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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| Mark One | ||
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended September 30, 2000 | ||
| OR | ||
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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 | |
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| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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| 5151 Corporate Drive, Troy, Michigan | 48098-2639 | |
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| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (248) 312-2000
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 No 
.
As of November 10, 2000, 11,879,453 shares of the registrant’s Common Stock, $0.01 par value, were outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited condensed consolidated financial statements of the Registrant are as follows:
| Consolidated Statements of Financial Condition — September 30, 2000 ( unaudited ) and December 31, 1999. |
| Unaudited Consolidated Statements of Earnings — For the three and nine months ended September 30, 2000 and 1999. |
| Unaudited Consolidated Statements of Cash Flows — For the nine months ended September 30, 2000 and 1999. | |
| Condensed Notes to Consolidated Financial Statements. |
When used in this Form 10-Q or future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases or other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “would be”, “will allow”, “intends to”, “will likely result”, “are expected to”, “will continue”, “is anticipated”, “estimate”, “project”, or similar expressions are intended to identify “forward looking statement” within the meaning of the Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities and competitive and regulatory factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.
2
Flagstar Bancorp, Inc.
Consolidated Statements of Financial Condition
(in thousands)
| At September 30, | At December 31, | ||||||||||
| Assets | 2000 | 1999 | |||||||||
| (unaudited) | |||||||||||
| Cash and cash equivalents | $ | 39,769 | $ | 118,636 | |||||||
| Loans receivable Mortgage loans available for sale | 1,900,961 | 2,230,381 | |||||||||
| Loans held for investment | 3,299,591 | 747,185 | |||||||||
| Less: allowance for losses | (25,000 | ) | (23,000 | ) | |||||||
| Loans receivable, net | 5,175,552 | 3,808,731 | |||||||||
| Federal Home Loan Bank stock | 98,800 | 79,850 | |||||||||
| Other investments | 3,744 | — | |||||||||
| Total earning assets | 5,278,096 | 3,888,581 | |||||||||
| Accrued interest receivable | 38,516 | 26,629 | |||||||||
| Repossessed assets | 23,425 | 21,364 | |||||||||
| Premises and equipment | 97,094 | 46,979 | |||||||||
| Mortgage servicing rights | 102,374 | 131,831 | |||||||||
| Other assets | 59,368 | 76,019 | |||||||||
| Total assets | $ | 5,638,642 | $ | 4,310,039 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Liabilities | |||||||||||
| Retail deposits | $ | 1,754,207 | $ | 1,293,183 | |||||||
| Wholesale deposits | 1,552,892 | 967,780 | |||||||||
| Federal Home Loan Bank advances | 1,732,000 | 1,477,000 | |||||||||
| Long term debt | 74,750 | 74,750 | |||||||||
| Total interest bearing liabilities | 5,113,849 | 3,812,713 | |||||||||
| Accrued interest payable | 41,018 | 15,689 | |||||||||
| Undisbursed payments on loans serviced for others | 44,095 | 69,231 | |||||||||
| Escrow accounts | 71,935 | 75,340 | |||||||||
| Liability for checks issued | 55,775 | 30,426 | |||||||||
| Federal income taxes payable | 51,364 | 50,238 | |||||||||
| Other liabilities | 70,272 | 70,688 | |||||||||
| Total liabilities | 5,448,308 | 4,124,325 | |||||||||
| Stockholders’ Equity | |||||||||||
| Common stock — $.01 par value, 40,000,000 shares authorized, 13,384,923 and 13,699,823 shares issued and 11,885,953 and 12,891,473 shares outstanding at September 30, 2000 and December 31, 1999, respectively | 119 | 129 | |||||||||
| Additional paid in capital | 5,249 | 18,307 | |||||||||
| Retained earnings | 184,966 | 167,278 | |||||||||
| Total stockholders’ equity | 190,334 | 185,714 | |||||||||
| Total liabilities and stockholders’ equity | $ | 5,638,642 | $ | 4,310,039 | |||||||
The accompanying notes are an integral part of these statements.
3
Flagstar Bancorp, Inc.
Unaudited Consolidated Statements of Earnings
(in thousands)
| For the quarter ended | For the nine months ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| 2000 | 1999 | 2000 | 1999 | ||||||||||||||
| Interest Income | |||||||||||||||||
| Loans | $ | 101,211 | $ | 59,009 | $ | 268,403 | $ | 167,683 | |||||||||
| Other | 3,213 | 1,225 | 7,335 | 3,643 | |||||||||||||
| Total | 104,424 | 60,234 | 275,738 | 171,326 | |||||||||||||
| Interest Expense | |||||||||||||||||
| Deposits | 51,002 | 28,614 | 126,160 | 83,792 | |||||||||||||
| FHLB advances | 25,784 | 12,440 | 72,849 | 32,391 | |||||||||||||
| Other | 2,998 | 3,572 | 9,477 | 8,487 | |||||||||||||
| Total | 79,784 | 44,626 | 208,486 | 124,670 | |||||||||||||
| Net interest income | 24,640 | 15,608 | 67,252 | 46,656 | |||||||||||||
| Provision for losses | 2,400 | 1,459 | 8,318 | 4,504 | |||||||||||||
| Net interest income after provision for losses | 22,240 | 14,149 | 58,934 | 42,152 | |||||||||||||
| Non-Interest Income | |||||||||||||||||
| Loan administration | 3,530 | 4,725 | 12,450 | 15,395 | |||||||||||||
| Net gain on loan sales | 4,170 | 1,187 | 9,698 | 32,143 | |||||||||||||
| Net gain on sales of mortgage servicing rights | 5,335 | 3,961 | 11,252 | 4,883 | |||||||||||||
| Other fees and charges | 4,471 | 4,068 | 12,969 | 10,374 | |||||||||||||
| Total | 17,506 | 13,941 | 46,369 | 62,795 | |||||||||||||
| Non-Interest Expense | |||||||||||||||||
| Compensation and benefits | 9,667 | 8,840 | 29,190 | 27,987 | |||||||||||||
| Occupancy and equipment | 7,930 | 5,450 | 21,402 | 15,235 | |||||||||||||
| General and administrative | 8,041 | 2,752 | 21,183 | 15,141 | |||||||||||||
| Total | 25,638 | 17,042 | 71,775 | 58,363 | |||||||||||||
| Earnings before federal income taxes | 14,108 | 11,048 | 33,528 | 46,584 | |||||||||||||
| Provision for federal income taxes | 5,088 | 3,844 | 12,124 | 16,318 | |||||||||||||
| Net Earnings | $ | 9,020 | $ | 7,204 | $ | 21,404 | $ | 30,266 | |||||||||
| Earnings per share – basic | $ | 0.75 | $ | 0.52 | $ | 1.75 | $ | 2.21 | |||||||||
| Earnings per share – diluted | $ | 0.71 | $ | 0.51 | $ | 1.71 | $ | 2.14 | |||||||||
The accompanying notes are an integral part of these statements
4
Flagstar Bancorp, Inc.
