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Previous: RWD TECHNOLOGIES INC, 10-Q, EX-27, 2000-08-11 |
Next: FLAGSTAR BANCORP INC, 10-Q, EX-11, 2000-08-11 |
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 June 30, 2000
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 (State or other jurisdiction of incorporation or organization) |
38-3150651 (I.R.S. Employer Identification No.) |
| 2600 Telegraph Road, Bloomfield Hills, Michigan (Address of principal executive offices) |
48302-0953 (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 sixty days. Yes X No .
As of July 31, 2000, 12,245,853 shares of the registrant’s Common Stock, $0.01 par value, were issued and 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 — June 30, 2000 ( unaudited ) and December 31, 1999. |
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| Unaudited Consolidated Statements of Earnings — For the three and six months ended June 30, 2000 and 1999. |
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| Unaudited Consolidated Statements of Cash Flows — For the six months ended June 30, 2000 and 1999. |
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| Condensed Notes to Consolidated Financial Statements |
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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 June 30, | At December 31, | ||||||||||
| Assets | 2000 | 1999 | |||||||||
| (unaudited) | |||||||||||
| Cash and cash equivalents | $ | 334,523 | $ | 118,636 | |||||||
| Loans receivable | |||||||||||
| Mortgage loans available for sale | 1,625,509 | 2,230,381 | |||||||||
| Loans held for investment | 3,032,335 | 1,555,350 | |||||||||
| Less: allowance for losses | (25,000 | ) | (23,000 | ) | |||||||
| Loans receivable, net | 4,682,844 | 3,808,731 | |||||||||
| Federal Home Loan Bank stock | 98,800 | 79,850 | |||||||||
| Other investments | 2,521 | — | |||||||||
| Total earning assets | 4,784,165 | 3,888,581 | |||||||||
| Accrued interest receivable | 36,807 | 26,629 | |||||||||
| Repossessed assets | 19,309 | 21,364 | |||||||||
| Premises and equipment | 84,588 | 46,979 | |||||||||
| Mortgage servicing rights | 125,527 | 131,831 | |||||||||
| Other assets | 74,436 | 76,019 | |||||||||
| Total assets | $ | 5,459,355 | $ | 4,310,039 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Liabilities | |||||||||||
| Retail deposit accounts | $ | 1,583,854 | $ | 1,293,183 | |||||||
| Wholesale deposit accounts | 1,662,720 | 967,780 | |||||||||
| Federal Home Loan Bank advances | 1,570,000 | 1,477,000 | |||||||||
| Long term debt | 74,750 | 74,750 | |||||||||
| Total interest bearing liabilities | 4,891,324 | 3,812,713 | |||||||||
| Accrued interest payable | 26,056 | 15,689 | |||||||||
| Undisbursed payments on loans serviced for others | 71,828 | 69,231 | |||||||||
| Escrow accounts | 99,773 | 75,340 | |||||||||
| Liability for checks issued | 63,440 | 30,426 | |||||||||
| Federal income taxes payable | 46,275 | 50,238 | |||||||||
| Other liabilities | 76,456 | 70,688 | |||||||||
| Total liabilities | 5,275,152 | 4,124,325 | |||||||||
| Stockholders’ Equity | |||||||||||
| Common stock — $.01 par value,
40,000,000 shares authorized; 13,699,823 shares issued; and 12,027,473 and 12,891,473 outstanding at June 30, 2000 and December 31, 1999, respectively |
120 | 129 | |||||||||
| Additional paid in capital | 6,913 | 18,307 | |||||||||
| Retained earnings | 177,170 | 167,278 | |||||||||
| Total stockholders’ equity | 184,203 | 185,714 | |||||||||
| Total liabilities and stockholders’ equity | $ | 5,459,355 | $ | 4,310,039 | |||||||
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The accompanying notes are an integral part of these statements.
3
Flagstar Bancorp, Inc.
Unaudited Consolidated Statements of Earnings
(in thousands, except per share data)
| For the quarter ended | For the six months ended | ||||||||||||||||
| June 30, | June 30, | ||||||||||||||||
| 2000 | 1999 | 2000 | 1999 | ||||||||||||||
| Interest Income | |||||||||||||||||
| Loans | $ | 92,947 | $ | 57,441 | $ | 167,192 | $ | 108,674 | |||||||||
| Other | 2,431 | 1,222 | 4,122 | 2,418 | |||||||||||||
| Total | 95,378 | 58,663 | 171,314 | 111,092 | |||||||||||||
| Interest Expense | |||||||||||||||||
| Deposits | 41,873 | 28,396 | 75,158 | 55,178 | |||||||||||||
| FHLB advances | 26,887 | 10,515 | 47,065 | 19,951 | |||||||||||||
| Other | 3,232 | 2,911 | 6,479 | 4,915 | |||||||||||||
| Total | 71,992 | 41,822 | 128,702 | 80,044 | |||||||||||||
| Net interest income | 23,386 | 16,841 | 42,612 | 31,048 | |||||||||||||
| Provision for losses | 4,352 | 972 | 5,918 | 3,045 | |||||||||||||
| Net interest income after provision for losses | 19,034 | 15,869 | 36,694 | 28,003 | |||||||||||||
| Non-Interest Income | |||||||||||||||||
| Loan administration | 4,476 | 7,519 | 8,920 | 10,670 | |||||||||||||
| Net gain on loan sales | 3,345 | 11,748 | 5,528 | 30,956 | |||||||||||||
| Net gain on sales of mortgage servicing rights | 5,596 | 227 | 5,916 | 922 | |||||||||||||
| Other fees and charges | 3,692 | 3,064 | 8,499 | 6,306 | |||||||||||||
| Total | 17,109 | 22,558 | 28,863 | 48,854 | |||||||||||||
| Non-Interest Expense | |||||||||||||||||
| Compensation and benefits | 8,116 | 9,736 | 19,523 | 19,147 | |||||||||||||
| Occupancy and equipment | 7,076 | 5,223 | 13,472 | 9,785 | |||||||||||||
| General and administrative | 7,494 | 5,426 | 13,143 | 12,389 | |||||||||||||
| Total | 22,686 | 20,385 | 46,138 | 41,321 | |||||||||||||
| Earnings before federal income taxes | 13,457 | 18,042 | 19,419 | 35,536 | |||||||||||||
| Provision for federal income taxes | 4,840 | 6,343 | 7,035 | 12,474 | |||||||||||||
| Net Earnings | $ | 8,617 | $ | 11,699 | $ | 12,384 | $ | 23,062 | |||||||||
| Earnings per share — basic | $ | 0.70 | $ | 0.86 | $ | 1.00 | $ | 1.69 | |||||||||
| Earnings per share — diluted | $ | 0.70 | $ | 0.83 | $ | 1.00 | $ | 1.63 | |||||||||
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The accompanying notes are an integral part of these statements.
