -- 6,591
Identifiable assets............ 416,023 480,511 (173,384) 723,150
Loans transferred to (from).... 106,261 (106,261) -- --
Intersegment income (expense).. (2,358) 2,358 -- --
</TABLE>
F-24
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenues are comprised of net interest income (before the provision for
credit losses) and non-interest income. Non-interest expenses are fully
allocated to each segment. The intersegment income (expense) consists of
interest expense incurred or charged on intersegment borrowing.
NOTE 18--QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table represents summarized data for each of the quarters in
1996 and 1995 (in thousands except earnings (loss) per share data).
<TABLE>
<CAPTION>
1996 1995
-------------------------------- -------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income......... $18,500 $18,603 $19,558 $19,518 $21,035 $19,879 $16,762 $13,628
Interest expense........ 11,846 10,579 11,820 11,722 12,042 12,206 9,739 7,456
------- ------- ------- ------- ------- ------- ------- -------
Net interest income..... 6,654 8,024 7,738 7,796 8,993 7,673 7,023 6,172
Provision for losses.... 1,464 488 344 308 49 20 4 165
------- ------- ------- ------- ------- ------- ------- -------
Net interest income
after provision for
losses................. 5,190 7,536 7,394 7,488 8,944 7,653 7,019 6,007
Mortgage banking non-
interest income........ 16,553 8,756 24,293 8,129 11,272 9,968 7,846 7,128
Other non-interest
income................. 147 180 221 255 141 229 200 204
Non-interest expense.... 12,326 19,460 14,554 12,480 12,478 10,637 9,069 9,532
------- ------- ------- ------- ------- ------- ------- -------
Earnings (loss) before
income taxes........... 9,564 (2,988) 17,354 3,392 7,879 7,213 5,996 3,807
Provision for federal
income taxes........... 3,881 (949) 6,225 1,142 3,061 2,682 2,221 1,455
------- ------- ------- ------- ------- ------- ------- -------
Net earnings (loss)..... $ 5,683 $(2,039) $11,129 $ 2,250 $ 4,818 $ 4,531 $ 3,775 $ 2,352
======= ======= ======= ======= ======= ======= ======= =======
Earnings (loss) per
share.................. $ 0.50 $ (0.18) $ 0.99 $ 0.20 $ 0.43 $ 0.40 $ 0.33 $ 0.21
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
F-25
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19--HOLDING COMPANY ONLY FINANCIAL STATEMENTS
The following are unconsolidated financial statements for the Company. These
condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto (in thousands).
HOLDING COMPANY
CONDENSED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................. $ 122 $ 44
Investment in subsidiaries................................ 78,308 62,326
Other assets.............................................. 38 76
------- -------
Total assets............................................ $78,468 $62,446
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Other liabilities......................................... $ -- $ 1
------- -------
Total liabilities....................................... -- 1
STOCKHOLDERS' EQUITY
Common stock.............................................. 112 112
Additional paid in capital................................ 2,816 2,816
Retained earnings......................................... 75,540 59,517
------- -------
Total stockholders' equity.............................. 78,468 62,445
------- -------
Total liabilities and stockholders' equity.............. $78,468 $62,446
======= =======
</TABLE>
F-26
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
HOLDING COMPANY
CONDENSED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Income
Dividends from subsidiaries...................... $ 1,000 $ 2,450 $ 1,700
Expenses
General and administrative....................... 8 13 18
------- ------- -------
Earnings before undistributed earnings of
subsidiaries...................................... 992 2,437 1,682
Equity in undistributed earnings of subsidiaries... 16,031 13,039 14,449
------- ------- -------
Net earnings....................................... $17,023 $15,476 $16,131
======= ======= =======
</TABLE>
F-27
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
HOLDING COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings................................. $ 17,023 $ 15,476 $ 16,131
Adjustments to reconcile net earnings to net
cash provided by operating activities
Equity in undistributed earnings........... (15,982) (13,004) (14,208)
Change in other assets..................... 38 (21) (55)
Change in other liabilities................ (1) 1 --
Change in unrealized gains................. -- -- (126)
-------- -------- --------
Net cash provided by operating
activities.............................. 1,078 2,452 1,742
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid............................... (1,000) (2,000) (400)
Stock repurchase............................. -- (450) (1,300)
-------- -------- --------
Net cash used by financing activities.... (1,000) (2,450) (1,700)
Net increase in cash and cash equivalents.... 78 2 42
Cash and cash equivalents at beginning of
period...................................... 44 42 --
-------- -------- --------
Cash and cash equivalents at end of period... $ 122 $ 44 $ 42
======== ======== ========
</TABLE>
F-28
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 20--SUBSEQUENT EVENTS
Name Change
In January 1997, the Company changed its name from FSSB Holding Corporation
to Flagstar Bancorp, Inc.
Stock Split
In January 1997, the Company increased its common shares authorized to
40,000,000 and split its issued and outstanding shares 38.4246 to one. All
share and per share information in the financial statements have been
retroactively restated to give effect to the stock split.
Stock Offering
In conjunction with the stock split, the Company filed a registration
statement in February 1997 with the Securities and Exchange Commission to
offer 8,050,000 shares of common stock to the public, including 5,850,000
shares being sold by the stockholders of the Company.
Stock Option and Purchase Plans, and Other Compensation Plans
In January 1997, the Company's Board of Directors adopted resolutions to
implement various stock option and purchase plans and deferred and incentive
compensation plans effective upon the successful completion of the common
stock offering.
The purpose of the Stock Option Plan ("Option Plan") is to provide an
additional incentive to directors and employees by facilitating their purchase
of Common Stock. The Option Plan will have a term of 10 years from the date of
its approval by the Company stockholders, after which no awards may be made,
unless the plan is earlier terminated by the Board of Directors of the
Company. Pursuant to the Option Plan, a number of shares equal to 10% of the
shares of Common Stock (1,345,000 shares) that are to be outstanding following
the Offering would be reserved for future issuance by the Company.
It is intended that options granted under the Option Plan will constitute
both incentive stock options ("ISOs") and non-incentive stock options ("non-
ISOs"). ISOs are options that comply with certain restrictions pursuant the
Internal Revenue Code of 1986, as amended (the "Code") and thereby provide
favorable tax treatment to recipients, although they do not generally result
in tax deductions to the Company. Non-ISO's are stock options that fail to
qualify as ISO, either at the time of grant or upon exercise.
The exercise price for ISOs may not be less than 100% of the fair market
value of the shares on the date of the grant. Non-ISOs may be granted with any
exercise price, although a recipient will recognize taxable income upon the
receipt of a non-ISO with an exercise price that is substantially less than
its fair market value.
The initial grant of stock options under the Option Plan is expected to take
place on the date of the Option Plan's receipt of stockholder approval. It is
anticipated that the Company will account for the Option Plan in accordance
with the provisions of APB No. 25, "Accounting for Stock issued to Employees"
and adopt the disclosure requirements of SFAS No. 123.
Under the Employee Stock Purchase Plan ("Purchase Plan") eligible
participants, upon providing evidence of a purchase of the Company's common
shares from any third party and on the open market, would receive a payment
from the Company equal to 15% of the full price of the shares. Persons who own
5% or more of the outstanding Common Stock are not eligible to purchase shares
under the Purchase Plan. The Purchase Plan includes limitations on the maximum
reimbursement to a participant during a year. The Purchase Plan has not
F-29
<PAGE>
FLAGSTAR BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
been designed to comply with the requirements of the Internal Revenue Code
with respect to employee stock purchase plans.
The Incentive Compensation Plan ("Incentive Plan") is unfunded and benefits
are payable only in the form of cash from the Bank's general assets. The
Incentive Plan is administered by a committee which decides from year to year
which employees of the Company will be eligible to participate in the
Incentive Plan and the size of the bonus pool.
The Deferred Compensation Plan allows employees to defer up to 25% of their
annual compensation and directors to defer all of their compensation. Funds
deferred remain the property of the Company and are placed in a trust.
Participants may direct that their deferred amounts be invested in stock of
the Company. Upon withdrawal, the participant has the option of receiving the
stock or the proceeds of its sale at the market price at the time of
withdrawal.
F-30
<PAGE>
================================================================================
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY U.S. UNDER-
WRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSONS IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UN-
DER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 10
The Company.............................................................. 18
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Market for the Common Stock.............................................. 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Consolidated Financial and Other Data........................... 21
Management's Discussion and Analysis of Changes in Financial Condition
and Results of Operations............................................... 23
Business................................................................. 37
Regulation............................................................... 58
Management............................................................... 65
Selling Stockholders..................................................... 76
Description of Capital Stock............................................. 77
Restrictions on Acquisition of the Company and the Bank.................. 78
Certain Anti-Takeover Provisions in the Restated Articles of
Incorporation and Restated Bylaws....................................... 81
Underwriting............................................................. 84
Legal Matters............................................................ 88
Experts.................................................................. 88
Available Information.................................................... 88
Index to Consolidated Financial Statements............................... F-1
</TABLE>
-----------------
UNTIL , 1997 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIRE-
MENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
================================================================================
================================================================================
8,050,000 SHARES
[LOGO OF FLAGSTAR BANCORP APPEARS HERE]
COMMON STOCK
-----------------
PROSPECTUS
April , 1997
-----------------
LEHMAN BROTHERS
PAINEWEBBER INCORPORATED
RONEY & CO.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFEDTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
"Alternate Pages for International Offering prospectus"
Subject to Completion, dated April 2, 1997
PROSPECTUS
8,050,000 SHARES
[LOGO OF FLAGSTAR BANCORP APPEARS HERE]
COMMON STOCK
------------
Of the shares of common stock, par value $0.01 per share (the "Common
Stock"), of Flagstar Bancorp, Inc. (the "Company") offered hereby, 2,200,000
shares are being issued and sold by the Company and 5,850,000 shares are being
sold by members of the Hammond family (collectively, the "Selling
Stockholders"), who prior to this offering own 100% of the Company. The Selling
Stockholders include Thomas J. Hammond, the Chairman of the Board and Chief
Executive Officer of the Company, and Mark T. Hammond, the Vice Chairman and
President of the Company. Of the 8,050,000 shares being offered hereby,
shares are being offered initially outside the United States and Canada by the
International Managers (the "International Offering") and shares are being
offered initially in the United States and Canada by the U.S. Underwriters (the
"U.S. Offering" and, together with the International Offering, the "Offering").
The initial public offering price and underwriting discounts and commissions
will be identical for both offerings. See "Underwriting." The Company was
formerly known as FSSB Holding Corporation and is the holding company and sole
stockholder of Flagstar Bank, FSB (the "Bank"), which was formerly known as
First Security Savings Bank, FSB. Following the consummation of the Offering,
the Selling Stockholders will own 5,400,000 shares of Common Stock representing
40.15% of the voting power of the Company, assuming no exercise of the
International Managers' and U.S. Underwriters' over-allotment options. See
"Selling Stockholders." The Company will not receive any of the proceeds from
the sale of the shares by the Selling Stockholders.
Prior to the Offering, there has been no public market for the Common Stock.
It is currently anticipated that the initial public offering price for the
Common Stock will be between $19 and $21 per share. See "Underwriting" for
information relating to the factors to be considered in determining the public
offering price. The Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "FLGS." See "Market for the Common Stock."
At the request of the Company, the U.S. Underwriters have reserved up to
800,000 shares of Common Stock for sale at the initial public offering price to
certain employees and customers of the Company and its affiliates.
------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 10.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION"), THE FEDERAL DEPOSIT INSURANCE
CORPORATION (THE "FDIC"), THE OFFICE OF THRIFT SUPERVISION (THE "OTS") OR ANY
STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION, THE FDIC, THE OTS OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR
OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION, AND ARE NOT INSURED BY THE
FDIC OR ANY OTHER GOVERNMENTAL AGENCY.
================================================================================
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2)(3) STOCKHOLDERS(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................. $ $ $ $
- --------------------------------------------------------------------------------
Total(4).................. $ $ $ $
</TABLE>
================================================================================
(1) The Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters and International Managers (together, the "Underwriters")
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) Before deducting offering expenses payable by the Company, estimated to be
$ .
(3) Pursuant to an agreement among each of the Selling Stockholders and the
Company, the Company has agreed to pay 50% of the Underwriting Discounts
and Commissions in connection with the sale of shares of the Common Stock
in the Offering as well as all other fees and expenses incurred in
connection therewith. See "Selling Stockholders--Selling Stockholder
Agreement."
(4) The Company and the Selling Stockholders have granted to the International
Managers a 30-day option to purchase up to an additional and shares
of Common Stock, respectively, on the same terms and conditions as set
forth above to cover over-allotments, if any. The Company and the Selling
Stockholders have granted the U.S. Underwriters a similar option to
purchase up to an additional and shares of Common Stock,
respectively, to cover over-allotments, if any. If all such shares of
Common Stock are purchased, the total Price to Public, Underwriting
Discounts and Commissions, Proceeds to Company and Proceeds to Selling
Stockholders will be $ , $ , $ and $ , respectively. See
"Underwriting."
------------
The shares of Common Stock offered by this Prospectus are offered by the
International Managers subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
International Managers and to certain further conditions. It is expected that
delivery of certificates for the shares of Common Stock will be made at the
offices of Lehman Brothers Inc., New York, New York, on or about , 1997.
------------
LEHMAN BROTHERS
PAINEWEBBER INTERNATIONAL
RONEY & CO.
April , 1997
<PAGE>
================================================================================
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY INTERNA-
TIONAL MANAGER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SO-
LICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITA-
TION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSONS IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION
TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFOR-
MATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HERE-
OF.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 10
The Company.............................................................. 18
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Market for the Common Stock.............................................. 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Consolidated Financial and Other Data........................... 21
Management's Discussion and Analysis of Changes in Financial Condition
and Results of Operations............................................... 23
Business................................................................. 37
Regulation............................................................... 58
Management............................................................... 65
Selling Stockholders..................................................... 76
Description of Capital Stock............................................. 77
Restrictions on Acquisition of the Company and the Bank.................. 78
Certain Anti-Takeover Provisions in the Restated Articles of
Incorporation and Restated Bylaws....................................... 81
Underwriting............................................................. 84
Legal Matters............................................................ 88
Experts.................................................................. 88
Available Information.................................................... 88
Index to Consolidated Financial Statements............................... F-1
</TABLE>
-----------------
UNTIL , 1997 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK IN THE UNITED STATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DE-
LIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN-
SOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
"Alternate Pages for International Offering Prospectus"
8,050,000 SHARES
[LOGO OF FLAGSTAR BANCORP APPEARS HERE]
COMMON STOCK
-----------------
PROSPECTUS
April , 1997
-----------------
LEHMAN BROTHERS
PAINEWEBBER INTERNATIONAL
RONEY & CO.
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with the sale and
distribution of the securities being registered hereby, other than
underwriting discounts and commissions. All such expenses are to be paid by
the Registrant.
<TABLE>
<S> <C>
SEC registration fee........................................... 59,000
NASD filing fee................................................ 20,000*
Nasdaq listing fee............................................. 53,000*
Blue Sky filing fees and expenses.............................. 10,000*
Accounting fees and expenses................................... 250,000*
Legal fees and expenses........................................ 500,000*
Printing, postage and mailing.................................. 650,000*
Stock transfer agent fees and certificates..................... 10,000*
Other.......................................................... 253,000*
----------
Total...................................................... $1,805,000
==========
</TABLE>
- --------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Restated Articles of Incorporation contain a provision,
authorized by the Michigan Business Corporation Act ("MBCA"), designed to
eliminate in certain circumstances the personal liability of directors for
monetary damages to the Company or its stockholders for breach of their
fiduciary duty as directors. This provision, however, does not limit the
liability of any director who breached his or her duty of loyalty to the
Company or its stockholders, failed to act in good faith, obtained an improper
personal benefit or paid a dividend or approved a stock repurchase or
redemption that was prohibited under Michigan law. This provision will not
limit or eliminate the rights of the Company or any stockholder to seek an
injunction or any other nonmonetary relief in the event of a breach of a
director's duty of care. In addition, this provision applies only to claims
against a director arising out of his or her role as a director and does not
relieve a director from liability unrelated to his or her fiduciary duty of
care or from a violation of statutory law such as certain liabilities imposed
on a director under the federal securities laws.
The Company's Restated Articles of Incorporation and Restated Bylaws also
provide that the Company shall indemnify all directors and officers of the
Company to the full extent permitted by the MBCA. Under the provisions of the
MBCA, any director or officer who, in his or her capacity as such, is made or
threatened to be made a party to any suit or proceeding, may be indemnified if
the Board determines such director or officer acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the Company or its stockholders.
Officers and directors are covered within specified monetary limits by
insurance against certain losses arising from claims made by reason of their
being directors or officers of the Company or of the Company's subsidiaries
and the Company's officers and directors are indemnified against such losses
by reason of their being or having been directors or officers of another
corporation, partnership, joint venture, trust or other enterprise at the
Company's or its subsidiaries' request.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following is the list of exhibits filed as part of this Registration
Statement and also serves as the Exhibit Schedules:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.1(a) Form of U.S. Underwriting Agreement.............................. *
1.1(b) Form of International Underwriting Agreement..................... *
1.2 Form of Custody Agreement........................................ *
1.3 Form of Selling Stockholders' Power of Attorney.................. *
3.1 Restated Articles of Incorporation of the Registrant............. **
3.2 By-Laws of the Registrant........................................ **
4 Form of Stock Certificate........................................ **
5 Opinion of Reinhart, Boerner, Van Deuren, Norris & Rieselbach,
P.C. regarding legality of securities being registered.......... **
10.1(a) Form of Employment Agreements between the Company and Thomas J.
Hammond, Mark T. Hammond, Joan H. Anderson and Michael W.
Carrie.......................................................... *
10.1(b) Form of Employment Agreements between the Bank and Thomas J.
Hammond, Mark T. Hammond, Joan H. Anderson and Michael W.
Carrie.......................................................... *
10.2 Form of Flagstar Bancorp, Inc. 1997 Employees and Directors Stock
Option Plan..................................................... *
10.3 Form of Flagstar Bancorp, Inc. 1997 Employee Stock Acquisition
Plan............................................................ *
10.4 Form of Flagstar Bancorp, Inc. 1997 Incentive Compensation Plan.. *
10.5 Form of Flagstar Bancorp, Inc. 1997 Deferred Compensation Plan... *
21 Subsidiaries of the Registrant................................... **
23.1 Consent of Grant Thornton LLP.................................... *
23.2 Consent of Reinhart, Boerner, Van Deuren, Norris & Rieselbach,
P.C. (contained in Exhibit 5)................................... **
23.3 Consent of Albert J. Gladner, Esq. .............................. **
24 Powers of Attorney (see the signature page of this Registration
Statement)...................................................... **
27 Financial Data Schedule (SEC Use Only)........................... *
99.1 Consent of Newly Elected Director--Richard S. Elsea.............. *
99.2 Consent of Newly Elected Director--James D. Ishister............. *
99.3 Consent of Newly Elected Director--John Kersten.................. *
99.4 Consent of Newly Elected Director--Michael Kojaian............... *
99.5 Consent of Newly Elected Director--Michael W. Carrie............. *
</TABLE>
- --------
* Filed herewith.
** Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes as follows:
(a) To provide to the Underwriters at the closing specified in the
Underwriting Agreement, certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to
each purchaser.
II-2
<PAGE>
(b) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(l) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(c) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDED REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BLOOMFIELD
HILLS, STATE OF MICHIGAN, ON THE 2ND DAY OF APRIL, 1997.
Flagstar Bancorp, Inc.
By /s/ Thomas J. Hammond
-----------------------------------
THOMAS J. HAMMOND CHAIRMAN OF THE
BOARD AND CHIEF EXECUTIVE
OFFICER(DULY AUTHORIZED
REPRESENTATIVE)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS PRE-
EFFECTIVE AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE
FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT IN THE CAPACITIES AND ON THE
DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the
- ------------------------------------- Board and Chief
THOMAS J. HAMMOND Executive Officer
(Principal
Executive Officer)
* Executive Vice
- ------------------------------------- President, Chief
MICHAEL W. CARRIE Financial Officer
and Treasurer
(Principal
Financial and
Accounting Officer)
* Vice Chairman of the
- ------------------------------------- Board and President
MARK T. HAMMOND
* Director and
- ------------------------------------- Executive Vice
JOAN H. ANDERSON President
* Director, Senior
- ------------------------------------- Vice President and
MARY KAY MCGUIRE Secretary
* Director
- -------------------------------------
RONALD I. NICHOLS, SR.
* Director
- -------------------------------------
JAMES D. COLEMAN
* Director
- -------------------------------------
CHARLES BAZZY
* Director
- -------------------------------------
HARRY S. ELLMAN
* Director
- -------------------------------------
WILLIAM B. BORTELS
</TABLE>
*By: /s/ Thomas J. Hammond April 2, 1997
-------------------------------
THOMAS J. HAMMOND
ATTORNEY-IN-FACT
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
-------------- ----------- ----
<C> <S> <C>
1.1(a) Form of U.S. Underwriting Agreement....................... *
1.1(b) Form of International Underwriting Agreement.............. *
1.2 Form of Custody Agreement................................. *
1.3 Form of Selling Stockholders' Power of Attorney........... *
3.1 Restated Articles of Incorporation of the Registrant...... **
3.2 By-Laws of the Registrant................................. **
4 Form of Stock Certificate................................. **
5 Opinion of Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, P.C. regarding legality of securities being
registered............................................... **
10.1(a) Form of Employment Agreements between the Company and
Thomas J. Hammond, Mark T. Hammond, Joan H. Anderson and
Michael W. Carrie........................................ *
10.1(b) Form of Employment Agreements between the Bank and Thomas
J. Hammond, Mark T. Hammond, Joan H. Anderson and Michael
W. Carrie................................................ *
10.2 Form of Flagstar Bancorp, Inc. 1997 Employees and
Directors Stock Option Plan.............................. *
10.3 Form of Flagstar Bancorp, Inc. 1997 Employee Stock
Acquisition Plan......................................... *
10.4 Form of Flagstar Bancorp, Inc. 1997 Incentive Compensation
Plan..................................................... *
10.5 Form of Flagstar Bancorp, Inc. 1997 Deferred Compensation
Plan..................................................... *
21 Subsidiaries of the Registrant............................ **
23.1 Consent of Grant Thornton LLP............................. *
23.2 Consent of Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, P.C. (contained in Exhibit 5)................ **
23.3 Consent of Albert J. Gladner, Esq. ....................... **
24 Powers of Attorney (see the signature page of this
Registration Statement).................................. **
27 Financial Data Schedule (SEC Use Only).................... *
99.1 Consent of Newly Elected Director--Richard S. Elsea....... *
99.2 Consent of Newly Elected Director--James D. Isbister...... *
99.3 Consent of Newly Elected Director--John Kersten........... *
99.4 Consent of Newly Elected Director--Michael Kojaian........ *
99.5 Consent of Newly Elected Director--Michael W. Carrie...... *
</TABLE>
- --------
* Filed herewith.
** Previously filed.
<PAGE>
Exhibit 1.1(a)
_________ Shares
FLAGSTAR BANCORP, INC.
Common Stock
Form of
U.S UNDERWRITING AGREEMENT
--------------------------
_____________ __, 1997
Lehman Brothers Inc.
PaineWebber Incorporated
Roney & Co.,
As Representatives of the several
U.S. Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
Flagstar Bancorp, Inc., a Michigan corporation (the "Company"), and
certain stockholders of the Company named in Schedule 2 hereto (the "Selling
Stockholders"), propose to sell an aggregate of _________ shares (the "Firm U.S.
Stock") of the Company's Common Stock, par value $0.01 per share (the "Common
Stock"). Of the _________ shares of the Firm U.S. Stock, _________ shares are
being sold by the Company and _________ shares by the Selling Stockholders. In
addition, the Company and the Selling Stockholders propose to grant to the U.S.
Underwriters named in Schedule 1 hereto (the "U.S. Underwriters") an option to
purchase up to an additional _______ shares and _______ shares, respectively, of
the Common Stock on the terms and for the purposes set forth in Section 3
(collectively, the "Option U.S. Stock"). The Firm U.S. Stock and the Option
U.S. Stock, if purchased, are hereinafter collectively called the "U.S. Stock."
This is to confirm the agreement concerning the purchase of the U.S. Stock from
the Company and the Selling Stockholders by the U.S. Underwriters.
It is understood by all parties that the Company and the Selling
Stockholders are concurrently entering into an agreement dated the date hereof
(the "International Underwriting Agreement") providing for the sale by the
Company and the Selling Stockholders of an aggregate of _________ Shares (the
"Firm Stock") and the granting of an option by the Company and the Selling
Shareholders to purchase up to an additional ________ Shares (the "Option
Stock"; and together with the Firm Stock, the "Stock") through arrangements with
the International Managers named in Schedule 1 to the International Underwriting
Agreement outside the United States and Canada, for whom Lehman Brothers
International (Europe), PaineWebber Incorporated and Roney & Co. are acting as
lead managers ("Lead Managers"). The U.S. Underwriters and the International
Managers simultaneously are entering into an agreement between the U.S. and
international underwriting syndicates (the "Agreement Between U.S. Underwriters
and International Managers") which provides for, among other things, the
transfer of Common Stock
<PAGE>
2
between the two syndicates. Two forms of prospectus are to be used in
connection with the offering and sale of the Common Stock contemplated by the
foregoing, one relating to the U.S. Stock to be sold in the United States and
Canada (the "U.S. Prospectus") and the second relating to the Stock to be sold
outside of the United States and Canada (the "International Prospectus"). The
International Prospectus will be identical to the U.S. Prospectus except for
certain substitute and additional pages.
1. Representations, Warranties and Agreements of the Company and the
Selling Stockholders. The Company and the Selling Stockholders, jointly and
severally, represent, warrant and agree that:
(a) A registration statement on Form S-1, and one or more
amendments thereto, with respect to the U.S. Stock and the Stock have
(i) been prepared by the Company in conformity with the requirements
of the Securities Act of 1933, as amended (the "Securities Act"), and
the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder, (ii)
been filed with the Commission under the Securities Act and (iii)
become effective under the Securities Act; and a second registration
statement on Form S-1 with respect to the U.S. Stock and the Stock (i)
may also be prepared by the Company in conformity with the
requirements of the Securities Act and the Rules and Regulations and
(ii) if to be so prepared, will be filed with the Commission under the
Securities Act pursuant to Rule 462(b) of the Rules and Regulations on
the date hereof. Copies of the first such registration statement and
the amendments to such registration statement, together with the form
of any such second registration statement, have been delivered by the
Company to you as the representatives (the "Representatives") of the
U.S. Underwriters. As used in this Agreement, "Effective Time" means
(i) with respect to the first such registration statement, the date
and the time as of which such registration statement, or the most
recent post-effective amendment thereto, if any, was declared
effective by the Commission and (ii) with respect to any second
registration statement, the date and time as of which such second
registration statement is filed with the Commission, and "Effective
Times" is the collective reference to both Effective Times; "Effective
Date" means (i) with respect to the first such registration statement,
the date of the Effective Time of such registration statement and (ii)
with respect to any second registration statement, the date of the
Effective Time of such second registration statement, and "Effective
Dates" is the collective reference to both Effective Dates;
"Preliminary Prospectus" means (i) the U.S. prospectus included in any
such registration statement, or amendments thereof, before it became
effective under the Securities Act and any prospectus filed with the
Commission by the Company with the consent of the Representatives
pursuant to Rule 424(a) of the Rules and Regulations and (ii) the
International Prospectus; "Primary Registration Statement" means the
first registration statement referred to in this Section 1(a), as
amended at its Effective Time, "Rule 462(b) Registration Statement"
means the second registration statement, if any, referred to in this
<PAGE>
3
Section 1(a), as filed with the Commission, and "Registration
Statements" means both the Primary Registration Statement and any Rule
462(b) Registration Statement, including in each case all information
contained in the final prospectus filed with the Commission pursuant
to Rule 424(b) of the Rules and Regulations in accordance with Section
6(a) hereof and deemed to be a part of the Registration Statements as
of the Effective Time of the Primary Registration Statement pursuant
to paragraph (b) of Rule 430A of the Rules and Regulations; and
"Prospectus" means such final U.S. Prospectus and International
Prospectus, as first filed with the Commission pursuant to paragraph
(1) or (4) of Rule 424(b) of the Rules and Regulations. The Commission
has not issued any order preventing or suspending the use of any
Preliminary Prospectus.
(b) The Primary Registration Statement conforms (and the Rule
462(b) Registration Statement, if any, the Prospectus and any further
amendments or supplements to the Registration Statements or the
Prospectus, when they become effective or are filed with the
Commission, as the case may be, will conform) in all respects to the
requirements of the Securities Act and the Rules and Regulations and
do not and will not, as of the applicable Effective Date (as to the
Registration Statements and any amendment thereto) and as of the
applicable filing date with the Commission (as to the Prospectus and
any amendment or supplement thereto) contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading;
provided that no representation or warranty is made as to information
contained in or omitted from the Registration Statements or the
Prospectus in reliance upon and in conformity with written information
furnished to the Company through the Representatives by or on behalf
of any U.S. Underwriter specifically for inclusion therein.
(c) the Prospectus delivered to the U.S. Underwriters for use in
connection with this offering was identical to the electronically
transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T;
(d) The Company and each of its subsidiaries (as defined in
Section 17) have been duly incorporated and are validly existing as
corporations in good standing under the laws of their respective
jurisdictions of incorporation (or, in the case of Flagstar Bank, FSB
(the "Bank"), is duly chartered and validly existing as a federal
stock savings bank in good standing under the Home Owners' Loan Act
("HOLA") and the rules and regulations of the Office of Thrift
Supervision ("OTS") thereunder), are duly qualified to do business and
are in good standing as foreign corporations in each jurisdiction in
which their respective ownership or lease of property or the conduct
of their respective businesses requires such qualification, except
where the failure to be so qualified and in good standing would not
have a material adverse effect on the consolidated financial position,
<PAGE>
4
stockholders' equity, results of operations, business or prospects of
the Company and its subsidiaries, are in compliance in all material
respects with the laws, orders, rules, regulations and directives
issued or administered by such jurisdictions and have all power and
authority necessary to own or hold their respective properties and to
conduct the businesses in which they are engaged.
(e) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully
paid and non-assessable and conform to the description thereof
contained in the Prospectus; and all of the issued shares of capital
stock of each subsidiary of the Company have been duly and validly
authorized and issued and are fully paid and non-assessable and
(except for directors' qualifying shares) are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims.
(f) The Company is duly registered as a savings and loan holding
company under HOLA; the Company owns, directly or indirectly,
beneficially and of record, all of the outstanding shares of capital
stock of the Bank; the Bank is a member in good standing of the
Federal Home Loan Bank System; the savings accounts of depositors in
the Bank are insured by the Savings Association Insurance Fund of the
Federal Deposit Insurance Corporation (the "FDIC") to the fullest
extent permitted by law and the rules and regulations of the FDIC, and
no proceedings for the termination of such insurance are pending or,
to the best of the Company's knowledge, threatened.
(g) The shares of the U.S. Stock to be issued and sold by the
Company to the U.S. Underwriters hereunder have been duly and validly
authorized and, when issued and delivered against payment therefor as
provided herein, will be duly and validly issued, fully paid and non-
assessable, and the U.S. Stock will conform to the descriptions
thereof contained in the Prospectus.
(h) The execution, delivery and performance of this Agreement
and the International Underwriting Agreement by the Company and the
consummation of the transactions contemplated hereby will not conflict
with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which
the Company or any of its subsidiaries is bound or to which any of the
properties or assets of the Company or any of its subsidiaries is
subject, except for such breaches, violations or defaults as would not
individually or in the aggregate have a material adverse effect on the
consolidated financial position, stockholders' equity, results of
operations, business or prospects of the Company and its subsidiaries,
nor will such actions result in any violation of the provisions of the
charter or by-laws of the Company or any of its subsidiaries or any
statute or any
<PAGE>
5
order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries or any
of their properties or assets; and except for the registration of the
U.S. Stock and the Stock under the Securities Act and under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), such
approvals as have been obtained in connection with the approval of the
quotation of the U.S. Stock and the Stock on the Nasdaq National
Market System and such filings or registrations as may be required
under applicable state securities laws in connection with the purchase
and distribution of the U.S. Stock and the Stock by the U.S.
Underwriters and International Managers, no consent, approval,
authorization or order of, or filing or registration with, any such
court or governmental agency or body is required for the execution,
delivery and performance of this Agreement by the Company and the
consummation of the transactions contemplated hereby.
(i) [Except as described in the Prospectus,] there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Securities Act with respect to any
securities of the Company owned or to be owned by such person or to
require the Company to include such securities in the securities
registered pursuant to the Registration Statements or in any
securities being registered pursuant to any other registration
statement filed by the Company under the Securities Act.
(j) Except as described in the Prospectus, the Company has not
sold or issued any shares of Common Stock during the six-month period
preceding the date of the Prospectus, including any sales pursuant to
Rule 144A under, or Regulations D or S of, the Securities Act [, other
than shares issued pursuant to employee benefit plans, qualified stock
options plans or other employee compensation plans or pursuant to
outstanding options, rights or warrants].
(k) Neither the Company nor any of its subsidiaries has
sustained, since the date of the latest audited financial statements
included in the Prospectus, any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since such date, there has not
been any change in the capital stock or long-term debt of the Company
or any of its subsidiaries or any material adverse change, or any
development involving a prospective material adverse change, in or
affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, other than as set forth or contemplated in the
Prospectus.
<PAGE>
6
(l) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statements or
included in the Prospectus present fairly the financial condition and
results of operations of the entities purported to be shown thereby,
at the dates and for the periods indicated, and have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the periods involved.
(m) Grant Thornton LLP, who have certified certain financial
statements of the Company, whose report appears in the Prospectus and
who have delivered the initial letter referred to in Section 9(f)
hereof, are independent public accountants as required by the
Securities Act and the Rules and Regulations.
(n) The Company and each of its subsidiaries own or possess
adequate rights to use all material patents, patent applications,
trademarks, service marks, trade names, trademark registrations,
service mark registrations, copyrights and licenses necessary for the
conduct of their respective businesses as described in the Prospectus
and have no reason to believe that such conduct of their respective
businesses will conflict with, and have not received any notice of any
claim of conflict with, any such rights of others.
(o) There are no legal or governmental proceedings pending to
which the Company or any of its subsidiaries is a party or of which
any property or asset of the Company or any of its subsidiaries is the
subject which might have a material adverse effect on the consolidated
financial position, stockholders' equity, results of operations,
business or prospects of the Company and its subsidiaries; and to the
best of the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others.
(p) Neither the Company nor any of its subsidiaries is a party
to any written agreement or memorandum of understanding with, or a
party to any commitment letter or similar undertaking to, or is
subject to any order or directive by, or is a recipient of any
extraordinary supervisory letter from, or has adopted any board
resolutions at the request of, the OTS, the FDIC or any other
government authority or agency responsible for the supervision,
regulation or insurance of depository institutions or their holding
companies which restricts materially the conduct of its business, or
in any manner relates to its capital adequacy (other than as described
in the Prospectus), its credit policies or its management, nor have
any of them been advised by the OTS, the FDIC or any such other
government authority or agency that it is contemplating issuing or
requesting (or is considering the appropriateness of issuing or
requesting) any such order, decree, agreement, memorandum of
understanding, extraordinary supervisory letter, commitment letter or
similar submission, or any such board resolutions.
<PAGE>
7
(q) There are no contracts or other documents which are required
to be described in the Prospectus or filed as exhibits to either of
the Registration Statements by the Securities Act or by the Rules and
Regulations which have not been described in the Prospectus or filed
as exhibits to either of the Registration Statements or incorporated
therein by reference as permitted by the Rules and Regulations.
(r) No relationship, direct or indirect, exists between or among
the Company on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company on the other hand,
which is required to be described in the Prospectus which is not so
described.
(s) Since the date as of which information is given in the
Prospectus through the date hereof, and except as may otherwise be
disclosed in the Prospectus, the Company has not (i) issued or granted
any securities, (ii) incurred any liability or obligation, direct or
contingent, other than liabilities and obligations which were incurred
in the ordinary course of business, (iii) entered into any transaction
not in the ordinary course of business or (iv) declared or paid any
dividend on its capital stock.
(t) Neither the Company nor any of its subsidiaries (i) is in
violation of its charter or by-laws, (ii) is in default in any
material respect, and no event has occurred which, with notice or
lapse of time or both, would constitute such a default, in the due
performance or observance of any term, covenant or condition contained
in any material indenture, mortgage, deed of trust, loan agreement,
investor purchase or servicing agreement or other agreement or
instrument to which it is a party or by which it is bound or to which
any of its properties or assets is subject or (iii) is in violation in
any material respect of any law, ordinance, governmental rule,
regulation or court decree to which it or its properties or assets may
be subject or the rules and requirements of the Federal Home Loan
Mortgage Corporation, the Federal National Mortgage Association, the
Government National Mortgage Association, the Federal Housing
Authority or any other government agency or government-sponsored
enterprise in whose secondary market programs the Company and its
subsidiaries participate, or has failed to obtain any material
license, permit, certificate, franchise or other governmental
authorization or permit necessary to the ownership of its properties
or assets or to the conduct of its business.
(u) Neither the Company nor any subsidiary is, nor upon the sale
of the U.S. Stock as herein contemplated will be, an "investment
company" or an entity "controlled" by an "investment company" within
the meaning of such terms under the Investment Company Act of 1940, as
amended, and the rules and regulations of the Commission thereunder
(the "1940 Act").
<PAGE>
8
(v) Neither the Company nor any subsidiary has taken or will
take, directly or indirectly, any action which is designed to or which
has constituted or which might reasonably be expected to cause or
result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the shares
of the Stock.
2. Representations, Warranties and Agreements of the Selling
Stockholders. Each Selling Stockholder severally represents, warrants and agrees
that:
(a) Such Selling Stockholder has, and immediately prior to the
First Delivery Date (as defined in Section 5 hereof) such Selling
Stockholder will have, good and valid title to the shares of U.S.
Stock to be sold by such Selling Stockholder hereunder and to the
Stock to be sold by such Selling Stockholder under the International
Underwriting Agreement on such date, free and clear of all liens,
encumbrances, equities or claims; and upon delivery of such shares and
payment therefor pursuant hereto, good and valid title to such shares,
free and clear of all liens, encumbrances, equities or claims, will
pass to the several U.S. Underwriters and International Managers, as
the case may be.
(b) Such Selling Stockholder has placed in custody under a
custody agreement (the "Custody Agreement") with __________, as
custodian (the "Custodian"), for delivery under this Agreement,
certificates in negotiable form (with signature guaranteed by a
commercial bank or trust company having an office or correspondent in
the United States or a member firm of the New York or American Stock
Exchanges) representing the shares of U.S. Stock to be sold by such
Selling Stockholder hereunder.
(c) Such Selling Stockholder has duly and irrevocably executed
and delivered a power of attorney (the "Power of Attorney") appointing
the Custodian and one or more other persons, as attorneys-in-fact,
with full power of substitution, and with full authority (exercisable
by any one or more of them) to execute and deliver this Agreement and
the International Underwriting Agreement and to take such other action
as may be necessary or desirable to carry out the provisions hereof
and thereof on behalf of such Selling Stockholder.