Unaudited Consolidated Statements of Cash Flows
(in thousands)
| For the nine months ended September 30, | |||||||||||
| 2000 | 1999 | ||||||||||
| Operating Activities | |||||||||||
| Net earnings | $ | 21,404 | $ | 30,266 | |||||||
| Adjustments to reconcile net earnings to net cash used in operating activities | |||||||||||
| Provision for losses | 8,318 | 4,504 | |||||||||
| Depreciation and amortization | 19,289 | 18,365 | |||||||||
| Net loss (gain) on the sale of assets | 89 | (190 | ) | ||||||||
| Net gain on loan sales | (11,252 | ) | (32,143 | ) | |||||||
| Gain on sales of mortgage servicing rights | (9,698 | ) | (3,671 | ) | |||||||
| Proceeds from sales of loans available for sale | 5,442,570 | 11,164,466 | |||||||||
| Originations and repurchases of loans available for sale, net of principal repayments | (6,997,109 | ) | (11,545,571 | ) | |||||||
| (Increase) decrease in accrued interest receivable | (11,887 | ) | 1,120 | ||||||||
| Decrease in other assets | 15,681 | 58,040 | |||||||||
| Increase (decrease) in accrued interest payable | 25,329 | (486 | ) | ||||||||
| Increase (decrease) in liability for checks issued | 25,349 | (22,663 | ) | ||||||||
| Decrease in current federal income taxes payable | (10,851 | ) | (15,458 | ) | |||||||
| Provision for deferred federal income taxes payable | 11,977 | 11,977 | |||||||||
| Decrease in other liabilities | (415 | ) | (6,386 | ) | |||||||
| Net cash used in operating activities | (1,471,206 | ) | (337,830 | ) | |||||||
| Investing Activities | |||||||||||
| Maturity of other investments | (3,744 | ) | 500 | ||||||||
| Originations of loans held for investment, net of principal repayments | 172,256 | (397,929 | ) | ||||||||
| Purchase of Federal Home Loan Bank stock | (18,950 | ) | (1,212 | ) | |||||||
| Proceeds from the disposition of repossessed assets | 15,362 | 14,196 | |||||||||
| Acquisitions of premises and equipment | (58,981 | ) | (12,486 | ) | |||||||
| Proceeds from the disposition of premises and equipment | 109 | — | |||||||||
| Increase in mortgage servicing rights | (105,977 | ) | (167,202 | ) | |||||||
| Proceeds from the sale of mortgage servicing rights | 136,454 | 153,646 | |||||||||
| Net cash provided by (used in) investing activities | 136,529 | (410,487 | ) | ||||||||
| Financing Activities | |||||||||||
| Net increase in deposit accounts | 1,046,136 | 195,288 | |||||||||
| Net increase in Federal Home Loan Bank advances | 255,000 | 586,980 | |||||||||
| Issuance of Junior Subordinated Debentures | — | 74,750 | |||||||||
| Net disbursement of payments of loans serviced for others | (25,136 | ) | (113,035 | ) | |||||||
| Net (disbursement) receipt of escrow payments | (3,406 | ) | 2,766 | ||||||||
| Net proceeds from the exercise of common stock options | — | 361 | |||||||||
| Common stock repurchases | (13,069 | ) | (1,464 | ) | |||||||
| Dividends paid to stockholders | (3,716 | ) | (3,556 | ) | |||||||
| Net cash provided by financing activities | 1,255,810 | 742,090 | |||||||||
| Net decrease in cash and cash equivalents | (78,867 | ) | (6,227 | ) | |||||||
| Beginning cash and cash equivalents | 118,636 | 75,799 | |||||||||
| Ending cash and cash equivalents | $ | 39,769 | $ | 69,572 | |||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Loans receivable transferred to repossessed assets | $ | 23,161 | $ | 14,717 | |||||||
| Total interest payments made on deposits and other borrowings | $ | 183,157 | $ | 125,157 | |||||||
| Federal income taxes paid | $ | 19,500 | $ | 10,000 | |||||||
| Loans available for sale transferred to loans held for investment | $ | 1,891,704 | $ | 581,203 | |||||||
The accompanying notes are an integral part of these statements
5
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, 2000.
6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Selected Financial Ratios
| For the quarter ended | For the nine months ended | |||||||||||||||
| September | September | September | September | |||||||||||||
| 30, 2000 | 30, 1999 | 30, 2000 | 30, 2000 | |||||||||||||
| Return on average assets | 0.65 | % | 0.76 | % | 0.57 | % | 1.14 | % | ||||||||
| Return on average equity | 19.15 | % | 15.58 | % | 15.47 | % | 22.67 | % | ||||||||
| Efficiency ratio | 60.06 | % | 56.58 | % | 62.32 | % | 52.44 | % | ||||||||
| Equity/assets ratio (average for the period) | 3.41 | % | 4.89 | % | 3.68 | % | 5.01 | % | ||||||||
| Mortgage loans originated or purchased | $ | 2,651,880 | $ | 3,043,968 | $ | 7,065,055 | $ | 12,257,897 | ||||||||
| Mortgage loans sold | $ | 1,942,227 | $ | 2,869,238 | $ | 5,364,332 | $ | 11,045,978 | ||||||||
| Interest rate spread | 1.84 | % | 1.82 | % | 1.81 | % | 1.82 | % | ||||||||
| Net interest margin | 1.92 | % | 1.91 | % | 1.93 | % | 2.01 | % | ||||||||
| Charge-offs to average loans outstanding | 0.19 | % | 0.18 | % | 0.19 | % | 0.13 | % | ||||||||
| September | June 30, | December | September | |||||||||||||
| 30, 2000 | 2000 | 31, 1999 | 30, 1999 | |||||||||||||
| Equity-to-assets ratio | 3.38 | % | 3.37 | % | 4.31 | % | 5.00 | % | ||||||||
| Tangible capital ratio (1) | 5.31 | % | 5.37 | % | 6.76 | % | 7.91 | % | ||||||||
| Core capital ratio (1) | 5.32 | % | 5.39 | % | 6.80 | % | 7.96 | % | ||||||||
| Risk-based capital ratio (1) | 9.65 | % | 9.89 | % | 12.26 | % | 16.69 | % | ||||||||
| Total risk-based capital ratio (1) | 10.45 | % | 10.68 | % | 13.16 | % | 17.77 | % | ||||||||
| Book value per share | $ | 16.01 | $ | 15.32 | $ | 14.41 | $ | 13.93 | ||||||||
| Average shares outstanding | 11,886 | 12,027 | 12,891 | 13,597 | ||||||||||||
| Mortgage loans serviced for others | $ | 6,431,943 | $ | 8,402,411 | $ | 9,519,926 | $ | 11,308,993 | ||||||||
| Value of mortgage servicing rights | 1.59 | % | 1.49 | % | 1.38 | % | 1.37 | % | ||||||||
| Allowance for losses to non performing loans | 50.0 | % | 53.3 | % | 55.0 | % | 54.8 | % | ||||||||
| Allowance for losses to total loans | 0.48 | % | 0.53 | % | 0.60 | % | 0.64 | % | ||||||||
| Non performing assets to total assets | 1.30 | % | 1.21 | % | 1.47 | % | 1.66 | % | ||||||||
| Number of bank branches | 48 | 40 | 35 | 32 | ||||||||||||
| Number of loan origination centers | 38 | 38 | 38 | 37 | ||||||||||||
| Number of correspondent offices | 15 | 15 | 16 | 17 | ||||||||||||
| Number of employees | 1,923 | 1,762 | 1,627 | 1,668 | ||||||||||||
| (1) | Based on adjusted total assets for purposes of tangible capital and core capital, and risk-weighted assets for purposes of the risk-based capital and the total risk-based capital. These ratios are applicable to Flagstar Bank only. |
7
Results of Operations
Net Earnings
Net earnings for the three months ended September 30, 2000 were $9.0 million ($0.71 per share-diluted), a $1.8 million increase from the $7.2 million ($0.51 per share-diluted) reported for the comparable 1999 period. The increase resulted primarily from a $9.0 million increase in net interest income and a $3.6 million increase in non-interest income, offset by a $8.6 million increase in operating expenses.