4
Flagstar Bancorp, Inc.
Unaudited Consolidated Statements of Cash Flows
(in thousands)
| For the six months ended | |||||||||||
| June 30, | |||||||||||
| 2000 | 1999 | ||||||||||
| Operating Activities | |||||||||||
| Net earnings | $ | 12,384 | $ | 23,062 | |||||||
| Adjustments to reconcile net earnings to net cash used in operating activities | |||||||||||
| Provision for losses | 5,918 | 3,045 | |||||||||
| Depreciation and amortization | 13,244 | 11,842 | |||||||||
| Net gain on the sale of assets | (52 | ) | (174 | ) | |||||||
| Net gain on loan sales | (5,528 | ) | (30,956 | ) | |||||||
| Net gain on sales of mortgage servicing rights | (5,916 | ) | (922 | ) | |||||||
| Proceeds from sales of loans available for sale | 3,471,568 | 8,265,243 | |||||||||
| Originations and repurchases of loans available for sale, net of principal repayments | (4,369,559 | ) | (8,813,466 | ) | |||||||
| Increase (decrease) in accrued interest receivable | (10,178 | ) | 2,528 | ||||||||
| Decrease in other assets | 937 | 9,926 | |||||||||
| Increase in accrued interest payable | 10,368 | 1,247 | |||||||||
| Increase in liability for checks issued | 33,014 | 4,807 | |||||||||
| Decrease in current federal income taxes payable | (1,990 | ) | (19,003 | ) | |||||||
| (Benefit) provision for deferred federal income taxes payable | (1,973 | ) | 11,977 | ||||||||
| Increase (decrease) in other liabilities | 5,768 | (3,296 | ) | ||||||||
| Net cash used in operating activities | (841,995 | ) | (534,140 | ) | |||||||
| Investing Activities | |||||||||||
| Net change in investments | (2,521 | ) | 500 | ||||||||
| Originations of loans held for investment, net of principal repayments | 14,425 | (146,009 | ) | ||||||||
| Purchase of Federal Home Loan Bank stock | (18,950 | ) | (1,213 | ) | |||||||
| Proceeds from the disposition of repossessed assets | 11,261 | 9,825 | |||||||||
| Acquisitions of premises and equipment | (43,053 | ) | (8,056 | ) | |||||||
| Net proceeds from the disposition of premises and equipment | 109 | — | |||||||||
| Increase in mortgage servicing rights | (64,816 | ) | (117,810 | ) | |||||||
| Proceeds from the sale of mortgage servicing rights | 69,681 | 110,159 | |||||||||
| Net cash used in investing activities | (33,864 | ) | (152,604 | ) | |||||||
| Financing Activities | |||||||||||
| Net increase in deposit accounts | 985,611 | 222,987 | |||||||||
| Net increase in Federal Home Loan Bank advances | 93,000 | 441,957 | |||||||||
| Issuance of Junior Subordinated Debentures | — | 74,750 | |||||||||
| Net (disbursement) receipt of payments of loans serviced for others | 2,597 | (87,528 | ) | ||||||||
| Net receipt of escrow payments | 24,432 | 33,881 | |||||||||
| Stock repurchase program | (11,403 | ) | — | ||||||||
| Net proceeds from the exercise of common stock options | — | 182 | |||||||||
| Dividends paid to stockholders | (2,491 | ) | (2,187 | ) | |||||||
| Net cash provided by financing activities | 1,091,746 | 684,042 | |||||||||
| Net decrease in cash and cash equivalents | 215,887 | (2,702 | ) | ||||||||
| Beginning cash and cash equivalents | 118,636 | 75,799 | |||||||||
| Ending cash and cash equivalents | $ | 334,523 | $ | 73,097 | |||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Loans receivable transferred to repossessed assets | $ | 12,948 | $ | 9,948 | |||||||
| Total interest payments made on deposits and other borrowings | $ | 118,334 | $ | 78,798 | |||||||
| Federal income taxes paid | $ | 11,000 | $ | 10,000 | |||||||
| Loans available for sale transferred to loans held for investment | $ | 1,508,391 | $ | 310,594 | |||||||
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 ( in thousands, except per share data )
| For the quarter ended | For the six months ended | |||||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2000 | 1999 | 2000 | 1999 | |||||||||||||
| Return on average assets | 0.67 | % | 1.31 | % | 0.52 | % | 1.34 | % | ||||||||
| Return on average equity | 18.95 | % | 25.94 | % | 13.58 | % | 26.44 | % | ||||||||
| Efficiency ratio | 55.22 | % | 52.10 | % | 63.65 | % | 51.71 | % | ||||||||
| Equity/assets ratio (average for the period) | 3.54 | % | 5.03 | % | 3.84 | % | 5.05 | % | ||||||||
| Mortgage loans originated or purchased | $ | 2,450,551 | $ | 4,419,296 | $ | 4,413,175 | $ | 9,213,929 | ||||||||
| Mortgage loans sold | $ | 2,040,827 | $ | 4,256,747 | $ | 3,422,105 | $ | 8,176,740 | ||||||||
| Interest rate spread | 1.83 | % | 1.73 | % | 1.80 | % | 1.79 | % | ||||||||
| Net interest margin | 1.96 | % | 2.14 | % | 1.95 | % | 2.07 | % | ||||||||
| Average common shares outstanding | 12,131 | 13,676 | 12,408 | 13,673 | ||||||||||||
| Average fully diluted shares outstanding | 12,131 | 14,082 | 12,432 | 14,178 | ||||||||||||
| Charge-offs to average loans outstanding | 0.20 | % | 0.12 | % | 0.18 | % | 0.10 | % | ||||||||
| June 30, | March 30, | December 31, | June 30, | |||||||||||||
| 2000 | 2000 | 2000 | 1999 | |||||||||||||
| Equity-to-assets ratio | 3.37 | % | 3.75 | % | 4.31 | % | 4.93 | % | ||||||||