(d) Such Selling Stockholder has full right, power and authority
to enter into this Agreement, the International Underwriting
Agreement, the Power of Attorney and the Custody Agreement; the
execution, delivery and performance of this Agreement, the
International Underwriting Agreement, the Power of Attorney and the
Custody Agreement by such Selling Stockholder and the consummation by
such Selling Stockholder of the transactions contemplated hereby and
thereby will not conflict with or result in a breach or violation of
any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument to which such Selling
<PAGE>
9
Stockholder is a party or by which such Selling Stockholder is bound
or to which any of the property or assets of such Selling Stockholder
is subject, other than such conflicts, breaches and violations as
would not adversely affect such Selling Stockholder's ability to
perform its obligations under this Agreement, the International
Underwriting Agreement, the Power of Attorney and the Custody
Agreement on a timely basis, nor will such actions result in any
violation of any statute or any order, rule or regulation of any court
or governmental agency or body having jurisdiction over such Selling
Stockholder or the property or assets of such Selling Stockholder;
and, except for the registration of the U.S. Stock and the Stock under
the Securities Act and the Exchange Act, such approvals as have been
obtained in connection with the approval of the quotation of the U.S.
Stock and the Stock on the Nasdaq National Market System and such
filings and registrations as may be required under applicable state
securities laws in connection with the purchase and distribution of
the U.S. Stock and the Stock by the U.S. Underwriters and the
International Managers, no consent, approval, authorization or order
of, or filing or registration with, any such court or governmental
agency or body is required for the execution, delivery and performance
of this Agreement, the International Underwriting Agreement, the Power
of Attorney or the Custody Agreement by such Selling Stockholder and
the consummation by such Selling Stockholder of the transactions
contemplated hereby and thereby.
(e) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result
in the stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the shares of the U.S.
Stock or the Stock.
(f) Such Selling Stockholder is not prompted to sell the U.S.
Stock to be sold by such Selling Stockholder hereunder by any material
information concerning the Company or any of its subsidiaries which is
not set forth in the Prospectus.
3. Purchase of the U.S. Stock by the U.S. Underwriters. On the basis
of the representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company hereby agrees to sell _________
shares of the Firm U.S. Stock and each Selling Stockholder hereby agrees to sell
the number of shares of the Firm U.S. Stock set forth opposite his or her name
in Schedule 2 hereto, severally and not jointly, to the several U.S.
Underwriters, and each of the U.S. Underwriters, severally and not jointly,
agrees to purchase the number of shares of the Firm U.S. Stock set opposite that
U.S. Underwriter's name in Schedule 1 hereto. Each U.S. Underwriter shall be
obligated to purchase from the Company, and from each Selling Stockholder, that
number of shares of the Firm U.S. Stock which represents the same proportion of
the number of shares of the Firm U.S. Stock to be sold by the Company, and by
each Selling Stockholder, as the number of shares of the Firm U.S. Stock set
forth opposite
<PAGE>
10
the name of such U.S. Underwriter in Schedule 1 represents of the total number
of shares of the Firm U.S. Stock to be purchased by all of the U.S. Underwriters
pursuant to this Agreement. The respective purchase obligations of the U.S.
Underwriters with respect to the Firm U.S. Stock shall be rounded among the U.S.
Underwriters to avoid fractional shares, as the Representatives may determine.
In addition, the Company hereby grants to the U.S. Underwriters an
option to purchase up to _______ shares of Option U.S. Stock and the Selling
Stockholders collectively hereby grant to the U.S. Underwriters an option to
purchase up to an aggregate of _______ shares of Option Stock. Such options are
granted solely for the purpose of covering over-allotments in the sale of Firm
U.S. Stock and are exercisable as provided in Section 5 hereof. Shares of
Option U.S. Stock shall be sold severally by the Company and each Selling
Stockholder on a pro rata basis to the U.S. Underwriters. Each U.S. Underwriter
shall be obligated to purchase from the Company and from each Selling
Stockholder that number of shares of the Option U.S. Stock to be sold by such
party which represents the same proportion of the total number of shares of the
Option U.S. Stock to be sold by the Company and by the Selling Stockholders in
the aggregate as the number of shares of the Firm U.S. Stock set forth opposite
the name of such U.S. Underwriter in Schedule 1 represents of the total number
of shares of the Firm U.S. Stock to be purchased by all of the U.S. Underwriters
pursuant to this Agreement. The respective purchase obligations of the U.S.
Underwriters with respect to the Option U.S. Stock shall be rounded among the
U.S. Underwriters to avoid fractional shares, as the Representatives may
determine.
The price of both the Firm U.S. Stock and any Option U.S. Stock shall
be $_____ per share.
The Company and the Selling Stockholders shall not be obligated to
deliver any of the U.S. Stock to be delivered on the First Delivery Date or the
Second Delivery Date (each as hereinafter defined), as the case may be, except
upon payment for all the U.S. Stock to be purchased on such Delivery Date (as
hereinafter defined) as provided herein.
As compensation for their commitments hereunder, the U.S. Underwriters
shall receive, on the applicable Delivery Date, an amount equal to $___ per
share for all of the U.S. Stock to be delivered by the Company and the Selling
Stockholders hereunder on such Delivery Date, such amount to be paid on such
date to the Representatives, for the accounts of the several U.S. Underwriters,
fifty percent by the Company and fifty percent by the Selling Stockholders
(ratably in accordance with the number of shares of U.S. Stock being delivered
by each such Selling Stockholder on such Delivery Date).
4. Offering of U.S. Stock by the U.S. Underwriters.
Upon authorization by the Representatives of the release of the Firm
U.S. Stock, the several U.S. Underwriters propose to offer the Firm U.S. Stock
for sale upon the terms and conditions set forth in the U.S. Prospectus;
provided, however, that no U.S. Stock registered
<PAGE>
11
pursuant to the Rule 462(b) Registration Statement, if any, shall be offered
prior to the Effective Time thereof.
It is understood that ________ shares of the Firm U.S. Stock will
initially be reserved by the several U.S. Underwriters for offer and sale upon
the terms and conditions set forth in the U.S. Prospectus to employees and
persons having business relationships with the Company and its subsidiaries who
have heretofore delivered to the Representatives offers to purchase shares of
Firm U.S. Stock in form satisfactory to the Representatives, and that any
allocation of such Firm U.S. Stock among such persons will be made in accordance
with timely directions received by the Representatives from the Company;
provided, that under no circumstances will the Representatives or any U.S.
Underwriter be liable to the Company or to any such person for any action taken
or omitted in good faith in connection with such offering to employees and
persons having business relationships with the Company and its subsidiaries. It
is further understood that any shares of such Firm U.S. Stock which are not
purchased by such persons will be offered by the U.S. Underwriters to the public
upon the terms and conditions set forth in the U.S. Prospectus.
Each U.S. Underwriter agrees that, except to the extent permitted by
the Agreement Between U.S. Underwriters and International Managers, it will not
offer or sell any of the U.S. Stock outside the United States or Canada.
5. Delivery of and Payment for the Stock. Delivery of and payment
for the Firm U.S. Stock shall be made at the office of Simpson Thacher &
Bartlett at 425 Lexington Avenue, New York, New York, at 10:00 A.M., New York
City time, on the third full business day following the date of this Agreement
or at such other date or place as shall be determined by agreement between the
Representatives and the Company. This date and time are sometimes referred to
as the "First Delivery Date." On the First Delivery Date, the Company and the
Selling Stockholders shall deliver or cause to be delivered certificates
representing the Firm U.S. Stock to the Representatives for the account of each
U.S. Underwriter against payment to or upon the order of the Company and the
Selling Stockholders of the purchase price (net of the commission provided for
in the last paragraph of Section 3) by certified or official bank check or
checks payable in immediately available (same-day) funds. Time shall be of the
essence, and delivery at the time and place specified pursuant to this Agreement
is a further condition of the obligation of each U.S. Underwriter hereunder.
Upon delivery, the Firm U.S. Stock shall be registered in such names and in such
denominations as the Representatives shall request in writing not less than two
full business days prior to the First Delivery Date. For the purpose of
expediting the checking and packaging of the certificates for the Firm Stock,
the Company and the Selling Stockholders shall make the certificates
representing the Firm U.S. Stock available for inspection by the Representatives
in New York, New York, not later than 2:00 P.M., New York City time, on the
business day prior to the First Delivery Date.
At any time on or before the thirtieth day after the date of this
Agreement the option granted in Section 3 may be exercised by written notice
being given to the Company and the Selling Stockholders by the Representatives.
Such notice shall set forth the aggregate number
<PAGE>
12
of shares of Option U.S. Stock as to which the option is being exercised, the
names in which the shares of Option U.S. Stock are to be registered, the
denominations in which the shares of Option U.S. Stock are to be issued and the
date and time, as determined by the Representatives, when the shares of Option
U.S. Stock are to be delivered; provided, however, that this date and time shall
not be earlier than the First Delivery Date nor earlier than the second business
day after the date on which the option shall have been exercised nor later than
the fifth business day after the date on which the option shall have been
exercised. The date and time the shares of Option U.S. Stock are delivered are
sometimes referred to as the "Second Delivery Date" and the First Delivery Date
and the Second Delivery Date are sometimes each referred to as a "Delivery
Date".
Delivery of and payment for the Option U.S. Stock shall be made at the
place specified in the first sentence of the first paragraph of this Section 5
(or at such other place as shall be determined by agreement between the
Representatives and the Company) at 10:00 A.M., New York City time, on the
Second Delivery Date. On the Second Delivery Date, the Company and the Selling
Stockholders shall deliver or cause to be delivered the certificates
representing the Option U.S. Stock to the Representatives for the account of
each U.S. Underwriter against payment to or upon the order of the Company and
the Selling Stockholders, as the case may be, of the purchase price (net of the
commission provided for in the last paragraph of Section 3) by certified or
official bank check or checks payable in immediately available (same-day) funds.
Time shall be of the essence, and delivery at the time and place specified
pursuant to this Agreement is a further condition of the obligation of each U.S.
Underwriter hereunder. Upon delivery, the Option U.S. Stock shall be registered
in such names and in such denominations as the Representatives shall request in
the aforesaid written notice. For the purpose of expediting the checking and
packaging of the certificates for the Option Stock, the Company and the Selling
Stockholders shall make the certificates representing the Option U.S. Stock
available for inspection by the Representatives in New York, New York, not later
than 2:00 P.M., New York City time, on the business day prior to the Second
Delivery Date.
On each Delivery Date, the Company and the Selling Stockholders will
pay the commission payable on such Delivery Date to the U.S. Underwriters under
the last paragraph of Section 3. The Company and the Selling Stockholders
hereby authorize the Representatives, in order to effect such payment, to deduct
from the purchase price payable to the Company and the Selling Stockholders in
exchange for the U.S. Stock sold on such date an amount equal to such
commission, calculated in accordance with the last paragraph of Section 3.
6. Further Agreements of the Company. The Company agrees:
(a) To prepare the Rule 462(b) Registration Statement, if
necessary, in a form approved by the Representatives and to file such
Rule 462(b) Registration Statement with the Commission on the date
hereof; to prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b)
under the Securities Act not later than 10:00 A.M., New York City
time, on the day following the execution and delivery of this
Agreement; to make no further amendment or any supplement to the
Registration Statements or to the
<PAGE>
13
Prospectus except as permitted herein; to advise the Representatives,
promptly after it receives notice thereof, of the time when any
amendment to either Registration Statement has been filed or becomes
effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish the Representatives with
copies thereof; to advise the Representatives, promptly after it
receives notice thereof, of the issuance by the Commission of any stop
order or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus, of the suspension of the
qualification of the U.S. Stock for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for
any such purpose, or of any request by the Commission for the amending
or supplementing of the Registration Statements or the Prospectus or
for additional information; and, in the event of the issuance of any
stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or suspending any such
qualification, to use promptly its best efforts to obtain its
withdrawal;
(b) To furnish promptly to the Representatives and to counsel
for the U.S. Underwriters a signed copy of each of the Registration
Statements as originally filed with the Commission, and each amendment
thereto filed with the Commission, including all consents and exhibits
filed therewith;
(c) To deliver promptly to the Representatives in New York City
such number of the following documents as the Representatives shall
request: (i) conformed copies of the Registration Statements as
originally filed with the Commission and each amendment thereto (in
each case excluding exhibits other than this Agreement and the
computation of per share earnings) and (ii) each Preliminary
Prospectus, the Prospectus (not later than 10:00 A.M., New York City
time, of the day following the execution and delivery of this
Agreement) and any amended or supplemented Prospectus (not later than
10:00 A.M., New York City time, on the day following the date of such
amendment or supplement); and, if the delivery of a prospectus is
required at any time after the Effective Time of the Primary
Registration Statement in connection with the offering or sale of the
U.S. Stock and if at such time any event shall have occurred as a
result of which the Prospectus as then amended or supplemented would
include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made when such
Prospectus is delivered, not misleading, or, if for any other reason
it shall be necessary to amend or supplement the Prospectus in order
to comply with the Securities Act, to notify the Representatives and,
upon their request, to prepare and furnish without charge to each U.S.
Underwriter and to any dealer in securities as many copies as the
Representatives may from time to time request of an amended or
supplemented Prospectus which will correct such statement or omission
or effect such compliance;
<PAGE>
14
(d) To file promptly with the Commission any amendment to the
Registration Statements or the Prospectus or any supplement to the
Prospectus that may, in the judgment of the Company or the
Representatives, be required by the Securities Act or requested by the
Commission;
(e) Prior to filing with the Commission (i) any amendment to
either of the Registration Statements or supplement to the Prospectus
or (ii) any Prospectus pursuant to Rule 424 of the Rules and
Regulations, to furnish a copy thereof to the Representatives and
counsel for the U.S. Underwriters and obtain the consent of the
Representatives to any such filing;
(f) As soon as practicable after the Effective Date of the
Primary Registration Statement, to make generally available to the
Company's security holders and to deliver to the Representatives an
earnings statement of the Company and its subsidiaries (which need not
be audited) complying with Section 11(a) of the Securities Act and the
Rules and Regulations (including, at the option of the Company, Rule
158);
(g) For a period of five years following the Effective Date of
the Primary Registration Statement, to furnish to the Representatives
(i) copies of all materials furnished by the Company to its
shareholders and all public reports and all reports and financial
statements furnished by the Company to the principal national
securities exchange upon which the Common Stock may be listed pursuant
to requirements of or agreements with such exchange or to the
Commission pursuant to the Exchange Act or any rule or regulation of
the Commission thereunder, (ii) copies of the publicly available
reports filed by the Bank with the OTS and (iii) such other
information as the U.S. Underwriters may reasonably request regarding
the Company and/or its subsidiaries;
(h) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the U.S. Stock for
offering and sale under the securities laws of such jurisdictions as
the Representatives may request and to comply with such laws so as to
permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the
distribution of the Stock;
(i) For a period of 180 days from the date of the Prospectus,
not to, directly or indirectly, offer for sale, sell or otherwise
dispose of (or enter into any transaction or device which is designed
to, or could be expected to, result in the disposition or purchase by
any person at any time in the future of) any shares of Common Stock
(other than the U.S. Stock and shares issued pursuant to employee
benefit plans, qualified stock option plans or other employee
compensation plans existing on the date hereof, as described in the
Prospectus), or sell or grant options, rights or warrants with respect
to any shares of Common Stock (other
<PAGE>
15
than the grant of options pursuant to option plans existing on the
date hereof, as described in the Prospectus), without the prior
written consent of Lehman Brothers Inc. ("Lehman Brothers") on behalf
of the Representatives; and to cause each officer and director of the
Company to furnish to the Representatives, prior to the First Delivery
Date, a letter or letters, in form and substance satisfactory to
counsel for the U.S. Underwriters, pursuant to which each such person
shall agree not to, directly or indirectly, offer for sale, sell or
otherwise dispose of (or enter into any transaction or device which is
designed to, or could be expected to, result in the disposition or
purchase by any person at any time in the future of) any shares of
Common Stock for a period of 180 days from the date of the Prospectus,
without the prior written consent of Lehman Brothers on behalf of the
Representatives;
(j) Prior to filing with the Commission any reports on Form SR
pursuant to Rule 463 of the Rules and Regulations, to furnish a copy
thereof to the counsel for the U.S. Underwriters and receive and
consider its comments thereon, and to deliver promptly to the
Representatives a signed copy of each report on Form SR filed by it
with the Commission;
(k) To apply the net proceeds from the sale of the U.S. Stock
being sold by the Company as set forth in the Prospectus; and
(l) To take such steps as shall be necessary to ensure that
neither the Company nor any subsidiary thereof shall become an
"investment company" or an entity "controlled" by an "investment
company" within the meaning of such terms under the 1940 Act.
7. Further Agreements of the Selling Stockholders. Each Selling
Stockholder agrees:
(a) For a period of 180 days from the date of the Prospectus,
not to, directly or indirectly, offer for sale, sell or otherwise
dispose of (or enter into any transaction or device which is designed
to, or could be expected to, result in the disposition or purchase by
any person at any time in the future of) any shares of Common U.S.
Stock (other than the U.S. Stock and the Stock), without the prior
written consent of Lehman Brothers on behalf of the Representatives
and the Lead Managers.
(b) That the U.S. Stock to be sold by such Selling Stockholder
hereunder, and the Stock to be sold by such Selling Stockholder under
the International Underwriting Agreement which is represented by the
certificates held in custody for such Selling Stockholder, is subject
to the interest of the U.S. Underwriters and the International
Managers and the other Selling Stockholders thereunder, that the
arrangements made by such Selling Stockholder for such custody are to
that
<PAGE>
16
extent irrevocable, and that the obligations of such Selling
Stockholder hereunder and under the International Underwriting
Agreement shall not be terminated by any act of such Selling
Stockholder, by operation of law, by the death or incapacity of any
individual Selling Stockholder or, in the case of a trust, by the
death or incapacity of any executor or trustee or the termination of
such trust, or the occurrence of any other event.
(c) To deliver to the Representatives prior to the First
Delivery Date a properly completed and executed United States Treasury
Department Form W-8 (if such Selling Stockholder is a non-United
States person) or Form W-9 (if such Selling Stockholder is a United
States person.)
8. Expenses. The Company agrees to pay, in addition to the
commissions specified in the last paragraph of Section 3, (a) the costs incident
to the authorization, issuance, sale and delivery of the U.S. Stock to the U.S.
Underwriters and any taxes payable in that connection; (b) the costs incident to
the preparation, printing and filing under the Securities Act of the
Registration Statements and any amendments and exhibits thereto; (c) the costs
of distributing the Registration Statements as originally filed and each
amendment thereto and any post-effective amendments thereto (including, in each
case, exhibits), any Preliminary Prospectus, the International Prospectus and
the U.S. Prospectus and any amendment or supplement to the International
Prospectus and the U.S. Prospectus, all as provided in this Agreement and the
International Underwriting Agreement; (d) the costs of reproducing and
distributing this Agreement, the International Underwriting Agreement, the
Agreement Between U.S. Underwriters and International Managers, the Agreement
Among International Managers and the Supplemental Agreement Among U.S.
Underwriters; (e) the costs of distributing the terms of agreement relating to
the organization of the underwriting syndicate and selling group to the members
thereof by mail, telex or other means of communication; (f) the costs of
delivering and distributing the Custody Agreement and the Power of Attorney; (g)
the filing fees incident to securing any required review by the National
Association of Securities Dealers, Inc. of the terms of sale of the U.S. Stock
and the Stock; (h) any applicable listing or other fees; (i) the fees and
expenses of qualifying the U.S. Stock under the securities laws of the several
jurisdictions as provided in Section 6 and of preparing, printing and
distributing a Blue Sky Memorandum (including related fees and expenses of
counsel to the U.S. Underwriters); (j) all costs and expenses of the U.S.
Underwriters, including the fees and disbursements of counsel for the U.S.
Underwriters, incident to the offer and sale of shares of the U.S. Stock by the
U.S. Underwriters to employees and persons having business relationships with
the Company and its subsidiaries, as described in Section 4; and (k) all other
costs and expenses incident to the performance of the obligations of the Company
and the Selling Stockholders under this Agreement; provided that, except as
provided in this Section 8 and in Section 13, the U.S. Underwriters shall pay
their own costs and expenses, including the costs and expenses of their counsel,
any transfer taxes on the U.S. Stock which they may sell and the expenses of
advertising any offering of the U.S. Stock made by the U.S. Underwriters.
<PAGE>
17
9. Conditions of U.S. Underwriters' Obligations. The respective
obligations of the U.S. Underwriters hereunder are subject to the accuracy, when
made and on each Delivery Date, of the representations and warranties of the
Company and the Selling Stockholders contained herein, to the performance by the
Company and the Selling Stockholders of their respective obligations hereunder,
and to each of the following additional terms and conditions:
(a) The Rule 462(b) Registration Statement, if any, and the
Prospectus shall have been timely filed with the Commission in
accordance with Section 6; no stop order suspending the effectiveness
of either of the Registration Statements or any part thereof shall
have been issued and no proceeding for that purpose shall have been
initiated or threatened by the Commission; and any request of the
Commission for inclusion of additional information in either of the
Registration Statements or the Prospectus or otherwise shall have been
complied with.
(b) No U.S. Underwriter or International Manager shall have
discovered and disclosed to the Company on or prior to such Delivery
Date that either of the Registration Statements or the Prospectus or
any amendment or supplement thereto contains any untrue statement of a
fact which, in the opinion of Simpson Thacher & Bartlett, counsel for
the U.S. Underwriters and the International Managers, is material or
omits to state any fact which, in the opinion of such counsel, is
material and is required to be stated therein or is necessary to made
the statements therein not misleading.
(c) All corporate proceedings and other legal matters incident
to the authorization, form and validity of this Agreement, the
International Underwriting Agreement, the Custody Agreement, the Power
of Attorney, the U.S. Stock, the Stock, the Registration Statements
and the Prospectus, and all other legal matters relating to this
Agreement and the International Underwriting Agreement and the
transactions contemplated hereby and thereby shall be satisfactory in
all respects to counsel for the U.S. Underwriters and the
International Managers, and the Company and the Selling Stockholders
shall have furnished to such counsel all documents and information
that they may reasonably request to enable them to pass upon such
matters.
(d) Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C.
shall have furnished to the Representatives its written opinion, as
counsel to the Company and the Selling Stockholders, addressed to the
U.S. Underwriters and dated such Delivery Date, in form and substance
satisfactory to the Representatives, to the effect that:
(i) The Company is duly registered as a savings and loan
holding company under HOLA;
<PAGE>
18
(ii) The Bank has been duly chartered and is validly
existing as a federal stock savings bank under the laws of the
United States of America, with full corporate power and authority
necessary to own or hold its properties and conduct the
businesses in which it is engaged, and is a member of the Federal
Home Loan Bank of Indianapolis;
(iii) This Agreement and the International Underwriting
Agreement each has been duly authorized, executed and delivered
by the Company and has been duly executed and delivered by or on
behalf of each Selling Stockholder;
(iv) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital
stock of the Company (including the shares of U.S. Stock and
Stock being delivered on such Delivery Date) have been duly and
validly authorized and issued, are fully paid and non-assessable
and conform to the description thereof contained in the
Prospectus; and all of the issued shares of capital stock of the
Bank and each other subsidiary of the Company have been duly and
validly authorized and issued and are fully paid, non-assessable
and (except for directors' qualifying shares) are owned directly
or indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims;
(v) The Primary Registration Statement was declared
effective under the Securities Act as of the date and time
specified in such opinion, the Rule 462(b) Registration
Statement, if any, was filed with the Commission on the date
specified therein, the Prospectus was filed with the Commission
pursuant to the subparagraph of Rule 424(b) of the Rules and
Regulations specified in such opinion on the date specified
therein and no stop order suspending the effectiveness of either
of the Registration Statements has been issued and, to the
knowledge of such counsel, no proceeding for that purpose is
pending or threatened by the Commission;
(vi) The Registration Statements, as of their respective
Effective Dates, and the Prospectus, as of its date, and any
further amendments or supplements thereto, as of their respective
dates, made by the Company prior to such Delivery Date (other
than the financial statements and other financial data contained
therein, as to which such counsel need express no opinion)
complied as to form in all material respects with the
requirements of the Securities Act and the Rules and Regulations;
(vii) The issue and sale of the shares of U.S. Stock and
Stock being delivered on such Delivery Date by the Company and
the compliance by the Company with all of the provisions of this
Agreement and the International Underwriting Agreement and the
consummation of
<PAGE>
19
the transactions contemplated hereby will not conflict with or
result in a breach or violation of any of the terms or provisions
of, or constitute a default under, any indenture, mortgage, deed
of trust, loan agreement or other agreement or instrument known
to such counsel to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries is
bound or to which any of the properties or assets of the Company
or any of its subsidiaries is subject, nor will such actions
result in any violation of the provisions of the charter or by-
laws of the Company or any of its subsidiaries or any statute or
any order, rule or regulation known to such counsel of any court
or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties or
assets (including, without limitation, HOLA and the rules and
regulations of the OTS thereunder); and, except for the
registration of the U.S. Stock and the Stock under the Securities
Act and the Exchange Act and such filings and registrations as
may be required under applicable state securities laws in
connection with the purchase and distribution of the U.S. Stock
and the Stock by the U.S. Underwriters and the International
Managers, no consent, approval, authorization or order of, or
filing or registration with, any such court or governmental
agency or body is required for the execution, delivery and
performance of this Agreement by the Company and the consummation
of the transactions contemplated hereby;
(viii) Each Selling Stockholder has full right, power and
authority to enter into this Agreement and the International
Underwriting Agreement, the Power of Attorney and the Custody
Agreement; the Power of Attorney and the Custody Agreement have
been duly executed and delivered by each Selling Stockholder and
constitute valid and binding agreements of each Selling
Stockholder; the execution, delivery and performance of this
Agreement, the International Underwriting Agreement, the Power of
Attorney and the Custody Agreement by each Selling Stockholder
and the consummation by each Selling Stockholder of the
transactions contemplated hereby and thereby will not conflict
with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which any Selling Stockholder
is a party or by which any Selling Stockholder is bound or to
which any of the property or assets of any Selling Stockholder is
subject, nor will such actions result in any violation of any
statute or any order, rule or regulation known to such counsel of
any court or governmental agency or body having jurisdiction over
any Selling Stockholder or the property or assets of any Selling
Stockholder (including, without limitation, HOLA and the rules
and regulations of the OTS, as applicable); and, except for the
registration of the U.S. Stock and the Stock under the
<PAGE>
20
Securities Act and the Exchange Act and such filings and
registrations as may be required under applicable state
securities laws in connection with the purchase and distribution
of the U.S. Stock and the Stock by the U.S. Underwriters and the
International Managers, no consent, approval, authorization or
order of, or filing or registration with, any such court or
governmental agency or body is required for the execution,
delivery and performance of this Agreement, the International
Underwriting Agreement, the Power of Attorney or the Custody
Agreement by any Selling Stockholder and the consummation by any
Selling Stockholder of the transactions contemplated hereby and
thereby;
(ix) There are no preemptive or other rights to
subscribe for or to purchase, nor any restriction upon the voting
or transfer of, any shares of the U.S. Stock or Stock pursuant to
the Company's charter or by-laws or any agreement or other
instrument known to such counsel;
(x) To the best of such counsel's knowledge and other
than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of
its subsidiaries is a party or of which any property or asset of
the Company or any of its subsidiaries is the subject which might
have a material adverse effect on the consolidated financial
position, stockholders' equity, results of operations, business
or prospects of the Company and its subsidiaries; and, to the
best of such counsel's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or
threatened by others;
(xi) To the best of such counsel's knowledge, there are
no contracts or other documents which are required to be
described in the Prospectus or filed as exhibits to the
Registration Statements by the Securities Act or by the Rules and
Regulations which have not been described or filed as exhibits to
the Registration Statements or incorporated therein by reference
as permitted by the Rules and Regulations;
(xii) The savings accounts of depositors in the Bank are
insured by the FDIC to the fullest extent permitted by law and
the rules and regulations of the FDIC, and no proceedings for the
termination of such insurance are pending, or to such counsel's
knowledge, threatened;
(xiii) To the best of such counsel's knowledge, neither
the Company nor any of its subsidiaries is a party to any written
agreement or memorandum of understanding with, or a party to any
commitment letter or similar undertaking to, or is subject to any
order or directive by, or is a recipient of any extraordinary
supervisory letter from, or has adopted any board resolutions at
the request of, the OTS, the FDIC or any other
<PAGE>
21
government authority or agency responsible for the supervision,
regulation or insurance of depository institutions or their
holding companies which restricts materially the conduct of its
business, or in any manner relates to its capital adequacy (other
than as described in the Prospectus), its credit policies or its
management, nor have any of them been advised by the OTS, the
FDIC or any such other government authority or agency that it is
contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such order, decree,
agreement, memorandum of understanding, extraordinary supervisory
letter, commitment letter or similar submission, or any such
board resolutions;
(xiv) The form of certificate used to evidence the U.S.
Stock complies in all material respects with all applicable
statutory requirements, with any applicable requirements of the
articles of incorporation and by-laws of the Company and the
requirements of the Nasdaq National Market;
(xv) [Except as described in the Prospectus,] to the
best of such counsel's knowledge, there are no contracts,
agreements or understandings between the Company and any person
granting such person the right to require the Company to file a
registration statement under the Securities Act with respect to
any securities of the Company owned or to be owned by such person
or to require the Company to include such securities in the
securities registered pursuant to the Registration Statements or
in any securities being registered pursuant to any other
registration statement filed by the Company under the Securities
Act;
(xvi) Neither the Company nor any subsidiary thereof is
an "investment company" or an entity "controlled" by an
"investment company" within the meaning of such terms under the
1940 Act; and
(xvii) Upon payment for, and delivery of, the shares of
U.S. Stock to be sold by each Selling Stockholder under this
Agreement in accordance with the terms hereof, the U.S.
Underwriters will acquire all of the rights of each Selling
Stockholder in such shares and will also acquire the interest of
each Selling Stockholder in such shares free of any adverse claim
(within the meaning of the Uniform Commercial Code).
In rendering such opinion, such counsel may (i) state that its opinion
is limited to matters governed by the Federal laws of the United
States of America [and the laws of _________] and that such counsel is
not admitted in the State of Michigan, (ii) insofar as such opinion
relates to or is dependent on matters governed by the laws of the
State of Michigan, rely on the opinion of Albert J. Gladner, Esq.,
General Counsel of the Company, referred to in Section 9(e) below and
(iii) in rendering the opinion in Section 9(d)(xvii) above, rely upon
a
<PAGE>
22
certificate of each Selling Stockholder in respect of matters of fact
as to ownership of, and the absence of adverse claims regarding, the
shares of U.S. Stock sold by such Selling Stockholder, provided that
such counsel shall furnish copies thereof to the Representatives and
state that it believes that both the U.S. Underwriters and it are
justified in relying upon such certificate. Such counsel shall also
have furnished to the Representatives a written statement, addressed
to the U.S. Underwriters and dated such Delivery Date, in form and
substance satisfactory to the Representatives, to the effect that (x)
such counsel has acted as counsel to the Company on a regular basis
(although the Company is also represented by its General Counsel and,
with respect to certain other matters, by other outside counsel) and
has acted as counsel to the Company and the Selling Stockholders in
connection with the preparation of the Registration Statements, and
(y) based on the foregoing, no facts have come to the attention of
such counsel which lead it to believe that the Registration
Statements, as of their respective Effective Dates, contained any
untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary in order to make the
statements therein not misleading, or that the Prospectus contains any
untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading. The foregoing opinion and statement may be
qualified by a statement to the effect that such counsel does not
assume any responsibility for the accuracy, completeness or fairness
of the statements contained in the Registration Statements or the
Prospectus except for the statements made in the Prospectus under the
caption "Description of Capital Stock", insofar as such statements
relate to the U.S. Stock and concern legal matters.
(e) Albert J. Gladner, Esq., General Counsel of the Company,
shall have furnished to the Representatives his written opinion,
addressed to the U.S. Underwriters and dated such Delivery Date, in
form and substance satisfactory to the Representatives, to the effect
that:
(i) This Agreement and the International Underwriting
Agreement each has been duly authorized, executed and delivered
by the Company;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital
stock of the Company (including the shares of U.S. Stock and the
Stock being delivered on such Delivery Date) have been duly and
validly authorized and issued, are fully paid and non-assessable
and conform to the description thereof contained in the
Prospectus; and all of the issued shares of capital stock of the
Bank and each other subsidiary of the Company have been duly and
validly authorized and issued and are fully paid, non-
<PAGE>
23
assessable and (except for directors' qualifying shares) are
owned directly or indirectly by the Company, free and clear of
all liens, encumbrances, equities or claims;
(iii) The Company and each of its subsidiaries (other
than the Bank) have been duly incorporated and are validly
existing as corporations in good standing under the laws of their
respective jurisdictions of incorporation, are duly qualified to
do business and are in good standing as foreign corporations in
each jurisdiction in which their respective ownership or lease of
property or the conduct of their respective businesses requires
such qualification (other than those jurisdictions in which the
failure to so qualify would not have a material adverse effect on
the Company or the Company and its subsidiaries taken as a
whole), and have all power and authority necessary to own or hold
their respective properties and conduct the businesses in which
they are engaged;
(iv) The issue and sale of the shares of U.S. Stock and
Stock being delivered on such Delivery Date by the Company and
the compliance by the Company with all of the provisions of this
Agreement and the International Underwriting Agreement and the
consummation of the transactions contemplated hereby will not
conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which the
Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries is bound or to which any of
the properties or assets of the Company or any of its
subsidiaries is subject, nor will such actions result in any
violation of the provisions of the charter or by-laws of the
Company or any of its subsidiaries or any statute or any order,
rule or regulation known to such counsel of any court or
governmental agency or body having jurisdiction over the Company
or any of its subsidiaries or any of their properties or assets
(including, without limitation, HOLA and the rules and
regulations of the OTS); and, except for the registration of the
U.S. Stock and the Stock under the Securities Act and such
consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and
applicable state securities laws in connection with the purchase
and distribution of the U.S. Stock and the Stock by the U.S.
Underwriters and the International Managers, no consent,
approval, authorization or order of, or filing or registration
with, any such court or governmental agency or body is required
for the execution, delivery and performance of this Agreement by
the Company and the consummation of the transactions contemplated
hereby;
<PAGE>
24
(v) There are no preemptive or other rights to
subscribe for or to purchase, nor any restriction upon the voting
or transfer of, any shares of the U.S. Stock or the Stock
pursuant to the Company's charter or by-laws or any agreement or
other instrument known to such counsel;
(vi) To the best of such counsel's knowledge and other
than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of
its subsidiaries is a party or of which any property or asset of
the Company or any of its subsidiaries is the subject which, if
determined adversely to the Company or any of its subsidiaries,
might have a material adverse effect on the consolidated
financial position, stockholders' equity, results of operations,
business or prospects of the Company and its subsidiaries; and,
to the best of such counsel's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or
threatened by others;
(vii) To the best of such counsel's knowledge, neither
the Company nor any of its subsidiaries is party to or otherwise
the subject of any consent decree, memorandum of understanding,
written agreement or similar supervisory or enforcement agreement
or understanding with the OTS, the FDIC or any other government
authority or agency responsible for the supervision, regulation
or insurance of depository institutions or their holding
companies; and
(viii) The form of certificate used to evidence the U.S.
Stock complies in all material respects with all applicable
statutory requirements, with any applicable requirements of the
articles of incorporation and by-laws of the Company.
In rendering such opinion, such counsel may state that his opinion is
limited to matters governed by the laws of the State of Michigan.
Such counsel shall also have furnished to the Representatives a
written statement, addressed to the U.S. Underwriters and dated such
Delivery Date, in form and substance satisfactory to the
Representatives, to the effect that (x) such counsel is General
Counsel to the Company and, as such, has acted as counsel to the
Company in connection with the preparation of the Registration
Statements, and (y) based on the foregoing, no facts have come to the
attention of such counsel which lead him to believe that the
Registration Statements, as of their respective Effective Dates,
contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary in order
to make the statements therein not misleading, or that the Prospectus
contains any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which
they were made, not misleading. The foregoing opinion and statement
may be
<PAGE>
25
qualified by a statement to the effect that such counsel does not
assume any responsibility for the accuracy, completeness or fairness
of the statements contained in the Registration Statements or the
Prospectus.
(f) With respect to the letter of Grant Thornton LLP delivered
to the Representatives concurrently with the execution of this
Agreement (the "initial letter"), the Company shall have furnished to
the Representatives a letter (the "bring-down letter") of such
accountants, addressed to the U.S. Underwriters and dated such
Delivery Date (i) confirming that they are independent public
accountants within the meaning of the Securities Act and are in
compliance with the applicable requirements relating to the
qualification of accountants under Rule 2-01 of Regulation S-X of the
Commission, (ii) stating, as of the date of the bring-down letter (or,
with respect to matters involving changes or developments since the
respective dates as of which specified financial information is given
in the Prospectus, as of a date not more than five days prior to the
date of the bring-down letter), the conclusions and findings of such
firm with respect to the financial information and other matters
covered by the initial letter and (iii) confirming in all material
respects the conclusions and findings set forth in the initial letter.
(g) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chairman of the Board
and Chief Executive Officer and its Chief Financial Officer stating
that:
(i) The representations, warranties and agreements of the
Company in Section 1 are true and correct as of such Delivery
Date; the Company has complied with all its agreements contained
herein; and the conditions set forth in Section 9(a) have been
fulfilled;
(ii) (A) Neither the Company nor any of its subsidiaries
has sustained since the date of the latest audited financial
statements included in the Prospectus any loss or interference
with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as
set forth or contemplated in the Prospectus and (B) since such
date there has not been any change in the capital stock or long-
term debt of the Company or any of its subsidiaries or any
material adverse change, or any development involving a
prospective material adverse change, in or affecting the general
affairs, management, financial position, stockholders' equity or
results of operations of the Company and its subsidiaries, other
than as set forth or contemplated in the Prospectus; and
(iii) They have carefully examined the Registration
Statements and the Prospectus and, in their opinion, (A) the
Registration Statements, as of
<PAGE>
26
their respective Effective Dates, and the Prospectus, as of each
of the Effective Dates, did not include any untrue statement of a
material fact and did not omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, and (B) since the Effective Date of the
Primary Registration Statement, no event has occurred which
should have been set forth in a supplement or amendment to either
of the Registration Statements or the Prospectus.
(h) Each Selling Stockholder (or the Custodian or one or more
attorneys-in-fact on behalf of such Selling Stockholder) shall have
furnished to the Representatives on such Delivery Date a certificate,
dated such Delivery Date, signed by, or on behalf of, such Selling
Stockholder (or the Custodian or one or more such attorneys-in-fact)
stating that the representations, warranties and agreements of such
Selling Stockholder contained herein are true and correct as of such
Delivery Date and that such Selling Stockholder has complied with all
agreements contained herein to be performed by such Selling
Stockholder at or prior to such Delivery Date.