Net earnings for the nine months ended September 30, 2000 were $21.4 million ($1.71 per share-diluted), a $8.9 million decrease from the $30.3 million ($2.14 per share-diluted) reported for the nine months ended September 30, 1999. The decrease resulted primarily from a $16.4 million decrease in non-interest income and a $13.4 million increase in operating expenses, offset by a $20.6 million increase in net interest income.
Net Interest Income
The Company continues to increase the amount of net interest income recorded in each quarterly period. These increases are a direct result of the large increases in average earning assets recorded by the Company. The growth experienced in 2000 was recorded with a nominal increase in the spread between earning assets and paying liabilities. Management plans to continue to increase the size of the earning asset portfolio in future quarters in relation to regulatory limits. As a regulated savings institution the Bank must keep capital levels at a minimum of 5.00% of total assets.
Net interest income during the three months ended September 30, 2000 increased $9.0 million, or 57.7%, to $24.6 million, from $15.6 million recorded for the 1999 period. This increase was due to a $1.9 billion increase in average interest-earning assets between the comparable periods, offset by a $1.8 billion increase in interest-bearing liabilities necessary to fund the growth. At the same time, the Company’s interest rate spread increased from 1.82% in the 1999 period to 1.84% for the three months ended September 30, 2000. The increased spread along with the $24.7 million increase in the excess of average earning assets over average interest-bearing liabilities resulted in an increase in the Company’s net interest margin by 0.01% to 1.92% for the three months ended September 30, 2000 from 1.91% for the comparable 1999 period.
Net interest income for the nine months ended September 30, 2000, increased $20.6 million, or 44.1%, to $67.3 million from $46.7 million for the comparable 1999 period. This increase was due to a $1.5 billion increase in average interest-earning assets between the comparable periods, offset by a $1.6 billion increase in interest-bearing liabilities necessary to fund the growth. The Company’s interest rate spread decreased nominally from 1.82% for the 1999 period to 1.81% for the nine months ended September 30, 2000. The slight decrease in the spread and the $10.8 million decrease in the excess of average earning assets over average interest-bearing liabilities, resulted in a net decrease in the Company’s net interest margin by 0.08% to 1.93% for the nine months ended September 30, 2000 from 2.01% for the comparable 1999 period.
8
AVERAGE YIELDS EARNED AND RATES PAID
Table 1 and Table 2 presents interest income from average earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates. Interest income from earning assets includes the amortization of net premiums and the amortization of net deferred loan origination costs. Nonaccruing loans were included in the average loan amounts outstanding.
TABLE 1
| Quarter ended September 30, | |||||||||||||||||||||||||
| 2000 | 1999 | ||||||||||||||||||||||||
| Average | Yield/ | Average | Yield/ | ||||||||||||||||||||||
| Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||
| Loans receivable, net | $ | 4,930,794 | $ | 101,211 | 8.14 | % | $ | 3,186,683 | $ | 59,009 | 7.35 | % | |||||||||||||
| FHLB stock | 98,800 | 2,111 | 8.50 | 59,050 | 1,190 | 8.00 | |||||||||||||||||||
| Other | 82,156 | 1,102 | 5.32 | 2,744 | 35 | 5.06 | |||||||||||||||||||
| Total interest-earning assets | 5,111,750 | $ | 104,424 | 8.13 | % | 3,248,477 | $ | 60,234 | 7.36 | % | |||||||||||||||
| Other assets | 417,332 | 531,999 | |||||||||||||||||||||||
| Total assets | $ | 5,529,082 | $ | 3,780,476 | |||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||
| Deposits | $ | 3,316,211 | $ | 51,002 | 6.10 | % | $ | 2,142,661 | $ | 28,614 | 5.30 | % | |||||||||||||
| FHLB advances | 1,578,929 | 25,784 | 6.48 | 897,175 | 12,440 | 5.50 | |||||||||||||||||||
| Other | 137,561 | 2,998 | 8.65 | 154,284 | 3,572 | 9.19 | |||||||||||||||||||
| Total interest-bearing liabilities | 5,032,701 | $ | 79,784 | 6.29 | % | 3,194,120 | $ | 44,626 | 5.54 | % | |||||||||||||||
| Other liabilities | 307,938 | 401,380 | |||||||||||||||||||||||
| Stockholders equity | 188,443 | 184,976 | |||||||||||||||||||||||
| Total liabilities and Stockholders equity | $ | 5,529,082 | $ | 3,780,476 | |||||||||||||||||||||
| Net interest-earning assets | $ | 79,049 | $ | 54,357 | |||||||||||||||||||||
| Net interest income | $ | 24,640 | $ | 15,608 | |||||||||||||||||||||
| Interest rate spread | 1.84 | % | 1.82 | % | |||||||||||||||||||||
| Net interest margin | 1.92 | % | 1.91 | % | |||||||||||||||||||||
| Ratio of average interest- | |||||||||||||||||||||||||
| Earning assets to Interest-bearing liabilities | 102 | % | 102 | % | |||||||||||||||||||||
9
TABLE 2
AVERAGE YIELDS EARNED AND RATES PAID
| Nine months ended September 30, | |||||||||||||||||||||||||
| 2000 | 1999 | ||||||||||||||||||||||||
| Average | Yield/ | Average | Yield/ | ||||||||||||||||||||||
| Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||
| Loans receivable, net | $ | 4,511,952 | $ | 268,403 | 7.93 | % | $ | 3,039,159 | $ | 167,683 | 7.36 | % | |||||||||||||
| FHLB stock | 92,832 | 5,674 | 8.16 | 58,697 | 3,511 | 8.00 | |||||||||||||||||||
| Other | 40,943 | 1,661 | 5.41 | 3,331 | 132 | 5.28 | |||||||||||||||||||
| Total interest-earning assets | 4,645,727 | $ | 275,738 | 7.92 | % | 3,101,187 | $ | 171,326 | 7.37 | % | |||||||||||||||
