<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No.: 0-22353
-----------------------
FLAGSTAR BANCORP, INC.
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-3150651
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2600 TELEGRAPH ROAD, BLOOMFIELD HILLS, MICHIGAN 48302-0953
----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 338-7700
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. Yes X No .
--- ---
As of May 12, 1999, 13,670,000 shares of the registrant's Common Stock,
$0.01 par value, were issued and outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements of the Registrant are
as follows:
Consolidated Statements of Financial Condition - March 31, 1999
(unaudited) and December 31, 1998.
Unaudited Consolidated Statements of Earnings - For the three months
ended March 31, 1999 and 1998.
Unaudited Consolidated Statements of Cash Flows - For the three months
ended March 31, 1999 and 1998.
Condensed Notes to Consolidated Financial Statements.
When used in this Form 10-Q or future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases or other public or
stockholder communications, or in oral statements made with the approval of an
authorized executive officer, the words or phrases "would be", "will allow",
"intends to", "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project", or similar expressions are intended to
identify "forward looking statement" within the meaning of the Private
Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
2
<PAGE> 3
FLAGSTAR BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
ASSETS 1999 1998
--------------------------------------
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 56,532 $ 75,799
Loans receivable
Mortgage loans available for sale 2,626,141 1,831,531
Loans held for investment 625,636 747,185
Less: allowance for losses (21,500) (20,000)
----------- -----------
Loans receivable, net 3,230,277 2,558,716
Federal Home Loan Bank stock 57,838 57,837
Other investments -- 500
----------- -----------
Total earning assets 3,288,115 2,617,053
Accrued interest receivable 21,137 24,812
Repossessed assets 24,049 22,966
Premises and equipment 33,657 31,124
Mortgage servicing rights 137,222 150,258
Other assets 105,111 124,433
----------- -----------
Total assets $ 3,665,823 $ 3,046,445
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts $ 2,038,397 $ 1,923,370
Federal Home Loan Bank advances 1,001,394 456,019
----------- -----------
Total interest bearing liabilities 3,039,791 2,379,389
Accrued interest payable 16,704 16,659
Undisbursed payments on
loans serviced for others 114,304 184,498
Escrow accounts 114,376 104,455
Liability for checks issued 74,253 65,634
Federal income taxes payable 45,896 49,265
Other liabilities 86,378 82,693
----------- -----------
Total liabilities 3,491,702 2,882,593
STOCKHOLDERS' EQUITY
Common stock - $.01 par value,
40,000,000 shares authorized,
13,670,000 shares issued at March 31, 1999 and
December 31, 1998 137 137
Additional paid in capital 29,988 29,988
Retained earnings 143,996 133,727
----------- -----------
Total stockholders' equity 174,121 163,852
----------- -----------
Total liabilities and stockholders' equity $ 3,665,823 $ 3,046,445
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
<PAGE> 4
FLAGSTAR BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
1999 1998
------------ ----------
<S> <C> <C>
INTEREST INCOME
Loans $51,233 $37,085
Other 1,196 823
------- -------
Total 52,429 37,908
INTEREST EXPENSE
Deposits 26,782 16,729
FHLB advances 9,436 9,722
Other 2,004 961
------- -------
Total 38,222 27,412
------- -------
Net interest income 14,207 10,496
Provision for losses 2,073 2,621
------- -------
Net interest income after provision for losses 12,134 7,875
NON-INTEREST INCOME
Loan administration 3,151 80
Net gain on loan sales 19,208 16,802
Net gain on sales of mortgage servicing rights 1,884
695
Other fees and charges 3,242 1,111
------- -------
Total 26,296 19,877
NON-INTEREST EXPENSE
Compensation and benefits 9,411 4,263
Occupancy and equipment 4,562 3,732
General and administrative 6,963 7,304
------- -------
Total 20,936 15,299
------- -------
Earnings before federal income taxes 17,494 12,453
Provision for federal income taxes 6,131 4,700
------- -------
NET EARNINGS $11,363 $ 7,753
======= =======
EARNINGS PER SHARE - BASIC $ 0.83 $ 0.57
======= =======
EARNINGS PER SHARE - DILUTED $ 0.80 $ 0.54
======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
<PAGE> 5
FLAGSTAR BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
1999 1998
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 11,363 $ 7,753
Adjustments to reconcile net earnings to net cash used in operating activities
Provision for losses 1,819 2,621
Depreciation and amortization 8,290 7,136
Net gain on the sale of assets (193) (208)
Net gain on loan sales (19,208) (16,802)
Gain on sales of mortgage servicing rights (644) (1,883)
Proceeds from sales of loans available for sale 3,990,131 3,146,811
Originations and repurchases of loans available for sale, net of principal repayments (4,771,111) (3,548,112)