(i) (i) Neither the Company nor any of its subsidiaries shall
have sustained since the date of the latest audited financial
statements included in the Prospectus any loss or interference with
its business from fire, explosion, flood or other calamity, whether or
not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus or (ii) since such date there shall not
have been any change in the capital stock or long-term debt of the
Company or any of its subsidiaries or any change, or any development
involving a prospective change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, other than as set
forth or contemplated in the Prospectus, the effect of which, in any
such case described in clause (i) or (ii), is, in the judgment of the
Representatives, so material and adverse as to make it impracticable
or inadvisable to proceed with the public offering or the delivery of
the U.S. Stock being delivered on such Delivery Date on the terms and
in the manner contemplated in the Prospectus.
(j) Subsequent to the execution and delivery of this Agreement
there shall not have occurred any of the following: (i) trading in
securities generally on the New York Stock Exchange or the American
Stock Exchange or in the over-the-counter market, or trading in any
securities of the Company on any exchange or in the over-the-counter
market, shall have been suspended or minimum prices shall have been
established on any such exchange or such market by the Commission, by
such exchange or by any other regulatory body or governmental
authority having jurisdiction, (ii) a banking moratorium shall have
been declared by Federal authorities or authorities in the State of
Michigan, (iii) the United States shall have become engaged in
hostilities, there shall have been an escalation in hostilities
<PAGE>
27
involving the United States or there shall have been a declaration of
a national emergency or war by the United States or (iv) there shall
have occurred such a material adverse change in general economic,
political or financial conditions (or the effect of international
conditions on the financial markets in the United States shall be
such) as to make it, in the judgment of a majority in interest of the
several U.S. Underwriters, impracticable or inadvisable to proceed
with the public offering or delivery of the U.S. Stock being delivered
on such Delivery Date on the terms and in the manner contemplated in
the Prospectus.
(k) The Nasdaq National Market System shall have approved the
U.S. Stock for listing, subject only to official notice of issuance
and evidence of satisfactory distribution.
(l) The closing under the International Underwriting Agreement shall
have occurred concurrently with the closing hereunder on such Delivery Date.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance satisfactory to counsel
for the U.S. Underwriters and the International Managers.
10. Indemnification and Contribution.
(a) The Company and the Bank (subject to Section 10(g) below), jointly
and severally, shall indemnify and hold harmless each Underwriter, its officers
and employees and each person, if any, who controls any U.S. Underwriter within
the meaning of the Securities Act, from and against any loss, claim, damage or
liability, joint or several, or any action in respect thereof (including, but
not limited to, any loss, claim, damage, liability or action relating to
purchases and sales of Stock), to which that U.S. Underwriter, officer, employee
or controlling person may become subject, under the Securities Act or otherwise,
insofar as such loss, claim, damage, liability or action arises out of, or is
based upon, (i) any untrue statement or alleged untrue statement of a material
fact contained in any Preliminary Prospectus, either of the Registration
Statements or the Prospectus, or in any amendment or supplement thereto, (ii)
the omission or alleged omission to state in any Preliminary Prospectus, either
of the Registration Statements or the Prospectus, or in any amendment or
supplement thereto, any material fact required to be stated therein or necessary
to make the statements therein not misleading or (iii) any act or failure to
act, or any alleged act or failure to act, by any U.S. Underwriter in connection
with, or relating in any manner to, the U.S. Stock or the offering contemplated
hereby, and which is included as part of or referred to in any loss, claim,
damage, liability or action arising out of or based upon matters covered by
clause (i) or (ii) above (provided that the Company and the Bank shall not be
liable in the case of any matter covered by this clause (iii) to the extent that
it is determined in a final judgment by a court of competent jurisdiction that
such loss, claim, damage, liability or action resulted directly from any such
act or failure to act undertaken or omitted to be taken by such U.S. Underwriter
through its gross negligence or
<PAGE>
28
wilful misconduct), and shall reimburse each U.S. Underwriter and each such
officer, employee and controlling person promptly upon demand for any legal or
other expenses reasonably incurred by that U.S. Underwriter, officer, employee
or controlling person in connection with investigating or defending or preparing
to defend against any such loss, claim, damage, liability or action as such
expenses are incurred; provided, however, that the Company and the Bank shall
not be liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of, or is based upon, any untrue statement or
alleged untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any such
amendment or supplement, in reliance upon and in conformity with the written
information furnished to the Company through the Representatives by or on behalf
of any U.S. Underwriter specifically for inclusion therein and described in
Section 10; and provided further that as to any Preliminary Prospectus this
indemnity agreement shall not inure to the benefit of any U.S. Underwriter, its
officers or employees or any person controlling that U.S. Underwriter on account
of any loss, claim, damage, liability or action arising from the sale of U.S.
Stock to any person by that U.S. Underwriter if that U.S. Underwriter failed to
send or give a copy of the Prospectus, as the same may be amended or
supplemented, to that person within the time required by the Securities Act, and
the untrue statement or alleged untrue statement of any material fact or
omission or alleged omission to state a material fact in such Preliminary
Prospectus was corrected in the Prospectus, unless such failure resulted from
non-compliance by the Company with Section 6. The foregoing indemnity
agreement is in addition to any liability which the Company and/or the Bank may
otherwise have to any U.S. Underwriter or to any officer, employee or
controlling person of that U.S. Underwriter.
(b) The Selling Stockholders, jointly and severally, shall indemnify
and hold harmless each U.S. Underwriter, its officers and employees and each
person, if any, who controls any U.S. Underwriter within the meaning of the
Securities Act, from and against any loss, claim, damage or liability, joint or
several, or any action in respect thereof (including, but not limited to, any
loss, claim, damage, liability or action relating to purchases and sales of
Stock), to which that U.S. Underwriter, officer, employee or controlling person
may become subject, under the Securities Act or otherwise, insofar as such loss,
claim, damage, liability or action arises out of, or is based upon, (i) any
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, either of the Registration Statements or the Prospectus,
or in any amendment or supplement thereto, or (ii) the omission or alleged
omission to state in any Preliminary Prospectus, either of the Registration
Statements or the Prospectus, or in any amendment or supplement thereto, any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and shall reimburse each U.S. Underwriter, its officers
and employees and each such controlling person for any legal or other expenses
reasonably incurred by that U.S. Underwriter, its officers, employees or
controlling person in connection with investigating or defending or preparing to
defend against any such loss, claim, damage, liability or action as such
expenses are incurred; provided, however, that the Selling Stockholders shall
not be liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of, or is based upon, any untrue statement or
alleged untrue statement or omission or alleged omission made in any Preliminary
Prospectus, either of the Registration Statements or the Prospectus or in any
such amendment or supplement in reliance upon and in
<PAGE>
29
conformity with written information furnished to the Company through the
Representatives by or on behalf of any U.S. Underwriter specifically for
inclusion therein; and provided further, that as to any Preliminary Prospectus
this indemnity agreement shall not inure to the benefit of any U.S. Underwriter,
its officers or employees or any person controlling that U.S. Underwriter on
account of any loss, claim, damage, liability or action arising from the sale of
U.S. Stock to any person by that U.S. Underwriter if that U.S. Underwriter
failed to send or give a copy of the Prospectus, as the same may be amended or
supplemented, to that person within the time required by the Securities Act, and
the untrue statement or alleged untrue statement of a material fact or omission
or alleged omission to state a material fact in such Preliminary Prospectus was
corrected in the Prospectus, unless such failure resulted from non-compliance by
the Company with Section 6; and provided still further, that the aggregate
liability of each Selling Stockholder under this Section 10(b) shall not exceed
the amount of net proceeds received by such Selling Stockholder from the U.S.
Stock and the Stock sold by it pursuant to this Agreement and the International
Underwriting Agreement. The foregoing indemnity agreement is in addition to any
liability which the Selling Stockholders may otherwise have to any U.S.
Underwriter or any officer, employee or controlling person of that U.S.
Underwriter.
(c) Each U.S. Underwriter, severally and not jointly, shall indemnify
and hold harmless the Company, its officers and employees, each of its directors
and each person, if any, who controls the Company within the meaning of the
Securities Act, from and against any loss, claim, damage or liability, joint or
several, or any action in respect thereof, to which the Company or any such
director, officer or controlling person may become subject, under the Securities
Act or otherwise, insofar as such loss, claim, damage, liability or action
arises out of, or is based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus, either of
the Registration Statements or the Prospectus, or in any amendment or supplement
thereto, or (ii) the omission or alleged omission to state in any Preliminary
Prospectus, either of the Registration Statements or the Prospectus, or in any
amendment or supplement thereto, any material fact required to be stated therein
or necessary to make the statements therein not misleading, but in each case
only to the extent that the untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
the written information furnished to the Company through the Representatives by
or on behalf of that U.S. Underwriter specifically for inclusion therein and
described in Section 10, and shall reimburse the Company and any such director,
officer or controlling person for any legal or other expenses reasonably
incurred by the Company or any such director, officer or controlling person in
connection with investigating or defending or preparing to defend against any
such loss, claim, damage, liability or action as such expenses are incurred.
The foregoing indemnity agreement is in addition to any liability which any U.S.
Underwriter may otherwise have to the Company or any such director, officer or
controlling person.
(d) Promptly after receipt by an indemnified party under this Section
10 of notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 10, notify the indemnifying party in
writing of the claim or the commencement of that action; provided,
<PAGE>
30
however, that the failure to notify the indemnifying party shall not relieve it
from any liability which it may have under this Section 10 except to the extent
it has been materially prejudiced by such failure and, provided further, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have to an indemnified party otherwise than under this
Section 10. If any such claim or action shall be brought against an
indemnified party, and it shall notify the indemnifying party thereof, the
indemnifying party shall be entitled to participate therein and, to the extent
that it wishes, jointly with any other similarly notified indemnifying party, to
assume the defense thereof with counsel reasonably satisfactory to the
indemnified party. After notice from the indemnifying party to the indemnified
party of its election to assume the defense of such claim or action, the
indemnifying party shall not be liable to the indemnified party under this
Section 10 for any legal or other expenses subsequently incurred by the
indemnified party in connection with the defense thereof other than reasonable
costs of investigation; provided, however, that the Representatives shall have
the right to employ counsel to represent jointly the Representatives and those
other U.S. Underwriters and their respective officers, employees and controlling
persons who may be subject to liability arising out of any claim in respect of
which indemnity may be sought by the U.S. Underwriters against the Company, the
Bank or any Selling Stockholder under this Section 10 if, in the reasonable
judgment of the Representatives, it is advisable for the Representatives and
those U.S. Underwriters, officers, employees and controlling persons to be
jointly represented by separate counsel, and in that event the fees and expenses
of such separate counsel shall be paid by the Company. Each indemnified party,
as a condition of the indemnity agreements contained in Sections 10, 10 and
10, shall use its best efforts to cooperate with the indemnifying party in the
defense of any such action or claim. No indemnifying party shall (i) without
the prior written consent of the indemnified parties (which consent shall not be
unreasonably withheld), settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding, or (ii) be liable for any
settlement of any such action effected without its written consent (which
consent shall not be unreasonably withheld), but if settled with its written
consent or if there be a final judgment of the plaintiff in any such action, the
indemnifying party agrees to indemnify and hold harmless any indemnified party
from and against any loss of liability by reason of such settlement or judgment.
(e) If the indemnification provided for in this Section 10 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 10, 10 or 10 in respect of any loss, claim, damage or
liability, or any action in respect thereof, referred to therein, then each
indemnifying party shall (subject to Section 10(g)), in lieu of indemnifying
such indemnified party, contribute to the amount paid or payable by such
indemnified party as a result of such loss, claim, damage or liability, or
action in respect thereof, (i) in such proportion as shall be appropriate to
reflect the relative benefits received by the Company, the Bank and the Selling
Stockholders on the one hand and the U.S. Underwriters on the other hand from
the offering of the U.S. Stock or (ii) if the allocation provided by clause (i)
<PAGE>
31
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company, the Bank and the Selling Stockholders on
the one hand and the U.S. Underwriters on the other hand with respect to the
statements or omissions which resulted in such loss, claim, damage or liability,
or action in respect thereof, as well as any other relevant equitable
considerations. The relative benefits received by the Company, the Bank and the
Selling Stockholders on the one hand and the U.S. Underwriters on the other hand
with respect to such offering shall be deemed to be in the same proportion as
the total net proceeds from the offering of the U.S. Stock purchased under this
Agreement (before deducting expenses) received by the Company, the Bank and the
Selling Stockholders, on the one hand, and the total underwriting discounts and
commissions received by the U.S. Underwriters with respect to the shares of the
U.S. Stock purchased under this Agreement, on the other hand, bear to the total
gross proceeds from the offering of the shares of the U.S. Stock under this
Agreement, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to whether the
untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact relates to information supplied by the
Company, the Bank, the Selling Stockholders or the U.S. Underwriters, the intent
of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission. For purposes of
the preceding two sentences, the net proceeds deemed to be received by the
Company shall be deemed to be also for the benefit of the Bank and information
supplied by the Company shall also be deemed to have been supplied by the Bank.
The Company, the Bank, the Selling Stockholders and the U.S. Underwriters agree
that it would not be just and equitable if contributions pursuant to this
Section 10 were to be determined by pro rata allocation (even if the U.S.
Underwriters were treated as one entity for such purpose) or by any other method
of allocation which does not take into account the equitable considerations
referred to herein. The amount paid or payable by an indemnified party as a
result of the loss, claim, damage or liability, or action in respect thereof,
referred to above in this Section 10 shall be deemed to include, for purposes
of this Section 10, any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 10, no U.S.
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the U.S. Stock underwritten by it and
distributed to the public was offered to the public exceeds the amount of any
damages which such U.S. Underwriter has otherwise paid or become liable to pay
by reason of any untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The U.S.
Underwriters' obligations to contribute as provided in this Section 10 are
several in proportion to their respective underwriting obligations and not
joint.
(f) The U.S. Underwriters severally confirm that the statements with
respect to the public offering of the U.S. Stock set forth on the cover page of,
and under the caption "Underwriting" in, the Prospectus are correct and
constitute the only information furnished in writing to the Company by or on
behalf of the U.S. Underwriters specifically for inclusion in the Registration
Statements and the Prospectus.
<PAGE>
32
(g) Notwithstanding any other provision of this Section 10, in no
event shall the Bank be liable for or obligated to pay any amounts pursuant to
Section 10(a), (b), (c) or (e) above to the extent such payments would at the
time thereof exceed the applicable limitations set forth in Section 23A of the
Federal Reserve Act.
11. Defaulting U.S. Underwriters.
If, on either Delivery Date, any U.S. Underwriter defaults in the
performance of its obligations under this Agreement, the remaining non-
defaulting U.S. Underwriters shall be obligated to purchase the U.S. Stock which
the defaulting U.S. Underwriter agreed but failed to purchase on such Delivery
Date in the respective proportions which the number of shares of the Firm U.S.
Stock set forth opposite the name of each remaining non-defaulting U.S.
Underwriter in Schedule 1 hereto bears to the total number of shares of the Firm
U.S. Stock set forth opposite the names of all the remaining non-defaulting U.S.
Underwriters in Schedule 1 hereto; provided, however, that the remaining non-
defaulting U.S. Underwriters shall not be obligated to purchase any of the U.S.
Stock on such Delivery Date if the total number of shares of the U.S. Stock
which the defaulting U.S. Underwriter or U.S. Underwriters agreed but failed to
purchase on such date exceeds 9.09% of the total number of shares of the U.S.
Stock to be purchased on such Delivery Date, and any remaining non-defaulting
U.S. Underwriter shall not be obligated to purchase more than 110% of the number
of shares of the U.S. Stock which it agreed to purchase on such Delivery Date
pursuant to the terms of Section 3. If the foregoing maximums are exceeded,
the remaining non-defaulting U.S. Underwriters, or those other underwriters
satisfactory to the Representatives who so agree, shall have the right, but
shall not be obligated, to purchase, in such proportion as may be agreed upon
among them, all the U.S. Stock to be purchased on such Delivery Date. If the
remaining U.S. Underwriters or other underwriters satisfactory to the
Representatives do not elect to purchase the shares which the defaulting U.S.
Underwriter or U.S. Underwriters agreed but failed to purchase on such Delivery
Date, this Agreement (or, with respect to the Second Delivery Date, the
obligation of the U.S. Underwriters to purchase, and of the Company and the
Selling Stockholders to sell, the Option Stock) shall terminate without
liability on the part of any non-defaulting Underwriter, the Company or the
Selling Stockholders, except that the Company will continue to be liable for the
payment of expenses to the extent set forth in Sections 8 and 13. As used in
this Agreement, the term "U.S. Underwriter" includes, for all purposes of this
Agreement unless the context requires otherwise, any party not listed in
Schedule 1 hereto who, pursuant to this Section 11, purchases Firm U.S. Stock
which a defaulting U.S. Underwriter agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting U.S. Underwriter
of any liability it may have to the Company and the Selling Stockholders for
damages caused by its default. If other underwriters are obligated or agree to
purchase the U.S. Stock of a defaulting or withdrawing U.S. Underwriter, either
the Representatives or the Company may postpone the Delivery Date for up to
seven full business days in order to effect any changes that in the opinion of
counsel for the Company or counsel for the U.S. Underwriters may be necessary in
the Registration Statement, the Prospectus or in any other document or
arrangement.
<PAGE>
33
12. Termination. The obligations of the U.S. Underwriters hereunder
may be terminated by the Representatives by notice given to and received by the
Company and the Selling Stockholders prior to delivery of and payment for the
Firm U.S. Stock if, prior to that time, any of the events described in Sections
9 or 9 shall have occurred or if the U.S. Underwriters shall decline to
purchase the U.S. Stock for any reason permitted under this Agreement.
13. Reimbursement of U.S. Underwriters' Expenses. If (a) the Company
or any Selling Stockholder shall fail to tender the U.S. Stock for delivery to
the U.S. Underwriters for any reason permitted under this Agreement, or (b) the
U.S. Underwriters shall decline to purchase the U.S. Stock for any reason
permitted under this Agreement (including the termination of this Agreement
pursuant to Section 12), the Company and the Selling Stockholders shall
reimburse the U.S. Underwriters for the fees and expenses of their counsel and
for such other out-of-pocket expenses as shall have been incurred by them in
connection with this Agreement and the proposed purchase of the Stock, and upon
demand the Company and the Selling Stockholders shall pay the full amount
thereof to the Representatives. If this Agreement is terminated pursuant to
Section 11 by reason of the default of one or more U.S. Underwriters, neither
the Company nor any Selling Stockholder shall be obligated to reimburse any
defaulting U.S. Underwriter on account of those expenses.
14. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the U.S. Underwriters, shall be delivered or sent by
mail, telex or facsimile transmission to Lehman Brothers Inc., Three
World Financial Center, New York, New York 10285, Attention:
Syndicate Department (Fax: 212-528-8822);
(b) if to the Company or to the Bank, shall be delivered or sent
by mail, telex or facsimile transmission to the address of the Company
set forth in the Primary Registration Statement, Attention: _________
(Fax: _________); and
(c) if to any Selling Stockholder, shall be delivered or sent by
mail, telex or facsimile transmission to such Selling Stockholder at
the address set forth on Schedule 2 hereto;
provided, however, that any notice to an U.S. Underwriter pursuant to Section
10 shall be delivered or sent by mail, telex or facsimile transmission to such
U.S. Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company and
the Selling Stockholders shall be entitled to act and rely upon any request,
consent, notice or agreement given or made on behalf of the U.S. Underwriters by
Lehman Brothers Inc. and the Company
<PAGE>
34
and the U.S. Underwriters shall be entitled to act and rely upon any request,
consent, notice or agreement given or made on behalf of the Selling Stockholders
by the Custodian.
15. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the U.S. Underwriters, the Company,
the Selling Stockholders and their respective personal representatives and
successors. This Agreement and the terms and provisions hereof are for the sole
benefit of only those persons, except that (A) the representations, warranties,
indemnities and agreements of the Company and the Selling Stockholders contained
in this Agreement shall also be deemed to be for the benefit of the officers and
employees of each U.S. Underwriter and the person or persons, if any, who
control each U.S. Underwriter within the meaning of Section 15 of the Securities
Act and (B) the indemnity agreement of the U.S. Underwriters contained in
Section 10 of this Agreement shall be deemed to be for the benefit of
directors, officers and employees of the Company and any person controlling the
Company within the meaning of Section 15 of the Securities Act. Nothing in this
Agreement is intended or shall be construed to give any person, other than the
persons referred to in this Section 15, any legal or equitable right, remedy or
claim under or in respect of this Agreement or any provision contained herein.
16. Survival. The respective indemnities, representations,
warranties and agreements of the Company, the Bank, the Selling Stockholders and
the U.S. Underwriters contained in this Agreement or made by or on behalf of
them, respectively, pursuant to this Agreement, shall survive the delivery of
and payment for the U.S. Stock and shall remain in full force and effect,
regardless of any investigation made by or on behalf of any of them or any
person controlling any of them.
17. Definition of the Terms "Business Day" and "Subsidiary". For
purposes of this Agreement, (a) "business day" means any day on which the New
York Stock Exchange, Inc. is open for trading and (b) "subsidiary" has the
meaning set forth in Rule 405 of the Rules and Regulations.
18. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of New York.
19. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
20. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
<PAGE>
35
If the foregoing correctly sets forth the agreement among the Company,
the Bank, the Selling Stockholders and the U.S. Underwriters, please indicate
your acceptance in the space provided for that purpose below.
Very truly yours,
FLAGSTAR BANCORP, INC.
By
----------------------------------------
[name]
FLAGSTAR BANK, FSB
By
----------------------------------------
[name]
The Selling Stockholders named in Schedule 2 to
this Agreement
By
----------------------------------------
Attorney-in-Fact
Accepted:
Lehman Brothers Inc.
PaineWebber Incorporated
Roney & Co.
For themselves as U.S. Underwriters and
as Representatives of the several
U.S. Underwriters named in Schedule 1 hereto
By Lehman Brothers Inc.
By
----------------------------------
Authorized Representative
<PAGE>
EXHIBIT 1.1(b)
--------------
Shares
------------
FLAGSTAR BANCORP, INC.
Common Stock
Form of
INTERNATIONAL UNDERWRITING AGREEMENT
------------------------------------
, 1997
-------------- --
Lehman Brothers International (Europe)
PaineWebber International
Roney & Co.,
As Lead Managers of the several
International Managers named in Schedule 1,
One Broadgate
London EC 2M 7HA
Dear Sirs:
Flagstar Bancorp, Inc., a Michigan corporation (the "Company"), and
certain stockholders of the Company named in Schedule 2 hereto (the "Selling
Stockholders"), propose to sell an aggregate of _________ shares (the "Firm
Stock") of the Company's Common Stock, par value $0.01 per share (the "Common
Stock"). Of the _________ shares of the Firm Stock, _________ shares are being
sold by the Company and _________ shares by the Selling Stockholders. In
addition, the Company and the Selling Stockholders propose to grant to the
International Managers named in Schedule 1 hereto (the "International Managers")
an option to purchase up to an additional _______ shares and _______ shares,
respectively, of the Common Stock on the terms and for the purposes set forth in
Section 3 (collectively, the "Option Stock"). The Firm Stock and the Option
Stock, if purchased, are hereinafter collectively called the "Stock." This is
to confirm the agreement concerning the purchase of the Stock from the Company
and the Selling Stockholders by the International Managers.
It is understood by all parties that the Company and the Selling
Stockholders are concurrently entering into an agreement dated the date hereof
(the "U.S. Underwriting Agreement") providing for the sale by the Company and
the Selling Stockholders of an aggregate of __________ Shares (the "Firm U.S.
Stock") and the granting of an option by the Company and the Selling
Stockholders to purchase up to an additional ________ Shares (the "Option U.S.
Stock"; and together with the Firm U.S. Stock, the "U.S. Stock") through
arrangements with the underwriters named in Schedule 1 to the U.S. Underwriting
Agreement in the United States and Canada (the "U.S. Underwriters") for whom
Lehman Brothers Inc., PaineWebber Incorporated and Roney & Co. are acting as
representatives (the "Representatives"). The U.S. Underwriters and the
International Managers simultaneously are entering into an agreement between the
U.S. and international underwriting syndicates (the "Agreement Between U.S.
Underwriters and International Managers") which provides for, among other
things, the transfer of Common Stock between the two syndicates. Two forms of
prospectus are to be used in connection with the
<PAGE>
2
offering and sale of the Common Stock contemplated by the foregoing, one
relating to the Shares to be sold in the United States and Canada (the "U.S.
Prospectus") and the second relating to the Common Stock to be sold outside of
the United States and Canada (the "International Prospectus"). The
International Prospectus will be identical to the U.S. Prospectus except for
certain substitute and additional pages.
1. Representations, Warranties and Agreements of the Company and the
Selling Stockholders. The Company and the Selling Stockholders, jointly and
severally, represent, warrant and agree that:
(a) A registration statement on Form S-1, and one or more
amendments thereto, with respect to the Stock and the U.S. Stock have
(i) been prepared by the Company in conformity with the requirements
of the Securities Act of 1933, as amended (the "Securities Act"), and
the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder, (ii)
been filed with the Commission under the Securities Act and (iii)
become effective under the Securities Act; and a second registration
statement on Form S-1 with respect to the Stock and the U.S. Stock (i)
may also be prepared by the Company in conformity with the
requirements of the Securities Act and the Rules and Regulations and
(ii) if to be so prepared, will be filed with the Commission under the
Securities Act pursuant to Rule 462(b) of the Rules and Regulations on
the date hereof. Copies of the first such registration statement and
the amendments to such registration statement, together with the form
of any such second registration statement, have been delivered by the
Company to you as the lead managers (the "Lead Managers") of the
International Managers. As used in this Agreement, "Effective Time"
means (i) with respect to the first such registration statement, the
date and the time as of which such registration statement, or the most
recent post-effective amendment thereto, if any, was declared
effective by the Commission and (ii) with respect to any second
registration statement, the date and time as of which such second
registration statement is filed with the Commission, and "Effective
Times" is the collective reference to both Effective Times; "Effective
Date" means (i) with respect to the first such registration statement,
the date of the Effective Time of such registration statement and (ii)
with respect to any second registration statement, the date of the
Effective Time of such second registration statement, and "Effective
Dates" is the collective reference to both Effective Dates;
"Preliminary Prospectus" means (i) the U.S. prospectus included in any
such registration statement, or amendments thereof, before it became
effective under the Securities Act and any prospectus filed with the
Commission by the Company with the consent of the Lead Managers
pursuant to Rule 424(a) of the Rules and Regulations and (ii) the
International Prospectus; "Primary Registration Statement" means the
first registration statement referred to in this Section 1(a), as
amended at its Effective Time, "Rule 462(b) Registration Statement"
means the second registration
<PAGE>
3
statement, if any, referred to in this Section 1(a), as filed with the
Commission, and "Registration Statements" means both the Primary
Registration Statement and any Rule 462(b) Registration Statement,
including in each case all information contained in the final
prospectus filed with the Commission pursuant to Rule 424(b) of the
Rules and Regulations in accordance with Section 6 hereof and deemed
to be a part of the Registration Statements as of the Effective Time
of the Primary Registration Statement pursuant to paragraph (b) of
Rule 430A of the Rules and Regulations; and "Prospectus" means such
final U.S. Prospectus and International Prospectus, as first filed
with the Commission pursuant to paragraph (1) or (4) of Rule 424(b) of
the Rules and Regulations. The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus.
(b) The Primary Registration Statement conforms (and the Rule
462(b) Registration Statement, if any, the Prospectus and any further
amendments or supplements to the Registration Statements or the
Prospectus, when they become effective or are filed with the
Commission, as the case may be, will conform) in all respects to the
requirements of the Securities Act and the Rules and Regulations and
do not and will not, as of the applicable Effective Date (as to the
Registration Statements and any amendment thereto) and as of the
applicable filing date with the Commission (as to the Prospectus and
any amendment or supplement thereto) contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading;
provided that no representation or warranty is made as to information
contained in or omitted from the Registration Statements or the
Prospectus in reliance upon and in conformity with written information
furnished to the Company through the Lead Managers by or on behalf of
any International Manager specifically for inclusion therein.
(c) the Prospectus delivered to the International Managers for
use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T;
(d) The Company and each of its subsidiaries (as defined in
Section 17) have been duly incorporated and are validly existing as
corporations in good standing under the laws of their respective
jurisdictions of incorporation (or, in the case of Flagstar Bank, FSB
(the "Bank"), is duly chartered and validly existing as a federal
stock savings bank in good standing under the Home Owners' Loan Act
("HOLA") and the rules and regulations of the Office of Thrift
Supervision ("OTS") thereunder), are duly qualified to do business and
are in good standing as foreign corporations in each jurisdiction in
which their respective ownership or lease of property or the conduct
of their respective businesses requires such qualification, except
where the failure to be so qualified and in good standing would not
have a material adverse effect on the consolidated financial position,
<PAGE>
4
stockholders' equity, results of operations, business or prospects of
the Company and its subsidiaries, are in compliance in all material
respects with the laws, orders, rules, regulations and directives
issued or administered by such jurisdictions and have all power and
authority necessary to own or hold their respective properties and to
conduct the businesses in which they are engaged.
(e) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully
paid and non-assessable and conform to the description thereof
contained in the Prospectus; and all of the issued shares of capital
stock of each subsidiary of the Company have been duly and validly
authorized and issued and are fully paid and non-assessable and
(except for directors' qualifying shares) are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims.
(f) The Company is duly registered as a savings and loan holding
company under HOLA; the Company owns, directly or indirectly,
beneficially and of record, all of the outstanding shares of capital
stock of the Bank; the Bank is a member in good standing of the
Federal Home Loan Bank System; the savings accounts of depositors in
the Bank are insured by the Savings Association Insurance Fund of the
Federal Deposit Insurance Corporation (the "FDIC") to the fullest
extent permitted by law and the rules and regulations of the FDIC, and
no proceedings for the termination of such insurance are pending or,
to the best of the Company's knowledge, threatened.
(g) The shares of the Stock to be issued and sold by the Company
to the International Managers hereunder have been duly and validly
authorized and, when issued and delivered against payment therefor as
provided herein, will be duly and validly issued, fully paid and non-
assessable, and the Stock will conform to the descriptions thereof
contained in the Prospectus.
(h) The execution, delivery and performance of this Agreement
and the U.S. Underwriting Agreement by the Company and the
consummation of the transactions contemplated hereby will not conflict
with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which
the Company or any of its subsidiaries is bound or to which any of the
properties or assets of the Company or any of its subsidiaries is
subject, except for such breaches, violations or defaults as would not
individually or in the aggregate have a material adverse effect on the
consolidated financial position, stockholders' equity, results of
operations, business or prospects of the Company and its subsidiaries,
nor will such actions result in any violation of the provisions of the
charter or by-laws of the Company or any of its subsidiaries or any
statute or any
<PAGE>
5
order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries or any
of their properties or assets; and except for the registration of the
Stock and the U.S. Stock under the Securities Act and under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), such
approvals as have been obtained in connection with the approval of the
quotation of the Stock and the U.S. Stock on the Nasdaq National
Market System and such filings or registrations as may be required
under applicable state securities laws in connection with the purchase
and distribution of the Stock and the U.S. Stock by the International
Managers and the U.S. Underwriters, no consent, approval,
authorization or order of, or filing or registration with, any such
court or governmental agency or body is required for the execution,
delivery and performance of this Agreement by the Company and the
consummation of the transactions contemplated hereby.
(i) [Except as described in the Prospectus,] there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Securities Act with respect to any
securities of the Company owned or to be owned by such person or to
require the Company to include such securities in the securities
registered pursuant to the Registration Statements or in any
securities being registered pursuant to any other registration
statement filed by the Company under the Securities Act.
(j) Except as described in the Prospectus, the Company has not
sold or issued any shares of Common Stock during the six-month period
preceding the date of the Prospectus, including any sales pursuant to
Rule 144A under, or Regulations D or S of, the Securities Act [, other
than shares issued pursuant to employee benefit plans, qualified stock
options plans or other employee compensation plans or pursuant to
outstanding options, rights or warrants].
(k) Neither the Company nor any of its subsidiaries has
sustained, since the date of the latest audited financial statements
included in the Prospectus, any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since such date, there has not
been any change in the capital stock or long-term debt of the Company
or any of its subsidiaries or any material adverse change, or any
development involving a prospective material adverse change, in or
affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, other than as set forth or contemplated in the
Prospectus.
<PAGE>
6
(l) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statements or
included in the Prospectus present fairly the financial condition and
results of operations of the entities purported to be shown thereby,
at the dates and for the periods indicated, and have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the periods involved.
(m) Grant Thornton LLP, who have certified certain financial
statements of the Company, whose report appears in the Prospectus and
who have delivered the initial letter referred to in Section 9(f)
hereof, are independent public accountants as required by the
Securities Act and the Rules and Regulations.
(n) The Company and each of its subsidiaries own or possess
adequate rights to use all material patents, patent applications,
trademarks, service marks, trade names, trademark registrations,
service mark registrations, copyrights and licenses necessary for the
conduct of their respective businesses as described in the Prospectus
and have no reason to believe that such conduct of their respective
businesses will conflict with, and have not received any notice of any
claim of conflict with, any such rights of others.
(o) There are no legal or governmental proceedings pending to
which the Company or any of its subsidiaries is a party or of which
any property or asset of the Company or any of its subsidiaries is the
subject which might have a material adverse effect on the consolidated
financial position, stockholders' equity, results of operations,
business or prospects of the Company and its subsidiaries; and to the
best of the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others.
(p) Neither the Company nor any of its subsidiaries is a party
to any written agreement or memorandum of understanding with, or a
party to any commitment letter or similar undertaking to, or is
subject to any order or directive by, or is a recipient of any
extraordinary supervisory letter from, or has adopted any board
resolutions at the request of, the OTS, the FDIC or any other
government authority or agency responsible for the supervision,
regulation or insurance of depository institutions or their holding
companies which restricts materially the conduct of its business, or
in any manner relates to its capital adequacy (other than as described
in the Prospectus), its credit policies or its management, nor have
any of them been advised by the OTS, the FDIC or any such other
government authority or agency that it is contemplating issuing or
requesting (or is considering the appropriateness of issuing or
requesting) any such order, decree, agreement, memorandum of
understanding, extraordinary supervisory letter, commitment letter or
similar submission, or any such board resolutions.
<PAGE>
7
(q) There are no contracts or other documents which are required
to be described in the Prospectus or filed as exhibits to either of
the Registration Statements by the Securities Act or by the Rules and
Regulations which have not been described in the Prospectus or filed
as exhibits to either of the Registration Statements or incorporated
therein by reference as permitted by the Rules and Regulations.
(r) No relationship, direct or indirect, exists between or among
the Company on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company on the other hand,
which is required to be described in the Prospectus which is not so
described.
(s) Since the date as of which information is given in the
Prospectus through the date hereof, and except as may otherwise be
disclosed in the Prospectus, the Company has not (i) issued or granted
any securities, (ii) incurred any liability or obligation, direct or
contingent, other than liabilities and obligations which were incurred
in the ordinary course of business, (iii) entered into any transaction
not in the ordinary course of business or (iv) declared or paid any
dividend on its capital stock.
(t) Neither the Company nor any of its subsidiaries (i) is in
violation of its charter or by-laws, (ii) is in default in any
material respect, and no event has occurred which, with notice or
lapse of time or both, would constitute such a default, in the due
performance or observance of any term, covenant or condition contained
in any material indenture, mortgage, deed of trust, loan agreement,
investor purchase or servicing agreement or other agreement or
instrument to which it is a party or by which it is bound or to which
any of its properties or assets is subject or (iii) is in violation in
any material respect of any law, ordinance, governmental rule,
regulation or court decree to which it or its properties or assets may
be subject or the rules and requirements of the Federal Home Loan
Mortgage Corporation, the Federal National Mortgage Association, the
Government National Mortgage Association, the Federal Housing
Authority or any other government agency or government-sponsored
enterprise in whose secondary market programs the Company and its
subsidiaries participate, or has failed to obtain any material
license, permit, certificate, franchise or other governmental
authorization or permit necessary to the ownership of its properties
or assets or to the conduct of its business.
(u) Neither the Company nor any subsidiary is, nor upon the sale
of the Stock as herein contemplated will be, an "investment company"
or an entity "controlled" by an "investment company" within the
meaning of such terms under the Investment Company Act of 1940, as
amended, and the rules and regulations of the Commission thereunder
(the "1940 Act").
<PAGE>
8
(v) Neither the Company nor any subsidiary has taken or will
take, directly or indirectly, any action which is designed to or which
has constituted or which might reasonably be expected to cause or
result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the shares
of the Stock.
2. Representations, Warranties and Agreements of the Selling
Stockholders. Each Selling Stockholder severally represents, warrants and
agrees that:
(a) Such Selling Stockholder has, and immediately prior to the
First Delivery Date (as defined in Section 5 hereof) such Selling
Stockholder will have, good and valid title to the shares of Stock to
be sold by such Selling Stockholder hereunder and to the U.S. Stock to
be sold by such Selling Stockholder under the U.S. Underwriting
Agreement on such date, free and clear of all liens, encumbrances,
equities or claims; and upon delivery of such shares and payment
therefor pursuant hereto, good and valid title to such shares, free
and clear of all liens, encumbrances, equities or claims, will pass to
the several International Managers and U.S. Underwriters, as the case
may be.
(b) Such Selling Stockholder has placed in custody under a
custody agreement (the "Custody Agreement") with __________, as
custodian (the "Custodian"), for delivery under this Agreement,
certificates in negotiable form (with signature guaranteed by a
commercial bank or trust company having an office or correspondent in
the United States or a member firm of the New York or American Stock
Exchanges) representing the shares of Stock to be sold by such Selling
Stockholder hereunder.
(c) Such Selling Stockholder has duly and irrevocably executed
and delivered a power of attorney (the "Power of Attorney") appointing
the Custodian and one or more other persons, as attorneys-in-fact,
with full power of substitution, and with full authority (exercisable
by any one or more of them) to execute and deliver this Agreement and
the U.S. Underwriting Agreement and to take such other action as may
be necessary or desirable to carry out the provisions hereof and
thereof on behalf of such Selling Stockholder.
(d) Such Selling Stockholder has full right, power and authority
to enter into this Agreement, the U.S. Underwriting Agreement, the
Power of Attorney and the Custody Agreement; the execution, delivery
and performance of this Agreement, the U.S. Underwriting Agreement,
the Power of Attorney and the Custody Agreement by such Selling
Stockholder and the consummation by such Selling Stockholder of the
transactions contemplated hereby and thereby will not conflict with or
result in a breach or violation of any of the terms or provisions of,
or constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which such Selling
Stockholder is
<PAGE>
9
a party or by which such Selling Stockholder is bound or to which any
of the property or assets of such Selling Stockholder is subject,
other than such conflicts, breaches and violations as would not
adversely affect such Selling Stockholder's ability to perform its
obligations under this Agreement, the U.S. Underwriting Agreement, the
Power of Attorney and the Custody Agreement on a timely basis, nor
will such actions result in any violation of any statute or any order,
rule or regulation of any court or governmental agency or body having
jurisdiction over such Selling Stockholder or the property or assets
of such Selling Stockholder; and, except for the registration of the
Stock and the U.S. Stock under the Securities Act and the Exchange
Act, such approvals as have been obtained in connection with the
approval of the quotation of the Stock and the U.S. Stock on the
Nasdaq National Market System and such filings and registrations as
may be required under applicable state securities laws in connection
with the purchase and distribution of the Stock and the U.S. Stock by
the International Managers and U.S. Underwriters, no consent,
approval, authorization or order of, or filing or registration with,
any such court or governmental agency or body is required for the
execution, delivery and performance of this Agreement, the U.S.