| Other assets | 368,377 | 452,914 | |||||||||||||||||||||||
| Total assets | $ | 5,014,104 | $ | 3,554,101 | |||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||
| Deposits | $ | 2,874,905 | $ | 126,160 | 5.86 | % | $ | 2,084,079 | $ | 83,792 | 5.38 | % | |||||||||||||
| FHLB advances | 1,538,479 | 72,849 | 6.33 | 794,468 | 32,391 | 5.45 | |||||||||||||||||||
| Other | 145,828 | 9,477 | 8.68 | 125,351 | 8,487 | 9.05 | |||||||||||||||||||
| Total interest-bearing liabilities | 4,559,212 | $ | 208,486 | 6.11 | % | 3,003,898 | $ | 124,670 | 5.55 | % | |||||||||||||||
| Other liabilities | 270,439 | 372,231 | |||||||||||||||||||||||
| Stockholders equity | 184,453 | 177,972 | |||||||||||||||||||||||
| Total liabilities and Stockholders equity | $ | 5,014,104 | $ | 3,554,101 | |||||||||||||||||||||
| Net interest-earning assets | $ | 86,515 | $ | 97,289 | |||||||||||||||||||||
| Net interest income | $ | 67,252 | $ | 46,656 | |||||||||||||||||||||
| Interest rate spread | 1.81 | % | 1.82 | % | |||||||||||||||||||||
| Net interest margin | 1.93 | % | 2.01 | % | |||||||||||||||||||||
| Ratio of average interest- earning assets to interest-bearing liabilities | 102 | % | 103 | % | |||||||||||||||||||||
10
RATE/VOLUME ANALYSIS
Table 3 and Table 4 present the dollar amount of changes in interest income and interest expense for the components of earning assets and interest-bearing liabilities, which are presented in Tables 1 and 2. Table 3 and 4 distinguishes between the changes related to average outstanding balances (changes in volume while holding the initial rate constant) and the changes related to average interest rates (changes in average rates while utilizing the average outstanding balances).
TABLE 3
| Quarter ended September 30, | ||||||||||||
| 2000 versus 1999 | ||||||||||||
| Increase (Decrease) due to: | ||||||||||||
| Rate | Volume | Total | ||||||||||
| Interest Income: | (In Thousands | ) | ||||||||||
| Loans receivable, net | $ | 9,738 | $ | 32,463 | $ | 42,202 | ||||||
| FHLB stock | 124 | 797 | 921 | |||||||||
| Other | 53 | 1,014 | 1,067 | |||||||||
| Total | $ | 9,916 | $ | 34,274 | $ | 44,190 | ||||||
| Interest Expense: | ||||||||||||
| Deposits | $ | 6,633 | $ | 15,755 | $ | 22,388 | ||||||
| FHLB advances | 3,868 | 9,476 | 13,344 | |||||||||
| Other | (186 | ) | (388 | ) | (574 | ) | ||||||
| Total | $ | 10,315 | $ | 24,843 | $ | 35,158 | ||||||
| Net change in net interest income | ($399 | ) | $ | 9,431 | $ | 9,032 | ||||||
TABLE 4
| Nine months ended September 30, | ||||||||||||
| 2000 versus 1999 | ||||||||||||
| Increase (Decrease) due to: | ||||||||||||
| Rate | Volume | Total | ||||||||||
| Interest Income: | (In Thousands | ) | ||||||||||
| Loans receivable, net | $ | 19,288 | $ | 81,432 | $ | 100,720 | ||||||
| FHLB stock | 113 | 2,050 | 2,163 | |||||||||
| Other | 40 | 1,489 | 1,529 | |||||||||
| Total | $ | 19,441 | $ | 84,971 | $ | 104,412 | ||||||
| Interest Expense: | ||||||||||||
| Deposits | $ | 10,350 | $ | 32,018 | $ | 42,368 | ||||||
| FHLB advances | 10,154 | 30,304 | 40,458 | |||||||||
| Other | (405 | ) | 1,395 | 990 | ||||||||
| Total | $ | 20,099 | $ | 63,717 | $ | 83,816 | ||||||
| Net change in net interest income | ($658 | ) | $ | 21,254 | $ | 20,596 | ||||||
11
Provision for Losses
During the three months ended September 30, 2000, the provision for losses was $2.4 million. The provision for losses recorded during the nine months ended September 30, 2000 was $8.3 million. During the nine month period, $2.0 million of the provision was used to increase the allowance for losses. The allowance, which totals $25.0 million, is 0.48% of loans and 50.0% of non-performing loans at September 30, 2000. The allowance stood at 0.64% and 0.60% of loans and 54.8% and 55.0% of non performing loans at September 30, 1999 and December 31, 1999, respectively.
Non-performing loans stood at $50.0 million at September 30, 2000, up from $46.9 million at June 30, 2000, and $41.8 million at December 31, 1999, an increase of 6.6% and 19.6%, respectively. Net charge-offs were an annualized 0.19% of average loans outstanding for both the three months and nine months ended September 30, 2000.
Non-Interest Income
During the three months ended September 30, 2000, non-interest income increased $3.6 million, or 25.9%, to $17.5 million from $13.9 million. This increase was attributable to increases in net gain on loan sales, net gain on the sales of mortgage servicing rights, and other fees and charges offset by a decrease in loan administration fees.
During the nine months ended September 30, 2000, non-interest income decreased $16.4 million, or 26.1%, to $46.4 million from $62.8 million. This decrease was attributable to a dramatic decrease in net gain on loan sales along with a decrease in loan administration fees offset by increases in net gain on the sales of mortgage servicing rights and other fees and charges.
Loan Administration
Net loan administration fee income decreased to $3.5 million during the three months ended September 30, 2000, from $4.7 million in the 1999 period. This decrease resulted primarily from a decrease in the amount of mortgage loans serviced for others during the 2000 period. Fee income before the amortization of serving rights totaled $6.4 million for the three months ended September 30, 2000 compared to the $9.1 million recorded in the 1999 period. At September 30, 2000 the unpaid principal balance of the loans serviced for others was $6.4 billion. These loans had a weighted average servicing fee of 0.302% (i.e., 30.2 basis points).
