<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 22, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_________
FLAGSTAR CAPITAL CORPORATION
(Exact name of registrant as specified in its governing instruments)
<TABLE>
<CAPTION>
MICHIGAN 6798 [APPLIED FOR]
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
2600 TELEGRAPH ROAD
BLOOMFIELD HILLS, MI 48032-0953
(248) 338-7700
(Address, including zip code and telephone number, including area
code, of registrant's principal executive offices)
---------
THOMAS J. HAMMOND
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
FLAGSTAR CAPITAL CORPORATION
2600 TELEGRAPH ROAD
BLOOMFIELD HILLS, MI 48032-0953
(248) 338-7700
(Name, address, including zip code and telephone number,
including area code, of agent for service)
Copies of communications to:
MATTHEW G. ASH DONALD L. KUNZ
PAUL D. BORJA J. THOMAS FERRIES
ROGER D. BAILEY HONIGMAN MILLER SCHWARTZ AND COHN
KUTAK ROCK 2290 FIRST NATIONAL BUILDING
1101 CONNECTICUT AVE, NW, SUITE 1000 DETROIT, MICHIGAN 48226
WASHINGTON, DC 20036 PHONE: (313) 256-7800
PHONE: (202) 828-2400 FAX: (313) 256-4215
FAX: (202) 828-2488
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ___________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]_________________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]____________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Title Of Securities Being Amount Being Proposed Maximum Proposed Maximum Amount Of
Registered Registered (1) Offering Price Per Share(2) Aggregate Offering Price(2) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noncumulative Exchangeable $ 57,500,000 $ 16,962.50
Preferred Stock, Series A, par
value $25.00 per share
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 300,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the Registration Fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
<PAGE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION DATED DECEMBER 22, 1997
2,000,000 SHARES
FLAGSTAR CAPITAL CORPORATION
[__]% NONCUMULATIVE PREFERRED STOCK, SERIES A
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
EXCHANGEABLE INTO PREFERRED STOCK OF FLAGSTAR BANK, FSB
________________
Flagstar Capital Corporation (the "Company") is hereby offering
2,000,000 shares of its ____% Noncumulative Exchangeable Preferred Stock, Series
A, par value $25.00 per share (the "Series A Preferred Shares"). The Company has
been formed for the purpose of acquiring, holding and managing real estate
mortgage loans that are intended to generate sufficient income to permit the
declaration of dividends on the Series A Preferred Shares at the stated rate and
to meet the operating expenses of the Company. Dividends on the Series A
Preferred Shares are payable at the rate of _____% per annum of the liquidation
preference (an amount equal to $______ per annum per share), if, when and as
declared by the Board of Directors of the Company and, if declared, are payable
quarterly in arrears on the last day of March, June, September and December in
each year, commencing March 31, 1998. Dividends are not cumulative and therefore
if no dividend is declared on the Series A Preferred Shares by the Company for a
quarterly dividend period, holders of the Series A Preferred Shares will have no
right to receive a dividend for that period, and the Company will have no
obligation to pay a dividend for that period, whether or not dividends are
declared and paid for any future period. Dividends in each dividend period will
accrue from the first day of the period, whether or not declared or paid in the
prior period.
(Continued)
________________
SEE "RISK FACTORS" COMMENCING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SERIES A PREFERRED
SHARES INCLUDING, AMONG OTHERS:
. AN AUTOMATIC EXCHANGE OF SERIES A PREFERRED SHARES FOR PREFERRED STOCK OF
FLAGSTAR BANK, FSB (THE "BANK") WOULD FORCE HOLDERS OF THE SERIES A
PREFERRED SHARES TO ACCEPT A LESSER QUALITY ILLIQUID STOCK AND TO RECOGNIZE
TAXABLE INCOME.
. CONFLICTS OF INTEREST EXIST DUE TO COMPETING INTERESTS OF THE COMPANY AND
THE BANK.
. THE COMPANY WILL BE WHOLLY DEPENDENT UPON THE BANK FOR THE SELECTION AND
SERVICING OF THE COMPANY'S PORTFOLIO OF MORTGAGE LOANS.
. THE COMPANY WILL BE DEPENDENT SOLELY UPON MORTGAGE LOANS FOR FUNDING
DIVIDEND PAYMENTS.
. THE COMPANY'S FAILURE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST (I.E., A
REIT) COULD ADVERSELY AFFECT THE COMPANY'S FINANCIAL RESULTS.
_________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION"), THE OFFICE OF THRIFT SUPERVISION (THE
"OTS"), THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC") OR ANY STATE
SECURITIES COMMISSION NOR HAS THE COMMISSION, THE OTS, THE FDIC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
_________________
THE SERIES A PREFERRED SHARES, AND THE PREFERRED STOCK OF THE BANK INTO WHICH
THEY ARE EXCHANGEABLE, ARE NOT SAVINGS ACCOUNTS OR DEPOSITS OR OTHER OBLIGATIONS
OF THE BANK AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL AGENCY OR
OTHERWISE INSURED OR GUARANTEED.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Initial Public Underwriting Proceeds to
Offering Price Commission(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ 25.00 $ $
- --------------------------------------------------------------------------------
Total (3) $50,000,000 $ $
- --------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Bank have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933.
(2) Before deducting expenses payable by the Company estimated at $1.2 million.
(3) The Company has granted the several Underwriters an option for 30 days to
purchase up to an additional 300,000 Series A Preferred Shares at the
initial public offering price per share, less underwriting commissions,
solely to cover over-allotments, if any. If such option is exercised in
full, the total initial public offering price, underwriting commission and
proceeds to Company will be $57.5 million, $_______ million and $______
million, respectively.
_________________
The Series A Preferred Shares are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that the Series A
Preferred Shares will be ready for delivery through the facilities of The
Depository Trust Company in New York, New York, on or about ______________, 1998
against payment therefor in immediately available funds.
_________________
RONEY & CO. MCDONALD & COMPANY
SECURITIES, INC.
The date of this Prospectus is ________________ ___, 1998
<PAGE>
(continued)
The Series A Preferred Shares are not redeemable prior to ________, 2003
(except upon the occurrence of a Tax Event as described herein). On and after
____________, 2003, the Series A Preferred Shares may be redeemed for cash at
the option of the Company, in whole or in part, at a redemption price of $25.00
per share, plus the accrued and unpaid dividends for the most recent quarter, if
any, thereon, subject to the receipt of prior approval from the OTS or any
successor regulatory agency. The Series A Preferred Shares will not be subject
to any sinking fund or mandatory redemption and will not be convertible into any
other securities of the Company.
Prior to the offering, there has been no market for the Series A Preferred
Shares. The Company has applied for listing of the Series A Preferred Shares on
the Nasdaq Stock Market ("Nasdaq"), subject to official notice of issuance,
under the symbol "FLGSP."
Under certain circumstances, each Series A Preferred Share will be
exchanged automatically (the "Automatic Exchange") for one newly issued share of
preferred stock (the "Bank Preferred Shares") of the Bank, a federally chartered
and federally insured stock savings bank, if the appropriate regulatory agency
directs in writing (a "Directive") an exchange of the Series A Preferred Shares
for Bank Preferred Shares because (i) the Bank has become "undercapitalized"
under prompt corrective action regulations, (ii) the Bank is placed into
conservatorship or receivership or (iii) the appropriate federal regulatory
agency, in its sole discretion and even if the Bank is not "undercapitalized,"
anticipates the Bank's becoming "undercapitalized" in the near term (the
"Exchange Event"). CONSEQUENTLY, AN INVESTMENT IN SERIES A PREFERRED SHARES
COULD BE REPLACED BY AN INVESTMENT IN BANK PREFERRED SHARES AT A TIME WHEN THE
BANK'S FINANCIAL CONDITION IS DETERIORATING OR WHEN THE BANK HAS BEEN PLACED
INTO CONSERVATORSHIP OR RECEIVERSHIP. POTENTIAL INVESTORS IN THE SERIES A
PREFERRED SHARES, THEREFORE, SHOULD CAREFULLY CONSIDER THE DESCRIPTION OF THE
BANK SET FORTH ELSEWHERE IN THIS PROSPECTUS. In the event of the Automatic
Exchange, the Bank Preferred Shares would constitute a new series of
preferred shares of the Bank, would have the same dividend rights, liquidation
preference, redemption options and other attributes as the Series A Preferred
Shares, except that the Bank Preferred Shares would not be listed on Nasdaq or
---
any other quotation system, and would rank pari passu in terms of cash dividend
payments and liquidation preference with any outstanding shares of preferred
stock of the Bank. Holders of Series A Preferred Shares cannot exchange their
Series A Preferred Shares for Bank Preferred Shares voluntarily, and, absent the
occurrence of the Automatic Exchange, holders of Series A Preferred Shares will
have no dividend, voting, liquidation preference or other rights with respect to
the Bank or any security of the Bank. See "Description of Series A Preferred
Shares--Automatic Exchange."
The Bank is registering the Bank Preferred Shares with the OTS in
conjunction with this Offering, but does not intend to apply for listing of the
---
Bank Preferred Shares on any national securities exchange or for quotation of
the Bank Preferred Shares through Nasdaq. Consequently, there can be no
assurance as to the liquidity of the trading markets for the Bank Preferred
Shares, if issued, or that an active public market for the Bank Preferred Shares
would develop or be maintained.
All of the shares of the Company's common stock, par value $1.00 per share
(the "Common Stock"), are owned by the Bank. The Bank currently intends that, so
long as any Series A Preferred Shares are outstanding, it will maintain direct
or indirect ownership of at least a majority of the outstanding shares of Common
Stock of the Company.
The Company expects to qualify as a real estate investment trust (a "REIT")
for federal income tax purposes, commencing with the taxable year ending
December 31, 1998. Among the requirements to qualify as a REIT, no person is
permitted to own beneficially more than 9.9% of any series of preferred stock of
the Company, including the Series A Preferred Shares, with limited exceptions.
____________________
THE INFORMATION CONTAINED HEREIN CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. A NUMBER OF FACTORS, INCLUDING
THOSE DISCUSSED HEREIN, COULD CAUSE RESULTS TO DIFFER MATERIALLY FROM THOSE
ANTICIPATED BY SUCH FORWARD-LOOKING STATEMENTS. IN ADDITION, SUCH FORWARD-
LOOKING STATEMENTS ARE NECESSARILY DEPENDENT UPON ASSUMPTIONS, ESTIMATES AND
DATA THAT MAY BE INCORRECT OR IMPRECISE. ACCORDINGLY, ANY FORWARD-LOOKING
STATEMENTS INCLUDED HEREIN DO NOT PURPORT TO BE PREDICTIONS OF FUTURE EVENTS OR
CIRCUMSTANCES AND MAY NOT BE REALIZED. FORWARD-LOOKING STATEMENTS CAN BE
IDENTIFIED BY, AMONG OTHER THINGS, THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH
AS "INTENDS," "BELIEVES," "EXPECTS," "MAY," "WILL," "SHOULD," "SEEKS," "PRO
FORMA" OR "ANTICIPATES," OR THE NEGATIVES THEREOF, OR OTHER VARIATIONS THEREON
OF COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY OR INTENTIONS.
____________________
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SERIES A PREFERRED
SHARES. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SERIES A PREFERRED SHARES
FOLLOWING THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE
SERIES A PREFERRED SHARES OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE
SERIES A PREFERRED SHARES, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PROSPECTUS SUMMARY................................................................................... 1
The Company..................................................................................... 1
The Bank........................................................................................ 1
Business and Strategy........................................................................... 3
The Formation................................................................................... 4
The Offering.................................................................................... 5
Risk Factors ................................................................................... 7
Conflicts of Interest........................................................................... 7
Automatic Exchange.............................................................................. 8
RISK FACTORS......................................................................................... 8
The Company Will Be Wholly Dependent Upon the Bank for Selection and Servicing of Portfolio..... 8
Automatic Exchange Would Force Holders of Series A Preferred Shares to Accept Lesser
Quality, Illiquid Stock and to Recognize Taxable Income......................................... 9
Conflicts of Interest Exist Due to Competing Interests of the Company and the Bank.............. 9
The Company Will Not Obtain Any Third Party Valuations of Mortgage Loans Purchased From
the Bank........................................................................................ 10
Payment of Dividends by the Company or the Bank Could be Subject to Regulatory Restrictions..... 10
Decline in Interest Rates Would Adversely Affect the Company's Ability to Pay Dividends......... 11
Stockholders Could Suffer a Permanent Loss of Any Dividends Not Declared ....................... 11
The Company Will be Dependent Solely Upon Mortgage Loans for Funding Dividend Payments ......... 12
Geographic Concentration of Loans Reduces Ability to Diversify Risk to Underlying Collateral ... 12
Mortgage Loans May Not Have Credit Enhancements or Hazard Insurance for the Company's
Protection...................................................................................... 12
Delays by the Bank in Liquidating Defaulted Mortgage Loans Could Delay Receipt of Proceeds
by the Company ................................................................................ 12
Income from Mortgage Loans is Subject to Satisfaction of Legal Requirements .................... 12
Ability of the Company to Increase Leverage May Adversely Affect the Company's Interest
Income.......................................................................................... 13
The Company's Failure to Qualify as a REIT Could Adversely Affect the Company's Financial
Results ....................................................................................... 13
The Company Must Continue a High Level of Stockholder Distributions to Maintain REIT
Qualification................................................................................... 13
Right of Redemption Arises Immediately Upon the Occurrence of a Tax Event ...................... 14
THE COMPANY.......................................................................................... 14
USE OF PROCEEDS...................................................................................... 14
CAPITALIZATION ..................................................................................... 16
BUSINESS AND STRATEGY................................................................................ 17
General......................................................................................... 17
Dividend Policy................................................................................. 17
Liquidity and Capital Resources................................................................. 18
General Description of Mortgage Loans; Investment Policy........................................ 19
Acquisition of Initial Portfolio................................................................ 19
Management Policies and Programs ............................................................... 20
Description of Designated Portfolio and Initial Portfolio....................................... 22
Servicing....................................................................................... 28
Employees ..................................................................................... 29
Competition ................................................................................... 30
Legal Proceedings ............................................................................. 30
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
MANAGEMENT....................................................................................................... 31
Directors and Executive Officers............................................................................ 31
Independent Directors ..................................................................................... 32
Audit Committee............................................................................................. 32
Credit Committee ........................................................................................... 33
Compensation of Directors and Officers ..................................................................... 33
Limitations on Liability of Directors and Officers.......................................................... 33
Advisory Agreement.......................................................................................... 33
THE FORMATION ................................................................................................... 35
The Formation............................................................................................... 35
Benefits to the Bank........................................................................................ 36
DESCRIPTION OF SERIES A PREFERRED SHARES ....................................................................... 37
General ................................................................................................... 37
Dividends................................................................................................... 37
Automatic Exchange ......................................................................................... 38
Voting Rights ............................................................................................. 39
Redemption ................................................................................................. 40
Rights Upon Liquidation ................................................................................... 41
Independent Director Approval............................................................................... 41
Restrictions on Ownership ................................................................................. 42
DESCRIPTION OF CAPITAL STOCK ................................................................................... 42
General..................................................................................................... 42
Common Stock................................................................................................ 42
Preferred Stock............................................................................................. 42
Restrictions on Ownership and Transfer ..................................................................... 43
FEDERAL INCOME TAX CONSIDERATIONS................................................................................ 45
Taxation of the Company..................................................................................... 45
Failure to Qualify as a REIT................................................................................ 49
Tax Treatment of Automatic Exchange......................................................................... 49
Taxation of United States Stockholders...................................................................... 50
Taxation of Foreign Stockholders ........................................................................... 51
Information Reporting Requirements and Backup Withholding Tax............................................... 52
Other Tax Consequences ..................................................................................... 53
ERISA CONSIDERATIONS............................................................................................. 53
General..................................................................................................... 53
Plan Asset Regulation....................................................................................... 54
Effect of Plan Asset Status................................................................................. 54
Prohibited Transactions..................................................................................... 55
Unrelated Business Taxable Income........................................................................... 55
CERTAIN INFORMATION REGARDING THE BANK........................................................................... 56
Operations of the Bank...................................................................................... 56
Selected Consolidated Financial Data........................................................................ 58
UNDERWRITING..................................................................................................... 62
EXPERTS.......................................................................................................... 63
LEGAL MATTERS.................................................................................................... 63
ADDITIONAL INFORMATION........................................................................................... 63
GLOSSARY......................................................................................................... 64
INDEX TO FINANCIAL STATEMENT..................................................................................... F-1
</TABLE>
ii
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information, risk factors and financial
statements, including the related notes, appearing elsewhere in this Prospectus.
Unless otherwise indicated, all information in this Prospectus assumes that the
over-allotment option described in "Underwriting" is not exercised.
See "Glossary" commencing at page 59 for the definitions of certain
capitalized terms used in this Prospectus and not otherwise defined.
THE COMPANY
Flagstar Capital Corporation (the "Company") is a recently formed Michigan
corporation incorporated for the purpose of acquiring, holding and managing real
estate mortgage loans ("Mortgage Loans") that are intended to generate
sufficient income to permit the declaration of dividends on the Series A
Preferred Shares at the stated rate as well as to generate dividends to the
holders of its common stock, par value $1.00 per share (the "Common Stock").
The Company anticipates that all of the loans that it will acquire upon
consummation of this Offering (the "Initial Portfolio") will consist of Mortgage
Loans, which will be acquired as whole loans solely from the Bank for an
aggregate purchase price of approximately $113 million. The Company has been
formed by Flagstar Bank, FSB (the "Bank"), a federally chartered savings bank,
to provide the Bank and its parent holding company and sole stockholder,
Flagstar Bancorp, Inc. ("Flagstar"), with a means of raising capital for bank
regulatory purposes in a cost-effective manner. The Bank currently intends
that, so long as any Series A Preferred Shares are outstanding, it will maintain
direct or indirect ownership of at least a majority of the outstanding shares of
Common Stock of the Company. The Series A Preferred Shares will be considered
core capital of the Bank for purposes of satisfying minimum regulatory capital
requirements, thus enabling the Bank to expand its business through the
retention of additional mortgage servicing and the growth of its loan portfolio.
The issuance of the Series A Preferred Shares by the Company will provide the
Bank with a more cost-effective means of raising capital than if the Bank were
to issue preferred stock itself because the Company will elect to be treated as
a real estate investment trust ("REIT") for federal income tax purposes and
therefore will be able to deduct for federal income tax purposes the dividends
paid on the Series A Preferred Shares. Also, as a REIT, the Company will
generally not be subject to federal income tax to the extent that it distributes
its earnings to its stockholders and maintains its qualification as a REIT. See
"Federal Income Tax Considerations" for a discussion of the requirements that
the Company must satisfy to qualify as a REIT, and "Description of Capital Stock
- - Restrictions on Ownership and Transfer" for information regarding related
restrictions on ownership of the Series A Preferred Shares. Notwithstanding
qualification for taxation as a REIT, the Company may still be subject to
federal, state and local tax. See "Risk Factors" and "Federal Income Tax
Considerations."
The principal executive offices of the Company are located at 2600 Telegraph
Road, Bloomfield Hills, Michigan 48302 and its telephone number is (248) 338-
7700.
THE BANK
The Bank is a federally chartered stock savings bank which is also the largest
independent Michigan-based savings institution based on asset size as of
September 30, 1997, according to SNL Securities, Inc. The Bank is also one of
the largest originators of conforming single-family mortgage loans in the United
States for the nine-month period ended September 30, 1997 according to Inside
Mortgage Finance. The Bank is engaged in the business of providing a full range
of retail banking services in southern and western Michigan and in originating,
purchasing and servicing residential mortgage loans on a nationwide basis. At
September 30, 1997, the Bank conducted business from 19 bank branches and 10
regional wholesale/correspondent lending offices nationwide. For 1996, the Bank
ranked fourth in the United States among thrifts and sixteenth in total mortgage
loan production, according to SMR Research Corp. All of the outstanding stock
of the Bank is owned by Flagstar, a Michigan corporation whose common stock is
listed for trading on the Nasdaq Stock Market ("Nasdaq") under the symbol
"FLGS."
As of September 30, 1997, the Bank had consolidated total assets of $2.0
billion, net loans of $1.8 billion, total deposits of $1.0 billion and total
stockholder's equity of $121.1 million. For the nine months ended September 30,
1997, the Bank's net earnings were $15.8 million and its return on average
assets and return on average equity (as annualized) were 1.34% and 21.53%,
respectively. At December 31, 1996, the Bank had consolidated total
1
<PAGE>
assets of $1.3 billion, net loans of $1.1 billion, total deposits of $624.7
million and total stockholder's equity of $77.9 million. For the year ended
December 31, 1996, the Bank's net earnings were $17.1 million and its return on
average assets and return on average equity were 1.54% and 24.82%, respectively
($19.3 million, 1.73% and 27.97%, respectively, excluding the special deposit
insurance assessment imposed in September 1996 on all depository institutions
insured by the Savings Association Insurance Fund (the "SAIF")). See "Certain
Information Regarding the Bank--Selected Consolidated Financial Data." The Bank
is a member of the Federal Home Loan Bank ("FHLB") of Indianapolis and is
subject to examination, supervision and regulation by the OTS and the FDIC.
The Bank's operations are segregated into two segments, mortgage banking and
retail banking, with most of the Bank's revenue (net interest income and non-
interest income) and earnings before income taxes attributable to the mortgage
banking segment. The Bank believes that its retail banking business provides a
strategic advantage through access to funding sources for mortgage origination
business which would not otherwise be available. These additional funding
sources include lower cost retail deposits, FHLB advances and escrowed funds.
The Bank believes it benefits as compared to mortgage originators with no retail
banking operations because it has access to a lower cost of funds.
BUSINESS AND STRATEGY
As a newly organized entity, the Company has no prior operating history. As
of the date hereof, it has $100 in assets, $100 in stockholder's equity and no
indebtedness. The Company's principal business objective is to acquire, hold
and manage Mortgage Loans purchased from the Bank. Simultaneously with the
consummation of the Offering, the Bank will purchase Common Stock for an
aggregate price equal to $63.0 million. The Company will use the total proceeds
of $113.0 million received in connection with both the Offering and such sale of
shares of Common Stock to the Bank to purchase a portfolio of Mortgage Loans
(the "Initial Portfolio") from a pool of mortgage loans created by the Bank for
this purpose (the "Designated Portfolio"). If the Underwriters exercise their
option to purchase additional Series A Preferred Shares to cover over-
allotments, the Bank will purchase additional shares of Common Stock in the same
proportion to the aggregate public offering price of the additional Series A
Preferred Shares purchased pursuant to the Underwriters' over-allotment option.
The Company will use the additional proceeds from any such additional sales of
Series A Preferred Shares and shares of Common Stock to purchase additional
Mortgage Loans of the types described in "Business and Strategy--Description of
Designated and Initial Portfolio." Simultaneously with the consummation of the
Offering (and upon exercise, if any, by the Underwriters of their over-allotment
option), the Bank will also purchase additional shares of Common Stock for an
aggregate price equal to the amount of underwriting commissions and expenses
incurred by the Company in connection with the Offering (including without
limitation any underwriting commissions associated with the exercise of the
Underwriters' over-allotment option) and all expenses incurred by the Company in
connection with its formation in order to provide the Company with funds
sufficient to pay such expenses. See "Use of Proceeds."
Immediately after the completion of the Offering, the sale of the shares of
Common Stock to the Bank and the purchase by the Company of the Initial
Portfolio, the Company (assuming that (i) the Underwriters' over-allotment
option is not exercised and (ii) there are $2.9 million in aggregate offering
and organizational expenses) will own $113.0 million in Mortgage Loans and have
$50.0 million in stated capital attributable to the Series A Preferred Shares,
$500,000 of stated capital attributable to the Common Stock and $62.5 million of
additional paid-in capital. See "Capitalization."
The Company and the Bank believe, based on Bank management's experience in
purchasing, selling and evaluating mortgage loans, that the fair value of the
Initial Portfolio will approximately equal the amount (approximately $113.0
million) that the Company will pay for the Initial Portfolio. However, no third
party valuations of the Mortgage Loans constituting the Initial Portfolio have
been or will be obtained for purposes of the Offering. See "Risk Factors--No
Third Party Valuation of the Mortgage Loans."
The Company currently does not contemplate ownership of property other than
Mortgage Loans and anticipates that Mortgage Loans acquired in the future will
be whole loans purchased solely from the Bank. The Company's current policy
prohibits the acquisition of any Mortgage Loan that (i) is delinquent in the
payment of principal or interest; (ii) is or was at any time in the preceding 12
months (a) Classified, (b) in Nonaccrual Status, or (c) renegotiated due to
financial deterioration of the borrower; (iii) has been over 30 days past due in
the payment of principal or interest more than once during the preceding 12
months; or (iv) has failed to make the initial monthly payment on a timely
basis. Loans that are in Nonaccrual Status are generally loans that are past
due 90 days or more in
2
<PAGE>
principal or interest, and Classified loans are troubled loans that are deemed
"substandard" or "doubtful" under bank regulatory guidelines and where the full
collectibility of principal and interest on such loans is unlikely to occur.
On December 16, 1997, the Designated Portfolio had an aggregate outstanding
principal balance of $129.9 million and was secured by first mortgages or deeds
of trust on single-family (one- to four-unit) residential properties. All
Mortgage Loans to be included in the Initial Portfolio will be purchased from
among the Mortgage Loans included in the Designated Portfolio in a manner
that approximates a proportionate basis. Such Mortgage Loans are whole loans,
represent first lien positions and have been acquired on a basis consistent with
secondary market standards or originated in accordance with the Bank's
underwriting standards. In general, substantially all the loans originated by
the Bank satisfy FNMA and FHLMC guidelines, except that the initial loan amount
of certain Mortgage Loans may exceed the maximum allowable loan amount. The
weighted average interest rate on the Mortgage Loans in the Designated Portfolio
is 7.29%. The weighted average Loan-To-Value Ratio of the Mortgage Loans in the
Designated Portfolio is 72.99%, with only 13.66% of the Designated Portfolio
having a Loan-To-Value Ratio greater than 80% (in which case the borrower is
required to have mortgage insurance as required by FNMA and FHLMC standards).
For more information with respect to the characteristics and types of Mortgage
Loans included in the Designated Portfolio, see "Business and Strategy--
Description of Designated Portfolio and Initial Portfolio."
The Company expects to use the proceeds received in connection with regular
principal payments or the repayment or disposition of Mortgage Loans to purchase
additional Mortgage Loans. The Company currently anticipates that all of the
Mortgage Loans that it may acquire in the future will be purchased solely from
the Bank and have the same characteristics as Mortgage Loans in the Initial
Portfolio. No arrangements or procedures are currently in place regarding the
acquisition by the Company of Mortgage Loans from unaffiliated third parties.
See "Business and Strategy -- Management Policies and Programs."
The Company will enter into a Servicing Agreement with the Bank pursuant to
which the Bank will service the Mortgage Loans purchased by the Company and hold
documents relating to the Mortgage Loans as custodian on behalf of the Company.
The Servicing Agreement requires servicing in conformity with accepted secondary
market standards, with any servicing guidelines promulgated by the Company and
with FNMA and FHLMC guidelines and procedures. In its role as servicer under
the Servicing Agreement, the Bank will be entitled to receive customary fees in
connection with the servicing of such Mortgage Loans. The Company will not
receive income from servicing loans. See "Business and Strategy--Servicing."
The Company will also enter into the Advisory Agreement with the Bank pursuant
to which the Bank will administer the day-to-day operations of the Company. In
its role as advisor under the terms of the Advisory Agreement, the Bank will be
responsible for (i) monitoring the credit quality of Mortgage Loans held by the
Company and (ii) advising the Company with respect to the acquisition,
management, financing and disposition of the Company's Mortgage Loans. For
these services, the Bank will be entitled to receive an annual advisory fee of
$250,000. See "Management--Advisory Agreement."
THE FORMATION
THE FORMATION. Prior to or simultaneously with the completion of the
Offering, the Company, Flagstar, and the Bank will engage in the transactions
described under "The Formation." These transactions are designed to (i)
facilitate the Offering, (ii) transfer the ownership of the Initial Portfolio to
the Company and (iii) enable the Company to qualify as a REIT for federal income
tax purposes commencing with its taxable year ending December 31, 1998. The
following chart outlines the relationship between the Company, the Bank and
Flagstar relevant to the Offering following completion of the Offering.
3
<PAGE>
----------------------------------
FLAGSTAR BANCORP, INC.
(FLAGSTAR)
----------------------------------
100%
Common Stock
----------------------------------
----------------------------------
----------------------------------
FLAGSTAR BANK, FSB
(THE BANK)
-----------------------------------
Public Advisory
Preferred Agreement
Stockholders
100%
Common
Series A Stock
Preferred Servicing
Shares Agreements
100%
--------------------------------------------
FLAGSTAR CAPITAL
CORPORATION (THE COMPANY)
--------------------------------------------
BENEFITS TO THE BANK. The Bank is required by the OTS to maintain certain
levels of capital for bank regulatory purposes. The Bank has informed the
Company that the Series A Preferred Shares will be treated as capital of the
Bank for regulatory purposes. The Bank has indicated to the Company that such
treatment, together with the Company's ability to deduct, for income tax
purposes, the dividends payable on the Series A Preferred Shares as a result of
the Company's qualification as a REIT, will provide the Bank with a more cost-
effective means of obtaining capital for regulatory purposes than if the Bank
were to issue preferred stock itself.
The Bank will realize certain other benefits from the Offering and the other
transactions constituting the formation of the Company, including (i) the
receipt by the Bank of the net proceeds from the sale of the Series A Preferred
Shares in connection with the sale to the Company of the Mortgage Loans and (ii)
the receipt of advisory and servicing fees under the Advisory Agreement and the
Servicing Agreement. It is also expected that the Bank will receive dividends in
respect of the Common Stock held by the Bank. See "The Formation--Benefits to
the Bank."
THE OFFERING
For a more complete description of the terms of the Series A Preferred Shares
specified in the following summary, see "Description of Series A Preferred
Shares."
Issuer................... Flagstar Capital Corporation, a Michigan corporation
created for the purpose of acquiring, holding and
managing Mortgage Loans.
Securities Offered....... 2,000,000 shares of Series A Preferred Shares. The
Company has granted the Underwriters an option for 30
days to purchase up to an additional 300,000 Series A
Preferred Shares at the initial public offering price
solely to cover over-allotments, if any.
Ranking.................. With respect to the payment of dividends and amounts
upon liquidation, the Series A Preferred Shares will
rank senior to the Company's Common Stock all of
which is held by the Bank. Additional shares of
preferred stock of the Company ranking senior to the
Series A Preferred Shares may not be issued without
the approval of holders of at least two-thirds of the
Series A Preferred Shares. Additional shares of
preferred stock ranking on a parity with the Series A
Preferred Shares (i.e., pari passu) may not be issued
without the approval of a majority of the Independent
Directors. See "Description of Series A Preferred
Shares--Independent Director Approval."
4
<PAGE>
Use of Proceeds.......... The net proceeds to the Company from the Offering,
together with proceeds received in connection with
the concurrent sale of shares of Common Stock to the
Bank, will be used to purchase the Company's Initial
Portfolio and to pay the expenses of the Offering and
the formation of the Company (currently estimated by
the Company to be approximately $____ million in the
aggregate). See "Use of Proceeds."
Dividends................ Dividends on the Series A Preferred Shares are
payable at the rate of ____% per annum of the
liquidation preference (an amount equal to $______
per annum per share), if, when and as declared by the
Board of Directors. If declared, dividends are
payable quarterly in arrears on the last day of
March, June, September and December in each year,
commencing March 31, 1998. Dividends accrue in each
quarterly period from the first day of such period,
whether or not dividends are paid with respect to the
preceding period. Dividends on the Series A Preferred
Shares are not cumulative and, accordingly, if no
dividend is declared on the Series A Preferred Shares
by the Company for a quarterly dividend period,
holders of the Series A Preferred Shares will have no
right to receive a dividend for that period, and the
Company will have no obligation to pay a dividend for
that period, whether or not dividends are declared
and paid for any future period with respect to either
the Series A Preferred Shares or the Common Stock. If
no dividend is paid on the Series A Preferred Shares
for a quarterly dividend period, the payment of
dividends on the Common Stock (100% of which is owned
by the Bank) will be prohibited for that period and
at least the following three quarterly dividend
periods. See "Description of Series A Preferred
Shares--Dividends."
Liquidation Preference... The liquidation preference for each Series A
Preferred Share is $25.00, plus an amount equal to
the current, quarterly accrued and unpaid dividends,
if any, thereon. See "Description of Series A
Preferred Shares--Rights Upon Liquidation."
Redemption............... The Series A Preferred Shares are not redeemable
prior to _____, 2003 (except upon the occurrence of a
Tax Event as defined in "Description of Series A
Preferred Shares--Redemption"). On and after ____,
2003, the Series A Preferred Shares may be redeemed
for cash at the option of the Company, in whole or in
part, at any time and from time to time, at a
redemption price of $25.00 per share, plus the
accrued and unpaid dividends for the most recent
quarter, if any, thereon. Upon the occurrence of a
Tax Event, the Company will have the right at any
time to redeem the Series A Preferred Shares in whole
(but not in part) at a redemption price of $25.00 per
share, plus the accrued and unpaid dividends for the
most recent quarter, if any, thereon. The Series A
Preferred Shares will not be subject to any sinking
fund or mandatory redemption and will not be
convertible into any other securities of the Company.
See "Description of Series A Preferred Shares--
Redemption."
Automatic Exchange....... Upon the occurrence of the Automatic Exchange, each
Series A Preferred Share would be exchanged
automatically for one Bank Preferred Share. See
"Description of Series A Preferred Shares--Automatic
Exchange."
Voting Rights............ Holders of Series A Preferred Shares will not have
any voting rights in the Company except under the
specific circumstances set forth in the Certificate
of Designation and described herein. In any matter on
which the Series A Preferred Shares may vote, each
Series A Preferred Share
5
<PAGE>
will be entitled to one vote. See "Description
of Series A Preferred Shares--Voting Rights."
Ownership Limits............... Ownership of more than 5% of any outstanding
series of preferred stock except as may
specifically be permitted by the Company,
including the Series A Preferred Shares offered
hereby, is prohibited to preserve the Company's
status as a REIT for federal income tax
purposes. See "Description of Capital Stock--
Restrictions on Ownership and Transfer."
Market for Series A
Preferred Shares............... The Company has applied for listing of the
Series A Preferred Shares on Nasdaq, subject to
official notice of issuance, under the symbol
"FLGSP."
<PAGE>
RISK FACTORS
The purchase of the Series A Preferred Shares offered hereby is subject to
certain risks including that (i) an Automatic Exchange would force holders of
the Series A Preferred Shares to accept a lesser quality illiquid stock and to
recognize taxable income; (ii) conflicts of interest exist due to competing
interests of the Company and the Bank; (iii) the Company will be wholly
dependent upon the Bank for the selection and servicing of the Company's
portfolio of mortgage loans; (iv) the Company will not obtain any third party
valuations of mortgage loans purchased from the Bank; (v) the unseasoned nature
of the Mortgage Loans in the Initial Portfolio could result in reduced funds to
the Company; (vi) the payment of dividends by the Company or the Bank could be
subject to regulatory restrictions; (vii) a decline in interest rates would
adversely affect the Company's ability to pay dividends; (viii) stockholders
could suffer a permanent loss of any dividends not declared; (ix) the Company
will be dependent solely upon Mortgage Loans for funding dividend payments; (x)
the geographic concentration of the Mortgage Loans reduces the Company's ability
to diversify the risk to its underlying collateral; (xi) the Mortgage Loans may
not have credit enhancements or hazard insurance for the Company's protection;
(xii) delays by the Bank in liquidating defaulted Mortgage Loans could delay
receipt of proceeds by the Company; (xiii) income from Mortgage Loans is subject
to the satisfaction of legal requirements; (xiv) the ability of the Company to
increase its leverage may adversely affect interest income; (xv) the Company's
failure to qualify as a REIT could adversely affect the Company's financial
results; (xvi) the Company must continue a high level of stockholder
distributions to maintain REIT qualification; and (xvii) the Company's right of
redemption arises immediately upon the occurrence of a Tax Event. See "Risk
Factors."
CONFLICTS OF INTEREST
The Company and the Bank have common officers and directors, which creates and
may continue to create conflicts of interest in the Company's dealings with the
Bank. The Bank may have interests which are not identical to those of the
Company. Consequently, conflicts of interest may arise with respect to
transactions, including without limitation, the Company's acquisition of the
Initial Portfolio; future acquisitions of Mortgage Loans from the Bank or its
affiliates; servicing of Mortgage Loans, particularly with respect to Mortgage
Loans that become Classified or are placed in Nonaccrual Status or which have
been over 30 days past due in the payment of principal or interest during the
preceding 12 months; future dispositions of Mortgage Loans to Flagstar and the
Bank; and the modification of the Advisory Agreement or the Servicing Agreement.
It is the intention of the Company, Flagstar and the Bank that any agreements
and transactions between the Company, on the one hand, and Flagstar, the Bank or
their affiliates, on the other hand, are fair to all parties and consistent with
market terms, such as the prices paid and received for Mortgage Loans, including
those in the Initial Portfolio, on their acquisition or disposition by the
Company or in connection with the servicing of such Mortgage Loans. The
Certificate of Designation establishing the Series A Preferred Shares requires,
among other things, that certain actions of the Company must be approved by a
majority of the Independent Directors. This requirement is intended to promote
fair dealings between the Company, Flagstar, the Bank and their respective
affiliates. However, there can be no assurance that such agreements or
transactions will be on terms as favorable to the Company as those that could
have been obtained from unaffiliated third parties. See "Risk Factors--Conflicts
of Interest Exist Due to Competing Interests of the Company and the Bank" and
"Business and Strategy--Management Policies and Programs--Conflict of Interest
Policies."