Underwriting Agreement, the Power of Attorney or the Custody Agreement
by such Selling Stockholder and the consummation by such Selling
Stockholder of the transactions contemplated hereby and thereby.
(e) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result
in the stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the shares of the
Stock and the U.S. Stock.
(f) Such Selling Stockholder is not prompted to sell the Stock
to be sold by such Selling Stockholder hereunder by any material
information concerning the Company or any of its subsidiaries which is
not set forth in the Prospectus.
3. Purchase of the Stock by the International Managers. On the basis
of the representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company hereby agrees to sell _________
shares of the Firm Stock and each Selling Stockholder hereby agrees to sell the
number of shares of the Firm Stock set forth opposite his or her name in
Schedule 2 hereto, severally and not jointly, to the several International
Managers, and each of the International Managers, severally and not jointly,
agrees to purchase the number of shares of the Firm Stock set opposite that
International Manager's name in Schedule 1 hereto. Each International Manager
shall be obligated to purchase from the Company, and from each Selling
Stockholder, that number of shares of the Firm Stock which represents the same
proportion of the number of shares of the Firm Stock to be sold by the Company,
and by each Selling Stockholder, as the number of shares of the Firm Stock set
forth opposite the name of such International Manager in Schedule 1 represents
of the total number of shares of the Firm Stock to be purchased by all of the
International Managers pursuant to this
<PAGE>
10
Agreement. The respective purchase obligations of the International Managers
with respect to the Firm Stock shall be rounded among the International Managers
to avoid fractional shares, as the Lead Managers may determine.
In addition, the Company hereby grants to the International Managers
an option to purchase up to _______ shares of Option Stock and the Selling
Stockholders collectively hereby grant to the International Managers an option
to purchase up to an aggregate of _______ shares of Option Stock. Such options
are granted solely for the purpose of covering over-allotments in the sale of
Firm Stock and are exercisable as provided in Section 5 hereof. Shares of
Option Stock shall be sold severally by the Company and each Selling Stockholder
on a pro rata basis to the International Managers. Each International Manager
shall be obligated to purchase from the Company and from each Selling
Stockholder that number of shares of the Option Stock to be sold by such party
which represents the same proportion of the total number of shares of the Option
Stock to be sold by the Company and by the Selling Stockholders in the aggregate
as the number of shares of the Firm Stock set forth opposite the name of such
International Manager in Schedule 1 represents of the total number of shares of
the Firm Stock to be purchased by all of the International Managers pursuant to
this Agreement. The respective purchase obligations of the International
Managers with respect to the Option Stock shall be rounded among the
International Managers to avoid fractional shares, as the Lead Managers may
determine.
The price of both the Firm Stock and any Option Stock shall be $_____
per share.
The Company and the Selling Stockholders shall not be obligated to
deliver any of the Stock to be delivered on the First Delivery Date or the
Second Delivery Date (each as hereinafter defined), as the case may be, except
upon payment for all the Stock to be purchased on such Delivery Date (as
hereinafter defined) as provided herein.
As compensation for their commitments hereunder, the International
Managers shall receive, on the applicable Delivery Date, an amount equal to $___
per share for all of the Stock to be delivered by the Company and the Selling
Stockholders hereunder on such Delivery Date, such amount to be paid on such
date to the Lead Manager, for the accounts of the several International
Managers, fifty percent by the Company and fifty percent by the Selling
Stockholders (ratably in accordance with the number of shares of Stock being
delivered by each such Selling Stockholder on such Delivery Date).
4. Offering of Stock by the International Managers.
Upon authorization by the Lead Managers of the release of the Firm
Stock, the several International Managers propose to offer the Firm Stock for
sale upon the terms and conditions set forth in the International Prospectus;
provided, however, that no Stock registered pursuant to the Rule 462(b)
Registration Statement, if any, shall be offered prior to the Effective Time
thereof.
<PAGE>
11
Each International Manager agrees that, except to the extent permitted
by the Agreement Between U.S. Underwriters and International Managers, it will
not offer or sell any of the Stock in the United States or Canada.
5. Delivery of and Payment for the Stock. Delivery of and payment
for the Firm Stock shall be made at the office of Simpson Thacher & Bartlett at
425 Lexington Avenue, New York, New York, at 10:00 A.M., New York City time, on
the third full business day following the date of this Agreement or at such
other date or place as shall be determined by agreement between the Lead
Managers and the Company. This date and time are sometimes referred to as the
"First Delivery Date." On the First Delivery Date, the Company and the Selling
Stockholders shall deliver or cause to be delivered certificates representing
the Firm Stock to the Lead Managers for the account of each International
Manager against payment to or upon the order of the Company and the Selling
Stockholders of the purchase price (net of the commission provided for in the
last paragraph of Section 3) by certified or official bank check or checks
payable in immediately available (same-day) funds. Time shall be of the
essence, and delivery at the time and place specified pursuant to this Agreement
is a further condition of the obligation of each International Manager
hereunder. Upon delivery, the Firm Stock shall be registered in such names and
in such denominations as the Lead Managers shall request in writing not less
than two full business days prior to the First Delivery Date. For the purpose
of expediting the checking and packaging of the certificates for the Firm Stock,
the Company and the Selling Stockholders shall make the certificates
representing the Firm Stock available for inspection by the Lead Managers in New
York, New York, not later than 2:00 P.M., New York City time, on the business
day prior to the First Delivery Date.
At any time on or before the thirtieth day after the date of this
Agreement the option granted in Section 3 may be exercised by written notice
being given to the Company and the Selling Stockholders by the Lead Manager.
Such notice shall set forth the aggregate number of shares of Option Stock as to
which the option is being exercised, the names in which the shares of Option
Stock are to be registered, the denominations in which the shares of Option
Stock are to be issued and the date and time, as determined by the Lead Manager,
when the shares of Option Stock are to be delivered; provided, however, that
this date and time shall not be earlier than the First Delivery Date nor earlier
than the second business day after the date on which the option shall have been
exercised nor later than the fifth business day after the date on which the
option shall have been exercised. The date and time the shares of Option Stock
are delivered are sometimes referred to as the "Second Delivery Date" and the
First Delivery Date and the Second Delivery Date are sometimes each referred to
as a "Delivery Date".
Delivery of and payment for the Option Stock shall be made at the
place specified in the first sentence of the first paragraph of this Section 5
(or at such other place as shall be determined by agreement between the Lead
Managers and the Company) at 10:00 A.M., New York City time, on the Second
Delivery Date. On the Second Delivery Date, the Company and the Selling
Stockholders shall deliver or cause to be delivered the certificates
representing the Option Stock to the Lead Managers for the account of each
International Manager against payment to or upon the order of the Company and
the Selling Stockholders, as the case may be,
<PAGE>
12
of the purchase price (net of the commission provided for in the last paragraph
of Section 3) by certified or official bank check or checks payable in
immediately available (same-day) funds. Time shall be of the essence, and
delivery at the time and place specified pursuant to this Agreement is a further
condition of the obligation of each International Manager hereunder. Upon
delivery, the Option Stock shall be registered in such names and in such
denominations as the Lead Managers shall request in the aforesaid written
notice. For the purpose of expediting the checking and packaging of the
certificates for the Option Stock, the Company and the Selling Stockholders
shall make the certificates representing the Option Stock available for
inspection by the Lead Managers in New York, New York, not later than 2:00 P.M.,
New York City time, on the business day prior to the Second Delivery Date.
On each Delivery Date, the Company and the Selling Stockholders will
pay the commission payable on such Delivery Date to the International Managers
under the last paragraph of Section 3. The Company and the Selling
Stockholders hereby authorize the Lead Manager, in order to effect such payment,
to deduct from the purchase price payable to the Company and the Selling
Stockholders in exchange for the Stock sold on such date an amount equal to such
commission, calculated in accordance with the last paragraph of Section 3.
6. Further Agreements of the Company. The Company agrees:
(a) To prepare the Rule 462(b) Registration Statement, if
necessary, in a form approved by the Lead Managers and to file such
Rule 462(b) Registration Statement with the Commission on the date
hereof; to prepare the Prospectus in a form approved by the Lead
Managers and to file such Prospectus pursuant to Rule 424(b) under the
Securities Act not later than 10:00 A.M., New York City time, on the
day following the execution and delivery of this Agreement; to make no
further amendment or any supplement to the Registration Statements or
to the Prospectus except as permitted herein; to advise the Lead
Manager, promptly after it receives notice thereof, of the time when
any amendment to either Registration Statement has been filed or
becomes effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish the Lead Managers with copies
thereof; to advise the Lead Manager, promptly after it receives notice
thereof, of the issuance by the Commission of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus
or the Prospectus, of the suspension of the qualification of the Stock
for offering or sale in any jurisdiction, of the initiation or
threatening of any proceeding for any such purpose, or of any request
by the Commission for the amending or supplementing of the
Registration Statements or the Prospectus or for additional
information; and, in the event of the issuance of any stop order or of
any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus or suspending any such qualification, to
use promptly its best efforts to obtain its withdrawal;
(b) To furnish promptly to the Lead Managers and to counsel for
the International Managers a signed copy of each of the Registration
Statements as
<PAGE>
13
originally filed with the Commission, and each amendment thereto filed
with the Commission, including all consents and exhibits filed
therewith;
(c) To deliver promptly to the Lead Managers in New York City
such number of the following documents as the Lead Managers shall
request: (i) conformed copies of the Registration Statements as
originally filed with the Commission and each amendment thereto (in
each case excluding exhibits other than this Agreement and the
computation of per share earnings) and (ii) each Preliminary
Prospectus, the Prospectus (not later than 10:00 A.M., New York City
time, of the day following the execution and delivery of this
Agreement) and any amended or supplemented Prospectus (not later than
10:00 A.M., New York City time, on the day following the date of such
amendment or supplement); and, if the delivery of a prospectus is
required at any time after the Effective Time of the Primary
Registration Statement in connection with the offering or sale of the
Stock and if at such time any event shall have occurred as a result of
which the Prospectus as then amended or supplemented would include any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such Prospectus is
delivered, not misleading, or, if for any other reason it shall be
necessary to amend or supplement the Prospectus in order to comply
with the Securities Act, to notify the Lead Managers and, upon its
request, to prepare and furnish without charge to each International
Manager and to any dealer in securities as many copies as the Lead
Managers may from time to time request of an amended or supplemented
Prospectus which will correct such statement or omission or effect
such compliance;
(d) To file promptly with the Commission any amendment to the
Registration Statements or the Prospectus or any supplement to the
Prospectus that may, in the judgment of the Company or the Lead
Manager, be required by the Securities Act or requested by the
Commission;
(e) Prior to filing with the Commission (i) any amendment to
either of the Registration Statements or supplement to the Prospectus
or (ii) any Prospectus pursuant to Rule 424 of the Rules and
Regulations, to furnish a copy thereof to the Lead Managers and
counsel for the International Managers and obtain the consent of the
Lead Managers to any such filing;
(f) As soon as practicable after the Effective Date of the
Primary Registration Statement, to make generally available to the
Company's security holders and to deliver to the Lead Managers an
earnings statement of the Company and its subsidiaries (which need not
be audited) complying with Section 11(a) of the Securities Act and the
Rules and Regulations (including, at the option of the Company, Rule
158);
<PAGE>
14
(g) For a period of five years following the Effective Date of
the Primary Registration Statement, to furnish to the Lead Managers
(i) copies of all materials furnished by the Company to its
shareholders and all public reports and all reports and financial
statements furnished by the Company to the principal national
securities exchange upon which the Common Stock may be listed pursuant
to requirements of or agreements with such exchange or to the
Commission pursuant to the Exchange Act or any rule or regulation of
the Commission thereunder, (ii) copies of the publicly available
reports filed by the Bank with the OTS and (iii) such other
information as the International Managers may reasonably request
regarding the Company and/or its subsidiaries;
(h) Promptly from time to time to take such action as the Lead
Managers may reasonably request to qualify the Stock for offering and
sale under the securities laws of such jurisdictions as the Lead
Managers may request and to comply with such laws so as to permit the
continuance of sales and dealings therein in such jurisdictions for as
long as may be necessary to complete the distribution of the Stock;
(i) For a period of 180 days from the date of the Prospectus,
not to, directly or indirectly, offer for sale, sell or otherwise
dispose of (or enter into any transaction or device which is designed
to, or could be expected to, result in the disposition or purchase by
any person at any time in the future of) any shares of Common Stock
(other than the Stock and shares issued pursuant to employee benefit
plans, qualified stock option plans or other employee compensation
plans existing on the date hereof, as described in the Prospectus), or
sell or grant options, rights or warrants with respect to any shares
of Common Stock (other than the grant of options pursuant to option
plans existing on the date hereof, as described in the Prospectus),
without the prior written consent of Lehman Brothers Inc. ("Lehman
Brothers") on behalf of the Lead Manager; and to cause each officer
and director of the Company to furnish to the Lead Manager, prior to
the First Delivery Date, a letter or letters, in form and substance
satisfactory to counsel for the International Managers, pursuant to
which each such person shall agree not to, directly or indirectly,
offer for sale, sell or otherwise dispose of (or enter into any
transaction or device which is designed to, or could be expected to,
result in the disposition or purchase by any person at any time in the
future of) any shares of Common Stock for a period of 180 days from
the date of the Prospectus, without the prior written consent of
Lehman Brothers on behalf of the Lead Manager;
(j) Prior to filing with the Commission any reports on Form SR
pursuant to Rule 463 of the Rules and Regulations, to furnish a copy
thereof to the counsel for the International Managers and receive and
consider its comments thereon, and to deliver promptly to the Lead
Managers a signed copy of each report on Form SR filed by it with the
Commission;
<PAGE>
15
(k) To apply the net proceeds from the sale of the Stock being
sold by the Company as set forth in the Prospectus; and
(l) To take such steps as shall be necessary to ensure that
neither the Company nor any subsidiary thereof shall become an
"investment company" or an entity "controlled" by an "investment
company" within the meaning of such terms under the 1940 Act.
7. Further Agreements of the Selling Stockholders. Each Selling
Stockholder agrees:
(a) For a period of 180 days from the date of the Prospectus,
not to, directly or indirectly, offer for sale, sell or otherwise
dispose of (or enter into any transaction or device which is designed
to, or could be expected to, result in the disposition or purchase by
any person at any time in the future of) any shares of Common Stock
(other than the Stock and the U.S. Stock), without the prior written
consent of Lehman Brothers on behalf of the Representatives and Lead
Managers.
(b) That the Stock to be sold by such Selling Stockholder
hereunder, and the U.S. Stock to be sold by such Selling Stockholder
under the U.S. Underwriting Agreement which is represented by the
certificates held in custody for such Selling Stockholder, is subject
to the interest of the International Managers and the U.S.
Underwriters, respectively, and the other Selling Stockholders
thereunder, that the arrangements made by such Selling Stockholder for
such custody are to that extent irrevocable, and that the obligations
of such Selling Stockholder hereunder and under the U.S. Underwriting
Agreement shall not be terminated by any act of such Selling
Stockholder, by operation of law, by the death or incapacity of any
individual Selling Stockholder or, in the case of a trust, by the
death or incapacity of any executor or trustee or the termination of
such trust, or the occurrence of any other event.
(c) To deliver to the Lead Managers prior to the First Delivery
Date a properly completed and executed United States Treasury
Department Form W-8 (if such Selling Stockholder is a non-United
States person) or Form W-9 (if such Selling Stockholder is a United
States person.)
8. Expenses. The Company agrees to pay, in addition to the
commissions specified in the last paragraph of Section 3, (a) the costs incident
to the authorization, issuance, sale and delivery of the Stock to the
International Managers and any taxes payable in that connection; (b) the costs
incident to the preparation, printing and filing under the Securities Act of the
Registration Statements and any amendments and exhibits thereto; (c) the costs
of distributing the Registration Statements as originally filed and each
amendment thereto and any post-effective amendments thereto (including, in each
case, exhibits), any Preliminary Prospectus,
<PAGE>
16
the U.S. Prospectus and the International Prospectus and any amendment or
supplement to the U.S. Prospectus and the International Prospectus, all as
provided in this Agreement and the U.S. Underwriting Agreement; (d) the costs of
reproducing and distributing this Agreement, the U.S. Underwriting Agreement,
the Agreement Between U.S. Underwriters and International Managers, the
Agreement Among International Managers and the Supplemental Agreement Among U.S.
Underwriters; (e) the costs of distributing the terms of agreement relating to
the organization of the underwriting syndicate and selling group to the members
thereof by mail, telex or other means of communication; (f) the costs of
delivering and distributing the Custody Agreement and the Power of Attorney; (g)
the filing fees incident to securing any required review by the National
Association of Securities Dealers, Inc. of the terms of sale of the Stock and
U.S. Stock; (h) any applicable listing or other fees; (i) the fees and expenses
of qualifying the Stock under the securities laws of the several jurisdictions
as provided in Section 6(h) and of preparing, printing and distributing a Blue
Sky Memorandum (including related fees and expenses of counsel to the
International Managers); and (j) all other costs and expenses incident to the
performance of the obligations of the Company and the Selling Stockholders under
this Agreement; provided that, except as provided in this Section 8 and in
Section 13, the International Managers shall pay their own costs and expenses,
including the costs and expenses of their counsel, any transfer taxes on the
Stock which they may sell and the expenses of advertising any offering of the
Stock made by the International Managers.
9. Conditions of International Managers' Obligations. The respective
obligations of the International Managers hereunder are subject to the accuracy,
when made and on each Delivery Date, of the representations and warranties of
the Company and the Selling Stockholders contained herein, to the performance by
the Company and the Selling Stockholders of their respective obligations
hereunder, and to each of the following additional terms and conditions:
(a) The Rule 462(b) Registration Statement, if any, and the
Prospectus shall have been timely filed with the Commission in
accordance with Section 6(a); no stop order suspending the
effectiveness of either of the Registration Statements or any part
thereof shall have been issued and no proceeding for that purpose
shall have been initiated or threatened by the Commission; and any
request of the Commission for inclusion of additional information in
either of the Registration Statements or the Prospectus or otherwise
shall have been complied with.
(b) No International Manager or U.S. Underwriter shall have
discovered and disclosed to the Company on or prior to such Delivery
Date that either of the Registration Statements or the Prospectus or
any amendment or supplement thereto contains any untrue statement of a
fact which, in the opinion of Simpson Thacher & Bartlett, counsel for
the International Managers and U.S. Underwriters, is material or omits
to state any fact which, in the opinion of such counsel, is material
and is required to be stated therein or is necessary to made the
statements therein not misleading.
<PAGE>
17
(c) All corporate proceedings and other legal matters incident
to the authorization, form and validity of this Agreement, the U.S.
Underwriting Agreement, the Custody Agreement, the Power of Attorney,
the Stock, the U.S. Stock, the Registration Statements and the
Prospectus, and all other legal matters relating to this Agreement and
the U.S. Underwriting Agreement and the transactions contemplated
hereby and thereby shall be satisfactory in all respects to counsel
for the U.S. Underwriters and International Managers, and the Company
and the Selling Stockholders shall have furnished to such counsel all
documents and information that they may reasonably request to enable
them to pass upon such matters.
(d) Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C.
shall have furnished to the Lead Managers its written opinion, as
counsel to the Company and the Selling Stockholders, addressed to the
International Managers and dated such Delivery Date, in form and
substance satisfactory to the Lead Manager, to the effect that:
(i) The Company is duly registered as a savings and loan
holding company under HOLA;
(ii) The Bank has been duly chartered and is validly
existing as a federal stock savings bank under the laws of the
United States of America, with full corporate power and authority
necessary to own or hold its properties and conduct the
businesses in which it is engaged, and is a member of the Federal
Home Loan Bank of Indianapolis;
(iii) This Agreement and the U.S. Underwriting Agreement
each has been duly authorized, executed and delivered by the
Company and has been duly executed and delivered by or on behalf
of each Selling Stockholder;
(iv) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital
stock of the Company (including the shares of Stock and U.S.
Stock being delivered on such Delivery Date) have been duly and
validly authorized and issued, are fully paid and non-assessable
and conform to the description thereof contained in the
Prospectus; and all of the issued shares of capital stock of the
Bank and each other subsidiary of the Company have been duly and
validly authorized and issued and are fully paid, non-assessable
and (except for directors' qualifying shares) are owned directly
or indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims;
(v) The Primary Registration Statement was declared
effective under the Securities Act as of the date and time
specified in such opinion,
<PAGE>
18
the Rule 462(b) Registration Statement, if any, was filed with
the Commission on the date specified therein, the Prospectus was
filed with the Commission pursuant to the subparagraph of Rule
424(b) of the Rules and Regulations specified in such opinion on
the date specified therein and no stop order suspending the
effectiveness of either of the Registration Statements has been
issued and, to the knowledge of such counsel, no proceeding for
that purpose is pending or threatened by the Commission;
(vi) The Registration Statements, as of their respective
Effective Dates, and the Prospectus, as of its date, and any
further amendments or supplements thereto, as of their respective
dates, made by the Company prior to such Delivery Date (other
than the financial statements and other financial data contained
therein, as to which such counsel need express no opinion)
complied as to form in all material respects with the
requirements of the Securities Act and the Rules and Regulations;
(vii) The issue and sale of the shares of Stock and U.S.
Stock being delivered on such Delivery Date by the Company and
the compliance by the Company with all of the provisions of this
Agreement and the U.S. Underwriting Agreement and the
consummation of the transactions contemplated hereby will not
conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which the
Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries is bound or to which any of
the properties or assets of the Company or any of its
subsidiaries is subject, nor will such actions result in any
violation of the provisions of the charter or by-laws of the
Company or any of its subsidiaries or any statute or any order,
rule or regulation known to such counsel of any court or
governmental agency or body having jurisdiction over the Company
or any of its subsidiaries or any of their properties or assets
(including, without limitation, HOLA and the rules and
regulations of the OTS thereunder); and, except for the
registration of the Stock and the U.S. Stock under the Securities
Act and the Exchange Act and such filings and registrations as
may be required under applicable state securities laws in
connection with the purchase and distribution of the Stock and
U.S. Stock by the International Managers and the U.S.
Underwriters, no consent, approval, authorization or order of, or
filing or registration with, any such court or governmental
agency or body is required for the execution, delivery and
performance of this Agreement by the Company and the consummation
of the transactions contemplated hereby;
<PAGE>
19
(viii) Each Selling Stockholder has full right, power and
authority to enter into this Agreement, the U.S. Underwriting
Agreement, the Power of Attorney and the Custody Agreement; the
Power of Attorney and the Custody Agreement have been duly
executed and delivered by each Selling Stockholder and constitute
valid and binding agreements of each Selling Stockholder; the
execution, delivery and performance of this Agreement, the U.S.
Underwriting Agreement, the Power of Attorney and the Custody
Agreement by each Selling Stockholder and the consummation by
each Selling Stockholder of the transactions contemplated hereby
and thereby will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument known to such counsel
to which any Selling Stockholder is a party or by which any
Selling Stockholder is bound or to which any of the property or
assets of any Selling Stockholder is subject, nor will such
actions result in any violation of any statute or any order, rule
or regulation known to such counsel of any court or governmental
agency or body having jurisdiction over any Selling Stockholder
or the property or assets of any Selling Stockholder (including,
without limitation, HOLA and the rules and regulations of the
OTS, as applicable); and, except for the registration of the
Stock and the U.S. Stock under the Securities Act and the
Exchange Act and such filings and registrations as may be
required under applicable state securities laws in connection
with the purchase and distribution of the Stock and the U.S.
Stock by the International Managers and U.S. Underwriters, no
consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body
is required for the execution, delivery and performance of this
Agreement, the U.S. Underwriting Agreement, the Power of Attorney
or the Custody Agreement by any Selling Stockholder and the
consummation by any Selling Stockholder of the transactions
contemplated hereby and thereby;
(ix) There are no preemptive or other rights to subscribe
for or to purchase, nor any restriction upon the voting or
transfer of, any shares of the Stock or U.S. Stock pursuant to
the Company's charter or by-laws or any agreement or other
instrument known to such counsel;
(x) To the best of such counsel's knowledge and other than
as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of
its subsidiaries is a party or of which any property or asset of
the Company or any of its subsidiaries is the subject which might
have a material adverse effect on the consolidated financial
position, stockholders' equity, results of operations, business
or prospects of the Company and its subsidiaries; and, to the
best of such
<PAGE>
20
counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(xi) To the best of such counsel's knowledge, there are no
contracts or other documents which are required to be described
in the Prospectus or filed as exhibits to the Registration
Statements by the Securities Act or by the Rules and Regulations
which have not been described or filed as exhibits to the
Registration Statements or incorporated therein by reference as
permitted by the Rules and Regulations;
(xii) The savings accounts of depositors in the Bank are
insured by the FDIC to the fullest extent permitted by law and
the rules and regulations of the FDIC, and no proceedings for the
termination of such insurance are pending, or to such counsel's
knowledge, threatened;
(xiii) To the best of such counsel's knowledge, neither the
Company nor any of its subsidiaries is a party to any written
agreement or memorandum of understanding with, or a party to any
commitment letter or similar undertaking to, or is subject to any
order or directive by, or is a recipient of any extraordinary
supervisory letter from, or has adopted any board resolutions at
the request of, the OTS, the FDIC or any other government
authority or agency responsible for the supervision, regulation
or insurance of depository institutions or their holding
companies which restricts materially the conduct of its business,
or in any manner relates to its capital adequacy (other than as
described in the Prospectus), its credit policies or its
management, nor have any of them been advised by the OTS, the
FDIC or any such other government authority or agency that it is
contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such order, decree,
agreement, memorandum of understanding, extraordinary supervisory
letter, commitment letter or similar submission, or any such
board resolutions;
(xiv) The form of certificate used to evidence the Stock
complies in all material respects with all applicable statutory
requirements, with any applicable requirements of the articles of
incorporation and by-laws of the Company and the requirements of
the Nasdaq National Market;
(xv) [Except as described in the Prospectus,] to the best of
such counsel's knowledge, there are no contracts, agreements or
understandings between the Company and any person granting such
person the right to require the Company to file a registration
statement under the Securities Act with respect to any securities
of the Company owned or to be owned by such person or to require
the Company to include such securities in the securities
registered pursuant to the Registration Statements or in any
<PAGE>
21
securities being registered pursuant to any other registration
statement filed by the Company under the Securities Act;
(xvi) Neither the Company nor any subsidiary thereof is an
"investment company" or an entity "controlled" by an "investment
company" within the meaning of such terms under the 1940 Act; and
(xvii) Upon payment for, and delivery of, the shares of
Stock to be sold by each Selling Stockholder under this Agreement
in accordance with the terms hereof, the International Managers
will acquire all of the rights of each Selling Stockholder in
such shares and will also acquire the interest of each Selling
Stockholder in such shares free of any adverse claim (within the
meaning of the Uniform Commercial Code).
In rendering such opinion, such counsel may (i) state that its opinion
is limited to matters governed by the Federal laws of the United
States of America [and the laws of _________] and that such counsel is
not admitted in the State of Michigan, (ii) insofar as such opinion
relates to or is dependent on matters governed by the laws of the
State of Michigan, rely on the opinion of Albert J. Gladner, Esq.,
General Counsel of the Company, referred to in Section 9(e) below and
(iii) in rendering the opinion in Section 9(d)(xvii) above, rely upon
a certificate of each Selling Stockholder in respect of matters of
fact as to ownership of, and the absence of adverse claims regarding,
the shares of Stock sold by such Selling Stockholder, provided that
such counsel shall furnish copies thereof to the Lead Managers and
state that it believes that both the International Managers and it are
justified in relying upon such certificate. Such counsel shall also
have furnished to the Lead Managers a written statement, addressed to
the International Managers and dated such Delivery Date, in form and
substance satisfactory to the Lead Manager, to the effect that (x)
such counsel has acted as counsel to the Company on a regular basis
(although the Company is also represented by its General Counsel and,
with respect to certain other matters, by other outside counsel) and
has acted as counsel to the Company and the Selling Stockholders in
connection with the preparation of the Registration Statements, and
(y) based on the foregoing, no facts have come to the attention of
such counsel which lead it to believe that the Registration
Statements, as of their respective Effective Dates, contained any
untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary in order to make the
statements therein not misleading, or that the Prospectus contains any
untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading. The foregoing opinion and statement may be
qualified by a statement to the effect that such counsel does not
assume any responsibility for the accuracy, completeness or fairness
of the statements contained in the Registration Statements or the
<PAGE>
22
Prospectus except for the statements made in the Prospectus under the
caption "Description of Capital Stock", insofar as such statements
relate to the Stock and concern legal matters.
(e) Albert J. Gladner, Esq., General Counsel of the Company,
shall have furnished to the Lead Managers his written opinion,
addressed to the International Managers and dated such Delivery Date,
in form and substance satisfactory to the Lead Manager, to the effect
that:
(i) This Agreement and the U.S. Underwriting Agreement
each has been duly authorized, executed and delivered by the
Company;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital
stock of the Company (including the shares of Stock and U.S.
Stock being delivered on such Delivery Date) have been duly and
validly authorized and issued, are fully paid and non-assessable
and conform to the description thereof contained in the
Prospectus; and all of the issued shares of capital stock of the
Bank and each other subsidiary of the Company have been duly and
validly authorized and issued and are fully paid, non-assessable
and (except for directors' qualifying shares) are owned directly
or indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims;
(iii) The Company and each of its subsidiaries (other than
the Bank) have been duly incorporated and are validly existing as
corporations in good standing under the laws of their respective
jurisdictions of incorporation, are duly qualified to do business
and are in good standing as foreign corporations in each
jurisdiction in which their respective ownership or lease of
property or the conduct of their respective businesses requires
such qualification (other than those jurisdictions in which the
failure to so qualify would not have a material adverse effect on
the Company or the Company and its subsidiaries taken as a
whole), and have all power and authority necessary to own or hold
their respective properties and conduct the businesses in which
they are engaged;
(iv) The issue and sale of the shares of Stock and U.S.
Stock being delivered on such Delivery Date by the Company and
the compliance by the Company with all of the provisions of this
Agreement and the U.S. Underwriting Agreement and the
consummation of the transactions contemplated hereby will not
conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which the
Company or any of its subsidiaries is a party or by which the
Company or
<PAGE>
23
any of its subsidiaries is bound or to which any of the
properties or assets of the Company or any of its subsidiaries is
subject, nor will such actions result in any violation of the
provisions of the charter or by-laws of the Company or any of its
subsidiaries or any statute or any order, rule or regulation
known to such counsel of any court or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries
or any of their properties or assets (including, without
limitation, HOLA and the rules and regulations of the OTS); and,
except for the registration of the Stock and the U.S. Stock under
the Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the
Exchange Act and applicable state securities laws in connection
with the purchase and distribution of the Stock and the U.S.
Stock by the International Managers and U.S. Underwriters, no
consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body
is required for the execution, delivery and performance of this
Agreement by the Company and the consummation of the transactions
contemplated hereby;
(v) There are no preemptive or other rights to subscribe
for or to purchase, nor any restriction upon the voting or
transfer of, any shares of the Stock and U.S. Stock pursuant to
the Company's charter or by-laws or any agreement or other
instrument known to such counsel;
(vi) To the best of such counsel's knowledge and other
than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of
its subsidiaries is a party or of which any property or asset of
the Company or any of its subsidiaries is the subject which, if
determined adversely to the Company or any of its subsidiaries,
might have a material adverse effect on the consolidated
financial position, stockholders' equity, results of operations,
business or prospects of the Company and its subsidiaries; and,
to the best of such counsel's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or
threatened by others;
(vii) To the best of such counsel's knowledge, neither the
Company nor any of its subsidiaries is party to or otherwise the
subject of any consent decree, memorandum of understanding,
written agreement or similar supervisory or enforcement agreement
or understanding with the OTS, the FDIC or any other government
authority or agency responsible for the supervision, regulation
or insurance of depository institutions or their holding
companies; and
(viii) The form of certificate used to evidence the Stock
complies in all material respects with all applicable statutory
requirements, with any
<PAGE>
24
applicable requirements of the articles of incorporation and by-
laws of the Company.
In rendering such opinion, such counsel may state that his opinion is
limited to matters governed by the laws of the State of Michigan.
Such counsel shall also have furnished to the Lead Managers a written
statement, addressed to the International Managers and dated such
Delivery Date, in form and substance satisfactory to the Lead Manager,
to the effect that (x) such counsel is General Counsel to the Company
and, as such, has acted as counsel to the Company in connection with
the preparation of the Registration Statements, and (y) based on the
foregoing, no facts have come to the attention of such counsel which
lead him to believe that the Registration Statements, as of their
respective Effective Dates, contained any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary in order to make the statements therein
not misleading, or that the Prospectus contains any untrue statement
of a material fact or omits to state any material fact required to be
stated therein or necessary in order to make the statements therein,
in light of the circumstances under which they were made, not
misleading. The foregoing opinion and statement may be qualified by a
statement to the effect that such counsel does not assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statements or the Prospectus.
(f) With respect to the letter of Grant Thornton LLP delivered
to the Lead Managers concurrently with the execution of this Agreement
(the "initial letter"), the Company shall have furnished to the Lead
Managers a letter (the "bring-down letter") of such accountants,
addressed to the International Managers and dated such Delivery Date
(i) confirming that they are independent public accountants within the
meaning of the Securities Act and are in compliance with the
applicable requirements relating to the qualification of accountants
under Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as
of the date of the bring-down letter (or, with respect to matters
involving changes or developments since the respective dates as of
which specified financial information is given in the Prospectus, as
of a date not more than five days prior to the date of the bring-down
letter), the conclusions and findings of such firm with respect to the
financial information and other matters covered by the initial letter
and (iii) confirming in all material respects the conclusions and
findings set forth in the initial letter.
(g) The Company shall have furnished to the Lead Managers a
certificate, dated such Delivery Date, of its Chairman of the Board
and Chief Executive Officer and its Chief Financial Officer stating
that:
(i) The representations, warranties and agreements of the
Company in Section 1 are true and correct as of such Delivery
Date; the
<PAGE>
25
Company has complied with all its agreements contained herein;
and the conditions set forth in Section 9(a) have been fulfilled;
(ii) (A) Neither the Company nor any of its subsidiaries
has sustained since the date of the latest audited financial
statements included in the Prospectus any loss or interference
with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as
set forth or contemplated in the Prospectus and (B) since such
date there has not been any change in the capital stock or long-
term debt of the Company or any of its subsidiaries or any
material adverse change, or any development involving a
prospective material adverse change, in or affecting the general
affairs, management, financial position, stockholders' equity or
results of operations of the Company and its subsidiaries, other
than as set forth or contemplated in the Prospectus; and
(iii) They have carefully examined the Registration
Statements and the Prospectus and, in their opinion, (A) the
Registration Statements, as of their respective Effective Dates,
and the Prospectus, as of each of the Effective Dates, did not
include any untrue statement of a material fact and did not omit
to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and (B)
since the Effective Date of the Primary Registration Statement,
no event has occurred which should have been set forth in a
supplement or amendment to either of the Registration Statements
or the Prospectus.
(h) Each Selling Stockholder (or the Custodian or one or more
attorneys-in-fact on behalf of such Selling Stockholder) shall have
furnished to the Lead Managers on such Delivery Date a certificate,
dated such Delivery Date, signed by, or on behalf of, such Selling
Stockholder (or the Custodian or one or more such attorneys-in-fact)
stating that the representations, warranties and agreements of such
Selling Stockholder contained herein are true and correct as of such
Delivery Date and that such Selling Stockholder has complied with all
agreements contained herein to be performed by such Selling
Stockholder at or prior to such Delivery Date.
(i) (i) Neither the Company nor any of its subsidiaries shall
have sustained since the date of the latest audited financial
statements included in the Prospectus any loss or interference with
its business from fire, explosion, flood or other calamity, whether or
not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus or (ii) since such date there shall not
have been any change in the capital stock or long-term debt of the
Company or any of its subsidiaries or any change, or any development
involving a prospective change,
<PAGE>
26
in or affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, other than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in clause
(i) or (ii), is, in the judgment of the Lead Manager, so material and
adverse as to make it impracticable or inadvisable to proceed with the
public offering or the delivery of the Stock being delivered on such
Delivery Date on the terms and in the manner contemplated in the
Prospectus.
(j) Subsequent to the execution and delivery of this Agreement
there shall not have occurred any of the following: (i) trading in
securities generally on the New York Stock Exchange or the American
Stock Exchange or in the over-the-counter market, or trading in any
securities of the Company on any exchange or in the over-the-counter
market, shall have been suspended or minimum prices shall have been
established on any such exchange or such market by the Commission, by
such exchange or by any other regulatory body or governmental
authority having jurisdiction, (ii) a banking moratorium shall have
been declared by Federal authorities or authorities in the State of
Michigan, (iii) the United States shall have become engaged in
hostilities, there shall have been an escalation in hostilities
involving the United States or there shall have been a declaration of
a national emergency or war by the United States or (iv) there shall
have occurred such a material adverse change in general economic,
political or financial conditions (or the effect of international
conditions on the financial markets in the United States shall be
such) as to make it, in the judgment of a majority in interest of the
several International Managers, impracticable or inadvisable to
proceed with the public offering or delivery of the Stock being
delivered on such Delivery Date on the terms and in the manner
contemplated in the Prospectus.
(k) The Nasdaq National Market System shall have approved the
Stock for listing, subject only to official notice of issuance and
evidence of satisfactory distribution.
(l) The closing under the U.S. Underwriting Agreement shall have
occurred concurrently with the closing hereunder on such Delivery
Date.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance satisfactory to counsel
for the International Managers and U.S. Underwriters.