Loan administration fee income for the nine months ended September 30, 2000 decreased $2.9 million to $12.5 million. This decrease also was the result of the decrease in the amount of mortgage loans serviced for others. Fee income before the amortization of serving rights decreased $4.9 million, or 17.8%, for the nine months ended September 30, 2000 compared to the results of the 1999 period.
Net Gain on Loan Sales
For the three months ended September 30, 2000, net gain on loan sales increased $3.0 million, to $4.2 million, from $1.2 million in the 1999 period. The 2000 period reflects the sale of $1.9 billion in loans versus $2.9 billion sold in the 1999 period. In the 1999 period, mortgage interest rates were rising and the associated pricing spreads achievable on loan sales were extremely tight. The spread achieved during the 1999 period equaled 0.04% (4 b.p.s) versus the 0.21% (21 b.p.s) recorded in the 2000 period.
For the nine months ended September 30, 2000, net gain on loan sales decreased $22.4 million, 69.8%, to $9.7 million, from $32.1 million in the comparable 1999 period. The 2000 period includes the sale of $5.4 billion in loans versus $11.0 billion sold in the 1999 period. For the nine month period ended September 30, 2000, the Company recorded an 18.1 basis point gain on the loans sold versus the 29.1 basis points earned on the loans sold in the 1999 period.
12
Net Gain on the Sale of Mortgage Servicing Rights
For the three months ended September 30, 2000, the net gain on the sale of mortgage servicing rights (“MSR”) increased $1.3 million to $5.3 million, from $4.0 million for the same period in 1999. The increased gain on sale of MSR was primarily due to the increased amount of servicing rights sold in the 2000 period. During the 2000 period the servicing rights to $3.7 billion of loans were sold while in the 1999 period the servicing rights to $2.1 billion of loans were sold.
For the nine months ended September 30, 2000, the net gain on the sale of MSR increased $6.4 million, to $11.3 million, from $4.9 million for the comparable 1999 period. The gain on sale of mortgage servicing rights increased due to the MSR bulk sales involving $3.6 billion in loans during the 2000 period versus $1.0 billion in loans during the 1999 period. When the Company sells MSR’s on a “flow basis”, the underlying loans have been originated within the past three months. The MSR’s sold on a “bulk basis” are typically seasoned.
Activity of Mortgage Loans Serviced for Others( in thousands):
| Three months ended | Three months ended | ||||||||
| September 30, 2000 | September 30, 1999 | ||||||||
| Beginning balance | $ | 8,402,411 | $ | 11,130,708 | |||||
| Loans sold | 1,942,227 | 2,869,238 | |||||||
| Subtotal | 10,344,638 | 13,999,946 | |||||||
| Loans sold servicing released | 9,326 | — | |||||||
| Servicing sold (flow basis) | 1,671,913 | 2,149,876 | |||||||
| Servicing sold (bulk basis) | 2,039,734 | — | |||||||
| Subtotal | 3,720,973 | 2,149,876 | |||||||
| Amortization | 191,722 | 541,077 | |||||||
| Ending balance | $ | 6,431,943 | $ | 11,308,993 | |||||
| Nine months ended | Nine months ended | ||||||||
| September 30, 2000 | September 30, 1999 | ||||||||
| Beginning balance | $ | 9,519,926 | $ | 11,472,211 | |||||
| Loans sold | 5,364,332 | 11,045,978 | |||||||
| Subtotal | 14,884,258 | 22,518,189 | |||||||
| Loans sold servicing released | 14,173 | 70,627 | |||||||
| Servicing sold (flow basis) | 3,878,754 | 8,339,065 | |||||||
| Servicing sold (bulk basis) | 3,641,238 | 1,043,645 | |||||||
| Subtotal | 7,524,839 | 9,453,337 | |||||||
| Amortization | 927,476 | 1,755,859 | |||||||
| Ending balance | $ | 6,431,943 | $ | 11,308,993 | |||||
Other Fees and Charges
During the three and nine months ended September 30, 2000, the Company recorded
$4.5 million and $13.0 million in other fees and charges, respectively. In the
comparable 1999 periods, the Company recorded $4.1 million and $10.4 million,
respectively. The collection and recording of these fees are dependent on the
amount of deposit
accounts, the number of certain types of loans closed and the
collection of any miscellaneous fees.
13
Non-Interest Expense
The following table sets forth components of the Company’s non-interest expense, along with the allocation of expenses related to loan originations that are deferred pursuant to SFAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” As required by SFAS No. 91, mortgage loan fees and certain direct origination costs (principally compensation and benefits) are capitalized as an adjustment to the basis of the loans originated during a period. Certain other expenses associated with loan production, however, are not required to be capitalized. These expense amounts are reflected on the Company’s statement of earnings. Management believes that the analysis of non-interest expense on a “gross” basis ( i.e., prior to the deferral of capitalized loan origination costs ) more clearly reflects the changes in non-interest expense when comparing periods.
| Quarter ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2000 | 1999 | 2000 | 1999 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Compensation and benefits | $ | 16,288 | $ | 14,852 | $ | 45,959 | $ | 46,590 | ||||||||
| Commissions | 7,669 | 6,492 | 19,556 | 21,841 | ||||||||||||
| Occupancy and equipment | 7,929 | 5,450 | 21,402 | 15,235 | ||||||||||||
| Advertising | 1,440 | 833 | 3,185 | 2,052 | ||||||||||||
| Core deposit amortization | 323 | 322 | 968 | 967 | ||||||||||||
| Federal insurance premium | 147 | 336 | 396 | 943 | ||||||||||||
| General and administrative | 8,392 | 5,933 | 22,231 | 23,886 | ||||||||||||
| Total | 42,188 | 34,218 | 113,697 | 111,514 | ||||||||||||
| Less: capitalized direct costs of loan closings | (16,550 | ) | (17,176 | ) | (41,922 | ) | (53,151 | ) | ||||||||
| Total, net | $ | 25,638 | $ | 17,042 | $ | 71,775 | $ | 58,363 | ||||||||
| Efficiency ratio | 60.06 | % | 56.58 | % | 62.32 | % | 52.44 | % | ||||||||
Non-interest expense, excluding the capitalization of direct loan origination costs, increased by $8.0 million, or 23.4%, and $2.2 million, or 2.0%, during the three months and nine months ended September 30, 2000, respectively, when compared to the three and nine month period in 1999. The amount of compensation and benefits expenses were up $1.4 million and down $0.7 million, commissions were up $1.2 million and down $2.2 million, occupancy and equipment charges were up $2.4 million and up $6.2 million, and the general and administrative expenses were reported up $2.5 million and down $1.7 million during the comparable three and nine month periods.