Increase in accrued interest receivable 3,674 (3,423)
(Increase) decrease in other assets 18,999 (15,708)
Increase in accrued interest payable 45 218
Increase in the liability for checks issued 8,618 24,033
Decrease in current federal income taxes payable (15,346) (12,098)
Provision for deferred federal income taxes payable 11,977 16,813
Increase in other liabilities 3,684 54,027
----------- -----------
Net cash used in operating activities (747,902) (338,822)
INVESTING ACTIVITIES
Maturity of other investments 500 1
Originations of loans held for investment, net of principal repayments 121,549 (198,192)
Purchase of Federal Home Loan Bank Stock -- (5,000)
Proceeds from the disposition of repossessed assets 4,369 3,706
Acquisitions of premises and equipment (4,135) (2,019)
Increase in mortgage servicing rights (53,779) (39,677)
Proceeds from the sale of mortgage servicing rights 61,094 34,956
----------- -----------
Net cash used in investing activities 129,598 (206,225)
FINANCING ACTIVITIES
Net increase in deposit accounts 115,028 257,342
Net increase in Federal Home Loan Bank advances 545,375 238,732
Net receipt (disbursement) of payments of loans serviced for others (70,193) 44,481
Net receipt of escrow payments 9,921 32,357
Dividends paid to stockholders (1,094) (820)
----------- -----------
Net cash provided by financing activities 599,037 572,092
----------- -----------
Net increase (decrease) in cash and cash equivalents (19,267) 27,045
Beginning cash and cash equivalents 75,799 21,928
----------- -----------
Ending cash and cash equivalents $ 56,532 $ 48,973
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Loans receivable transferred to repossessed assets $ 5,259 $ 2,003
=========== ===========
Total interest payments made on deposits and other borrowings $ 38,177 $ 26,711
=========== ===========
Federal income taxes paid $ 9,500 $ 12,000
=========== ===========
Loans held for sale transferred to loans held for investment $ -- $ 110,671
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
5
<PAGE> 6
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS
Flagstar Bancorp, Inc. ("Flagstar" or the "Company"), is the holding company for
Flagstar Bank, FSB (the "Bank"), a federally chartered stock savings bank
founded in 1987. Flagstar's primary business consists of attracting deposits
from the general public and originating or acquiring residential mortgage loans.
The Company also acquires funds on a wholesale basis from a variety of sources,
services a significant volume of loans for others, and to a lesser extent makes
consumer loans, commercial real estate loans, and non-real estate commercial
loans.
The Bank is a member of the Federal Home Loan Bank System ("FHLB") and is
subject to regulation, examination and supervision by the Office of Thrift
Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC"). The
Bank's deposits are insured by the FDIC through the Savings Association
Insurance Fund ("SAIF").
NOTE 2. BASIS OF PRESENTATION
The accompanying consolidated unaudited financial statements of Flagstar
Bancorp, Inc. (the "Company"), have been prepared in accordance with generally
accepted accounting principles for interim information and in accordance with
the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by
the Securities and Exchange Commission. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. All interim amounts are subject to year-end
audit, the results of operations for the interim period herein are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
NOTE 3. SALE OF PREFERRED SECURITIES
On April 29, 1999, Flagstar Trust ("Trust") sold 2.99 million shares of its $25
liquidation value, 9.50%, cumulative preferred securities in a public offering.
The shares began trading on April 27, 1999 on the Nasdaq Stock Market under the
symbol "FLGSO".
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SELECTED FINANCIAL RATIOS
<TABLE>
<CAPTION>
For the quarter ended
March 31, March 31,
1999 1998
----------------- ----------------
(Unaudited)
(in thousands, except per share data)
<S> <C> <C>
Return on average assets 1.37% 1.37%
Return on average equity 26.99% 24.05%
Efficiency ratio 51.7% 41.0%
Average equity/assets ratio 5.06% 5.70%
Mortgage loans originated $ 4,794,633 $ 3,631,328
Mortgage loans sold $ 3,919,993 $ 3,088,417
Interest rate spread 1.79% 1.62%
Net interest margin 1.99% 2.19%
Charge-offs to average loans .08% .22%
March 31, December 31,
1999 1998
----------------- ------------------
Equity-to-assets ratio 4.75% 5.38%
Core capital ratio (1) 5.85% 6.54%
Total risk-based capital ratio (1) 12.38% 12.93%
Book value per share $ 12.74 $ 11.98
Mortgage loans serviced for others $ 10,511,935 $11,472,211
Value of mortgage servicing rights 1.31% 1.31%
Allowance for losses to problem loans 57.5% 53.78%
Allowance for losses to total loans 0.67% 0.78%
Non performing assets to total assets 1.68% 1.97%
Number of bank branches 30 28
Number of loan origination centers 35 31
Number of correspondent offices 15 15
Number of employees 1,899 1,675
</TABLE>
- -----------------------
(1) These ratios are applicable to Flagstar Bank only.