| Tangible capital ratio (1) | 5.37 | % | 6.03 | % | 6.76 | % | 7.87 | % | ||||||||
| Core capital ratio (1) | 5.39 | % | 6.06 | % | 6.80 | % | 7.93 | % | ||||||||
| Risk-based capital ratio (1) | 9.89 | % | 10.81 | % | 12.26 | % | 15.56 | % | ||||||||
| Total risk-based capital ratio (1) | 10.68 | % | 11.61 | % | 13.16 | % | 16.58 | % | ||||||||
| Book value per share | $ | 15.32 | $ | 14.65 | $ | 14.41 | $ | 13.51 | ||||||||
| Number of common shares outstanding | 12,027 | 12,330 | 12,891 | 13,685 | ||||||||||||
| Mortgage loans serviced for others | $ | 8,402,411 | $ | 9,569,910 | $ | 9,519,926 | $ | 11,130,708 | ||||||||
| Value of mortgage servicing rights | 1.49 | % | 1.41 | % | 1.38 | % | 1.36 | % | ||||||||
| Allowance for losses to non performing loans | 53.33 | % | 49.65 | % | 55.00 | % | 57.12 | % | ||||||||
| Allowance for losses to total loans | 0.53 | % | 0.53 | % | 0.60 | % | 0.66 | % | ||||||||
| Non performing assets to total assets | 1.21 | % | 1.35 | % | 1.47 | % | 1.62 | % | ||||||||
| Number of bank branches | 40 | 38 | 35 | 31 | ||||||||||||
| Number of loan origination centers | 38 | 35 | 38 | 36 | ||||||||||||
| Number of correspondent offices | 15 | 15 | 16 | 15 | ||||||||||||
| Number of employees | 1,762 | 1,627 | 1,627 | 1,913 | ||||||||||||
| (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
During both the three and six month period ended June 30, 2000, the Company recorded decreased net earnings from operations due to the interest rate environment prevalent in 2000. The higher and/or rising interest rates experienced in 2000 have negatively affected the mortgage banking segment of the Company’s operations. Despite the decline in revenues in the mortgage banking operation, the expanding retail banking operation has allowed the Company to remain profitable.
Net earnings for the three months ended June 30, 2000 were $8.6 million ( $0.70 per share-diluted ), a $3.1 million decrease from the $11.7 million ( $0.83 per share-diluted ) reported in 1999. The decrease resulted from a $5.5 million decrease in other income, a $3.4 million increase in the provision for losses, and a $2.3 million increase in operating expenses, which was offset by a $1.5 million decrease in the provision for federal income taxes and a $6.6 increase in net interest income.
Net earnings for the six months ended June 30, 2000 were $12.4 million ( $1.00 per share-diluted ), a $10.7 million decrease from the $23.1 million ( $1.63 per share-diluted ) reported in 1999. The decrease resulted from a $20.0 million decrease in other income, a $2.9 million increase in the provision for losses, and a $4.8 million increase in operating expenses, which was offset by a $5.5 million decrease in the provision for federal income taxes and a $11.6 increase in net interest income.
Net Interest Income
Net interest income continues to rise and increased $6.6 million, or 39.3%, to $23.4 million for the three months ended June 30, 2000. This level of interest income compares positively to the $16.8 million recorded for the 1999 period. The increase was due to a $1.6 billion increase in average interest-earning assets between the comparable periods, offset by a $1.7 billion increase in interest-bearing liabilities necessary to fund the growth. As volumes were increasing, the Company’s interest rate spread also increased from 1.73% in the 1999 period to 1.83% for the three months ended June 30, 2000. The increased spread was offset by an $85.5 million decrease in the excess of average earning assets over average interest-bearing liabilities. This decrease created a decrease in the Company’s net interest margin of 0.18% to 1.96% for the three months ended June 30, 2000 from 2.14% for the comparable 1999 period.
Net interest income also increased $11.6 million, or 37.4%, to $42.6 million for the six months ended June 30, 2000. This level of interest income compares to $31.0 million recorded during the 1999 period. This increase was due to a $1.4 billion increase in average interest-earning assets between the comparable periods, offset by a $1.4 billion increase in interest-bearing liabilities necessary to fund the growth. The Company’s interest rate spread increased from 1.79% for the 1999 period to 1.80% for the six months ended June 30, 2000. The increased spread was offset by the $25.8 million decrease in the excess of average earning assets over average interest-bearing liabilities during the period. These changes resulted in a net decrease in the Company’s net interest margin by 0.12% to 1.95% for the six months ended June 30, 2000 from 2.07% for the comparable 1999 period.
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AVERAGE YIELDS EARNED AND RATES PAID
Table 1 and Table 2 presents interest income from average earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates. Interest income from earning assets includes the amortization of net premiums and the amortization of net deferred loan origination costs. Nonaccruing loans were included in the average loan amounts outstanding.