As the loan origination results of the period were accumulated, the amount of direct expense related to the origination process was calculated and deferred. During the three and nine months ended September 30, 2000, the direct cost attributable to the loan origination process equaled $826 per loan, or 0.62% of the loan balance, and $782 per loan, or 0.59% of the loan balance, respectively. During the comparable 1999 periods that cost was calculated as $718 per loan, or 0.56% of the loan balance, and $547 per loan, or 0.43% of the loan balance, respectively.
14
Non-Interest Expense (cont’d)
During the quarter ended September 30, 2000, the Company paid its sales staff commissions, which totaled $7.7 million, or 0.29% of loan originations. This amount compares with $6.5 million, or 0.21% of loan originations, paid in the comparable 1999 period. These increases in commissions are reflective of the current compensation structure employed by the Company. Retail loan officers which are part of the Company’s “net branch” program are afforded a larger commission component in exchange for a greater role in the management of the branch office along with an acceptance of responsibility for the branch office’s variable expenses. Members of the wholesale account executive group have been increasingly changed to a total commission based compensation package from their former salary plus commission compensation package. These changes have increased commissions for the nine months ended September 30, 2000 from 0.18% of mortgage originations to 0.28% of mortgage loan originations.
The majority of the $1.4 million increase in compensation and benefits during the third quarter is directly attributable to the eight new bank branches opened during the quarter, and the sixteen new branches maintained during the year 2000 quarter when compared to the 1999 period. These new offices also accounted for the majority of the increased occupancy and equipment costs of $2.4 million during the 2000 quarterly period and the $6.2 million of increase recorded throughout the year 2000. These costs will continue to increase in relation to the general expansion planned within the Company’s retail banking operations. This increase in expenses is offset by the reduction in the cost of funds achieved by Company.
The majority of the $2.5 million increase and the $1.7 decrease in general and administrative expenses represents increased costs associated with the new bank branches offset by decreases in the mortgage loan production costs. The increased occupancy and equipment expense of $6.2 million along with the increased advertising costs are also associated with the opening and maintenance of the additional six bank branches operated during 2000.
Federal Income Taxes
For the three months ended September 30, 2000, the provision for federal income taxes increased $1.3 million to $5.1 million, from $3.8 million for the same period in 1999. The provision was 36.2% and 34.5% of pretax earnings for the periods ended September 30, 2000 and 1999, respectively. For the nine months ended September 30, 2000, the provision for federal income taxes decreased $4.2 million to $12.1 million, from $16.3 million for the same period in 1999. The provision was 36.1% and 35.0% of pretax earnings for the periods ended September 30, 2000 and 1999, respectively.
15
SEGMENT REPORTING
RETAIL BANKING OPERATIONS
The Company provides a full range of banking services to consumers and small businesses in southern and western Michigan. The Bank operated a network of 48 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 38 loan origination centers located predominantly in Michigan. Flagstar purchases mortgage loans on a wholesale basis through a network of correspondents consisting of other banks, thrifts, mortgage companies, and mortgage brokers. This mortgage banking network conducts mortgage lending operations nationwide. A majority of the mortgage loans, which are subsequently sold in the secondary mortgage market, conform to the underwriting standards of FHLMC or FNMA.
The following tables present certain financial information concerning the results of operations of Flagstar’s retail banking and mortgage banking operation.
Table 4
Retail Banking Operations
| At or for the quarter ended | At or for the nine months | |||||||||||||||
| September 30, | ended September 30, | |||||||||||||||
| 2000 | 1999 | 2000 | 1999 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Revenues | $ | 18,124 | $ | 14,798 | $ | 52,993 | $ | 43,377 | ||||||||
| Earnings before taxes | 9,979 | 11,275 | 30,104 | 31,845 | ||||||||||||
| Identifiable assets | 3,366,924 | 1,476,456 | 3,366,924 | 1,476,456 | ||||||||||||
Table 5
Mortgage Banking Operations
| At or for the quarter ended | At or for the nine months | |||||||||||||||||||||||
| September 30, | ended September 30, | |||||||||||||||||||||||
| 2000 | 1999 | 2000 | 1999 | |||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Revenues | $ | 24,021 | $ | 14,751 | $ | 60,628 | $ | 66,074 | ||||||||||||||||
| Earnings before taxes | 4,129 | (227 | ) | 3,424 | 14,739 | |||||||||||||||||||
| Identifiable assets | 2,271,718 | 2,600,096 | 2,271,718 | 2,600,096 | ||||||||||||||||||||
16
Financial Condition
Assets
The Company’s assets totaled $5.6 billion at September 30, 2000, an increase of $1.3 billion, or 30.2%, as compared to $4.3 billion at December 31, 1999. This increase was primarily due to an increase in mortgage loans held for investment.
Cash and cash equivalents
Cash and cash equivalents decreased from $118.6 million at December 31, 1999 to $39.8 million at September 30, 2000
Loans receivable, net
| September 30, 2000 | June 30, 2000 | December 31, 1999 | September 30, 1999 | ||||||||||||||
| Mortgage loans held for sale | $ | 1,900,961 | $ | 1,625,509 | $ | 2,230,381 | $ | 2,227,058 | |||||||||
| Single family mortgage | 2,798,714 | 2,529,970 | 1,169,781 | 789,141 | |||||||||||||
| Second mortgage | 134,644 | 199,338 | 145,075 | 112,845 | |||||||||||||
| Residential construction | 56,373 | 51,818 | 46,838 | 40,319 | |||||||||||||
| Commercial real estate | 185,712 | 182,689 | 143,652 | 108,191 | |||||||||||||
| Warehouse lending | 57,779 | 56,548 | 46,221 | 52,747 | |||||||||||||
| Commercial | 9,408 | 9,071 | 7,024 | 4,601 | |||||||||||||
| Consumer | 56,961 | 52,901 | 42,758 | 37,270 | |||||||||||||
| Total loans held for investment | 3,299,591 | 3,082,335 | 1,601,350 | 1,145,114 | |||||||||||||
| Allowance for losses | (25,000 | ) | (25,000 | ) | (23,000 | ) | (21,500 | ) | |||||||||
| Total loans receivable, net | $ | 5,175,552 | $ | 4,682,844 | $ | 3,808,731 | $ | 3,350,672 | |||||||||
Loans receivable, net increased $1.4 billion, from $3.8 billion at December 31, 1999 to $5.2 billion at September 30, 2000.
Mortgage loans available for sale decreased $0.3 billion, or 13.6%, to $1.9 billion at September 30, 2000, from $2.2 billion at December 31, 1999. This decrease is reflective of the decrease in the loan originations generated during the period ending September 30, 2000.
Loans held for investment increased $1.7 billion, or 106.3%, from $1.6 billion at December 31, 1999 to $3.3 billion at September 30, 2000. This increase is attributable to Management’s strategy to enlarge the asset and liability base of the Company. As can be viewed above, each category of investment loans has increased period to period except warehouse lending and second mortgages. Warehouse lending is driven by the funding needs of other mortgage lenders. In a period of slow loan volume warehouse lending balances will decline. In the third quarter the Company sold a portion of the second mortgages to the secondary market.