AUTOMATIC EXCHANGE
6
<PAGE>
Under certain circumstances, each Series A Preferred Share would be exchanged
automatically for one newly issued Bank Preferred Share (i.e., the Automatic
Exchange) if directed by the appropriate regulatory agency in writing because
(i) the Bank has become "undercapitalized" under prompt corrective action
regulations, (ii) the Bank is placed into conservatorship or receivership or
(iii) the appropriate regulatory agency, in its sole discretion and even if the
Bank is not "undercapitalized," anticipates the Bank becoming "undercapitalized"
in the near term (the "Exchange Event"). CONSEQUENTLY, AN INVESTMENT IN SERIES
A PREFERRED SHARES COULD BE REPLACED BY AN INVESTMENT IN BANK PREFERRED SHARES
AT A TIME WHEN THE BANK'S FINANCIAL CONDITION IS DETERIORATING OR THE BANK HAS
BEEN PLACED INTO CONSERVATORSHIP OR RECEIVERSHIP. POTENTIAL INVESTORS IN THE
SERIES A PREFERRED SHARES, THEREFORE, SHOULD CAREFULLY CONSIDER THE DESCRIPTION
OF THE BANK SET FORTH UNDER "CERTAIN INFORMATION REGARDING THE BANK" AS WELL AS
THE OFFERING CIRCULAR FILED WITH THE OTS RELATING TO THE BANK PREFERRED SHARES
(THE "OFFERING CIRCULAR"), ATTACHED HERETO AS ANNEX I. See also "Description of
Series A Preferred Shares--Automatic Exchange." The Bank will be considered to
be "undercapitalized" under the "prompt corrective action" regulations
established pursuant to the Federal Deposit Insurance Corporation Improvement
Act of 1991, as amended ("FDICIA"), if it has (i) a core capital (or leverage)
ratio of less than 4.0%, (ii) a Tier 1 risk-based capital ratio of less than
4.0%, or (iii) a total risk-based capital ratio of less than 8.0%. Tier 1 or
core capital consists of common shareholders' equity, noncumulative perpetual
preferred stock, and minority interests in consolidated subsidiaries, less
certain intangible assets and investments in certain subsidiaries. Total
capital consists of core capital plus supplementary capital (which includes
cumulative perpetual preferred stock, qualifying subordinated debt, and a
limited amount of the allowances for loan and lease losses) to the extent such
supplementary capital does not exceed 100% of core capital, less certain equity
investments. For purposes of the "prompt corrective action" regulations, the
Bank's capital category is determined as of the most recent date (i) certain
quarterly financial reports are required to be filed with the regulators; (ii) a
final report of examination has been delivered to the Bank; or (iii) the Bank is
notified in writing by the OTS of its capital category or a change in such
category. At September 30, 1997 and at December 31, 1996 and 1995, the Bank's
core capital (or leverage) ratio was 5.95%, 6.01%, and 5.84%, respectively, its
Tier 1 risk-based capital ratio was 10.88%, 10.48% and 9.83%, respectively, and
its total risk-based capital ratio was 11.25%, 10.91%, and 10.12%, respectively.
After giving effect to the Offering, the capital ratios at September 30, 1997
would have been 7.61%, 13.94% and 14.29%, respectively.
The Bank Preferred Shares would only be issued upon the occurrence of the
Automatic Exchange. The Bank Preferred Shares would not be registered with the
Commission but are being registered with the OTS.
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, including the
Offering Circular attached to this Prospectus as Annex I, the following factors
should be carefully considered before investing in the Series A Preferred Stock
offered hereby.
The discussion in this Prospectus contains certain forward-looking statements
that involve risks and uncertainties, such as statements of the Company's or the
Bank's plans, objectives, expectations and intentions. The cautionary statements
made in this Prospectus, including the risk factors discussed below, should be
read as being applicable to all related forward-looking statements wherever they
appear in this Prospectus. The Company's and the Bank's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere herein or in the documents attached hereto or incorporated
by reference herein.
THE COMPANY WILL BE WHOLLY DEPENDENT UPON THE BANK FOR SELECTION AND SERVICING
OF PORTFOLIO
The Company's financial results will depend upon the selection, structuring
and monitoring of its Mortgage Loans, which in turn will depend solely upon the
diligence and skill of its officers (all of whom are also officers of the Bank
or its affiliates) and the officers and employees of the Bank. See
"Management." In addition, the Company will be dependent upon the expertise of
the Bank for the servicing of the Mortgage Loans. The Bank may subcontract all
or a portion of its obligations under the Advisory Agreement, and all or a
portion of its obligations under the Servicing Agreement, to one or more
affiliates, and under certain conditions to non-affiliates, involved in the
business of managing or servicing Mortgage Loans. To the extent the Bank's
officers and employees do not exercise an appropriate level of diligence or fail
to apply the proper skills, the Company's financial results could be adversely
affected. In the event the Bank subcontracts its obligations in such a manner,
the Company will be similarly dependent
7
<PAGE>
upon the subcontractor to provide these services. See "Management--Advisory
Agreement" and "Business and Strategy--Servicing."
AUTOMATIC EXCHANGE WOULD FORCE HOLDERS OF SERIES A PREFERRED SHARES TO ACCEPT
LESSER QUALITY, ILLIQUID STOCK AND TO RECOGNIZE TAXABLE INCOME
If the Automatic Exchange occurs, holders of the Series A Preferred Shares
could suffer a decline in the quality of their investment and also be required
to recognize taxable income.
A decline in the performance and capital levels of the Bank or the placement
of the Bank into conservatorship or receivership could trigger the Automatic
Exchange, which would result in holders of the Series Preferred Shares
thereafter having an investment in the Bank rather than in the Company. As a
result, holders of Series A Preferred Shares would become preferred stockholders
of the Bank at a time when the Bank's financial condition was deteriorating or
when the Bank had been placed into conservatorship or receivership. An
investment in the Bank is also subject to certain risks that are distinct from
the risks associated with an investment in the Company. For example, an
investment in the Bank would involve risks relating to the capital levels of,
and other regulatory requirements applicable to, the Bank and the performance of
the Bank's loan portfolio. Also, the Bank is subject to the general risks
inherent in equity investments in depository institutions. If the Bank were ever
liquidated, the claims of depositors and secured, senior, general and
subordinated creditors of the Bank would be entitled to a priority of payment
over the claims of holders of equity interests such as the Bank Preferred
Shares. As a result, if the Bank were to be placed into receivership after the
Automatic Exchange or if the Automatic Exchange were to occur after receivership
of the Bank, the holders of the Bank Preferred Shares likely would receive, if
anything, substantially less than the holders of the Series A Preferred Shares
would have received had the Series A Preferred Shares not been exchanged for
Bank Preferred Shares. Furthermore, there can be no assurance that the Bank
would be in a financial position, after the occurrence of the Automatic
Exchange, to make any dividend payments on the Bank Preferred Shares. Potential
investors in the Series A Preferred Shares should carefully consider the risks
with respect to an investment in the Bank set forth in the Bank's Offering
Circular attached to this Prospectus as Annex I. See "Description of Series A
Preferred Shares--Automatic Exchange."
In addition, as a result of the Automatic Exchange, holders of the Series A
Preferred Shares would be required to accept an equity instrument (i.e., the
Bank Preferred Shares) that would not have the same liquidity. Although the
Series A Preferred Shares will be listed on Nasdaq, the Bank does not intend to
apply for listing of the Bank Preferred Shares on any national securities
exchange or for quotation through Nasdaq. Consequently, there can be no
assurance as to the liquidity of the trading markets for the Bank Preferred
Shares, if issued, or that an active public market for the Bank Preferred Shares
would develop or be maintained. Therefore, the value of the Bank Preferred
Shares will not be readily determinable.
Also, by being required to participate in the Automatic Exchange, holders of
the Series A Preferred Shares would be required to recognize taxable gain or
loss upon their receipt of the Bank Preferred Shares. The amount of the gain or
loss would be measured by the difference between the basis of each such holder
in the Series A Preferred Shares and the fair market value of the Bank Preferred
Shares received in the Automatic Exchange. See "Federal Income Tax
Consequences--Tax Treatment of Automatic Exchange."
CONFLICTS OF INTEREST EXIST DUE TO COMPETING INTERESTS OF THE COMPANY AND THE
BANK
The Bank and its affiliates have interests which occasionally may be adverse
to those of the Company. Consequently, conflicts of interest may arise with
respect to transactions, including without limitation, the Company's acquisition
of the Initial Portfolio; future acquisitions of Mortgage Loans from the Bank or
its affiliates; servicing of Mortgage Loans, particularly with respect to
Mortgage Loans that become Classified or are placed in Nonaccrual Status or
which have been over 30 days past due in the payment of principal or interest
during the preceding 12 months; future dispositions of Mortgage Loans to the
Bank or any of its non-bank subsidiaries; and the modification of the Advisory
Agreement or the Servicing Agreement.
It is the intention of the Company and the Bank that any agreements and
transactions between the Company, on the one hand, and the Bank or their
affiliates, on the other hand, are fair to all parties and consistent with
market terms, such as the prices paid and received for Mortgage Loans or in
connection with the servicing of such Mortgage Loans. The requirement in the
Certificate of Designation establishing the Series A Preferred Shares that
certain actions
8
<PAGE>
of the Company be approved by a majority of the Independent Directors is
intended to ensure fair dealings between the Company and the Bank and their
respective affiliates. However, there can be no assurance that such agreements
or transactions will be on terms as favorable to the Company as those that could
have been obtained from unaffiliated third parties. See "Business and Strategy--
Management Policies and Programs--Conflict of Interest Policies."
THE COMPANY WILL NOT OBTAIN ANY THIRD PARTY VALUATIONS OF MORTGAGE LOANS
PURCHASED FROM THE BANK
No third party valuations of the Mortgage Loans constituting the Designated
Portfolio were obtained for purposes of the Offering, and there can be no
assurance that the fair value of the Initial Portfolio does not differ from the
purchase price payable by the Company. In addition, it is anticipated that no
third party valuations will be obtained in connection with future acquisitions
and dispositions of Mortgage Loans even in circumstances where the transactions
are with an affiliate of the Company. Accordingly, although the Company and the
Bank intend that future acquisitions or dispositions of Mortgage Loans will be
on a fair value basis, there can be no assurance that the consideration to be
paid (or received) by the Company to (or from) the Bank or any of their
respective affiliates in connection with future acquisitions or dispositions of
Mortgage Loans will not differ from the fair value of such Mortgage Loans.
PAYMENT OF DIVIDENDS BY THE COMPANY OR THE BANK COULD BE SUBJECT TO REGULATORY
RESTRICTIONS
Holders of the Series A Preferred Shares would not receive some or all of
their quarterly dividend payments if the OTS determines, it its discretion, to
restrict or prevent such payments by the Company. Further, following the
Automatic Exchange, the OTS could similarly restrict or prevent dividend
payments by the Bank on the Bank Preferred Shares.
Because the Company is a subsidiary of the Bank, federal banking regulatory
authorities will have the right to examine the Company and its activities. Under
certain circumstances, including any determination that the Bank's relationship
to the Company results in an unsafe and unsound banking practice, such
regulatory authorities will have the authority to restrict the ability of the
Company to transfer assets, to make distributions to its stockholders (including
dividends to the holders of Series A Preferred Shares) or to redeem shares of
preferred stock, or even to require the Bank to sever its relationship with or
divest its ownership of the Company. While the Company believes that dividends
on the Series A Preferred Shares should not be considered "capital
distributions" for this purpose, there can be no assurances that the OTS would
agree with this position.
Payment of dividends on the Series A Preferred Shares by the Company could
also be subject to regulatory limitations if the Bank becomes "undercapitalized"
for purposes of the OTS prompt corrective action regulations, which is currently
defined as having a core capital (or leverage) ratio of less than 4.0%, Tier 1
risk-based capital ratio of less than 4.0% and a total risk-based capital ratio
of less than 8.0%. At September 30, 1997, the Bank's core capital (or leverage)
ratio was 5.95%, its Tier 1 risk-based capital ratio was 10.88% and its total
risk-based capital ratio was 11.25%. Such ratios, adjusted to give effect to
the sale of Series A Preferred Shares in the Offering, would have been 7.61%,
13.94% and 14.29%, respectively.
If the Automatic Exchange occurs, the Bank would likely be prohibited from
paying dividends on the Bank Preferred Shares. Under OTS regulations, the
ability of thrift institutions such as the Bank to make "capital distributions"
(defined to include payment of dividends, stock repurchases, cash-out mergers
and other distributions charged against the capital accounts of an institution)
varies depending primarily on the institution's earnings and regulatory capital
levels. See "Business and Strategy--Dividends."
Furthermore, in the event the Bank is placed into conservatorship or
receivership (whether before or after the Automatic Exchange), the Bank would
likely be unable to pay dividends on the Bank Preferred Shares. In addition, in
the event of a liquidation of the Bank, the claims of the Bank's depositors and
of its secured, senior, general and subordinated creditors would be entitled to
a priority of payment over the dividend and other claims of holders of equity
interests such as the Bank Preferred Shares issued pursuant to the Automatic
Exchange.
9
<PAGE>
DECLINE IN INTEREST RATES WOULD ADVERSELY AFFECT THE COMPANY'S ABILITY TO PAY
DIVIDENDS
The Company's income will consist primarily of interest payments on the
Mortgage Loans held by it. The Company anticipates that approximately 70% of
its Mortgage Loans will bear interest at adjustable rates. These include loans
in the Initial Portfolio that will have fixed rates for an initial three-year,
five-year or seven-year term but will, in each case, convert at the end of such
initial term to an interest rate that is adjustable once each year. If there is
a decline in interest rates (as measured by the indices upon which the interest
rates of the Mortgage Loans are based), then the Company will experience a
decrease in income available to be distributed to its stockholders. In such an
interest rate environment, the Company may also experience an increase in
prepayments on its Mortgage Loans, both those with adjustable and those with
fixed rates, and may find it more difficult to purchase additional Mortgage
Loans bearing rates sufficient to support payment of the dividends on the Series
A Preferred Shares. Because the rate at which dividends are required to be paid
on the Series A Preferred Shares is fixed, there can be no assurance that a
declining interest rate environment would not adversely affect the Company's
ability to pay dividends on the Series A Preferred Shares.
STOCKHOLDERS COULD SUFFER A PERMANENT LOSS OF ANY DIVIDENDS NOT DECLARED
If the Board of Directors does not declare a dividend on the Series A
Preferred Shares for any quarterly period, the holders of the Series A Preferred
Shares would not be entitled to recover such dividend whether or not funds are
or subsequently became available. This provision is required in order to qualify
the Series A Preferred Stock as Tier 1 capital of the Bank for regulatory
capital purposes. The Board of Directors may determine, in its business
judgment, that it would be in the best interests of the Company to pay less than
the full amount of the stated dividends on the Series A Preferred Shares or no
dividends for any quarter notwithstanding that funds are available. Factors
that would generally be considered by the Board of Directors in making this
determination are the Company's financial condition and capital needs, its
ability to retain its tax status as a REIT, the impact of legislation and
regulations as then in effect or as may be proposed, economic conditions, and
such other factors as the Board may deem relevant. To remain qualified as a
REIT, the Company must distribute annually at least 95% of its REIT Taxable
Income (not including capital gains) to stockholders. See "Federal Income Tax
Considerations--Taxation of the Company--Organizational Requirements."
THE COMPANY WILL BE DEPENDENT SOLELY UPON MORTGAGE LOANS FOR FUNDING DIVIDEND
PAYMENTS
An investment in the Series A Preferred Shares may be affected by, among other
things, a decline in real estate values. Neither the Bank nor Flagstar
guarantees the performance of the Mortgage Loans purchased from the Bank or the
payment of dividends to the holders of the Series A Preferred Shares. In the
event the Mortgage Loans held by the Company become nonperforming, the Company
may not have funds sufficient to pay dividends on the Series A Preferred Shares.
GEOGRAPHIC CONCENTRATION OF LOANS REDUCES ABILITY TO DIVERSIFY RISK TO
UNDERLYING COLLATERAL
Geographically, the Company's Mortgage Loans will be generally concentrated in
California and Michigan, which comprises 23.1% and 18.3%, respectively, of the
Designated Portfolio. Mortgage Loans secured by properties located in California
and Michigan may be subject to a greater risk of default than other comparable
Mortgage Loans in the event of adverse economic, political or business
developments or natural hazards that may affect California and Michigan and the
ability of property owners in California and Michigan to make payments of
principal and interest on the underlying mortgages. The Company complies with
general hazard insurance policy requirements of Fannie Mae ("FNMA") or the
Federal Home Loan Mortgage Corporation ("FHLMC"). The Company will not maintain,
however, any special hazard insurance policies which could mitigate any damages
caused by natural disasters (such as floods) which may occur in California,
Michigan or any other state in which collateral underlying a Mortgage Loan is
located. In the event of any such natural disaster, the Company's ability to pay
dividends on the Series A Preferred Shares could be adversely affected. Certain
other geographic regions of the United States may from time to time experience
natural disasters or weaker regional economic conditions and housing markets,
and, consequently, may experience higher rates of loss and delinquency on
Mortgage Loans generally. Any concentration of the Mortgage Loans in any other
region may present risks in addition to those present with respect to Mortgage
Loans generally. See "Business and Strategy--Description of Designated Portfolio
and Initial Portfolio--Geographic Distribution" herein for further information
regarding the geographic concentration of the Mortgage Loans in the Initial
Portfolio.
MORTGAGE LOANS MAY NOT HAVE CREDIT ENHANCEMENTS OR HAZARD INSURANCE FOR THE
COMPANY'S PROTECTION
10
<PAGE>
During the time it holds Mortgage Loans for which third party insurance is not
obtained, the Company will be subject to risks of borrower defaults and
bankruptcies and special hazard losses that are not covered by standard hazard
insurance (such as those occurring from floods unless flood insurance has been
obtained on an individual basis). The Company generally does not intend to
obtain credit enhancements such as mortgagor bankruptcy insurance or to obtain
special hazard insurance for its Mortgage Loans, other than standard hazard
insurance, which will in each case only relate to individual Mortgage Loans. In
addition, in the event of a default on any Mortgage Loan held by the Company
resulting from declining property values or worsening economic conditions, among
other factors, the Company would bear the risk of loss of principal to the
extent of any deficiency between (i) the value of the related mortgaged
property, plus any payments from an insurer and (ii) the amount owing on the
Mortgage Loan. Further, no assurance can be given that the values of the
properties securing the pool of Mortgage Loans have remained or will remain at
the levels existing on the dates of origination of such Mortgage Loans.
DELAYS BY THE BANK IN LIQUIDATING DEFAULTED MORTGAGE LOANS COULD DELAY RECEIPT
OF PROCEEDS BY THE COMPANY
Substantial delays could be encountered in connection with the liquidation of
defaulted Mortgage Loans, with corresponding delays in the receipt of related
proceeds by the Company. An action to foreclose on a mortgaged property securing
a Mortgage Loan is regulated by state statutes and rules and is subject to many
of the delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring several years to complete. Furthermore, in some
states an action to obtain a deficiency judgment is not permitted following a
nonjudicial sale of a mortgaged property. In the event of a default by a
mortgagor, these restrictions, among other things, may impede the ability of the
Company to foreclose on or sell the mortgaged property or to obtain proceeds
sufficient to repay all amounts due on the related Mortgage Loan. In addition,
the Bank will be entitled to deduct from collections received all expenses
reasonably incurred in attempting to recover amounts due and not yet repaid on
liquidated Mortgage Loans, including legal fees and costs of legal action, real
estate taxes and maintenance and preservation expenses, thereby reducing amounts
available to the Company.
INCOME FROM MORTGAGE LOANS IS SUBJECT TO SATISFACTION OF LEGAL REQUIREMENTS
Violations by the Company of applicable federal and state laws, policies and
principles may limit the ability of the Company to collect all or part of the
principal of or interest on the Mortgage Loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the Company to
damages and administrative sanctions. Applicable federal and state laws may
regulate interest rates or other charges or require certain disclosures to
borrowers. In addition, most states have other laws, public policy and general
principles of equity relating to the protection of consumers, unfair and
deceptive practices and practices which may apply to the servicing and
collection of the Mortgage Loans. Management of the Company believes the laws
of the states where it services Mortgage Loans do not impose any uniquely
unfavorable burdens or conditions.
ABILITY OF THE COMPANY TO INCREASE LEVERAGE MAY ADVERSELY AFFECT THE COMPANY'S
INTEREST INCOME
Although the Company does not currently intend to incur any indebtedness in
connection with the acquisition and holding of Mortgage Loans, the Company may
do so at any time (although indebtedness in excess of 20% of the aggregate
amount of net proceeds received in connection with the issuance of the Series A
Preferred Stock and Common Stock may not be incurred without the approval of a
majority of the Independent Directors of the Company). To the extent the Company
were to change its policy with respect to the incurrence of indebtedness, the
Company would be subject to risks associated with leverage, including, without
limitation, changes in interest rates, prepayment risk and risks of various
hedging strategies.
THE COMPANY'S FAILURE TO QUALIFY AS A REIT COULD ADVERSELY AFFECT THE COMPANY'S
FINANCIAL RESULTS
If in any taxable year the Company fails to qualify as a REIT, the Company
would not be allowed a deduction for distributions to stockholders in computing
its taxable income and would be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. As a result, the amount available for distribution to the Company's
stockholders would be reduced for the year or years involved. In addition,
unless entitled to relief under certain statutory provisions, the Company would
also be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification was lost. A failure of the Company
to qualify as a REIT would not, by itself, give the Company the right to redeem
the Series A Preferred Shares. See "Description of Series A Preferred Shares--
Redemption."
11
<PAGE>
The Company intends to operate so as to qualify as a REIT under the Code.
Although the Company believes that it will be owned and organized and will
operate in such a manner, and Kutak Rock will render certain opinions, described
under "Federal Income Tax Considerations" below, regarding the Company's
qualification as a REIT, no assurance can be given that the Company will be able
to operate in such a manner so as to qualify as a REIT or to remain so
qualified. Qualification as a REIT involves the application of highly technical
and complex Code provisions for which there are only limited judicial or
administrative interpretations. The determination of various factual matters and
circumstances, not entirely within the Company's control and not addressed by
the opinion of Kutak Rock, may affect the Company's ability to qualify as a
REIT. Although the Company is not aware of any proposal in Congress to amend the
tax laws in a manner that would materially and adversely affect the Company's
ability to operate as a REIT, no assurance can be given that new legislation or
new regulations, administrative interpretations or court decisions will not
significantly change the tax laws in the future with respect to qualification as
a REIT or the federal income tax consequences of such qualification.
The Company is relying on the opinion of Kutak Rock, tax advisor to the
Company, regarding various issues affecting the Company's ability to qualify,
and retain qualification, as a REIT. Such opinion is not binding on the Internal
Revenue Service ("IRS").
Notwithstanding that the Company currently intends to operate in a manner
designed to qualify as a REIT, future economic, market, legal, tax or other
considerations may cause the Company to determine that it is in the best
interest of the Company and the holders of its Common Stock and Series A
Preferred Stock to revoke the REIT election. As long as any Series A Preferred
Shares are outstanding, any such determination by the Company may not be made
without the approval of a majority of the Independent Directors. The tax law
prohibits the Company from electing treatment as a REIT for the four taxable
years following the year of such revocation. See "Federal Income Tax
Considerations."
THE COMPANY MUST CONTINUE A HIGH LEVEL OF STOCKHOLDER DISTRIBUTIONS TO MAINTAIN
REIT QUALIFICATION
To obtain favorable tax treatment as a REIT qualifying under the Code, the
Company generally will be required each year to distribute as dividends to its
stockholders at least 95% of its REIT Taxable Income (excluding capital gains).
Failure to comply with this requirement would result in the Company's income
being subject to tax at regular corporate rates. In addition, the Company will
be subject to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions considered as paid by it with respect to any calendar year
are less than the sum of 85% of its ordinary income for the calendar year, 95%
of its capital gains net income for the calendar year and any undistributed
taxable income from prior periods.
RIGHT OF REDEMPTION ARISES IMMEDIATELY UPON THE OCCURRENCE OF A TAX EVENT
At any time following the occurrence of a Tax Event (as defined under
"Description of Series A Preferred Shares--Redemption"), even if such Tax Event
occurs prior to ________, 2003, the Company will have the right to redeem the
Series A Preferred Shares in whole but not in part. See "Description of Series A
Preferred Shares--Redemption." Upon the occurrence of a Tax Event, should the
Company not redeem the Series A Preferred Shares, the Company's ability to pay
dividends on the Series A Preferred Shares may be adversely affected.
THE COMPANY
The Company is a recently-formed Michigan corporation created for the purpose
of acquiring, holding and managing Mortgage Loans that will generate net income
for distribution to stockholders. For federal income tax purposes, the Company
will elect to be treated as a REIT and therefore will not be subject to tax on
the interest and fees earned on the Mortgage Loans if, among other things, it
distributes at least 95% of its taxable income to its stockholders as dividends.
Further, as a REIT, the Company will be entitled to a federal tax deduction for
dividends paid on its stock. See "Federal Income Tax Considerations." The
Company has been formed by the Bank to provide the Bank with a means of raising
capital for bank regulatory purposes in a cost-effective manner because the
Company will be able to deduct for federal income tax purposes the dividends
payable on the Series A Preferred Shares. The Series A Preferred Shares will be
considered as capital of the Bank for regulatory purposes.
12
<PAGE>
The Company anticipates that approximately 100% of its portfolio will consist
of Mortgage Loans, all of which will be acquired as whole loans from the Bank.
The Bank will administer the day-to-day operations of the Company under the
Advisory Agreement.
All of the Common Stock of the Company is owned by the Bank, and all of the
common stock of the Bank is owned by Flagstar, a savings and loan holding
company organized under the laws of Michigan and registered as such under the
Home Owners Loan Act of 1933, as amended. The Bank conducts its business
through a network of 19 bank branches and 10 regional wholesale/correspondent
lending offices nationwide. As of and for the nine months ended September 30,
1997, the Bank had total assets of $2.0 billion, a return on average assets of
1.34% and a return on average equity of 21.53%.
The Series A Preferred Shares would be exchanged automatically on a one-for-
one basis for Bank Preferred Shares upon the occurrence of the Automatic
Exchange. Consequently, an investment in Series A Preferred Shares could be
replaced by an investment in Bank Preferred Shares at a time when the Bank's
financial condition is deteriorating or when the Bank has been placed into
conservatorship or receivership. Potential investors in the Series A Preferred
Shares, therefore, should carefully consider the description of the Bank set
forth under "Certain Information Regarding the Bank" as well as the Bank's
Offering Circular, attached as Annex I. See also "Description of Series A
Preferred Shares--Automatic Exchange."
USE OF PROCEEDS
The proceeds to the Company from the sale of the Series A Preferred Shares
offered hereby are expected to be $50.0 million (assuming the Underwriters'
over-allotment option is not exercised). Simultaneously with the consummation of
the Offering, the Bank will purchase shares of Common Stock for a price equal to
$63.0 million. The Company will use the aggregate proceeds of $113.0 million
received in connection with both the Offering and the sale of shares of Common
Stock to the Bank to purchase the Initial Portfolio from the Bank. See "Business
and Strategy."
If the Underwriters exercise their option to purchase additional Series A
Preferred Shares to cover over-allotments in the Offering, the Bank will
purchase additional shares of Common Stock for a price equal to the aggregate
initial public offering price of such additional Series A Preferred Shares. The
Company will use the additional proceeds from any such additional sales of
Series A Preferred Shares and shares of Common Stock to purchase additional
Mortgage Loans of the types described in "Business and Strategy -- Description
of Initial Portfolio." The Company expects that it will purchase any such
additional Mortgage Loans within six months from the exercise by the
Underwriters of their over-allotment option. Pending such purchase, the Company
will invest such additional proceeds in mortgage-backed securities or short-term
money market investments.
Simultaneously with the consummation of the Offering, the Bank will also
purchase additional shares of Common Stock for a price equal to the aggregate
amount of underwriting commissions and expenses incurred by the Company in
connection with the Offering and all expenses incurred by the Company in
connection with its formation and the offering of the Series A Preferred Shares
(currently estimated by the Company to be approximately $2.9 million in the
aggregate) in order to provide the Company with funds sufficient to pay such
expenses. Simultaneously with the consummation of any sale of additional Series
A Preferred Shares in connection with the exercise by the Underwriters of their
over-allotment option, the Bank will also purchase additional shares of Common
Stock for a price equal to the aggregate amount of underwriting commissions and
expenses incurred by the Company in connection with the exercise of such
overallotment option in order to provide the Company with funds sufficient to
pay such expenses.
The following table illustrates the use of proceeds by the Company from the
sale of the Series A Preferred Shares offered hereby (assuming the Underwriters'
over-allotment option is not exercised) and the sale of shares of Common Stock
to the Bank described above.
13
<PAGE>
<TABLE>
<S> <C>
Gross proceeds from the Offering of
Series A Preferred Shares................................... $ 50,000,000
Gross proceeds from the issuance of
shares of Common Stock to the Bank.......................... 65,918,000
Public Offering Expenses:
Underwriting commissions.................................... 1,750,000
Other expenses of the formation
and the Offering (1)........................................ 1,168,000(1)
============
Net proceeds to be applied to the
purchase of Mortgage Loans from the Bank.................... $113,000,000
============
</TABLE>
________________
(1) Assumes that expenses incurred by the Company in connection with its
formation and the Offering of the Series A Preferred Shares, other than
underwriting commissions, are $1,168,000. If such expenses are in excess
of $1,168,000, the Bank will purchase additional shares of Common Stock for
a purchase price equal to such excess.
Neither the Bank nor any of its affiliates will receive any transaction
fees upon completion of the Offering, including any advance payment in respect
of servicing or advisory fees.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 16, 1997 (the date of the most recent audited financial statement of
the Company) and as adjusted to reflect (i) the consummation of the Offering
(assuming the Underwriters' over-allotment option is not exercised) and (ii) the
transactions described in "The Formation--The Formation" and the use of the net
proceeds therefrom as described under "Use of Proceeds."
<TABLE>
<CAPTION>
December 16, 1997
Actual As Adjusted
------ ------------
<S> <C> <C>
DEBT
Total long-term debt $ -- $ --
------- ------------
STOCKHOLDERS' EQUITY
Preferred Stock (4,000,000 authorized, none issued and
outstanding; 4,000,000 shares authorized, 2,000,000 shares issued
and outstanding, as adjusted) -- 50,000,000
Common Stock par value $1.00 per share
(1,000,000 shares authorized, 100 shares issued and 100 500,000
outstanding; 500,000 shares issued and outstanding, as adjusted) ------- ------------
Additional paid-in capital -- 62,500,000
------- ------------
Total stockholders' equity 100 113,000,000
------- ------------
TOTAL CAPITALIZATION $ 100 $113,000,000
======= ============
</TABLE>
14
<PAGE>
BUSINESS AND STRATEGY
GENERAL
The Company's principal business objective is to acquire, hold and manage
Mortgage Loans selected from the Designated Portfolio to create the Initial
Portfolio that will generate net income for distribution to stockholders. The
Company does not expect to be in the business of selling or trading Mortgage
Loans. The Company will acquire the Initial Portfolio from the Bank for an
aggregate purchase price of approximately $113.0 million. See "The Formation."
In order to preserve its status as a REIT under the Code, substantially all of
the assets of the Company will consist of Mortgage Loans and other qualified
REIT real estate assets of the type set forth in Section 856(c)(6)(B) of the
Code. See "Federal Income Tax Considerations."
DIVIDEND POLICY
The Company currently expects to pay an aggregate amount of dividends with
respect to its outstanding shares of capital stock equal to approximately 100%
of the Company's REIT Taxable Income (excluding capital gains). To remain
qualified as a REIT, the Company must distribute annually at least 95% of its
REIT Taxable Income (excluding capital gains) to stockholders. The Company
anticipates that none of the dividends on the Series A Preferred Shares and none
or no material portion of the dividends on the Common Stock will constitute non-
taxable return of capital.
The Company's income will consist primarily of interest payments on the
Mortgage Loans held by it. The Company anticipates that a majority of its
Mortgage Loans will bear interest at adjustable rates. If there is a decline in
interest rates (as measured by the indices upon which the interest rates of the
Mortgage Loans are based), then the Company will experience a decrease in income
available to be distributed to its stockholders. In addition, in such an
interest rate environment, the Company may experience an increase in prepayments
on its Mortgage Loans and may find it more difficult to purchase additional
Mortgage Loans bearing rates sufficient to support payment of the dividends on
the Series A Preferred Shares. In addition, certain Mortgage Loan products which
the Company may purchase could allow borrowers in such an interest rate
environment to convert an adjustable rate mortgage to a fixed rate mortgage,
thus "locking in" a low fixed interest rate. Because the rate at which
dividends are required to be paid on the Series A Preferred Shares is fixed,
there can be no assurance that a declining interest rate environment would not
adversely affect the Company's ability to pay dividends on the Series A
Preferred Shares.
Dividends will be declared at the discretion of the Board of Directors after
considering the Company's distributable funds, financial requirements, tax
considerations and other factors. Although there can be no assurances, because
(i) the Mortgage Loans are interest bearing, (ii) the Series A Preferred Shares
represent less than 50% of the Company's capitalization and (iii) the
Company does not anticipate incurring any indebtedness, the Company currently
expects that both its cash available for distribution and its REIT Taxable
Income will be in excess of amounts needed to pay dividends on the Series A
Preferred Shares. Accordingly, the Company expects that it will, after paying
the quarterly dividends on the Series A Preferred Shares, pay dividends to
holders of its Common Stock. Assuming (i) the Mortgage Loans included in the
Initial Portfolio are held for the 12-month period following completion of the
Offering, (ii) principal repayments are reinvested in additional Mortgage Loans
with characteristics similar to those of the Mortgage Loans included in the
Initial Portfolio and (iii) interest rates remain constant during such 12-month
period, the Company anticipates that the Initial Portfolio will generate
interest income of approximately $7.6 million, after payment of servicing and
advisory fees, during such 12-month period. Since the aggregate annual dividend
payment on the Series A Preferred Shares is $________ million, based on the
foregoing, the Company anticipates that $_____ million would be available for
payment of dividends on the Common Stock held by the Bank.
There are several limitations which restrict the Company's ability to pay
dividends on the Common Stock, none of which should adversely affect either the
ability of the Company to pay dividends in respect of the Series A Preferred
Shares or the ability of the Company to maintain its status as a REIT. First,
under the Company's current dividend policy, the Company may not make any
distribution in respect of the Common Stock with respect to any year to the
extent that, after taking into account such proposed distribution, total cash or
property distributions on the Company's outstanding shares of preferred stock
and Common Stock with respect to that year would exceed 105% of the Company's
REIT Taxable Income (excluding capital gains) for that year plus net capital
gains of the Company for
15
<PAGE>
that year. This policy regarding the limitations on payment of dividends in
respect of Common Stock may not be modified without the approval of a majority
of the Independent Directors.
Second, if the Company fails to declare and pay full dividends on the
Series A Preferred Shares in any dividend period, the Company may not make any
dividend or other distributions with respect to the Common Stock until such time
as dividends on all outstanding Series A Preferred Shares have been (i) declared
and paid for three consecutive dividend periods and (ii) declared and paid or
declared and a sum sufficient for the payment thereof has been set apart for
payment for the fourth consecutive dividend period. See "Description of Series A
Preferred Shares--Dividends."
Third, Michigan law provides that no dividends (as well as other
distributions) may be paid on the capital stock of the Company if, after giving
it effect, the Company would not be able to pay its debts as they become due in
the usual course of business, or the Company's total assets would be less than
the sum of its total liabilities plus the amount that would be needed, if the
Company were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution of shareholders whose preferential rights
are superior to those receiving the distribution.
The OTS prompt corrective action regulations prohibit thrift institutions
such as the Bank from making "capital distributions" (defined to include a
transaction that the OTS or FDIC determines, by order or regulation, to be "in
substance a distribution of capital") unless the institution is at least
"adequately capitalized" after the distribution. There can be no assurances that
either the OTS or the FDIC would not seek to restrict the Company's payment of
dividends on the Series A Preferred Shares under this provision if the Bank were
to fail to maintain its status as "adequately capitalized." Currently, an
institution is considered "adequately capitalized" if it has a leverage (or core
capital) ratio of at least 4.0%, a Tier 1 risk-based capital ratio of at least
4.0%, and a total risk-based capital ratio of at least 8.0%. At September 30,
1997, the Bank's core capital (or leverage) ratio was 5.95%, Tier 1 risk-based
capital ratio was 10.88% and total risk-based capital ratio was 11.25%. Such
ratios, adjusted to give effect to the sale of Series A Preferred Shares in the
Offering, would be 7.61%, 13.94% and 14.29%, respectively.
In addition, an Exchange Event may take place under circumstances in which
the Bank will not be considered "adequately capitalized" for purposes of the OTS
prompt corrective action regulations. Thus, at the time of the Automatic
Exchange, the Bank would likely be prohibited from paying dividends on the Bank
Preferred Shares. Further, the Bank's ability to pay dividends on the Bank
Preferred Shares following the Automatic Exchange also would be subject to
various restrictions under OTS regulations and resolution of the Bank's board of
directors. See "Certain Information Regarding the Bank--Risk Factors and Other
Considerations--Restrictions on Bank Dividends." In the event that the Bank did
pay dividends on the Bank Preferred Shares, such dividends would be paid out of
the Bank's capital surplus.
Under certain circumstances, including any determination that the Bank's
relationship to the Company results in an unsafe and unsound banking practice,
regulatory authorities will have the authority to issue an order which restricts
the ability of the Company to make dividend payments to its stockholders.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity need will be to fund the acquisition of
additional Mortgage Loans as Mortgage Loans held by the Company are repaid. The
acquisition of such additional Mortgage Loans will be funded with the proceeds
of principal repayments received by the Company on its portfolio of Mortgage
Loans. The Company does not anticipate that it will have any other material
capital expenditures. The Company believes that cash generated from the payment
of interest and principal on its Mortgage Loan portfolio will provide sufficient
funds to meet both operating requirements and payment of dividends by the
Company in accordance with the REIT Requirements for the foreseeable future.
GENERAL DESCRIPTION OF MORTGAGE LOANS; INVESTMENT POLICY
The Company may from time to time acquire both conforming and nonconforming
Mortgage Loans consistent with its primary investment objective to acquire
Mortgage Loans primarily for income. Conforming Mortgage Loans comply with the
requirements for inclusion in a loan guarantee program sponsored by either the
FHLMC or FNMA. Under current regulations, the maximum principal balance allowed
on conforming Mortgage Loans ranges from $214,600 for one-unit residential loans
to $442,450 for four-unit residential loans. Nonconforming
16
<PAGE>
Mortgage Loans are residential Mortgage Loans that do not qualify in one or more
respects for purchase by FNMA or FHLMC under their standard programs solely
because they exceed FHLMC or FNMA guidelines for the dollar limit of such loans.
The Company expects that approximately 65% of the Mortgage Loans it purchases in
the Initial Portfolio will be nonconforming solely because of the large size of
the loan. All of the Company's Mortgage Loans satisfy the requirements for sale
to national private mortgage conduit programs or other investors in the
secondary mortgage market.
Each Mortgage Loan will be evidenced by a promissory note secured by a
mortgage or deed of trust or other similar security instrument creating a first
lien on single-family (one- to four-unit) residential properties. Residential
real estate properties underlying Mortgage Loans consist of individual dwelling
units, individual condominium units, two- to four-family dwelling units, planned
unit developments and townhouses.
The Company currently expects that approximately 70% of the Mortgage Loans
to be acquired by it will be adjustable rate Mortgage Loans and that
approximately 30% of the Mortgage Loans will be fixed rate Mortgage Loans.