10. Indemnification and Contribution.
(a) The Company and the Bank (subject to Section 10(g) below), jointly
and severally, shall indemnify and hold harmless each International Manager, its
officers and employees and each person, if any, who controls any International
Manager within the meaning
<PAGE>
27
of the Securities Act, from and against any loss, claim, damage or liability,
joint or several, or any action in respect thereof (including, but not limited
to, any loss, claim, damage, liability or action relating to purchases and sales
of Stock), to which that International Manager, officer, employee or controlling
person may become subject, under the Securities Act or otherwise, insofar as
such loss, claim, damage, liability or action arises out of, or is based upon,
(i) any untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, either of the Registration Statements
or the Prospectus, or in any amendment or supplement thereto, (ii) the omission
or alleged omission to state in any Preliminary Prospectus, either of the
Registration Statements or the Prospectus, or in any amendment or supplement
thereto, any material fact required to be stated therein or necessary to make
the statements therein not misleading or (iii) any act or failure to act, or any
alleged act or failure to act, by any International Manager in connection with,
or relating in any manner to, the Stock or the offering contemplated hereby, and
which is included as part of or referred to in any loss, claim, damage,
liability or action arising out of or based upon matters covered by clause (i)
or (ii) above (provided that the Company and the Bank shall not be liable in the
case of any matter covered by this clause (iii) to the extent that it is
determined in a final judgment by a court of competent jurisdiction that such
loss, claim, damage, liability or action resulted directly from any such act or
failure to act undertaken or omitted to be taken by such International Manager
through its gross negligence or wilful misconduct), and shall reimburse each
International Manager and each such officer, employee and controlling person
promptly upon demand for any legal or other expenses reasonably incurred by that
International Manager, officer, employee or controlling person in connection
with investigating or defending or preparing to defend against any such loss,
claim, damage, liability or action as such expenses are incurred; provided,
however, that the Company and the Bank shall not be liable in any such case to
the extent that any such loss, claim, damage, liability or action arises out of,
or is based upon, any untrue statement or alleged untrue statement or omission
or alleged omission made in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or in any such amendment or supplement, in reliance
upon and in conformity with the written information furnished to the Company
through the Lead Managers by or on behalf of any International Manager
specifically for inclusion therein and described in Section 10(f); and provided
further that as to any Preliminary Prospectus this indemnity agreement shall not
inure to the benefit of any International Manager, its officers or employees or
any person controlling that International Manager on account of any loss, claim,
damage, liability or action arising from the sale of Stock to any person by that
International Manager if that International Manager failed to send or give a
copy of the Prospectus, as the same may be amended or supplemented, to that
person within the time required by the Securities Act, and the untrue statement
or alleged untrue statement of any material fact or omission or alleged omission
to state a material fact in such Preliminary Prospectus was corrected in the
Prospectus, unless such failure resulted from non-compliance by the Company with
Section 6(c). The foregoing indemnity agreement is in addition to any liability
which the Company and/or the Bank may otherwise have to any International
Manager or to any officer, employee or controlling person of that International
Manager.
(b) The Selling Stockholders, jointly and severally, shall indemnify
and hold harmless each International Manager, its officers and employees and
each person, if any, who
<PAGE>
28
controls any International Manager within the meaning of the Securities Act,
from and against any loss, claim, damage or liability, joint or several, or any
action in respect thereof (including, but not limited to, any loss, claim,
damage, liability or action relating to purchases and sales of Stock), to which
that International Manager, officer, employee or controlling person may become
subject, under the Securities Act or otherwise, insofar as such loss, claim,
damage, liability or action arises out of, or is based upon, (i) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, either of the Registration Statements or the Prospectus,
or in any amendment or supplement thereto, or (ii) the omission or alleged
omission to state in any Preliminary Prospectus, either of the Registration
Statements or the Prospectus, or in any amendment or supplement thereto, any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and shall reimburse each International Manager, its
officers and employees and each such controlling person for any legal or other
expenses reasonably incurred by that International Manager, its officers,
employees or controlling person in connection with investigating or defending or
preparing to defend against any such loss, claim, damage, liability or action as
such expenses are incurred; provided, however, that the Selling Stockholders
shall not be liable in any such case to the extent that any such loss, claim,
damage, liability or action arises out of, or is based upon, any untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, either of the Registration Statements or the
Prospectus or in any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company through the Lead
Managers by or on behalf of any International Manager specifically for inclusion
therein; and provided further, that as to any Preliminary Prospectus this
indemnity agreement shall not inure to the benefit of any International Manager,
its officers or employees or any person controlling that International Manager
on account of any loss, claim, damage, liability or action arising from the sale
of Stock to any person by that International Manager if that International
Manager failed to send or give a copy of the Prospectus, as the same may be
amended or supplemented, to that person within the time required by the
Securities Act, and the untrue statement or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact in such
Preliminary Prospectus was corrected in the Prospectus, unless such failure
resulted from non-compliance by the Company with Section 6(c); and provided
still further, that the aggregate liability of each Selling Stockholder under
this Section 10(b) shall not exceed the amount of net proceeds received by such
Selling Stockholder from the Stock and the U.S. Stock sold by it pursuant to
this Agreement and the U.S. Underwriting Agreement. The foregoing indemnity
agreement is in addition to any liability which the Selling Stockholders may
otherwise have to any International Manager or any officer, employee or
controlling person of that International Manager.
(c) Each International Manager, severally and not jointly, shall
indemnify and hold harmless the Company, its officers and employees, each of its
directors and each person, if any, who controls the Company within the meaning
of the Securities Act, from and against any loss, claim, damage or liability,
joint or several, or any action in respect thereof, to which the Company or any
such director, officer or controlling person may become subject, under the
Securities Act or otherwise, insofar as such loss, claim, damage, liability or
action arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained
<PAGE>
29
in any Preliminary Prospectus, either of the Registration Statements or the
Prospectus, or in any amendment or supplement thereto, or (ii) the omission or
alleged omission to state in any Preliminary Prospectus, either of the
Registration Statements or the Prospectus, or in any amendment or supplement
thereto, any material fact required to be stated therein or necessary to make
the statements therein not misleading, but in each case only to the extent that
the untrue statement or alleged untrue statement or omission or alleged omission
was made in reliance upon and in conformity with the written information
furnished to the Company through the Lead Managers by or on behalf of that
International Manager specifically for inclusion therein and described in
Section 10(f), and shall reimburse the Company and any such director, officer or
controlling person for any legal or other expenses reasonably incurred by the
Company or any such director, officer or controlling person in connection with
investigating or defending or preparing to defend against any such loss, claim,
damage, liability or action as such expenses are incurred. The foregoing
indemnity agreement is in addition to any liability which any International
Manager may otherwise have to the Company or any such director, officer or
controlling person.
(d) Promptly after receipt by an indemnified party under this Section
10 of notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 10, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 10 except to the extent it has
been materially prejudiced by such failure and, provided further, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 10.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After notice
from the indemnifying party to the indemnified party of its election to assume
the defense of such claim or action, the indemnifying party shall not be liable
to the indemnified party under this Section 10 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
the Lead Managers shall have the right to employ counsel to represent jointly
the Lead Managers and those other International Managers and their respective
officers, employees and controlling persons who may be subject to liability
arising out of any claim in respect of which indemnity may be sought by the
International Managers against the Company, the Bank or any Selling Stockholder
under this Section 10 if, in the reasonable judgment of the Lead Manager, it is
advisable for the Lead Managers and those International Managers, officers,
employees and controlling persons to be jointly represented by separate counsel,
and in that event the fees and expenses of such separate counsel shall be paid
by the Company. Each indemnified party, as a condition of the indemnity
agreements contained in Sections 10(a), 10(b) and 10(c), shall use its best
efforts to cooperate with the indemnifying party in the defense of any such
action or claim. No indemnifying party shall (i) without the prior written
consent of the indemnified parties (which consent shall not be unreasonably
withheld),
<PAGE>
30
settle or compromise or consent to the entry of any judgment with respect to any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action,
suit or proceeding, or (ii) be liable for any settlement of any such action
effected without its written consent (which consent shall not be unreasonably
withheld), but if settled with its written consent or if there be a final
judgment of the plaintiff in any such action, the indemnifying party agrees to
indemnify and hold harmless any indemnified party from and against any loss of
liability by reason of such settlement or judgment.
(e) If the indemnification provided for in this Section 10 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 10(a), 10(b) or 10(c) in respect of any loss, claim, damage
or liability, or any action in respect thereof, referred to therein, then each
indemnifying party shall (subject to Section 10(g)), in lieu of indemnifying
such indemnified party, contribute to the amount paid or payable by such
indemnified party as a result of such loss, claim, damage or liability, or
action in respect thereof, (i) in such proportion as shall be appropriate to
reflect the relative benefits received by the Company, the Bank and the Selling
Stockholders on the one hand and the International Managers on the other hand
from the offering of the Stock or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company, the Bank and the Selling Stockholders on
the one hand and the International Managers on the other hand with respect to
the statements or omissions which resulted in such loss, claim, damage or
liability, or action in respect thereof, as well as any other relevant equitable
considerations. The relative benefits received by the Company, the Bank and the
Selling Stockholders on the one hand and the International Managers on the other
hand with respect to such offering shall be deemed to be in the same proportion
as the total net proceeds from the offering of the Stock purchased under this
Agreement (before deducting expenses) received by the Company, the Bank and the
Selling Stockholders, on the one hand, and the total underwriting discounts and
commissions received by the International Managers with respect to the shares of
the Stock purchased under this Agreement, on the other hand, bear to the total
gross proceeds from the offering of the shares of the Stock under this
Agreement, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to whether the
untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact relates to information supplied by the
Company, the Bank, the Selling Stockholders or the International Managers, the
intent of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission. For purposes of
the preceding two sentences, the net proceeds deemed to be received by the
Company shall be deemed to be also for the benefit of the Bank and information
supplied by the Company shall also be deemed to have been supplied by the Bank.
The Company, the Bank, the Selling Stockholders and the International Managers
agree that it would not be just and equitable if contributions pursuant to this
Section 10(e) were to be determined by pro rata allocation (even if the
International Managers were treated as one entity for such purpose) or by any
other method
<PAGE>
31
of allocation which does not take into account the equitable considerations
referred to herein. The amount paid or payable by an indemnified party as a
result of the loss, claim, damage or liability, or action in respect thereof,
referred to above in this Section 10(e) shall be deemed to include, for purposes
of this Section 10(e), any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 10(e), no International
Manager shall be required to contribute any amount in excess of the amount by
which the total price at which the Stock underwritten by it and distributed to
the public was offered to the public exceeds the amount of any damages which
such International Manager has otherwise paid or become liable to pay by reason
of any untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The International
Managers' obligations to contribute as provided in this Section 10(e) are
several in proportion to their respective underwriting obligations and not
joint.
(f) The International Managers severally confirm that the statements
with respect to the public offering of the Stock set forth on the cover page of,
and under the caption "Underwriting" in, the Prospectus are correct and
constitute the only information furnished in writing to the Company by or on
behalf of the International Managers specifically for inclusion in the
Registration Statements and the Prospectus.
(g) Notwithstanding any other provision of this Section 10, in no
event shall the Bank be liable for or obligated to pay any amounts pursuant to
Section 10(a), (b), (c) or (e) above to the extent such payments would at the
time thereof exceed the applicable limitations set forth in Section 23A of the
Federal Reserve Act.
11. Defaulting International Managers.
If, on either Delivery Date, any International Manager defaults in the
performance of its obligations under this Agreement, the remaining non-
defaulting International Managers shall be obligated to purchase the Stock which
the defaulting International Manager agreed but failed to purchase on such
Delivery Date in the respective proportions which the number of shares of the
Firm Stock set forth opposite the name of each remaining non-defaulting
International Manager in Schedule 1 hereto bears to the total number of shares
of the Firm Stock set forth opposite the names of all the remaining non-
defaulting International Managers in Schedule 1 hereto; provided, however, that
the remaining non-defaulting International Managers shall not be obligated to
purchase any of the Stock on such Delivery Date if the total number of shares of
the Stock which the defaulting International Manager or International Managers
agreed but failed to purchase on such date exceeds 9.09% of the total number of
shares of the Stock to be purchased on such Delivery Date, and any remaining
non-defaulting International Manager shall not be obligated to purchase more
than 110% of the number of shares of the Stock which it agreed to purchase on
such Delivery Date pursuant to the terms of Section 3. If the foregoing
maximums are exceeded, the remaining non-defaulting International Managers, or
those other international managers satisfactory to the Lead Managers who so
agree, shall have the right, but shall not be
<PAGE>
32
obligated, to purchase, in such proportion as may be agreed upon among them, all
the Stock to be purchased on such Delivery Date. If the remaining International
Managers or other international managers satisfactory to the Lead Managers do
not elect to purchase the shares which the defaulting International Manager or
International Managers agreed but failed to purchase on such Delivery Date, this
Agreement (or, with respect to the Second Delivery Date, the obligation of the
International Managers to purchase, and of the Company and the Selling
Stockholders to sell, the Option Stock) shall terminate without liability on the
part of any non-defaulting International Manager, the Company or the Selling
Stockholders, except that the Company will continue to be liable for the payment
of expenses to the extent set forth in Sections 8 and 13. As used in this
Agreement, the term "International Manager" includes, for all purposes of this
Agreement unless the context requires otherwise, any party not listed in
Schedule 1 hereto who, pursuant to this Section 11, purchases Firm Stock which
a defaulting International Manager agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting International
Manager of any liability it may have to the Company and the Selling Stockholders
for damages caused by its default. If other international managers are
obligated or agree to purchase the Stock of a defaulting or withdrawing
International Manager, either the Lead Managers or the Company may postpone the
Delivery Date for up to seven full business days in order to effect any changes
that in the opinion of counsel for the Company or counsel for the International
Managers may be necessary in the Registration Statement, the Prospectus or in
any other document or arrangement.
12. Termination. The obligations of the International Managers
hereunder may be terminated by the Lead Managers by notice given to and received
by the Company and the Selling Stockholders prior to delivery of and payment for
the Firm Stock if, prior to that time, any of the events described in Sections
9(i) or 9(j) shall have occurred or if the International Managers shall decline
to purchase the Stock for any reason permitted under this Agreement.
13. Reimbursement of International Managers' Expenses. If (a) the
Company or any Selling Stockholder shall fail to tender the Stock for delivery
to the International Managers for any reason permitted under this Agreement, or
(b) the International Managers shall decline to purchase the Stock for any
reason permitted under this Agreement (including the termination of this
Agreement pursuant to Section (12), the Company and the Selling Stockholders
shall reimburse the International Managers for the fees and expenses of their
counsel and for such other out-of-pocket expenses as shall have been incurred by
them in connection with this Agreement and the proposed purchase of the Stock,
and upon demand the Company and the Selling Stockholders shall pay the full
amount thereof to the Lead Manager. If this Agreement is terminated pursuant to
Section 11 by reason of the default of one or more International Managers,
neither the Company nor any Selling Stockholder shall be obligated to reimburse
any defaulting International Manager on account of those expenses.
14. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
<PAGE>
33
(a) if to the International Managers, shall be delivered or sent
by mail, telex or facsimile transmission to Lehman Brothers Inc.,
Three World Trade Center, New York, New York, 10285, Attention:
Syndicate Department (Fax: 212-528-8822);
(b) if to the Company or to the Bank, shall be delivered or sent
by mail, telex or facsimile transmission to the address of the Company
set forth in the Primary Registration Statement, Attention: _________
(Fax: _________); and
(c) if to any Selling Stockholder, shall be delivered or sent by
mail, telex or facsimile transmission to such Selling Stockholder at
the address set forth on Schedule 2 hereto;
provided, however, that any notice to an International Manager pursuant to
Section 10(e) shall be delivered or sent by mail, telex or facsimile
transmission to such International Manager at its address set forth in its
acceptance telex to the Lead Manager, which address will be supplied to any
other party hereto by the Lead Managers upon request. Any such statements,
requests, notices or agreements shall take effect at the time of receipt
thereof. The Company and the Selling Stockholders shall be entitled to act and
rely upon any request, consent, notice or agreement given or made on behalf of
the International Managers by Lehman Brothers Inc. and the Company and the
International Managers shall be entitled to act and rely upon any request,
consent, notice or agreement given or made on behalf of the Selling Stockholders
by the Custodian.
15. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the International Managers, the
Company, the Selling Stockholders and their respective personal representatives
and successors. This Agreement and the terms and provisions hereof are for the
sole benefit of only those persons, except that (A) the representations,
warranties, indemnities and agreements of the Company and the Selling
Stockholders contained in this Agreement shall also be deemed to be for the
benefit of the officers and employees of each International Manager and the
person or persons, if any, who control each International Manager within the
meaning of Section 15 of the Securities Act and (B) the indemnity agreement of
the International Managers contained in Section 10(c) of this Agreement shall be
deemed to be for the benefit of directors, officers and employees of the Company
and any person controlling the Company within the meaning of Section 15 of the
Securities Act. Nothing in this Agreement is intended or shall be construed to
give any person, other than the persons referred to in this Section 15, any
legal or equitable right, remedy or claim under or in respect of this Agreement
or any provision contained herein.
16. Survival. The respective indemnities, representations,
warranties and agreements of the Company, the Bank, the Selling Stockholders and
the International Managers contained in this Agreement or made by or on behalf
of them, respectively, pursuant to this Agreement, shall survive the delivery of
and payment for the Stock and shall remain in full force
<PAGE>
34
and effect, regardless of any investigation made by or on behalf of any of them
or any person controlling any of them.
17. Definition of the Terms "Business Day" and "Subsidiary". For
purposes of this Agreement, (a) "business day" means any day on which the New
York Stock Exchange, Inc. is open for trading and (b) "subsidiary" has the
meaning set forth in Rule 405 of the Rules and Regulations.
18. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of New York.
19. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
20. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
<PAGE>
35
If the foregoing correctly sets forth the agreement among the Company,
the Bank, the Selling Stockholders and the U.S. Underwriters, please indicate
your acceptance in the space provided for that purpose below.
Very truly yours,
FLAGSTAR BANCORP, INC.
By
----------------------------------------
[name]
FLAGSTAR BANK, FSB
By
----------------------------------------
[name]
The Selling Stockholders named in Schedule 2 to
this Agreement
By
----------------------------------------
Attorney-in-Fact
Accepted:
Lehman Brothers International
PaineWebber International
Roney & Co.
For themselves as U.S. Underwriters and
as Representatives of the several
U.S. Underwriters named in Schedule 1 hereto
By Lehman Brothers Inc.
By
----------------------------------
Authorized Representative
<PAGE>
SCHEDULE 1
Number of
Shares of
U.S. Underwriter Firm U.S Stock
--------------------- ----------------
Lehman Brothers Inc. . . . . . . . . . . . . .
Roney & Co . . . . . . . . . . . . . . . . . .
PaineWebber Incorporated . . . . . . . . . . .
[ to be completed ]
Total. . . . . . . . . . . . . . . . . . ..
<PAGE>
SCHEDULE 2
Number of Shares
Name and address of Selling Stockholder of Firm U.S. Stock
- --------------------------------------- -------------------
[ to come from Company ]
Total ....................................................... ==========
<PAGE>
EXHIBIT 1.2
8,050,000 Shares
FLAGSTAR BANCORP, INC.
Common Stock
Form of
Custody Agreement for Selling Stockholder
-----------------------------------------
_________ __, 1997
[Name and Address of Custodian]
Dear Sirs:
There are delivered herewith to you as custodian (i) certificates (the
"Certificates") representing ______ shares of Common Stock, par value $0.01 per
share (the "Common Stock"), of Flagstar Bancorp, Inc., a Michigan corporation
(the "Company"), which the undersigned wishes to sell (the "Offered Stock"), as
set forth in the fourth paragraph of this Custody Agreement, and (ii) stock
powers (the "Stock Powers") duly executed in blank by the undersigned with
respect to the Offered Stock with signatures guaranteed by a national bank or a
member firm of the New York Stock Exchange, Inc. The Certificates are to be
held by you as custodian for the account of the undersigned and are to be
disposed of by you in accordance with this Custody Agreement.
Prior to the execution and delivery of this Custody Agreement, the
undersigned has executed a Power of Attorney (the "Power of Attorney")
authorizing the attorneys-in-fact or any of them (the "Attorneys-in-Fact") to
act on [his/her] behalf in connection with the sale of up to the number of
shares of Common Stock indicated below to be sold by the undersigned and for
that purpose to, inter alia, (i) execute and deliver this Custody Agreement and
(ii) enter into an Underwriting Agreement (the "Underwriting Agreement") among
the Company, Flagstar Bank, FSB, certain stockholders of the Company (including
the undersigned, the "Selling Stockholders"), and Lehman Brothers Inc.,
PaineWebber Incorporated and Roney & Co. (collectively, the "Representatives"),
as representatives of the Underwriters, relating to a proposed public offering
of up to 8,050,000 shares of Common Stock. Unless otherwise defined herein,
terms defined in the Power of Attorney are used herein as defined therein.
<PAGE>
A-2
The following Certificates for Common Stock are enclosed herewith:
<TABLE>
<CAPTION>
Number of shares
of Common Stock
Serial Number represented by
of Certificate each Certificate
<S> <C>
---------------- -----------------
---------------- -----------------
---------------- -----------------
---------------- -----------------
---------------- -----------------
---------------- -----------------
Total...........
=================
</TABLE>
You are authorized and directed to hold the Certificates and the Stock Powers
in your custody, and (i) to cause the number of shares of [Stockholder Name]
Stock which are to be sold by the undersigned pursuant to the Underwriting
Agreement to be transferred on the books of the Company into such names as the
Attorneys-in-Fact shall have instructed you, (ii) to cause to be issued, against
surrender of the certificates representing such shares of [Stockholder Name]
Stock, new certificates for such shares of Common Stock registered in such names
and in such denominations as the Attorneys-in-Fact shall have instructed you,
(iii) to purchase all stock transfer tax stamps necessary, if any, in connection
with the transfer of such shares and upon the instructions of the Attorneys-in-
Fact, and (iv) to deliver such new certificates to the Representatives for the
accounts of the several Underwriters, as the case may be, pursuant to the
Underwriting Agreement, against payment to the Company therefor, on behalf of
the undersigned, in accordance with the Underwriting Agreement. The Attorneys-
in-Fact will notify you, at least two full business days prior to each Delivery
Date (as defined in the Underwriting Agreement), of the names and denominations
in which the new certificates are to be issued pursuant to this paragraph.
On or after each Delivery Date, the Custodian shall, as instructed by the
Attorneys-in-Fact, return to the undersigned certificates representing the
number of shares of Common Stock, if any, deposited herewith, which are in
excess of the number of shares sold by the undersigned pursuant to the
Underwriting Agreement, as instructed by the Attorneys-in-Fact. Any new
certificates representing such excess number of shares of Common Stock shall
bear such restrictive legends, if any, that were borne by the Certificates
representing the Common Stock delivered herewith.
The authority granted and conferred hereby is subject to and in consideration
of the interests of the Company, the Underwriters and the other Selling
Stockholders. Accordingly,
<PAGE>
A-3
the Certificates deposited herewith and this Custody Agreement and your
authority hereunder are subject to said interests, and this Custody Agreement
and your authority hereunder are irrevocable by the undersigned and shall not be
terminated or affected by any act of the signatory or, to the extent permitted
by applicable law, whether by the subsequent death, incapacity, disability or
incompetence, liquidation or dissolution of the Selling Stockholder, or by the
occurrence of any other event or events, and, if after the execution hereof any
such event or events shall occur before the completion of the transactions
contemplated by the Underwriting Agreement and this Custody Agreement, you are
nevertheless authorized and directed to deal with the Certificates deposited
hereunder in accordance with the terms and conditions hereof, as if such event
or events had not occurred, regardless of whether or not you shall have received
notice thereof.
Notwithstanding the foregoing, if the First Delivery Date under the
Underwriting Agreement shall not have occurred prior to _______ __, 1997 or if
the Underwriting Agreement is earlier terminated pursuant to its terms, then,
from and after such date, the undersigned shall have the power to terminate this
Custody Agreement by giving written notice to the Custodian that this Custody
Agreement has been terminated, subject, however, to all lawful action taken by
the Custodian pursuant to this Custody Agreement prior to the actual receipt of
such notice.
Until payment of the purchase price for the shares of Common Stock to be sold
by the undersigned pursuant to the Underwriting Agreement has been made in the
amount and form provided herein and in the Underwriting Agreement, the
undersigned shall remain the owner of the shares of Common Stock represented by
the Certificates deposited herewith and shall have the right to vote such shares
and to receive all dividends and distributions thereon (if any).
You shall be entitled to act and rely upon any statement, request, notice or
instructions respecting this Custody Agreement given to you by the Attorneys-in-
Fact.
It is understood that you assume no responsibility or liability to any person
or undertake to take any action other than as set forth herein, and the
undersigned agrees to indemnify you and to hold you harmless with respect to
anything done by you in good faith in accordance with the foregoing instructions
and agrees that you may consult with counsel of your own choice (who may be
counsel for the Company) and that you shall have full and complete authorization
and protection for any action taken or suffered by you hereunder in good faith
and in accordance with the opinion of such counsel.
The undersigned represents, warrants and agrees that he has full right, power
and authority to execute and deliver this Custody Agreement, the Power of
Attorney and the Underwriting Agreement, and to sell the Offered Stock pursuant
to this Custody Agreement and the Underwriting Agreement, and upon payment for
and delivery of the Offered Stock in the manner provided in the Underwriting
Agreement, the Underwriters will acquire all rights of the undersigned in the
Offered Stock and also will acquire their interest in the Offered Stock free of
any adverse claim (within the meaning of the Uniform Commercial Code as in
effect in the State of New York), assuming that the Underwriters purchase the
Offered Stock in good faith and without notice of any adverse claim.
<PAGE>
A-4
This Custody Agreement is for the benefit of, and may be relied upon by, the
undersigned, the Company and its counsel, the Representatives and the
Underwriters and their agents and counsel, and the Custodian. This Custody
Agreement is binding upon the undersigned, the Custodian and the Company and
their respective successors and assigns. Nothing in this Custody Agreement is
intended or shall be construed to give any person other than the persons
mentioned in the preceding two sentences any legal or equitable rights, remedies
or claims under or in respect of this Custody Agreement or any provision
contained herein.
THIS CUSTODY AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.
The undersigned will provide you with such evidence of the undersigned's
authority as you may reasonably request.
Please acknowledge your acceptance of this Custody Agreement as custodian and
receipt of the Certificates and the Stock Powers deposited herewith by executing
and returning to the undersigned the enclosed copy of this Custody Agreement
with the attached Acknowledgment and Receipt completed and executed at the
following address:
________________________________________________
________________________________________________
________________________________________________
Attn: ___________________________________________
Dated: ___________ __, 1997
Very truly yours,
____________________________________
[Name of Selling Stockholder]
<PAGE>
ACKNOWLEDGEMENT AND RECEIPT
[Name], [title] of [name of Custodian], as custodian, acknowledges acceptance
of the duties of custodian under the foregoing Custody Agreement and receipt of
the Certificates and the Stock Powers referred to therein.
Dated: ________ __, 1997
____________________________________
[Name of Custodian],
as Custodian
<PAGE>
ACKNOWLEDGEMENT AND RECEIPT
Flagstar Bancorp, Inc. acknowledges acceptance of the duties conferred upon it
in the foregoing Custody Agreement. [NECESSARY IN THE ABSENCE OF PRE-OFFERING
STOCK OPTIONS?]
Dated: _________ __, 1997
FLAGSTAR BANCORP, INC.
By_________________________________
Title:
<PAGE>
DEFINITIONS
The term "associate," as used throughout the Power of Attorney, means (a) any
corporation or organization (other than the Company or any of its subsidiaries)
of which you are an officer, director or partner or of which you are, directly
or indirectly, the beneficial owner of 10% or more of any class of equity
securities, (b) any trust or other estate in which you have a substantial
beneficial interest or as to which you serve as trustee or in a similar
capacity, (c) your spouse, (d) any relative of your spouse or any relative of
yours who has the same home as you or who is a director or officer or key
executive of the Company or any of its subsidiaries, or (e) any partner,
syndicate member or person with whom you have agreed to act in concert with
respect to the acquisition, holding, voting or disposition of shares of the
Company's securities.
The term "material," when used in the Power of Attorney to qualify a
requirement for the furnishing of information as to any subject, limits the
information required to those matters as to which there is a substantial
likelihood that a reasonable investor would attach importance in determining
whether to purchase the Common Stock of the Company.
The term "material relationship" has not been defined by the Securities and
Exchange Commission. However, the Commission has indicated that it will
probably construe as a "material relationship" any relationship which tends to
prevent arms-length bargaining in dealings with a company, whether arising from
a close business connection or family relationship, a relationship of control or
otherwise. It seems prudent, therefore to consider that you would have such a
relationship, for example, with any organization of which you are an officer,
director, trustee or partner or in which you own, directly or indirectly, 10% or
more of the outstanding voting stock, or in which you have some other
substantial interest, and with any person or organization with whom you have, or
with whom any relative or spouse (or any other person or organization as to
which you have any of the foregoing other relationships) has, a contractual
relationship.
The term "beneficially," when used in connection with the ownership of
securities, means (a) any interest in a security which entitles you to any of
the rights or benefits of ownership even though you may not be the owner of
record or (b) securities owned by you directly or indirectly, including those
held by you for your own benefit (regardless of how registered) and securities
held by others for your benefit (regardless of how registered), such as by
custodians, brokers, nominees, pledges, etc., and including securities held by
an estate or trust in which you have an interest as legatee or beneficiary,
securities owned by a partnership of which you are a partner, securities held by
a personal holding company of which you are a stockholder, etc., and securities
held in the name of your spouse, minor children and any relative (sharing the
same home). A "beneficial owner" of a security includes any person who,
directly or indirectly, through any contract, arrangement, understanding,
relationship, or otherwise has or shares:
<PAGE>
B-2
(1) Voting power which includes the power to vote, or to direct the
voting of, such security; and/or
(2) Investment power which includes the power to dispose, or to
direct the disposition of such security.
A person is also deemed to be the beneficial owner of a security, if that person
has the right to acquire beneficial ownership of such security, as defined in
the preceding sentence at any time within sixty days, including but not limited
to, any right to acquire:
(i) through the exercise of any option, warrant or right; or
(ii) through the conversion of a security; or
(iii) pursuant to the power to revoke a trust, discretionary account,
or similar arrangement.
<PAGE>
EXHIBIT 1.3
-----------
8,050,000 Shares
FLAGSTAR BANCORP, INC.
Common Stock
Form of
Selling Stockholder's Power of Attorney
____________ __, 1997
Lehman Brothers Inc.
PaineWebber Incorporated
Roney & Co.,
As Representatives of each of the
several Underwriters named in
the Underwriting Agreement
described herein,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
The undersigned stockholder of Flagstar Bancorp, Inc., a Michigan
corporation (the "Company"), understands that the Company has filed a
registration statement (the "Registration Statement") under the Securities Act
of 1933, as amended (the "Act"), in connection with the proposed sale by certain
stockholders of the Company (including the undersigned) (collectively, the
"Selling Stockholders") of 5,850,000 shares (the "Firm Stock") of the Common
Stock, par value $0.01 per share (the "Common Stock"), of the Company to the
underwriters named in the Underwriting Agreement referred to below (the
"Underwriters"), represented by Lehman Brothers Inc., PaineWebber Incorporated
and Roney & Co. (collectively, the "Representatives"), who propose to offer such
shares to the public. In addition, the Selling Stockholders propose to grant to
the Underwriters an option to purchase additional shares of Common Stock
pursuant to the Underwriting Agreement referred to below (the "Option Stock").
The shares of the Firm Stock and the Option Stock are hereinafter collectively
referred to as the "Stock."
The undersigned desires to sell up to _______ shares of Common Stock to the
Underwriters, all of which shares have been issued by the Company and are
currently owned by the undersigned.
<PAGE>
2
1. In connection with the foregoing, the undersigned hereby makes,
constitutes and appoints each of ___________________ and ___________________, or
any one of them or their successors, with full power of substitution, the true
and lawful attorneys-in-fact of the undersigned (said persons, or any one of
them or their successors, being hereinafter referred to as the "Attorneys-in-
Fact"), each one of them with full power and authority, in the name and on
behalf of the undersigned, to do and perform the following as fully as could the
undersigned if personally present and acting:
(a) To execute and deliver a Custody Agreement, in substantially the
form attached hereto as Exhibit A, pursuant to which (i) stock certificates
representing _________ shares of Common Stock owned as of the date hereof
to be sold on the First Delivery Date (as defined in the Underwriting
Agreement) (the "[Stockholder Name] Firm Stock"), (ii) stock certificates
representing up to _________ shares of Common Stock owned as of the date
hereof to be sold on the Second Delivery Date (as defined in the
Underwriting Agreement) (the "[Stockholder Name] Option Stock") and (iii)
stock powers (undated, in blank) with respect to both the [Stockholder
Name] Firm Stock and the [Stockholder Name] Option Stock (together, the
"[Stockholder Name] Stock") are being or will be delivered to the Custodian
(as defined in the Custody Agreement).
(b) To sell to the Representatives or the Underwriters the
[Stockholder Name] Firm Stock at a gross purchase price per share (the
"Purchase Price") (not to be less than $______ per share) and subject to
underwriting discounts and commissions (not to be in excess of 7% of such
Purchase Price per share), as the Attorneys-in-Fact, in his or their sole
discretion shall determine pursuant to and as provided in the Underwriting
Agreement referred to below; to sell to the Representatives or the
Underwriters up to ______ shares of the [Stockholder Name] Option Stock at
a purchase price per share equal to that which is to be paid by the
Underwriters for the Firm Stock.
(c) For the purpose of effecting such sale, to execute and deliver an
Underwriting Agreement (the "Underwriting Agreement"), in substantially the
form of the draft thereof included as Exhibit ____ to the Registration
Statement, among the Company, Flagstar Bank, FSB, the Selling Stockholders
and the Representatives, as representatives of the Underwriters, with such
modifications therein as such Attorneys-in-Fact, in his or their sole
discretion, shall approve, such approval to be conclusively evidenced by
such execution and delivery, and to execute and deliver all documents on
behalf of the undersigned required or contemplated by the Underwriting
Agreement.
(d) To take for the undersigned all steps deemed necessary or
advisable by the Attorneys-in-Fact in connection with the registration of
the [Stockholder Name] Stock under the Act, including, without limitation,
filing the Registration Statement and any amendment thereto, requesting
acceleration of effectiveness of the Registration Statement and such other
steps as the Attorneys-in-Fact may in his or their sole discretion deem
necessary or advisable.
<PAGE>
3
(e) To make, acknowledge, verify and file on behalf of the
undersigned applications, consents to service of process and such other
undertakings or reports as may be required by law with state commissioners
or officers administering state securities laws, and to take any other
action required to facilitate the qualification of the Stock under the blue
sky or securities laws of the jurisdictions in which the Stock is to be
offered.
(f) To give such orders and instructions to the Underwriters, the
Custodian, the Company or to ____________, as transfer agent for the Common
Stock, as the case may be, as the Attorneys-in-Fact may in his or their
sole discretion determine are necessary or desirable in connection with the
transactions contemplated by the Underwriting Agreement and this Power of
Attorney, including, without limitation, with respect to (i) the transfer
on the books of the Company of the certificates representing the
[Stockholder Name] Stock (including the names in which the new certificates
are to be issued and the denominations thereof), (ii) the delivery to or
for the account of the Representatives or the Underwriters, as the case may
be, of the certificates representing the shares of [Stockholder Name] Stock
to be sold on each Delivery Date (as defined in the Underwriting Agreement)
against receipt by the Attorneys-in-Fact, on behalf of the undersigned, of
a check for the purchase price therefor and (iii) instructions to make
payment of any costs and expenses payable by the undersigned (which are not
otherwise agreed to be paid by the Company, if any).
(g) To retain legal counsel to act on behalf of the undersigned and
the Attorneys-in-Fact in connection with any and all matters referred to
herein, which counsel may also represent the Company.
(h) To accept and acknowledge receipt of any and all documents
delivered or deliverable to the undersigned as a Selling Stockholder, and
any and all checks, drafts or funds payable to the undersigned as a result
of the sale of shares of [Stockholder Name] Stock pursuant to the
Underwriting Agreement.
(i) To make, execute, acknowledge and deliver all such other
contracts, orders, receipts, notices, requests, instructions, certificates,
letters, written consents and other writings, including, without
limitation, communications to the Securities and Exchange Commission (the
"Commission") and to various state securities administrators or
commissions, amendments to the Underwriting Agreement and the Custody
Agreement, and certificates from the undersigned, as a Selling Stockholder,
called for in the conditions sections of the Underwriting Agreement on each
Delivery Date (as defined therein), and in general to do all things and to
take all actions which the Attorneys-in-Fact, in his or their sole
discretion may consider necessary or proper in connection with or to carry
out the aforesaid sale of shares of [Stockholder Name] Stock to the
Underwriters.
<PAGE>
4
2. This Power of Attorney and all authority conferred hereby are
granted and conferred subject to and in consideration of the interests of and
for the benefit of the Underwriters and the other Selling Stockholders, and in
consideration of those interests, and for the purpose of completing the
transactions contemplated by the Underwriting Agreement and this Power of
Attorney, this Power of Attorney and all authority conferred hereby shall be
irrevocable and shall not be terminated by any act of the undersigned or, to the
extent permitted by applicable law, upon the occurrence of any event or events
which otherwise would result in a revocation or termination of this Power of
Attorney and the authority conferred hereby (including, without limitation, the
subsequent disability or incompetence of the undersigned, the liquidation or
dissolution of the undersigned or the termination of any trust or estate for
which the undersigned is acting as a fiduciary). If any such event or events
shall occur before the completion of the transactions contemplated by the
Underwriting Agreement and this Power of Attorney, the Attorneys-in-Fact
nevertheless shall be authorized and directed to complete all such transactions
as if such liquidation, termination or dissolution or such other event or events
had not occurred and regardless of notice thereof.
Notwithstanding the foregoing, if the First Delivery Date shall not
have occurred prior to _________ __, 1997 or if the Underwriting Agreement is
earlier terminated pursuant to its terms, then, from and after such date, the
undersigned shall have the power to revoke all authority hereby conferred by
giving written notice to the Attorneys-in-Fact that this Power of Attorney has
been terminated, subject, however, to all lawful action taken by either or both
Attorneys-in-Fact pursuant to this Power of Attorney prior to the actual receipt
of such notice.
3. Each Attorney-in-Fact shall have full power to make and substitute
any Attorney-in-Fact in his place and stead, and the undersigned hereby ratifies
and confirms all that the Attorneys-in-Fact or such substitute or substitutes
shall do by virtue of this Power of Attorney. All actions hereunder may be
taken by any one of the persons named herein as Attorneys-in-Fact or their
respective substitutes. In the event of the death or incapacity of any
Attorney-in-Fact, the remaining Attorneys-in-Fact shall appoint a substitute
therefor. The term "Attorneys-in-Fact" as used herein shall include their
respective substitutes.
4. The undersigned hereby represents, warrants and agrees that:
(a) The undersigned, having full right, power and authority to do so,
has duly executed and delivered this Power of Attorney.
(b) The undersigned acknowledges that its execution and delivery of
this Power of Attorney will authorize the Attorneys-in-Fact to execute and
deliver in the name of and on behalf of the undersigned the Custody
Agreement, which will contain such modifications as the Attorneys-in-Fact
in his or their sole discretion shall determine.