17
Allowance for losses
The allowance for losses totaled $25.0 million at September 30, 2000, an increase of $2.0 million, or 8.7%, from $23.0 million at December 31, 1999. The allowance for losses as a percentage of non-performing loans was 50.0% and 55.0% at September 30, 2000 and December 31, 1999, respectively. The Company’s non-performing loans totaled $50.0 million and $41.8 million at September 30, 2000 and December 31, 1999, respectively. The allowance for losses as a percentage of total loans, was 0.48% and 0.60% at September 30, 2000 and December 31, 1999, 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.
FHLB stock
Holdings of FHLB stock increased from $79.9 million at December 31, 1999 to $98.8 million at September 30, 2000 in response to the Company’s increased mortgage loan portfolio. As a member of the FHLB, the Bank is required to hold shares of FHLB stock in an amount at least equal to 1% of the aggregate unpaid principal balance of its home mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or 1/20th of its FHLB advances, whichever is greater.
Accrued interest receivable
Accrued interest receivable increased from $26.6 million at December 31, 1999 to $38.5 million at September 30, 2000 as the Company’s interest earning asset portfolio increased. The Company typically collects interest in the following month after it is earned.
Repossessed assets
Repossessed assets increased from $21.4 million at December 31, 1999 to $23.4 million at September 30, 2000 The increased was caused by the Company’s foreclosure proceedings upon non-performing loans.
Mortgage servicing rights
Mortgage servicing rights totaled $102.4 million at September 30, 2000, a decrease of $29.4 million, or 22.3%, from $131.8 million at December 31, 1999. During the nine months ended September 30, 2000, the Company capitalized $106.0 million, amortized $10.2 million, and sold $125.2 million in mortgage servicing rights. The principal balance of the loans serviced for others stands at $6.4 billion at September 30, 2000 versus $9.5 billion at December 31, 1999. The capitalized value of the mortgage servicing rights was 1.59% and 1.38% value at September 30, 2000 and December 31, 1999, respectively.
Other assets
Other assets decreased $16.6 million, or 21.8%, to $59.4 million at September 30, 2000, from $76.0 million at December 31, 1999. The majority of these balances are attributable to the collection of receivables previously recorded in conjunction with the sale of MSR’s. Upon the sale of MSR’s a receivable is recorded for a portion of the sale proceeds. The balance due is paid within 180 days after the sale date.
18
Liabilities
The Company’s total liabilities increased $1.3 billion, or 31.7%, to $5.4 billion at September 30, 2000, from $4.1 billion at December 31, 1999. This increase was attributable to an large increases in retail deposits, wholesale deposits, FHLB advances, accrued interest payable, checks issued, and federal income tax payable offset by decreases in undisbursed payments and escrow accounts.
Retail deposits
| September 30, 2000 | December 31, 1999 | |||||||||||||||||||||||||
| Balance | Rate | % | Balance | Rate | % | |||||||||||||||||||||
| DDA: | ||||||||||||||||||||||||||
| Non-interest bearing | $ | 9,967 | 0.01 | % | 0.57 | % | $ | 7,088 | 0.03 | % | 0.55 | % | ||||||||||||||
| Interest bearing | 7,206 | 2.03 | 0.41 | 6,504 | 1.89 | 0.50 | ||||||||||||||||||||
| Interest bearing (tiered) | 83,157 | 4.60 | 4.74 | 74,904 | 4.47 | 5.79 | ||||||||||||||||||||
| Business | 28,778 | 0.23 | 1.64 | 48,923 | 0.01 | 3.78 | ||||||||||||||||||||
| Total | 129,108 | 3.12 | 7.36 | 137,419 | 2.53 | 10.63 | ||||||||||||||||||||
| Savings: | ||||||||||||||||||||||||||
| Statement | 14,533 | 3.11 | 0.83 | 15,162 | 3.03 | 1.17 | ||||||||||||||||||||
| Statement plus | 323,705 | 5.32 | 18.45 | 343,851 | 5.17 | 26.59 | ||||||||||||||||||||
| Total | 338,238 | 5.22 | 19.28 | 359,013 | 5.08 | 27.76 | ||||||||||||||||||||
| Certificates of deposits | 1,286,861 | 6.56 | 73.36 | 796,751 | 5.72 | 61.61 | ||||||||||||||||||||
| Total retail deposits | $ | 1,754,207 | 6.05 | % | 100.00 | % | $ | 1,293,183 | 5.20 | % | 100.00 | % | ||||||||||||||
Retail deposits accounts increased $0.5 billion, or 38.5%, to $1.8 billion at September 30, 2000, from $1.3 billion at December 31, 1999. This increase reflects the Company’s strategy to grow its branch network and to increase its market penetration. The number of bank branches increased from 35 at December 31, 1999 to 48 at September 30, 2000. The 13 new bank branches have added $128.7 million in new deposits to the Company’s total. In June 2000, the Company opened its first banking center in a Wal-Mart Superstore. The Company has signed agreements to open 39 of these banking centers within the next three years. These new banking centers although being opened a short period of time have contributed $28.4 million of the newly generated deposits. The Company has signed agreements or has begun construction on 30 more banking centers which will be in operation by December 31, 2001.
Wholesale deposits
Wholesale deposits increased $0.6 billion, or 60.0%, to $1.6 billion at September 30, 2000, from $1.0 billion at December 31, 1999. This increase in deposits is reflective of the Company’s aggressive growth strategy during the nine month period. These funds are composed entirely of certificates of deposit. These funds were brokered, garnered through the secondary markets, or are solicited from local municipalities. These deposits carried a weighted average cost of 6.36%.
19
FHLB advances
FHLB advances increased $0.2 billion, or 13.3%, to $1.7 billion at September 30, 2000, from $1.5 billion at December 31, 1999. The Company relies upon such advances as a source for both short term and long term funding. The short term funding needs of the Company arises from the origination or purchase of loans, which later are sold into the secondary market. The long term needs of the Company occur when management needs a fixed rate instrument to lengthen the duration of its liabilities. 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.
Long term debt
On April 30, 1999, the Company issued $74.8 million of 9.50% preferred securities to the general public in an initial public offering. The securities were issued by the Company’s subsidiary, Flagstar Trust, a Delaware trust. These preferred securities mature in 30 years, pay interest quarterly, and the interest expense is deductible for federal income tax purposes. The net proceeds from the offering were contributed to Flagstar Bank as additional paid in capital and is included as regulatory capital.
Accrued interest payable
Accrued interest payable increased from $15.7 million at December 31, 1999 to $41.0 million at September 30, 2000 as the Company’s total loan portfolio increased. The Company typically pays interest on its debt within the following quarter after it is accrued. This large increase (161.1%) is considered immaterial after consideration is given to the 34.2% increase in the paying liability portfolio.