7
<PAGE> 8
RESULTS OF OPERATIONS
NET EARNINGS
Net earnings for the three months ended March 31, 1999 were $11.4 million ( $.80
per share-diluted ), a $3.6 million increase from the $7.8 million ( $.54 per
share-diluted ) reported in 1998. The increase resulted from a $3.7 million
increase in net interest income, a $6.4 million increase in non-interest income,
and a $0.5 million decrease in the provision for losses, offset by a $5.6
million increase in operating expenses, and a $1.4 million increase in the
provision for federal income taxes.
NET INTEREST INCOME
Net interest income increased $3.7 million, or 35.2%, to $14.2 million for the
three months ended March 31, 1999, from $10.5 million for the comparable 1998
period. This increase was due to a $864.4 million increase in average
interest-earning assets between the comparable periods, offset by a $922.2
million increase in interest-bearing liabilities necessary to fund the growth.
At the same time, the Company's interest rate spread increased from 1.62% in the
1998 period to 1.79% for the three months ended March 31, 1999. The increased
spread, offset in part by a $57.8 million decrease in the excess of average
earning assets over average interest-bearing liabilities, resulted in a decrease
in the Company's net interest margin by 0.20% to 1.99% for the three months
ended March 31, 1999 from 2.19% for the comparable 1998 period.
8
<PAGE> 9
AVERAGE YIELDS EARNED AND RATES PAID
Table 1 presents interest income from average earning assets, expressed in
dollars and yields, and interest expense on average interest-bearing
liabilities, expressed in dollars and rates. Interest income from earning assets
includes the amortization of net premiums and the amortization of net deferred
loan origination costs. Nonaccruing loans were included in the average loan
amounts outstanding.
TABLE 1
AVERAGE YIELDS EARNED AND RATES PAID
<TABLE>
<CAPTION>
Quarter Ended March 31,
------------------------------------------------------------------------------------
1999 1998
-------------------------------------- ------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------------- ------------ ---------- -- ---------------- ------------- -----------
INTEREST-EARNING ASSETS: ( In Millions )
<S> <C> <C> <C> <C> <C> <C>
Loans receivable, net $ 2,839,532 $ 51,233 7.32% $ 1,994,820 $ 37,085 7.44%
FHLB stock 57,838 1,141 8.00 40,900 807 8.00
Other 3,962 55 5.55 1,184 17 5.41
----------- -------- ----------- --------
Total 2,901,332 $ 52,429 7.33% 2,036,904 $ 37,909 7.44%
Other assets 425,177 226,969
----------- -----------
Total assets $ 3,326,509 $ 2,263,873
=========== ===========
INTEREST-BEARING LIABILITIES:
Deposits $ 1,997,876 $ 26,782 5.44% $ 1,189,422 $ 16,729 5.70%
FHLB advances 697,890 9,436 5.48 661,133 9,722 5.96
Other 102,652 2,004 7.92 25,671 961 7.55
----------- -------- ----------- --------
Total interest-bearing liabilities 2,798,418 $ 38,222 5.54% 1,876,226 $ 27,412 5.82%
Other liabilities 359,681 258,704
Stockholders equity 168,410 128,943
----------- -----------
Total liabilities and
Stockholders equity $ 3,326,509 $ 2,263,873
=========== ===========
Net interest-earning assets $ 102,914 $ 160,678
=========== ===========
-------- --------
Net interest income $ 14,207 $ 10,497
======== ========
---- -----
Interest rate spread 1.79% 1.62%
==== ====
Net interest margin 1.99% 2.19%
==== ====
Ratio of average interest-
Earning assets to
Interest-bearing liabilities 104% 109%
==== ===
</TABLE>
9
<PAGE> 10
RATE/VOLUME ANALYSIS
Table 2 presents the dollar amount of changes in interest income and interest
expense for the components of earning assets and interest-bearing liabilities
which are presented in Tables 1. Table 2 distinguishes between the changes
related to average outstanding balances (changes in volume while holding the
initial rate constant) and the changes related to average interest rates
(changes in average rates while holding the initial balance constant).