(c) The undersigned acknowledges that its execution and delivery of
this Power of Attorney will authorize the Attorneys-in-Fact to execute and
deliver in the name of and on behalf of the undersigned the Underwriting
Agreement, which will contain such
<PAGE>
5
additions to and changes in the form of the draft of the Underwriting
Agreement included as Exhibit ____ to the Registration Statement as the
Attorneys-in-Fact in his or their sole discretion shall determine, subject
to subparagraph (b) of paragraph 1 hereof. The undersigned has carefully
reviewed such form of the Underwriting Agreement, and the undersigned
represents and warrants hereby that each representation and warranty
contained in Section 2 of the Underwriting Agreement is true and correct as
to the undersigned and will also be true and correct as of each Delivery
Date (as defined in the Underwriting Agreement). In addition, the
undersigned agrees to perform every agreement which such form of
Underwriting Agreement contemplates being performed by the undersigned as a
Selling Stockholder.
(d) The undersigned has carefully reviewed the Registration Statement
[as amended by Pre-Effective Amendment No. 1 thereto...] and will carefully
review each additional amendment thereto upon receipt thereof from the
Company and the undersigned hereby represents and warrants that except as
set forth in paragraph 9 below:
(1) The information relating to the undersigned which is set
forth in each final prospectus relating to the Registration Statement
("Prospectus") under the section captioned "Selling Stockholders" is,
and will on each Delivery Date (as defined in the Underwriting
Agreement) be, completely and accurately set forth; and
(2) Except as is and will be fully and accurately set forth in
the Registration Statement and in each Prospectus, neither the
undersigned nor, to the undersigned's best knowledge, any of the
undersigned's associates/1/ (A) has an adverse interest to the Company
in any pending legal or administrative proceeding, (B) is, has been or
is proposed to be a party to any transaction or contract involving the
Company which was performed, or is to be performed, in whole or in
part, on or after the date hereof, or is a member of the immediate
family of any such party or (C) has a material relationship/2/ or
holds a position or office with the Company or has a material
relationship with any of its officers or directors (or has had any
such relationship at any time since ______ __, 19__).
(e) Except as indicated in paragraph 9 below, neither the undersigned
nor, to the best of the undersigned's knowledge, any associate/3/ of the
undersigned is affiliated with any member of the National Association of
Securities Dealers, Inc. or any firm directly or indirectly engaged in the
securities business as a broker or dealer, as (i) an employee acting in any
capacity including that of an officer or registered representative, (ii) a
- --------------------
1. See Exhibit B attached hereto for certain definitions.
2. See Exhibit B attached hereto for certain definitions.
3. See Exhibit B attached hereto for certain definitions.
<PAGE>
6
director or partner, or (iii) an equity investor or debt investor. (You
need not include or disclose investments in publicly held corporations
which in turn have investments in firms in the securities business if your
investment in the publicly held corporation is of the same class of
security as is publicly held and does not exceed 5% of such class.)
(f) The undersigned has not distributed and will not distribute any
prospectus or other offering material in connection with the offering and
sale of the Stock other than a preliminary prospectus contained in the
Registration Statement and the Prospectuses or other material permitted by
the Act.
5. (a)(1) The number of shares of Common Stock owned beneficially/4/
by the undersigned as of the date hereof is as set forth below:
Common Stock. . . . . . . . . . . . . . . _______ shares.
(2) Each person or class of persons to whom the undersigned has sold
any shares of Common Stock of the Company since _____ __, 199_, or to whom the
undersigned is committed to sell shares of Common Stock of the Company in the
future other than the Underwriters, is named below, along with the circumstances
of each such sale:
<TABLE>
<CAPTION>
Name Circumstances/5/
---- -------------
<S> <C>
------------------------- -----------------------
------------------------- -----------------------
------------------------- -----------------------
</TABLE>
(b) The undersigned is not acting in a fiduciary capacity or as a
nominee, custodian or agent in selling shares, except as indicated in paragraph
9 below.
6. The undersigned hereby authorizes the Attorney-in-Fact to furnish
the information concerning the undersigned which is set forth in this Power of
Attorney to the Commission, to the Underwriters, to the National Association of
Securities Dealers, Inc. and to the Company for use by them in connection with
the offering of the Stock and the preparation of the Registration Statement and
the Prospectuses. The undersigned represents and warrants to the Company, the
Underwriters, the other Selling Stockholders and their respective counsel that
such information is true and correct, and agrees to notify the Attorney-in-Fact
immediately if there is any change in any of such information prior to the
effective date of the Registration Statement. You and all of such persons and
firms may consider that there has been no such change unless advised to the
contrary in writing.
- ----------------------
4. Include shares issuable upon exercise of currently exercisable stock
options, if any.
5. Include consideration received or to be received, date of sale and number
of shares sold.
<PAGE>
7
7. Each Attorney-in-Fact may act upon any instrument or other writing
believed by him to be genuine and to be signed or presented or caused to be sent
by the proper person. The undersigned hereby agrees to indemnify and hold the
Attorneys-in-Fact, jointly and severally, free and harmless from and against any
and all liabilities, costs, damages, judgments, attorneys' fees and
disbursements, expenses, losses or liabilities of any kind or nature which the
Attorneys-in-Fact may incur or sustain as a result of any action taken by them
in good faith hereunder.
8. It is understood that the Attorneys-in-Fact shall serve entirely
without compensation, except as expressly provided in the foregoing paragraph 7.
9. EXCEPTIONS TO ANY OF THE ABOVE:
10. THIS POWER OF ATTORNEY SHALL CONSTITUTE AN INSTRUMENT UNDER SEAL
AND BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK.
11. The undersigned hereby ratifies and confirms all that the
aforesaid Attorneys-in-Fact shall do by virtue of these presents.
Dated: ___________ __, 1997
Very truly yours,
------------------------------------
[NAME OF SELLING STOCKHOLDER]
Residence:
----------------------------
--------------------------------------
Telephone No.:
-----------------------
Number of shares of Stock to be sold:
--------------
<PAGE>
8
SUBSCRIBED AND SWORN to
before me this _____ day
of _______________________, 1997
- ---------------------------------------------
Notary Public
[Notarial Seal]
My commission expires:
- -------------------------
<PAGE>
Exhibit 10.1(a)
FORM OF
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective as of , 1997 (the "Effective Date"), by
and between Flagstar Bancorp, Inc. (the "Company") and (the "Employee").
WHEREAS, the Company wishes to assure retention of the services of the
Employee for the period provided in the Agreement; and
WHEREAS, the Employee is willing to serve in the employ of the Company for
said period.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed as the of the Company. The
Employee shall render such administrative and management services for the
Company as are currently rendered and as are customarily performed by persons
situated in a similar executive capacity. The Employment shall also promote,
by entertainment or otherwise, as and to the extent permitted by law, the
business of the Company. The Employee's other duties shall be such as the
Board of Directors of the Company ("Board") may from time to time reasonably
direct, including normal duties as an officer of the Company.
2. Consideration from Company; Joint and Several Liability. In lieu of
paying the Employee a base salary during the term of this Agreement, the
Company hereby agrees that to the extent permitted by law, it shall be jointly
and severally liable with its subsidiary, Flagstar Bank, FSB (the "Bank"), for
the payment of all amounts due under the employment agreement between the Bank
and the Employee (the "Bank Agreement"). Nevertheless, the Board a base salary
for the remaining term of this Agreement. If the Board agrees to pay such
salary, the Board shall thereafter review, not less often than annually, the
rate of the Employee's salary, and in its sole direction may decide to
increase his salary.
3. Discretionary Bonuses. The Employee shall participate in an equitable
manner with all other senior management employees of the Company in
discretionary bonuses that the Board may award from time to time to the
Company's senior management employees. No other compensation provided for in
this Agreement shall be deemed a substitute for the Employer's right to
participate in such discretionary bonuses.
4. (a) Participation in Retirement, Medical and Other Plans. The Employee
shall participate in any plan that the Company maintains for the benefit of
its employees if the plan relates to (i) pension, profit-sharing, or other
retirement benefits, (ii) medical insurance or the reimbursement of medical or
dependent care expenses, or (iii) other group benefits, including disability
and life insurance plans.
(b) Employee Benefits: Expenses. The Employee shall participate in any
fringe benefits which are or may become available to the Company's senior
management employees and which are commensurate with the responsibilities and
functions to be performed by the Employee under this Agreement. The Employee
shall be reimbursed for all reasonable out-of-pocket business expenses which
he shall incur in connection with his services under this Agreement upon
substantiation of such expenses in accordance with the policies of the
Company.
(c) Liability Insurance Indemnification. The Company shall provide the
Employee (including his heirs, executors and administrators) with coverage
under a standard directors' and officers' liability insurance policy at the
Company's expense, or in lieu thereof, shall indemnify the Employee (and his
heirs, executors and administrators) to the fullest extent permitted under
Michigan law against all expenses and liabilities reasonably incurred by him
in connection with or arising out of any action, suit or proceeding in which
he may be involved by reason of his having been a director or officer of the
Company (whether or not he continues to be a director or officer at the time
of incurring such expenses or liabilities); such expenses and liabilities to
include, but not limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements, and such settlements to be approved by the
Board of Directors of the Company; provided, however, that such
indemnification shall
1
<PAGE>
not extend to matters as to which the Employee is finally adjudged to be
liable for willful misconduct or gross negligence in the performance of his
duties as a director or officer of the Company.
5. Term. The Company hereby employs the Employee, and the Employee hereby
accepts such employment under this Agreement, for the period commencing on the
Effective Date and ending thirty six (36) months thereafter (or such earlier
date as is determined in accordance with Section 9). Additionally, on each
annual anniversary date from the Effective Date, the Employee's term of
employment shall be extended for an additional one-year period beyond the then
effective expiration date, provided the Board determines in a duly adopted
resolution that the performance of the Employee has met the Board's
requirements and standards and that this Agreement shall be extended.
6. Loyalty; Noncompetition.
(a) During the period of his employment hereunder and except for illnesses,
reasonable vacation periods, and reasonable leaves of absence, the Employee
shall devote all his full business time, attention, skill, and efforts to the
faithful performance of his duties hereunder to the Company and its
subisidiaries; provided, however, from time to time, Employee may serve on the
boards of directors of, and hold any other offices or positions in, companies
or organizations which will not present any conflict of interest with the
Company or any of its subsidiaries or affiliates, or unfavorably affect the
performance of the Employee's duties pursuant to this Agreement, or will not
violate any applicable statute or regulation. "Full business time" is hereby
defined as that amount of time usually devoted to like companies by similarly
situated executive officers. During the term of his employment under this
Agreement, the Employee shall not engage in any business or activity contrary
to the business affairs or interests of the Company, or be gainfully employed
in any other position or job other than as provided above.
(b) Nothing contained in this Section 6 shall be deemed to prevent or limit
the Employee's right to invest in the capital stock or other securities of any
business dissimilar from that of the Company, or, solely as a passive or
minority investor, in any business.
7. Standards. The Employee shall perform his duties under this Agreement in
accordance with such reasonable standards as the Board may establish from time
to time. The Company will provide the Employee with the working facilities and
staff customary for similar executives and necessary for him to perform his
duties.
8. Vacation and Sick Leave. At such reasonable times as the Board shall in
its discretion permit, the Employee shall be entitled, without loss of pay, to
absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time; provided
that:
(a) The Employee shall be entitled to an annual vacation in accordance
with the policies that the Board periodically establishes for senior
management employees of the Company.
(b) The Employee shall not receive any additional compensation from the
Company on account of his failure to take a vacation, and the Employee
shall not accumulate unused vacation from one fiscal year to the next,
except in either case to the extent authorized by the Board.
(c) In additional to the aforesaid paid vacations, the Employee shall be
entitled without loss of pay, to absent himself voluntarily from the
performance of his employment with the Company for such additional periods
of time and for such valid and legitimate reasons as the Board may in its
discretion determine. Further, the Board may grant to the Employee a leave
or leaves of absence, with or without pay, at such time or times and upon
such terms and conditions as such Board in its discretion may determine.
(d) In addition, the Employee shall be entitled to an annual sick leave
benefit as established by the Board.
9. Termination and Termination Pay. Subject to Section 11 hereof (which
shall only be applicable during the twelve-month period following a "Change in
Control" as defined herein), the Employee's employment hereunder may be
terminated under the following circumstances:
2
<PAGE>
(a) Death. The Employee's employment under this Agreement shall terminate
upon his death during the term of this Agreement, in which event the
Employee's estate shall be entitled to receive the compensation due the
Employee for the remaining term of the contract payable in a lump sum if
election is made by the spouse within 30 days of Employee's death or
otherwise on a monthly basis, plus any accrued and unpaid discretionary
bonus due Employee at the time of his death, payable in a lump sum amount
within 30 days of the Employee's death. In addition, the Bank shall
maintain the existing medical insurance for the Employee's spouse for six
months after the Employee's death.
(b) Disability. The Company may terminate the Employee's employment after
having established the Employee's Disability. For purposes of this
Agreement, "Disability" means a physical or mental infirmity which impairs
the Employee's ability to substantially perform his duties under this
Agreement and which results in the Employee becoming eligible for long-term
disability benefits under the Company's long-term disability plan (or, if
the Company has no such plan in effect, which impairs, or can be expected
to impair, the Employee's ability to substantially perform his duties under
this Agreement for a period of 180 consecutive days). The Employee shall be
entitled to the compensation and benefits provided for under this Agreement
for (i) any period not to exceed twelve (12) months during the term of this
Agreement and prior to the establishment of the Employee's Disability
during which the Employee is unable to work due to the physical or mental
infirmity, or (ii) any period not to exceed twelve (12) months of
Disability which is prior to the Employee's termination of employment
pursuant to this Section 9(b).
(c) Just Cause. The Board may, by written notice to the Employee,
immediately terminate his employment at any time, for Just Cause. The
Employee shall have no right to receive compensation or other benefits for
any period after termination for Just Cause. Termination for "Just Cause"
shall mean termination because of, in the good faith determination of the
Board, the Employee's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, failure to
perform stated duties, willful violation of any law, rule or regulation
(other than traffic violations or similar offenses) or final cease-and-
desist order, or material breach of any provision of this Agreement. No
act, or failure to act, on the Employee's part shall be considered
"willful", unless he has acted, or failed to act, with an absence of good
faith and without a reasonable belief that his action, or failure to act,
was in the best interest of the Company. Notwithstanding the foregoing, (i)
the Employee shall not be deemed to have been terminated for Just Cause
unless there shall have been delivered to the Employee a copy of a
resolution duly adopted by the affirmative vote of not less than a majority
of the entire Employee and an opportunity for the Employee to be heard
before the Board), finding that in the good faith opinion of the Board the
Employee was guilty of conduct set forth above in the second sentence of
this Subsection (c) and specifying the particulars thereof in detail.
(d) Without Just Cause. The Board may, by written notice to the Employee,
immediately terminate his employment at any time for a reason other than
Just Cause, in which event the Employee shall be entitled to receive the
following compensation and benefits (unless such termination occurs within
the time period set forth in Section 11(b) hereof, of which event the
benefits and compensation provided for in Section 11 shall apply): (i) the
salary provided pursuant to Section 2 hereof, up to the date of termination
of the term (including any renewal term) of this Agreement (the "Expiration
Date"), plus said salary for an additional 12-month period, and (ii) at the
Employee's election, either (A) cash in an amount equal to the cost to the
Employee of obtaining all health, life, disability and benefits which the
Employee would have been eligible to participate in through the Expiration
Date based upon the benefit levels substantially equal to those that the
Company provided for the Employee at the date of termination of employment
or (B) continued participation under such Company benefit plans through the
Expiration Date, but only to the extent the Employee continues to qualify
for participation therein. All amounts payable to the Employee shall be
paid, at the option of the Employee, either (I) in periodic payments
through the Expiration Date, or (II) in one lump sum within 10 days of such
termination.
(e) Voluntary Termination by Employee. Subject to Section 11 hereof, the
Employee may voluntarily terminate employment with the Company during the
term of this Agreement, upon at least 60 days' prior written notice to the
Board of Directors, in which case the Employee shall receive only his
3
<PAGE>
compensation, vested rights and employee benefits up to the date of his
termination (unless such termination occurs pursuant to Section 9(d)(2)
hereof or within the time period set forth Section 11(a) hereof, in which
went the benefits and compensation provided for in Section 9(d) or 11, as
applicable, shall apply.
10. No Mitigation. The Employee shall not be required to mitigate the amount
of any payment provided for in this Agreement by seeking other employment or
otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Employee in any subsequent
employment.
11. Change in Control.
(a) Notwithstanding any provision herein to the contrary, if the Employee's
employment under this Agreement is terminated by the Company, without the
Employee's prior written consent and for a reason other than Just Cause, in
connection with or within 12 months after any Change in Control (as
hereinafter defined ) of the Bank of the Company, the Employee shall be paid
an amount equal to the difference between (i) product of 2.99 times his "base
amount" as defined in Section 280G(b)(3) of the Internal Revenue code of 1986,
as amended (the "Code") and regulations promulgated thereunder, and (ii) the
sum of any other parachute payments (as defined under Section 280G(b)(2) of
the Code) that the Employee receives on account of the change in control. Said
sum shall be paid in one lump sum within ten (10) days of such termination,
and shall be paid in lieu of the payment of any benefits under Section 9
hereof. The Bank shall also maintain existing insurance for six months after
termination of the Employee's employment, or if Employee dies within such six
months, the Bank shall maintain health insurance for the Employee's spouse, if
living, for the remainder of the six month period. At the election of the
Employee, which election is to be made within 30 days of Employee's
termination, such payments shall be made in a lump sum or paid monthly during
the remaining term of this Agreement following the Employee's termination, and
shall be payable, in the event of the Employee's death before full payment is
made to the Employee's surviving spouse, if any, and otherwise to his estate.
In the event that no election is made, payment to the Employee will be made on
a monthly basis during the remaining term of this Agreement.
The term "Change in Control" shall mean (i) the ownership, holding or power
to vote more than 25% of the Bank's or the Company's voting stock, (2) the
acquisition of the ability to control of the election of a majority of the
Bank's or the Company's directors, (3) the acquisition of a controlling
influence over the management or policies of the Company by any person or by
persons acting as a "group" (within the meaning of Section 13(d) of the
Securities Exchange Act of 1934) (except in the case of (1), (2) and (3)
hereof, ownership of control of the Bank by the Company itself shall not
constitute a "Change in Control"), or (4) during any period of two consecutive
years, individuals who at the beginning of such period constitute the board of
directors of the Bank or the Company (the "Continuing Directors") cease for
any reason to constitute at least two-thirds thereof; provided, however, that
any individual whose election or nomination for election as a member of the
board of directors of the Bank or the Company was approved by a vote of at
least two-thirds of the Continuing Directors then in office shall be
considered a Continuing Director. The term "person" means an individual other
than the Employee, or a corporation, partnership, trust, association, joint
venture, pool, syndicate, sole proprietorship, unincorporated organization or
any other form of entity not specifically listed herein. The decision of the
Continuing Directors as to whether a Change in Control has occurred shall be
conclusive and binding.
(b) Notwithstanding any other provision of this Agreement to the contrary,
the Employee may voluntarily terminate his employment under this Agreement
following a Change in Control of the Company, and the Employee shall thereupon
be entitled to receive the payment described in Section 11(a) of this
Agreement, upon the occurrence of any of the following events, or within 12
months thereafter, which have not been consented to in advance by the Employee
in writing: (i) the requirement that the Employee move his personal residence,
or perform his principal executive functions, more than 30 miles from his
primary office as of the date of the change in control; (ii) a material
reduction in the Employee's base compensation as in effect on the date of the
change in control or as the same may be increased from time to time; (iii) the
failure by the Company to continue to provide the Employee with compensation
and benefits provided for under this Agreement, as the same may be increased
from time to time, or with benefits substantially similar to those provided to
him under any of the
4
<PAGE>
employee benefit plans in which the Employee now or hereafter becomes a
participant, or the taking of any action by the Company which would directly
or indirectly reduce any of such benefits or deprive the Employee of any
material fringe benefit enjoyed by him at the time of the change in control;
(iv) the assignment to the Employee of duties and responsibilities materially
different from those normally associated with his position as referenced at
Section 1; (v) a failure to reelect the Employee to the Board if he is then
serving on the Hoard; or (vi) a material diminution or reduction in the
Employee's responsibilities or authority (including reporting
responsibilities) in connection with his employment with the Company. Said sum
shall be paid in lieu of the payment of any benefits under Section 9 hereof.
(c) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.
12. Arbitration; Reimbursement of Expenses.
(a) Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in accordance
with the rules of the American Arbitration Association then in effect.
Judgment may be entered on the arbitration award in any court having
jurisdiction; provided, however, that until the Expiration Date the Employee
shall be entitled to such specific performance of his right to be paid during
the pendancy of any dispute or controversy arising under or in connection with
this Agreement. Any arbitration proceeding shall be governed by and subject to
Alabama arbitration law.
(b) Reimbursement. All reasonable costs and legal fees paid or incurred by
the Employee pursuant to any dispute or question of interpretation relating to
this Agreement, or its specific performance, shall be paid or reimbursed by
the Company, if the Employee is the prevailing party. Such payment or
reimbursement shall be made within 10 days of the Employee's furnishing to the
Bank written evidence, which may be in the form, among other things, of a
cancelled check or receipt, of any costs or expenses incurred by the Employee.
13. Federal Income Tax Withholding. The Company may withhold all Federal and
State income or other taxes for any benefit payable under this Agreement as
shall be required pursuant to any law or governmental regulation or ruling.
14. Successors and Assigns.
(a) Company. This Agreement shall not be assignable by the Company;
provided, however, that this Agreement shall inure to the benefit of and be
binding upon any corporated or other successor of the Company which shall
acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of the Company.
(b) Employee. Since the Company is contracting for the unique and personal
skills of the Employee, the Employee shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Company; provided, however, that nothing in this paragraph
shall preclude (i) the Employee from designating a beneficiary to receive any
benefit payable hereunder upon his death, or (ii) the executor, administrator
or other legal representatives of the Employee or his estate from assigning
any rights hereunder to the person or persons entitled thereunto.
(c) Attachment. Except as required by law, no right to receive payments
under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
to exclusion, attached, levying or similar process or assignment by operation
of law, and any attempt, voluntarily or involuntarily, to effect any such
action shall be null, void and of no effect.
15. Amendments. No amendments or additions to this Agreement shall be
binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.
5
<PAGE>
16. Applicable Law. Except to the extent preempted by Federal law, the laws
of the State of Michigan shall govern this Agreement in all respects, whether
as to its validity, construction, capacity, performance or otherwise.
17. Severability. The provisions of this Agreement shall be deemed severable
and the invalidity or unenforceability of any provision shall not affect the
validity or enforceability of the other provisions hereof.
18. Entire Agreement. This Agreement, together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first hereinabove written.
ATTEST: Flagstar Bancorp, Inc.
_____________________________ By: _________________________________
Secretary
_____________________________________
WITNESS:
_____________________________
6
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EXHIBIT 10.1(b)
FORM OF
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made effective as of ______ __, 1997 (the "Effective
Date"), by and between Flagstar Bank, FSB (the "Bank") and _____________________
(the "Employee").
WHEREAS, the Bank wishes to assure retention of the services of the
Employee for the period provided in this Agreement; and
WHEREAS,the Employee is willing to serve in the employ of the Bank for
said period.
NOW, THEREFORE, it is AGREED as follow:
1. Employment. The Employee is employed as the ______________ of the
----------
Bank. The Employee shall render such administrative and management services for
the Bank as are currently rendered and as are customarily performed by persons
situated in a similar executive capacity. The Employee shall also promote, by
entertainment or otherwise, as and to the extent permitted by law, the business
of the Bank. The Employee's other duties shall be such as the Board of Directors
of the Bank ("Board") may from time to time reasonably direct, including normal
duties as an officer of the Bank.
2. Base Compensation. The Bank agrees to pay the Employee during the
-----------------
term of this Agreement a salary at the rate of $____ per annum, payable in cash
not less frequently than monthly; provided, however, that such salary shall be
reduced by any salary paid to the Employee by the Bank's holding company,
Pinnacle Bancshares, Inc. (the "Company"), under the employment agreement of
even date herewith the Company and the Employee. The Board shall review, not
less often than annually, the rate of the Employee's salary, and in its sole
discretion may decide to increase his salary. If the Employee's salary is
reduced to less than $____ per annum subsequent to a change in control of the
Bank, as defined in Section 11(a)(4) hereof, the Employee may within 90 days of
such reduction terminate this Agreement.
3. Discretionary Bonuses. The Employee may be entitled to annual
---------------------
bonuses at the sole discretion of the Board. No other compensation provided for
in this Agreement shall be deemed a substitute for the Employee's right to
participate in such discretionary bonuses. In the event the Bank and/or the
Company executes a definitive agreement providing for a change in control of
the Bank, as defined in Section 11(a)(4) hereof, the Employee shall be paid a
bonus equal to ___ his then current annual salary. Such bonus shall be paid
immediately prior to consummation of the change in control and shall be deducted
from the Maximum Amount if determined to be a parachute payment, as such terms
are defined in Section 11(a)(1) hereof.
4. (a) Participation in Retirement, Medical and Other Plans. The
----------------------------------------------------
Employee shall participate in any plan that the Bank maintains for the benefit
of its employees if the plan relates to (i) pension, profit-sharing, or other
retirement benefits, (ii) medical insurance or the reimbursement of medical or
dependent care expenses, or (iii) other group benefits, including disability and
life insurance plans.
(b) Employee Benefits: Expenses. (1) The Employee shall
---------------------------
participate in any fringe benefits which are or may become available to the
Bank's senior management employees and which are commensurate with the
responsibilities and functions to be performed by the Employee under this
Agreement. The Employee shall be reimbursed for all reasonable out-of-pocket
business expenses which he shall incur in connection with his services under
this Agreement upon substantiation of such expenses in accordance with the
policies of the Bank.
(2) The Board recognizes the Employee's need for an
automobile, including all related maintenance, repairs,
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<PAGE>
insurance and other costs. The make and model of the automobile shall be
mutually agreed upon by the Employee and the Board.
(c) Liability Insurance: Indemnification. The Bank shall provide the
------------------------------------
Employee (including his heirs, executors, and administrators) with coverage
under a standard directors' and officers' liability insurance
policy at the Bank's expense, or in lieu thereof, shall indemnify the Employee
(and his heirs, executors, and administrators) to the fullest extent permitted
under Federal law against all expenses and liabilities reasonably incurred by
him in connection with or arising out of any action, suit or proceeding in which
he may be involved by reason of his having been a director or officer of the
Bank (whether or not he continues to be a director or officer at the time of
incurring such expenses or liabilities); such expenses and liabilities to
include, but not limited to, judgments, court costs and attorneys' fees and the
cost of reasonable settlements, and such settlements to be approved by the Board
of Directors of the Bank; provided, however, that such indemnification shall not
extend to matters as to which the Employee is finally adjudged to be liable for
willful misconduct or gross negligence in the performance of his duties as a
director or officer of the Bank.
5. Term. The Bank hereby employs the Employees, and the Employee
----
hereby accepts such employment under this Agreement, for the period commencing
on the Effective Date and ending thirty six (36) months thereafter (or such
earlier date as is determined in accordance with Section 9). Additionally, on
each annual anniversary date from the Effective Date the Employee's term of
employment may be extended for an additional one-year period beyond the then
effective expiration date, provided the Board determines in a duly adopted
resolution that the performance of the Employee has net the Board's requirements
and standards and that this Agreement shall be extended.
6. Loyalty: Noncompetition.
-----------------------
(a) During the period of his employment hereunder and except for
illnesses, reasonable vacation periods, and reasonable leaves of absence, the
Employee shall devote all his full business time, attention, skill, and efforts
to the faithful performance of his duties to the Bank hereunder and/or to its
affiliates; provided, however, that from time to time, the Employee may serve on
the boards of directors of, and hold any other offices or positions in,
companies or organizations which will not present, in the reasonable opinion of
the Board, any conflict of interest with the Bank or any of its subsidiaries or
affiliates, or unfavorably affect the performance of the Employee's duties
pursuant to this Agreement, or will not violate any applicable statute or
regulation. "Full business time" is hereby defined as that amount of time
usually devoted to like companies by similarly situated executive officers.
During the term of his employment under this Agreement, the Employee shall not
engage in any business or activity contrary to the business affairs or interests
of the Bank and/or its affiliates, or be gainfully employed in any other
position or job other than as provided above.
(b) Nothing contained in this Paragraph 6 shall be deemed to
prevent or limit the Employee's right to invest in the capital stock or other
securities of any business dissimilar from that of the Bank, or, solely as a
passive or minority investor, in any business.
7. Standards. The Employee shall perform his duties under this
---------
Agreement in accordance with such reasonable standards as the Board may
establish from time to time. The Bank will provide the Employee with the working
facilities and staff customary for similar executives and necessary for him to
perform his duties.
8. Vacation and Sick Leave. At such reasonable times as the Board shall
-----------------------
in its discretion permit, the Employee shall be entitled, without loss of pay,
to absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time; provided that:
(a) The Employee shall be entitled to an annual in accordance
with the policies that the Board periodically establishes for senior management
employees of the Bank. The timing of vacations shall be scheduled in a
reasonable manner by the Board of Directors. The Employee shall not be entitled
to receive any additional compensation from the Bank on account of his failure
to take a vacation; nor shall he be entitled to
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<PAGE>
accumulate unused vacation from one fiscal year to the next except to the extent
authorized by the Board of Directors for senior management officials of the
Bank.
(b) The Employee shall not receive any additional compensation from
the Bank on account of his failure to take a vacation or sick leave, and the
Employee shall not accumulate unused vacation or sick leave from one fiscal year
to the next, except in either case to the extent authorized by the Board.
(c) In addition to the aforesaid paid vacation, the Employee shall be
entitled without loss of pay, to absent himself voluntarily from the performance
of his employment with the Bank for such additional periods of time and for such
valid and legitimate reasons as the Board may in its discretion determine.
Further, the Board may grant to the Employee a leave or leaves of absence, with
or without pay, at such time or times and upon such terms and conditions as such
Board in its discretion may determine.
(d) In addition, the Employee shall be entitled to an annual sick
leave benefit as established by the Board for senior management officials of the
Bank.
9. Termination and Termination Pay. Subject to Section 11 hereof, the
-------------------------------
Employee's employment hereunder may be terminated under the following
circumstances:
(a) Death. The Employee's employment under this Agreement shall
-----
terminate upon his death during the term of this Agreement, in which event the
Employee's estate shall be entitled to receive the compensation due the
Employee for the remaining term of the contract, payable in a lump sum if
election is made by the spouse within 30 days of Employee's death or otherwise
on a monthly basis, plus any accrued and unpaid discretionary bonus due Employee
at the time of his death, payable in a lump sum amount within 30 days of the
Employee's death. In addition, the Bank shall maintain the existing medical
insurance for the Employee's spouse for six months after the Employee's death.
(b) Disability. (1) The Bank may terminate the Employee's employment
----------
after having established the Employee's Disability. For purposes of this
Agreement, "Disability" means a physical or mental infirmity which impairs the
Employee's ability to substantially perform his duties under this Agreement and
which results in the Employee becoming eligible for long-term disability
benefits under the Banks long-term disability plan (or, if the Bank has no such
plan in effect, which impairs, or which can be expected to impair, the
Employee's ability to substantially perform his duties under this Agreement for
a period of 180 consecutive days). The Employee shall be entitled to the
compensation and benefits provided for under this Agreement for (i) any period
not to exceed twelve (12) months during the term of this Agreement and prior to
the establishment of the Employee's Disability during which the Employee is
unable to work due to the physical or mental infirmity, or (ii) any period not
to exceed twelve (12) months of Disability which is prior to the Employee's
termination of employment pursuant to this Section 9(b).
(2) During any period that the Employee shall receive disability
benefits and to the extent that the Employee shall be physically and mentally
able to do so, he shall furnish such information, assistance and documents so as
to assist in the continued ongoing business of the Bank and, if able, shall make
himself available to the Bank to undertake reasonable assignments consistent
with his prior position and his physical and mental health. The Bank shall pay
all reasonable expenses incident to the performance of any assignment given to
the Employee during the disability period.
(c) Just Cause. The Board may, by written notice to the Employee,
----------
immediately terminate his employment at any time, for Just Cause. The Employee
shall have no right to receive compensation or other benefits for any period
after termination for Just Cause. Termination for "Just Cause" shall mean
termination because of, in good faith determination of the Board, the Employee's
personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, failure to perform stated duties, willful violation
of any law, rule or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of any provision
of this Agreement. No act, or failure to act, on the Employee's part shall be
considered "willful" unless he has acted, or failed to act, with an absence of
good faith and without a reasonable
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<PAGE>
belief that his action or failure to act was in the best interest of the Bank.
Notwithstanding the foregoing, the Employee shall not be deemed to have been
terminated for Just Cause unless there shall have been delivered to the Employee
a copy of a resolution duly adopted by the affirmative vote of not less than a
majority of the entire membership of the Board at a meeting of the Board called
and held for that purpose (after reasonable notice to the Employee and an
opportunity for the Employee to be heard before the Board), finding that in the
good faith opinion of the Board the Employee was guilty of conduct set forth
above in the third sentence of this Subsection (c) and specifying the
particulars thereof in detail. If following such meeting the Employee is
reinstated, he shall be entitled to receive back pay for the period following
termination and continuing through reinstatement.
(d) Without Just Cause; Constructive Discharge. (1) The Board may,
------------------------------------------
by written notice to the Employee, immediately terminate his employment at any
time for a reason other than Just Cause, in which event the Employee shall be
entitled to receive the following compensation and benefits (unless such
termination occurs within the time period set forth in Section 11(b) hereof in
which event the benefits and compensation provided for in Section 11 shall
apply): (i) the salary provided pursuant to Section 2 hereof, up to the date of
termination of the term as provided in Section 5 hereof (including any renewal
term) of this Agreement (the "Expiration Date"), plus said salary for an
additional 12-month period, but in no event more than the amount specified in
the first sentence of Section 11(a)(1) and (ii) at the Employee's election,
either (A) cash in an amount equal to the cost to the Employee of obtaining all
health, life, disability and other benefits which the Employee would have been
eligible to participate in through the Expiration Date based upon the benefit
levels substantially equal to those that the Bank benefit plans through the
Expiration Date, but only to the extent the Employee continues to qualify for
participation therein. All amounts payable to the Employee shall be paid, at the
option of the Employee, either (I) in periodic payments through the Expiration
Date, or (II) in one lump sum within 10 days of such termination.
(2) The Employee may voluntarily terminate his employment
under this Agreement, and the Employee shall thereupon be entitled to receive
the compensation and benefits payable under Section 9(d)(1) hereof, within 90
days following the occurrence of any of the following events, wich has not been
consented to in advance by the Employee in writing (unless such voluntary
termination occurs within the time period set forth in Section 11(b) hereof in
which event the benefits and compensation provided for in Section 11 shall
apply): (i) the requirement that the Employee move his personal residence, or
perform his principal executive functions, more than 30 miles from his primary
office; (ii) a material reduction without reasonable cause in the Employee's
base compensation; (iii) the failure by the Bank to continue to provide the
Employee with compensation and benefits provided for under this Agreement, as
the same may be increased from time to time, or with benefits substantially
similar to those provided to him under any of the employee benefit plans in
which the Employee now or hereafter becomes a participant, or the taking of any
action by the Bank which would directly or indirectly reduce any of such
benefits or deprive the Employee of any material fringe benefit enjoyed by him;
(iv) the assignment to the Employee of duties and responsibilities materially
different from those normally associated with his position as referenced at
Section 1; (v) a failure to reelect the Employee to the Board if he is then
serving on the Board; (vi) a material diminution or reduction in the Employee's
responsibilities or authority (including reporting responsibilities) in
connection with his employment with the Bank; or (vii) a material reduction in
the secretarial or other administrative support of the Employee.
(3) Notwithstanding the foregoing, but only to the extent
required under federal banking law, the amount payable under clause (d)(1)(i)
hereof shall be reduced to the extent that on the date of the Employee's
termination of employment, the present value of the benefits payable under
clauses (d)(1)(i)and (ii) hereof exceeds the limitation on severance benefits
that is set forth in Regulatory Bulletin 27a of the Office of Thrift Supervision
("OTS"), as in effect on the Effective Date. In the event that Section 280G of
the Internal Revenue Code of 1986, as amended (the "Code") becomes applicable to
payments made under this Section 9(d), and the payments exceed the "Maximum
Amount" as defined in Section 11(a)(1) hereof, the payments shall be reduced as
provided by Section 11(a)(2) of this Agreement.
(e) Termination or Suspension Under Federal Law. (1) If the
-------------------------------------------
Employee is removed and/or permanently prohibited from participating in the
conduct of the Bank's affairs by an order issued under Sections 8(e)(4) or
8(g)(1) of the Federal Deposit Insurance Act ("FDIA")(12 U.S.C. 1818(e)(4) and
(g)(1)), all obligations
-4-
<PAGE>
of the Bank under this Agreement shall terminate, as of the effective date of
the order, but vested rights of the parties shall not be affected.
(2) If the Bank is in default (as defined in Section 3(x)(1)
of FDIA), all obligations under this Agreement shall terminate as of the date of
default; however, this Paragraph shall not affect the vested rights of the
parties.
(3) All obligations under this Agreement shall terminate,
except to the extent that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the OTS, or his or her
designee, at the time that the Federal Deposit Insurance Corporation ('FDIC") or
the Resolution Trust Corporation enters into an agreement to provide assistance
to or on behalf of the Bank under the authority contained in Section 13(c) of
the FDIA; or (ii) by the Director of the OTS, or his or her designee approves a
supervisory merger to resolve problems related to operation of the Bank or when
the Bank is determined by the Director of the OTS to be in an unsafe or unsound
condition. Such action shall not affect any vested rights of the parties.
(4) If a notice served under Section 8(e)(3) or (g)(1) of the
FDIA (12 U.S.C. 1818(e)(3) or (g)(1) suspends and/or temporarily prohibits the
Employee from participating in the conduct of the Bank's affairs, the Bank's
obligations under this Agreement shall be suspended as of the date of such
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may in its discretion (i) pay the Employee all or part
of the compensation withheld while its contract obligations were suspended, and
(ii) reinstate (in whole or in part) any of its obligations which were
suspended.
(f) Voluntary Termination by Employee. Subject to Section 11
---------------------------------
hereof, the Employee may voluntarily terminate employment with the Bank during
the term of this Agreement, upon at least 60 days' prior written notice to the
Board of Directors, in which case the Employee shall receive only his
compensation, vested rights and employee benefits up to the date of his
termination (unless such termination occurs pursuant to Section 9(d)(2) hereof
or within the time period set forth in Section 11(a) hereof, in which event the
benefits and compensation provided for in the Section 9(d) or 11, as applicable,
shall apply).
10. No Mitigation. The Employee shall not be required to mitigate the
-------------
amount of any payment provided for in this Agreement by seeking other employment
or otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Employee in any subsequent employment.