ACQUISITION OF INITIAL PORTFOLIO
Simultaneously with the consummation of the Offering, the Company will
acquire the Initial Portfolio from Mortgage Loans owned by the Bank and
contained in the Designated Portfolio. The Company will undertake to select
Mortgage Loans for the Initial Portfolio in the same proportion and containing
the same risks and characteristics as the Mortgage Loans in the Designated
Portfolio described herein. Upon consummation of the Offering, the Company will
acquire the Initial Portfolio pursuant to the terms of a Mortgage Loan Purchase
and Warranties Agreement (the "Mortgage Purchase Agreement") with the Bank. Each
Mortgage Loan will be identified in a schedule appearing as an exhibit to the
Mortgage Purchase Agreement (a "Mortgage Loan Schedule") and will have been
obtained from the Designated Portfolio, provided it had not become disqualified.
The Mortgage Loan Schedule will specify, among other things, with respect to
each Mortgage Loan: the interest rate or interest rate formula and current
interest rate, the original principal amount and the unpaid principal balance as
of the purchase date, the monthly payment, maturity date, mortgagor, type of
mortgaged property, and location of the mortgaged property.
In addition, the Bank will deliver or cause to be delivered to the Company
the mortgage note with respect to each Mortgage Loan (together with all
amendments and modifications thereto) endorsed in blank, the original or
certified copy of the mortgage (together with all amendments and modifications
thereto) with evidence of recording indicated thereon, if available, and an
original or certified copy of an assignment of the mortgage in recordable form.
Such documents will initially be held by the Bank, acting as custodian for the
Company. Although the Company will have the right to record the assignments of
mortgage at any time, it does not currently anticipate doing so. The Company
believes that maintaining record title of the Mortgage Loans in the name of the
Bank will facilitate the servicing of the Mortgage Loans. Once the assignments
of mortgage are recorded, the Company's lien on the mortgaged properties will
date back to the date of the original mortgages and rank ahead of any
intervening mortgages granted by the borrowers.
The Bank will make certain customary representations and warranties with
respect to the Mortgage Loans in the Initial Portfolio for the benefit of the
Company, including, among other things: (i) the information provided with
respect to the Mortgage Loans is correct in all material respects; (ii) each
Mortgage Loan is subject to a valid first lien subject only to the lien for
current real property taxes and assessments not yet due and payable, generally
acceptable covenants, conditions, restrictions, rights of way, easements and
other matters of public record present at the time of origination and other
common matters; (iii) the validity of the mortgage documents; (iv) all required
payments have been made; and (v) each Mortgage Loan complies with applicable
federal and state laws, including, without limitation, usury, truth-in-lending,
real estate settlement procedures, consumer credit protection, fair housing,
equal credit opportunity and disclosure laws. See also "Description of
Designated and Initial Portfolio." The Bank will be obligated to repurchase any
Mortgage Loan sold by it to the Company as to which there is a material breach
of any such representation or warranty, unless the Bank elects to substitute a
qualified Mortgage Loan for such Mortgage Loan. The Bank will also indemnify the
Company for damages or costs resulting from any such breach. The repurchase
price for any such Mortgage Loan will be its outstanding principal amount plus
accrued and unpaid interest on the date of repurchase plus any premium paid by
the Company. In addition, under the terms of the Mortgage Purchase Agreement,
the Company will acquire, in addition to the Mortgage Loans included in the
Initial Portfolio, (i) all amounts, including payments of principal and interest
(other than payments of principal and interest due on or before ____________,
1998), held in one or more accounts maintained for the benefit of or in the name
of the Company pursuant to the Servicing Agreement and (ii) all insurance
policies relating to the Mortgage Properties and the proceeds thereof. See "--
Servicing."
17
<PAGE>
MANAGEMENT POLICIES AND PROGRAMS
The Board of Directors has adopted certain policies to guide administration
of the Company and the Bank with respect to the acquisition and disposition
of assets, use of capital and leverage, credit risk management and certain other
activities. These policies, which are discussed below, may be amended or revised
from time to time at the discretion of the Board of Directors (in certain
circumstances subject to the approval of a majority of the Independent
Directors) without a vote of the Company's stockholders, including holders of
the Series A Preferred Shares. See also "--Dividends." Notwithstanding this
oversight, in performing its duties the Bank has a high degree of autonomy.
Asset Acquisition and Disposition Policies. Subsequent to the acquisition
of the Initial Portfolio, the Company anticipates that it will from time to time
purchase additional Mortgage Loans from the Bank, although Mortgage Loans may be
acquired from unaffiliated third parties, out of proceeds received in connection
with the repayment or disposition of Mortgage Loans or the issuance of
additional shares of Common Stock and preferred stock. The Company anticipates
that additional Mortgage Loans purchased from the Bank or its affiliates will be
purchased on terms that are substantially identical to those that could be
obtained by the Company if such additional Mortgage Loans were purchased from
third parties unaffiliated with the Company. No arrangements or procedures are
currently in place regarding the purchase of additional Mortgage Loans from
unaffiliated third parties.
The Company currently anticipates that additional Mortgage Loans acquired
by the Company will be of the types described in "--Description of Designated
Portfolio and Initial Portfolio," although if the Bank develops additional
Mortgage Loan products, the Company may purchase such additional types of
Mortgage Loans. The Company currently anticipates that it will not acquire the
right to service any Mortgage Loan it acquires in the future and that the Bank
or an affiliate of the Bank will act to service such additional Mortgage
Loans. The Company anticipates that any servicing arrangement that it enters
into in the future with the Bank will contain fees and other terms that would be
substantially equivalent to those that would be contained in servicing
arrangements entered into with third parties unaffiliated with the Company.
The Company currently intends to maintain its entire portfolio of assets in
Mortgage Loans. The Company's current policy prohibits the acquisition of any
Mortgage Loan which (i) is delinquent in the payment of principal or interest
at the time of proposed acquisition; (ii) is or was at any time during the
preceding 12 months (a) Classified, (b) in Nonaccrual Status, or (c)
renegotiated due to financial deterioration of the borrower; or (iii) has been,
more than once during the preceding 12 months, more than 30 days past due in the
payment of principal or interest.
The Company may choose, at any time subsequent to its acquisition of any
Mortgage Loan, to require the Bank to dispose of any Mortgage Loan, for any
reason, including as a result of such mortgage loan becoming Classified or being
placed in Nonaccrual Status or having been, more than once during the preceding
12 months, more than 30 days past due in the payment of principal or interest.
Capital and Leverage Policies. To the extent that the Board of Directors
determines that additional funding is required, the Company may raise such funds
through additional equity offerings, debt financing or retention of cash flow
(after consideration of provisions of the Code requiring the distribution by a
REIT of at least 95% of its REIT Taxable Income and taking into account taxes
that would be imposed on undistributed taxable income), or a combination of
these methods.
The Company will have no debt outstanding following consummation of the
Offering, and the Company does not currently intend to incur any indebtedness.
However, the organizational documents of the Company do not contain any
limitation on the amount or percentage of debt, funded or otherwise, the Company
might incur. Notwithstanding the foregoing, the Company may not, without the
approval of a majority of the Independent Directors, incur debt for borrowed
money other than debt not in excess of 20% of the aggregate amount of net
proceeds received in connection with the issuance of all outstanding preferred
stock and Common Stock of the Company. Any such debt incurred may include
intercompany advances made by the Bank to the Company.
The Company may also issue additional series of preferred stock. However,
the Company may not issue additional shares of preferred stock senior to the
Series A Preferred Shares without the consent of holders of at least two-thirds
of the outstanding Series A Preferred Shares at that time, voting as a single
class, and the Company may not issue additional shares of preferred stock on a
parity with the Series A Preferred Shares (i.e., pari passu) without the
approval of a majority of the Company's Independent Directors. The Company does
not currently intend to issue any
18
<PAGE>
additional series of preferred stock unless it simultaneously issues additional
Common Stock to the Bank and the proceeds to be received from the issuance of
the Common Stock are approximately equal to the aggregate offering price of such
additional preferred stock plus the Company's expenses (including underwriting
commissions or placement fees) in connection with the issuance of such
additional shares of preferred stock. It is currently anticipated that the
Company will issue additional shares of preferred stock if such issuance would
provide the Bank with the most cost-effective means of raising capital for bank
regulatory purposes at the time. See "The Formation--Benefits to the Bank."
Credit Risk Management Policies. The Company expects that each Mortgage
Loan acquired from the Bank or one of its affiliates in the future will be a
whole loan, will represent a first lien position and will be originated by the
Bank or such affiliate in the ordinary course of its real estate lending
activities based on the underwriting standards generally applied (at the time of
origination) for its own account by the Bank or the affiliate of the Bank which
originated the Mortgage Loan. See "--Description of Designated Portfolio and
Initial Portfolio--Underwriting Standards." The Company also expects that all
Mortgage Loans held by the Company will be serviced pursuant to the Servicing
Agreement, which requires servicing in conformity with accepted secondary market
standards, with any servicing guidelines promulgated by the Company and with
FNMA and FHLMC guidelines and procedures.
Conflict of Interest Policies. Because of the nature of the Company's
relationship with the Bank and its affiliates, it is likely that conflicts of
interest will arise with respect to certain transactions, including, without
limitation, the Company's transactions in Mortgage Loans with the Bank, Flagstar
or their respective affiliates and the modification of the Advisory Agreement or
the Servicing Agreement. It is the Company's policy that the terms of any
financial dealings with the Bank, Flagstar and their respective affiliates will
be consistent with those available from third parties in the mortgage lending
industry. In addition, neither the Advisory Agreement nor the Servicing
Agreement may be modified or terminated without the approval of a majority of
the Independent Directors.
Conflicts of interest between the Company and the Bank and its affiliates
may also arise in connection with making decisions that bear upon the credit
arrangements that the Bank or one of its affiliates may have with a mortgagor
under a Mortgage Loan. Conflicts could also arise in connection with actions
taken by the Bank as a controlling person in the Company. It is the intention of
the Company, the Bank and Flagstar that any agreements and transactions between
the Company, on the one hand, and Flagstar, the Bank or their affiliates, on the
other hand, including without limitation the Mortgage Purchase Agreement and
Servicing Agreement, are fair to all parties and are consistent with market
terms for such types of transactions. The Servicing Agreement provides that (i)
foreclosures and dispositions of the Mortgage Loans are to be performed with a
view to maximizing the recovery by the Company as owner of the Mortgage Loans
and (ii) the Bank shall service the Mortgage Loans solely with a view toward the
interests of the Company, and without regard to the interests of the Bank or its
affiliates. The requirement in the Certificate of Designation establishing the
Series A Preferred Shares that certain actions of the Company be approved by a
majority of the Independent Directors is also intended by the Company to give
greater assurance of fair dealings between the Company on the one hand and
Flagstar, the Bank and their respective affiliates on the other hand. However,
there can be no absolute assurance that any such agreement or transaction will
in all circumstances be on terms as favorable to the Company as would have been
obtained from unaffiliated third parties.
There are no provisions in the Company's Articles of Incorporation limiting
any officer, director, security holder or affiliate of the Company from having
any direct or indirect pecuniary interest in any Mortgage Loan to be acquired or
disposed of by the Company or in any transaction in which the Company has an
interest or from engaging in acquiring, holding and managing Mortgage Loans. As
described herein, it is expected that the Bank and its affiliates will have
direct interests in transactions with the Company (including without limitation
the sale of Mortgage Loans to the Company). However, it is not currently
anticipated that any of the officers or directors of the Company will have any
interests in such Mortgage Loans.
Other Policies. The Company intends to operate in a manner that will not
subject it to regulation under the Investment Company Act of 1940. The Company
does not intend (i) to invest in the securities of other issuers for the
purpose of exercising control over such issuers, (ii) to underwrite securities
of other issuers, (iii) to actively trade in loans or other investments, (iv) to
offer securities in exchange for property or (v) to make loans to third parties,
including, without limitation, officers, directors or other affiliates of the
Company. The Company may, under certain circumstances, purchase the Series A
Preferred Shares and other shares of its capital stock in the open market or
otherwise, provided, however, that the Company will not redeem or repurchase any
shares of its Common Stock for so long as any Series A Preferred Shares are
outstanding without the approval of a majority of the Independent Directors. The
Company has no present intention to repurchase any shares of its capital stock,
and any such action would be taken only in conformity with applicable federal
and state laws and regulations and the requirements for qualifying as a REIT.
19
<PAGE>
The Company intends to publish and distribute to stockholders, in
accordance with Exchange Act rules, annual reports containing financial
statements prepared in accordance with generally accepted accounting principles
and certified by the Company's independent public accountants. The Certificate
of Designation establishing the Series A Preferred Shares provides that the
Company shall maintain its status as a reporting company under the Exchange Act
for so long as any of the Series A Preferred Shares are outstanding.
The Company currently intends to make investments and operate its business
at all times in such a manner as to be consistent with the requirements of the
Code to qualify as a REIT. However, future economic, market, legal, tax or other
considerations may cause the Board of Directors, subject to approval by a
majority of Independent Directors, to determine that it is in the best interests
of the Company and its stockholders to revoke its REIT status.
DESCRIPTION OF DESIGNATED PORTFOLIO AND INITIAL PORTFOLIO
Information with respect to the Mortgage Loans in the Designated Portfolio
is presented as of December 16, 1997. The composition of the Initial Portfolio
actually purchased by the Company contemporaneously with the consummation of the
Offering will differ from the description of the Designated Portfolio only to
the extent it is discovered prior to the consummation of the Offering that a
Mortgage Loan included in the Designated Portfolio described herein (i) is
delinquent in the payment of principal or interest; (ii) is or was at any time
during the preceding 12 months (a) Classified, (b) in Nonaccrual Status, or (c)
renegotiated due to financial deterioration of the borrower; (iii) has been,
more than once during the preceding 12 months, more than 30 days past due in the
payment of principal or interest; or (iv) has failed to make the initial monthly
payment on a timely basis. In such event, a Mortgage Loan similar in aggregate
outstanding principal balance and product type will be substituted for such non-
purchased Mortgage Loan.
References herein to percentages of Mortgage Loans included in the Initial
Portfolio refer in each case to the percentage of the aggregate outstanding
principal balance of the Mortgage Loans in the Designated Portfolio as of
December 16, 1997, based on the outstanding principal balances of such Mortgage
Loans as of such date, after giving effect to scheduled monthly payments due on
or prior to such date, whether or not received.
The detailed information set forth in this Prospectus applies only to the
Designated Portfolio, and the Company's portfolio of Mortgage Loans in the
future may not have all of the characteristics described below.
GENERAL. The Designated Portfolio contains 613 Mortgage Loans. On December
16, 1997, the Mortgage Loans included in the Designated Portfolio had an
aggregate outstanding principal balance of $129.9 million.
Substantially all of the Mortgage Loans included in the Designated
Portfolio are whole loans, represent first lien positions, have been acquired on
a basis consistent with secondary market standards or have been originated and
underwritten in conformity with standards generally applied by the Bank at the
time the Mortgage Loans were originated. In general, substantially all the loans
originated by the Bank satisfy FNMA and FHLMC guidelines, except that the
initial loan amount of certain Mortgage Loans may exceed the maximum allowable
loan amount.
All of the Mortgage Loans included in the Designated Portfolio were
originated during 1996 and 1997, and have original terms to stated maturity of
either 15 or 30 years. As of December 16, 1997, the average outstanding
principal balance of a Mortgage Loan was $211,859. The weighted average number
of months since origination of the Mortgage Loans included in the Designated
Portfolio (calculated as of December 16, 1997) was less than one month. The
weighted average Loan-to-Value Ratio (defined below) of the Mortgage Loans in
the Designated Portfolio is 72.99%; however, 13.66% of the Mortgage Loans have
Loan-to-Value Ratios of greater than 80%. "Loan-to-Value Ratio" means the ratio
(expressed as a percentage) of the original principal amount of such Mortgage
Loan to the lesser of (i) the appraised value at origination of the underlying
mortgaged property and (ii) if the Mortgage Loan was made to finance the
acquisition of property, the purchase price of the mortgaged property.
Substantially all Mortgage Loans included in the Designated Portfolio have
mortgage notes which contain "due-on-sale" provisions.
None of the Mortgage Loans included in the Designated Portfolio (i) is
delinquent in the payment of principal or interest as of December 16, 1997; (ii)
is or was at any time during the preceding 12 months (a) Classified, (b) in
Nonaccrual Status, or (c) renegotiated due to financial deterioration of the
borrower; (iii) was, more than once during the preceding 12 months, more than 30
days past due in the payment of principal or interest; or (iv) has failed to
make the initial monthly payment on a timely basis. If, prior to the
acquisition of the Initial Portfolio, any Mortgage
20
<PAGE>
Loan included in the description of the Designated Portfolio herein falls within
any of the foregoing categories, the Company will not purchase such Mortgage
Loan but will instead purchase a Mortgage Loan similar in aggregate outstanding
principal balance and product type which does not fall into any of these
categories.
The following types of Mortgage Loan products, each of which is more fully
described below, and included in the Designated Portfolio and are expected to be
included in the Initial Portfolio: Three-Year ARM, Five-Year ARM, Seven-Year
ARM, 15-year and 30-year fixed rate Mortgage Loans. All of these loans are
secured by one- to four-family residential properties.
21
<PAGE>
The following table sets forth certain information with respect to each
type of Mortgage Loan included in the Designated Portfolio as of December 16,
1997:
TYPE OF MORTGAGE LOAN PRODUCT
<TABLE>
<CAPTION>
Percentage of Designated
Number of Aggregate Principal Portfolio Weighted Average
Type Mortgage Loans Balance by Aggregate Remaining Term
---- -------------- ------------------- --------------------- ----------------
<S> <C> <C> <C> <C>
Fixed Rate 299 $ 39,839,200 30.7% 292 months
Three-Year ARM 135 40,192,787 30.9% 358 months
Five-Year ARM 85 25,000,689 19.3% 357 months
Seven-Year ARM 94 24,836,700 19.1% 359 months
--- ------------ -----
Total 613 $129,869,376 100.0%
=== ============ =====
</TABLE>
Of the Mortgage Loans included in the Designated Portfolio, approximately
30% bear interest at fixed rates. The interest rates of the fixed rate Mortgage
Loans included in the Designated Portfolio range from 6.875% per annum to 7.75%
per annum. The weighted average interest rate of the fixed rate Residential
Mortgage Loans included in the Designated Portfolio is approximately 7.37% per
annum. The following tables contain certain additional data with respect to the
interest rates and terms of the fixed rate Mortgage Loans included in the
Designated Portfolio as of December 16, 1997:
INTEREST RATE OF FIXED RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Designated
Interest Number of Mortgage Aggregate Principal Weighted Average Portfolio by Aggregate
Rate Loans Balance Rate Principal Balance
-------- ------------------ ------------------- ---------------- ------------------------
<S> <C> <C> <C> <C>
6.75 - 6.99 30 $ 3,990,403 6.88% 3.1%
7.00 - 7.249 58 7,508,985 7.03% 5.8%
7.25 - 7.499 65 8,829,856 7.33% 6.8%
7.50 - 7.749 105 14,294,077 7.56% 11.0%
7.75 - 7.99 41 5,215,878 7.75% 4.0%
--- ----------- -----
Totals 299 $39,839,200 7.37% 30.7%
=== =========== ==== -----
</TABLE>
22
<PAGE>
ORIGINAL TERM OF FIXED RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of
Aggregate Designated Portfolio
Original Term Number of Principal Weighted Average by Aggregate Principal
(In months) Mortgage Loans Balance Original Term Balance
------------- -------------- ---------- ---------------- ------------------------
<S> <C> <C> <C> <C>
121 - 181 113 $15,005,351 180 11.5%
301 - 361 186 24,833,849 360 19.2%
--- ----------- ----
Totals 299 $39,839,200 292 30.7%
=== =========== ----
</TABLE>
Of the Mortgage Loans included in the Designated Portfolio, approximately
70% bear interest at adjustable rates. The interest rates on the "adjustable
rate mortgages" or "ARMs" contained in the Initial Portfolio are, in the case of
the Three-Year ARMs, Five-Year ARMs and Seven-Year ARMs, tied to the Treasury
Index, and, in both cases, adjust periodically. ARMs are typically subject to
limitations on lifetime interest rates as well as periodic interest rate
adjustments. The current interest rates of the Mortgage Loans included in the
Designated Portfolio that are ARMs ranged from 6.00% per annum to 8.50% per
annum as of December 16, 1997. As of such date, the weighted average current
interest rate of the Mortgage Loans included in the Designated Portfolio that
are ARMs was approximately 7.26% per annum. The following table contains
certain additional data as of December 16, 1997 with respect to the interest
rates of the Mortgage Loans included in the Designated Portfolio that are ARMs:
CURRENT INTEREST RATE OF ADJUSTABLE RATE
MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of
Weighted Designated Portfolio
Current Interest Number of Aggregate Principal Average by Aggregate Principal
Rate Mortgage Loans Balance Rate Balance
---------------- -------------- ------------------- -------- ----------------------
<S> <C> <C> <C> <C>
6.0 - 6.249% 2 $ 621,247 6.08% 0.5%
6.25 - 6.499 1 235,119 6.38% 0.2%
6.50 - 6.749 11 2,771,955 6.61% 2.1%
6.75 - 6.999 27 7,650,961 6.83% 5.9%
7.00 - 7.249 87 24,783,750 7.05% 19.1%
7.25 - 7.499 98 28,481,174 7.30% 21.8%
7.50 - 7.749 65 18,391,129 7.55% 14.2%
7.75 - 7.999 16 5,286,147 7.77% 4.1%
8.00 - 8.249 6 1,537,530 8.12% 1.2%
8.25 - 8.500 1 271,164 8.50% 0.2%
--- ----------- ----
Totals 314 $90,030,176 7.26% 69.3%
=== =========== ==== ====
</TABLE>
"Gross Margin," with respect to a Mortgage Loan that is an ARM, means the
applicable fixed percentage which, when added to the applicable index, results
in the current interest rate paid by the borrower of such Mortgage Loan (without
taking into account any interest rate caps or minimum interest rates). Gross
Margin is inapplicable to fixed rate Mortgage Loans.
The following table sets forth certain additional data as of December 16,
1997 with respect to the Gross Margins of the Mortgage Loans included in the
Designated Portfolio that are ARMs:
23
<PAGE>
GROSS MARGIN ON MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Designated
Gross Margin Number of Aggregate Principal Portfolio by Aggregate
Balance Mortgage Loans Balance Principal Balance
------------ -------------- ------------------- -------------------------
<S> <C> <C> <C>
2.50 - 3.00 314 $90,030,176 69.3%
</TABLE>
The interest rate of each ARM loan included in the Designated Portfolio
adjusts at the times (each, a "Rate Adjustment Date") and in the manner
described below subject to lifetime interest rate caps, to minimum interest
rates and to maximum annual interest rate increases or decreases, each as
specified in the mortgage note relating to the ARM. Information set forth below
regarding interest rate caps and minimum interest rates applies to the
Designated Portfolio and is intended to apply to the Initial Portfolio in a
similar manner. Mortgage Loans purchased by the Company after consummation of
the Offering may be subject to different interest rate caps and minimum interest
rates.
Each ARM bears interest at its initial interest rate until its first Rate
Adjustment Date. Effective with each Rate Adjustment Date, the monthly principal
and interest payment on most of the adjustable rate Mortgage Loans included in
the Designated Portfolio and the Initial Portfolio will be adjusted to an amount
that will fully amortize the then-outstanding principal balance of such Mortgage
Loan over its remaining term to stated maturity and that will be sufficient to
pay interest at the adjusted interest rate. All of the Mortgage Loans included
in the Designated Portfolio and the Initial Portfolio allow the mortgagor to
prepay at any time some or all of the outstanding principal balance of the
Mortgage Loan without fee or penalty.
Three-Year ARM. The interest rate with respect to a Three-Year ARM is fixed
at an initial rate for the first 36 monthly payments and adjusts annually
thereafter on the date specified in the related mortgage note to a rate equal to
the then-current Treasury Index (defined below) plus the Gross Margin set forth
in such mortgage note, subject to a maximum annual interest rate increase or
decrease of 2%, a lifetime interest rate cap equal to the initial interest rate
with respect to such Mortgage Loan plus 6% and to a minimum interest rate no
less than the Gross Margin. The sum of the Treasury Index and the Gross Margin
is rounded upwards to the nearest 0.125%. The "Treasury Index" with respect to
each Three-Year ARM is the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of one year as published by the Federal Reserve
Board in Statistical Release H.15 (519) or any similar publication, or as
reported by any Federal Reserve Bank or by any U.S. Government department or
agency and made available to the Bank. Should the Treasury Index not be
published or become otherwise unavailable, the Bank will select a comparable
alternative index over which it has no control and which is publicly available.
Five-Year ARM. The interest rate with respect to each Five-Year ARM is
fixed at an initial rate for the first 60 monthly payments and adjusts annually
thereafter on the date specified in the related mortgage note to a rate equal to
the then-current Treasury Index (defined below) plus the Gross Margin set forth
in such mortgage note, subject to a maximum annual interest rate increase or
decrease of 2%, a lifetime interest rate limitation equal to the initial
interest rate with respect to such Mortgage Loan plus 6% and a minimum interest
rate no less than the Gross Margin. The sum of the Treasury Index and the Gross
Margin is rounded upwards to the nearest 0.125%. The "Treasury Index" with
respect to each Five-Year ARM is the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity of one year as published by the
Federal Reserve Board in Statistical Release H.15 (519) or any similar
publication, or as reported by any Federal Reserve Bank or by any U.S.
Government department or agency and made available to the Bank. Should the
Treasury Index not be published or become otherwise unavailable, the Bank will
select a comparable alternative index over which it has no control and which is
publicly available.
Seven-Year ARM. The interest rate with respect to each Seven-Year ARM is
fixed at an initial rate for the first 84 monthly payments and adjusts annually
thereafter on the date specified in the related mortgage note to a rate equal to
the then current Treasury Index (defined below) plus the Gross Margin set forth
in such mortgage note, subject to a maximum annual interest rate increase or
decrease of 2%, a lifetime interest rate cap equal to the initial interest rate
with respect to such Residential Mortgage Loan plus 6% and to a minimum no less
than the Gross Margin. The sum of the Treasury Index and the Gross Margin is
rounded upwards to the nearest 0.125%. The "Treasury Index" with respect to
each Seven-Year ARM is the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of one year as published by the Federal Reserve
Board in Statistical Release H.15 (519) or any similar publication, or as
reported by any Federal Reserve Bank or by any U.S. Government department or
agency and made available to the Bank. Should the Treasury Index not be
published or become otherwise unavailable, the Bank will select a comparable
alternative index over which it has no control and which is publicly available.
24
<PAGE>
Fixed Rate Loans. The fixed rate Mortgage Loans which are included in the
Designated Portfolio and the Initial Portfolio or may be purchased by the
Company will generally have original terms to stated maturity of 15 or 30 years.
The interest rates of these Mortgage Loans are fixed prior to origination. The
monthly principal and interest payment is calculated to fully amortize the
initial outstanding principal balance of such Mortgage Loan to its stated
maturity.
The interest rates of the fixed rate Mortgage Loans included in the
Designated Portfolio range from 6.875% per annum to 7.75% per annum. The
weighted average interest rate of the fixed mortgage loans included in the
Initial Portfolio is approximately 7.37% per annum. The fixed rate loans will be
conventional, conforming loans originated according to the guidelines
established by FNMA or FHLMC, except that the Initial Portfolio may contain
loans that are otherwise conforming loans except that the initial principal
balance of the loan exceeds the $214,600 maximum loan amount allowed under such
guidelines (i.e., so-called "jumbo loans").
Underwriting Standards. The Mortgage Loans in the Designated Portfolio have
been acquired on a basis consistent with secondary market standards or
originated in accordance with the Bank's underwriting standards. In general,
substantially all the loans originated by the Bank satisfy FHLMC and FNMA
guidelines, except that the initial loan amount of certain Mortgage Loans may
exceed the maximum allowable loan amount. FNMA and FHLMC loans are, in 1997,
limited to a maximum of $214,600 (to increase to $227,150 in 1998).
Approximately 65% of the Mortgage Loans in the Designated Portfolio exceed such
amount.
All mortgage loans originated or acquired by the Bank, whether through its
retail loan origination offices or through its wholesale or correspondent
networks, must satisfy the Bank's underwriting standards. The Bank permits a
few originating correspondent lenders operating under the Bank's delegated
underwriting program to perform initial underwriting reviews. The Bank employs
an automated underwriting process on most loans that is based upon data provided
through the Bank's initial loan data entry software and is available from FNMA
through its Desktop Underwriter(TM) software and from FHLMC through its Loan
Prospector(TM) software. This process incorporates credit scoring and an
appraisal evaluation system, which in turn employs rules-based and statistical
technologies to evaluate the borrower, property and the sale of the loan in the
secondary market. This process is intended to reduce processing and
underwriting time, to improve overall loan approval productivity, to improve
credit quality and to reduce potential investor repurchase requests.
Approximately one-third of loans underwritten by the Bank are initially
underwritten on a contractual basis by mortgage insurance companies, in their
capacity as contract underwriters. The contract underwriter may be required to
repurchase loans that are determined not to be in compliance with such
underwriting criteria.
Loans underwritten directly by the Bank are subject to a complete review of
all information prior to loan approval. This process involves the transfer of
loan data to the Bank by wholesalers or correspondents using loan data entry
software provided by the Bank plus certain other physical documentation or
through the physical transfer of loan files to the Bank. Further, the Bank has
introduced the use of video-based computer technology, known as LIVE(R), to
expedite the loan approval process by allowing its underwriters to conduct face-
to-face interviews with loan applicants using personal computers with cameras
mounted on them. This equipment is installed and can be used on an as-needed or
pre-scheduled basis in the offices of certain mortgage brokers.
Geographic Distribution. Approximately 23.1% and 18.3% of the residential
real estate properties underlying the Mortgage Loans included in the Designated
Portfolio are located in California and Michigan, respectively. Consequently,
these Mortgage Loans may be subject to a greater risk of default than other
comparable Mortgage Loans in the event of adverse economic, political or
business developments and natural hazards in California and Michigan that may
affect the ability of residential property owners in California and Michigan to
make payments of principal and interest on the underlying mortgages. Standard
hazard insurance required to be maintained with respect to Mortgage Loans held
by the Company may not protect the Company against losses occurring from
tornados and other natural disasters. Consequently, in the event of a natural
disaster, the Company's ability to pay dividends on the Series A Preferred
Shares could be adversely affected as the Company will not maintain special
hazard insurance to protect against such losses.
Loan-to-Value Ratios; Insurance. All of the Mortgage Loans in the
Designated Portfolio having Loan-to-Value Ratios of greater than 80%, which
comprise 13.66% of the Designated Portfolio, are insured under primary mortgage
guaranty insurance policies. "Loan-to-Value Ratio" means the ratio (expressed as
a percentage) of the original principal amount of such Mortgage Loan to the
lesser of (i) the appraised value at origination of the underlying mortgaged
property and (ii) if the Mortgage Loan was made to finance the acquisition of
property, the purchase price of the mortgaged property. A standard hazard
insurance policy is required to be maintained by the mortgagor with respect to
each Mortgage Loan in an amount equal to the maximum insurable value of the
improvements securing such Mortgage Loan or the principal balance of such
Mortgage Loan, whichever is less. If the residential real estate property
25
<PAGE>
underlying a Mortgage Loan is located in a flood zone, such Mortgage Loan may
also be covered by a flood insurance policy as required by law. No mortgagor
bankruptcy insurance will be maintained by the Company with respect to the
Mortgage Loans in the Initial Portfolio, nor will any Mortgage Loan be insured
by the Federal Housing Administration or guaranteed by the Veterans
Administration. The Company will not maintain any special hazard insurance
policy with respect to any Mortgage Loan which could mitigate damages caused by
any natural disaster. In addition, the standard hazard insurance required to be
maintained with respect to Mortgage Loans does not protect the Company against
losses occurring from natural disasters. In the event of any such natural
disaster, the Company's ability to pay dividends on the Series A Preferred
Shares could be adversely affected.
SERVICING
The Mortgage Loans included in the Initial Portfolio will be sold to the
Company by the Bank on a servicing retained basis. The Bank will service the
Mortgage Loans included in the Initial Portfolio pursuant to the terms of the
Servicing Agreement and will receive an annual servicing fee with respect to
each Mortgage Loan serviced for the Company of 0.375% of the outstanding
principal balance of such Mortgage Loans.
The Servicing Agreement requires the Bank to service the Company's Mortgage
Loans in a manner generally consistent with accepted secondary market practices,
with any servicing guidelines promulgated by the Company and with FNMA and FHLMC
guidelines and procedures. Further, the Servicing Agreement requires the Bank to
service the Mortgage Loans solely with a view toward the interests of the
Company, and without regard to the interests of the Bank or its affiliates. The
Bank will collect and remit principal and interest payments, administer mortgage
escrow accounts, submit and pursue insurance claims and initiate and supervise
foreclosure proceedings on the Mortgage Loans it services. The Bank will also
provide accounting and reporting services required by the Company for such
Mortgage Loans. The Bank must follow such collection procedures as are customary
in the industry, including contacting delinquent borrowers and supervising
foreclosures and property dispositions in the event of unremedied defaults in
accordance with servicing guidelines promulgated by the Company. The Bank may,
in its discretion, arrange with a defaulting borrower a schedule for the
liquidation of delinquencies, provided that no primary mortgage guarantee
insurance coverage is adversely affected. The Bank may also be directed by the
Company, at any time during the servicing process, to dispose of any Mortgage
Loan which becomes Classified, placed in Nonaccrual Status or which has been,
more than once during the preceding 12 months, more than 30 days past due in the
payment of principal and interest.
The Bank may from time to time subcontract all or a portion of its
servicing obligations under the Servicing Agreement to one or more of its
affiliates or, subject to approval of a majority of the Independent Directors,
may subcontract all or a portion of its obligations under the Servicing
Agreement to an unrelated third party. At September 30, 1997, the Bank serviced
mortgage loans having an aggregate principal balance of approximately $6.2
billion (including $2.0 billion in sub-servicing). The Bank will not, in
connection with subcontracting any of its obligations under the Servicing
Agreement, be discharged or relieved in any respect from its obligation to the
Company to perform its obligations under the Servicing Agreement.
The Servicing Agreement requires the Bank to pay all expenses related to
the performance of its duties under the Servicing Agreement. If such advances
are made, the Bank generally will be reimbursed by the Company out of proceeds
related to such Mortgage Loan. The Bank also will be entitled to reimbursement
by the Company for expenses incurred by it in connection with the liquidation of
defaulted Mortgage Loans serviced by it and in connection with the restoration
of mortgaged property. If claims are not made or paid under applicable insurance
policies or if coverage thereunder has ceased, the Company will suffer a loss to
the extent that the proceeds from liquidation of the mortgaged property, after
reimbursement of the Bank's expenses in the sale, are less than the outstanding
principal balance of the related Mortgage Loan. The Bank will be responsible to
the Company for any loss suffered as a result of its failure to make and pursue
timely claims or as a result of actions taken or omissions made by it which
cause the policies to be canceled by the insurer.
In connection with any foreclosure proceedings that the Bank may institute,
the Bank may exercise any power of sale contained in any mortgage or deed of
trust, obtain a deed in lieu of foreclosure or otherwise acquire title to a
mortgaged property underlying a Mortgage Loan by operation of law or otherwise
in accordance with the terms of the Servicing Agreement.
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The Company may terminate the Servicing Agreement upon the happening of one
or more events specified in the Servicing Agreement. Such events relate
generally to the Bank's proper and timely performance of its duties and
obligations under the Servicing Agreement. In addition, the Company may also
terminate the Servicing Agreement without cause upon 30 days' notice and payment
of a termination fee equal to 2% of the aggregate outstanding principal amount
of the loans then serviced under the Servicing Agreement. As long as any Series
A Preferred Shares remain outstanding, the Company may not terminate, or elect
not to renew, the Servicing Agreement without the approval of a majority of the
Independent Directors. As is customary in the mortgage loan servicing industry,
the Bank will be entitled to retain any late payment charges and penalties
collected in connection with the Mortgage Loans serviced by it. In addition, the
Bank will receive any benefit derived from interest earned on collected
principal and interest payments between the date of collection and the date of
remittance to the Company and from interest earned on tax and insurance impound
funds with respect to Mortgage Loans serviced by it. The Servicing Agreement
requires the Bank to remit to the Company no later than the 20th day of each
month all principal and interest due from borrowers of Mortgage Loans serviced
by it (unless deemed nonrecoverable by the Bank).
When any mortgaged property underlying a Mortgage Loan is conveyed by a
mortgagor, the Bank generally will enforce any "due-on-sale" clause contained in
the Mortgage Loan, to the extent permitted under applicable law and governmental
regulations. The terms of a particular Mortgage Loan or applicable law, however,
may provide that the exercise of the "due-on-sale" clause is prohibited under
certain circumstances related to the security underlying the Mortgage Loan and
the buyer's ability to fulfill the obligations under the related mortgage note.
Upon any assumption of a Mortgage Loan by a transferee, a fee equal to a
specified percentage of the outstanding principal balance of the Mortgage Loan
is typically required, which sum will be retained by the Bank as additional
servicing compensation.
As a result of the relationship between the Bank and the Company, certain
conflicts of interest may arise. See "Risk Factors--Conflicts of Interest Exist
Due To Competing Interests of the Company and the Bank."
EMPLOYEES
The Company has five officers, each of whom is described further below
under "Management." The Company does not anticipate that it will require any
additional employees because it has retained the Bank to perform certain
functions pursuant to the Advisory Agreement described below under "Management--
The Advisor." It is currently anticipated that all of the officers of the
Company will also be officers or employees of Flagstar, the Bank or their
affiliates. The Company will maintain corporate records and audited financial
statements that are separate from those of the Bank or any of its affiliates.
None of the officers, employees or directors of the Company will have any direct
or indirect pecuniary interest in any Mortgage Loan to be acquired or disposed
of by the Company or in any transaction in which the Company has an interest or
will engage in acquiring, holding and managing Mortgage Loans.
COMPETITION
The Company does not anticipate that it will engage in the business of
originating Mortgage Loans. It does anticipate that it will purchase Mortgage
Loans in addition to those in the Initial Portfolio and currently intends to
purchase all of these Mortgage Loans from the Bank or affiliates of the Bank.
LEGAL PROCEEDINGS
From time to time, the Company and its subsidiaries are parties to various
legal proceedings incident to its business. At September 30, 1997, there were
no legal proceedings which management anticipates would have a material adverse
effect on the Company.
Neither the Company, the Bank nor any of its affiliates is currently
involved in nor, to the Company's knowledge, currently threatened with any
material litigation with respect to the Mortgage Loans to be included in the
Initial Portfolio, other than routine litigation arising in the ordinary course
of business.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors will be composed of seven members, two of
whom will be Independent Directors. These directors will serve until their
successors are duly elected and qualified. There is no current intention to
alter the number of directors comprising the Board of Directors. Pursuant to the
Certificate of Designation establishing the Series A Preferred Shares, the
Independent Directors are required to take into account the interests of both
the holders of the Series A Preferred Shares and the holders of the Common Stock
in assessing the benefit to the Company of any proposed action requiring their
consent. In considering the interests of the holders of the Series A Preferred
Shares, the Independent Directors shall owe the same duties which the
Independent Directors owe to holders of Common Stock. The Company currently has
five officers, each of whom are also directors. The Company has no other
employees and does not anticipate that it will require additional employees. See
"Business and Strategy--Employees".