TABLE 1
| Quarter ended June 30, | |||||||||||||||||||||||||||||
| 2000 | 1999 | ||||||||||||||||||||||||||||
| Average | Yield/ | Average | Yield/ | ||||||||||||||||||||||||||
| Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||||
| Loans receivable, net | $ | 4,657,465 | $ | 92,947 | 7.98 | % | $ | 3,136,382 | $ | 57,441 | 7.33 | % | |||||||||||||||||
| FHLB stock | 98,800 | 1,971 | 8.00 | 58,500 | 1,180 | 8.00 | |||||||||||||||||||||||
| Other | 32,745 | 460 | 5.62 | 3,165 | 42 | 5.31 | |||||||||||||||||||||||
| Total interest-earning assets | 4,789,010 | $ | 95,378 | 7.97 | % | 3,198,047 | $ | 58,663 | 7.34 | % | |||||||||||||||||||
| Other assets | 352,277 | 384,815 | |||||||||||||||||||||||||||
| Total assets | $ | 5,141,287 | $ | 3,582,862 | |||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||
| Deposits | $ | 2,866,023 | $ | 41,873 | 5.86 | % | $ | 2,110,291 | $ | 28,396 | 5.40 | % | |||||||||||||||||
| FHLB advances | 1,686,296 | 26,887 | 6.40 | 783,753 | 10,515 | 5.38 | |||||||||||||||||||||||
| Other | 149,750 | 3,232 | 8.66 | 131,599 | 2,911 | 8.87 | |||||||||||||||||||||||
| Total interest-bearing liabilities | 4,702,069 | $ | 71,992 | 6.14 | % | 3,025,643 | $ | 41,822 | 5.61 | % | |||||||||||||||||||
| Other liabilities | 257,293 | 376,836 | |||||||||||||||||||||||||||
| Stockholders equity | 181,925 | 180,383 | |||||||||||||||||||||||||||
| Total liabilities and stockholders equity | $ | 5,141,287 | $ | 3,582,862 | |||||||||||||||||||||||||
| Net interest-earning assets | $ | 86,941 | $ | 172,404 | |||||||||||||||||||||||||
| Net interest income | $ | 23,386 | $ | 16,841 | |||||||||||||||||||||||||
| Interest rate spread | 1.83 | % | 1.73 | % | |||||||||||||||||||||||||
| Net interest margin | 1.96 | % | 2.14 | % | |||||||||||||||||||||||||
| Ratio of average interest-earning assets to interest-bearing liabilities | 102 | % | 106 | % | |||||||||||||||||||||||||
9
TABLE 2
AVERAGE YIELDS EARNED AND RATES PAID
| Six months ended June 30, | |||||||||||||||||||||||||
| 2000 | 1999 | ||||||||||||||||||||||||
| Average | Yield/ | Average | Yield/ | ||||||||||||||||||||||
| Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||
| Loans receivable, net | $ | 4,276,730 | $ | 167,192 | 7.82 | % | $ | 2,963,777 | $ | 108,674 | 7.33 | % | |||||||||||||
| FHLB stock | 89,325 | 3,563 | 8.00 | 58,521 | 2,321 | 8.00 | |||||||||||||||||||
| Other | 20,000 | 559 | 5.59 | 3,561 | 97 | 5.45 | |||||||||||||||||||
| Total interest-earning assets | 4,386,055 | $ | 171,314 | 7.81 | % | 3,025,859 | $ | 111,092 | 7.34 | % | |||||||||||||||
| Other assets | 368,772 | 428,371 | |||||||||||||||||||||||
| Total assets | $ | 4,754,827 | $ | 3,454,230 | |||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||
| Deposits | $ | 2,637,337 | $ | 75,158 | 5.72 | % | $ | 2,054,478 | $ | 55,178 | 5.42 | % | |||||||||||||
| FHLB advances | 1,509,736 | 47,065 | 6.25 | 740,056 | 19,951 | 5.44 | |||||||||||||||||||
| Other | 149,187 | 6,479 | 8.71 | 115,705 | 4,915 | 8.57 | |||||||||||||||||||
| Total interest-bearing liabilities | 4,296,260 | $ | 128,702 | 6.01 | % | 2,910,239 | $ | 80,044 | 5.55 | % | |||||||||||||||
| Other liabilities | 276,144 | 369,560 | |||||||||||||||||||||||
| Stockholders equity | 182,423 | 174,431 | |||||||||||||||||||||||
| Total liabilities and Stockholders equity | $ | 4,754,827 | $ | 3,454,230 | |||||||||||||||||||||
| Net interest-earning assets | $ | 89,795 | $ | 115,620 | |||||||||||||||||||||
| Net interest income | $ | 42,612 | $ | 31,048 | |||||||||||||||||||||
| Interest rate spread | 1.80 | % | 1.79 | % | |||||||||||||||||||||
| Net interest margin | 1.95 | % | 2.07 | % | |||||||||||||||||||||
| Ratio of average interest-earning assets to interest-bearing liabilities | 102 | % | 104 | % | |||||||||||||||||||||
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 holding the initial volume constant).