Undisbursed payments on loans serviced for others
Undisbursed payments on loans serviced for others decreased $25.1 million, or 36.3%, to $44.1 million at September 30, 2000, from $69.2 million at December 31, 1999. These amounts represent payments received from borrowers for interest, principal and related loan charges, which have not been remitted to the respective investors. These balances fluctuate with the size of the servicing portfolio and increase during a time of high payoff or refinance volume. This substantial change is attributable to the general slowdown in the refinance volume experienced in the mortgage servicing portfolio.
Escrow accounts
Customer escrow accounts decreased $3.4 million, or 4.5%, to $71.9 million at September 30, 2000, from $75.3 million at December 31, 1999. These amounts represent payments received from borrowers for taxes and insurance payments, which have not been remitted to the tax authorities or insurance providers. These balances fluctuate with the size of the servicing portfolio and during the year before and after the remittance of scheduled payments.
Liability for checks issued
Liability for checks issued increased $25.4 million, or 83.6%, to $55.8 million at September 30, 2000, from $30.4 million at December 31, 1999. These amounts represent checks issued to acquire mortgage loans that have not cleared for payment. These balances fluctuate with the size of the mortgage pipeline.
20
Federal income taxes payable
Federal income taxes payable increased $1.2 million, or 2.4%, to $51.4 million at September 30, 2000, from $50.2 million at December 31, 1999. This increase is attributable to the accrual of deferred taxes during the nine months ended September 30, 2000.
Other liabilities
Other liabilities decreased $0.4 million, or 0.6%, to $70.3 million at September 30, 2000, from $70.7 million at December 31, 1999. This decrease is deemed immaterial.
21
Liquidity and Capital Resources
Liquidity
Liquidity refers to the ability or the financial flexibility to manage future cash flows to meet the needs of depositors and borrowers and fund operations on a timely and cost-effective basis. The Company has no other significant business than that of its wholly owned subsidiary, Flagstar Bank, FSB.
The Bank is required by the Office of Thrift Supervision (“OTS”) regulations to maintain minimum levels of liquid assets. This requirement, which may be changed at the discretion of the OTS depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The required minimum ratio is currently 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 10.38% for the quarter ended September 30, 2000.
A significant source of cash flow for the Company is the sale of mortgage loans held for sale. Additionally, the Company receives funds from loan principal repayments, advances from the FHLB, deposits from customers and cash generated from operations.
Mortgage loans sold during the three months ended September 30, 2000 totaled $1.9 billion, a decrease of $1.0 billion, or 34.5% from $2.9 billion sold during the same period in 1999. This decrease in mortgage loan sales was attributable to the 10.0% decrease in mortgage loan originations and the 10.6% increase in the loan portfolio during the quarter. The Company sold 70.4% and 96.7% of its mortgage loan originations during the three month periods ended September 30, 2000 and 1999, respectively.
Mortgage loans sold during the nine months ended September 30, 2000 totaled $5.4 billion, a decrease of $5.6 billion, or 50.9% from $11.0 billion sold during the same period in 1999. This decrease in mortgage loan sales was attributable to the 42.3% decrease in mortgage loan originations and the 36.8% increase in the loan portfolio during the period. The Company sold 76.1% and 89.4% of its mortgage loan originations during the nine month periods ended September 30, 2000 and 1999, respectively.
The Company typically uses FHLB advances to fund its daily operational liquidity needs and to assist in funding loan originations. The Company will continue to use this source of funds until a more cost-effective source of funds becomes available. FHLB advances are used because of their flexibility. These funds are typically borrowed for terms that are less than one year with no prepayment penalty. The Company had $1.7 billion outstanding at September 30, 2000. Such advances are repaid with the proceeds from the sale of mortgage loans held for sale. The Company currently has an authorized line of credit equal to $2.0 billion. This line is collateralized by non-delinquent mortgage loans. To the extent that the amount of retail deposits or customer escrow accounts can be increased, the Company expects to replace FHLB advances.
At September 30, 2000, the Company had outstanding rate-lock commitments to lend $938.9 million in mortgage loans, along with outstanding commitments to make other types of loans totaling $27.3 million. Because such commitments may expire without being drawn upon, they do not necessarily represent future cash commitments. Also, at September 30, 2000, the Company had outstanding commitments to sell $1.2 billion of mortgage loans. These commitments will be funded within 90 days. Total commercial and consumer unused lines of credit totaled $268.6 million at September 30, 2000. Such commitments include $252.0 million in warehouse lines of credit to various mortgage companies, of which $57.8 million was advanced at September 30, 2000.
Capital Resources.
At September 30, 2000, the Bank exceeded all applicable bank regulatory minimum capital requirements. The Company is not subject to any such requirements.
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STOCK BUYBACK
The board of directors of Flagstar Bancorp released data on October 31, 2000 that stated that the Company has repurchased a total of 1.8 million shares, or approximately 13.1 % of its outstanding shares prior to the commencement of the program. The repurchased shares are reserved for later reissue in connection with future stock dividends, dividend reinvestment plans, and employee benefit plans.
Item 3. Market Risk
In its mortgage banking operations, the Company is exposed to market risk in the form of interest rate risk from the time the interest rate on a mortgage loan application is committed to by the Company through the time the Company sells or commits to sell the mortgage loan. On a daily basis, the Company analyzes various economic and market factors and, based upon these analyses, projects the amount of mortgage loans it expects to sell for delivery at a future date. The actual amount of loans sold will be a percentage of the number of mortgage loans on which the Company has issued binding commitments (and thereby locked in the interest rate) but has not yet closed (“pipeline loans”) to actual closings. If interest rates change in an unanticipated fashion, the actual percentage of pipeline loans that close may differ from the projected percentage. The resultant mismatching of commitments to fund mortgage loans and commitments to sell mortgage loans may have an adverse effect on the results of operations in any such period. For instance, a sudden increase in interest rates can cause a higher percentage of pipeline loans to close than projected. To the degree that this is not anticipated, the Company will not have made commitments to sell these additional pipeline loans and may incur losses upon their sale as the market rate of interest will be higher than the mortgage interest rate committed to by the Company on such additional pipeline loans. To the extent that the hedging strategies utilized by the Company are not successful, the Company’s profitability may be adversely affected.
Management believes there has been no material change in either interest rate risk or market risk since December 31, 1999.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
| Exhibit 11. Computation of Net Earnings per Share |
| Exhibit 27 (SEC Use only) |
(b) Reports on Form 8-K
| None |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| FLAGSTAR BANCORP, INC. | ||||||
| Date: | November 13, 2000 | /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 (Principal Accounting Officer) |
25
Exhibit Index
| Exhibit No. | Description | |
| 11 | Computation of Net Earnings per Share | |
| 27 | Financial Data Schedule |
|
|