The persons who are currently directors and executive officers of the
Company are as follows:
<TABLE>
<CAPTION>
Director Term
Name Age* Position with the Company to Expire
- ---- ---- ------------------------- -------------
<S> <C> <C> <C>
Thomas J. Hammond 54 Chairman and Chief Executive Officer 1999
Mark T. Hammond 32 Vice Chairman and President 1998
Joan H. Anderson 47 Director and Executive Vice President 1999
Mary Kay McGuire 41 Director and Secretary 2000
Michael W. Carrie 43 Director, Executive Vice President and 2000
Chief Financial Officer
</TABLE>
__________________________________
*As of September 30, 1997
The Company expects that the two additional members of the Board of
Directors, who will be the Independent Directors, will be appointed prior to
consummation of the Offering.
The following sets forth the business experience and other information for
each of the current directors of the Company.
THOMAS J. HAMMOND has served as Chairman of the Board of Directors and
Chief Executive Officer of the Bank since the Bank's formation in 1987 and
served as President of the Bank from 1987 to September 1995. Mr. Hammond has
also served as Chairman of the Board of Directors and Chief Executive Officer of
Flagstar since its formation in 1993. Mr. Hammond has over 29 years of
experience in the mortgage lending industry. After earning a BSBA and an MBA in
finance, Mr. Hammond began his career as a Staff Financial Analyst for Ford
Motor Company in 1966. Prior to founding the Bank in 1987, Mr. Hammond formed
and managed a series of companies in the financial services industry, including
Hammond Mortgage Corporation, Seller's & Homeowner's Uniform Receipt of Equity,
Inc. and First Security Mortgage Corporation (formerly known as Oak Hills
Mortgage Corporation) dating back to 1969. Mr. Hammond founded Hammond Mortgage
Corporation, a residential mortgage brokerage firm, in 1969. This company did
business nationwide and operated branches in eight different states and was one
of the country's largest FHA mortgage lenders prior to being sold to Michigan
National Bank in 1981. It eventually became known as Independence One and is now
part of Norwest Mortgage, Inc. Mr. Hammond is the father of Mark T. Hammond, the
Vice Chairman and President of the Bank.
MARK T. HAMMOND has served as President of the Bank since September 1995.
He has served as a member of the Bank's Board of Directors since 1991 and as its
Vice Chairman since 1993. Mr. Hammond has served as Vice Chairman of the Board
of Directors and President of Flagstar since January 1997. He has also served as
Executive Vice President of the Bank from 1991 to September 1995 in charge of
mortgage operations, wholesale lending and construction lending. From 1989 to
1991, he served as the Bank's Senior Vice President in charge of
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<PAGE>
secondary marketing and mortgage production. Mr. Hammond was a loan officer in
1987 for the Bank, worked part-time in the financial services industry from 1982
to 1986 and is a graduate of Wharton Business School. Mr. Hammond was
responsible for the national expansion of the Bank's loan production offices and
has played a lead role in the development and implementation of new technology
for the Bank. Mr. Hammond recently served on one of Fannie Mae's regional
advisory councils. Mr. Hammond is the son of Thomas J. Hammond, the Chairman and
Chief Executive Officer of the Bank.
JOAN H. ANDERSON has been the Bank's Executive Vice President in charge of
mortgage loan servicing, collections and real estate holdings since 1988. Ms.
Anderson is also an Executive Vice President of Flagstar, a position she has
held since 1994. She has also been a director of Flagstar since January 1997.
Ms. Anderson served as a Senior Vice President of the Bank from 1987 to 1988.
Prior to that time, she held various positions with mortgage lending companies
owned by Thomas J. Hammond and has worked in the financial services industry
since 1970.
MARY KAY MCGUIRE has been a Director of the Bank since September 1987. She
has also served as the Bank's Secretary since its formation in 1987, and Senior
Vice President of the Bank in charge of human resources, purchasing and
facilities management since 1988 and advertising since 1996. She also served as
a Vice President of the Bank from 1987 to 1988. Prior to that time, Ms. McGuire
served with Mr. Thomas Hammond since 1977 and has worked in the financial
services industry since 1974.
MICHAEL W. CARRIE has served as Chief Financial Officer of the Bank since
1993 and has been a director of Flagstar since 1997, and its Executive Vice
President in charge of financial planning, financial accounting, cash
management, investor reporting, regulatory accounting, loan funding and
information services since 1995. From 1993 to 1995 he served as Senior Vice
President of the Bank. From 1985 until 1993, he served as Vice President and
Manager of Financial Analysis of Standard Federal Bank, F.S.B., a major regional
federal savings bank. From July 1994 to February 1996, Mr. Carrie also served as
a director of Security Savings after its acquisition by the Bank.
INDEPENDENT DIRECTORS
The Company's Certificate of Designation establishing the Series A
Preferred Shares requires that, so long as any Series A Preferred Shares are
outstanding, certain actions by the Company be approved by a majority of the
Independent Directors of the Company. See "Description of Series A Preferred
Shares--Independent Director Approval." The Company expects that the two
additional members of the Board of Directors will be Independent Directors and
will be appointed prior to consummation of this Offering. For so long as there
are only two Independent Directors, any action that requires the approval of a
majority of Independent Directors must be approved by both Independent
Directors.
If at any time the Company fails to declare and pay a quarterly dividend
payment on the Series A Preferred Shares, the number of directors then
constituting the Board of Directors of the Company will be increased by two at
the Company's next annual meeting and the holders of Series A Preferred Shares,
voting together with the holders of any other outstanding series of Preferred
Stock as a single class, will be entitled to elect two additional directors to
serve on the Company's Board of Directors. Any member of the Board of Directors
elected by holders of the Series A Preferred Shares will be deemed to be an
Independent Director for purposes of the actions requiring the approval of a
majority of the Independent Directors. See "Description of Series A Preferred
Shares--Voting Rights."
AUDIT COMMITTEE
Upon consummation of the Offering, the Company will establish an audit
committee which will review the engagement and independence of its auditors. The
audit committee will also review the adequacy of the Company's internal
accounting controls. The audit committee will initially be comprised of _______
and ________.
CREDIT COMMITTEE
Upon consummation of the Offering, the Company will establish a credit
committee which will review and approve the acquisition of any additional
Mortgage Loans by the Company, will review the status of all Mortgage
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<PAGE>
Loans which have become Classified or have been placed in Nonaccrual Status, and
will review the terms and conditions upon which any such Loans are modified or
disposed of by the Company. The credit committee will initially be comprised of
_________, ________ and __________.
COMPENSATION OF DIRECTORS AND OFFICERS
The Company intends to pay the Independent Directors of the Company fees
for their services as directors. Each Independent Director will receive a fee of
$_________ for attendance (in person or by telephone) at each meeting of the
Board of Directors or Committee of the Board. However, multiple fees shall not
be paid for two or more meetings attended on the same day. The Company will not
pay any compensation to its officers or employees or to directors who are not
Independent Directors.
LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation eliminate, to the fullest extent
permitted by Michigan law, the personal liability of a director to the Company
or its stockholders for monetary damages for breach of such director's fiduciary
duty. The Company's Articles of Incorporation empower the Company to indemnify,
to the fullest extent permitted by Michigan law, any director or officer of the
Company. The Company's Articles of Incorporation also empower the Company to
purchase and maintain insurance to protect any director or officer against any
liability asserted against him or her, or incurred by him or her, arising out of
his or her status as such.
The by-laws of the Company (the "By-laws") permit indemnification of the
Company's directors and officers and specify that the right to indemnification
is a contract right, setting forth certain procedural and evidentiary standards
applicable to the enforcement of a claim under the By-laws. The By-laws also
entitle any director or officer to be reimbursed for the expenses of defending
any claim against him or her arising out of his or her status as such. The By-
laws of the Company also provide that the Company may enter into contracts with
any director or officer in furtherance of the indemnification provisions
contained in the By-laws and allow the Company to create a trust fund to ensure
payment of amounts indemnified.
ADVISORY AGREEMENT
In connection with the consummation of the Offering and the formation of
the Company, the Company will enter into the Advisory Agreement with the Bank
to administer the day-to-day operations of the Company. The Bank will be
responsible for (i) monitoring the credit quality of the Mortgage Loans held by
the Company, (ii) advising the Company with respect to the acquisition,
management, financing and disposition of the Company's Mortgage Loans and (iii)
maintaining custody of the documents related to the Company's Mortgage Loans.
The Bank may, from time to time, subcontract all or a portion of its obligations
under the Advisory Agreement to one or more of its affiliates involved in the
business of managing Mortgage Loans or, with the approval of a majority of the
Board of Directors as well as a majority of the Independent Directors,
subcontract all or a portion of its obligations under the Advisory Agreement to
unrelated third parties. The Bank will not, in connection with the
subcontracting of any of its obligations under the Advisory Agreement, be
discharged or relieved in any respect from its obligations under the Advisory
Agreement. Notwithstanding the above, the Company will control the activities of
the Bank under the Advisory Agreement and the Company's directors will maintain
the continuing and exclusive authority to manage the operations of the Company.
The Bank has substantial experience in the mortgage lending industry, both
in the origination and in the servicing of mortgage loans. At September 30,
1997, the Bank held approximately $1.6 billion of residential mortgage loans. In
its residential mortgage loan business, the Bank originates and purchases
residential mortgage loans and sells substantially all such loans to investors,
primarily in the secondary market, while in many cases retaining the rights to
service such loans.
The Advisory Agreement has an initial term of five (5) years, and will be
renewed automatically for additional five-year periods unless notice of
nonrenewal is delivered to the Bank by the Company. The Advisory Agreement
may be terminated by the Company at any time upon 90 days' prior notice. As long
as any Series A Preferred Shares remain outstanding, any decision by the Company
either not to renew the Advisory Agreement or to terminate the Advisory
Agreement must be approved by a majority of the Board of Directors, as well as
by a majority of the
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<PAGE>
Independent Directors. The Bank will be entitled to receive an annual advisory
fee equal to $250,000 with respect to the advisory and management services it
provides to the Company.
As a result of the relationship between the Bank and the Company, certain
conflicts of interest may arise. See "Risk Factors--Conflicts of Interest Exist
Due to Competing Interests of the Company and the Bank."
31
<PAGE>
THE FORMATION
The Formation
Prior to or simultaneously with the completion of the Offering, the
Company, the Bank and its affiliates will engage in the transactions described
below which are designed (i) to facilitate the Offering, (ii) to transfer the
ownership of the Initial Portfolio to the Company and (iii) to enable the
Company to qualify as a REIT for federal income tax purposes commencing with its
taxable year ending December 31, 1998.
The transactions constituting the formation of the Company will include the
following:
. The Amended and Restated Articles of Incorporation of the Company
provide for authorized shares of preferred stock and authorized shares
of Common Stock, and the Company will file a Certificate of Designation
with the Secretary of State of the State of Michigan establishing the
terms of the Series A Preferred Shares.
. The Company will sell to the public 2,000,000 Series A Preferred Shares
in the Offering.
. The Bank will acquire 500,000 shares of Common Stock for a purchase
price equal to $63 million plus an amount equal to the aggregate amount
of underwriting commissions and expenses of the Offering and the
formation of the Company.
. The Bank will sell the Initial Portfolio to the Company for an aggregate
purchase price equal to approximately $113 million pursuant to the terms
of the Mortgage Purchase Agreement.
. The Company will enter into the Advisory Agreement with the Bank
pursuant to which the Bank will manage the Mortgage Loans held by the
Company and administer the day-to-day operations of the Company. See
"Management--Advisory Agreement."
. The Company will enter into the Servicing Agreement with the Bank
pursuant to which the Bank will service the Mortgage Loans included in
the Initial Portfolio. See "Business and Strategy--Servicing."
The Bank currently owns, and following the completion of the Offering
intends to continue to own, all of the issued and outstanding shares of Common
Stock of the Company. The Bank currently intends that, so long as any Series A
Preferred Shares are outstanding, it will maintain direct or indirect ownership
of at least a majority of the outstanding shares of Common Stock of the Company.
Flagstar intends to maintain direct ownership of the Bank for the foreseeable
future.
In addition to its ownership of 100% of the Common Stock of the Company,
the Bank will also have responsibility for the day-to-day management and custody
of the Company's assets, under the terms of the Advisory Agreement, and will
have responsibility for servicing the Mortgage Loans as Bank under the Servicing
Agreement. See "Management--Advisory Agreement."
The Company and the Bank intend that the fair value of the Initial
Portfolio will approximately equal the amount (approximately $113 million) that
the Company will pay for the Initial Portfolio. However, no third party
valuations of the Mortgage Loans constituting the Initial Portfolio have been or
will be obtained for purposes of the Offering, and there can be no assurance
that the fair value of the Initial Portfolio will not differ from the purchase
price to be paid by the Company. See "Risk Factors--The Company Will Not Obtain
Any Third Party Valuations of Mortgage Loans Purchased From the Bank" and "--
Conflicts of Interest Exist Due to Competing Interests of the Company and the
Bank."
BENEFITS TO THE BANK
The Bank expects to realize the following benefits in connection with the
Offering and the formation of the Company:
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<PAGE>
. The Bank is required by the OTS to maintain certain levels of capital
for regulatory purposes. The Bank has informed the Company that the
Series A Preferred Shares will be treated as capital of the Bank for
regulatory purposes.
. As a result of the Company's qualification as a REIT, the dividends
payable on the Series A Preferred Shares will be deductible for income
tax purposes and will provide the Bank with a more cost-effective means
of obtaining regulatory capital than if the Bank were to issue preferred
stock itself.
. The Bank will receive approximately $113 million at the consummation of
the Offering (assuming no exercise by the Underwriters of their over-
allotment option) in connection with the sale of the Initial Portfolio
to the Company, approximately $63 million of which would represent new
funds after giving effect to the Bank's expense of purchasing the
Company's Common Stock.
. The Bank will be entitled to receive annual advisory and servicing fees
and annual dividends in respect of the Common Stock. For the first 12
months following completion of the Offering, these annual fees and
dividends are anticipated to be as follows:
Advisory Fee $250,000
Servicing Fee/1/ 423,750
Common Stock Dividend/2/
-------
$
=======
. The Bank will also be entitled to retain any late payment charges and
penalties collected in connection with the Mortgage Loans serviced by
it. In addition, the Bank will receive any benefit derived from interest
earned on collected principal and interest payments between the date of
collection and the date of remittance to the Company and from interest
earned on tax and insurance escrow funds with respect to Mortgage Loans
serviced by it.
DESCRIPTION OF SERIES A PREFERRED SHARES
The following summary sets forth the material terms and provisions of the
Series A Preferred Shares, and is qualified in its entirety by reference to the
terms and provisions of the Certificate of Designation establishing the Series A
Preferred Shares and the Company's Articles of Incorporation. See "Description
of Capital Stock" below.
__________________________
/1/ Assumes that for the first 12 months following completion of the Offering,
the Company holds Mortgage Loans with the same outstanding principal
balances as those Mortgage Loans included in the Initial Portfolio. See
"Business and Strategy--Servicing" for a description of the basis upon
which the servicing fees will be calculated.
/2/ The amount of dividends to be paid in respect of the Common Stock is
expected to be equal to the excess of the Company's REIT Taxable Income
(excluding capital gains) over the amount of dividends paid in respect of
Series A Preferred Shares. The aggregate annual dividend amount of the
Series A Preferred Shares is $ ________________ million. Assuming that (i)
the Mortgage Loans included in the Initial Portfolio are held for the 12-
month period following completion of the Offering, (ii) principal
repayments are reinvested in additional Mortgage Loans with characteristics
similar to those of the Mortgage Loans included in the Initial Portfolio
and (iii) interest rates remain constant during such 12-month period, the
Company anticipates that the Initial Portfolio will generate REIT Taxable
Income (excluding capital gains) of approximately $7.6 million, after
payment of servicing and advisory fees, during such 12-month period.
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<PAGE>
GENERAL
The Series A Preferred Shares constitute an authorized series of the
preferred stock of the Company, which the Company is permitted to issue from
time to time in one or more series with such rights, preferences and limitations
as the Board of Directors or, if then constituted, a duly authorized committee
thereof, may determine. The Board of Directors has authorized the Company to
issue the Series A Preferred Shares.
When issued, the Series A Preferred Shares will be validly issued, fully
paid and nonassessable. The holders of the Series A Preferred Shares will have
no preemptive rights with respect to any shares of the capital stock of the
Company or any other securities of the Company convertible into or carrying
rights or options to purchase any such shares. The Series A Preferred Shares
will not be convertible into shares of Common Stock or any other class or series
of capital stock of the Company and will not be subject to any sinking fund or
other obligation of the Company for its repurchase or retirement.
The transfer agent, registrar and dividend disbursement agent for the
Series A Preferred Shares will be Registrar and Transfer Company, Cranford, New
Jersey. The registrar will send notices to shareholders of any meetings at which
holders of the Series A Preferred Shares have the right to elect directors of
the Company or to vote on any other matter.
DIVIDENDS
Holders of Series A Preferred Shares will be entitled to receive, when and
as declared by the Board of Directors out of assets of the Company legally
available therefor, cash dividends at the rate of ____% per annum of the initial
liquidation preference (equivalent to $[ ] per share per annum). If declared,
dividends on the Series A Preferred Shares will be payable quarterly on March
31, June 30, September 30 and December 31 of each year, at such annual rate,
commencing on March 31, 1998. Dividends in each quarterly period will accrue
from the first day of such period, whether or not declared or paid for the prior
quarterly period. Each declared dividend will be payable to holders of record as
they appear on the stock register of the Company on such record dates, not
exceeding 45 days preceding the payment dates thereof, as shall be fixed by the
Board of Directors or a duly authorized committee thereof. Dividends payable on
the Series A Preferred Shares for any period less than a full dividend period
shall be computed on the basis of twelve 30-day months, a 360-day year and the
actual number of days elapsed in the period. Dividends payable on the Series A
Preferred Shares for each dividend period shall be computed by dividing the rate
per annum by four.
The right of holders of Series A Preferred Shares to receive dividends is
noncumulative. Accordingly, if the Board of Directors fails to declare a
dividend on the Series A Preferred Shares for a quarterly dividend period, then
holders of the Series A Preferred Shares will have no right to receive a
dividend for that period, and the Company will have no obligation to pay a
dividend for that period, whether or not dividends are declared and paid for any
future period with respect to either the Series A Preferred Shares or the Common
Stock. If the Company fails to pay or declare and set aside for payment a
quarterly dividend on the Series A Preferred Shares, holders of the Series A
Preferred Shares will be entitled to elect two directors. See "--Voting
Rights."
If full dividends on the Series A Preferred Shares for any dividend period
shall not have been declared and paid, or declared and a sum sufficient for the
payment thereof shall not have been set apart for such payments, no dividends
shall be declared or paid or set aside for payment and no other distribution
shall be declared or made or set aside for payment upon the Common Stock or any
other capital stock of the Company ranking junior to or on a parity with the
Series A Preferred Shares as to dividends or amounts upon liquidation, nor shall
any Common Stock or any other capital stock of the Company ranking junior to or
on a parity with the Series A Preferred Shares as to dividends or amounts upon
liquidation be redeemed, purchased or otherwise acquired for any consideration
(or any monies to be paid to or made available for a sinking fund for the
redemption of any such stock) by the Company (except by conversion into or
exchange for other capital stock of the Company ranking junior to the Series A
Preferred Shares as to dividends and amounts upon liquidation), until such time
as dividends on all outstanding Series A Preferred Shares have been (i) declared
and paid for three consecutive dividend periods and (ii) declared and paid or
declared and a sum sufficient for the payment thereof has been set apart for
payment for the fourth consecutive dividend period.
When dividends are not paid in full (or a sum sufficient for such full
payment is not set apart) upon the Series A Preferred Shares and the shares of
any other series of capital stock ranking on a parity as to dividends with the
Series
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A Preferred Shares, all dividends declared upon the Series A Preferred Shares
and any other series of capital stock ranking on a parity as to dividends with
the Series A Preferred Shares shall be declared pro rata so that the amount of
dividends declared per share on the Series A Preferred Shares and such other
series of capital stock shall in all cases bear to each other the same ratio
that full dividends, for the then-current dividend period, per share on the
Series A Preferred Shares (which shall not include any accumulation in respect
of unpaid dividends for prior dividend periods) and full dividends, including
required or permitted accumulations, if any, on such other series of capital
stock bear to each other.
For a discussion of the tax treatment of distributions to stockholders, see
"Federal Income Tax Considerations--Taxation of United States Stockholders" and
"--Taxation of Foreign Stockholders." For a discussion of certain potential
regulatory limitations on the Company's ability to pay dividends, see "Risk
Factors."
AUTOMATIC EXCHANGE
Each Series A Preferred Share will be exchanged automatically for one newly
issued Bank Preferred Share if the appropriate regulatory agency so directs in
writing because (i) the Bank has become "undercapitalized" under prompt
corrective action regulations established pursuant to FDICIA, (ii) the Bank is
placed into conservatorship or receivership or (iii) the appropriate regulatory
agency, in its sole discretion and even if the Bank is not "undercapitalized,"
anticipates the Bank becoming "undercapitalized" in the near term (i.e., the
Exchange Event). Upon the Automatic Exchange, each holder of Series A Preferred
Shares would be unconditionally obligated to surrender to the Bank the
certificates representing each Series A Preferred Share of such holder, and the
Bank would be unconditionally obligated to issue to such holder in exchange for
each such Series A Preferred Share a certificate representing one Bank Preferred
Share. Any Series A Preferred Shares purchased or redeemed by the Company prior
to the Time of Exchange (as defined below) would not be deemed outstanding and
shall not be subject to the Automatic Exchange.
The Bank will be considered to be "undercapitalized" under the "prompt
corrective action" regulations established pursuant to the Federal Deposit
Insurance Corporation Improvement Act of 1991, as amended ("FDICIA"), if it has
(i) a core capital (or leverage) ratio of less than 4.0%, (ii) a Tier 1 risk-
based capital ratio of less than 4.0%, or (iii) a total risk-based capital ratio
of less than 8.0%. Tier 1 or core capital consists of common shareholders'
equity, noncumulative perpetual preferred stock, and minority interests in
consolidated subsidiaries, less certain intangible assets and investments in
certain subsidiaries. Total capital consists of core capital plus supplementary
capital (which includes cumulative perpetual preferred stock, qualifying
subordinated debt, and a limited amount of the allowances for loan and lease
losses) to the extent such supplementary capital does not exceed 100% of core
capital, less certain equity investments. For purposes of the "prompt
corrective action" regulations, the Bank's capital category is determined as of
the most recent date (i) certain quarterly financial reports are required to be
filed with the regulators; (ii) a final report of examination has been delivered
to the Bank; or (iii) the Bank is notified in writing by the OTS of its capital
category or a change in such category. At September 30, 1997 and at December
31, 1996 and 1995, the Bank's core capital (or leverage) ratio was 5.95%, 6.01%,
and 5.84%, respectively, its Tier 1 risk-based capital ratio was 10.88%, 10.48%
and 9.83%, respectively, and its total risk-based capital ratio was 11.25%,
10.91%, and 10.12%, respectively. After giving effect to the Offering, the
capital ratios at September 30, 1997 would have been 7.61%, 13.94% and 14.29%,
respectively.
The Automatic Exchange would occur as of 8:00 a.m. Eastern Time on the date
for such exchange set forth in the Directive, or, if such date is not set forth
in the Directive, as of 8:00 a.m. on the earliest possible date such exchange
could occur consistent with the Directive (the "Time of Exchange"), as evidenced
by the issuance by the Bank of a press release prior to such time. As of the
Time of Exchange, all of the Series A Preferred Shares would be deemed cancelled
without any further action by the Company, all rights of the holders of Series A
Preferred Shares as stockholders of the Company will cease, and such persons
would thereupon and thereafter be deemed to be and would be for all purposes the
holders of Bank Preferred Shares within 30 days of such event, and the Bank will
deliver to each such holder certificates for Bank Preferred Shares upon
surrender of certificates for Series A Preferred Shares. Until such replacement
stock certificates would be delivered (or in the event such replacement
certificates are not delivered), certificates previously representing Series A
Preferred Shares would be deemed for all purposes to represent Bank Preferred
Shares. All corporate action necessary for the Bank to issue the Bank Preferred
Shares will be completed upon completion of the Offering. Accordingly, once the
Directive would be issued, no action would be required to be taken by holders of
Series A Preferred Shares, by the Bank or by the Company in order to effect the
Automatic Exchange as of the Time of Exchange.
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Absent the occurrence of the Exchange Event, no shares of Bank Preferred
Shares will be issued. Upon the occurrence of the Exchange Event, the Bank
Preferred Shares to be issued as part of the Automatic Exchange would constitute
a newly issued series of preferred stock of the Bank and would constitute 100%
of the issued and outstanding shares of Bank Preferred Shares. Holders of Bank
Preferred Shares would have the same dividend rights, liquidation preference,
redemption options and other attributes as to the Bank as holders of Series A
Preferred Shares have as to the Company, except that the Bank Preferred Shares
would not be listed on the Nasdaq National Market System. Any accrued and
unpaid dividends for the most recent quarter on the Series A Preferred Shares as
of the Time of Exchange would be deemed to be accrued and unpaid dividends for
the most recent quarter on the Bank Preferred Shares. The Bank Preferred Shares
would rank pari passu in terms of dividend payment and liquidation preference
with any outstanding shares of preferred stock of the Bank. The Bank intends to
register the Bank Preferred Shares solely with the OTS pursuant to an Offering
Circular, a copy of which is affixed to this Prospectus as Annex I and
incorporated herein by reference. The Bank Preferred Shares will not be
registered with the Commission and would be offered pursuant to an exemption
from registration under Section 3(a)(5) of the Securities Act of 1933, as
amended (the "Securities Act"). The Bank does not intend to apply for listing
of the Bank Preferred Shares on any national securities exchange or for
quotation of the Bank Preferred Shares through the Nasdaq National Market
System. Absent the occurrence of the Exchange Event, however, the Bank will not
issue any Bank Preferred Shares, although the Bank will be able to issue
preferred stock in series. There can be no assurance as to the liquidity of the
trading markets for the Bank Preferred Shares, if issued, or that an active
public market for the Bank Preferred Shares would develop or be maintained.
Holders of Series A Preferred Shares cannot exchange their Series A
Preferred Shares for Bank Preferred Shares on a voluntary basis or otherwise
compel such an exchange. In addition, absent the occurrence of the Automatic
Exchange, holders of Series A Preferred Shares will have no dividend, voting,
liquidation preference or other rights with respect to any security of the Bank;
such rights as are conferred by the Series A Preferred Shares exist solely as to
the Company.
VOTING RIGHTS
Except as expressly required by applicable law, or except as indicated
below, the holders of the Series A Preferred Shares will not be entitled to
vote. In the event the holders of Series A Preferred Shares are entitled to vote
as indicated below, each Series A Preferred Share will be entitled to one vote
on matters on which holders of the Series A Preferred Shares are entitled to
vote.
If at the time of any annual meeting of the Company's stockholders for the
election of directors the Company has failed to pay or declare and set aside for
payment a quarterly dividend during any of the four preceding quarterly dividend
periods on any series of preferred stock of the Company, including the Series A
Preferred Shares, the number of directors then constituting the Board of
Directors of the Company will be increased by two, and the holders of the Series
A Preferred Shares, voting together with the holders of all other series of
preferred stock as a single class, will be entitled to elect such two additional
directors to serve on the Board of Directors at each such annual meeting. Each
director elected by the holders of shares of the preferred stock shall continue
to serve as such director until the later of (i) the full term for which he or
she shall have been elected or (ii) the payment of four quarterly dividends on
the preferred stock, including the Series A Preferred Shares.
The affirmative vote or consent of the holders of at least two-thirds of
the outstanding shares of each series of preferred stock of the Company,
including the Series A Preferred Shares, voting as a single class without regard
to series, will be required (a) to create any class or series of stock which
shall have preference as to dividends or distribution of assets over any
outstanding series of preferred stock of the Company other than a series which
shall not have any right to object to such creation or (b) to alter or change
the provisions of the Company's Articles of Incorporation (including the
Certificate of Designation establishing the Series A Preferred Shares) so as to
affect adversely the voting powers, preferences or special rights of the holders
of a series of preferred stock of the Company; provided that if such amendment
shall not adversely affect all series of preferred stock of the Company, such
amendment need only be approved by at least two-thirds of the holders of shares
of all series of preferred stock adversely affected thereby.
REDEMPTION
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The Series A Preferred Shares will not be redeemable prior to ____________,
2003 (except upon the occurrence of a Tax Event). On or after such date, the
Series A Preferred Shares will be redeemable at the option of the Company, in
whole or in part, at any time or from time to time on not less than 30 nor more
than 60 days notice by mail, at a redemption price of $25.00 per share, plus the
accrued and unpaid dividends for the most recent quarter to the date of
redemption, if any, thereon. Any such redemption may only be effected with the
prior approval of the OTS (unless at such time such approvals are not required).
Unless full dividends on the Series A Preferred Shares have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof has been set apart for payment for the then current dividend
period, no Series A Preferred Shares shall be redeemed unless all outstanding
Series A Preferred Shares are redeemed and the Company shall not purchase or
otherwise acquire any Series A Preferred Shares; provided, however, that the
Company may purchase or acquire Series A Preferred Shares pursuant to a purchase
or exchange offer made on the same terms to holders of all outstanding Series A
Preferred Shares.
The Company will also have the right at any time, upon the occurrence of a
Tax Event and with the prior written approval of the OTS, to redeem the Series A
Preferred Shares, in whole (but not in part) at a redemption price of $25.00 per
share, plus the accrued and unpaid dividends for the most recent quarter to the
date of redemption, if any, thereon. "Tax Event" means the receipt by the
Company of an opinion of a law firm or accounting firm experienced in such
matters to the effect that, as a result of (i) any amendment to, clarification
of, or change (including any announced prospective change) in the laws or
treaties (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein affecting taxation, (ii) any
judicial decision, official administrative pronouncement, published or private
ruling, regulatory procedure, notice or announcement (including any notice or
announcement of intent to adopt such procedures or regulations) ("Administrative
Action") or (iii) any amendment to, clarification of, or change in the official
position or the interpretation of such Administrative Action or any
interpretation or pronouncement that provides for a position with respect to
such Administrative Action that differs from the theretofore generally accepted
position, in each case, by any legislative body, court, governmental authority
or regulatory body, irrespective of the manner in which such amendment,
clarification or change is made known, which amendment, clarification, or change
is effective or such pronouncement or decision is announced on or after the date
of issuance of the Series A Preferred Shares, there is more than an
insubstantial risk that (a) dividends paid or to be paid by the Company with
respect to the capital stock of the Company are not, or will not be, fully
deductible by the Company for federal income tax purposes or (b) the Company is,
or will be, subject to more than a de minimis amount of other taxes, duties or
other governmental charges.
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Series A Preferred Shares at the
time outstanding will be entitled to receive out of assets of the Company
available for distribution to stockholders, before any distribution of assets is
made to holders of Common Stock or any other class of stock ranking junior to
the Series A Preferred Shares upon liquidation, liquidating distributions in the
amount of $25 per share, plus the accrued and unpaid dividends for the most
recent quarter thereon, if any, to the date of liquidation.
After payment of the full amount of the liquidating distributions to which
they are entitled, the holders of Series A Preferred Shares will have no right
or claim to any of the remaining assets of the Company. In the event that, upon
any such voluntary or involuntary liquidation, dissolution or winding up, the
available assets of the Company are insufficient to pay the amount of the
liquidation distributions on all outstanding Series A Preferred Shares and the
corresponding amounts payable on all shares of other classes or series of
capital stock of the Company ranking on a parity with the Series A Preferred
Shares in the distribution of assets upon any liquidation, dissolution or
winding up of the affairs of the Company, then the holders of the Series A
Preferred Shares and such other classes or series of capital stock shall share
ratably in any such distribution of assets in proportion to the full liquidating
distributions to which they would otherwise be respectively entitled.
For such purposes, the consolidation or merger of the Company with or into
any other entity, the consolidation or merger of any other entity with or into
the Company or the sale of all or substantially all of the property or business
of the Company shall not be deemed to constitute a liquidation, dissolution or
winding up of the Company.
INDEPENDENT DIRECTOR APPROVAL
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The Certificate of Designation establishing the Series A Preferred Shares
requires that, so long as any Series A Preferred Shares are outstanding, certain
actions by the Company be approved by a majority of the Independent Directors.
For so long as there are only two Independent Directors, any action that
requires the approval of a majority of Independent Directors must be approved by
both Independent Directors. ____________ and ______________are the Company's
initial Independent Directors. See "Management--Independent Directors". In order
to be considered "independent," a director must not, prior to or during
appointment, be a current director, officer or employee of the Company, the Bank
or any affiliate of the Bank or a person who owns more than one percent of the
Common Stock of Flagstar. In addition, members of the Board of Directors elected
by holders of preferred stock, including the Series A Preferred Shares, will be
deemed to be Independent Directors for purposes of approving actions requiring
the approval of a majority of the Independent Directors.
The actions which may not be taken without the approval of a majority of
the Independent Directors include (i) the issuance of additional preferred stock
ranking on a parity with the Series A Preferred Shares; (ii) the incurrence of
debt for borrowed money in excess of 20% of the aggregate amount of net proceeds
received in connection with the issuance of preferred stock and Common Stock;
(iii) the modification of the general distribution policy or the declaration of
any distribution in respect of Common Stock for any year if, after taking into
account any such proposed distribution, total distributions on the Series A
Preferred Shares and the Common Stock would exceed an amount equal to the sum of
105% of the Company's REIT Taxable Income (excluding capital gains) for such
year plus net capital gains of the Company for that year; (iv) the acquisition
of real estate assets other than Mortgage Loans that (A) qualify as real estate
assets under Section 856(c)(6)(B) of the Code, (B) are rated investment grade or
better by at least one nationally recognized independent rating organization,
(C) are not interest-only, principal-only or high-risk securities and (D)
represent interests in or obligations backed by pools of mortgage loans; (v) the
redemption of any shares of Common Stock; (vi) the termination or modification
of, or the election not to renew, the Advisory Agreement or any Servicing
Agreement or the subcontracting of any duties under the Advisory Agreement or
the Servicing Agreements to third parties unaffiliated with the Bank; (vii) any
dissolution, liquidation or termination of the Company prior to _____________,
2003; (viii) any material amendment to or modification of the Mortgage Purchase
Agreement, including, without limitation, any amendment to the representations,
warranties and covenants contained in such agreement made in connection with the
acquisition of additional Mortgage Loans; and (ix) the determination to revoke
the Company's REIT status or the amendment of any of the ownership limitations
contained in the Articles of Incorporation. The Certificate of Designation
requires that, in assessing the benefits to the Company of any proposed action
requiring their consent, the Independent Directors take into account the
interests of both the holders of the Common Stock and the holders of the
preferred stock, including, without limitation, holders of the Series A
Preferred Shares. In considering the interests of both the holders of preferred
stock, including without limitation the holders of the Series A Preferred
Shares, the Independent Directors shall owe the same duties which the
Independent Directors owe to the holders of Common Stock.
RESTRICTIONS ON OWNERSHIP
For information regarding restrictions on ownership of the Series A
Preferred Shares, see "Description of Capital Stock--Restrictions on Ownership
and Transfer."
DESCRIPTION OF CAPITAL STOCK
The following summary of the material terms and provisions of the capital
stock of the Company does not purport to be complete and is subject in all
respects to the applicable provisions of Michigan law and the Amended and
Restated Articles of Incorporation of the Company.
GENERAL
The Company is authorized to issue up to 1,000,000 shares of Common Stock
and 4,000,000 shares of preferred stock. Upon consummation of the Offering and
the transactions described in "Certain Transactions Constituting the Formation,"
the Company will have outstanding 500,000 shares of Common Stock, all of which
will be held by the Bank, and 2,000,000 shares of Preferred Stock.
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COMMON STOCK
Dividends. Holders of Common Stock are entitled to receive dividends when,
as and if declared by the Board of Directors out of funds legally available
therefor, provided that, so long as any shares of preferred stock are
outstanding, no dividends or other distributions (including redemptions and
purchases) may be made with respect to the Common Stock unless full dividends on
the shares of all series of preferred stock, including accumulations in the case
of cumulative preferred stock, have been paid for the prior four quarters. In
order to remain qualified as a REIT, the Company must distribute annually at
least 95% of its annual REIT Taxable Income (not including capital gains) to
stockholders.
Voting Rights. Subject to the rights, if any, of the holders of any class
or series of preferred stock, all voting rights are vested in the Common Stock.
The holders of Common Stock are entitled to one vote per share. All of the
issued and outstanding shares of Common Stock are currently, and upon
consummation of the Offering will be, held by the Bank.
Rights Upon Liquidation. In the event of the liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, after there have
been paid or set aside for the holders of all series of Preferred Stock the full
preferential amounts to which such holders are entitled, the holders of Common
Stock will be entitled to share equally and ratably in any assets remaining
after the payment of all debts and liabilities.
PREFERRED STOCK
Subject to limitations prescribed by Michigan law and the Company's Amended
and Restated Articles of Incorporation, the Board of Directors or, if then
constituted, a duly authorized committee thereof is authorized to issue, from
the authorized but unissued shares of capital stock of the Company, preferred
stock in such classes or series as the Board of Directors may determine and to
establish, from time to time, the number of shares of preferred stock to be
included in any such class or series and to fix the designation and any
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption of the shares of any such class or series, and such other subjects or
matters as may be fixed by resolution of the Board of Directors.
Preferred stock, upon issuance against full payment of the purchase price
therefor, will be fully paid and nonassessable. The specific terms of a
particular class or series of preferred stock will be described in the
Certificate of Designation relating to that class or series.