TABLE 3
| Quarter ended June 30, | ||||||||||||
| 2000 versus 1999 | ||||||||||||
| Increase (Decrease) due to: | ||||||||||||
| Rate | Volume | Total | ||||||||||
| Interest Income: | (in thousands) | |||||||||||
| Loans receivable, net | $ | 7,648 | $ | 27,858 | $ | 35,506 | ||||||
| FHLB stock | 0 | 791 | 791 | |||||||||
| Other | 26 | 392 | 418 | |||||||||
| Total | $ | 7,674 | $ | 29,041 | $ | 36,715 | ||||||
| Interest Expense: | ||||||||||||
| Deposits | $ | 3,317 | $ | 10,160 | $ | 13,477 | ||||||
| FHLB advances | 4,275 | 12,097 | 16,372 | |||||||||
| Other | (81 | ) | 402 | 321 | ||||||||
| Total | $ | 7,511 | $ | 22,659 | $ | 30,170 | ||||||
| Net change in net interest income | $ | 163 | $ | 6,382 | $ | 6,545 | ||||||
TABLE 4
| Six months ended June 30, | |||||||||||||
| 2000 versus 1999 | |||||||||||||
| Increase (Decrease) due to: | |||||||||||||
| Rate | Volume | Total | |||||||||||
| Interest Income: | (in thousands) | ||||||||||||
| Loans receivable, net | $ | 10,375 | $ | 48,143 | $ | 58,518 | |||||||
| FHLB stock | 1 | 1,241 | 1,242 | ||||||||||
| Other | 15 | 447 | 462 | ||||||||||
| Total | $ | 10,391 | $ | 49,831 | $ | 60,222 | |||||||
| Interest Expense: | |||||||||||||
| Deposits | $ | 3,945 | $ | 16,035 | $ | 19,980 | |||||||
| FHLB advances | 6,156 | 20,958 | 27,114 | ||||||||||
| Other | 107 | 1,457 | 1,564 | ||||||||||
| Total | $ | 10,208 | $ | 38,450 | $ | 48,658 | |||||||
| Net change in net interest income | $ | 183 | $ | 11,381 | $ | 11,564 | |||||||
11
Provision for Losses
The provision for losses was increased to $4.4 million for the three months ended June 30, 2000 from $1.0 million during the same period in 1999. The provision for losses increased to $5.9 million for the six months ended June 30, 2000 from $3.0 million during the same period in 1999.
The increased provision contained an amount which increased the allowance for losses by $2.0 million at June 30, 2000. The allowance was increased by management in order to set loan loss reserves at a level that would offset the inherent risk associated with the Company’s loan portfolio. The loan portfolio increased 23.7% during the six month period ended June 30, 2000. The Company’s increase in its general reserves constituted an increase of 8.7%. During the 1999 periods no such increases were made. The allowance, which now totals $25.0 million, is 0.53% of loans and 53.3% of non-performing loans. The allowance stood at 0.66% and 0.60% of total loans and 57.1% and 55.0% of non-performing loans at June 30, 1999 and December 31, 1999, respectively.
Non-performing loans stood at $46.9 million at June 30, 2000, up slightly from $46.3 million, a 1.3% increase, at March 31, 2000. Non-performing loans stood at $41.8 million (12.2% less) at December 31, 1999. Net charge-offs were an annualized 0.20% and 0.18% of average loans outstanding during the three months and six months ended June 30, 2000, respectively.
Non-Interest Income
During the three months ended June 30, 2000, non-interest income decreased $5.5 million, or 24.3%, to $17.1 million from $22.6 million. This decrease was primarily attributable to a decrease in net gain on loan sales and loan administration fees, offset by an increase in the net gain on the sales of mortgage servicing rights and a small increase in other fees and charges.
During the six months ended June 30, 2000, non-interest income decreased $20.0 million, or 40.9%, to $28.9 million from $48.9 million. This decrease was also attributable to a decrease in net gain on loan sales and loan administration fees, offset by an increase in the net gain on the sales of mortgage servicing rights and a small increase in other fees and charges.
Loan Administration
Net loan administration fee income decreased to $4.5 million during the three months ended June 30, 2000, from $7.5 million in the 1999 period. This decrease resulted from an increase in the amortization of the mortgage servicing rights caused by a recalculation of the remaining life associated with the underlying mortgage loans and a decrease in the amount of average loans serviced for others. Fee income before the amortization of servicing rights decreased only $0.9 million for the three months ended June 30, 2000, to $8.1 million compared to the $9.0 million recorded in the 1999 period.
At June 30, 2000, the unpaid principal balance of loans serviced for others was $8.4 billion versus $9.5 billion serviced at March 31, 2000 and $9.5 billion serviced at December 31, 1999. At June 30, 1999, the unpaid principal balance of loans serviced for others was $11.1 billion versus $10.5 billion serviced at March 31, 1999 and $11.5 billion serviced at December 31, 1998. The weighted average servicing fee on loans serviced for others at June 30, 2000 was 0.284% (i.e., 28.4 basis points).
Net loan administration fee income for the six months ended June 30, 2000 decreased to $8.9 million from $10.7 million recorded in the 1999 period. This decrease also was the result of the increased amortization of mortgage servicing rights and the decreased size of the portfolio of loans serviced for others. Gross fee income, before the amortization of serving rights, decreased $2.2 million for the six months ended June 30, 2000 to $16.3 million, from $18.5 million for the comparable 1999 period.
12
Net Gain on Loan Sales
For the three months ended June 30, 2000, net gain on loan sales decreased $8.4 million, to $3.3 million, from $11.7 million in the 1999 period. The 2000 period reflects the sale of $2.0 billion in loans versus $4.3 billion sold in the 1999 period. The higher interest rate environment in the 2000 period resulted in a smaller mortgage loan origination volume ($2.4 billion in the 2000 period vs. $4.4 billion in the 1999 period) and a smaller or narrower gain on sale spread (16 basis points versus 28 basis points) recorded when the loans were sold.
For the six months ended June 30, 2000, net gain on loan sales decreased $25.5 million, to $5.5 million, from $31.0 million in the comparable 1999 period. The 2000 period includes the sale of $3.4 billion in loans versus $8.2 billion sold in the 1999 period. For the six month period ended June 30, 2000, the higher interest rate environment also resulted in a smaller or narrower gain on sale spread recorded (16 basis points versus 38 basis points) when the loans were sold.
Net Gain on the Sale of Mortgage Servicing Rights
For the three months ended June 30, 2000, the net gain on the sale of mortgage servicing rights increased from $227,000 during the 1999 period to $5.6 million. The gain on sale of mortgage servicing rights increased because the Company sold a $1.6 billion seasoned bulk servicing package in the 2000 period and did not have such a sale of seasoned loans in the 1999 period. During 1999, the Company sold $3.2 billion of newly originated servicing rights on a flow basis. During 2000, the Company also sold $1.4 billion of servicing rights on a flow basis for a minimal profit.