TABLE 2
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------------------
1999 versus 1998
Increase (Decrease) due to:
Rate Volume Total
-------------- ------------- ------------
(In Thousands)
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable, net ($ 3,371) $ 17,520 $14,149
FHLB stock (1) 335 334
Other 9 29 38
-------- -------- -------
Total ($ 3,363) $ 17,884 $14,521
INTEREST EXPENSE:
Deposits ($ 5,344) $ 15,397 $10,053
FHLB advances (3,352) 3,066 (286)
Other (7,457) 8,500 1,043
-------- -------- -------
Total ($ 16,153) $ 26,963 $10,810
-------- -------- -------
Net change in net interest income $ 12,790 ($ 9,079) $ 3,711
======== ======== =======
</TABLE>
PROVISION FOR LOSSES
The provision for losses decreased to $2.0 million for the three months ended
March 31, 1999 from $2.6 million recorded during the same period in 1998. This
loss provision increased the level of the general allowance for losses to $21.5
million. The allowance now stands at 0.67% of loans and 57.5% of non performing
loans. The allowance stood at 0.78% of loans and 53.8% of non performing loans
at December 31, 1998.
Non-performing loans stood at $37.4 million at March 31, 1999, up slightly from
$37.2 at December 31, 1998, an increase of 0.01%. Net charge-offs were an
annualized 0.08% of average loans outstanding during the three months ended
March 31, 1999.
NON-INTEREST INCOME
During the three months ended March 31, 1999, non-interest income increased $6.4
million, or 32.2%, to $26.3 million versus the $19.9 million recorded during the
three months ended March 31, 1998. This increase was attributable to an increase
in loan administration fees, an increase in net gain on loan sales, an increase
in other fees and charges, offset by a decrease in net gain on the sales of
mortgage servicing rights.
LOAN ADMINISTRATION
Loan administration fee income increased to $3.1 million during the three months
ended March 31, 1999, from $80 thousand in the comparable 1998 period. This
increase resulted primarily from a decrease in the amortization of mortgage
servicing rights caused by a general slow down in the rate of prepayment on the
underlying mortgage loans. Fee income before the amortization of servicing
rights actually increased $4.1 million for the three months ended March 31,
1999, to $9.5 million but was offset by a $1.0 million increase in amortization.
At March 31, 1999, the unpaid principal balance of loans serviced for others was
$10.5 billion versus $6.5 billion serviced at March 31, 1998 and $11.5 billion
serviced at December 31, 1998. At March 31, 1999 the weighted average servicing
fee on loans serviced for others was 0.279% (i.e., 27.9 basis points).
10
<PAGE> 11
NET GAIN ON LOAN SALES
For the three months ended March 31, 1999, net gain on loan sales increased $2.4
million, to $19.2 million, from $16.8 million in the 1998 period. The 1999
period reflects the sale of $3.9 billion in loans versus $3.1 billion sold in
the 1998 period. The falling interest rate environment in the 1998 period
resulted in a larger profit margin (54 bps. versus 49 bps.) but the more stable
interest rate environment and the increased mortgage loan origination volume
($4.8 billion in the 1999 period versus $3.6 billion in the 1998 period) in the
1999 period accounted for the net increase in revenue.
NET GAIN ON THE SALE OF MORTGAGE SERVICING RIGHTS
For the three months ended March 31, 1999, the net gain on the sale of mortgage
servicing rights decreased $1.2 million to $695,000 from $1.9 million for the
same period in 1998. The 1999 gain on sale of mortgage servicing rights included
the bulk sale of FNMA / FHLMC servicing rights totaling $4.2 billion which were
sold with a gain of only $49,000 and bulk servicing sales of $126.2 million of
GNMA servicing rights which generated a $342,000 gain. In 1998 the servicing
rights sale included $2.3 billion of newly originated servicing rights which
were capitalized at a level which generated a larger book value to market value
gain than in 1999.
Additionally the Company sold $23.1 million and $337.8 million in loans on a
servicing released basis during the 1999 and
1998 periods, respectively.