A Certificate of Designation relating to each class or series of preferred
stock will set forth the preferences and other terms of such class or series,
including, without limitation, the following: (1) the title and stated value of
such class or series; (2) the number of shares of such class or series offered
and the liquidation preference per share of such class or series; (3) the
dividend rate(s), period(s), and/or payment date(s) or method(s) of calculation
thereof applicable to such class or series; (4) whether such class or series of
Preferred Stock is noncumulative or not and, if noncumulative, the date from
which dividends on such class or series shall accumulate; (5) the provision for
a sinking fund, if any, for such class or series; (6) the provision for
redemption, if applicable, of such class or series; (7) any limitations on
direct or beneficial ownership and restrictions on transfer, in each case as may
be appropriate to preserve the status of the Company as a REIT; (8) any voting
rights of such class or series; (9) the relative ranking and preferences of such
class or series as to dividend rights and rights upon liquidation, dissolution
or winding up of the affairs of the Company; (10) any limitations on issuance of
any class or series of Preferred Stock ranking senior to or on a parity with
such class or series of Preferred Stock as to dividend rights and rights upon
liquidation, dissolution or winding up of the affairs of the Company; and (11)
any other specific terms, preferences, rights, limitations or restrictions of
such class or series.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
The Company's Amended and Restated Articles of Incorporation contain
certain restrictions on the number of shares of Common Stock and preferred stock
that individual stockholders may own. For the Company to qualify as a REIT under
the Code, no more than 50% in number or value of its outstanding shares of
capital stock may be owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities) during the last half of a
taxable year (other than the first year) or during a proportionate part of a
shorter taxable year (the "Five or Fewer Test"). The capital stock of the
Company must also be beneficially owned by 100 or more persons during at least
335 days of a taxable year or during a proportionate part of a shorter taxable
year (the "One Hundred Persons Test"). The ownership by the Bank of 100% of the
shares of Common Stock of the REIT will not adversely affect the Company's
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REIT qualification because each stockholder of Flagstar (the sole stockholder of
the Bank) counts as a separate beneficial owner for purposes of the Five or
Fewer Test and the capital stock of Flagstar is widely held. Further, the
Articles of Incorporation of the Company contain restrictions on the acquisition
of preferred stock intended to ensure compliance with the One Hundred Persons
Test. Such provisions include a restriction that if any transfer of shares of
capital stock of the Company would cause the Company to be beneficially owned by
fewer than 100 persons, such transfer shall be null and void and the intended
transferee will acquire no rights to the stock.
Subject to certain exceptions specified in the Company's Amended and
Restated Articles of Incorporation, no holder of preferred stock is permitted to
own (including shares deemed to be owned by virtue of the attribution provisions
of the Code) more than 5% (the "Ownership Limit") of any issued and outstanding
class or series of preferred stock. The Board of Directors may (but in no event
will be required to), upon request of a person to acquire up to 9.9% of the
class of preferred stock or, in the case of a corporation, partnership, estate
or trust, upon receipt of a ruling from the IRS or an opinion of counsel
satisfactory to it, waive the Ownership Limit with respect to such holder if the
holder's ownership will not then or in the future jeopardize the Company's
status as a REIT.
The Articles of Incorporation provide that shares of any class or series of
preferred stock owned, or deemed to be owned, by or transferred to a stockholder
in excess of the Ownership Limit (the "Excess Shares") will automatically be
transferred, by operation of law, to a trust for the exclusive benefit of a
charity to be named by the Company as of the day prior to the day the prohibited
transfer took place. Any distributions paid prior to the discovery of the
prohibited transfer are to be repaid by the original transferee to the Company
and by the Company to the trust; any vote of the shares while the shares were
held by the original transferee prior to the Company's discovery thereof shall
be void ab initio and the original transferee shall be deemed to have given its
proxy to the trustee. Any unpaid distributions with respect to the original
transferee will be rescinded as void ab initio. In liquidation, the original
transferee stockholder's ratable share of the Company's assets would be limited
to the price paid by the original transferee for the Excess Shares or, if no
value was given, the price per share equal to the closing market price on the
date of the purported transfer. The trustee of the trust shall promptly sell the
shares to any person whose ownership is not prohibited, whereupon the interest
of the trust shall terminate. Proceeds of the sale shall be paid to the original
transferee up to its purchase price (or, if the original transferee did not
purchase the shares, the value on its date of acquisition) and any remaining
proceeds shall be paid to a charity to be named by the Company.
The constructive ownership rules of the Code are complex and may cause
preferred stock owned, directly or indirectly, by a group of related individuals
and/or entities to be deemed to be constructively owned by one individual or
entity. As a result, the acquisition of less than 5% of a class or series of
issued and outstanding preferred stock (or the acquisition of an interest in an
entity that owns shares of such series of preferred stock) by an individual or
entity could cause that individual or entity (or another individual or entity)
to own constructively in excess of 5% of such class or series of preferred
stock, and thus subject such stock to the Ownership Limit. Direct or
constructive ownership in excess of the Ownership Limit, without the approval of
the Company as provided in its Amended and Restated Articles of Incorporation,
would cause ownership of the shares in excess of the limit to be transferred to
the trustee.
All certificates representing shares of preferred stock will bear a legend
referring to the restrictions described above.
The Ownership Limit provisions will not be automatically removed even if
the REIT Provisions (as defined herein) are changed so as to eliminate any
ownership concentration limitation or if the ownership concentration limitation
is increased. The Amended and Restated Articles of Incorporation may not be
amended to alter, change, repeal or amend any of the Ownership Limit provisions
without the prior approval of a majority of the Independent Directors.
The Amended and Restated Articles of Incorporation require that any person
who beneficially owns 1% (or such lower percentage as may be required by the
Code or the Treasury Regulations) of the outstanding shares of any class or
series of preferred stock of the Company must provide certain information to the
Company within 30 days of June 30 and December 31 of each year. In addition,
each stockholder shall upon demand be required to disclose to the Company in
writing such information as the Company may request in order to determine the
effect, if any, of such stockholder's actual and constructive ownership on the
Company's status as a REIT and to ensure compliance with the Ownership Limit.
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FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING SUMMARY OF MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
REGARDING THE OFFERING IS BASED UPON CURRENT LAW, IS FOR GENERAL INFORMATION
ONLY AND IS NOT TAX ADVICE. THE INFORMATION SET FORTH BELOW, TO THE EXTENT THAT
IT CONSTITUTES SUMMARIES OF TAX MATTERS OR TAX CONCLUSIONS, HAS BEEN REVIEWED BY
KUTAK ROCK, AND IT IS THEIR OPINION THAT SUCH INFORMATION IS ACCURATE IN ALL
MATERIAL RESPECTS. THE DISCUSSION BELOW IS BASED ON EXISTING FEDERAL INCOME TAX
LAW, WHICH IS SUBJECT TO CHANGE, WITH POSSIBLE RETROACTIVE EFFECT. THE
DISCUSSION BELOW DOES NOT ADDRESS ALL ASPECTS OF TAXATION THAT MAY BE RELEVANT
IN THE PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER OR TO CERTAIN TYPES OF
STOCKHOLDERS (INCLUDING INSURANCE COMPANIES, TAX-EXEMPT ENTITIES, FINANCIAL
INSTITUTIONS OR BROKER-DEALERS, FOREIGN CORPORATIONS AND PERSONS WHO ARE NOT
CITIZENS OR RESIDENTS OF THE UNITED STATES, EXCEPT TO THE EXTENT DISCUSSED)
SUBJECT TO SPECIAL TREATMENT UNDER THE FEDERAL INCOME TAX LAWS.
EACH PROSPECTIVE INVESTOR IS URGED TO SEEK INDIVIDUAL ADVICE CONCERNING THE
EFFECT ON HIM OR HER OF THE PURCHASE, OWNERSHIP AND SALE OF THE SERIES A
PREFERRED SHARES UNDER FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS INCLUDING THE
EFFECT OF POSSIBLE CHANGES IN TAX LAW.
TAXATION OF THE COMPANY
General. The Company will elect to be taxed as a REIT under Sections 856
through 860 of the Code and the applicable Treasury Regulations (the "REIT
Requirements" or the "REIT Provisions"), which are the requirements for
qualifying as a REIT, commencing with its taxable year ending December 31, 1998.
The Company believes that, commencing with its taxable year ending December 31,
1998, it will be organized, will operate and its capital stock will be owned in
such a manner as to qualify for taxation as a REIT under the Code. The Company
intends to continue to operate in such a manner, but no assurance can be given
that it will operate in a manner so as to qualify or remain qualified.
The REIT Requirements are technical and complex. The following discussion
sets forth only the material aspects of those requirements. This summary is
qualified in its entirety by the applicable Code provisions, rules and
regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
In the opinion of Kutak Rock, commencing with the Company's taxable year
ending December 31, 1998, the Company will be organized in conformity with the
requirements for qualification as a REIT, and its proposed method of operation
will enable it to meet the requirements for qualification and taxation as a REIT
under the Code. It must be emphasized that this opinion is based on certain
factual assumptions relating to the organization and operation of the Company
and is conditioned upon certain representations made by the Company as to
factual matters, such as the organization and expected manner of operation of
the Company. In addition, this opinion is based upon factual assumptions and
representations of the Company concerning its business and Mortgage Loans.
Moreover, such qualification and taxation as a REIT depends upon the Company's
ability to meet, through actual annual operating results, distribution levels
and diversity of stock ownership and the various qualification tests imposed
under the Code discussed below, the results of which will not be reviewed by
Kutak Rock on a continuing basis. No assurance can be given that the actual
results of the Company's operation for any taxable year will satisfy such
requirements. See "--Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on that portion of its ordinary income
or capital gain that is currently distributed to stockholders. Such treatment
substantially eliminates the federal "double taxation" on earnings (at the
corporate and the stockholder levels) that generally results from investment in
a corporation.
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Despite the REIT election, the Company may be subject to federal income and
excise tax as follows:
. First, the Company will be taxed at regular corporate rates on any
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undistributed REIT Taxable Income, including undistributed net capital
gains.
. Second, under certain circumstances, the Company may be subject to the
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"alternative minimum tax" on certain of its items of tax preferences, if
any.
. Third, if the Company has (i) net income from the sale or other disposition
-----
of "foreclosure property" that is held primarily for sale to customers in
the ordinary course of business or (ii) other nonqualifying net income from
foreclosure property, it will be subject to tax at the highest corporate
rate on such income.
. Fourth, if the Company has net income from prohibited transactions (which
------
are, in general, certain sales or other dispositions of property held
primarily for sale to customers in the ordinary course of business, other
than sales of foreclosure property and sales that qualify for a statutory
safe harbor), such income will be subject to a 100% tax.
. Fifth, if the Company should fail to satisfy the 75% gross income test or
-----
the 95% gross income test (as discussed below), but has nonetheless
maintained its qualifications as a REIT because certain other requirements
have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the
75% or 95% test, multiplied by a fraction intended to reflect the Company's
profitability.
. Sixth, if the Company should fail to distribute, or fail to be treated as
-----
having distributed, with respect to each calendar year at least the sum of
(i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year, and (iii) any undistributed taxable
income from prior periods, the Company would be subject to a 4% excise tax
on the excess of such required distribution over the amounts actually
distributed.
The Company does not now intend to acquire any appreciated assets from a
corporation generally subject to full corporate-level tax in a transaction in
which any gain on the transfer is not fully recognized. However, in the event of
such an acquisition, the Company could, under certain circumstances, be subject
to tax upon disposition of such assets.
If the Company were treated as a taxable mortgage pool, it would be subject
to certain provisions regarding the taxation of excess inclusions. A taxable
mortgage pool is any entity which has the following characteristics: (i)
substantially all of its assets are debt obligations and more than 50% of such
obligations are real estate mortgages; (ii) the entity is the obligor on debt
obligations which have two or more maturities; and (iii) the payments on the
liabilities of the entity bear a relationship to the payments on the debt
obligations held as assets. If the Company were to be treated as a taxable
mortgage pool, holders of Series A Preferred Shares would be subject to tax on
the excess inclusions generated by the Company. The Company does not expect to
incur any indebtedness, as described in those provisions and thus does not
expect to be treated as a taxable mortgage pool. Each potential holder of Series
A Preferred Shares should consult his tax advisor concerning the application of
these principles.
Organizational Requirements. The Code defines a REIT as a corporation,
trust, or association (i) that is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (iii) that would be taxable
as a domestic corporation, but for the REIT Requirements; (iv) that is neither a
financial institution nor an insurance company subject to certain provisions of
the Code; (v) the beneficial ownership of which is held by 100 or more persons;
(vi) not more than 50% in value of the outstanding stock of which is owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include private foundations and certain pension trusts and other entities) at
any time during the last half of each taxable year; (vii) that is not a bank, an
insurance company or certain other specified types of financial institutions;
and (viii) that meets certain other tests, described below, including those
regarding the nature of its income and assets. The Code provides that conditions
(i) through (iv), inclusive, must be met during the entire taxable year and that
condition (v) must be met during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
Conditions (v) and (vi) will not apply until after the first taxable year for
which an election is made to be taxed as a REIT. For purposes of condition (vi),
certain tax-exempt entities are generally treated as individuals, and the
beneficiaries of a pension trust that qualifies under Section 401(a) of the Code
and that holds shares
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of a REIT will be treated as holding shares of the REIT in proportion to their
actuarial interests in the pension trust. See "--Taxation of United States
Stockholders--Treatment of Tax-Exempt Stockholders."
In rendering its opinion, described above, counsel has concluded that
beneficial owners of both common and preferred shares of a corporation will be
considered for purposes of the 100 holder requirement. The Company expects that
the Series A Preferred Shares will be held by not less than 100 beneficial
owners at all times such Shares are outstanding. Such ownership of the Series A
Preferred Shares would allow the Company to meet condition (v). In determining
whether condition (vi) above is met, shareholders of a corporation are treated
as owning their proportionate share of any stock held by that corporation. The
Company expects that the stock of the Company and of Flagstar will at no time be
held directly or indirectly by five or fewer shareholders who are individuals,
private foundations, pension trusts or other relevant entities that in the
aggregate own more than 50 percent by value of the stock of the Company or
Flagstar, respectively. Stock ownership of the Company and Flagstar in
accordance with the Company's expectation will satisfy condition (vi) with
respect to the Company. In addition, the Company's Amended and Restated Articles
of Incorporation include certain restrictions regarding transfer of its shares,
which restrictions are intended to assist the Company in continuing to satisfy
the share ownership requirements described in (v) and (vi) above. Such transfer
and ownership restrictions are described under "Description of Capital Stock--
Restrictions on Ownership and Transfer."
Moreover, in order to elect to be treated as a REIT, an entity must
distribute sufficient amounts to eliminate any earnings and profits attributable
to any year in which such entity was not a REIT. In addition, a corporation may
not elect to become a REIT unless its taxable year is the calendar year. The
Company expects to satisfy these requirements.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of the
assets and gross income of the partnership will retain the same character in the
hands of the REIT as such income had in the hands of the partnership for
purposes of the REIT Requirements, including satisfying the gross income tests
and the assets test.
Income Tests. In order to maintain qualification as a REIT, the Company
must annually satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (such as interest on
obligations secured by mortgages on real property, certain "rents from real
property" or as gain on the sale or exchange of such property and certain fees
with respect to agreements to make or acquire mortgage loans), from certain
types of temporary investments or certain other types of gross income. Second,
at least 95% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such real
property investments as aforesaid and from dividends, interest, and gain from
the sale or other disposition of stock or securities and certain other types of
gross income, including certain income derived from interest rate swaps, caps or
similar financial instruments (or from any combination of the foregoing).
For interest to qualify as "interest on obligations secured by mortgages on
real property or on interests in real property," the obligation must be secured
by real property having a fair market value at the time of acquisition at least
equal to the principal amount of the loan. The term "interest" includes only an
amount that constitutes compensation for the use or forbearance of money. For
example, a fee received or accrued by a lender which is in fact a charge for
services performed for a borrower rather than a charge for the use of borrowed
money is not includible as interest. However, amounts earned as consideration
for entering into agreements to make loans secured by real property, although
not interest, are otherwise treated as within the 75% and 95% classes of gross
income so long as the determination of those amounts does not depend on the
income or profits of any person. By statute, the term interest does not include
any amount based on income or profits except that the Code provides that (i)
interest "based on a fixed percentage or percentages of receipts or sales" is
not excluded and (ii) when the REIT makes a loan that provides for interest
based on the borrower's receipts or sales and the borrower leases under one or
more leases based on income or profits, only a portion of the contingent
interest paid by the borrower will be disqualified as interest.
Rents received or deemed to be received by the Company will qualify as
"rents from real property" in satisfying the gross income requirements for a
REIT described above only if certain statutory conditions are met that limit
rental income essentially to rentals on investment-type properties. In the event
that a REIT acquires by foreclosure property that generates income that does not
qualify as "rents from real property," such income may be treated as qualifying
for three years following foreclosure (which period may be extended by the IRS)
so long as (i) all leases
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entered into after foreclosure generate only qualifying rent, (ii) only limited
construction takes place and (iii) within 90 days of foreclosure, any trade or
business in which the property is used is conducted by an independent contractor
from which the REIT derives no income. In the event the special foreclosure
property rule applies to qualify otherwise unqualified income, the net income
that qualifies only under the special rule for foreclosure property may be
subject to tax, as described above.
Relief Provisions. If the Company fails to satisfy one or both of the 75%
or 95% gross income tests for any taxable year, it may nevertheless qualify as a
REIT for such year if it is entitled to relief under certain provisions of the
Code. These relief provisions will be generally available if the Company's
failure to meet such tests was due to reasonable cause and not due to willful
neglect, the Company attaches a schedule of the sources of its income to its
return, and any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. As discussed above in "--Taxation of the Company--General," even if
these relief provisions apply, a tax would be imposed with respect to the excess
net income.
Asset Tests. At the close of each quarter of each taxable year, the Company
must satisfy three tests relating to the nature of its assets. First, at least
75% of the value of the Company's total assets must be represented by real
estate assets (including stock or debt instruments held for not more than one
year that were purchased with the proceeds of a stock offering or long-term (at
least five years) debt offering of the Company), cash, cash items, and
government securities. Second, not more than 25% of the Company's total assets
may be represented by securities other than those in the 75% asset class. Third,
of the investments included in the 25% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the value of the
Company's total assets and the Company may not own more than 10% of any one
issuer's outstanding voting securities.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT if it fails to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. The Company intends to maintain adequate records of the value of
its assets to ensure compliance with the asset tests, and to take such action
within 30 days after the close of any quarter as may be required to cure any
noncompliance but no assurance can be given that such asset tests will be met.
Annual Distribution Requirements. In order to be treated as a REIT, the
Company is required to distribute dividends (other than capital gain dividends)
to its stockholders in an amount at least equal to (A) the sum of (i) 95% of the
Company's REIT Taxable Income (computed without regard to the dividends paid
deduction and the Company's net capital gain) plus (ii) 95% of the net income,
if any, from foreclosure property in excess of the special tax on income from
foreclosure property, minus (B) the sum of certain items of noncash income.
Such distributions must be paid in the taxable year to which they relate or in
the following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend payment
after such declaration. To the extent that the Company does not distribute (or
is not treated as having distributed) all of its net capital gain or distributes
(or is treated as having distributed) at least 95%, but less than 100% of its
REIT Taxable Income, as adjusted, it will be subject to tax thereon at regular
ordinary and capital gains corporate tax rates. Furthermore, if the Company
should fail to distribute during each calendar year at least the sum of (i) 85%
of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net
income for such year, and (iii) any undistributed taxable income from prior
periods, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. The Company intends
to make timely distributions sufficient to satisfy the annual distribution
requirement.
REIT Taxable Income is the taxable income of a REIT, which generally is
computed in the same fashion as the taxable income of any corporation, except
that (i) certain deductions are not available, such as the deduction for
dividends received, (ii) it may deduct dividends paid (or deemed paid) during
the taxable year, (iii) net capital gains and losses are excluded, and (iv)
certain other adjustments are made.
It is possible that, from time to time, the Company may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses and (ii) the inclusion of such income and deduction of
such expenses in calculating the taxable income of the Company. In the event
that such an insufficiency or such timing differences occur, in order to meet
the 95% distribution requirement the Company may find it necessary to arrange
for borrowings or to pay dividends in the form of taxable stock dividends if it
is practicable to do so.
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Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be able
to avoid being taxed on amounts distributed as deficiency dividends; however,
the Company will be required to pay interest based upon the amount of any
deduction taken for deficiency dividends.
FAILURE TO QUALIFY AS A REIT
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions described above do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to stockholders in any year in
which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income, and subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends-received deduction.
Unless entitled to relief under specific statutory provisions, the Company will
also be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost, and will not be
permitted to requalify unless it distributes any earnings and profits
attributable to the period when it failed to qualify. In addition, it would be
subject to tax on any built-in gains on property held during the period during
which it did not qualify if it sold such property within 10 years of
requalification. It is not possible to state whether in all circumstances the
Company would be entitled to such statutory relief.
TAX TREATMENT OF AUTOMATIC EXCHANGE
Upon the occurrence of the Automatic Exchange, the outstanding Series A
Preferred Shares would be automatically exchanged on a one-for-one basis for
Bank Preferred Shares. See "Description of Series A Preferred Shares--Automatic
Exchange". The Automatic Exchange would be a taxable exchange with respect to
which each holder of the Series A Preferred Shares who would have a gain or
loss, as the case may be, measured by the difference between the basis of such
holder in the Series A Preferred Shares and the fair market value of the Bank
Preferred Shares received in the Automatic Exchange. Because the Bank Preferred
Shares would not be listed on Nasdaq or on any exchange, each individual holder
would be required to determine the fair market value of Bank Preferred Shares
received to determine the tax effect of the Automatic Exchange. Assuming that
such holder's Series A Preferred Shares were held as capital assets for more
than one year prior to the Automatic Exchange, any gain or loss would be long-
term capital gain or loss. Long-term capital losses are deductible, subject to
certain limitations. The basis of the holder in the Bank Preferred Shares will
be the holder's fair market value at the time of the Automatic Exchange.
TAXATION OF UNITED STATES STOCKHOLDERS
As used herein, the term "United States Stockholder" means a holder of
Series A Preferred Shares that is for United States federal income tax purposes
(i) a citizen or resident of the United States, (ii) a corporation, partnership,
or other entity created or organized in or under the laws of the United States
or of any political subdivision thereof, or (iii) an estate or trust the income
of which is subject to United States federal income taxation regardless of its
source.
Distributions Generally. As long as the Company qualifies as a REIT,
distributions to a United States Stockholder up to the amount of the Company's
current or accumulated earnings and profits (and not designated as capital gains
dividends) will be taken into account as ordinary income and will not be
eligible for the dividends-received deduction for corporations. Distributions
that are designated by the Company as capital gain dividends will be treated as
long-term capital gain (to the extent they do not exceed the Company's actual
net capital gain) for the taxable year without regard to the period for which
the stockholder has held its stock. However, corporate stockholders may be
required to treat up to 20% of certain capital gains dividends as ordinary
income, pursuant to Section 291(d) of the Code. A distribution in excess of
current or accumulated earnings and profits will first be treated as a tax-free
return of capital, reducing the tax basis in the United States Stockholder's
Series A Preferred Shares, and a distribution in excess of the United States
Stockholder's tax basis in its Series A Preferred Shares will be taxable gain
realized from the sale of such shares. Dividends declared by the Company in
October, November or December of any year payable to a stockholder of record on
a specified date in any such month shall be treated as both paid by the Company
and received
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by the stockholder on December 31 of such year, provided that the dividend is
actually paid by the Company during January of the following calendar year.
Stockholders may not claim the benefit of any tax losses of the Company on their
own income tax returns.
The Company will be treated as having sufficient earnings and profits to
treat as a dividend any distribution by the Company up to the amount required to
be distributed in order to avoid imposition of the 4% excise tax discussed under
"--Taxation of the Company--General" and "--Taxation of the Company--Annual
Distribution Requirements" above. As a result, stockholders may be required to
treat as taxable dividends certain distributions that would otherwise result in
tax-free returns of capital. Moreover, any "deficiency dividend" will be treated
as a "dividend" (an ordinary dividend or a capital gain dividend, as the case
may be), regardless of the Company's earnings and profits.
Losses incurred on the sale or exchange of Series A Preferred Shares held
for less than six months will be deemed a long-term capital loss to the extent
of any capital gain dividends received by the selling stockholder with respect
to such stock. In the event the Company elects to retain capital gains, the
Company may designate a portion of its undistributed gains. In that event the
Company will be required to pay a tax thereon. The holders of the Series A
Preferred Shares would be required to include such amounts in income but will be
entitled to a credit for a corresponding share of the capital gain paid by the
Company.
Treatment of Tax-Exempt Stockholders. Distributions from the Company to a
tax-exempt employee's pension trust or other domestic tax-exempt stockholder
will generally not constitute "unrelated business taxable income" unless the
stockholder has borrowed to acquire or carry its shares of the Company. A tax-
exempt employee's pension trust that holds more than 10% of the shares of the
capital stock of the Company may under certain circumstances be required to
treat a certain percentage of dividends as unrelated business taxable income if
the Company is "predominantly held" by qualified trusts. Under this provision, a
REIT is predominantely held by a qualified trust if: (i) at least one qualified
trust holds at least 25% of the interests of the REIT; or (ii) one or more
qualified trusts each own at least 10% of the interests in the REIT and such
qualified trusts, in the aggregate, own at least 50% of the interests of the
REIT. For these purposes, a qualified trust is any trust defined under Section
401(a) of the Code and exempt from tax under Section 501(a) of the Code.
TAXATION OF FOREIGN STOCKHOLDERS
The rules governing United States income taxation of non-resident alien
individuals, foreign corporations, foreign partnerships, and foreign trusts and
estates holding Series A Preferred Shares (collectively, "Foreign Stockholders")
are complex, and no attempt will be made herein to provide more than a summary
of such rules. A Foreign Stockholder should consult with its own tax advisor to
determine the effect of federal, state, and local and country of tax residence
income tax laws on an investment in the Company, including any reporting
requirements.
In general, a Foreign Stockholder will be subject to regular United States
income tax to the same extent as a United States Stockholder with respect to
income or gain derived from its investment in the Company if under all facts and
circumstances such income or gain is "effectively connected" with such
stockholder's conduct of a trade or business in the United States. See "--
Taxation of United States Stockholders." A corporate Foreign Stockholder that
receives income that is effectively connected with a United States trade or
business may also be subject to the branch profits tax under Section 884 of the
Code, which is payable in addition to the regular United States corporate income
tax. The following discussion will apply to a Foreign Stockholder whose income
or gain derived from investment in the Company is not so effectively connected
in light of the facts and circumstances.
The Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA")
significantly affects the federal income tax treatment of the sale or exchange
of shares in REITs held by a Foreign Stockholder. Under FIRPTA, gain or loss
realized on the sale or exchange of a "United States real property interest"
("USRPI") by a foreign taxpayer is treated by statute as effectively connected
with a U.S. trade or business as a matter of law, without regard to the
particular facts and circumstances. Shares of a corporation generally are
treated as a USRPI only if the fair market value of USRPIs owned by the
corporation equals or exceeds 50% of the fair market value of its total assets.
If at no time within the five years preceding the sale or exchange of shares in
the Company the shares constituted a USRPI, gain or loss on the sale or exchange
will not be treated as effectively connected with a U.S. trade or business by
reason of FIRPTA. While ownership of real property within the U.S. (including
ownership of interests in certain entities) is always a USRPI, a
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loan secured by a mortgage on U.S. real property constitutes a USRPI only if the
amounts payable by the borrower are contingent on the income or receipts of the
borrower or the property or otherwise based on the property. Because such
contingent interest is not likely to be present in the residential mortgage
loans to be owned by the Company that are expected to represent approximately
90% of the assets of the Company (although such interest is fairly common in
commercial loans) the Company believes it is unlikely that its shares will be
USRPIs or that it will derive significant gain from the sale or exchange of
USRPIs, although whether its shares are a USRPI or it derives income from USRPIs
will depend upon the facts as they ultimately develop. A distribution of cash to
a Foreign Stockholder that is not attributable to gain from sales or exchanges
by the Company of USRPIs and not designated by the Company as a capital gain
dividend is not subject to FIRPTA but generally will be subject to the
withholding of United States federal income tax at a rate of 30%, unless (i) a
lower treaty rate applies or (ii) the Foreign Stockholder files an IRS Form 4224
with the withholding agent certifying that the investment to which the
distribution relates is effectively connected to a United States trade or
business of such Foreign Stockholder. A Foreign Stockholder who receives a
distribution that has been subject to such withholding tax may file a claim for
refund to the extent the withholding has been imposed on a portion of such
distributions representing amounts in excess of current and accumulated earnings
and profits. Under FIRPTA, distributions of proceeds attributable to gain from
the Company's sale or exchange of a USRPI are subject to income tax at the
normal capital gains rates applicable to United States stockholders (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of a nonresident alien individual). Also, these distributions may be
subject to a 30% branch profits tax in the hands of a corporate Foreign
Stockholder not entitled to a treaty exemption or reduced rate of tax. Treasury
Regulations require the withholding of 35% of any distribution that could be
designated by the Company as a capital gain dividend. This amount is creditable
against the Foreign Stockholder's tax liability. It should be noted that the 35%
withholding tax rate on capital gain dividends is higher than the 28% maximum
rate on capital gains of individuals. Capital gain dividends not attributable to
gain on the sale or exchange of USRPIs are not subject to United States taxation
if there is no requirement of withholding.
If the shares of the Company do constitute a USRPI (or did so constitute
within the previous five years), gain or loss on the sale or exchange of the
shares will be treated as effectively connected with the conduct of a U.S. trade
or business unless one or more special rules apply to preclude U.S. taxation.
If the Company is a "domestically-controlled REIT," a sale of Series A
Preferred Shares by a Foreign Stockholder generally will not be subject to
United States taxation. A domestically controlled REIT is a REIT in which, at
all times during a specified testing period, less than 50% in value of its
shares is held directly or indirectly, under Code attribution rules, by Foreign
Stockholders. Because the Series A Preferred Shares will be publicly traded, no
assurance can be given that the Company will constitute a domestically-
controlled REIT or that it will be possible to ascertain whether or not it is
domestically-controlled.
If the Company is not a domestically-controlled REIT (and would otherwise
be treated as a United States holding company), a sale of Series A Preferred
Shares would be subject to tax under FIRPTA as a sale of a USRPI and gain or
loss would be effectively connected with a United States trade or business if
either (i) the Series A Preferred Shares were not "regularly traded" (as defined
by applicable Treasury Regulations) on an established securities market (e.g.,
the Nasdaq National Market System, on which the Series A Preferred Shares will
be listed) during the quarter in which the Series A Preferred Shares were sold
or (ii) even if the Series A Preferred Shares were "regularly traded", the
selling stockholder held, directly or indirectly, more than 5% of the Series A
Preferred Shares during the five-year period ending on the date of disposition.
The applicable Treasury Regulations that define "regularly traded" for this
purpose may be interpreted to provide that a security will not be "regularly
traded" for any calendar quarter during which 100 or fewer persons (treating
related persons as one person) in the aggregate own 50% or more of such security
or the quarterly trading volume is less than 7.5% of the average number of the
issued and outstanding shares of such security (2.5% if there are 2,500 or more
stockholders of record). In the event that the Series A Preferred Shares were
not "regularly traded" and the Company did not at that time constitute a
domestically-controlled REIT, a Foreign Stockholder (without regard to its
ownership percentage of Series A Preferred Shares) must treat as effectively
connected with a United States trade or business any gain or loss on any sale or
other disposition of Series A Preferred Shares that occurs within a calendar
quarter during which the Series A Preferred Shares were not "regularly traded"
and the shares were a USRPI.
If the gain on the sale of the Company's Series A Preferred Shares were
subject to taxation under FIRPTA, the Foreign Stockholder would be subject to
the same treatment as a United States Stockholder with respect to such gain
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of a nonresident alien individual). Notwithstanding the
foregoing, capital gain from sale of shares of a REIT not subject to FIRPTA will
nonetheless be taxable to a Foreign Stockholder who is an individual (under
rules generally applicable to United States
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Stockholders) if such person is in the United States for 183 days or more during
the taxable year of disposition and certain other conditions apply. In any
event, a purchaser of Series A Preferred Shares from a Foreign Stockholder will
not be required under FIRPTA to withhold on the purchase price if the purchased
Series A Preferred Shares are "regularly traded" on an established securities
market or if the Company is a domestically-controlled REIT. Otherwise, under
FIRPTA the purchaser of Series A Preferred Shares may be required to withhold
10% of the purchase price and remit such amount to the IRS.
Shares of the Company owned by a nonresident alien decedent are subject to
United States federal estate tax (which is imposed at rates up to 55%) unless an
estate tax treaty binding upon the United States provides otherwise.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company will report to its stockholders and the IRS the amount of
dividends paid or deemed paid during each calendar year, and the amount of tax
withheld, if any.
United States Stockholders. Under certain circumstances, a United States
Stockholder of Series A Preferred Shares may be subject to backup withholding at
a rate of 31% on payments made with respect to, or cash proceeds of a sale or
exchange of, Series A Preferred Shares. Backup withholding will apply only if
the holder (i) fails to furnish the person required to withhold with its
Taxpayer Identification Number ("TIN") which, for an individual, would be his or
her Social Security Number, (ii) furnishes an incorrect TIN, (iii) is notified
by the IRS that it has failed properly to report payments of interest and
dividends, or (iv) under certain circumstances, fails to certify, under penalty
of perjury, that it has furnished a correct TIN and has not been notified by the
IRS that it is subject to backup withholding for failure to report interest and
dividend payments. Backup withholding will not apply with respect to payments
made to certain exempt recipients, such as corporations and tax-exempt
organizations. A United States Stockholder should consult with a tax advisor
regarding qualification for exemption from backup withholding and the procedure
for obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a
United States Stockholder will be allowed as a credit against such United States
Stockholder's United States federal income tax liability and may entitle such
United States Stockholder to a refund, provided that the required information is
furnished to the IRS.
Foreign Stockholders. Additional issues may arise pertaining to information
reporting and backup withholding with respect to Foreign Stockholders, and a
Foreign Stockholder should consult with a tax advisor with respect to any such
information reporting and backup withholding requirements. Backup withholding
with respect to a Foreign Stockholder is not an additional tax. Rather, the
amount of any backup withholding with respect to a payment to a Foreign
Stockholder will be allowed as a credit against any United States federal income
tax liability of such Foreign Stockholder. If withholding results in an
overpayment of taxes, a refund may be obtained provided that the required
information is furnished to the IRS.
OTHER TAX CONSEQUENCES
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Company.
ERISA CONSIDERATIONS
GENERAL
In evaluating the purchase of Series A Preferred Shares, a fiduciary of a
qualified profit-sharing, pension or stock bonus plan, including a plan for
self-employed individuals and their employees or any other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), a collective investment fund or separate account in which such plans
invest and any other investor using assets that are treated as the assets of an
employee benefit plan subject to ERISA (each, a "Plan" and collectively,
"Plans") should consider (a) whether the ownership of Series A Preferred Shares
is in accordance with the documents and instruments governing such Plan; (b)
whether the ownership of Series A Preferred Shares is solely in the interest of
Plan participants and beneficiaries and
48
<PAGE>
otherwise consistent with the fiduciary's responsibilities and in compliance
with the requirements of Part 4 of Title I of ERISA, including, in particular,
the diversification, prudence and liquidity requirements of Section 404 of ERISA
and the prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code; (c) whether the Company's assets are treated as assets of the
Plan; and (d) the need to value the assets of the Plan annually. In addition,
the fiduciary of an individual retirement arrangement under Section 408 of the
Code (an "IRA") considering the purchase of Series A Preferred Shares should
consider whether the ownership of Series A Preferred Shares would result in a
non-exempt prohibited transaction under Section 4975 of the Code.
The fiduciary investment considerations summarized below provide a general
discussion that does not include all of the fiduciary investment considerations
relevant to Plans and, where indicated, IRAs. This summary is based on the
current provisions of ERISA and the Code and regulations and rulings thereunder,
and may be changed (perhaps adversely and with retroactive effect) by future
legislative, administrative or judicial actions. PLANS AND IRAS THAT ARE
PROSPECTIVE PURCHASERS OF SERIES A PREFERRED SHARES SHOULD CONSULT WITH AND RELY
UPON THEIR OWN ADVISORS IN EVALUATING THESE MATTERS IN LIGHT OF THEIR OWN
PARTICULAR CIRCUMSTANCES.
PLAN ASSET REGULATION
Under Department of Labor regulations governing what constitutes the assets
of a Plan or IRA ("Plan Assets") for purposes of ERISA and the related
prohibited transaction provisions of the Code (the "Plan Asset Regulation", 29
C.F.R. Sec.2510.3-101), when a Plan or IRA makes an equity investment in another
entity, the underlying assets of the entity will not be considered Plan Assets
if the equity interest is a "publicly-offered security".
For purposes of the Plan Asset Regulation, a "publicly-offered security" is
a security that is (a) "freely transferable", (b) part of a class of securities
that is "widely held," and (c) sold to the Plan or IRA as part of an offering of
securities to the public pursuant to an effective registration statement under
the Securities Act and part of a class of securities that is registered under
the Exchange Act within 120 days (or such later time as may be allowed by the
Commission) after the end of the fiscal year of the issuer during which the
offering of such securities to the public occurred. The Series A Preferred
Shares will be registered under the Securities Act of 1933, as amended (the
"Securities Act"), and the Exchange Act within the time periods specified in the
Plan Asset Regulation.
The Plan Asset Regulation provides that a security is "widely held" only if
it is a part of the class of securities that is owned by 100 or more investors
independent of the issuer and of one another. A security will not fail to be
"widely held" because the number of independent investors falls below 100
subsequent to the initial offering as a result of events beyond the control of
the issuer. The Company expects the Series A Preferred Shares to be "widely
held" upon the completion of the Offering.
The Plan Asset Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The Plan Asset Regulation further provides
that when a security is part of an offering in which the minimum investment is
$10,000 or less, as is the case with the Offering, certain restrictions
ordinarily will not, alone or in combination, affect the finding that such
securities are "freely transferable". The Company believes that any restrictions
imposed on the transfer of the Series A Preferred Shares are limited to the
restrictions on transfer generally permitted under the Plan Asset Regulation and
are not likely to result in the failure of the Series A Preferred Shares to be
"freely transferable".
A Plan should not acquire or hold the Series A Preferred Shares if the
Company's underlying assets will be treated as the assets of such Plan. However,
the Company believes that under the Plan Asset Regulation the Series A Preferred
Shares should be treated as "publicly-offered securities" and, accordingly, the
underlying assets of the Company should not be considered to be assets of any
Plan or IRA investing in the Series A Preferred Shares.
EFFECT OF PLAN ASSET STATUS
ERISA generally requires that the assets of a Plan be held in trust and
that the trustee, or an investment manager (within the meaning of Section 3(38)
of ERISA), have exclusive authority and discretion to manage and control the
assets of the Plan. As discussed above, the assets of the Company under current
law do not appear likely to be assets of the Plans receiving Series A Preferred
Shares as a result of the Offering. However, if the assets of the Company were
deemed to be assets of the Plans under ERISA, certain directors and officers of
the Company might be deemed fiduciaries with respect to the Plans that invest in
the Company and the prudence and other fiduciary standards set forth in ERISA
would apply to them and to all investments.
49
<PAGE>
If the assets of the Company were deemed to be Plan Assets, transactions
between the Company and parties in interest or disqualified persons with respect
to the investing Plan or IRA could be prohibited transactions unless a statutory
or administrative exemption is available. In addition, investment authority
would also have been improperly delegated to such fiduciaries, and, under
certain circumstances, Plan fiduciaries who make the decision to invest in the
Series A Preferred Shares could be liable as co-fiduciaries for actions taken by
the Company that do not conform to the ERISA standards for investments under
Part 4 of Title I of ERISA.