For the six months ended June 30, 2000, the net gain on the sale of mortgage servicing rights increased $5.0 million to $5.9 million, from $922,000 for the same period in 1999. The gain on sale of mortgage servicing rights increased due to the aforementioned sale of $1.6 billion of seasoned servicing rights in 2000. During 1999, the Company only recorded a minimal gain on a bulk servicing sale of $1.0 billion in mortgage servicing rights. During 2000, the Company sold a total of $4.1 billion in servicing versus $3.4 billion in the origination of mortgage servicing rights. In 1999, the Company sold $7.6 billion and originated $8.2 billion in mortgage servicing rights.
Other Fees and Charges
During the three and six months ended June 30, 2000, the Company recorded $3.7 million and $8.5 million in other fees and charges, respectively. In the comparable 1999 periods, the Company recorded $3.1 million and $6.3 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 the 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 or allowed 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 June 30, | Six months ended June 30, | |||||||||||||||
| 2000 | 1999 | 2000 | 1999 | |||||||||||||
| ( in thousands ) | ||||||||||||||||
| Compensation and benefits | $ | 14,615 | $ | 16,038 | $ | 29,671 | $ | 31,738 | ||||||||
| Commissions | 6,800 | 8,601 | 11,887 | 15,349 | ||||||||||||
| Occupancy and equipment | 7,077 | 5,223 | 13,473 | 9,785 | ||||||||||||
| Advertising | 975 | 366 | 1,745 | 1,219 | ||||||||||||
| Core deposit amortization | 323 | 323 | 645 | 645 | ||||||||||||
| Federal insurance premium | 126 | 307 | 249 | 607 | ||||||||||||
| General and administrative | 7,742 | 7,533 | 13,840 | 17,953 | ||||||||||||
| Total | 37,658 | 38,391 | 71,510 | 77,296 | ||||||||||||
| Less: capitalized direct costs of loan closings | (14,972 | ) | (18,006 | ) | (25,372 | ) | (35,975 | ) | ||||||||
| Total, net | $ | 22,686 | $ | 20,385 | $ | 46,138 | $ | 41,321 | ||||||||
| Efficiency ratio | 55.22 | % | 52.10 | % | 63.65 | % | 51.71 | % | ||||||||
Non-interest expense, excluding the capitalization of direct loan origination costs, decreased by $0.7 million, or 1.8%, to $37.7 million during the three months ended June 30, 2000, from $38.4 million for the comparable 1999 period. Although the overall decreased costs were modest, the makeup of the expenses varied greatly. The largest changes occurred in the amount of compensation and benefits and commissions paid and the occupancy and equipment costs reported.
The decreased commission expense of $1.8 million is the direct result of the decrease in mortgage loan originations during the period. The majority of the $1.9 million increase in occupancy and equipment costs are directly attributable to the deposit branch expansion. The decrease in general and administrative expenses are reflective of the decreased mortgage loan originations offset by the increased number of deposit branches. The Company opened two bank branches during the quarter, and maintained nine more branches during the 2000 quarter than the comparable 1999 period.
During the six months ended June 30, 2000, non-interest expense, excluding the capitalization of direct loan origination costs, decreased by $5.8 million, or 7.5%, to $71.5 million, from $77.3 million for the comparable 1999 period. The decreased costs are primarily attributable to the $4.8 billion decrease (52.2%) in mortgage loans originated during the comparable periods. The largest changes occurred in the decreased amounts of compensation and benefits and commissions and general and administrative expenses, offset somewhat by the increase in occupancy and equipment costs reported.
The decreased commission expense of $3.4 million and the $2.0 million decrease in compensation costs are the direct result of the decrease in mortgage loan originations during period. The majority of the $4.2 million decrease in general and administrative expenses represents decreased mortgage origination costs, offset by increases in costs associated with the deposit branch expansion. Additionally, the increased occupancy and equipment expense of $3.7 million along with the $0.5 million increase in advertising costs are the result of the opening and maintenance of the nine bank branches operated during 2000.
14
SEGMENT REPORTING
RETAIL BANKING OPERATIONS
The Company provides a full range of banking services to consumers and small businesses in southern and western Michigan. At June 30, 2000, the Bank operated a network of 40 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 in Michigan, California, 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 Freddie Mac or Fannie Mae, or both.
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 six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2000 | 1999 | 2000 | 1999 | |||||||||||||
| ( In thousands ) | ||||||||||||||||
| Revenues | $ | 16,908 | $ | 14,757 | $ | 34,165 | $ | 28,615 | ||||||||
| Earnings before taxes | 8,743 | 10,769 | 20,125 | 20,607 | ||||||||||||
| Identifiable assets | 1,745,115 | 1,349,024 | 1,745,115 | 1,349,024 | ||||||||||||
Table 5
Mortgage Banking Operations
| At or for the quarter ended | At or for the six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2000 | 1999 | 2000 | 1999 | |||||||||||||
| ( In thousands ) | ||||||||||||||||
| Revenues | $ | 23,588 | $ | 24,642 | $ | 37,311 | $ | 51,287 | ||||||||
| Earnings before taxes | 4,715 | 7,273 | (705 | ) | 14,929 | |||||||||||
| Identifiable assets | 3,714,240 | 2,817,979 | 3,714,240 | 2,817,979 | ||||||||||||
15
Financial Condition
Assets
The Company’s assets totaled $5.5 billion at June 30, 2000, an increase of $1.2 billion, or 27.9%, as compared to $4.3 billion at December 31, 1999. This increase was primarily due to increases in loans receivable, net.
Cash and cash equivalents
Cash and cash equivalents increased from $118.6 million at December 31, 1999 to $334.5 million at June 30, 2000. The cash on hand at June 30, 2000 includes $265.0 million of funds held in an overnight time account at the Federal Home Loan Bank. This excess cash was part of the proceeds received on loan sales consumated at the end of June. These funds were utilized in the mortgage banking operation during July.