11. Change in Control.
-----------------
(a) Charge in Control:Involuntary Termination. (1) Notwithstanding
-----------------------------------------
any provision herein to the contrary, if the Employee's employment under this
Agreement is terminated by the Bank, without the Employee's prior written
consent and for a reason other than Just Cause, in connection with or within 12
months after any change in control of the Bank or the Company, the Employee
shall, subject to paragraph (2) of this Section 11(a), be paid an amount equal
to the difference between (i) the product of 2.99 times his "base amount" as
defined in Section 280G(b)(3) of the Code and regulations promulgated thereunder
(the "Maximum Amount"), and (ii) the sum of any other parachute payments (as
defined under Section 280G(b)(2) of the Code) that the Employee receives on
account of the change in control. Said sum shall be paid in one lump sum within
10 days of such termination, and shall be paid in lieu of the payment of any
benefits under Section 9 hereof. The Bank shall also maintain existing insurance
for six months after termination of the Employee's employment, or if Employee
dies within such six months, the Bank shall maintain health insurance for the
Employee's spouse, if living, for the remainder of the six month period. At the
election of the Employee, which election is to be made within 30 days of the
Employee's termination, such payments shall be made in a lump sum or paid
monthly during the remaining term of this Agreement following the Employee's
termination, and shall be payable, in the event of the Employee's death before
full payment is made, to the Employee's surviving spouse, if any, and otherwise
to his estate. In the event that no election is made, payment to the Employee
will be made on a monthly basis during the remaining term of this Agreement.
-5-
<PAGE>
(2) In the event that the Employee and the Bank jointly
determine and agree that the total parachute payments under clauses (i) and (ii)
of Section 11(a)(1) hereof exceed the Maximum Amount, notwithstanding the
payment procedure set forth in Section 11(a)(1) hereof, the Employee shall
determine which and how much, if any, of the parachute payments to which he is
entitled shall be eliminated or reduced so that the total parachute payments to
be received by the Employee do not exceed the Maximum Amount. If the Employee
does not make his determination within 10 business days after receiving a
written request from the Bank, the Bank may make such determination and shall
notify the Employee promptly thereof. Within five business days of the earlier
of the Bank's receipt of the Employees's determination pursuant to this
paragraph or the Bank's determination in lieu of a determination by the
Employee, the Bank shall pay to or distribute to or for the benefit of the
Employee such amounts as are then due the Employee under this Agreement.
(3) As a result of uncertainty in application of Section 280G
of the Code at the time of payment hereunder, it is possible that such payments
will have been made by the Bank which should not have been made ("Overpayment")
or that additional payments will not have been made by the Bank which should
have been made ("Underpayment"), in each case, consistent with the calculations
required to be made under Section 11(a)(1) hereof. In the event that the
Employee, based upon the assertion by the Internal Revenue Service against the
Employee of a deficiency which the Employee believes has a high probability of
success, determines that an Overpayment has been made, any such Overpayment paid
or distributed by the Bank to or for the benefit of Employee shall be treated
for all purposes as a loan ab initio which the Employee shall repay to the Bank
-- ------
together with interest at the applicable federal rate provided for in Section
7872(f)(2)(B) of the Code; provided, however, that no such loan shall be deemed
to have been made and no amount shall be payable by the Employee to the Bank if
and to the extent such deemed loan and payment would not either reduce the
amount on which the Employee is subject to tax under Section 1 and Section 4999
of the Code or generate a refund of such taxes. In the event that the Employee
and the Bank determine, based upon controlling precedent or other substantial
authority, that an Underpayment has occurred, any such Underpayment shall be
promptly paid by the Bank to or for the benefit of the Employee together with
interest at the applicable federal rate provided for in Section 78 72(f)(2)(B)
of the Code .
(4) The term "change in control" shall mean any one of the
following events: (i) the acquisition of ownership, holding or power to vote
more than 25% of the Bank's or the Company's voting stock, (ii) acquisition of
the ability to control the election of a majority of the Bank's or the Company's
directors, (iii) the acquisition of a controlling influence over the management
or policies of the Bank or the Company by any person or by persons acting as a
"group" (within the meaning of Section 13(d) of the Securities Exchange Act of
1934, as amended), (iv) the acquisition of control of the Bank or the Company
within the meaning of 12 C.F.R. Part 574 or its applicable equivalent (except in
the case of (i), (ii), (iii) and (iv) hereof, ownership or control of the Bank
by the Company itself shall not constitute a "change in control"), or (v) during
any period of two consecutive years, individuals who at the beginning of such
period constitute the Board of Directors of the Company or the Bank (the
"Existing Board") (the "Continuing Directors") cease for any reason to
constitute at least a majority thereof, provided that any individual whose
election or nomination for election as a member of the Existing Board was
approved by a vote of at least a majority of the Continuing Directors then in
office shall be considered a Continuing Director. For purposes of this
subparagraph only, the term "person" refers to an individual or a corporation,
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
Notwithstanding the foregoing, but only to the extent required under
federal banking law, the amount payable under Subsection (a) of this Section 11
shall be reduced to the extent that on the date of the Employee's termination of
employment, the amount payable under Subsection (a) of this Section 11 exceeds
the limitation on severance benefits that is set forth in Regulatory Bulletin
27a of the OTS, as in effect on the Effective Date.
(b) Change in Control: Voluntary Termination. Notwithstanding any other
----------------------------------------
provision of this Agreement to the contrary, but subject to Section 11(a)(2)
hereof, the Employee may voluntarily terminate his employment under this
Agreement within 12 months following a change in control of the Bank or the
Company, as defined in paragraph (a)(4) of this Section 11, and the Employee
shall thereupon be entitled to receive the payment described in Section 11(a)
(1) of this Agreement, within 90 days following the occurrence of any of the
following events, which has not been consented to in advance by the Employee in
writing: (i) the requirement that the
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Employee perform his principal executive functions more than 30 miles from his
primary office as of the date of the change in control; (ii) a material
reduction in the Employee's base compensation as in effect on the date of the
change in control or as the same may be changed by mutual agreement from time
to time; (iii) the failure by the Bank to continue to provide the Employee with
compensation and benefits provided for under this Agreement, as the same may be
increased from time to time, or with benefits substantially similar to those
provided to him under any employee benefit in which the Employee is a
participant at the time of the change in control, or the taking of any action
which would materially reduce any of such benefits or deprive the Employee of
any material fringe benefit enjoyed by him at the time of the change in control;
(iv) the assignment to the Employee of duties and responsibilities materially
different from those normally associated with his position as referenced at
Section 1; (v) a failure to elect or reelect the Employee to the Board of
Directors of the Bank, if the Employee is serving on the Board on the date of
the change in control; (vi) a material diminution or reduction in the Employee's
responsibilities or authority (including reporting responsibilities) in
connection with his employment with the Bank; or (vii) a material reduction in
the secretarial or other administrative support of the Employee.
(c) Compliance with 12 U.S.C. Section 1828(k). Any payments made to
-----------------------------------------
the Employee pursuant to this Agreement, or otherwise, are subject to and
conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any
regulations promulgated thereunder.
12. Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgement may be entered on the arbitration award in any court having
jurisdiction; provided, however, that until the Expiration Date the Employee
shall be entitled to seek specific performance of his right to be paid during
the pendency of any dispute or controversy arising under or in connection with
this Agreement. Any arbitration proceeding shall be governed by and subject
to Alabama arbitration law.
13. Federal Income Tax Withholding. The Bank may withhold all Federal
------------------------------
and State income or other taxes from any benefit payable under this Agreement
as shall be required pursuant to any law or government regulation or ruling.
14. Successors and Assigns.
----------------------
(a) Bank. This Agreement shall not be assignable by the Bank,
----
provided that this Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Bank which shall acquire, directly or
indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank.
(b) Employee. Since the Bank is contracting for the unique and
--------
personal skills of the Employee, the Employee shall be precluded from assigning
or delegating his rights or duties hereunder without first obtaining the
written consent of the Bank; provided, however, that nothing in this paragraph
shall preclude (i) the Employee from designating a beneficiary to receive any
benefit payable hereunder upon his death, or (ii) the executors, administrators,
or other legal representatives of the Employee or his estate from assigning any
rights hereunder to the person or persons entitled thereunto.
(c) Attachment. Except as required by law, no right to receive
----------
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
to exclusion, attachment, levy or similar process or assignment by operation
of law, and any attempt, voluntary or involuntary, to effect any such action
shall be null, void and of no effect.
15. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.
16. Applicable Law. Except to the extent preempted by Federal law, the
--------------
laws of the State of Michigan shall govern this Agreement in all respects,
whether as to its validity, construction, capacity, performance or otherwise.
-7-
<PAGE>
17. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
18. Entire Agreement. This Agreement, together with any understanding
----------------
or modifications thereof as agreed to in writing by the parties, shall
constitute the entire agreement between the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first hereinabove written.
ATTEST: FLAGSTAR BANK, FSB
By:
- ------------ ------------------
Secretary --------------
WITNESS:
- ------------ -----------------
-----------
9088
-8-
<PAGE>
Exhibit 10.2
Form of
FLAGSTAR BANCORP, INC.
1997 EMPLOYEES AND DIRECTORS STOCK OPTION PLAN
1. Purpose of the Plan.
The purpose of this Flagstar Bancorp, Inc. 1997 (the "Company")
Employees and Directors Stock Option Plan is to advance the interests of the
Company through providing select key Employees and Directors of the Company and
its Affiliates with the opportunity to acquire Shares. By encouraging such
stock ownership, the Company seeks to attract, retain and motivate the best
available personnel for positions of substantial responsibility and to provide
additional incentive to Directors and key Employees of the Company, the Bank or
any Affiliate to promote the success of the business.
2. Definitions.
As used herein, the following definitions shall apply.
(a) "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Bank or the Company, as such terms are defined
in Section 424(e) and (f), respectively, of the Code.
(b) "Agreement" shall mean a written agreement entered into in accordance
with Paragraph 5(c).
(c) "Awards" shall mean Options unless the context clearly indicates a
different meaning.
(d) "Bank" shall mean Flagstar Bank, FSB.
(e) "Board" shall mean the Board of Directors of the Company.
(f) "Change in Control" shall mean any one of the following events: (1)
the ownership, holding or power to vote more than 25% of the
Company's or the Bank's voting stock, (2) the acquisition of control
of the election of a majority of the Company's or the Bank's
directors, (3) the exercise of a controlling influence over the
management or policies of the Company or the Bank by any person or by
persons acting as a group within the meaning of Section 13(d) of
the Securities Exchange Act of 1934 or (4) during any period of two
consecutive years, individuals who at the beginning of such period
constitute the Board of Directors of the Company (the "Company
1
<PAGE>
Board") (the "Continuing Directors") cease for any reason to constitute at
least two-thirds thereof, provided that any individual whose election or
nomination for election as a member of the Company Board was approved by a
vote of at least two-thirds of the Continuing Directors then in office
shall be considered a Continuing Director. For purposes of this
subparagraph only, the term "person" refers to an individual or a
corporation, partnership, trust, association, joint venture, pool,
syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein. The decision of the
Committee as to whether a change in control has occurred shall be
conclusive and binding.
(g) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(h) "Committee" shall mean the Stock Option Committee appointed by the Board
---------
in Board in accordance with Paragraph 5(a) hereof.
(i) "Common Stock" shall mean the common stock, par value $.01 per share, of
the Company.
(j) "Continuous Service" shall mean the absence of any interruption or
termination of service as an Employee or Director of the Company or the
Bank or an Affiliate. Continuous Service shall not be considered
interrupted in the case of sick leave, military leave or any other leave
of absence, in the case of transfers between payroll locations of the Bank
or between the Bank, an Affiliate or a successor, or in the case of a
Director's performance of services in an emeritus or advisory capacity.
(k) "Director" shall mean any member of the Board, and any member of the board
of directors of any Affiliate that the Board has by resolution designated
as being eligible for participation in this Plan.
(l) "Disability" shall mean a physical or mental condition, which in the sole
and absolute discretion of the Committee, is reasonably expected to be of
indefinite duration and to prevent substantially a Participant from
fulfilling his or her duties or responsibilities to the Bank or an
Affiliate.
(m) "Effective Date" shall mean the date specified in Paragraph 13 hereof.
(n) "Employee" shall mean any person employed by the Company or an Affiliate.
2
<PAGE>
(o) "Exercise Price" shall mean the price per Optioned Share at which an
Option may be exercised.
(p) "ISO" means as option to purchase Common Stock which meets the
requirements set forth in the Plan and which is intended to be and is
identified as an "incentive stock option" within the meaning of
Section 422 of the Code.
(q) "Market Value" shall mean the fair market value of the Common Stock,
as determined under Paragraph 7(b) hereof.
(r) "Non-Employee Director" shall mean any member of the Board who is a
Non-Employee Director within the meaning of Rule 16b-3.
(s) "Non-ISO" means an option to purchase Common Stock which meets the
requirements set forth in the Plan but which is not intended to be
and is not identified as an ISO.
(t) "Option" means an ISO and a Non-ISO.
(u) "Optioned Shares" shall mean Shares subject to an Award granted
pursuant to this Plan.
(v) "Participant" shall mean any person who receives an Award pursuant to
this Plan.
(w) "Plan" shall mean this Flagstar Bancorp, Inc. 1997 Employees and
Directors Stock Option Plan.
(x) "Rule 16b-3" shall mean Rule 16b-3 of the General Rules and
Regulations under the Securities and Exchange Act of 1934, as
amended.
(y) "Share" shall mean one share of Common Stock.
(z) "Year of Service" shall mean a full 12-month period of Continuous
Service, measured from the date of an Award and each annual
anniversary of that date, during which a Participant has been an
Employee or Director.
3. Term of the Plan and Awards.
3
<PAGE>
(a) Term of the Plan. The Plan shall continue in effect for a term of 10
-----------------
years from the Effective Date, unless sooner terminated pursuant to
Paragraph 15 hereof. No Award shall be granted under the Plan after 10
years from the Effective Date.
(b) Term of Awards. The term of each Award granted under the Plan shall be
---------------
established by the Committee, but shall not exceed 10 years; provided,
however, that in the case of an Employee who owns Shares representing
more than 10% of the outstanding Common Stock at the time an ISO is
granted, the term of such ISO shall not exceed five years.
4. Shares Subject to the Plan.
General Rule. The aggregate number of Shares deliverable pursuant to
-------------
Awards shall not exceed 1,345,000 Shares, as such number may be adjusted on
and after the Effective Date pursuant to Paragraph 10 hereof. Such Shares
may either be authorized but unissued Shares, Shares held in treasury, or
Shares held in a grantor trust created by the Company. If any Awards should
expire, become unexercisable, or be forfeited for any reason without having
been exercised, the Optioned Shares shall, unless the Plan shall have been
terminated, be available for the grant of additional Awards under the Plan.
5. Administration of the Plan.
(a) Composition of the Committee. The Plan shall be administered by the
-----------------------------
Stock Option Committee, which shall consist of not less than two
members of the Board, all of whom shall be Non-Employee Directors.
Members of the Committee shall serve at the pleasure of the Board.
In the absence of a duly appointed Committee, the Plan shall be
administered by those members of the Board who are Non-Employee
Directors.
(b) Powers of the Committee. Except as limited by the express provisions
------------------------
of the Plan or by resolutions adopted by the Board, the Committee
shall have sole and complete authority and discretion (i) to select
Participants and grant Awards, (ii) to determine the form and content
of Awards to be issued in the form of Agreements under the Plan, (iii)
to interpret the Plan, (iv) to prescribe, amend and rescind rules and
regulations relating to the Plan, and (v) to make other determinations
necessary or advisable for the administration of the Plan. The
Committee shall have and may exercise such other power and authority
as may be delegated to it by the Board from time to time. A majority
of the entire Committee shall constitute a quorum and the action of a
majority of the members present at any meeting at which
4
<PAGE>
a quorum is present, or acts approved in writing by all members of
the Committee without a meeting, shall be deemed the action of the
Committee.
(c) Agreement. Each Award shall be evidenced by a written agreement
----------
containing such provisions as may be approved by the Committee. Each
such Agreement shall constitute a binding contract between the
Company and the Participant and every Participant, upon acceptance of
such Agreement, shall be bound by the terms and restrictions of the
Plan and of such Agreement. The terms of each such Agreement shall be
in accordance with the Plan, but each Agreement may include such
additional provisions and restrictions determined by the Committee,
in its discretion, provided that such additional provisions and
restrictions are not inconsistent with the terms of the Plan. In
particular, the Committee shall set forth in each Agreement (i) the
Exercise Price of an Option, (ii) the number of Shares subject to,
and the expiration date of, the Award, (iii) the manner, time and
rate (cumulative or otherwise) of exercise or vesting of such Award,
and (iv) the restrictions, if any, to be placed upon such Award or
upon Shares which may be issued upon exercise of such Award.
The Chairman of the Committee and such other Directors and officers
as shall be designated by the Committee are herby authorized to
execute Agreements on behalf of the Company and to cause them to be
delivered to the recipients of Awards.
(d) Effect of the Committee' Decisions. All decisions, determinations and
-----------------------------------
interpretations of the Committee shall be final and conclusive on all
persons affected thereby.
(e) Indemnification. In addition to such other rights of indemnification
----------------
as they may have, the members of the Committee shall be indemnified
by the Company in connection with any claim, action, suit or
proceeding relating to any action taken or failure to act under or in
connection with the Plan or any Award, to the full extent provided
for under the Company's governing instruments with respect to the
indemnification of Directors.
6. Grant of Options.
(a) General Rule. In its sole discretion, the Committee may grant Awards
-------------
to select key Employees. In selection those Employees to whom Awards
will be granted and the number of shares covered by such Awards, the
Committee shall consider their respective positions, duties and
responsibilities, the value of their services to the Company and its
Affiliates,
5
<PAGE>
and any other factors the Committee may deem relevant. Notwithstanding the
foregoing, the Committee shall automatically make the Awards specified in
Paragraphs 6(b) and 6(d) hereof.
(b) Automatic Grants to Employees. On the Effective Date, each of the
-----------------------------
following Employees shall receive an Option (in the form of an ISO, to the
extent permissible under the Code) to purchase the number of Share listed
below, at an Exercise Price per Share equal to the Market Value of a Share
on the Effective Date; provided that such grant shall not be made to an
Employee whose Continuous Service terminates on or before the Effective
Date:
EMPLOYEE SHARES
----------------------------------------
Thomas W. Hammond 400,000
Mark T. Hammond 250,000
Michael W. Carrie 45,000 + 20,000
Joan H. Anderson 45,000
Mary Kay McGuire 15,000 + 20,000
7 Senior Vice Presidents 15,000 each*
6 First Vice Presidents 5,000 each*
22 Vice Presidents 2,500 each*
52 Assistant Vice Presidents 1,500 each*
----------
* Additional names are set forth on the Attachment to the Plan.
With respect to each of the above-named Employees, the Option granted
to the Employee hereunder (i) shall vest in accordance with the general
rule set forth in Paragraph 8(a) of the Plan, (ii) shall have a term of
ten years from the Effective Date, except as limited by Paragraph 3(b),
and (iii) shall be subject to the general rule set forth in Paragraph 8(c)
with respect to the effect of a Employee's termination of Continuous
Service on the Employees's right to exercise his Options.
(c) Special Rules for ISOs. The aggregate Market Value, as of the date the
----------------------
Option is granted, of the Shares with respect to which ISOs are
exercisable for the first time by an Employee during any calendar year
(under all stock option plans, as defined in Section 422 of the Code, of
the Company or any present or future Affiliate of the Company) shall not
exceed $100,000. Notwithstanding the foregoing, the Committee may grant
Options in excess
6
<PAGE>
of the foregoing limitations, in which case such Options granted in excess
of such limitation shall be Options which are Non-ISOs.
(d) Automatic Grants to Directors. Notwithstanding any other provisions of
this Plan, each Director who is not an Employee but is a Director on
the dates specified below shall receive ISOs to purchase the number of
Shares indicated of the Shares reserved under Paragraph 4(a) hereof.
Such ISOs shall have an Exercise Price per Share equal to the Market
Value of a Share on the date of grant.
(1) each Non-Employee Director of the Company or the Bank in
office on the day immediately prior to the Effective Date
shall receive Options to purchase 8,000 Shares;
(2) each Non-Employee Director who is elected to the Board of
the Company on or following the Effective Date shall upon
taking office receive Options to purchase 800 Shares;
(3) each Non-Employee Director of the Company or the Bank shall
receive on April 1, 1998 and each succeeding April 1,
Options to purchase 800 Shares; an individual serving on
the Boards of both the Company and the Bank shall be
entitled to Options to purchase a total of 800 Shares per
year.
7. Exercise Price for Options.
(a) Limits on Committee Discretion. The Exercise Price as to any
------------------------------
particular Option shall not be less than 50% of the Market Value of
the Shares on the date of grant (100% in the case of ISOs). In the
case of an Employee who owns Shares representing more than 10% of the
Company's outstanding Shares of Common Stock at the time an ISO is
granted, the Exercise Price shall not be less than 110% of the Market
Value of the Shares at the time the ISO is granted.
(b) Standards for Determining Exercise Price. If the Common Stock is
----------------------------------------
listed on a national securities exchange (including the Nasdaq
National Market) on the date in question, then the Market Value per
Share shall be the average of the highest and lowest selling prices on
such exchange on such date, or if there were no sales on such date,
then the Market Value per Share shall be
7
<PAGE>
the average of the highest and lowest selling price on such exchange
on the trading day immediately preceding such date on which sales
were effected. If the Common Stock is traded otherwise than on a
national securities exchange on the date in question, then the
Market Value per Share shall be the average of the bid and asked
price on such date, or, if there is no bid and asked price on such
date, then on the next prior business day on which there was a bid
and asked price. If no price is available, then the Market Value per
Share shall be its fair market value as determined by the Committee,
in its sole and absolute discretion. Notwithstanding the foregoing,
in the event that either (i) the Committee exercises its discretion
to impose transfer (or other) restrictions on the Shares subject to
an Option, or (ii) the Plan requires specified transfer restrictions,
the Committee shall make an appropriate adjustment in determining the
Market Value of the Shares subject to such an Option (in order to
take into account that their fair market value may be less than the
fair market value of unrestricted Shares).
8. Exercise of Options by Employees.
(a) Generally. Unless otherwise provided by the Committee pursuant to an
---------
applicable Agreement, each Option shall be fully (100%) exercisable
after the one year period following the date of its grant. An
Option may not be exercised for a fractional Share.
(b) Procedure for Exercise. An Employee may exercise Options, subject to
----------------------
provisions relative to its termination and any limitations on its
exercise, only by (1) written notice of intent to exercise the Option
with respect to a specified number of Shares, and (2) payment to the
Company (contemporaneously with delivery of such notice) in cash, in
Common Stock, or a combination of cash and Common Stock, of the
amount of the Exercise Price for the number of Shares with respect to
which the Option is then being exercised. Each such notice (and
payment where required) shall be delivered, or mailed by prepaid
registered or certified mail, addressed to the Treasurer of the
Company at the Company's executive offices. Common Stock utilized in
full or partial payment of the Exercise Price for Options shall be
valued at its Market Value at the date of exercise and may consist of
Shares subject to the Option being exercised. An Employee who
exercises Non-ISOs pursuant to this Paragraph may satisfy all
applicable federal, state and local income and employment tax
withholding obligations, in whole or in part, by irrevocably electing
to have the Company withhold shares of Common Stock, or to deliver to
the Company shares of Common Stock that the Employee already owns,
having a value equal to the amount required to be withheld; provided
that to the extent not inconsistent
8
<PAGE>
herewith, such election otherwise complies with those requirements
of Paragraphs 8 and 18 hereof.
(c) Period of Exercisability. Except to the extent otherwise provided
------------------------
in the terms of an Agreement, an Option may be exercised hereunder
only while the Employee is employed by the Company and has
maintained Continuous Service from the date of the grant of the
Option, or until the later of three months after termination of such
Continuous Service or the date on which the Option would otherwise
expire, except if the Employee's Continuous Service terminates by
reason of-
(1) "Just Cause" which for purposes hereof shall have the meaning
set forth in any unexpired employment or severance agreement of
the Employee (and, in the absence of any such agreement, shall
mean termination because of the Employee's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation [other
than traffic violations or similar offenses] or final cease-and-
desist order), then the Employee's to exercise such Option shall
expire on the date of such termination;
(2) death, then to the extent that the Employee would have been
entitled to exercise the Option immediately prior to his death,
such Option of the deceased Employee may be exercised within
two years from the date of his death (but not later than the
date on which the Option would otherwise expire) by the personal
representatives of his estate or person or persons to whom his
rights under such Option shall have passed by will or by laws of
descent and distribution;
(3) Disability, then to the extent that the Employee would have been
entitled to exercise the Option immediately prior to his or her
Disability, such Option may be exercised within one year from
the date of termination of employment due to Disability, but not
later than the date on which the Option would otherwise expire.
(d) Effect of the Committee's Decisions. The Committee's determination
-----------------------------------
whether an Employee's Continuous Service has ceased, and the
effective date thereof, shall be final and conclusive on all persons
affected thereby.
(e) Acceleration of Vesting. Notwithstanding the six-month period set
-----------------------
forth in Paragraph 8(a) hereof and except to the extent otherwise
provided in the
9
<PAGE>
terms of an Agreement, all Options held by an Employee whose service
with the Company or an Affiliate terminates due to death,
Disability, retirement, or a Change in Control shall be deemed fully
exercisable and non-forfeitable as of the Employee's last day of
service.
9. Exercise of Options by Non-Employee Directors.
(a) Generally. Unless otherwise provided by the Committee pursuant to an
---------
applicable Agreement, each Option shall be fully (100%) exercisable
after one year following the date of its grant.
(b) Terms of Exercise.
-----------------
(i) Options received by Directors who are not Employees will become
exercisable in accordance with the general rule set forth in
Paragraph 8(a) hereof, and may be exercised from time to time
in the manner set forth in Paragraph 8(b).
(ii) Options granted to Non-Employee Directors shall have a term of
5 years; provided that Options so granted shall expire one year
after the date on which a Director terminates Continuous
Service on the Board, but in no event later than the date on
which such Options would otherwise expire. In the event of
such Director's death during the term of his directorship, such
Options shall become immediately exercisable, and may be
exercised within two years from the date of his death by the
personal representatives of his estate or person or persons to
whom his rights under such Options shall have passed by will or
by laws of descent and distribution, but in no event later than
the date on which such Options would otherwise expire. In the
event of such Director's Disability during his or her
directorship, the Director's Options shall become immediately
exercisable, and such Options may be exercised within one year
of the termination of directorship due to Disability, but not
later than the date that the Options would otherwise expire.
Unless otherwise inapplicable or inconsistent with the
provisions of this Paragraph, the Options to be granted to
Directors hereunder shall be subject to all other provisions of
this Plan.
(c) Effect of the Committee's Decisions. The Committee's determination
-----------------------------------
whether a Director's Continuous Service has ceased, and the
effective date thereof, shall be final and conclusive on all persons
affected thereby.
10
<PAGE>
(d) Acceleration of Vesting. Notwithstanding the six-month period set
-----------------------
forth in Paragraph 9(a) hereof and except to the extent otherwise
provided in the terms of an Agreement, all Options held by a
Director whose service with the Bank terminates due to death,
Disability, retirement or a Charge in Control shall be deemed
fully exercisable and non-forfeitable as of the Director's last
day of service with the Bank.
10. Effect of Changes in Common Stock Subject to the Plan.
(a) Recapitalizations; Stock Splits, Etc. The number and kind of
------------------------------------
Shares reserved for issuance under the Plan, and the number and
kind of Shares subject to outstanding Awards, and the Exercise
Price thereof, shall be proportionately adjusted for any increase,
decrease, change or exchange of Shares for a different number or
kind of shares or other securities of the Company which results
from a merger, consolidation, recapitalization, reorganization,
reclassification, stock dividend, split-up, combination of shares
or similar event in which the number or kind of shares is changed
without the receipt or payment of consideration by the Company.
(b) Transactions in which the Company is Not the Surviving Entity. In
-------------------------------------------------------------
the event of (i) the liquidation or dissolution of the Company,
(ii) a merger or consolidation in which the Company is not the
surviving entity, or (iii) the sale or disposition of all or
substantially all of the Company's assets (any of the foregoing to
be referred to herein as a "Transaction"), all outstanding Awards,
together with the Exercise Prices thereof, shall be equitably
adjusted for any change or exchange of Shares for a different
number or kind of shares or other securities which results from
the Transaction.
(c) Special Rule for ISOs. Any adjustment made pursuant to
---------------------
subparagraphs (a) or (b) hereof shall be made in such a manner as
not to constitute a modification, within the meaning of Section
424(h) of the Code.
(d) Conditions and Restrictions on New, Additional, or Different
------------------------------------------------------------
Shares or Securities. If, by reason of any adjustment made
--------------------
pursuant to this Paragraph, a Participant becomes entitled to new,
additional, or different shares of stock or securities, such new,
additional, or different shares of stock or securities shall
thereupon be subject to all of the conditions and restrictions
which were applicable to the Shares pursuant to the Award before
the adjustment was made.
(e) Other Issuances. Except as expressly provided in this Paragraph,
---------------
the issuance by the Company of shares of stock of any class, or of
securities
11
<PAGE>
convertible into Shares or stock of another class, for cash or
property or for labor or services either upon direct sale or upon the
exercise of rights or warrants to subscribe therefor, shall not
affect, and no adjustment shall be made with respect to, the number,
class, or Exercise Price of Shares then subject to Awards or reserved
for issuance under the Plan.
11. Non-Transferability of Awards.
Awards may not be sold, pledged, assigned, hypothecated, transferred
or disposed of in any manner other than by will or by the laws of descent
and distribution. Notwithstanding any other provision of this Plan to the
contrary, to the extent permissible under Rule 16b-3, and except to the
extent otherwise provided in the terms of an Agreement, a Participant who
is granted Non-ISOs pursuant to this Plan may transfer such Non-ISOs to
his or her spouse, lineal ascendants, lineal descendants, or to a duly
established trust, provided that Non-ISOs so transferred may not again be
transferred other than (i) to the Participant originally receiving the
grant of Non-ISOs, or (ii) to an individual or trust to whom such
Participant could have transferred Non-ISOs pursuant to this Paragraph 11.
Non-ISOs which are transferred pursuant to this Paragraph 11 shall be
exercisable by the transferee subject to the same terms and conditions as
would have applied to such Non-ISOs in the hands of the Participant
originally receiving the grant of such Non-ISOs.
12. Time of Granting Awards.
The date of grant of an Award shall, for all purposes, be the later
of the date on which the Committee makes the determination of granting
such Award and the Effective Date. Notice of the determination shall be
given to each Participant to whom an Award is so granted within a
reasonable time after the date of such grant.
13. Effective Date.
The Plan shall become effective on April , 1997.
14. Modification of Awards.
At any time, and from time to time, the Board may authorize the
Committee to direct execution of an instrument providing for the
modification of any outstanding Award, provided no such modification shall
confer on the holder of said Award any right or benefit which could not be
conferred on him by the grant of a new Award at such time, or impair the
Award without the consent of the holder of the Award.
12
<PAGE>
15. Amendment and Termination of the Plan.
The Board may from time to time amend the terms of the Plan and
suspend or terminate the Plans. No amendment, suspension or termination
of the Plan shall, without the consent of any affected holders of an
Award, alter or impair any rights or obligations under any Award
theretofore granted.
16. Conditions Upon Issuance of Shares.
(a) Compliance with Securities Laws. Shares of Common Stock shall not
--------------------------------
be issued with respect to any Award unless the issuance and
delivery of such Shares shall comply with all relevant provisions
of law, including, without limitation, the Securities Act of 1933,
as amended, the rules and regulations promulgated thereunder, any
applicable state securities law and the requirements of any stock
exchange upon which the Shares may then be listed.
(b) Securities Laws. As a condition to the exercise of an Option, the
----------------
Company may require the person exercising the Option to make such
representations and warranties as may be necessary to assure the
availability of an exemption from the registration requirements of
federal or state securities laws.
(c) Committee Discretion. The Committee shall have the discretionary
---------------------
authority to impose in Agreements such restrictions on Shares as it may deem
appropriate or desirable, including but not limited to the authority to
impose a right of first refusal or to establish repurchase rights or both of
these restrictions.
17. Reservation of Shares.
The Company, during the term of the Plan, will reserve and keep
available for issuance a number of Shares sufficient to satisfy the
requirements of the Plan.
18. Withholding Tax.
The Company's obligation to deliver Shares upon exercise of
Options shall be subject to the Participant's satisfaction of all
applicable federal, state and local income and employment tax
withholding obligations.
19. No Employment or Other Rights.
13
<PAGE>
In no event shall an Employee's or Director's eligibility to
participate or participation in the Plan create or be deemed to create
any legal or equitable right of the Employee, Director or any other
party to continue service with the Company or any Affiliate. Except to
the extent provided in Paragraphs 6(b) and 6(d), no Employee or
Director shall have a right to be granted an Award or, having received
an Award, the right to again be granted an Award. However, an Employee
or Director who has been granted an Award may, if otherwise eligible,
be granted an additional Award or Awards.
20. Governing Law.
The Plan shall be governed by and construed in accordance with
the laws of the State of Michigan, except to the extent that federal
law shall be deemed to apply. Any action by an Employee arising with
respect to any claim regarding any award, any claim of right, or
otherwise arising with respect to this Plan or its administration,
shall only be brought in a court of competent jurisdiction with venue
in the State of Michigan.
14
<PAGE>
Exhibit 10.3
FORM OF
FLAGSTAR BANCORP, INC.
1997 EMPLOYEE STOCK ACQUISITION PLAN
1. PURPOSE.
(a) The purpose of the Flagstar Bancorp, Inc. 1997 Employee Stock
Acquisition Plan (the "Plan") is to provide a means by which employees of
Flagstar Bancorp, Inc., a Michigan corporation (the "Company"), and its
Affiliates, as defined in subparagraph 2(a), may be given an opportunity to
purchase stock of the Company.
(b) The Company, by means of the Plan, seeks to retain the services
of its employees, to secure and retrain the services of new employees, and to
provide incentives for such persons to exert maximum efforts for success of the
Company.
(c) The Plan will provide a cash reimbursement of a portion of the
cost incurred by eligible participants for the purchase in open market
transactions of Company stock, subject at all times to the limitations and
qualifications set forth in the Plan.
2. DEFINITIONS.
(a) "Affiliate" as used in the Plan means any parent corporation or
subsidiary corporation of the Company designated by the Board to participate in
the Plan.
(b) "Eligible Participant" shall mean an employee or director of the
Company or an Affiliate who has been employed for a period of at least twelve
(12) consecutive months and, with respect to employees, at least twenty (20)
hours of work in each week. A break in service shall, unless otherwise provided
by the Board or the Committee, terminate eligibility for participation in the
Plan until a new period of twelve months of service has occurred.
(c) "Total Compensation" shall mean a participant's wages, salary and
other amounts including bonuses received for personal services rendered to the
Company or an Affiliate as an employee or director, including amounts paid to
the participant as a commission; provided, however, that Total Compensation
shall not include amounts paid by the Company or an Affiliate for
<PAGE>
or on account of any participant under any employee benefit plan of the Company
or Affiliate.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors (the
"Board") of the Company unless and until the Board delegates administration to a
committee, as provided in subparagraph 3(c). Whether or not the Board has
delegated administration, the Board shall have the final power to determine all
questions of policy and expediency that may arise in the administration of the
Plan.
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(i) to determine when and how rights to partial reimbursement for
the purchase of stock of the Company shall be granted under the Plan;
(ii) to construe and interpret the Plan and rights granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan, in a manner and to the extent it
shall deem necessary or expedient to make the Plan fully effective;
(iii) to amend the Plan as provided in paragraph 5; and
(iv) generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company.
(c) The Board may delegate administration of the Plan to a committee
composed of not fewer than two (2) members of the Board (the "Committee"). If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers possessed by the
Board, subject however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
4. PARTICIPATION.
<PAGE>
(a) Eligible Participants may participate in the Plan through the
receipt of partial reimbursement from the Company of the cost of the actual
purchase by the individual of Company stock from an registered broker.
(b) Within sixty (60) days of any purchase of Company stock, an
Eligible Participant shall present to the representative of the Company
designated by the Board the original documents from the broker confirming the
purchase of the stock and the price paid therefor, including all commissions and
transaction costs. The Company shall, no less frequently than at the conclusion
of each calendar quarter, reimburse the Eligible Participant an amount equal to
fifteen percent (15%) of the cost of the purchase.
(c) An Eligible Participant's rights to receive reimbursement for a
portion of the cost of the purchase of the Company stock under this Plan shall
be conditioned upon the individual agreeing to hold and not to sell or otherwise
transfer (other than upon death) said shares of Company stock for a period of
one year. Sales or transfers made in violation of this agreement will disqualify
an employee or director from participation in the Plan for the current and two
(2) succeeding years.
(d) An Eligible Participant may receive reimbursement under the Plan
only to the extent that the total cost of purchases do not exceed an amount
equal to seven percent (7%) of Total Compensation received in the previous
calendar year.
5. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN
(a) The Board at any time, and from time to time, may amend the Plan.
(b) The Board may suspend or terminate the Plan at any time.
(c) No amendment, suspension or termination of the Plan shall
adversely effect the ability of an Eligible Participant to receive reimbursement
under the Plan for purchases of the Company stock occurring in the sixty (60)
day period preceding the announcement to the employees of the Company of the
amendment, suspension or termination of the Plan.
6. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as of April , 1997.
<PAGE>
7. INDEMNIFICATION.
To the extent permitted, the Company shall indemnify and save harmless
the Board and Committee members who are officers, directors, shareholders
or employees of the Company against any liabilities, damages or costs incurred
by them in the good faith exercise and performance of their powers and duties
under the Plan.
<PAGE>
Exhibit 10.4
FORM OF
FLAGSTAR BANCORP, INC.
1997 INCENTIVE COMPENSATION PLAN
----------------
Adoption Agreement
----------------
Flagstar Bancorp, Inc. hereby establishes an incentive compensation
plan having the terms and conditions set forth in the Flagstar Bancorp, Inc.
1997 Incentive Compensation Plan Document, as modified by the elections made in
this Adoption Agreement.
I. General Information about the Plan
II. General Information about the Employer
III. Eligibility and Participation
A. For each Plan Year, an individual will participate in the Plan
if he or she is selected as one of or falls within any one of
the following classes on a Participation Determination Date:
1. ____ Key Employees designated by the Committee
("Eligible Key Employees").
2. ____ Other employees designated by the Committee
("Eligible Employees").
B. The following date or dates will constitute Participant
Determination Dates:
1. ____ The first day of the Plan Year.
2. ____ The last day of Plan Year.
3. ____ Service is required on both of the above dates.
IV. Calculation of the Multiplier
A. For each Plan Year, the Multiplier will equal the lesser of 4.0
and the sum of --
1. 75% of the ROA Factor.
2. 75% of the ROE Factor.
3. 50% of the Camels Rating Factor.
4. 75% of the Deposit Factor.
5. 75% of the Loan Factor.
<PAGE>
B. The ROA Factors will equal the ratio of (i) the Employer's ROA for the
Plan Year, to (ii) the Employer's budgeted ROA for the Plan Year.
C. The ROE factor will equal the ratio of (i) the Employer's ROE for the
Plan Year, to (ii) the Employer's budgeted ROE for the Plan Year.