OTHER FEES AND CHARGES
During the three months ended March 31, 1999, the Company recorded $3.2 million
in other fees and charges. In the comparable 1998 period, the Company recorded
$1.1 million. The collection and recording of these types of fees are dependent
on the amount of deposit accounts, the number of certain types of loans closed
with fees that are not deferred and the collection of any miscellaneous fee
revenue.
NON-INTEREST EXPENSE
The following table sets forth components of the Company's non-interest expense,
along with the allocation of expenses related to loan originations that are
deferred pursuant to SFAS No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases." As required by SFAS No. 91, mortgage loan fees and certain direct
origination costs (principally compensation and benefits) are capitalized as an
adjustment to the basis of the loans originated during a period. Certain other
expenses associated with loan production, however, are not required to be
capitalized. These expense amounts are reflected on the Company's statement of
earnings. Management believes that the analysis of non-interest expense on a
"gross" basis ( i.e., prior to the deferral of capitalized loan origination
costs ) more clearly reflects the changes in non-interest expense when comparing
two periods.
<TABLE>
<CAPTION>
Quarter ended
March 31,
1998 1998
------------- ------------
(In thousands)
<S> <C> <C>
Compensation and benefits $ 15,700 $ 12,340
Commissions 6,748 5,906
Occupancy and equipment 4,562 3,732
Advertising 853 282
Core deposit amortization 323 323
Federal insurance premium 300 165
General and administrative 10,419 9,993
-------- -------
Total 38,905 32,743
Less: capitalized direct costs of loan closings (17,969) (17,443)
-------- -------
Total, net $ 20,936 $15,300
======== =======
Efficiency ratio 51.7% 41.0%
</TABLE>
11
<PAGE> 12
NON-INTEREST EXPENSE (CONT'D)
Non-interest expense, excluding the capitalization of direct loan origination
costs, increased by $6.2 million, or 19.0%, to $38.9 million during the three
months ended March 31, 1999, from $32.7 million for the comparable 1998 period.
These increased costs are primarily attributable to the $1.2 billion increase
(33%) in mortgage loans originated during the comparable periods. The largest
change occurred in the amount of compensation and benefits paid but there was an
increase reported in every category.
The increased commission expense of $0.8 million and the $0.4 million increase
in general and administration expense was attributable for the most part to the
increased mortgage loan production levels.
The increased compensation and benefits costs were attributable to the
additional 569 employees at the 1999 period. These employees were utilized in
the eight new bank branches and five new retail loan centers operated in the
1999 quarter versus the comparable 1998 period. These new employees and branches
and loan centers accounted for the $0.9 million increase in occupancy and
equipment cost during the comparable periods.
The increased deposit insurance costs and the increased advertising costs are a
direct result of the expansion in the retail banking operation of the Company.
SEGMENT REPORTING
RETAIL BANKING OPERATIONS
The Company provides a full range of banking services to consumers and small
businesses in southern and western Michigan. The Bank operates a network of 30
bank branches. The Company has continued to focus on expanding its branch
network in order to increase its access to retail deposit funding sources. The
retail banking operation allows the Company to cross-market consumer banking
services to the Company's mortgage customers in Michigan.
MORTGAGE BANKING OPERATIONS
Flagstar's mortgage banking activities involve the origination of mortgage loans
or the purchase of mortgage loans from the originating lender. Company personnel
originate loans and conduct business from 35 loan origination centers located in
Michigan, Ohio, and Florida. Flagstar purchases mortgage loans on a wholesale
basis through a network of correspondents consisting of other banks, thrifts,
mortgage companies, and mortgage brokers. This mortgage banking network conducts
mortgage lending operations nationwide. The mortgage loans, the majority of
which are subsequently sold in the secondary mortgage market, conform to the
underwriting standards of FHLMC or FNMA.
12
<PAGE> 13
The following tables present certain financial information concerning the
results of operations of Flagstar's retail banking and mortgage banking
operations.
TABLE 4
RETAIL BANKING OPERATIONS
<TABLE>
<CAPTION>
At or for the quarter ended March 31,
1999 1998
-------------------- ------------------
(In thousands)
<S> <C> <C>
Revenues $ 13,713 $ 6,478
Earnings before taxes 9,694 4,015
Identifiable assets 1,138,423 696,374
TABLE 5
MORTGAGE BANKING OPERATIONS
At or for the quarter ended March 31,
1999 1998
-------------------- -----------------
(In thousands)
Revenues $ 26,790 $ 23,896
Earnings before taxes 7,800 8,438
Identifiable assets 3,014,558 1,981,213
</TABLE>
FINANCIAL CONDITION
ASSETS
The Company's assets totaled $3.7 billion at March 31, 1999, an increase of
$619.4 million, or 20.3%, as compared to $3.0 billion at December 31, 1998. This
increase was primarily due to an increase in mortgage loans available for sale
offset by decreases in loans held for investment, mortgage servicing rights, and
other assets.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents decreased from $75.8 million at December 31, 1998 to
$56.5 million at March 31, 1999.