Loans receivable, net
Loans receivable, net increased $0.9 billion, from $3.8 billion at December 31, 1999 to $4.7 billion at June 30, 2000.
Mortgage loans available for sale decreased $0.6 billion, or 27.3%, to $1.6 billion at June 30, 2000, from $2.2 billion at December 31, 1999. This decrease is primarily attributable to Company’s decision to transfer $1.5 billion of loans available for sale to the held for investment category as part of the Company’s interest rate risk management. These loans were primarily adjustable rate loans which carry a fixed rate of interest for the first 3, 5, or 7 years.
Loans held for investment increased $1.4 billion, or 87.5%, from $1.6 billion at December 31, 1999 to $3.0 billion at June 30, 2000. This increase is primarily attributable to the above mentioned transfer, but also includes increases in every category of loan designated as held for investment. These increases include a $10.1 million increase in consumer loans, a $14.6 million increase in commercial loans, a $36.8 million increase in commercial real estate loans, a $5.0 million increase in construction loans, and a $54.2 million increase in second mortgage loans.
Included in the commercial loan total of $65.6 million reported at June 30, 2000 were $56.5 million of utilized warehouse lines of credit. These warehouse lines totaled $273.3 million, of which $216.8 million were not utilized. Warehouse lines of credit utilized at December 31, 1999 totaled $46.2 million.
Allowance for losses
The allowance for losses totaled $25.0 million at June 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 53.3% and 55.0% at June 30, 2000 and December 31, 1999, respectively. The Company’s non-performing loans totaled $46.9 million and $41.8 million at June 30, 2000 and December 31, 1999, respectively. The allowance for losses as a percentage of total loans, was 0.53% and 0.60% at June 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. During the six months ended June 30, 2000, non-performing loans increased $5.1 million, or 12.2%, and management increased the allowance for losses $2.0 million, creating a 16.5% increase in net non-performing loans.
16
FHLB stock
Holdings of FHLB stock increased from $79.9 million at December 31, 1999 to $98.8 million at June 30, 2000 as the Company’s total mortgage loan portfolio increased. As a member of the FHLB, the Bank is required to hold shares of FHLB stock in an amount at least equal to 1% of the aggregate unpaid principal balance of its home mortgage loans, or 5% of its outstanding FHLB advances, whichever is greater. During the quarter ended June 30, 2000, the FHLB advance total reached $2.0 billion creating the need for the increased stock balance.
Accrued interest receivable
Accrued interest receivable increased from $26.6 million at December 31, 1999 to $36.8 million at June 30, 2000 as the Company’s total loan portfolio increased. The Company typically collects loan interest in the following month after it is earned.
Repossessed assets
Repossessed assets decreased from $21.4 million at December 31, 1999 to $19.3 million at June 30, 2000 because of the net sale of foreclosed real estate.
Mortgage servicing rights
Mortgage servicing rights totaled $125.5 million at June 30, 2000, a decrease of $6.3 million, or 4.8%, from $131.8 million reported at December 31, 1999. During the six months ended June 30, 2000, the Company capitalized $64.8 million, amortized $7.4 million, and sold $63.7 million in mortgage servicing rights. The principal balance of the loans serviced for others stands at $8.4 billion at June 30, 2000 versus $9.5 billion at December 31, 1999. The capitalized value of the mortgage servicing rights was 1.49% and 1.38% value at June 30, 2000 and December 31, 1999, respectively.
Other assets
Other assets decreased $1.6 million, or 2.1%, to $74.4 million at June 30, 2000, from $76.0 million at December 31, 1999. The majority of this small decrease was attributable to the collection of receivables previously recorded in conjunction with the sale of residential mortgage loan servicing rights completed in the latter half of 1999. 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.
17
Liabilities
The Company’s total liabilities increased $1.2 billion, or 29.3%, to $5.3 billion at June 30, 2000, from $4.1 billion at December 31, 1999. This increase was primarily attributable to an increase of $1.1 billion in interest bearing liabilities but includes an increase in most every liability category.
Retail deposit accounts
Retail deposit accounts increased $0.3 billion, or 23.1%, to $1.6 billion at June 30, 2000, from $1.3 billion at December 31, 1999. This increase reflects the deposit growth strategy being implemented in the Company’s bank branch network. The number of bank branches increased from 38 at December 31, 1999 to 40 at June 30, 2000. At June 30, 2000, the Company’s retail certificates of deposit totaled $1.1 billion, or 68.8% of total retail deposits. These certificates carry an average balance of $19,504 and a weighted average cost of 6.31%.
Wholesale deposit accounts
Wholesale deposit accounts increased $0.7 billion, or 70.0%, to $1.7 billion at June 30, 2000, from $1.0 billion at December 31, 1999. This increase reflects the Company’s need to provide a short-term funding source for the increased level of held for investment mortgage loans. These deposits are made up entirely of certificates of deposit garnered through the secondary market. At June 30, 2000, the portfolio of certificates of deposit had a weighted cost of 6.31%.
FHLB advances
FHLB advances increased $0.1 billion, or 6.7%, to $1.6 billion at June 30, 2000, from $1.5 million at December 31, 1999. The Company relies upon these advances as a funding source for the origination or purchase of loans, which are later sold into the secondary market. The outstanding balance of FHLB advances fluctuates from time to time depending upon the Company’s current inventory of loans held for sale and the availability of lower cost funding from its deposit base and its escrow accounts.
Long term debt
On April 30, 1999, the Company issued $74.8 million of 9.50% preferred securities to the general public in an initial public offering. The securities were issued by the Company’s subsidiary, Flagstar Trust, a Delaware trust. The preferred securities mature in 30 years, pay interest quarterly, and the interest expense is deductible for federal income tax purposes. The net proceeds from the offering was contributed to Flagstar Bank as additional paid in capital and is included as regulatory capital.