D. The CAMELS Rating Factor will be determined according to the following
schedule:
1. 1.2 for a CAMELS rating of 1.
2. 1.0 for a CAMELS Rating of 2.
3. -1.0 for a CAMELS Rating below 2.
E. The Deposit Factor will equal the ratio of the Employer's total
deposit growth in the Plan Year to its budgeted deposit growth for
the Plan Year.
F. The Loan Factor will equal the ratio of total loan originations to
budgeted loan originations for the Plan Year.
G. Notwithstanding the foregoing, if a ratio referred to in Items IV.B.
or IV.C. is less than 50% for any Plan Year, the corresponding Factor
shall be zero.
V. Bonuses For each Plan Year, Bonuses will be paid in accordance with
Section 4.01 and the following elections:
1. ___ Thomas J. Hammond will receive a Bonus equal to 25% of his
Compensation times the Multiplier.
2. ___ Mark T. Hammond will receive a Bonus equal to 12% of his
Compensation times the Multiplier.
3. ___ Each Key Employee will receive a Bonus equal to 6% of his or
her Compensation times the Multiplier.
4. ___ Each Eligible Employee will receive a Bonus equal to 4% of
his or her Compensation times the Multiplier.
WHEREFORE, on this ____ day of _________, 1997, the Employer hereby
executes this Adoption Agreement, and thereby establishes the Plan upon the
terms and conditions set forth herein and in the Plan Document.
FLAGSTAR BANCORP, INC.
By:
------------------------------
It's President
Witness:
[SEAL]
- ----------------------
9533
<PAGE>
Exhibit 10.5
Form of
FLAGSTAR BANCORP, INC.
1997 DEFERRED COMPENSATION PLAN
Effective April __, 1997
<PAGE>
FLAGSTAR BANCORP, INC.
1997 DEFERRED COMPENSATION PLAN
TABLE OF CONTENTS
Page
ARTICLE I
ESTABLISHMENT OF PLAN AND PURPOSE
1.01 Establishment of Plan 1-1
1.02 Purpose of Plan 1-1
ARTICLE II
DEFINITIONS AND CONSTRUCTION
2.01 Definitions 2-1
2.02 Construction 2-2
ARTICLE III
ELIGIBILITY
3.01 Conditions of Eligibility 3-1
3.02 Commencement of Participation 3-1
3.03 Termination of Participation 3-1
ARTICLE IV
Deferral OF COMPENSATION
4.01 Amount and Manner of Deferral 4-1
4.02 Cessation Of Deferral 4-1
<PAGE>
ARTICLE V
MEMORANDUM ACCOUNT
5.01 Nature of Account 5-1
5.02 Credit to Memorandum Account 5-1
5.03 Changes in Memorandum Account 5-1
5.04 Valuation of Memorandum Account 5-2
5.05 Additional Credit 5-2
ARTICLE VI
DISTRIBUTIONS
6.01 For Reasons Other Than Death 6-1
6.02 Upon Death 6-1
6.03 Emergencies 6-2
6.04 Form of Payment 6-2
ARTICLE VII
ADMINISTRATION OF THE PLAN
7.01 Appointment of Serparte Administrator 7-1
7.02 Powers and Duties 7-1
7.03 Records and Notices 7-2
7.04 Compensation and Expenses 7-2
7.05 Limitation of Authority 7-2
ARTICLE VII
GENERAL PROVISIONS
8.01 Assigment 8-1
8.02 Employment Not Guaranteed by Plan 8-1
8.03 Termination and Amendment 8-1
8.04 Contingency 8-1
8.05 Notice 8-1
8.06 Limitation on Liability 8-2
8.07 Indemnification 8-2
ii
<PAGE>
8.08 Headings 8-2
8.09 Severability 8-2
iii
<PAGE>
FLAGSTAR BANCORP, INC.
1997 DEFERRED COMPENSATION PLAN
ARTICLE I
Establishment of Plan and Purpose
1.01 Establishment of Plan. Flagstar Bancorp, Inc. has established the
---------------------
"Flagstar Bancorp, Inc. 1997 Deferred Compensation Plan," effective as of
April __, 1997 (the "Plan").
1.02 Purpose of Plan. The Plan shall permit management, Directors and
---------------
Employees to enhance the security of themselves and their beneficiaries
following the termination of their employment with the Company (as defined
herein) by deferring until that time a portion of the compensation which may
otherwise be payable to them at an earlier date. By allowing Directors and
Employees to participate in the Plan, the Company expects the Plan to benefit it
in attracting and retaining the most capable individuals to fill such positions.
The parties intend that the arrangements described herein be
unfunded for tax purposes and for purposes of Title I in the Employee
Retirement Income Security Act, as amended from time to time ("ERISA").
1-1
<PAGE>
ARTICLE 2
Definitions and Construction
As used herein, the following words shall have the following meanings:
2.01 Definitions.
-----------
(a) Administrator. The person or persons selected pursuant to Article
-------------
7 below to control and manage the operation and administration of the Plan.
(b) Beneficiaries. The spouse or descendants of Participant or any
-------------
other person receiving benefits hereunder in relation to Participant.
(c) Company. Flagstar Bancorp, Inc., a Michigan corporation and any
-------
subsidiary, successor or affiliate which has adopted this Plan and any successor
thereto. The board of directors of Flagstar Bancorp, Inc., or such board members
authorized by the board of directors from time to time, shall act on behalf of
the Company for purposes of the Plan.
(d) Compensation. Amounts payable to a Participant including annual
------------
salary, directors fees and Incentive Compensation.
(e) Director. Any member of the board of directors of the Company or
--------
any subsidiary, successor or affiliate designated to participate in this Plan.
(f) Effective Date. The effective date of this Plan shall be April ,
--------------
1997.
(g) Employee. An employee of the Company.
--------
(h) Incentive Compensation. Amounts payable to a Participant in
----------------------
addition to annual compensation. Such amounts shall be determined by the
Company, in its sole discretion, as soon as possible following the close of a
calendar year.
2-1
<PAGE>
(i) Memorandum Account. The account maintained for each Participant
------------------
pursuant to Article 5 below.
(j) Participants. The Directors and such management and other
------------
Employees whom the Company identifies as eligible to defer compensation
hereunder and who elect to participate herein.
(i) Plan. The Flagstar Bancorp, Inc. 1997 Deferred Compensation Plan,
----
as stated herein and as amended from time to time.
(l) Plan Year. The period beginning on the Effective Date and ending
---------
on December 31, 1997, and each 12-month period ending on each subsequent
December 31.
(m) Retirement. As to each Participant, the earlier of:
----------
(i) his attaining age 70 1/2 or
(ii) the termination of his Employment.
(n) Unforeseeable Emergency. An Unforeseeable Emergency is a severe
-----------------------
financial hardship to a Participant resulting from a sudden and unexpected
illness or accident of the Participant or of a dependent (as defined in section
152(a) of the Code) of the Participant, loss of the Participant's property due
to casualty or other similar extraordinary and unforeseeable circumstances
arising as a result of events beyond the control of the Participant.
2.02 Construction. The laws of the State of Michigan, as amended from time
------------
to time, shall govern the construction and application of this Agreement. Words
used in the masculine gender shall include the feminine and words used in the
singular shall include the plural, as appropriate. The words "hereof," "herein,"
"hereunder" and other similar compounds of the word "here" shall refer to the
entire Agreement, not to a particular section. All references to statutory
sections shall include the section so identified as amended from time to time or
any other statute of similar import. If any provisions of the Internal Revenue
Code, ERISA or other statutes or regulations render any provisions of this Plan
unenforceable, such provision shall be of no force and effect only to the
minimum extent required by such law.
2-2
<PAGE>
ARTICLE 3
Eligibility
3.01 Conditions of Eligibility. The Administrator shall, from time to time,
-------------------------
specify the Employees eligible to participate herein in addition to all
Directors on Appendix A, consistent with the guidelines in effect as of the date
of selection as defined in Appendix C.
3.02 Commencement of Participation. An individual identified as eligible to
-----------------------------
participate herein shall, by electing a deferral of compensation substantially
in the form of Appendix B attached hereto, commence participation as of the
first day of any Plan Year beginning on or after his or her identification as
eligible for participation. During the first Plan Year, Employees and Directors
shall have until 30 days following the Effective Date to elect deferral of
compensation for such Plan year.
3.03 Termination of Participation. An individual's right to defer
----------------------------
compensation shall cease as of the earlier of the termination of his
employment or service as a Director or action by the Administrator removing him
from the Employees eligible to participate herein.
If an individual's right to defer compensation terminates during a
Plan Year, his deferral for such year shall, consistent with his deferral
election for such year, include only Compensation otherwise earned before the
cessation of his or her eligibility to defer.
3-1
<PAGE>
ARTICLE 4
Deferral of Compensation
4.01 Amount and Manner of Deferral. Prior to the commencement of any Plan
-----------------------------
Year beginning on or after the Effective Date, or for the first Plan Year,
within 30 days of the Effective Date, a Participant may submit to the Company a
written election substantially in the form of Appendix B attached hereto
indicating the amount of Compensation for such Plan Year which he or she elects
to be deferred, which election shall become irrevocable immediately upon
commencement of such Plan Year or, for purpose of the first Plan Year,
immediately upon such election. The Company shall, consistent with such
election, defer all or such portion of his salary, fees and/or Incentive
Compensation earned in such Plan Year provided; however, that the Company shall
not allow a Participant to defer Compensation unless such deferral is at least
equal to the amount specified in Appendix C.
If a Participant elects to defer a portion of his or her salary, the
Company shall reduce the Participant's regular salary by the amount deferred on
a pro rata basis during the Plan Year of deferral. If a Participant elects to
defer all or a portion of the Incentive Compensation that may become payable to
him, the Company shall reduce each Incentive Compensation payment by the
percentage elected by the participant.
4.02 Cessation of Deferral. In the event of an Unforeseeable Emergency, a
---------------------
Participant may request in writing that deferrals elected hereunder cease for
the then current Plan Year. Such Unforeseeable Emergency must inflict hardship
upon the Participant and must arise from causes beyond the Participant's
control. The Administrator shall, in its reasonable judgment, determine whether
the applicant could not address the emergency through reimbursement or
compensation by insurance or otherwise, by liquidation of other assets (provided
such liquidation, in itself, would not create a financial hardship).
Circumstances that will constitute an Unforeseeable Emergency will depend upon
the facts of each case, consistent with the provisions of Treasury Regulation
section 1.457-2(h)(4) and (5), as now or hereafter in effect. If the
Administrator determines that such an Unforeseeable Emergency exists, the
deferrals for such Plan Year shall cease as to the Participant. If the
Administrator determines that no such emergency exists, the deferrals shall
continue as originally elected.
If a Participant, consistent with the immediately preceding paragraph,
ceases deferral in a Plan Year, he may not resume deferrals hereunder
4-1
<PAGE>
(if otherwise eligible therefor) until the Plan Year following the Plan Year in
which such cessation occurred.
4-2
<PAGE>
ARTICLE 5
Memorandum Account
5.01 Nature of Account. Only for the purpose of measuring payments due
-----------------
Participants hereunder, the Company shall maintain on behalf of each Participant
a Memorandum Account to which the Company shall credit the amounts described in
this Article 5.
The Memorandum Account hereunder and assets, if any and of any
nature, acquired by the Company to measure a Participant's benefits hereunder
shall not constitute or be treated for any reason as a trust for, property of or
a security interest for the benefit of, Participant, his Beneficiaries or any
other person. Participant and the Company acknowledge that the Plan constitutes
an unsecured promise by the Company to pay benefits to the Participants or their
Beneficiaries, that Participants' rights hereunder (by electing to defer
compensation hereunder) are limited to those of general unsecured creditors of
the Company and that the establishment of the Plan, acquisition of assets to
measure Participant's benefits hereunder or deferral of all or any portion of
Participant's Compensation hereunder does not prevent any property of the
Company from being subject to the rights of all the Company's creditors. The
Company may, in its discretion, contribute amounts to a trust and any trust
created by the Company and any assets held by the trust (the "Trust") to assist
it in meeting its obligations under the Plan will conform to the terms of the
Internal Revenue Service's model trust, as described in Revenue Procedure 92-64.
5.02 Credit to Memorandum Account. As of the last day of each Plan Year,
----------------------------
the Company shall credit to the Memorandum Account of each Participant the
amount, if any, of his Compensation deferred for such Plan Year (even if
calculated and otherwise payable following the close of such Plan Year). If the
Company elects, it may credit to a Participant's Memorandum Account during a
Plan Year amounts representing Compensation otherwise payable before the end of
the Plan Year. In such instances, the Company shall credit such amounts to
Participants' Memorandum Accounts as the amounts would otherwise become payable
and shall do so on a uniform and nondiscriminatory basis for all Participants.
5.03 Changes in Memorandum Account. If a Participant defers the receipt of
-----------------------------
Compensation, his or her Memorandum Account shall record the receipt of such
amounts and reflect them as if invested as indicated from time to time on
Appendix B. The Participant shall be offered the opportunity to designate the
5-1
<PAGE>
allocation of deferred compensation among no fewer than two types of investments
including a deemed investment in Company Common Stock. From time to time, the
Memorandum Account shall reflect the income and losses and increase or decrease
in value experienced by assets specified on Appendix B. A Participant's
Memorandum Account shall also reflect expenses generated by, and related to, the
investment choices made for the Account.
No individual may commence participation herein as to the deferral of
any amount without first submitting an election pursuant to this subsection
5.03. A Participant or, following his or her death, his or her Beneficiaries may
continue submitting elections hereunder, which may be effective each January 1
and July 1, until the distribution of all amounts from the Memorandum Account.
All elections must be in writing and must be signed by the Participant and the
Administrator.
5.04 Valuation of Memorandum Account. Within 90 days after the last day of
-------------------------------
each Plan Year, the Company shall provide each Participant or his or her
Beneficiaries a statement indicating the balance of his or her Memorandum
Account as of the last day of such Plan Year, reflecting the amount of
deferrals, if any, occurring for such year, together with all other changes in
value during the Plan Year. Participants who disagree with the information
provided in such statements must submit objections, in writing, to the
Administrator within 90 days of receipt of such statements.
5-2
<PAGE>
ARTICLE 6
Distributions
6.01 For Reasons Other Than Death. The Company shall pay an amount equal
----------------------------
to the entire balance of a Participant's Memorandum Account to him in
accordance with the Participant's written election substantially in the form of
Appendix B attached hereto.
6.02 Upon Death.
----------
(a) Upon a Participant's death, either before or after his
Retirement, with a balance remaining in his Memorandum Account, the Company
shall pay an amount equal to entire balance of his Memorandum Account to the
Beneficiaries he specifies or, if none, to his surviving spouse or, if none, to
his estate. Each Participant may designate a Beneficiary of Beneficiaries to
receive the unpaid balance of his Memorandum Account upon his death and may
revoke or modify such designation at any time and from time to time by
submitting to the Administrator a Beneficiary Designation substantially in
the form thereof attached hereto as Exhibit B.
(b) If a Participant's death occurs, whether before or after the
payment of any amount to him hereunder, payments shall be made, as soon as
practicable, to his Beneficiary or if none to his estate in lump sum.
(c) If a Beneficiary survives a Participant but dies prior to
receipt of the entire amount in the Memorandum Account due him, the Company
shall, as soon as practicable, pay to the estate of the Beneficiary in a lump
sum the entire remaining balance therein due the Beneficiary.
(d) The Administrator shall reduce the balance in the deceased
Participant's Memorandum Account by the amount of any payment pursuant to this
section 6.02 immediately upon the occurrence of such payment.
6.03 Emergencies. In the event of an Unforeseeable Emergency either before
-----------
or after the commencement of payments hereunder, a Participant or Beneficiary
may request in writing that all or any portion of the benefits due him hereunder
be paid in one or more installments prior to the normal time for payment of such
amount. The Administrator shall, in its reasonable judgment, determine whether
the applicant could not address the emergency through reimbursement or
compensation by insurance or otherwise, by liquidation of other assets (provided
<PAGE>
such liquidation, in itself, would not create a financial hardship) or by
ceasing deferrals hereunder. Only if the Administrator determines that such an
Unforeseeable Emergency exists, the Company shall pay to the Participant or
Beneficiary, as the case may be, an amount equal to the lesser of (a) the amount
requested or (b) the amount reasonably necessary to alleviate the hardship. The
Administrator shall use its reasonable discretion to determine when the
prepayments shall be made and shall immediately reduce the balance in the
Participant's Memorandum Account by the amount of such payment.
6.04 Form of Payment. All payments made pursuant to this Plan shall be
---------------
made in cash except that if the Participant has selected investment in Company
stock in Appendix B, the Administrator may but is not obligated to honor a
request for a payment from a Participant or Beneficiary for the distribution of
such stock.
<PAGE>
ARTICLE
Administration of the Plan
7.01 Appointment of Separate Administrator. The Company shall, in writing
-------------------------------------
on a form substantially similar to the attached Appendix C, appoint a separate
Administrator. Any person, including, but not limited to, Employees, shall be
eligible to serve as Administrator. Two or more persons may form a committee to
serve as Administrator. Persons serving as Administrator may resign by written
notice to the Company and the Company may appoint or remove such persons. An
Administrator consisting of more than one person shall act by a majority of its
members at the time in office, either by vote at a meeting or in writing without
a meeting. An Administrator consisting of more than one person may authorize any
one or more of its members to execute any document or documents on behalf of the
Administrator, in which event the Administrator shall notify the Company of
the member or members so designated. The Company shall accept and rely upon any
document executed by such member or members as representing action by the
Administrator until the Administrator shall file with the Company a written
revocation of such designation. No person serving as Administrator shall vote or
decide upon any matter relating solely to himself or solely to any of his rights
or benefits pursuant to the Plan.
7.02 Powers and Duties. The Administrator shall administer the Plan in
-----------------
accordance with its terms. The Administrator shall have full and complete
authority and control with respect to Plan operations and administration unless
the Administrator allocates and delegates such authority or control pursuant to
the procedures stated in subsection (b) or (c) below. Any decisions of the
Administrator or its delegate shall be final and binding upon all persons
dealing with the Plan or claiming any benefit under the Plan. The Administrator
shall have all powers which are necessary to manage and control Plan operations
and administration including, but not limited to, the following powers:
(a) to employ such accountants, counsel or other persons as it deems
necessary or desirable in connection with Plan administration. Except for
expenses provided for in subsection 5.03, the Company shall bear the costs of
such services and other administrative expenses;
(b) to designate in writing persons other than the Administrator to
perform any of its powers and duties hereunder;
<PAGE>
(c) to allocate in writing any of its powers and duties hereunder to
those persons who have been designated to perform Plan fiduciary
responsibilities;
(d) the discretionary authority to construe and interpret the Plan,
including the power to construe disputed provisions;
(e) to resolve all questions arising in the administration,
interpretation and application of the Plan, including, but not limited to,
questions as to the eligibility or the right of any person to a benefit;
(f) to adopt such rules, regulations, forms and procedures from time
to time as it deems advisable and appropriate in the proper administration of
the Plan;
(g) to prescribe procedures to be followed by any person in applying
for distributions pursuant to the Plan and to designate the forms or documents,
evidence and such other information as the Administrator may reasonably deem
necessary, desirable or convenient to support an application for such
distribution;
(h) to apply consistently and uniformly rules, regulations and
determinations to all Participants and beneficiaries in similar circumstances;
7.03 Records and Notices. The Administrator shall keep a record of all
-------------------
its proceedings and acts and shall maintain all such books of accounts, records
and other data as may be necessary for proper plan administration. The
Administrator shall notify the Company of any action taken by the Administrator
which affects the Company's or a Participant's Plan obligations or rights and,
when required, shall notify any other interested parties.
7.04 Compensation and Expenses. The expenses incurred by the Administrator
-------------------------
in the proper administration of the Plan shall be paid from the Company. An
Administrator who is an Employee shall not receive any additional fee or
compensation for services rendered as an Administrator.
7.05 Limitation of Authority. The Administrator shall not add to, subtract
-----------------------
from or modify any of the terms of the Plan, change or add to any benefits
prescribed by the Plan, or waive or fail to apply any Plan requirement for
benefit eligibility.
7-2
<PAGE>
ARTICLE 8
General Provisions
8.01 Assignment. No Participant or Beneficiary may sell, assign, transfer,
----------
encumber or otherwise dispose of the right to receive payments hereunder. A
Participant's rights to benefit payments under the Plan are not subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, attachment or garnishment by creditors of the Participant or the
Participant's beneficiary.
8.02 Employment Not Guaranteed by Plan. The establishment of this Plan,
---------------------------------
its amendments and the granting of a benefit pursuant to the Plan shall not give
any Participant the right to continued Employment or limit the right of the
Company to dismiss or impose penalties upon the Participant or modify the terms
of Employment of any Participant.
8.03 Termination and Amendment. The Company may at any time and from time
-------------------------
to time terminate, suspend, alter or amend this Plan and no Participant or
any other person shall have any right, title, interest or claim against the
Company, its directors, officers or employees for any amounts, except that
Participant shall be vested in his Memorandum Account hereunder as of the date
on which the Plan is terminated, suspended, altered or amended and (unless the
Company and Participant agree to the contrary) such amount shall (a) continue to
fluctuate pursuant to the investment election then in effect and (b) be paid to
the Participant or his Beneficiaries at the time and in the manner provided by
Article 6 above.
8.04 Contingency. The Company may apply for private rulings from the
-----------
United States Department of Labor as to the exemption of the arrangement
described herein from the reporting and disclosure requirements of ERISA and
from the Internal Revenue Service as to the deductibility from taxable income of
benefits paid hereunder or the exclusion of amounts deferred hereunder from the
taxable income of Participant until paid. If the Company applies for a private
letter ruling from the Department of Labor or Internal Revenue Service and does
not receive a satisfactory reply thereto, the Company may deem this Plan
terminated, in which event, the parties shall treat all amounts deferred
hereunder as immediately payable to the Participants and all parties' rights and
obligations hereunder shall thereupon cease.
8-1
<PAGE>
8.05 Notice. Any and all notices, designations or reports provided for
------
herein shall be in writing and delivered personally or by registered or
certified mail, return receipt requested, addressed, in the case of the Company,
its Board of Directors or Administrator, to the Company's principal business
office and, in the case of a Participant or Beneficiary, to his home address as
shown on the records of the Company.
8.06 Limitation on Liability. In no event shall the Company, Administrator
-----------------------
or any Employee, officer or Director of the Company incur any liability for any
act or failure to act unless such act or failure to act constitutes a lack of
good faith, willful misconduct or gross negligence with respect to the Plan.
8.07 Indemnification. The Company shall indemnify the Administrator and
---------------
any Employee, officer or Director of the Company against all liabilities arising
by reason of any act or failure to act unless such act or failure to act is due
to such person's own gross negligence or willful misconduct or lack of good
faith in the performance of his duties to the Plan or Trust. Such
indemnification shall include, but not be limited to, expenses reasonably
incurred in the defense of any claim, including attorney and legal fees, and
amounts paid in any settlement or compromise; provided, however, that
indemnification shall not occur to the extent that it is not permitted by
applicable law. Indemnification shall not be deemed the exclusive remedy of any
person entitled to indemnification pursuant to this section. The indemnification
provided hereunder shall continue as to a person who has ceased acting as a
director, officer, member, agent or Employee of the Administrator or as an
officer, Director or Employee of the Company, and such person's rights shall
inure to the benefit of his heirs and representatives.
8.08 Headings. All articles and section headings in this Plan are intended
--------
merely for convenience and shall in no way be deemed to modify or supplement the
actual terms and provisions stated thereunder.
8.09 Severability. Any provision of this Plan prohibited by law shall be
------------
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof. The illegal or invalid provisions shall be fully
severable and this Plan shall be construed and enforced as if the illegal or
invalid provisions had never been inserted in this Plan.
<PAGE>
APPENDIX A
PARTICIPANTS IN THE
FLAGSTAR BANCORP, INC.
1997 DEFERRED COMPENSATION PLAN
NAME
----
<PAGE>
APPENDIX B
DEFERRED COMPENSATION AGREEMENT
THIS AGREEMENT is made as of the ____ day of ______, 199_, by and between
FLAGSTAR BANCORP, Inc. ("Flagstar") and ______________________ (the "Employee").
RECITALS:
A. The Employee has been and is currently employed by the Company.
B. Flagstar desires to retain the services of the Employee and to induce
him to continue his [her] employment by providing him with a deferred
compensation plan.
C. Flagstar has established the Flagstar Bancorp, Inc. 1997 Deferred
Compensation Plan (the "Plan").
D. The Employee desires to participate in the Plan by irrevocably electing
to defer a portion of his [her] Compensation.
AGREEMENTS:
NOW, THEREFORE, for and in consideration of the premises and of the mutual
covenants herein contained, the parties hereby agree as follows:
1. The parties acknowledge that the Plan, attached as Appendix I, is
incorporated as part of this Agreement. Capitalized terms shall have the meaning
assigned to them in the Plan unless the context clearly requires otherwise.
2. The Employee irrevocably directs Flagstar to defer for the _______
calendar year payment of $______ per pay period or ____% [not to exceed 25%] of
his [her] salary (before any pretax and after tax reductions and
1
<PAGE>
before any tax withholding) and ___% [not to exceed 25%] of his [her] Incentive
Compensation (as defined in Section 1.1(h) of the Plan) effective ____________,
199_ pursuant to the provisions of the Plan. Flagstar agrees to provide benefits
according to the Plan's provisions. Notwithstanding the foregoing, because
Flagstar shall not allow the Employee to defer his [her] salary or Incentive
Compensation unless the total amount deferred for the year is anticipated to
exceed $5,000 per year, the final Incentive Compensation payment to the Employee
during the calendar year shall be reduced by an amount necessary to equal total
deferrals of $5,000 during the calendar year.
3. The Employee's direction under Section 2 of this Agreement is
irrevocable and may only be modified or revoked, prior to the commencement of
the calendar year or in an emergency as provided by Section 4.02 of the Plan.
4. The parties acknowledge that the amount and payment of benefits
resulting from the deferral of Compensation pursuant to this Agreement shall be
determined exclusively pursuant to the terms of the Plan. The value of the
Employee's benefit shall be determined in accordance with Section 4.01 of the
Plan and the value of the Account established pursuant to Article 5 of the Plan.
5. The Employee hereby authorizes the Administrator to reduce the
accumulation of his [her] Account by the expenses of such investment if any.
6. The parties acknowledge that this Agreement shall not be construed as
giving the Employee the right to continue as an employee of Flagstar or any of
its subsidiaries or as otherwise limiting the right of Flagstar to modify the
terms of employment of the Employee.
7. The Employee directs that any benefits payable pursuant to the Plan
upon his [her] death be paid to the following primary beneficiaries and to the
following contingent beneficiaries:
Primary Beneficiaries: Percentage of Benefit
- ------------------------------ ------------------------------
- ------------------------------ ------------------------------
- ------------------------------ ------------------------------
Contingent Beneficiaries: Percentage of Benefit
- ------------------------------ ------------------------------
2
<PAGE>
- ------------------------------ ------------------------------
The Employee hereby acknowledges that these designations shall remain
in full force and effect until revoked or modified by the Employee in writing.
8. In the event of any inconsistency between the terms of this Agreement
and the terms of the Plan, the terms of the Plan shall govern.
9. For purposes of Section 5.03 of the Plan, the Employee directs that any
amounts credited to the Employee's Account under this Agreement shall be
credited with earnings based on the following deemed investments:
___% to earn an amount equal to the highest rate paid by Flagstar on a
certificate of deposit with a maturity of one (1) year; or
___% to earn income and reflect capital appreciation and depreciation as if
invested in shares of the Common Stock of Flagstar.
The Employee hereby acknowledges that these designations shall remain
in full force and effect until modified by the Employee in writing. Such
modification shall only be permitted twice each year to be effective on
January 1 and July 1 of each year.
10. Pursuant to Section 6.01 of the Plan, the Employee irrevocably directs
Flagstar to pay the entire amount of his [her] Account, representing
Compensation deferred under this Agreement (including accrued interest and
capital appreciation or depreciation, if any), in one of the following methods:
Distribution Option Employee's Election
- ------------------- -------------------
(a) Lump sum distribution to be
paid as soon as possible but not
later than 120 days following the
Retirement of the Employee. ------------------------------
3
<PAGE>
(b) Five equal annual installments,
the first such installment to be paid
as soon as possible but not later
than 120 days following the Retirement
of the Employee. ------------------------------
(c) Ten equal annual installments,
the first such installment to be paid
as soon as possible but not later than
120 days following the Retirement of
the Employee. ------------------------------
The Employee's election under this Section 10 of this Agreement is irrevocable
and only applies to Compensation deferred under this Agreement. Any elections
made under prior deferred compensation agreements under the Plan shall remain in
full force and effect and the Employee shall have no right to decide the method
of distribution of any amounts earned prior to the commencement of the current
calendar year.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first written above.
FLAGSTAR BANCORP, INC.
[Corporate Seal] By
------------------------------
Mark T. Hammond, President
---------------------------------
{Employee}
4
<PAGE>
APPENDIX C
GUIDELINES FOR THE SELECTION OF PARTICIPANTS
IN THE FLAGSTAR BANCORP, INC.
1997 DEFERRED COMPENSATION PLAN
Pursuant to Section 3.01 of the Flagstar Bancorp, Inc. 1997 Deferred
Compensation Plan (the "Plan"), the Administrator of the Plan has the discretion
to select participants for the Plan. Effective initially upon the adoption of
the Plan, and each year thereafter until this Appendix C is amended, an
individual will be eligible for selection as a participant in the Plan if he or
she satisfies both of the following requirements:
. the individual is a Vice President of Flagstar, including any
subsidiary of successor thereof now or hereinafter created (the "Company");or
. the individual earned at least $50,000 from the Company during the
prior calendar year or is anticipated to earn at least $50,000 with the Company
during the current or next calendar year.
These requirements will remain in effect until revoked, in writing, by the
Administrator of the Plan.
Pursuant to Section 4.01 of the Plan, any individual seeking to
participate in the Plan must defer, if selected by the Administrator, at least
$5,000 during the Plan year in which the individual participates in the Plan.
This minimum deferral will remain in effect until modified or revoked, in
writing, by the Administrator of the Plan.
Pursuant to Section 7.01 of the Plan, the Administrator of the Plan
shall be the members of the Compensation Committee of the Board of Directors of
Flagstar. These individuals shall serve as the Administrator of the Plan until
the Board of Directors of Flagstar appoints or removes an individual or an
individual resigns pursuant to Section 7.01 of the Plan.
<PAGE>
APPENDIX D
DEFERRED COMPENSATION AGREEMENT
THIS AGREEMENT is made as of the ______ day of ______, 199_, by and
between FLAGSTAR BANCORP, Inc. ("Flagstar") and ______________ (the "Director").
RECITALS:
A. The Director has been and is currently employed by the Company.
B. Flagstar desires to retain the services of the Director and to
induce him to continue his [her] services by providing him or her with a
deferred compensation plan.
C. Flagstar has established the Flagstar Bancorp, Inc. 1997 Deferred
Compensation Plan (the "Plan").
D. The Director desires to participate in the Plan by irrevocably
electing to defer a portion of his [her] Compensation.
AGREEMENTS:
NOW, THEREFORE, for and in consideration of the premises and of the
mutual covenants herein contained, the parties hereby agree as follows:
1. The parties acknowledge that the Plan, attached as Appendix I, is
incorporated as part of this Agreement. Capitalized terms shall have the meaning
assigned to them in the Plan unless the context clearly requires otherwise.
2. The Director irrevocably directs Flagstar to defer for the _______
calendar year payments of $______ or ___% (before any pretax
1
<PAGE>
and after tax reductions and before any tax withholding) of his [her]
Compensation effective ______________, 199_ pursuant to the provisions of the
Plan. Flagstar agrees to provide benefits according to the Plan's provisions.
3. The Director's direction under Section 2 of this Agreement is
irrevocable and may only be modified or revoked, prior to the commencement of
the calendar year or in an emergency as provided by Section 4.02 of the Plan.
4. The parties acknowledge that the amount and payment of benefits
resulting from the deferral of Compensation pursuant to this Agreement shall be
determined exclusively pursuant to the terms of the Plan. The value of the
Director's benefit shall be determined in accordance with Section 4.01 of the
Plan and the value of the Account established pursuant to Article 5 of the Plan.
5. The Director hereby authorizes the Administrator to reduce the
accumulation of his [her] Account by the expenses of such investment if any.
6. The parties acknowledge that this Agreement shall not be construed as
giving the Director the right to continue as an Director of Flagstar or any of
its subsidiaries or as otherwise limiting the right of Flagstar to modify the
terms of employment of the Director.
7. The Director directs that any benefits payable pursuant to the Plan
upon his [her] death be paid to the following primary beneficiaries and to the
following contingent beneficiaries:
Primary Beneficiaries: Percentage of Benefit
- ------------------------------ ------------------------------
- ------------------------------ ------------------------------
- ------------------------------ ------------------------------
Contingent Beneficiaries: Percentage of Benefit
- ------------------------------ ------------------------------
- ------------------------------ ------------------------------
The Director hereby acknowledges that these designations shall remain
in full force and effect until revoked or modified by the Director in writing.
2
<PAGE>
8. In the event of any inconsistency between the terms of this Agreement
and the terms of the Plan, the terms of the Plan shall govern.
9. For purposes of Section 5.03 of the Plan, the Director directs that any
amounts credited to the Director's Account under this Agreement shall be
credited with earnings based on the following deemed investments:
___% to earn an amount equal to the highest rate paid by Flagstar on a
certificate of deposit with a maturity of one (1) year; or
___% to earn income and reflect capital appreciation and depreciation as
if invested in shares of the Common Stock of Flagstar.
The Director hereby acknowledges that these designations shall remain
in full force and effect until modified by the Director in writing. Such
modification shall only be permitted twice each year to be effective on
January 1 and July 1 of each year.
10. Pursuant to Section 6.01 of the Plan, the Director irrevocably directs
Flagstar to pay the entire amount of his [her] Account, representing
Compensation deferred under this Agreement (including accrued interest and
capital appreciation or depreciation, if any), in one of the following methods:
Distribution Option Director's Election
- ------------------- -------------------
(a) Lump sum distribution to be paid
as soon as possible but not later than
120 days following the Retirement of
the Director. ------------------------------
(b) Five equal annual installments,
the first such installment to be paid
as soon as possible but not later than
120 days following the Retirement of
the Director. ------------------------------
3
<PAGE>
(c) Ten equal annual installments,
the first such installment to be paid
as soon as possible but not later than
120 days following the Retirement of
the Director. ------------------------------
The Director's election under this Section 10 of this Agreement is irrevocable
and only applies to Compensation deferred under this Agreement. Any elections
made under prior deferred compensation agreements under the Plan shall remain in
full force and effect and the Director shall have no right to decide the method
of distribution of any amounts earned prior to the commencement of the current
calendar year.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first written above.
FLAGSTAR BANCORP, INC.
[Corporate Seal] By
--------------------------------
Mark T. Hammond, President
----------------------------------
{Director}
4
<PAGE>
Exhibit 23.1
Consent of Independent Certified Public Accountants
We have issued our report dated March 3, 1997 accompanying the consolidated
financial statements of Flagstar Bancorp, Inc. contained in the Registration
Statement and Prospectus. We consent to the use of the aforementioned report in
the Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts".
/s/ Grant Thorton LLP
Detroit, Michigan
March 31, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FLAGSTAR
BANCORP, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 44,187
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,114,336
<ALLOWANCE> 3,500
<TOTAL-ASSETS> 1,297,226
<DEPOSITS> 624,485
<SHORT-TERM> 389,801
<LIABILITIES-OTHER> 204,472
<LONG-TERM> 0
0
0
<COMMON> 112
<OTHER-SE> 78,356
<TOTAL-LIABILITIES-AND-EQUITY> 1,297,226
<INTEREST-LOAN> 74,588
<INTEREST-INVEST> 0
<INTEREST-OTHER> 1,591
<INTEREST-TOTAL> 76,179
<INTEREST-DEPOSIT> 30,431
<INTEREST-EXPENSE> 15,536
<INTEREST-INCOME-NET> 30,212
<LOAN-LOSSES> 2,604
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 58,820
<INCOME-PRETAX> 27,322
<INCOME-PRE-EXTRAORDINARY> 17,023
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,023
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.51
<YIELD-ACTUAL> 0.027
<LOANS-NON> 30,621
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,102
<CHARGE-OFFS> 1,206
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 3,500
<ALLOWANCE-DOMESTIC> 2,200
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,300
</TABLE>
<PAGE>
Exhibit 99.1
CONSENT OF DIRECTOR
I, Richard S. Elsea, hereby consent to act as a director of Flagstar
Bancorp, Inc. (the "Company"), effective upon consummation of the offering of
the Company's common stock as set forth in the Prospectus contained in the
Company's Registration Statement on Form S-1 (File No. 333-21621). I also
consent to reference to the undersigned in the Prospectus under the caption
"Management."
/s/ Richard S. Elsea March 31, 1997
-------------------------- --------------
Richard S. Elsea Date
<PAGE>
Exhibit 99.2
CONSENT OF DIRECTOR
I, James D. Isbister, hereby consent to act as a director of Flagstar
Bancorp, Inc. (the "Company"), effective upon consummation of the offering of
the Company's common stock as set forth in the Prospectus contained in the
Company's Registration Statement on Form S-1 (File No. 333-21621). I also
consent to reference to the undersigned in the Prospectus under the caption
"Management."
/s/ James D. Isbister March 31, 1997
--------------------------- --------------
James D. Isbister Date
<PAGE>
Exhibit 99.3
CONSENT OF DIRECTOR
I, John Kersten, hereby consent to act as a director of Flagstar Bancorp,
Inc. (the "Company"), effective upon consummation of the offering of the
Company's common stock as set forth in the Prospectus contained in the Company's
Registration Statement on Form S-1 (File No. 333-21621). I also consent to
reference to the undersigned in the Prospectus under the caption "Management."
/s/ John Kersten March 31, 1997
----------------------- --------------
John Kersten Date
<PAGE>
Exhibit 99.4
CONSENT OF DIRECTOR
I, Michael Kojaian,hereby consent to act as a director of Flagstar Bancorp,
Inc. (the "Company"), effective upon consummation of the offering of the
Company's common stock as set forth in the Prospectus contained in the Company's
Registration statement on Form S-1 (File No. 333-21621). I also consent to
reference to the undersigned in the Prospectus under the caption "Management."
/s/ Michael Kojaian March 31,1997
------------------------ --------------
Michael Kojaian Date
<PAGE>
Exhibit 99.5
CONSENT OF DIRECTOR
I, Michael W. Carrie, hereby consent to act as a director of Flagstar
Bancorp, Inc. (the "Company"), effective upon consummation of the offering of
the Company's common stock as set forth in the Prospectus contained in the
Company's Registration Statement on Form S-1 (File No. 333-21621). I also
consent to reference to the undersigned in the Prospectus under the Caption
"Management".
/s/ Michael W. Carrie March 31,1997
------------------------- -------------
Michael W. Carrie Date