LOANS RECEIVABLE, NET
Loans receivable, net increased $671.6 million, from $2.6 billion at December
31, 1998 to $3.2 billion at March 31, 1999.
Mortgage loans available for sale increased $794.6 million, or 43.4%, to $2.6
billion at March 31, 1999, from $1.8 billion at December 31, 1998. This increase
is attributable to the Company's ability and management's decision to hold a
larger portion of its mortgage loan production for a longer period until it is
subsequently sold into the secondary market. The increased mortgage production
also has contributed to the larger warehouse of mortgage loans.
Loans held for investment decreased $121.6 million, or 16.3%, from $747.2
million at December 31, 1998 to $625.6 million at March 31, 1999. This decrease
is primarily attributable to a $107.9 million decrease in the amount of
warehouse lending lines of credit outstanding. These lines of credit are used by
other mortgage lenders to facilitate the closing of mortgage loans. Warehouse
lines utilized at March 31, 1999 totaled $128.1 million versus $235.7 million at
December 31, 1998.
13
<PAGE> 14
ALLOWANCE FOR LOSSES
The allowance for losses totaled $21.5 million at March 31, 1999, an increase of
$1.5 million, or 7.5%, from $20.0 million at December 31, 1998. The allowance
for losses as a percentage of non-performing loans was 57.5% and 53.8% at March
31, 1999 and December 31, 1998, respectively. The Company's non-performing loans
totaled $37.4 million and $37.2 million at March 31, 1999 and December 31, 1998,
respectively. The allowance for losses as a percentage of total loans, was 0.67%
and 0.78% at March 31, 1999 and December 31, 1998, respectively. The increase in
the dollar amount of the allowance for losses was based upon management's
assessment of relevant factors, including the types and amounts of
non-performing loans, historical, and anticipated loss experience on such types
of loans, and current and projected economic conditions. During the three months
ended March 31, 1999, non-performing assets increased $0.2 million, or .54%, and
management increased the allowance for losses $1.5 million, creating an 7.6%
decrease in net non-performing assets.
FHLB STOCK
Holdings of FHLB stock remained unchanged at $57.8 million at March 31, 1999. As
a member of the FHLB, the Bank is required to hold shares of FHLB stock in an
amount at least equal to 1% of the aggregate unpaid principal balance of its
home mortgage loans, home purchase contracts and similar obligations at the
beginning of each year, or 1/20th of its FHLB advances, whichever is greater.
ACCRUED INTEREST RECEIVABLE
Accrued interest receivable decreased from $24.8 million at December 31, 1998 to
$21.1 million at March 31, 1999. This small change is deemed immaterial.
REPOSSESSED ASSETS
Repossessed assets increased from $23.0 million at December 31, 1998 to $24.0
million at March 31, 1999 as the Company's non-performing loans were foreclosed
upon by the Bank. This 4.3% increase is deemed immaterial.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights totaled $137.2 million at March 31, 1999, a decrease
of $13.1 million, or 8.7%, from $150.3 million at December 31, 1998. During the
three months ended March 31, 1999, the Company capitalized $56.4 million,
amortized $6.4 million, and sold $63.1 million in mortgage servicing rights. The
principal balance of the loans serviced for others stands at $10.5 billion at
March 31, 1999 versus $11.5 billion at December 31, 1998. The capitalized value
of the mortgage servicing rights was 1.31% and 1.31% of the underlying principal
balance at March 31, 1999 and December 31, 1998, respectively.
OTHER ASSETS
Other assets decreased $19.3 million, or 15.5%, to $105.1 million at March 31,
1999, from $124.4 million at December 31, 1998. The majority of this decrease
was attributable to the receivables recorded in conjunction with the sale of
mortgage servicing rights completed on December 31, 1998. Upon the sale of the
mortgage servicing rights a receivable is recorded for a portion of the sale
proceeds. The balance due is paid within 180 days after the sale date. A portion
of the receivables recorded at December 31, 1998 have been received by the
Company.