Undisbursed payments on loans serviced for others
Undisbursed payments on loans serviced for others increased $2.6 million, or 3.8%, to $71.8 million at June 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.
18
Escrow accounts
Customer escrow accounts increased $24.5 million, or 32.5%, to $99.8 million at June 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 $33.0 million, or 108.6%, to $63.4 million at June 30, 2000, from $30.4 million at December 31, 1999. These amounts represent checks issued to acquire mortgage loans which have not cleared for payment. These balances fluctuate with the size of the mortgage pipeline.
Federal income taxes payable
Federal income taxes payable decreased $3.9 million, or 7.8%, to $46.3 million at June 30, 2000, from $50.2 million at December 31, 1999. This decrease is attributable to the payment of taxes during the six months ended June 30, 2000 offset by an increase in the deferred tax liability created through operations.
Other liabilities
Other liabilities increased $5.8 million, or 8.2%, to $76.5 million at June 30, 2000, from $70.7 million at December 31, 1999. This increase is deemed immaterial.
19
Liquidity and Capital Resources
Liquidity
Liquidity refers to the ability or the financial flexibility to manage future cash flows in order 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 liquidity ratio was 6.17% for the quarter ended June 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 June 30, 2000 totaled $2.0 billion, a decrease of $2.3 billion, or 53.5% from $4.3 billion sold during the same period in 1999. This decrease in mortgage loan sales was attributable to the 45.5% decrease in mortgage loan originations during the quarter. The Company sold 83.3% and 97.7% of its mortgage loan originations during the three month periods ended June 30, 2000 and 1999, respectively.
Mortgage loans sold during the six months ended June 30, 2000 totaled $3.4 billion, a decrease of $4.8 billion, or 58.5% from $8.2 billion sold during the same period in 1999. This decrease in mortgage loan sales was attributable to the 52.2% decrease in mortgage loan originations. The Company sold 77.3% and 89.1% of its mortgage loan originations during the six month periods ended June 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. The Company had $1.6 billion outstanding at June 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 June 30, 2000, the Company had outstanding rate-lock commitments to lend $926.5 million in mortgage loans, along with outstanding commitments to make other types of loans totaling $17.8 million. Because such commitments may expire without being drawn upon, they do not necessarily represent future cash commitments. Also, at June 30, 2000, the Company had outstanding commitments to sell $670.0 million of mortgage loans. These commitments will be funded within 90 days. Total commercial and consumer unused lines of credit totaled $289.7 million at June 30, 2000. Such commitments include $216.8 million of unused warehouse lines of credit to various mortgage companies. The Company had advanced $56.5 million at June 30, 2000.
Capital Resources.
At June 30, 2000, the Bank exceeded all applicable bank regulatory minimum capital requirements. The Company is not subject to any such requirements.
20
STOCK BUYBACK
The board of directors of Flagstar Bancorp adopted the Company’s Stock Repurchase Program (“Program”) on September 21, 1999. The Company has repurchased a total of 1.7 million shares, or approximately 12.2 % of the outstanding shares prior to the Program. These shares were repurchased at a weighted price of $14.04 per share. The repurchased shares totaled over 25.0% of the stock that was not owned by Flagstar’s founders, executive management, and directors prior to the Program. Flagstar insiders and affiliates collectively own over 60% of the Company’s outstanding common shares.
The repurchased shares will be reserved for possible reissue in connection with stock dividends, dividend reinvestment plans, employee benefit plans, and other general corporate purposes.
Item 3. Market Risk
In its mortgage banking operations, the Company is exposed to market risk in the form of interest rate risk from the time the interest rate on a mortgage loan application is committed to by the Company through the time the Company sells or commits to sell the mortgage loan. On a daily basis, the Company analyzes various economic and market factors and, based upon these analyses, projects the amount of mortgage loans it expects to sell for delivery at a future date. The actual amount of loans sold will be a percentage of the number of mortgage loans on which the Company has issued binding commitments (and thereby locked in the interest rate) but has not yet closed (“pipeline loans”) to actual closings. If interest rates change in an unanticipated fashion, the actual percentage of pipeline loans that close may differ from the projected percentage. The resultant mismatching of commitments to fund mortgage loans and commitments to sell mortgage loans may have an adverse effect on the results of operations in any such period. For instance, a sudden increase in interest rates can cause a higher percentage of pipeline loans to close than projected. To the degree that this is not anticipated, the Company will not have made commitments to sell these additional pipeline loans and may incur losses upon their sale as the market rate of interest will be higher than the mortgage interest rate committed to by the Company on such additional pipeline loans. To the extent that the hedging strategies utilized by the Company are not successful, the Company’s profitability may be adversely affected.
Management believes there has been no material change in either interest rate risk or market risk since December 31, 1999.
21
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
| None. |
Item 2. Changes in Securities
| None. |
Item 3. Defaults upon Senior Securities
| None. |
Item 4. Submission of Matters to a Vote of Security Holders
| (a) | The 1999 Annual Meeting of Shareholders of the Company was held on May 9, 2000. |
| (b) | Not applicable |
| (c) | The following directors were re-elected for a term of three years: |
| Votes | ||||||||
| For | Abstain | |||||||
| Michael W. Carrie | 11,781,275 | 590,444 | ||||||
| James D. Coleman | 12,326,927 | 44,792 | ||||||
| Richard S. Elsea | 12,320,299 | 51,420 | ||||||
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 |
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| FLAGSTAR BANCORP, INC |
| Date: August 14, 2000 | /S/ Thomas J. Hammond | |||
| Thomas J. Hammond Chairman of the Board and Chief Executive Officer (Duly Authorized Officer) |
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| /S/ Michael W. Carrie | |
| Michael W. Carrie Executive Vice President (Principal Accounting Officer) |
23
Exhibit Index
| Exhibit No. | Description | |
|
| ||
| 11 | Computation of Net Earnings per Share | |
|
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| 27 | Financial Data Schedule |
24
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