PROHIBITED TRANSACTIONS
Section 406 of ERISA provides that Plan fiduciaries are prohibited from
causing the Plan to engage in certain types of transactions. Section 406(a)
prohibits a fiduciary from knowingly causing a Plan to engage directly or
indirectly in, among other things: (a) a sale or exchange, or leasing, of
property with a party in interest; (b) a loan or other extension of credit with
a party in interest; (c) a transaction involving the furnishing of goods,
services or facilities with a party in interest; or (d) a transaction involving
the transfer of Plan assets to, or use of Plan assets by or for the benefit of,
a party in interest. Additionally, Section 406 prohibits a Plan fiduciary from
dealing with Plan assets in its own interest or for its own account, from acting
in any capacity in any transaction involving the Plan on behalf of a party (or
representing a party) whose interests are adverse to the interests of the Plan,
and from receiving any consideration for its own account from any party dealing
with the Plan in connection with a transaction involving Plan assets. Similar
provisions in Section 4975 of the Code apply to transactions between
disqualified persons and Plans and IRAs and result in the imposition of excise
taxes on such disqualified persons.
If a prohibited transaction has occurred, Plan fiduciaries involved in the
transaction could be required to (a) undo the transaction, (b) restore to the
Plan any profit realized on the transaction and (c) make good to the Plan any
loss suffered by it as a result of the transaction. In addition, parties in
interest or disqualified persons would be required to pay excise taxes or
penalties.
If the investment constituted a prohibited transaction under Section
408(e)(2) of the Code by reason of the Company engaging in a prohibited
transaction with the individual who established an IRA or his beneficiary, the
IRA would lose its tax-exempt status. The other penalties for prohibited
transactions would not apply .
Thus, the acquisition of the Series A Preferred Shares by a Plan could
result in a prohibited transaction if an Underwriter, the Company, the Bank, or
any of their affiliates is a party in interest or disqualified person with
respect to the Plan. Any such prohibited transaction could be treated as exempt
under ERISA and the Code if the Series A Preferred Shares were acquired pursuant
to and in accordance with one or more "class exemptions" issued by the
Department of Labor, such as Prohibited Transaction Class Exemption ("PTCE") 75-
1 (an exemption for certain transactions involving employee benefit plans and
broker-dealers (such as the Underwriters), reporting dealers, and banks), PTCE
84-14 (an exemption for certain transactions determined by an independent
qualified professional asset manager), PTCE 90-1 (an exemption for certain
transactions involving insurance company pooled separate accounts), PTCE 91-38
(an exemption for certain transactions involving bank collective investment
funds), PTCE 95-60 (an exemption for certain transactions involving an insurance
company's general account) and PTCE 96-23 (an exemption for certain transactions
determined by a qualifying in-house asset manager).
A Plan should not acquire the Series A Preferred Shares pursuant to the
Offering if such acquisition will constitute a non-exempt prohibited
transaction.
UNRELATED BUSINESS TAXABLE INCOME
Plan fiduciaries should also consider the consequences of holding more than
10% of the Series A Preferred Shares if the Company is "predominantly held" by
qualified trusts. See "Federal Income Tax Considerations--Taxation of United
States Stockholders--Treatment of Tax-Exempt Stockholders".
50
<PAGE>
CERTAIN INFORMATION REGARDING THE BANK
The following is a summary of certain information regarding the Bank. As an
integral part of this Prospectus, a copy of the Bank's offering circular filed
with the OTS relating to the Bank Preferred Shares to be issued upon the
Exchange Event (the "Offering Circular"), including exhibits, is attached hereto
as Annex I and is incorporated by reference herein. All material information
relating to the Bank, including information relating to the Bank's financial
position, can be found in these documents.
OPERATIONS OF THE BANK
Flagstar Bank, FSB, a federally chartered stock savings bank, is the
largest independent Michigan-based savings institution based on asset size as of
September 30, 1997, according to SNL Securities. The Bank is also one of the
largest originators of conforming single-family mortgage loans in the United
States according to Inside Mortgage Finance. The Bank is engaged in the business
of providing a full range of retail banking services in southern and western
Michigan and in originating, purchasing and servicing residential mortgage loans
on a nationwide basis. For 1996, the Bank ranked fourth in the United States
among thrifts in mortgage loan originations and sixteenth in total mortgage loan
production according to SMR Research Corp. All of the outstanding stock of the
Bank is owned by Flagstar Bancorp, Inc. ("Flagstar"), a Michigan corporation
whose common stock is listed for trading on the Nasdaq Stock Market ("Nasdaq")
under the symbol "FLGS."
As of September 30, 1997, the Bank had consolidated total assets of $2.0
billion, net loans of $1.8 billion, total deposits of $1.0 billion and total
stockholder's equity of $121.1 million. For the nine months ended September 30,
1997, the Bank's net earnings were $15.8 million and its return on average
assets and return on average equity (as annualized) were 1.34% and 21.53%,
respectively. At December 31, 1996, the Bank had consolidated total assets of
$1.3 billion, net loans of $1.1 billion, total deposits of $624.7 million and
total stockholder's equity of $77.9 million. For the year ended December 31,
1996, the Bank's net earnings were $17.1 million and its return on average
assets and return on average equity were 1.54% and 24.82%, respectively ($19.3
million, 1.73% and 27.97%, respectively, excluding the special deposit insurance
assessment imposed on September 30, 1996 on all depository institutions insured
by the Savings Association Insurance Fund (the ''SAIF'')).
The Bank's operations are segregated into two segments, mortgage banking
and retail banking, with most of the Bank's revenue (net interest income and
non-interest income) and earnings before income taxes attributable to the
mortgage banking segment. The Bank believes that its retail banking business
provides it with a strategic advantage because it affords the Bank access to
funding sources for its mortgage origination business which would not otherwise
be available. These additional funding sources include low cost retail deposits,
FHLB advances and escrowed funds. The Bank benefits as compared to mortgage
originators with no retail banking operations because it has access to a lower
cost of funds and is therefore able to generate greater net interest income. See
''The Bank'' and ''Business.''
RETAIL BANKING. The Bank (which was formerly known as First Security
Savings Bank, FSB) provides a full range of retail banking services to consumers
and small businesses in southern and western Michigan. The Bank operates a
network of 19 bank branches (including four opened in 1997) located in southern
and western Michigan counties. Beginning with the acquisition of Security
Savings Bank, F.S.B. (''Security Savings'') and its seven bank branches in 1994,
the Bank has focused on expanding its branch network in these markets in order
to increase its access to retail deposit funding sources. The Bank believes that
this also provides a greater opportunity for cross-marketing of consumer banking
services to the Bank's mortgage customers in Michigan and for taking advantage
of opportunities that the Bank believes exist for community banks in Michigan as
a result of the substantial consolidation that has occurred in the banking
industry. See ''Business.''
MORTGAGE BANKING. The Bank's mortgage banking operations, which have
historically generated substantially all of the Bank's earnings, originate
residential mortgages through 33 retail loan origination offices located in
Michigan (21), California (9), Florida (2) and Ohio (1). In addition, the Bank
originates mortgage loans on a wholesale basis through a network of
approximately 1,800 independent mortgage brokers nationwide (who originate such
loans using the Bank's underwriting systems and standards and close such loans
using funds advanced by the Bank). This network is serviced by sixty account
executives, who are organized among 10 regional wholesale/correspondent lending
offices and five wholesale/correspondent satellite offices. The Bank also
purchases mortgage loans on a regular basis from independent mortgage lenders,
commercial banks, savings and loan
51
<PAGE>
associations and other financial institutions with whom the Bank has established
a correspondent relationship. See ''Business.''
For the nine months ended September 30, 1997, the Bank produced
approximately $4.8 billion in mortgage loans through wholesale and correspondent
networks and $529.9 million through the Bank's retail network. During the years
ended December 31, 1996 and 1995, the Bank's mortgage loan production totaled
$6.8 billion and $5.2 billion, respectively. Of these amounts, approximately
$6.1 billion was produced during the year ended December 31, 1996 through the
Bank's wholesale and correspondent loan production network and $685.3 million
was produced through the Bank's retail network ($4.6 billion and $632.7 million,
respectively, during 1995).
The Bank sells a substantial portion of its loan production into the
secondary market, principally by securitizing pools of loans through programs
offered by government-sponsored enterprises such as the Federal National
Mortgage Association (''FNMA'' or ''Fannie Mae'') and the Federal Home Loan
Mortgage Corporation (''FHLMC'' or ''Freddie Mac'') and through sales to private
investors. In addition, the Bank originates and sells loans conforming to the
underwriting criteria of the Federal Housing Authority (''FHA'') and the
Department of Veterans Affairs (''VA''). Generally, the Bank retains the
servicing rights to many of the loans that it sells, but also realizes
additional income by selling servicing rights on an individual and a bulk basis
to other mortgage Banks. At September 30, 1997 and at December 31, 1996 and
1995, the Bank's loan servicing portfolio totaled $4.1 billion, $4.8 billion and
$6.8 billion, respectively (net of loans subserviced for others), substantially
all of which related to conventional loans.
The Bank makes extensive use of advanced technology and automated processes
in order to enhance the competitiveness and reduce the cost of its mortgage
origination operations. The Bank was one of the first mortgage lenders to
utilize video conferencing for loan production. In 1996, the Bank began full-
scale operational use of automated underwriting system technologies, including
Fannie Mae's Desktop Underwriter/TM/ and Freddie Mac's Loan Prospector/TM/ (of
which the Bank is currently one of the largest users), and has combined the two
technologies into its LIVE/R/ video conferencing and underwriting system. The
Bank believes that the LIVE/R/ system, which permits a loan underwriter to
interview and complete a loan application and approve a loan for a prospective
borrower in one session during a live video conference, provides it with a
significant competitive edge in writing mortgage loans. During 1997,
substantially all of its mortgage loan production has been underwritten using
automated systems, which the Bank believes reduces overhead, enhances customer
service and facilitates conformity of the Bank's loan production with FHLMC and
FNMA underwriting guidelines.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial and other data of the Bank herein, as
of and for the nine months ended September 30, 1997 and 1996 and each of the
five years in the period ended December 31, 1996, have been derived from the
Consolidated Financial Statements of the Bank and the unaudited financial
statements of the Bank contained in Annex I. In the opinion of management all
adjustments (which consist of normal recurring accruals) necessary for a fair
presentation of the results of operations for such periods have been included.
The results of operations for the nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the entire year.
<TABLE>
<CAPTION>
At or for the Nine Months
Ended September 30,
-------------------------- At or for the Years Ended December 31,
----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------------ ------------ ----------- -------- --------- -------- --------
Summary of Operations: (In thousands)
- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income................ $84,789 $ 57,679 $ 76,179 $71,304 $35,112 $29,760 $18,735
Interest expense............... 54,597 34,121 45,967 41,443 14,482 12,052 9,227
------- --------- --------- ------- ------- ------- -------
Net interest income............ 30,192 23,558 30,212 29,861 20,630 17,708 9,508
Provision for losses........... 3,730 1,140 2,604 238 290 644 380
------- --------- --------- ------- ------- ------- -------
Net interest income after
provision for losses....... 26,462 22,418 27,608 29,623 20,340 17,064 9,128
Non-interest income
Loan administration
income.................... 5,543 11,110 11,859 14,248 13,261 7,786 2,340
Net gain on loan sales........ 9,269 4,536 4,511 2,872 (1,132) 7,015 6,900
Net gain on sales of
mortgage servicing
rights ...................... 25,472 20,917 35,129 13,356 28,489 13,385 3,021
Other income................. 3,158 5,085 6,803 4,626 2,065 5,468 6,162
------- --------- --------- ------- ------- ------- -------
Total..................... 43,442 41,648 58,302 35,102 42,683 33,654 18,423
------- --------- --------- ------- ------- ------- -------
Non-interest expense
Compensation and
benefits.................. 19,303 18,443 25, 479 18,538 18,609 7,984 5,184
Other expense................. 25,730 27,809(1) 33,060(1) 21,311 18,975 13,308 7,298
------- --------- --------- ------- ------- ------- -------
Total..................... 45,033 46,252 58,539 39,849 37,584 21,292 12,482
------- --------- --------- ------- ------- ------- -------
Earnings before federal
income taxes............... 24,871 17,814 27,371 24,876 25,439 29,426 15,069
Provision for federal
income taxes............... 9,043 6,387 10,258 9,348 9,302 10,405 5,275
------- --------- --------- ------- ------- ------- -------
Net earnings................... $15,828 $11,427(1) $17,113(1) $15,528 $16,137 $19,021 $ 9,794
======= ========= ========= ======= ======= ======= =======
(continued)
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
At September 30, At December 31,
----------------- -------------------------------------------------------------
1997 1996 1995 1994 1993 1992
----------------- ----------- ------------ ---------- ---------- ----------
Summary of Financial Condition: (In thousands)
- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total assets................................. $2,033,199 $1,296,810 $1,044,851 $722,469 $467,629 $304,758
Loans receivable:
Mortgage loans available for sale.......... 1,363,822 840,767 620,455 205,480 389,073 218,266
Loans held for investment.................. 444,552 273,579 305,590 429,800 26,906 21,637
Less: Allowance for losses................ (4,950) (3,500) (2,102) (1,871) (901) (550)
---------- ---------- ---------- -------- -------- --------
Total loans, net...................... 1,803,424 1,110,846 923,943 633,409 415,078 239,353
Mortgage servicing rights.................... 51,713 30,064 27,957 18,179 17,563 11,108
Deposits..................................... 1,012,121 624,732 529,218 308,497 190,761 181,171
FHLB advances................................ 718,878 389,801 191,156 200,750 55,000 --
Stockholder's equity......................... 121,055 77,899 61,003 47,925 35,114 16,767
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
At or for the Nine Months Ended
September 30, At or for the Years Ended December 31,
--------------------------------- -----------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------------- ---------------- ----------- ------------ ----------- ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Performance Ratios(2):
- ---------------------
Return on average
assets...................... 1.34% 1.38% 1.54% 1.64% 3.19% 4.39% 3.72%
Return on average
equity...................... 21.53% 22.61% 24.82% 29.52% 35.79% 69.56% 84.78%
Interest rate spread......... 2.27% 2.13% 2.13% 2.36% 3.37% 3.39% 2.04%
Net interest margin.......... 2.83% 3.21% 3.07% 3.46% 4.63% 4.55% 3.92%
Ratio of average interest
earning assets to
average interest bearing
liabilities................ 111% 123% 120% 123% 139% 137% 158%
Ratio of non-interest
expense to average assets... 3.80% 5.58% (3) 5.25% (3) 4.20% 7.43% 4.92% 4.71%
Efficiency ratio (4)......... 59.8% 69.5% 64.7% 59.3% 58.3% 41.5% 44.7%
Dividend payout ratio........ -- 8.75% 5.84% 15.78% 19.83% 4.21% 7.66%
Asset Quality Data:
- -------------------
Net charge-offs to average
loans outstanding(2)........ 0.22% 0.03% 0.13% 0.00% 0.08% 0.08% 0.09%
Non-performing
assets to
total assets at end
of period.................. 3.04% 3.37% 3.16% 1.25% 0.42% 0.60% 0.94%
Non-performing loans
to total loans at end
of period.................. 2.44% 3.50% 2.75% 1.15% 0.27% 0.37% 0.85%
Allowance for losses
to total
loans at end of
period..................... 0.27% 0.33% 0.31% 0.23% 0.29% 0.22% 0.23%
Allowance for losses
to non-performing
loans at end
of period................... 11.23% 9.56% 11.43% 19.67% 107.59% 58.17% 26.84%
Capital Ratios:
- --------------
Tangible Capital............. 5.73% 6.22% 5.58% 5.19% 5.54% 7.41% 5.35%
Core Capital................. 5.95% 6.75% 6.01% 5.84% 6.63% 7.41% 5.35%
Total Risk-based
Capital..................... 11.25% 11.96% 10.91% 10.12% 12.08% 13.84% 13.40%
Average
equity-to-average
assets..................... 6.20% 6.09% 6.19% 5.54% 8.91% 6.32% 5.14%
Mortgage Origination
and
Servicing Data:
--------------
Mortgage loans
originated or
purchased................... $5,287,711 $5,283,843 $6,791,665 $5,195,605 $3,720,173 $6,220,415 $2,984,076
Mortgage loans sold.......... $4,518,451 $5,285,538 $6,581,897 $4,760,806 $3,551,319 $6,034,828 $2,888,564
Mortgage loans
serviced for
others(5)................... $4,143,352 $6,946,080 $4,801,581 $6,788,530 $5,691,421 $6,198,311 $3,091,399
Capitalized value of
mortgage
servicing rights (6)........ 1.25% 0.60% 0.63% 0.41% 0.32% 0.28% 0.36%
Other Data:
- ----------
Full-time equivalent
employees................... 1,110 1,179 1,310 1,142 869 971 584
Number of branches........... 19 15 15 13 9 1 1
Number of wholesale/
correspondent lending
centers..................... 10 10 10 9 6 5 4
(footnotes on following page)
</TABLE>
55
<PAGE>
_________________
(1) Includes the special deposit insurance assessment imposed on SAIF-insured
institutions during September 1996. The Bank's assessment was $3.4 million,
before taxes. If such assessment had not been imposed, the Bank's net
earnings would have been approximately $13.6 million for the nine months
ended September 30, 1996 and its return on average assets and return on
average equity for the period would have been 1.64% and 26.90%,
respectively. If such assessment had not been imposed, the Bank's net
earnings would have been approximately $19.3 million for the year ended
December 31, 1996 and its return on average assets and return on average
equity for the period would have been 1.73% and 27.97%, respectively.
(2) Ratios are annualized where applicable.
(3) Excluding the special SAIF assessment of $3.4 million, before taxes,
incurred during 1996, mentioned in footnote 1 above, such ratio would have
been 5.17% for the nine months ended September 30, 1996 and 4.94% for the
year ended December 31, 1996.
(4) Computed as non-interest expense (excluding amortization of core deposit
premiums) divided by the sum of net interest income and non-interest income.
Excluding the special SAIF assessment of $3.4 million, before taxes,
incurred during 1996, mentioned in footnote 1 above, such ratio would have
been 64.3% for the nine months ended September 30, 1996 and 60.8% for the
year ended December 31, 1996.
(5) Amount excludes loans being subserviced for others, which is servicing of
loans subsequent to the sale of the related mortgage servicing rights but
prior to their delivery, of $2.0 billion, $2.1 billion, $3.6 billion and
$536.3 million at September 30, 1997 and 1996 and December 31, 1996 and
1995, respectively. There was no subservicing in prior years.
(6) Reflects percentage of book value of mortgage servicing rights to loans
serviced for others (excluding subservicing).
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated
______, 1998 (the "Underwriting Agreement") among the Company, the Bank and the
underwriters named below (the "Underwriters"), the Company has agreed that the
Company will sell to each of the Underwriters, and each of such Underwriters for
which Roney & Co., L.L.C. and McDonald & Company Securities, Inc. are acting as
representatives (the "Representatives") has severally agreed to purchase from
the Company, the respective number of Series A Preferred Shares set forth
opposite its name below:
Number of Shares of Series A
Underwriter Preferred Shares
----------- ----------------
Roney & Co., L.L.C.
McDonald & Company Securities, Inc.
---------
Total 2,000,000
=========
The Underwriting Agreement provides that the obligations of the
Representatives to pay for and accept delivery of the shares are subject to the
approval of certain legal matters by counsel and to certain other conditions.
Under the terms and conditions of the Underwriting Agreement, the Underwriters
are committed to purchase and pay for all the Series A Preferred Shares offered
hereby, if any are purchased.
If the Underwriting Agreement is terminated, except in certain limited
cases, the Underwriting Agreement provides that the Company will reimburse the
Underwriters for all accountable out-of-pocket expenses incurred by them in
connection with the proposed purchase and sale of the Series A Preferred Shares
up to a maximum of $100,000. Upon the purchase by the Underwriters of at least
2,000,000 shares, the Company will not reimburse the Underwriters for any
out-of-pocket expenses.
The Company and the Underwriters have agreed that the Underwriters will
purchase the 2,000,000 Series A Preferred Shares offered hereunder at a price to
the public of $25.00 per share less underwriting discounts and commissions of
$___ per share. The underwriters propose to offer the Series A Preferred Shares
in part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus, and in part to certain securities dealers at
such price less a concession of $______ per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $_____ per share to
certain brokers and dealers. After the Series A Preferred Shares are released
for sale to the public, the offering price and other selling terms may from time
to time be varied by the Representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 300,000
additional Series A Preferred Shares solely to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of Series A Preferred Shares to be
purchased by each of them, as shown in the foregoing table, bears to the
2,000,000 Series A Preferred Shares offered hereby.
The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 90 days after the date
of this Prospectus, it will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company which are substantially similar to the
Series A Preferred Shares or which are convertible or exchangeable into
securities which are substantially similar to the Series A Preferred Shares
offered in connection with the Offering.
57
<PAGE>
The Representatives have informed the Company that they do not expect sales
to accounts over which the Underwriters exercise discretionary authority to
exceed five percent of the total number of Series A Preferred Shares offered by
them.
Prior to the Offering, there has been no public market for the Series A
Preferred Shares.
The Company has filed an application to list the Series A Preferred Shares,
subject to official notice of issuance, on Nasdaq. The Representatives have
advised the Company that they intend to make a market in the Series A Preferred
Shares prior to commencement of trading on Nasdaq, but are not obligated to do
so and may discontinue any such market making at any time without notice.
The Company and the Bank have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act.
Certain of the Underwriters or their affiliates have provided from time to
time, and expect to provide in the future, investment or commercial banking
services to affiliates of the Company, for which such Underwriters or their
affiliates have received or will receive customary fees and commissions.
EXPERTS
The balance sheet of Flagstar Capital Corporation as of December 16, 1997
included in this Prospectus has been so included in reliance on the report of
Grant Thornton LLP, independent certified public accountants, given on the
authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the Series A Preferred Shares offered hereby will be passed
upon for the Company by Kutak Rock, Washington, D.C. Certain tax matters
described under "Federal Income Tax Considerations" will be passed upon for the
Company by Kutak Rock. Certain legal matters will be passed upon for the
Underwriters by Honigman Miller Schwartz and Cohn, Detroit, Michigan.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement (of
which this Prospectus is a part) on Form S-11 (the "Registration Statement")
under the Securities Act, with respect to the Series A Preferred Shares offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. Statements contained in this
Prospectus as to the content of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. For
further information regarding the Company and the Series A Preferred Shares
offered hereby, reference is made to the Registration Statement and the exhibits
thereto.
The Registration Statement and the exhibits forming a part thereof filed by
the Company with the Commission can be inspected at and copies can be obtained
from the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, or at the following regional offices of the Commission:
7 World Trade Center, 13th Floor, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, 14th Floor, Suite 1400, Chicago,
Illinois 60661 and at the offices of the National Association of Securities
Dealers, 1735 K Street, N.W., Washington, D.C. 20006. Copies of such materials
can be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. Such material may
also be accessed electronically by means of the Commission's home page on the
Internet at "http://www.sec.gov."
58
<PAGE>
The Certificate of Designation establishing the rights, preferences and
limitations of the Series A Preferred Shares provides that the Company shall
maintain its status as a reporting company under the Exchange Act for so long as
any of the Series A Preferred Shares are outstanding.
GLOSSARY
"Advisor" means the Bank in its role as advisor under the Advisory
Agreement.
"Advisory Agreement" means the agreement between the Bank and the Company
pursuant to which the Bank will (i) administer the day-to-day operations of the
Company, (ii) monitor the credit quality of the Mortgage Loans held by the
Company, (iii) advise the Company with respect to the acquisition, management,
financing and disposition of the Company's Mortgage Loans and (iv) maintain
custody of the documents related to the Company's Mortgage Loans.
"ARM" or "adjustable rate mortgage" means a Mortgage Loan that features
adjustments of the underlying interest rate at predetermined times based on an
agreed margin to an established index. An ARM is usually subject to periodic
interest rate and/or payment caps and a lifetime interest rate cap.
"Articles of Incorporation" means the Amended and Restated Articles of
Incorporation of the Company.
"Automatic Exchange" means the automatic exchange on a share-for-share
basis of Series A Preferred Shares for Bank Preferred Shares upon the occurrence
of the Exchange Event.
"Bank" means Flagstar Bank, FSB, a savings bank organized under the laws of
the United States, and the parent of the Company.
"Bank Preferred Shares" means the newly issued series of preferred stock of
the Bank for which the Series A Preferred Shares will be exchanged automatically
upon the occurrence of the Exchange Event.
"Board of Directors" means the board of directors of the Company.
"By-laws" means the by-laws of the Company.
"Classified" means a loan which, for financial institution regulatory
purposes, is designated as "substandard," "doubtful" or "loss." For such
purposes, a "substandard" asset is one that is deemed inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any, because the asset has a well-defined weakness or weaknesses
that jeopardize the liquidation of the debt. An asset classified as "doubtful"
has all the weaknesses inherent in one classified "substandard," with the added
characteristic that the weaknesses make collection or liquidation in full, on
the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as "loss" are considered
uncollectible.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the United States Securities and Exchange Commission.
"Common Stock" means the common stock, par value $1.00 per share, of the
Company.
"Company" means Flagstar Capital Corporation, a Michigan corporation.
"Designated Portfolio" means the pool of Mortgage Loans from which the
Company will purchase from the Bank those Mortgage Loans that will comprise the
Initial Portfolio.
"Directive" means the writing issued by the appropriate regulatory agency
directing the Automatic Exchange.
"DOL" means the United States Department of Labor.
59
<PAGE>
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Shares" means the shares of any class or series of preferred stock
owned, or deemed to be owned, by or transferred to a stockholder in excess of
the Ownership Limit.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Event" means an occurrence by which the appropriate regulatory
agency directs in writing an exchange of the Series A Preferred Shares for Bank
Preferred Shares because (i) the Bank becomes "undercapitalized" under prompt
corrective action regulations established pursuant to FDICIA, (ii) the Bank is
placed into conservatorship or receivership or (iii) the appropriate regulatory
agency, in its sole discretion and even if the Bank is not "undercapitalized,"
anticipates the Bank becoming "undercapitalized" in the near term.
"FHLMC" or "Freddie Mac" means the Federal Home Loan Mortgage Corporation.
"Five-Year ARM" means an ARM in which the interest rate adjusts annually
beginning in the month in which the 60th payment is due.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"Five or Fewer Test" means the Code requirement that not more than 50% in
value of the Company's outstanding stock may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Code).
"Flagstar" means Flagstar Bancorp, Inc., a Michigan corporation and the
parent of the Bank.
"FNMA" or "Fannie Mae" means the Federal National Mortgage Association.
"FNMA Required Net Yield" means (i) with respect to any Mortgage Loan with
an original term of 20, 25 or 30 years, FNMA's required net yield for 30-year
fixed rate mortgages (covered by 60-day mandatory commitments) that was in
effect 45 days prior to the effective date of any conversion of such Mortgage
Loan and (ii) with respect to any Mortgage Loan with an original term of 15
years, FNMA's required net yield for 15-year fixed rate mortgages (covered by
60-day mandatory commitments) that was in effect 45 days prior to the effective
date of any conversion of such Mortgage Loan.
"Foreign Stockholders" means holders of Series A Preferred Shares that are
for United States federal income tax purposes (i) non-resident alien
individuals, (ii) foreign corporations and foreign partnerships or (iii) foreign
trusts and estates.
"Gross Margin" means, with respect to a Mortgage Loan that is an ARM, the
applicable fixed percentage which, when added to the applicable index,
calculates to the current interest rate paid by the borrower of the adjustable
rate Mortgage Loan (without taking into account any interest rate caps or
minimum interest rates). Gross Margin is inapplicable to fixed rate loans.
"Independent Directors" means the members of the Board of Directors who,
prior to their appointment, were not current directors, officers or employees of
the Company, Flagstar, the Bank or any affiliate of the Bank or of any person or
persons that, in the aggregate, own more than one percent of the common stock of
Flagstar.
"Initial Portfolio" means the portfolio of Mortgage Loans purchased by the
Company from the Bank upon or simultaneously with the closing of the Offering.
"IRA" means an individual retirement arrangement under Section 408 of the
Code.
"IRS" means the United States Internal Revenue Service.
"LIBOR" means the London Inter-Bank Offered Rate.
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<PAGE>
"Lifetime interest rate cap" means, with respect to Mortgage Loans that are
ARMs, the maximum interest rate that may accrue during any period over the term
of such Mortgage Loan as stated in the governing instruments evidencing such
Mortgage Loan.
"Loan-to-Value Ratio" means, with respect to any Mortgage Loan, the ratio
(expressed as a percentage) of the original principal amount of such Mortgage
Loan to the lesser of (i) the appraised value at origination of the mortgaged
property underlying such Mortgage Loan and (ii) if the Mortgage Loan was made to
finance the acquisition of property, the purchase price of the mortgaged
property.
"Mortgage Loans" means whole loans secured by a first mortgage or deed of
trust on single-family (one- to four-unit) residential real estate properties
none of which have been originated under or are insured by or guaranteed by
either the Federal Housing Administration or the Veterans' Administration.
"Mortgage Purchase Agreement" means the Mortgage Loan Purchase and
Warranties Agreement between the Company and the Bank.
"Nonaccrual Status" means a loan on which, in the opinion of management,
principal or interest is not likely to be paid in accordance with the terms of
the loan agreement or on which the principal or interest is past due 90 days or
more and collateral, if any, is insufficient to cover principal and interest.
"Offering" means the offering of Series A Preferred Shares pursuant to the
Prospectus.
"Offering Circular" means the registration statement on Form OC pursuant to
which the Bank Preferred Shares are being registered with the OTS.
"One Hundred Persons Test" means the Code requirement that the capital
stock of the Company be owned by 100 or more persons during at least 335 days of
a taxable year or during a proportionate part of a shorter taxable year.
"OTS" means the Office of Thrift Supervision, Department of the Treasury.
"Ownership Limit" means the provision in the Company's Articles of
Incorporation limiting any person from owning (including shares deemed to be
owned by the attribution provisions of the Code) more than 5% of any issued and
outstanding class or series of preferred stock of the Company without the prior
approval of the Company.
"Periodic interest rate cap" means, with respect to ARMs, the maximum
change in the coupon rate permissible under the terms of the loan at each coupon
adjustment date. Periodic interest rate caps limit both the speed by which the
coupon rate can adjust upwards in a rising interest rate environment and the
speed by which the coupon rate can adjust downwards in a falling rate
environment.
"Plan" means a pension, profit-sharing, retirement or other employee
benefit plan.
"Plan Asset Regulation" means the DOL regulations determining the assets of
a Plan for purposes of ERISA and the related prohibited transaction excise tax
provisions of the Code.
"Prime Rate" for any date means the lowest prime rate as published in the
"Money Rates" table of The Wall Street Journal for that date.
"Prospectus" means this prospectus, as the same may be amended.
"Rate Adjustment Date" means, with respect to any ARM, a date on which the
interest rate on such ARM adjusts.
"Registration Statement" means the registration statement filed by the
Company with the Commission on Form S-11 with respect to the Series A Preferred
Shares.
61
<PAGE>
"REIT" means a real estate investment trust as defined pursuant to the REIT
Provisions, or any successor provisions thereof.
"REIT Provisions" and "REIT Requirements" means Sections 856 through 860 of
the Code and the applicable Treasury Regulations.
"REIT Taxable Income" shall have the meaning set forth in "Federal Income
Tax Considerations--Taxation of the Company--Annual Distribution Requirements."
"Securities Act" means the Securities Act of 1933, as amended.
"Series A Preferred Shares" means the shares of preferred stock of the
Company offered hereby.
"Servicing Agreement" means the servicing agreement entered into by the
Bank and the Company with respect to the Mortgage Loans.
"Seven-Year ARM" means an ARM that adjust annually beginning in the month
in which the 84th monthly payment is due.
"Tax Event" means the receipt by the Company of an opinion of a law or
accounting firm experienced in such matters to the effect that, as a result of
(i) any amendment to, clarification of, or change (including any announced
prospective change) in the laws or treaties (or any regulations thereunder) of
the United States or any political subdivision or taxing authority thereof or
therein affecting taxation, (ii) any judicial decision, official administrative
pronouncement, ruling, regulatory procedure, notice or announcement (including
any notice or announcement of intent to adopt such procedures or regulations)
("Administrative Action") or (iii) any amendment to, clarification of, or change
in the official position or the interpretation of such Administrative Action or
judicial decision or any interpretation or pronouncement that provides for a
position with respect to such Administrative Action or judicial decision that
differs from the theretofore generally accepted position, in each case, by any
legislative body, court, governmental authority or regulatory body, irrespective
of the manner in which such amendment, clarification or change is made known,
which amendment, clarification, or change is effective or such pronouncement or
decision is announced on or after the date of issuance of the Series A Preferred
Shares, there is more than an insubstantial risk that (a) dividends payable by
the Company with respect to the capital stock of the Company are not, or will
not be, fully deductible for United States federal income tax purposes or (b)
the Company is, or will be, subject to more than a de minimis amount of other
taxes, duties or other governmental charges.
"Three-Year ARM" means an ARM that adjusts annually beginning in the month
in which the 36th monthly payment is due.
"TIN" means Taxpayer Identification Number.
"Treasury Index" means the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of one year as published by the Federal Reserve
Board in Statistical Release H.15 (519) or any similar publication or, if not
so published, as reported by any Federal Reserve Bank or by any U.S. Government
department or agency.
"Treasury Regulations" means the income tax regulations promulgated under
the Code.
"Underwriters" means those underwriters to which the Company will sell the
Series A Preferred Shares pursuant to the terms of the Underwriting Agreement.
"Underwriting Agreement" means the underwriting agreement by and among the
Company, the Bank and the Underwriters.
"United States Stockholders" means holders of Series A Preferred Shares
that are for United States federal income tax purposes (i) citizens or residents
of the United States, (ii) corporations, partnerships, or other entities created
62
<PAGE>
or organized in or under the laws of the United States or of any political
subdivisions thereof, or (iii) an estate or trust the income of which is subject
to United States federal income taxation regardless of its source.
"USRPI" means United States real property interest.
63
<PAGE>
INDEX TO FINANCIAL STATEMENT
Report of Independent Certified Public Accountants........................ F-2
Balance Sheet of Flagstar Capital Corporation as of December 16, 1997..... F-3
Note to Financial Statement............................................... F-4
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Flagstar Capital Corporation:
We have audited the accompanying balance sheet of Flagstar Capital Corporation
(the "Company") as of December 16, 1997. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Flagstar Capital Corporation as of
December 16, 1997, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
- --------------------------
Grant Thornton LLP
Southfield, Michigan
December 19, 1997
F-2
<PAGE>
FLAGSTAR CAPITAL CORPORATION
BALANCE SHEET
December 16, 1997
ASSETS
Cash.................................................................. $100
====
STOCKHOLDER'S EQUITY
Common Stock, par value $1.00 share, 1,000,000 shares
authorized; 100 shares issued and outstanding....................... $100
====
The Note to the Financial Statement is an integral part of this
Statement.
F-3
<PAGE>
FLAGSTAR CAPITAL CORPORATION
NOTE TO FINANCIAL STATEMENT
1. ORGANIZATION
Flagstar Capital Corporation (the "Company"), a wholly-owned subsidiary of
Flagstar Bank, FSB (the "Bank"), was incorporated on June 28, 1995 in the State
of Michigan.
The Company intends to invest in mortgage-related assets financed by common
and preferred stock offerings and expects to generate income for distribution to
its future preferred and common stockholders primarily from the net interest
income derived from its investments in mortgage-related assets. The Company
intends to purchase these mortgage-related assets from the Bank at their
estimated fair values. These assets will be recorded in the Company's financial
statements at the Bank's historical cost basis which will approximate their
estimated fair values. The Company intends to operate in a manner that permits
it to elect, and it intends to elect, to be subject to tax as a real estate
investment trust for federal income tax purposes. The Company has not had any
operations as of December 16, 1997.
The Company intends to sell preferred stock in an underwritten public
offering. The cost of this public offering will be paid by the Company out of
proceeds from a sale of common stock to the Bank. If the public offering is not
consummated, the Bank will pay any offering costs.
F-4
<PAGE>
OFFERING CIRCULAR ANNEX I
- -----------------
2,000,000 SHARES
FLAGSTAR BANK, FSB
_____% NONCUMULATIVE PREFERRED STOCK, SERIES A
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
The ___% Noncumulative Preferred Stock, par value $25.00 per share (the
"Bank Preferred Shares"), of Flagstar Bank, FSB (the "Bank") will be issued only
upon the automatic exchange (the "Automatic Exchange") of the _____%
Noncumulative Exchangeable Preferred Stock, Series A (the "Series A Preferred
Shares") of Flagstar Capital Corporation (the "Company"), a wholly owned
subsidiary of the Bank, upon the occurrence of certain events. See "Offering
Circular Summary -- The Offering." Dividends on the Bank Preferred Shares will
be payable at the same rate as the Series A Preferred Shares if, when and as
declared by the Board of Directors of the Bank. For a description of the terms
of the Bank Preferred Shares, see "Description of the Bank Preferred Shares"
herein.
The Bank Preferred Shares rank, in priority of payment of dividends and
rights upon the voluntary or involuntary dissolution, liquidation or winding up
of the Bank, junior to all claims of the Bank's creditors, including the claims
of the Bank's depositors. The Bank Preferred Shares rank superior and prior to
the issued and outstanding common stock of the Bank with respect to dividend
rights and rights upon voluntary or involuntary dissolution, liquidation or
winding up of the Bank, and to all other classes and series of equity securities
of the Bank hereafter issued, other than any class or series expressly
designated as being on parity with or senior to the Bank Preferred Shares. The
common stock of the Bank is the only class of equity securities currently
outstanding.
The Series A Preferred Shares have been registered with the Securities and
Exchange Commission (the "Commission") and an application will be filed to list
the Series A Preferred Shares on the Nasdaq Stock Market ("Nasdaq") under the
symbol "FLGSP". In the event the Series A Preferred Shares are exchanged into
Bank Preferred Shares, the Bank does not intend to apply for listing of the Bank
---
Preferred Shares on any national securities exchange or for quotation through
Nasdaq.
AN INVESTMENT IN THE BANK PREFERRED SHARES INVOLVES A HIGH DEGREE OF RISK.
INVESTORS SHOULD CAREFULLY CONSIDER THE RISK FACTORS AND OTHER CONSIDERATIONS
RELATING TO THE BANK AND THE BANK PREFERRED SHARES. SEE "RISK FACTORS"
BEGINNING ON PAGE OC-13.
______________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE OFFICE OF THRIFT
SUPERVISION (THE "OTS"), THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC"),
THE COMMISSION OR ANY OTHER FEDERAL AGENCY, OR BY ANY STATE SECURITIES
COMMISSION, NOR HAS THE COMMISSION, THE OTS, THE FDIC, OTHER AGENCY OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
OFFERING CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS OR OTHER
OBLIGATIONS OF THE BANK AND ARE NOT INSURED BY THE FDIC OR ANY OTHER
GOVERNMENTAL AGENCY OR OTHERWISE INSURED.