14
<PAGE> 15
LIABILITIES
The Company's total liabilities increased $609.1 million, or 21.1%, to $3.5
billion at March 31, 1999, from $2.9 billion at December 31, 1998. This increase
was attributable to increases in deposits, Federal Home Loan Bank advances,
escrow accounts, and liabilities for checks issued, offset by decreases in
undisbursed payments on loans serviced for others.
DEPOSIT ACCOUNTS
Deposit accounts increased $115.0 million, or 6.0%, to $2.0 billion at March 31,
1999, from $1.9 billion at December 31, 1998. This increase reflects the
Company's deposit growth strategy through both its branch network and the
secondary market. The number of bank branches increased from 28 at December 31,
1998 to 30 at March 31, 1999. The bank branches have generated $171.4 million in
new deposits, an annualized 20.7% growth rate, since December 31, 1998.
At March 31, 1999, the Company's certificates of deposit totaled $1.7 billion,
or 85.0% of total deposits. These certificates carry an average balance of
$51,436 and a weighted average cost of 5.66%. Approximately $1.0 billion of the
certificates of deposit were brokered deposits or deposits garnered through the
secondary markets and carried a weighted average cost of 5.57%.
FEDERAL HOME LOAN BANK ADVANCES
FHLB advances increased $545.4 million, or 119.6%, to $1.0 billion at March 31,
1999, from $456.0 million at December 31, 1998. The Company relies upon such
advances as a source of funding for the origination or purchase of mortgage
loans which are later sold into the secondary market. The outstanding balance of
FHLB advances fluctuates from time to time depending upon the Company's current
inventory of loans held for sale and the availability of lower cost funding from
its deposit base and its escrow accounts.
ACCRUED INTEREST PAYABLE
Accrued interest payable remained unchanged from $16.7 million reported at
December 31, 1998. The Company typically pays interest on a one month lag.
UNDISBURSED PAYMENTS ON LOANS SERVICED FOR OTHERS
Undisbursed payments on loans serviced for others decreased $70.2 million, or
38.0%, to $114.3 million at March 31, 1999, from $184.5 million at December 31,
1998. These amounts represent payments received from borrowers for interest,
principal and related loan charges, which have not been remitted to the
respective investors. These balances fluctuate with the size of the servicing
portfolio and increase during a time of high payoff or refinance volume.
This decrease resulted primarily from a slow down in the rate of prepayment on
the underlying mortgage loans serviced for others.
ESCROW ACCOUNTS
Customer escrow accounts increased $9.9 million, or 9.5%, to $114.4 million at
March 31, 1999, from $104.5 million at December 31, 1998. These amounts
represent payments received from borrowers for taxes and insurance payments,
which have not been remitted to the tax authorities or insurance providers.
These balances fluctuate with the size of the servicing portfolio and during the
year before and after the remittance of scheduled payments.
LIABILITY FOR CHECKS ISSUED
Liability for checks issued increased $8.7 million, or 13.3%, to $74.3 million
at March 31, 1999, from $65.6 million at December 31, 1998. These amounts
represent checks issued to acquire mortgage loans which have not cleared for
payment. These balances fluctuate with the size of the mortgage pipeline,
increasing in lower interest rate scenarios and decreasing during a time when
loan origination volume is down.
15
<PAGE> 16
FEDERAL INCOME TAXES PAYABLE
Federal income taxes payable decreased $3.4 million, or 6.9%, to $45.9 million
at March 31, 1999, from $49.3 million at December 31, 1998. This decrease is
attributable to payment of $9.5 million in current taxes and the increase in the
tax liability for the first quarter income of $6.1 million.
OTHER LIABILITIES
Other liabilities increased $3.7 million, or 4.5%, to $86.4 million at March 31,
1999, from $82.7 million at December 31, 1998. This increase is attributable to
increases in accrued accounts payable relating to compensation and mortgage loan
production.
16
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Liquidity refers to the ability or the financial flexibility to manage future
cash flows to meet the needs of depositors and borrowers and fund operations on
a timely and cost-effective basis. The Company has no other significant business
other than that of its wholly owned subsidiary, Flagstar Bank, FSB.
The Bank is required by the Office of Thrift Supervision ("OTS") regulations to
maintain minimum levels of liquid assets. This requirement, which may be changed
at the discretion of the OTS depending upon economic conditions and deposit
flows, is based upon a percentage of deposits and short-term borrowings. The
required minimum ratio is currently 4.00%. While the Bank's liquidity ratio
varies from time to time, the Bank has generally maintained liquid assets
substantially in excess of the minimum requirements. The Bank's average daily
liquidity ratio was 13.02% for the month ended March 31, 1999.
A significant source of cash flow for the Company is the sale of mortgage loans
held for sale. Additionally, the Company receives funds from loan principal
repayments, advances from the FHLB, deposits from customers and cash generated
from operations.
Mortgage loans sold during the three months ended March 31, 1999 totaled $4.0
billion, an increase of $0.9 billion, or 29.0% from $3.1 billion sold during the
same period in 1998. This increase in mortgage loan sales was attributable to
the 33% increase in mortgage loan originations. The Company sold 83.3% and 86.1%
of its mortgage loan originations during the three month periods ended March 31,
1999 and 1998, respectively.
The Company typically uses FHLB advances to fund its daily operational liquidity
needs and to assist in funding loan originations. The Company will continue to
use this source of funds until a more cost-effective source of funds becomes
available. FHLB advances are used because of their flexibility. These funds are
typically borrowed for terms that are less than one year with no prepayment
penalty. The Company had $1.0 billion outstanding at March 31, 1999. Such
advances are repaid with the proceeds from the sale of mortgage loans held for
sale. The Company currently has an authorized line of credit equal to $1.3
billion. This line is collateralized by non-delinquent mortgage loans. To the
extent that the amount of retail deposits or customer escrow accounts can be
increased, the Company expects to replace FHLB advances.
At March 31, 1999, the Company had outstanding rate-lock commitments to lend
$459.7 million in mortgage loans, along with outstanding commitments to make
other types of loans totaling $17.3 million. Because such commitments may expire
without being drawn upon, they do not necessarily represent future cash
commitments. Also, at March 31, 1999, the Company had outstanding commitments to
sell $2.1 billion of mortgage loans. These commitments will be funded within 90
days. The Company has issued warehouse lines of credit to various mortgage
companies totaling $412.8 million, of which $128.1 million was advanced at March
31, 1999. The Company also has other unused commercial and consumer lines of
credit totaling $35.9 million at March 31, 1999.
17
<PAGE> 18
CAPITAL RESOURCES
At March 31, 1999, the Bank exceeded all applicable bank regulatory minimum
capital requirements. The Company is not subject to any such requirements.
YEAR 2000
As with other companies, many of the Company's computer programs and other
applications were originally designed to recognize calendar years by their last
two digits. Calculations performed using these truncated fields will not work
properly with dates from the year 2000 and beyond. Many of the systems utilized
by the Company are vendor-supplied, and these vendors have provided the Company
with a certification of compliance. The Company began reviewing its year 2000
conversion needs mid-1996 and has utilized two project committees to monitor the
status of these conversions. A comprehensive review to identify the systems
affected by this issue was completed and an implementation plan was compiled and
was executed. The Company has not spent any significant amounts with outside
contractors relative to the completion of these tasks. Therefore, costs did not
represent any material incremental costs, but rather has represented the
redeployment of existing technology resources. The Company presently believes
that all year 2000 compliance issues have been resolved. Additionally, the
Company believes that any related costs will not have a material impact on the
operations, cash flows, or financial condition of future periods.
ITEM 3. MARKET RISK
Management believes there has been no material change in either interest rate
risk or market risk since December 31, 1998.
18
<PAGE> 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11. Computation of Net Earnings per Share
Exhibit 27 (SEC Use only)
(b) Reports on Form 8-K
None
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLAGSTAR BANCORP, INC.
Date: May 12, 1999 /S/ Thomas J. Hammond
---------------------
Thomas J. Hammond
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
/S/ Michael W. Carrie
---------------------
Michael W. Carrie
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
20
<PAGE> 21
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
EX 11 Computation of Net Earnings per Share
EX 27 Financial Data Schedule
21
<PAGE> 1
EXHIBIT 11
Flagstar Bancorp, Inc.
Computation of Net Earnings per Share
Net earnings per share - basic and Net earnings per share - diluted are computed
by dividing this amount by the weighted average number of common stock and
common stock equivalents outstanding during the period, respectively.
<TABLE>
<CAPTION>
For the quarter
Ended March 31,
1999 1998
-------------- -----------
<S> <C> <C>
Net Earnings $ 11,363 $ 7,753
Average common shares outstanding 13,670 13,670
Net earnings per share - basic $ 0.83 $ 0.57
Average common share equivalents outstanding 14,253 14,101
Net earnings per share - diluted $ 0.80 $ 0.54
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001033012
<NAME> FLAGSTAR BANCORP, INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1,000
<CASH> 56,532
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0
0
<COMMON> 137
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