THE DATE OF THIS OFFERING CIRCULAR IS ___________, 1998.
OC-1
<PAGE>
TABLE OF CONTENTS
PAGE
----
Forward-Looking Information........................................... 3
Available Information................................................. 3
Offering Circular Summary............................................. 4
Risk Factors.......................................................... 13
Flagstar Capital Corporation.......................................... 21
Use of Proceeds....................................................... 21
Capitalization........................................................ 22
Selected Consolidated Financial and Other Data........................ 23
Management's Discussion and Analysis of Changes in Financial
Condition and Results of Operations.................................. 27
Business.............................................................. 47
Regulation............................................................ 72
Management............................................................ 78
Description of the Bank Preferred Shares.............................. 83
Automatic Exchange.................................................... 86
Experts............................................................... 86
Legal Matters......................................................... 86
Index to Financial Statements......................................... F-1
OC-2
<PAGE>
FORWARD-LOOKING INFORMATION
THE INFORMATION CONTAINED HEREIN CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. A NUMBER OF FACTORS,
INCLUDING THOSE DISCUSSED BELOW, COULD CAUSE RESULTS TO DIFFER MATERIALLY FROM
THOSE ANTICIPATED BY SUCH FORWARD-LOOKING STATEMENTS. IN ADDITION, SUCH
FORWARD-LOOKING STATEMENTS ARE NECESSARILY DEPENDENT UPON ASSUMPTIONS, ESTIMATES
AND DATA THAT MAY BE INCORRECT OR IMPRECISE. ACCORDINGLY, ANY FORWARD-LOOKING
STATEMENTS INCLUDED HEREIN DO NOT PURPORT TO BE PREDICTIONS OF FUTURE EVENTS OR
CIRCUMSTANCES AND MAY NOT BE REALIZED. FORWARD-LOOKING STATEMENTS CAN BE
IDENTIFIED BY, AMONG OTHER THINGS, THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH
AS "INTENDS," "BELIEVES," "EXPECTS," "MAY," "WILL," "SHOULD," "SEEKS," "PRO
FORMA" OR "ANTICIPATES," OR THE NEGATIVES THEREOF, OR OTHER VARIATIONS THEREON
ON COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY OR INTENTIONS.
AVAILABLE INFORMATION
Flagstar Bank, FSB (the "Bank") is not subject to the information reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). However, the Bank is wholly owned by Flagstar Bancorp, Inc. ("Flagstar")
which is subject to the requirements of the Exchange Act and, in accordance
therewith, files reports and other information with the Commission. Such
reports and other information may be inspected without charge and copied at
prescribed rates at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the
Commission's Regional Offices at Seven World Trade Center, Suite 1300, New York,
New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
In addition, the Commission maintains a web site that contains reports, proxy
and information statements and other information regarding the electronic
filings of Flagstar. The address of the Commission's web site is "http://
www.sec.gov."
The Bank has filed with the OTS a Registration Statement on Form OC (including
any amendments thereto, the "Form OC") with respect to the securities covered by
this Offering Circular. This Offering Circular does not contain all of the
information set forth in the Form OC, certain items of which are contained in
exhibits to the Form OC as permitted by the rules and regulations of the OTS.
For further information with respect to the Bank and the securities offered
hereby, reference is made to the Form OC, including the exhibits filed as a part
thereof. Statements contained in this Offering Circular as to the contents of
any contract or other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Form OC, each such statement being qualified in all
respects by such reference. The Form OC and the exhibits thereto may be
inspected without charge and copied at prescribed rates at the public reference
facilities maintained by the OTS at 1700 G Street, N.W., Washington, D.C. 20552.
Information regarding the Bank is also available through the web site of the
OTS. The address of the OTS' web site is "http://www.ots.ustreas.gov."
OC-3
<PAGE>
OFFERING CIRCULAR SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with the more detailed information, risk factors and financial
statements, including the related notes, appearing elsewhere in the Offering
Circular. Unless otherwise indicated, all information in this Offering Circular
assumes that the over-allotment option granted to the Underwriters has not been
exercised. Terms used but not defined herein are defined elsewhere in this
Offering Circular.
THE BANK
Flagstar Bank, FSB, a federally chartered stock savings bank, is the largest
independent Michigan-based savings institution based on asset size as of
September 30, 1997, according to SNL Securities. The Bank is also one of
the largest originators of conforming single-family mortgage loans in the United
States according to Inside Mortgage Finance. The Bank is engaged in the
business of providing a full range of retail banking services in southern and
western Michigan and in originating, purchasing and servicing residential
mortgage loans on a nationwide basis. For 1996, the Bank ranked fourth in the
United States among thrifts in mortgage loan originations and sixteenth in total
mortgage loan production according to SMR Research Corp. All of the outstanding
stock of the Bank is owned by Flagstar Bancorp, Inc. ("Flagstar"), a Michigan
corporation whose common stock is listed for trading on the Nasdaq Stock Market
("Nasdaq") under the symbol "FLGS."
As of September 30, 1997, the Bank had consolidated total assets of $2.0
billion, net loans of $1.8 billion, total deposits of $1.0 billion and total
stockholder's equity of $121.1 million. For the nine months ended September 30,
1997, the Bank's net earnings were $15.8 million and its return on average
assets and return on average equity (as annualized) were 1.34% and 21.53%,
respectively. At December 31, 1996, the Bank had consolidated total assets of
$1.3 billion, net loans of $1.1 billion, total deposits of $624.7 million and
total stockholder's equity of $77.9 million. For the year ended December 31,
1996, the Bank's net earnings were $17.1 million and its return on average
assets and return on average equity were 1.54% and 24.82%, respectively ($19.3
million, 1.73% and 27.97%, respectively, excluding the special deposit insurance
assessment imposed on September 30, 1996 on all depository institutions insured
by the Savings Association Insurance Fund (the "SAIF")).
The Bank's operations are segregated into two segments, mortgage banking and
retail banking, with most of the Bank's revenue (net interest income and non-
interest income) and earnings before income taxes attributable to the mortgage
banking segment. The Bank believes that its retail banking business provides it
with a strategic advantage because it affords the Bank access to funding sources
for its mortgage origination business that would not otherwise be available.
These additional funding sources include lower cost retail deposits, Federal
Home Loan Bank ("FHLB") advances and escrowed funds. The Bank benefits as
compared to mortgage originators with no retail banking operations because it
has access to a lower cost of funds and is therefore able to generate greater
net interest income. See "The Bank" and "Business."
RETAIL BANKING. The Bank (which was formerly known as First Security Savings
Bank, FSB) provides a full range of retail banking services to consumers and
small businesses in southern and western Michigan. The Bank operates a network
of 19 bank branches (including four opened in 1997) located in southern and
western Michigan counties. Beginning with the acquisition of Security Savings
Bank, F.S.B. ("Security Savings") and its seven bank branches in 1994, the
Bank has focused on expanding its branch network in these markets in order to
increase its access to retail deposit funding sources. The Bank believes that
this also provides a greater opportunity for cross-marketing of consumer banking
services to the Bank's mortgage customers in Michigan and for taking advantage
of opportunities that the Bank believes exist for community banks in Michigan as
a result of the substantial consolidation that has occurred in the banking
industry. See "Business."
MORTGAGE BANKING. The Bank's mortgage banking operations, which have
historically generated substantially all of the Bank's earnings, originate
residential mortgages through 33 retail loan origination offices
OC-4
<PAGE>
located in Michigan (21), California (9), Florida (2) and Ohio (1). In addition,
the Bank originates mortgage loans on a wholesale basis through a network of
approximately 1,800 independent mortgage brokers nationwide (who originate such
loans using the Bank's underwriting systems and standards and close such loans
using funds advanced by the Bank). This network is serviced by sixty account
executives, who are organized among 10 regional wholesale/correspondent lending
offices and five wholesale/correspondent satellite offices. The Bank also
purchases mortgage loans on a regular basis from independent mortgage lenders,
commercial banks, savings and loan associations and other financial institutions
with whom the Bank has established a correspondent relationship. See
"Business."
For the nine months ended September 30, 1997, the Bank produced approximately
$4.8 billion in mortgage loans through wholesale and correspondent networks and
$529.9 million through the Bank's retail network. During the years ended
December 31, 1996 and 1995, the Bank's mortgage loan production totaled $6.8
billion and $5.2 billion, respectively. Of these amounts, approximately $6.1
billion was produced during the year ended December 31, 1996 through the Bank's
wholesale and correspondent loan production network and $685.3 million was
produced through the Bank's retail network ($4.6 billion and $632.7 million,
respectively, during 1995).
The Bank sells a substantial portion of its loan production into the secondary
market, principally by securitizing pools of loans through programs offered by
government-sponsored enterprises such as the Federal National Mortgage
Association ("FNMA" or "Fannie Mae") and the Federal Home Loan Mortgage
Corporation ("FHLMC" or "Freddie Mac") and through sales to private
investors. In addition, the Bank originates and sells loans conforming to the
underwriting criteria of the Federal Housing Authority ("FHA") and the
Department of Veterans Affairs ("VA"). Generally, the Bank retains the
servicing rights to many of the loans that it sells, but also realizes
additional income by selling servicing rights on an individual and a bulk basis
to other mortgage servicers. At September 30, 1997 and at December 31, 1996 and
1995, the Bank's loan servicing portfolio totaled $4.1 billion, $4.8 billion and
$6.8 billion, respectively (net of loans subserviced for others), substantially
all of which related to conventional loans.
The Bank makes extensive use of advanced technology and automated processes in
order to enhance the competitiveness and reduce the cost of its mortgage
origination operations. The Bank was one of the first mortgage lenders to
utilize video conferencing for loan production. In 1996, the Bank began full-
scale operational use of automated underwriting system technologies, including
Fannie Mae's Desktop Underwriter/TM/ and Freddie Mac's Loan Prospector/TM/ (of
which the Bank is currently one of the largest users), and has combined the two
technologies into its LIVE/SM/ video conferencing and underwriting system. The
Bank believes that the LIVE/SM/ system, which permits a loan underwriter to
interview and complete a loan application and approve a loan for a prospective
borrower in one session during a live video conference, provides it with a
significant competitive edge in writing mortgage loans. During 1997,
substantially all of its mortgage loan production has been underwritten using
automated systems, which the Bank believes reduces overhead, enhances customer
service and facilitates conformity of the Bank's loan production with FHLMC and
FNMA underwriting guidelines.
BUSINESS STRATEGY. The Bank's strategy consists of the following key
elements:
- continue to expand the Bank's branch network into the demographically
desirable communities adjacent to the Bank's current markets in southern
and western Michigan in order to gain access to additional low cost retail
funding sources;
- cross-sell retail banking services to the Bank's large Michigan base of
existing mortgage customers;
- benefit from economies of scale by increasing the size of its loan
servicing portfolio through the continued origination and purchase of large
volumes of mortgage loans on a diversified, nationwide basis;
- as market conditions permit, retain more of its mortgage loan production
volume or mortgage servicing rights, or both;
- utilize advanced technology and automated processes throughout the Bank's
business to improve customer service, reduce costs of loan production and
servicing and increase efficiencies.
OC-5
<PAGE>
RECENT OPERATING RESULTS. The Bank's operations have grown significantly
over the past five years. Between year-end 1992 and year-end 1996, the Bank's
annual mortgage loan production volume grew from $3.0 billion to $6.8 billion,
its assets grew from $304.8 million to $1.3 billion and its loan servicing
portfolio (net of loans subserviced for others) grew from $3.1 billion to a peak
of $6.8 billion at December 31, 1995 before decreasing to $4.8 billion at
December 31, 1996 as a result of significant sales of servicing rights during
1996. Over this period, net earnings increased from $9.8 million in 1992 to
$17.1 million in 1996 ($19.3 million before the special deposit insurance
assessment imposed on September 30, 1996, on all SAIF-insured institutions). Net
earnings decreased in 1994 and 1995 compared to 1993 as a result of several
factors, including higher levels of compensation and expense relating to
expansion that the Bank undertook in 1993 in response to the record levels of
refinancing activity and its acquisition of Security Savings in 1994. For the
three years ended December 31, 1996, 1995 and 1994, the Bank reported a return
on average equity of 24.82%, 29.52% and 35.79%, respectively, and a return on
average assets of 1.54%, 1.64% and 3.19%, respectively.
Net earnings for the nine months ended September 30, 1997 were $15.8 million,
a $4.4 million increase from the $11.4 million in net earnings reported for the
nine months ended September 30, 1996 ($13.6 million before the SAIF assessment).
The increase resulted primarily from the Bank's increase in average assets which
totaled $1.6 billion for the nine months ended September 30, 1997, an increase
of $500.0 million, or 45.5%, from $1.1 billion for the nine months ended
September 30, 1996.
Historically, the Bank has incurred minimal losses from charge-offs in
connection with its residential mortgage loan production. Net charge-offs as a
percentage of average loans outstanding increased from 0.09% in 1992 to 0.13% in
1996. Net charge-offs further increased to 0.22% for the nine months ended
September 30, 1997. Over this period, non-performing assets as a percentage of
total assets ranged from 0.94% in 1992 to a low of 0.42% in 1994, increased to
1.25% at December 31, 1995, to 3.16% at December 31, 1996 and finally to 3.04%
at September 30, 1997. Non-performing assets totaled $1.7 million in 1994,
$10.7 million in 1995, $30.6 million in 1996 and $44.1 million at September 30,
1997. As a result of the increase in non-performing assets during 1997, the Bank
increased its provision for losses to $3.7 million for the nine months ended
September 30, 1997 from $2.6 million for all of 1996. At September 30, 1997, the
Bank's allowance for losses was equal to 0.27% of total loans and 11.23% of non-
performing loans compared to 0.31% and 11.43%, respectively, at December 31,
1996. The 1996 and 1997 increases in non-performing assets resulted primarily
from increased repurchases of delinquent residential mortgage loans from
secondary market investors. Although the Bank generally does not sell loans with
recourse, it typically is required to repurchase loans, including delinquent and
defaulted loans, which were not underwritten strictly in compliance with the
underwriting standards of secondary market investors. As the volume of the
Bank's new loan production has increased substantially over the past several
years (totalling $24.9 billion in mortgage loan production from 1992 through
1996), the aggregate amount of loan delinquencies and foreclosures has also
increased, thereby increasing the number of loans potentially subject to
repurchase. In addition, during 1996 two of the largest secondary market
purchasers of loans implemented automated underwriting review systems which
enabled them to review delinquent loans on a much faster basis, thereby
accelerating the process of returning to the Bank loans originated in prior
periods.
It has been the Bank's experience that non-performing loans do not necessarily
result in an ultimate loss to the Bank. Approximately 92% of the Bank's non-
performing loans at September 30, 1997 were single-family residential mortgage
loans (88% at December 31, 1996), which generally represent minimal risk of
ultimate loss because of the nature of the underlying collateral, private
mortgage insurance for loans with over-80% loan-to-value (''LTV'') ratios and
insurance or guarantees on certain loans from the FHA and VA. In addition, the
Bank may also have the right to sell the repurchased loan back to the broker or
correspondent which originated it, or to seek indemnity from the applicable
mortgage insurance company in the case of loans which are underwritten on a
contract basis for the Bank by such insurers.
The Bank anticipates that its level of loan repurchases and non-performing
assets may continue to be above historical levels through 1998 as a result of
the factors described above. However, although there can be no assurance, the
Bank believes that several actions it has taken during 1996 and 1997, including
a tightening of credit standards and the implementation of automated
underwriting systems (which the Bank believes, in most cases, significantly
reduce the ability of secondary market investors to require repurchases of loans
absent material
OC-6
<PAGE>
misrepresentation), should result in a decline of the level of
loan repurchases over time. See "Management's Discussion and Analysis of
Changes in Financial Condition and Results of Operations--Financial Condition--
Allowance for Losses" and "Business--Asset Quality."
MANAGEMENT
The Bank's senior management team consists of four individuals with extensive
experience in the financial services industry, particularly residential mortgage
loan origination. The Chairman, Chief Executive Officer and founder, Thomas J.
Hammond, has over 29 years of experience in various aspects of residential
lending and has been the Chief Executive Officer of the Bank since its inception
in 1987. Prior to organizing the Bank, Mr. Hammond organized, owned and managed
a series of financial services related companies, including Hammond Mortgage
Corporation, which was sold to Michigan National Bank in 1981. The President,
Mark T. Hammond, has worked in various positions at the Bank for the past 10
years, including Senior Vice President of the Bank in charge of secondary
marketing and loan production and Executive Vice President responsible for
mortgage operations. Joan H. Anderson, who is Executive Vice President in charge
of mortgage loan servicing, collections and real estate holdings, has 27 years
of banking and mortgage-related experience and has managed numerous aspects of
the Bank's mortgage banking operations since joining the Bank in 1987. Michael
W. Carrie, who is Chief Financial Officer of the Bank, has 13 years of
experience in banking and mortgage lending, both with the Bank and previously
with Standard Federal Bank, F.S.B., a major regional federal savings bank.
THE OFFERING
Securities Offered. . . . . . . . 2,000,000 Bank Preferred Shares.
Automatic Exchange . . . . . . . The Bank Preferred Shares are to be issued,
if ever, in connection with an exchange of
the Series A Preferred Shares of Flagstar
Capital Corporation, a wholly owned
subsidiary of the Bank (the "Automatic
Exchange"). See "Automatic Exchange."
Ranking . . . . . . . . . . . . . The Bank Preferred Shares rank senior
to the Bank's common stock, par value $0.01
per share (the "Common Stock") and junior to
all claims of the Bank's creditors, including
the claims of the Bank's depositors.
Additional shares of preferred stock ranking
senior to the Bank Preferred Shares may not
be issued without the approval of holders of
at least 2/3 of the Bank Preferred Shares.
Dividends . . . . . . . . . . . . Dividends on the Bank Preferred Shares are
payable at the rate of [___]% per annum of
the initial liquidation preference (an amount
equal to $[____] per annum per share), if,
when, and as declared by the Board of
Directors of the Bank. If declared, dividends
are payable quarterly in arrears on the last
day of March, June, September and December in
each year, or, if such day is not a business
day, on the next business day. Dividends on
the Bank Preferred Shares are not cumulative
and, accordingly, if no dividend is declared
on the Bank Preferred Shares by the Bank for
a quarterly dividend period, holders of the
Bank Preferred Shares will have no right to
receive a dividend for that period, and the
Bank will have no obligation to pay a
dividend for that period, whether or not
dividends are declared and paid for any
future period.
Upon the Automatic Exchange of Series A
Preferred Shares for Bank Preferred Shares,
any accrued and unpaid dividends for the most
recent quarter of the Series A Preferred
Shares at the time of the Automatic Exchange
will be deemed to be accrued and unpaid
dividends on the Bank Preferred Shares. See
"Description of the Bank Preferred Shares --
Dividends." The Bank's ability to pay cash
dividends is subject to regulatory and other
restrictions described herein.
OC-7
<PAGE>
Liquidation Preference . . . . . The liquidation preference for each Bank
Preferred Share is $25.00, plus an amount
equal to the accrued and unpaid dividends for
the most recent quarter, if any, thereon for
the then-current dividend period to the date
fixed for liquidation. See "Description of
the Bank Preferred Shares -- Rights Upon
Liquidation."
Redemption . . . . . . . . . . . The Bank may not redeem the Bank Preferred
Shares before [______], 2003. After such
date, the Bank Preferred Shares may be
redeemed for cash at the option of the Bank,
in whole or in part, at any time and from
time to time, at the redemption price of
$25.00 per share, plus the accrued and unpaid
dividends for the most recent quarter
thereon, to the date fixed for redemption, if
any, thereon. Redemption of the Bank
Preferred Shares will be subject to
compliance with applicable regulatory and
other restrictions. See "Description of the
Bank Preferred Shares -- Redemption."
Voting Rights . . . . . . . . . . Holders of Bank Preferred Shares will not
have any voting rights, except as expressly
provided herein. On any matter on which
holders of the Bank Preferred Shares may
vote, each Bank Preferred Share will be
entitled to one vote. See "Description of the
Bank Preferred Shares -- Voting Rights."
Use of Proceeds . . . . . . . . . The Bank Preferred Shares will only be
issued in connection with an Automatic
Exchange for the Series A Preferred Shares.
The proceeds from the sale of the Series A
Preferred Shares will be used by Flagstar
Capital Corporation to purchase a portfolio
of mortgage assets and to pay expenses
associated with the formation and offering of
the Series A Preferred Shares. The conversion
of Series A Preferred Shares into Bank
Preferred Shares will produce no proceeds to
the Bank. See "Use of Proceeds."
Absence of a Public Market . . . There is currently no public market for the
Bank Preferred Shares as such shares have not
been issued and such shares will not be
listed on any securities exchange or for
quotation through Nasdaq.
RISK FACTORS
See "Risk Factors and Other Considerations" for a discussion of the risk
factors and other considerations relating to the Bank and the Bank Preferred
Shares.
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<PAGE>
SUMMARY SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table presents summary selected consolidated financial and
other data as of and for the nine months ended September 30, 1997 and 1996 and
each of the five years in the period ended December 31, 1996. The information
set forth below should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Consolidated Statements of
Financial Condition as of December 31, 1996 and 1995, and the Consolidated
Statements of Earnings for each of the three years in the period ended December
31, 1996, are included elsewhere in this Prospectus. The selected consolidated
financial and other data as of September 30, 1997 and for the nine months ended
September 30, 1997 and 1996 are unaudited and are derived from the Bank's
internal consolidated financial statements which, in the opinion of management,
contain all adjustments (consisting only of normal recurring adjustments) which
are necessary for a fair presentation of the results for such periods. The
results of operations for the nine months ended September 30, 1997 are not
necessarily indicative of the results of operations to be obtained for the
entire year.
<TABLE>
<CAPTION>
At or for the Nine Months
Ended September 30, At or for the Years Ended December 31,
------------------------- -----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations:
- ----------------------
Interest income................ $84,789 $57,679 $76,179 $71,304 $35,112 $29,760 $18,735
Interest expense............... 54,597 34,121 45,967 41,443 14,482 12,052 9,227
------- ------- ------- ------- ------- ------- -------
Net interest income............ 30,192 23,558 30,212 29,861 20,630 17,708 9,508
Provision for losses........... 3,730 1,140 2,604 238 290 644 380
------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for losses.......... 26,462 22,418 27,608 29,623 20,340 17,064 9,128
Non-interest income
Loan administration income.... 5,543 11,110 11,859 14,248 13,261 7,786 2,340
Net gain on loan sales........ 9,269 4,536 4,511 2,872 (1,132) 7,015 6,900
Net gain on sales of
mortgage servicing rights.... 25,472 20,917 35,129 13,356 28,489 13,385 3,021
Other income................. 3,158 5,085 6,803 4,626 2,065 5,468 6,162
------- ------- ------- ------- ------- ------- -------
Total..................... 43,442 41,648 58,302 35,102 42,683 33,654 18,423
------- ------- ------- ------- ------- ------- -------
Non-interest expense
Compensation and benefits..... 19,303 18,443 25,479 18,538 18,609 7,984 5,184
Other expense................. 25,730 27,809(1) 33,060(1) 21,311 18,975 13,308 7,298
------- ------- ------- ------- ------- ------- -------
Total..................... 45,033 46,252 58,539 39,849 37,584 21,292 12,482
------- ------- ------- ------- ------- ------- -------
Earnings before federal
income taxes............... 24,871 17,814 27,371 24,876 25,439 29,426 15,069
Provision for federal
income taxes.................. 9,043 6,387 10,258 9,348 9,302 10,405 5,275
------- ------- ------- ------- ------- ------- -------
Net earnings................... $15,828 $11,427(1) $17,113(1) $15,528 $16,137 $19,021 $ 9,794
======= ======= ======= ======= ======= ======= =======
</TABLE>
(continued)
OC-9
<PAGE>
<TABLE>
<CAPTION>
At September 30, At December 31,
---------------- --------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Summary of Financial Condition:
- -------------------------------
Total assets............................ $2,033,199 $1,296,810 $1,044,851 $722,469 $467,629 $304,758
Loans receivable:
Mortgage loans available for sale..... 1,363,822 840,767 620,455 205,480 389,073 218,266
Loans held for investment............. 444,552 273,579 305,590 429,800 26,906 21,637
Less: Allowance for losses........... (4,950) (3,500) (2,102) (1,871) (901) (550)
---------- ---------- ----------- --------- --------- ---------
Total loans, net................. 1,803,424 1,110,846 923,943 633,409 415,078 239,353
Mortgage servicing rights............... 51,713 30,064 27,957 18,179 17,563 11,108
Deposits................................ 1,012,121 624,732 529,218 308,497 190,761 181,171
FHLB advances........................... 718,878 389,801 191,156 200,750 55,000 --
Stockholder's equity.................... 121,055 77,899 61,003 47,925 35,114 16,767
</TABLE>
(continued)
OC-10
<PAGE>
<TABLE>
<CAPTION>
At or for the Nine Months
Ended September 30, At or for the Years Ended December 31,
------------------------- --------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Performance Ratios(2):
- ---------------------
Return on average assets.............. 1.34% 1.38% 1.54% 1.64% 3.19% 4.39% 3.72%
Return on average equity.............. 21.53% 22.61% 24.82% 29.52% 35.79% 69.56% 84.78%
Interest rate spread.................. 2.27% 2.13% 2.13% 2.36% 3.37% 3.39% 2.04%
Net interest margin................... 2.83% 3.21% 3.07% 3.46% 4.63% 4.55% 3.92%
Ratio of average interest earning
assets to average interest bearing
liabilities.......................... 111% 123% 120% 123% 139% 137% 158%
Ratio of non-interest expense
to average assets.................... 3.80% 5.58% (3) 5.25% (3) 4.20% 7.43% 4.92% 4.71%
Efficiency ratio (4).................. 59.8% 69.5% 64.7% 59.3% 58.3% 41.5% 44.7%
Dividend payout ratio................. -- 8.75% 5.84% 15.78% 19.83% 4.21% 7.66%
Asset Quality Data:
- -------------------
Net charge-offs to average loans
outstanding(2)........................ 0.22% 0.03% 0.13% 0.00% 0.08% 0.08% 0.09%
Non-performing assets to total assets
at end of period..................... 3.04% 3.37% 3.16% 1.25% 0.42% 0.60% 0.94%
Non-performing loans to total loans
at end of period..................... 2.44% 3.50% 2.75% 1.15% 0.27% 0.37% 0.85%
Allowance for losses to total loans
at end of period..................... 0.27% 0.33% 0.31% 0.23% 0.29% 0.22% 0.23%
Allowance for losses to non-performing
loans at end of period.............. 11.23% 9.56% 11.43% 19.67% 107.59% 58.17% 26.84%
Capital Ratios:
- ---------------------
Tangible Capital...................... 5.73% 6.22% 5.58% 5.19% 5.54% 7.41% 5.35%
Core Capital.......................... 5.95% 6.75% 6.01% 5.84% 6.63% 7.41% 5.35%
Total Risk-based Capital.............. 11.25% 11.96% 10.91% 10.12% 12.08% 13.84% 13.40%
Average equity-to-average
assets............................... 6.20% 6.09% 6.19% 5.54% 8.91% 6.32% 5.14%
Mortgage Origination and
- ------------------------
Servicing Data:
- ---------------
Mortgage loans originated or
purchased............................ $5,287,711 $5,283,843 $6,791,665 $5,195,605 $3,720,173 $6,220,415 $2,984,076
Mortgage loans sold................... $4,518,451 $5,285,538 $6,581,897 $4,760,806 $3,551,319 $6,034,828 $2,888,564
Mortgage loans serviced for
others(5)............................ $4,143,352 $6,946,080 $4,801,581 $6,788,530 $5,691,421 $6,198,311 $3,091,399
Capitalized value of mortgage
servicing rights (6)................. 1.25% 0.60% 0.63% 0.41% 0.32% 0.28% 0.36%
Other Data:
- -----------
Full-time equivalent employees......... 1,110 1,179 1,310 1,142 869 971 584
Number of branches..................... 19 15 15 13 9 1 1
Number of wholesale/correspondent
lending centers...................... 10 10 10 9 6 5 4
</TABLE>
(footnotes on following page)
OC-11
<PAGE>
(1) Includes the special deposit insurance assessment imposed on SAIF-insured
institutions during September 1996. The Bank's assessment was $3.4 million,
before taxes. If such assessment had not been imposed, the Bank's net
earnings would have been approximately $13.6 million for the nine months
ended September 30, 1996 and its return on average assets and return on
average equity for the period would have been 1.64% and 26.90%,
respectively. If such assessment had not been imposed, the Bank's net
earnings would have been approximately $19.3 million for the year ended
December 31, 1996 and its return on average assets and return on average
equity for the period would have been 1.73% and 27.97%, respectively.
(2) Ratios are annualized where applicable.
(3) Excluding the special SAIF assessment of $3.4 million, before taxes,
incurred during 1996, mentioned in footnote 1 above, such ratio would have
been 5.17% for the nine months ended September 30, 1996 and 4.94% for the
year ended December 31, 1996.
(4) Computed as non-interest expense (excluding amortization of core deposit
premiums) divided by the sum of net interest income and non-interest income.
Excluding the special SAIF assessment of $3.4 million, before taxes,
incurred during 1996, mentioned in footnote 1 above, such ratio would have
been 64.3% for the nine months ended September 30, 1996 and 60.8% for the
year ended December 31, 1996.
(5) Amount excludes loans being subserviced for others, which is servicing of
loans subsequent to the sale of the related mortgage servicing rights but
prior to their delivery, of $2.0 billion, $2.1 billion, $3.6 billion and
$536.3 million at September 30, 1997 and 1996 and December 31, 1996 and
1995, respectively. There was no subservicing in prior years.
(6) Reflects percentage of book value of mortgage servicing rights to loans
serviced for others (excluding subservicing).
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<PAGE>
RISK FACTORS
An investment in the Bank Preferred Shares involves a high degree of risk.
In addition to the other information in this Offering Circular, investors should
carefully consider the following factors before investing in the Bank Preferred
Shares offered hereby.
The discussion in this Offering Circular contains certain forward-looking
statements that involve risks and uncertainties, such as statements of the
Bank's plans, objectives, expectations, and intentions. The cautionary
statements made in this Offering Circular, including the risk factors discussed
below, should be read as being applicable to all related forward-looking
statements wherever they appear in the Offering Circular. The Bank's actual
results could differ materially from those discussed here. Factors that could
cause or contribute to such differences include those discussed below, as well
as those discussed elsewhere herein or in the documents attached hereto or
incorporated by reference herein.
BANK'S UNCERTAIN FINANCIAL CONDITION AT TIME OF THE AUTOMATIC EXCHANGE
The Bank Preferred Shares will be issued in the Automatic Exchange for the
Series A Preferred Shares only if (i) the Bank becomes "undercapitalized" under
prompt corrective action regulations, (ii) the Bank is placed into
conservatorship or receivership or (iii) the appropriate federal regulatory
agency, in its sole discretion, anticipates the Bank becoming "undercapitalized"
in the near term. As a result, holders of Series A Preferred Shares would become
stockholders of the Bank at a time when the Bank's financial condition was
deteriorating or when the Bank had been placed into conservatorship or
receivership. In the event of receivership of the Bank, the claims of depositors
and secured, senior, general and subordinated creditors of the Bank would be
entitled to a priority of payment over the claims of holders of equity interests
such as the Bank Preferred Shares. As a result of such subordination, either if
the Bank were to be placed into receivership after the Automatic Exchange or if
the Automatic Exchange were to occur after receivership of the Bank, the holders
of the Bank Preferred Shares likely would receive, if anything, substantially
less than the holders of the Series A Preferred Shares would have received had
the Series A Preferred Shares not been exchanged for Bank Preferred Shares.
BANK PREFERRED SHARES WILL NOT BE LISTED ON NASDAQ
Although the Series A Preferred Shares will be listed on Nasdaq, the Bank
does not intend to apply for listing of the Bank Preferred Shares, for which the
Series A Preferred Shares will be exchanged automatically on a one-for-one basis
upon the occurrence of an Automatic Exchange Event on any national securities
exchange or Nasdaq. Consequently, there can be no assurance as to the liquidity
of the trading markets for the Bank Preferred Shares, if issued, or that an
active public market for the Bank Preferred Shares would develop or be
maintained.
DIVIDEND AND OTHER REGULATORY RESTRICTIONS ON OPERATIONS OF THE BANK
Federal regulatory authorities regularly examine the Bank and its activities.
Under certain circumstances, including any determination that the Bank's
activities constitute an unsafe and unsound banking practice, such regulatory
authorities will have the authority to restrict the ability of the Bank to
transfer assets, to make distributions to its stockholders (including dividends
to the holders of Bank Preferred Shares, as described below), or to redeem
shares of preferred stock. Furthermore, in the event the Bank is placed into
conservatorship or receivership, the Bank would be unable to pay dividends on
the Bank Preferred Shares. In addition, in the event of a liquidation of the
Bank, the claims of the Bank's depositors and of its secured, senior, general
and subordinated creditors would be entitled to a priority of payment over the
dividend and other claims of holders of equity interests such as the Bank
Preferred Shares issued pursuant to the Automatic Exchange.
Payment of dividends on the Bank Preferred Shares could also be subject to
regulatory limitations if the Bank became "undercapitalized" for purposes of the
OTS prompt corrective action regulations, which is currently defined as having a
core capital (or leverage) ratio of less than 4.0%, a Tier 1 risk-based capital
ratio of less than 4.0% and a total risk-based capital ratio of less than 8.0%.
At September 30, 1997, the Bank was in compliance with all of its regulatory
capital requirements. As of that date, the Bank's core capital (or leverage)
ratio was
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5.95%, its Tier 1 risk-based capital ratio was 10.88% and its total risk-based
capital ratio was 11.25%. Such ratios, adjusted to give effect to the sale of
Series A Preferred Shares in the offering, would be 7.61%, 13.94% and 14.29%,
respectively.
Under OTS regulations, the ability of thrift institutions such as the Bank to
make "capital distributions" (defined to include payment of dividends, stock
repurchases, cash-out mergers and other distributions charged against the
capital accounts of an institution) varies depending primarily on the
institution's earnings and regulatory capital levels. The OTS retains general
discretion to prohibit any otherwise permitted capital distribution on general
safety and soundness grounds and must be given 30 days advance notice of all
capital distributions. Dividends on the Bank Preferred Shares in excess of the
Bank's net income would be treated as "capital distributions" by the OTS, in
which case the Bank's payment of such dividends would be subject to restrictions
under the OTS capital distribution regulations. Under these regulations,
institutions are divided into tiers. Tier 1 institutions are those in
compliance with their "fully phased-in" capital requirements and which have not
been notified by the OTS that they are "in need of more than normal
supervision." Tier 1 institutions may make capital distributions without
regulatory approval of up to the greater of (i) 100% of net income for the
calendar year to date, plus up to one-half of the institution's surplus capital
(i.e., the excess of capital over the fully phased-in requirement) at the
beginning of the calendar year in which the distribution is made or (ii) 75% of
net income for the most recent four quarters. Tier 1 institutions that make
capital distributions under the foregoing rules must continue to meet the
applicable capital requirements on a pro forma basis after giving effect to such
distributions. Tier 1 institutions may seek OTS approval to pay dividends
beyond these amounts.
The category of Tier 2 institutions, which are defined as institutions that
are in compliance with their current, but not their "fully phased-in" capital
requirements, is no longer relevant because all deductions from capital
requirements have been fully phased-in as of July 1, 1996.
Tier 3 institutions have capital levels below their current required minimum
levels and may not make any capital distributions without the prior written
approval of the OTS.
As of September 30, 1997, the Bank had sufficient levels of capital to be a
Tier 1 institution. However, the OTS retains discretion under its capital
distribution regulations to treat an institution that it believes is in need of
more than normal supervision (after written notice) as a Tier 3 institution.
Moreover, deteriorating collateral values or general economic conditions could
result in recognition of losses on the Bank's loan and REO portfolios and a
consequent reduction in capital.
DIVIDENDS NOT CUMULATIVE
Dividends on the Bank Preferred Shares are not cumulative. Consequently, if
the Board of Directors does not declare a dividend on the Bank Preferred Shares
for any quarterly period, the holders of the Bank Preferred Shares would not be
entitled to recover such dividend whether or not funds are or subsequently
become available. The Board of Directors may determine, in its business
judgment, that it would be in the best interests of the Bank to pay less than
the full amount of the stated dividends on the Bank Preferred Shares or no
dividends for any quarter notwithstanding that funds are available. Factors
that would be considered by the Board of Directors in making this determination
are the Bank's financial condition and capital needs, the impact of legislation
and regulations as then in effect or as may be proposed, economic conditions,
and such other factors as the Board may deem relevant.
The Bank Preferred Shares will be issued upon an Automatic Exchange of the
Series A Preferred Shares. Each Series A Preferred Share will be exchanged
automatically for one Bank Preferred Share if the appropriate regulatory agency
directs in writing an Automatic Exchange of the Series A Preferred Shares for
Bank Preferred Shares because (i) the Bank becomes "undercapitalized" under
prompt corrective action regulations established pursuant to FDICIA, (ii) the
Bank is placed into conservatorship or receivership or (iii) the appropriate
regulatory agency, in its sole discretion, anticipates the Bank's becoming
"undercapitalized" in the near term. The OTS' prompt corrective action
regulations prohibit "capital distributions" (including dividends) unless an
institution is at least "adequately capitalized." Thus, at the time of the
Automatic Exchange, by regulation, the Bank may not be permitted to pay
dividends on the Bank Preferred Shares. In addition, the Bank's ability to pay
dividends on the
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Bank Preferred Shares even if the Bank were "adequately capitalized" following
the Automatic Exchange would be subject to various restrictions under OTS
regulations.
EARNINGS AND ASSET VALUE DECLINES FROM INTEREST RATE FLUCTUATIONS
Changes in interest rates can have a variety of effects on the Bank's
business. In particular, changes in interest rates may impact the volume of
mortgage loan originations, the interest spread on mortgage loans held for sale,
the amount of gain or loss on the sale of mortgage loans and mortgage servicing
rights and the market value of the Bank's mortgage servicing portfolio.
During periods of declining interest rates, such as occurred during 1993, the
Bank typically experiences an increase in mortgage loan originations,
particularly those due to the refinancing of existing mortgages. In addition,
during a declining interest rate environment, the Bank may experience an
increase in prepayments on its residential mortgage loans. As the Bank replaces
these prepaid mortgage loans with newly originated loans, the new origination
interest rates may be lower than the original mortgage interest rate. Since the
dividend rate on the Bank Preferred Stock is fixed, there can be no assurance
that new origination mortgage loans in a declining interest rate environment
will provide enough income to pay dividends. On the other hand, an increase in,
or stabilization of, interest rates for an extended period of time would
adversely affect refinancing demand which could also have an adverse effect on
the Bank's loan origination volume.
The Bank's net interest income or loss is the difference between the interest
income it earns on the loans it originates or purchases as well as on other
interest-earning assets and the interest expense it pays on its interest-bearing
liabilities to fund such interest-earning assets. The Bank principally funds its
interest-earning assets from deposits and borrowings from the Federal Home Loan
Bank of Indianapolis. The profitability of the Bank's mortgage
loan originations is in part a function of the spread between long-term interest
rates (the rates on the loans the Bank holds, whether for investment or for sale
in the secondary market) and short-term interest rates (the rates at which the
Bank funds such mortgage loans). Since 1994, the Bank's interest rate spread has
declined from 3.37% for the year ended December 31, 1994 to 2.27% for the nine
months ended September 30, 1997 in large part because of the decrease in the
prevailing spread between long-term and short-term interest rates. There can be
no assurance that future changes in interest rates will not further decrease
this spread, which may adversely affect the Bank's level of net interest income.
In its retail banking operations, the Bank is subject to interest rate risk on
loans held in its portfolio arising from mismatches (i.e., the interest
sensitivity gap) between the dollar amount of repricing or maturing assets and
liabilities, which is measured in terms of the ratio of the interest rate
sensitivity gap to total assets. More assets repricing or maturing than
liabilities over a given time frame is considered asset-sensitive and is
reflected as a positive gap, and more liabilities repricing or maturing than
assets over a given time frame is considered liability-sensitive and is
reflected as a negative gap. An asset-sensitive position (i.e., a positive gap)
will generally enhance earnings in a rising interest rate environment and will
negatively impact earnings in a falling interest rate environment. A liability-
sensitive position (i.e., a negative gap) will generally enhance earnings in a
falling interest rate environment and negatively impact earnings in a rising
interest rate environment. Fluctuations in interest rates are not predictable or
controllable. Although the Bank has attempted to structure its asset and
liability management strategies to mitigate the impact on net interest income of
changes in market interest rates, there can be no assurance that a sudden or
significant change in prevailing interest rates will not have a material adverse
effect on the Bank's operating results. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition--Asset/Liability
Management--Interest Rate Sensitivity Analysis."
In its mortgage banking operations, the Bank is exposed to interest rate risk
from the time the interest rate on a mortgage loan application is committed to
by the Bank through the time the Bank sells or commits to sell the mortgage
loan. On a daily basis, the Bank 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 Bank 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
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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 Bank will not have made commitments to sell these
additional pipeline loans and may incur significant losses upon their sale as
the market rate of interest will be higher than the mortgage interest rate
committed to by the Bank on such additional pipeline loans. To the extent that
the hedging strategy utilized by the Bank is not successful, the Bank's
profitability may be adversely affected. See "Business--Secondary Marketing."
The market value of, and earnings from, the Bank's mortgage loan servicing
portfolio may be adversely affected by declines in interest rates. If mortgage
interest rates decline and mortgage loan prepayments therefore increase due to
refinancing activity, the income stream from the Bank's current mortgage loan
servicing portfolio may decline. In that case, the Bank may be required to
amortize the portfolio more quickly or reduce the carrying value of its mortgage
loan servicing portfolio, which would adversely affect the Bank's operating
results and financial condition. See "Business--Loan Servicing."
POTENTIAL LOSS OF ACCESS TO AND INCREASED COST OF FUNDING SOURCES
The Bank's principal sources of funding for its operations have been deposits
placed with the Bank and, to a lesser extent, borrowings from the FHLB and funds
held in escrow for mortgage loan servicing purposes. Historically, the Bank's
cost of funds associated with deposits has generally been lower than its cost to
borrow from the FHLB. To the extent the Bank is unable to fund its asset growth
through the maintenance and growth of its deposit base, it may have to rely to a
greater extent on borrowings from the FHLB or other sources. If the cost of non-
deposit funds is higher than the cost of deposits placed with the Bank, the
Bank's net interest income and profitability would be adversely affected. At
September 30, 1997, the Bank had an $850.0 million line of credit with the FHLB,
of which $718.9 million had been drawn and was outstanding.
There can be no assurance that the Bank will be successful in retaining access
to funds at the level or cost necessary to continue originations of single-
family mortgage loans at their current volume and level of profitability. To the
extent that the Bank is not successful in maintaining the availability of its
current funding sources, by retaining existing deposits and attracting new
deposits and by maintaining its line of credit with the FHLB, it may have to
curtail its origination of single-family mortgage loans. A reduction in the
Bank's origination of single-family mortgage loans could have a material effect
on the Bank's gain on mortgage loan sales and sales of mortgage servicing
rights. See "Management's Discussion and Analysis of Changes in Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"Business--Funding Sources."
POSSIBLE LOSS OF ACCESS TO SECONDARY MORTGAGE MARKET
The ability of the Bank to continue the mortgage banking segment of its
operations, which generated a significant portion of the Bank's pre-tax earnings
for the year ended December 31, 1996 and the nine months ended September 30,
1997, and has historically generated substantially all of the Bank's earnings,
is dependent upon the Bank's continued access to an active secondary market in
which to sell its single-family mortgage loans.
The Bank currently sells substantially all of the mortgage loans that it
originates through its mortgage banking operations. The Bank's ability to
readily sell mortgage loans is dependent upon the availability of an active
secondary market for single-family mortgage loans, which in turn depends in part
upon the continuation of programs currently offered by Fannie Mae, Freddie Mac
and other institutional and non-institutional investors. These entities account
for a substantial portion of the secondary market in residential mortgage loans.
Some of the largest participants in the secondary market, including Freddie Mac
and Fannie Mae, are government-sponsored enterprises whose activities are
governed by federal law. Any future changes in those laws could limit the
activity of such government sponsored enterprises or change the terms on which
they acquire loans, which in turn could adversely affect the Bank's operations.
The Bank expects that it will continue to remain eligible to participate in such
programs but any significant impairment of such eligibility could materially and
adversely affect its operations. Further, the criteria for loans to be accepted
under such programs may be changed from time to time by the sponsoring entity.
The profitability of participating in specific programs may vary depending on a
number of factors, including the administrative costs to the Bank of originating
and purchasing qualifying loans.
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There can be no assurance that the Bank will continue to have ready access to
an active secondary market for the sale of its single-family mortgage loans or
that it can continue to originate the types of loans for which such a market
exists. Any significant change in the secondary market level of activity or
underwriting criteria of Fannie Mae, Freddie Mac or other institutional or non-
institutional investors could have a material adverse effect on the Bank's
results of operations.
POTENTIAL LOSS FROM LOAN DELINQUENCIES AND DEFAULTS ON LOANS
From the time that the Bank funds the mortgage loans it originates to the time
it sells such loans, generally 10 to 40 days, the Bank is at risk for any loan
defaults. Once the Bank sells the mortgage loans it originates, the risk of loss
from loan defaults and foreclosure generally passes to the purchaser or insurer
of the loans. In connection with the sale, the Bank typically makes certain
representations and warranties to the purchasers and insurers of such loans.
Such representations and warranties generally relate to the origination and
servicing of loans in substantial conformance with the laws of the state of
origination and applicable investor guidelines and program eligibility
standards. The Bank relies upon its underwriting department to ascertain
compliance with individual investor standards prior to sale of the loans in the
secondary market, and it relies upon its quality control department to test sold
loans on a sample basis for compliance. See "Business--Underwriting" and
"--Quality Control." The purchasers of such loans will typically conduct a more
detailed review of such loans following acquisition to determine whether such
loans were originated in compliance with the purchaser's underwriting guidelines
and program eligibility standards.
If a loan defaults and there has been a breach of the Bank's representations
and warranties, the Bank becomes liable for the unpaid principal and interest on
the defaulted mortgage loan and may be required to repurchase the loan. During
1996, the Bank sold approximately $6.6 billion in single family mortgage loans
in the secondary market, of which approximately $10.4 million (0.16% of loans
sold) were repurchased during 1996. Total repurchases of single family mortgage
loans by the Bank during 1996 of $54.8 million also included $32.7 million
related to loans sold in 1995 (0.69% of such loans) and $11.7 million related to
loans sold prior to 1995. Of the $54.8 million of mortgage loans repurchased
during 1996, $15.0 million were non-performing at the time of repurchase, $10.1
million were non-performing at December 31, 1996 and $3.7 million had been
foreclosed and were held as other repossessed assets at such date. These amounts
represented significant increases over 1995, when the Bank repurchased an
aggregate of $4.5 million of single family residential mortgage loans. This
increase in loan repurchases resulted primarily from the Bank's increased volume
of loan production in 1996 and also the accelerated review by certain secondary
market investors of delinquent and other loans, which in turn accelerated the
process of returning to the Bank loans originated in prior periods that did not
comply with the underwriting standards of such investors. See "Business--Asset
Quality." Primarily as a result of these increases in repurchases of non-
performing loans from secondary market investors, the Bank's level of non-
performing assets increased from 1.25% of total assets at December 31, 1995 to
3.16% at December 31, 1996. Although the Bank increased its provision for losses
from $238,000 in 1995 to $2.6 million in 1996, its ratio of allowance for losses
to non-performing loans declined from 107.59% at December 31, 1994 to 19.67% at
December 31, 1995, 11.43% at December 31, 1996 and 11.23% at September 30, 1997.
The increase in non-performing loans at September 30, 1997 from the amount at
December 31, 1996 resulted primarily from the repurchase of $52.3 million in
mortgage loans from secondary market investors during the first nine months of
1997. Approximately $14.7 million of the loans repurchased in 1997 were non-
performing, $2.0 million were delinquent, and $5.8 million were immediately
classified to a real estate owned status when repurchased. Loan repurchases are
an ongoing part of the Bank's operations since all loans sold in the secondary
market are generally subject to detailed underwriting reviews by the ultimate
purchaser. Although the Bank generally does not sell loans with recourse, it
typically is required to repurchase loans, including defaulted and delinquent
loans, that were not underwritten in strict compliance with the underwriting
standards of secondary market investors. As the volume of the Bank's loan
production has increased substantially over the past several years, the
aggregate amount of loan delinquencies and foreclosures has also increased,
thereby increasing the number of loans potentially subject to repurchase.
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The Bank believes that its risk of loss arising from its non-performing loans,
including loans acquired through repurchase from individual investors after
initial sale in the secondary market, has not materially increased as a result
of either the increase in repurchased loans or the overall increase in non-
performing loans. During 1997, 57.2% of the loans repurchased were performing
loans but were required to be repurchased for reasons (such as failure to meet
all of the secondary market investor's criteria for mortgagor eligibility or
failure to meet the investor's program eligibility requirements) that the Bank
believes do not significantly affect the ultimate collectibility of such loans
or significantly increase the Bank's exposure to losses. A portion of the
repurchased loans are eligible for resale in the secondary market to other
investors, and the Bank does not believe that the remaining repurchased loans
that are currently non-performing or that have been foreclosed, present any
risks of ultimate loss that are significantly different than the Bank has
historically experienced. Of the Bank's $44.1 million of non-performing loans at
September 30, 1997, $40.5 million, or 91.8%, were single family residential
mortgage loans, which generally represent minimal risk of ultimate loss because
of the nature of the collateral securing the loans, the presence of private
mortgage insurance for loans with over-80% LTV ratios, or the presence of
insurance or guarantees on certain loans from the FHA or VA. At September 30,
1997, $19.5 million of such loans were the subject of bankruptcy proceedings by
the mortgagor; however, it has been the Bank's experience that such proceedings
usually result in full repayment to the Bank and present minimal risk of loss
because the imposition of judicial scrutiny and related enforcement powers
supersede the less comprehensive collection methods normally available to the
Bank.
For the reasons discussed under "Management's Discussion and Analysis of
Changes in Financial Condition and Results of Operations," the Bank expects
that the level of its loan repurchases may continue to be above historical
levels for the remainder of 1997 and during 1998. The Bank has historically
incurred minimal losses from charge-offs in connection with its residential
mortgage loan production and does not expect that these increases in loan
repurchases and non-performing assets will result in materially increased levels
of losses in the future (see "Management's Discussion and Analysis of Changes
in Financial Condition and Results of Operations--Financial Condition--Allowance
for Losses"); however, there can be no assurance that this will continue to be
the case.
The Bank is also affected by loan delinquencies and defaults on mortgage loans
that it services. At September 30, 1997, approximately 3.41% of the loans being
serviced by the Bank were delinquent (including foreclosures). Under certain
types of servicing contracts, the servicer must advance all or part of the
scheduled payments to the owner of the loan, even when loan payments are
delinquent. Also, to protect their liens on mortgaged properties, owners of
loans usually require the servicer to advance mortgage and hazard insurance and
tax payments on schedule even if sufficient escrow funds are not available. The
servicer will be reimbursed by the mortgage owner or from liquidation proceeds
for payments advanced that the servicer is unable to recover from the mortgagor,
although the timing of such reimbursement is typically uncertain. In the
interim, the servicer must absorb the cost of funds advanced. Further, the
servicer must bear the costs of attempting to collect on delinquent and
defaulted loans. The Bank also foregoes servicing income from the time a loan
becomes delinquent until foreclosure, at which time such amounts, if any, may be
recovered.
GEOGRAPHIC CONCENTRATIONS IN LOANS HELD FOR INVESTMENT AND SERVICING PORTFOLIO
Historically, the Bank's single-family mortgage loan portfolio held for
investment has been concentrated in certain geographic regions, particularly
Michigan, based upon the location of the property collateralizing the mortgage
loan. Because borrowers of single-family mortgage loans usually reside on the
collateral property, changes in economic and business conditions in the area in
which the property is located can affect the borrower and thus have an effect on
the performance of the loan. As of September 30, 1997, approximately 28.6% of
the Bank's single-family mortgage loans held for investment and of the mortgage
loans serviced by the Bank (as measured by unpaid principal balance) were
collateralized by property located in Michigan. As a result, unfavorable or
worsened economic conditions in Michigan could have a material adverse effect on
the Bank's financial condition and results of operations. Although the Bank
continues to diversify its loan portfolio geographically to minimize this risk,
there can be no assurance that the Bank will be successful in this effort. See
"Business--Lending."
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In addition to risks associated with a geographic concentration of its loan
portfolio, the Bank's results of operations can be affected by the Bank's
concentration of credit to particular borrowers. The Bank currently provides
warehouse lines of credit ranging up to $11.0 million to certain mortgage
companies. At September 30, 1997, the Bank had issued a total of $121.5 million
in such lines of credit, under which $53.3 million in borrowings were
outstanding. Repayment of such loans is dependent upon the retention of value
of the collateral securing the loan and therefore could be subject to a greater
extent to adverse conditions in the economy. The Bank seeks to minimize these
risks by granting warehouse lines of credit generally to borrowers with which
the Bank has had substantial favorable business experience, by monitoring each
credit drawdown for prompt repayment and by requiring collateral with a value in
excess of the amount of the outstanding borrowings. At September 30, 1997, none
of these loans were non-performing or classified. See "Business--Mortgage
Banking Operations--Commercial Lending."
SEASONAL NATURE OF MORTGAGE BANKING BUSINESS
The mortgage banking industry is generally subject to seasonal trends. These
trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during the
spring and summer seasons and decline to lower levels from mid-November through
February. In addition, delinquency rates typically rise in the winter months,
which results in higher servicing costs.
EXPANSION OF RETAIL BANKING BRANCHES
The Bank intends to grow and expand its retail banking operations through the
acquisition or establishment of additional bank branches. This expansion is
expected to be in communities across southern and western Michigan. If the Bank
is unable to generate a customer base within these communities because of
consumer loyalty to other financial institutions or for other reasons, the Bank
will have incurred construction or building acquisition costs and liabilities
under lease agreements as well as related branch overhead expenses without an
appropriate return on its investment. See "Business--Properties" regarding the
Bank's branch expansion plans.
DEPENDENCE ON KEY PERSONNEL
The growth and development of the Bank to date have been largely dependent on
certain key employees, the loss of whom could have a material adverse effect.
The key employees of the Bank are Thomas J. Hammond, Chief Executive Officer;
Mark T. Hammond, President; Michael W. Carrie, Executive Vice President and
Chief Financial Officer; and Joan H. Anderson, Executive Vice President. The
Bank does not carry "key person" life insurance on the lives of its officers.
See "Management."
HIGHLY COMPETITIVE NATURE OF RETAIL AND MORTGAGE BANKING BUSINESS
The Bank competes in the retail banking business primarily with commercial
banks and thrift institutions, many of which have a substantial presence in the
same markets as the Bank. Competitors for deposits include thrift institutions,
commercial banks, credit unions, full service and discount broker dealers, and
other investment alternatives, such as mutual funds, money market funds, and
savings bonds or other government securities. The Bank and its peers compete
primarily on price at which products are offered and on customer service, with
the Bank generally offering deposit rates equal to or greater than prevailing
market rates. See "Management's Discussion and Analysis of Changes in Financial
Condition and Results of Operations--Financial Condition." In addition, the
Bank offers extended hours in its bank branches to attract a retail base of
deposits.
The Bank competes in the mortgage banking business for mortgage originations
with thrift institutions, commercial banks, insurance companies, and mortgage
companies, many of which operate nationwide mortgage origination networks
similar to that of the Bank. Primary competitive factors include service
quality, relationships with builders, mortgage brokers, real estate brokers and
investors, technology, product offerings and rates and fees. Many of the Bank's
competitors are, or are affiliated with, organizations with substantially larger
asset and capital bases (including regional and multi-national banks and bank
holding companies). The Bank has positioned itself
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with a product mix that attracts business from mortgage companies, credit unions
and thrifts that may not have sufficient loan origination volume to obtain
preferential pricing directly in the secondary market.
BANK'S EXPOSURE TO REGULATORY AND LEGISLATIVE CHANGES AND CIVIL LAWSUITS
The Bank, as a federally chartered savings bank, is subject to extensive
regulation, supervision and examination by the OTS and the FDIC. Such regulation
and supervision establishes a comprehensive framework of activities in which a
savings institution may engage and is intended primarily for the protection of
depositors and the SAIF, which is administered by the FDIC. In addition,
Flagstar, as a registered savings and loan holding company, is subject to the
regulation and supervision of the OTS. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities. Any change in such regulation, whether by the OTS,
the FDIC, the Board of Governors of the Federal Reserve Board (the "Federal
Reserve Board") or the U.S. Congress, could have a significant impact on the
Bank and its operations. See "Regulation."
The Bank's lending activities, including its mortgage banking operations, are
subject to the rules and regulations of the FHA, VA, Fannie Mae, Freddie Mac,
the Government National Mortgage Association ("GNMA") and other regulatory
agencies with respect to originating, processing, underwriting, selling, and
servicing mortgage loans. In addition, there are other federal and state
statutes and regulations affecting such activities. These rules and regulations,
among other things, impose licensing obligations on the Bank, prohibit
discrimination and establish underwriting guidelines which include provisions
for inspections and appraisals, require credit reports on prospective borrowers
and fix maximum loan amounts. Moreover, lenders such as the Bank are required
annually to submit audited financial statements to Fannie Mae, Freddie Mac, and
GNMA and to comply with each regulatory entity's own financial requirements. The
Bank's business is also subject to examination by Fannie Mae, Freddie Mac and
GNMA to assure compliance with applicable regulations, policies and procedures.
Mortgage loan origination activities are subject to the provisions of various
federal and state statutes including, among others, the Equal Credit Opportunity
Act, the Federal Truth in Lending Act, the Real Estate Settlement Procedures
Act, the Fair Housing Act, and the regulations promulgated thereunder, which,
among other provisions, prohibit discrimination, prohibit unfair and deceptive
trade practices, and require the disclosure of certain basic information to
mortgagors concerning credit terms and settlement costs, and otherwise regulate
terms and conditions of credit and the procedures by which credit is offered and
administered. Many of the aforementioned regulatory requirements are designed to
protect the interests of consumers, while others protect the owners or insurers
of mortgage loans. Failure to comply with these requirements can lead to loss of
approved status, termination of servicing contracts without compensation to the
servicer, demands for indemnification or loan repurchases, class action lawsuits
and administrative enforcement actions.
In addition, certain states require that interest be paid to mortgagors on
funds deposited by them in escrow to cover mortgage-related payments such as
property taxes and insurance premiums. Federal legislation has in the past been
introduced that revised escrow regulations and established a uniform escrow
calculation methodology in all states. If other states enact legislation
relating to payment of, or increases in the rate of, interest on escrow
balances, or if such legislation were retroactively applied to loans in the
Bank's servicing portfolio, the Bank's earnings would be adversely affected.
In recent years, mortgage originators have been subject to class action
lawsuits that allege violations of federal and state laws and regulations,
including the propriety of collecting and paying various fees and charges and
the calculation of escrow amounts. Class action lawsuits may continue to be
filed in the future against mortgage originators generally. There can be no
assurance that the Bank will not be the subject of such lawsuits in the future.
In the event of an unfavorable court judgment in such lawsuits, if any, the
Bank's results of operations could be adversely affected. See "Business--Legal
Proceedings."
There are various other state and local laws and regulations affecting the
Bank's operations. The Bank is licensed in those states that require licensing
to originate, purchase and/or service mortgage loans.
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FLAGSTAR CAPITAL CORPORATION
In 1997, the Bank established Flagstar Capital Corporation (the "Company") for
the purpose of acquiring, holding and managing real estate mortgage loans. All
of the Company's common stock is owned by the Bank. It is expected that all of
its mortgage loans will be acquired from the Bank. The Company will enter into
an agreement with the Bank pursuant to which the Bank will service mortgage
loans. The Company will be the issuer of the Series A Preferred Shares which,
under certain circumstances, would be exchanged for the Bank Preferred Shares.
USE OF PROCEEDS
The Bank Preferred Shares are to be issued, if ever, in connection with an
Automatic Exchange of the Series A Preferred Shares, which shares were sold
pursuant to an effective registration statement filed with the Commission. The
proceeds from the sale of the Series A Preferred Shares were used by the Company
to purchase a portfolio of mortgage loans. The automatic exchange of Series A
Preferred Shares into Bank Preferred Shares will produce no proceeds to the
Bank.
OC-21
<PAGE>
CAPITALIZATION
The following table sets forth the actual capital of the Bank at September 30,
1997 and as adjusted as of such date to give effect to (i) the issuance of the
Series A Preferred Shares by Flagstar Capital Corporation and (ii) an Automatic
Exchange of the Series A Preferred Shares into Bank Preferred Shares of the
Bank. This table should be read in conjunction with the Consolidated Financial
Statements of the Bank and the notes thereto included elsewhere in this Offering
Circular.
<TABLE>
<CAPTION>
At September 30, 1997
---------------------------------------------------
Historical As Adjusted(2) As Adjusted(3)
------------ ----------------- -----------------
<S> <C> <C> <C>
(Dollars in thousands)
Long-term debt (1)........................................... $152,500 $152,500 $152,500
-------- -------- --------
Minority Interest in capital stock
of consolidated subsidiary................................... -- 50,000(4) --
Stockholder's Equity:
Preferred Stock [ ]% Noncumulative Preferred Stock, Series
A, $25.00 par value, 4,000,000 shares authorized; issued
and outstanding, 2,000,000 as adjusted..................... -- -- 50,000
Common Stock, $1.00 par value, 1,000,000 shares authorized,
500,000 shares issued and outstanding...................... 3,000 3,000 3,000
Additional paid-in capital.................................. 28,111 25,193(5) 25,193(5)
Retained earnings........................................... 89,944 89,944 89,944
-------- -------- --------
Total stockholders' equity................................. 121,055 118,137 168,137
-------- -------- --------
Total capitalization..................................... $273,555 $320,637 $320,637
======== ======== ========
Regulatory capital ratios:
Tangible Capital............................................ 5.73% 7.39% 7.87%
Core Capital................................................ 5.95% 7.61% 8.08%
Tier 1 Risk-Based Capital................................... 10.88% 13.94% 14.81%
Total Risk-Based Capital(3)................................. 11.25% 14.29% 14.52%
</TABLE>
- ---------------------
(1) Reflects FHLB advances maturing more than one year from September 30, 1997.
(2) Adjusted to give effect to the issuance of the Series A Preferred Shares by
the Company.
(3) Adjusted to give effect to the Automatic Exchange of the Series A Preferred
Shares into Bank Preferred Shares.
(4) All of the preferred stock of Flagstar Capital Corporation, while
outstanding, is eligible as permanent regulatory capital of the Bank and, as
such, is includable in the core capital accounts of the Bank at up to a
maximum of 25% of the Bank's total core (or leverage) capital.
(5) Offering expenses are expected to be approximately $2.9 million.
OC-22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table presents selected consolidated financial and other data
as of and for the nine months ended September 30, 1997 and 1996 and each of the
five years in the period ended December 31, 1996. The information set forth
below should be read in conjunction with the Consolidated Financial Statements
and the Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Consolidated Statements of Financial
Condition as of December 31, 1996 and 1995, and the Consolidated Statements of
Earnings for each of the three years in the period ended December 31, 1996, are
included elsewhere in this Prospectus. The selected consolidated financial and
other data as of September 30, 1997 and for the nine months ended September 30,
1997 and 1996 are unaudited and are derived from the Bank's internal
consolidated financial statements which, in the opinion of management, contain
all adjustments (consisting only of normal recurring adjustments) which are
necessary for a fair presentation of the results for such periods. The results
of operations for the nine months ended September 30, 1997 are not necessarily
indicative of the results of operations to be obtained for the entire year.
<TABLE>
<CAPTION>
At or for the Nine Months
Ended September 30, At or for the Years Ended December 31,
------------------------- -------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations:
- ----------------------
Interest income................ $84,789 $57,679 $76,179 $71,304 $35,112 $29,760 $18,735
Interest expense............... 54,597 34,121 45,967 41,443 14,482 12,052 9,227
------- ------- ------- ------- ------- ------- -------
Net interest income............ 30,192 23,558 30,212 29,861 20,630 17,708 9,508
Provision for losses........... 3,730 1,140 2,604 238 290 644 380
------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for losses.......... 26,462 22,418 27,608 29,623 20,340 17,064 9,128
Non-interest income
Loan administration
income...................... 5,543 11,110 11,859 14,248 13,261 7,786 2,340
Net gain on loan sales........ 9,269 4,536 4,511 2,872 (1,132) 7,015 6,900
Net gain on sales of
mortgage servicing rights.... 25,472 20,917 35,129 13,356 28,489 13,385 3,021
Other income................. 3,158 5,085 6,803 4,626 2,065 5,468 6,162
------- ------- ------- ------- ------- ------- -------
Total..................... 43,442 41,648 58,302 35,102 42,683 33,654 18,423
------- ------- ------- ------- ------- ------- -------
Non-interest expense
Compensation and benefits.... 19,303 18,443 25,479 18,538 18,609 7,984 5,184
Other expense................ 25,730 27,809(1) 33,060(1) 21,311 18,975 13,308 7,298
------- ------- ------- ------- ------- ------- -------
Total..................... 45,033 46,252 58,539 39,849 37,584 21,292 12,482
------- ------- ------- ------- ------- ------- -------
Earnings before federal
income taxes.................. 24,871 17,814 27,371 24,876 25,439 29,426 15,069
Provision for federal
income taxes............... 9,043 6,387 10,258 9,348 9,302 10,405 5,275
------- ------- ------- ------- ------- ------- -------
Net earnings................... $15,828 $11,427(1) $17,113(1) $15,528 $16,137 $19,021 $ 9,794
======= ======= ======= ======= ======= ======= =======
</TABLE>
(continued)
OC-23
<PAGE>
<TABLE>
<CAPTION>
At September 30, At December 31,
----------------- ----------------------------------------------------------
1997 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Summary of Financial Condition:
- -------------------------------
Total assets................................. $2,033,199 $1,296,810 $1,044,851 $722,469 $467,629 $304,758
Loans receivable:
Mortgage loans available for sale.......... 1,363,822 840,767 620,455 205,480 389,073 218,266
Loans held for investment.................. 444,552 273,579 305,590 429,800 26,906 21,637
Less: Allowance for losses................ (4,950) (3,500) (2,102) (1,871) (901) (550)
---------- ---------- ---------- --------- --------- ---------
Total loans, net...................... 1,803,424 1,110,846 923,943 633,409 415,078 239,353
Mortgage servicing rights.................... 51,713 30,064 27,957 18,179 17,563 11,108
Deposits..................................... 1,012,121 624,732 529,218 308,497 190,761 181,171
FHLB advances................................ 718,878 389,801 191,156 200,750 55,000 --
Stockholder's equity......................... 121,055 77,899 61,003 47,925 35,114 16,767
</TABLE>
(continued)
OC-24
<PAGE>
<TABLE>
<CAPTION>
At or for the Nine Months
Ended September 30, At or for the Years Ended December 31,
------------------------- --------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Performance Ratios(2):
- ----------------------
Return on average assets....... 1.34% 1.38% 1.54% 1.64% 3.19% 4.39% 3.72%
Return on average equity....... 21.53% 22.61% 24.82% 29.52% 35.79% 69.56% 84.78%
Interest rate spread........... 2.27% 2.13% 2.13% 2.36% 3.37% 3.39% 2.04%
Net interest margin............ 2.83% 3.21% 3.07% 3.46% 4.63% 4.55% 3.92%
Ratio of average interest
earning assets to average
interest bearing liabilities.. 111% 123% 120% 123% 139% 137% 158%
Ratio of non-interest expense
to average assets............. 3.80% 5.58% (3) 5.25% (3) 4.20% 7.43% 4.92% 4.71%
Efficiency ratio (4)........... 59.8% 69.5% 64.7% 59.3% 58.3% 41.5% 44.7%
Dividend payout ratio.......... -- 8.75% 5.84% 15.78% 19.83% 4.21% 7.66%
Asset Quality Data:
- -------------------
Net charge-offs to average
loans outstanding(2).......... 0.22% 0.03% 0.13% 0.00% 0.08% 0.08% 0.09%
Non-performing assets to
total assets at end of period. 3.04% 3.37% 3.16% 1.25% 0.42% 0.60% 0.94%
Non-performing loans to total
loans at end of period........ 2.44% 3.50% 2.75% 1.15% 0.27% 0.37% 0.85%
Allowance for losses to total
loans at end of period........ 0.27% 0.33% 0.31% 0.23% 0.29% 0.22% 0.23%
Allowance for losses to
non-performing loans at end
of period..................... 11.23% 9.56% 11.43% 19.67% 107.59% 58.17% 26.84%
Capital Ratios:
- ---------------
Tangible Capital............... 5.73% 6.22% 5.58% 5.19% 5.54% 7.41% 5.35%
Core Capital................... 5.95% 6.75% 6.01% 5.84% 6.63% 7.41% 5.35%
Total Risk-based Capital....... 11.25% 11.96% 10.91% 10.12% 12.08% 13.84% 13.40%
Average equity-to-average
assets........................ 6.20% 6.09% 6.19% 5.54% 8.91% 6.32% 5.14%
Mortgage Origination and
- ------------------------
Servicing Data:
- ----------------
Mortgage loans originated or
purchased..................... $5,287,711 $5,283,843 $6,791,665 $5,195,605 $3,720,173 $6,220,415 $2,984,076
Mortgage loans sold............ $4,518,451 $5,285,538 $6,581,897 $4,760,806 $3,551,319 $6,034,828 $2,888,564
Mortgage loans serviced for
others(5)..................... $4,143,352 $6,946,080 $4,801,581 $6,788,530 $5,691,421 $6,198,311 $3,091,399
Capitalized value of mortgage
servicing rights (6).......... 1.25% 0.60% 0.63% 0.41% 0.32% 0.28% 0.36%
Other Data:
- -----------
Full-time equivalent
employees..................... 1,110 1,179 1,310 1,142 869 971 584
Number of branches............. 19 15 15 13 9 1 1
Number of wholesale/
correspondent lending
centers....................... 10 10 10 9 6 5 4
</TABLE>
(footnotes on following page)
OC-25
<PAGE>
- -------------
(1) Includes the special deposit insurance assessment imposed on SAIF-insured
institutions during September 1996. The Bank's assessment was $3.4 million,
before taxes. If such assessment had not been imposed, the Bank's net
earnings would have been approximately $13.6 million for the nine months
ended September 30, 1996 and its return on average assets and return on
average equity for the period would have been 1.64% and 26.90%,
respectively. If such assessment had not been imposed, the Bank's net
earnings would have been approximately $19.3 million for the year ended
December 31, 1996 and its return on average assets and return on average
equity for the period would have been 1.73% and 27.97%, respectively.
(2) Ratios are annualized where applicable.
(3) Excluding the special SAIF assessment of $3.4 million, before taxes,
incurred during 1996, mentioned in footnote 1 above, such ratio would have
been 5.17% for the nine months ended September 30, 1996 and 4.94% for the
year ended December 31, 1996.
(4) Computed as non-interest expense (excluding amortization of core deposit
premiums) divided by the sum of net interest income and non-interest income.
Excluding the special SAIF assessment of $3.4 million, before taxes,
incurred during 1996, mentioned in footnote 1 above, such ratio would have
been 64.3% for the nine months ended September 30, 1996 and 60.8% for the
year ended December 31, 1996.
(5) Amount excludes loans being subserviced for others, which is servicing of
loans subsequent to the sale of the related mortgage servicing rights but
prior to their delivery, of $2.0 billion, $2.1 billion, $3.6 billion and
$536.3 million at September 30, 1997 and 1996 and December 31, 1996 and
1995, respectively. There was no subservicing in prior years.
(6) Reflects percentage of book value of mortgage servicing rights to loans
serviced for others (excluding subservicing).
OC-26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CHANGES IN FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Bank's operations are segregated into two segments, mortgage banking
and retail banking. The mortgage banking operation commenced in 1987 and
involves the origination and purchase of single-family residential mortgage
loans on a nationwide basis and residential construction loans on a regional
basis, the sale of such loans, usually on a pooled and securitized basis, in the
secondary market, and the servicing of mortgage loans for investors as well as
the Bank's own loan portfolio. The retail banking operation involves attracting
deposits from the general public and originating consumer, commercial and
commercial real estate loans, primarily through the Bank's branch network. A
significant portion of the deposits attracted by the Bank through its branch
network and from wholesale sources is used to support the mortgage banking
operations.
The tables below set forth certain information for the Bank's businesses for
the periods shown. Prior to the Bank's acquisition of a longstanding community
institution in 1994, the Bank did not have material retail banking operations.
In addition, during May 1997, Flagstar consummated the initial public offering
of its common stock and invested approximately $27.3 million in net proceeds
into the Bank.
REVENUES
--------
<TABLE>
<CAPTION>
Retail Mortgage
Banking Operation Banking Operation Combined
-------------------------- -------------------------- --------------------------
(In thousands)
<S> <C> <C> <C>
Nine months ended:
- -------------------------
September 30, 1997 $16,097 $57,537 $73,634
September 30, 1996 9,309 55,897 65,206
Year ended:
- -----------
December 31, 1996 13,791 74,723 88,514
December 31, 1995 12,390 52,573 64,963
December 31, 1994 1,432 61,881 63,313
<CAPTION>
EARNINGS (LOSS) BEFORE INCOME TAXES
-----------------------------------
Retail Mortgage
Banking Operation Banking Operation Combined
------------------------------ -------------------------- --------------------------
(In thousands)
<S> <C> <C> <C>
Nine months ended:
- ------------------
September 30, 1997 $ 8,429 $16,442 $24,871
September 30, 1996 1,164(1) 16,650 17,814
Year ended:
- -------------------------
December 31, 1996 3,305(1) 24,066 27,371
December 31, 1995 3,549 21,327 24,876
December 31, 1994 (2,127)(2) 27,566 25,439
</TABLE>
(Footnotes on following page)
OC-27
<PAGE>
- ---------------
(1) The earnings before income taxes of the retail banking segment for the nine
months ended September 30, 1996 and for the year ended December 31, 1996
were each adversely affected by the one-time SAIF assessment of $3.4 million
before taxes ($2.2 million, net of taxes) imposed as of September 30, 1996.
(2) The retail banking segment began with the acquisition of Security Savings
Bank on July 1, 1994. See "Business--Lending--Retail Banking Operations."
The Bank's earnings are primarily dependent upon four revenue sources: its net
interest income, which is the difference between interest earned on interest-
earning assets (including loans held for sale in the Bank's mortgage banking
operations as well as loans held for investment) and interest paid on interest-
bearing liabilities; fee income from servicing mortgages held by investors;
gains realized on sales of mortgage loans; and gains realized on the sale of
mortgage servicing rights. These revenues are in turn significantly affected by
factors such as changes in prevailing interest rates and in the yield curve
(that is, the difference between prevailing short-term and long-term interest
rates), as well as changes in the volume of mortgage originations nationwide and
prepayments of outstanding mortgages.
Since 1993 there has been a gradual flattening of the yield curve which has
had the effect of reducing the Bank's net interest spread. In order to offset
this change, the Bank has pursued a strategy of expanding its retail banking
branch network in order to gain greater access to lower-cost retail deposits and
reduce its reliance on wholesale funding sources and other borrowings. The Bank
does not use warehouse loans from commercial lending sources.
In addition, changes in prevailing interest rates have had a significant
effect on the Bank's mortgage loan production volume. The Bank's mortgage loan
production volume more than doubled between 1992 and 1993 (from $3.0 billion to
$6.2 billion) principally as a result of the record level of refinancing
activity that occurred in 1993 following the sudden decline in interest rates.
Excluding the 1993 surge in refinancing activity, the Bank's mortgage loan
origination volume has grown steadily and significantly each year, from $3.0
billion in 1992 to $6.8 billion in 1996 and $5.3 billion during the first nine
months of 1997. This in turn has contributed to the yearly growth in net
interest income and loan administration income, as well as the substantial gains
on loan sales and gains on sales of mortgage servicing rights, that the Bank has
been able to recognize during this period.
RESULTS OF OPERATIONS
OVERVIEW OF OPERATING RESULTS. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996. Net earnings increased to $15.8
million in 1997 from $11.4 million in the same period in 1996. These increased
earnings were the result of a $6.6 million increase in net interest income, a
$1.8 million increase in non-interest income, and a decrease in non-interest
expenses of $1.3 million, offset by a $2.6 million increase in the provision for
losses and a $2.6 million increase in the provision for federal income taxes.
The increase in net earnings resulted primarily from the Bank's increase in
average assets which totaled $1.6 billion for the nine months ended September
30, 1997, an increase of $500.0 million or 45.5% from $1.1 billion for the nine
months ended September 30, 1996. In addition, the nine months ended September
30, 1996 were influenced by the one-time SAIF assessment of $2.2 million (after
tax).
1996 COMPARED TO 1995. Net earnings for 1996 were $17.1 million, a 10.3%
increase from the $15.5 million reported in 1995. Excluding the effect of the
one-time SAIF assessment of $2.2 million (after tax) in 1996, net earnings would
have been $19.3 million, a 24.5% increase over the 1995 period. The increase in
net earnings resulted from increases in net gains on loan sales and sales of
mortgage servicing rights (up $23.4 million, or 144.4%), and a $300,000, or
1.0%, increase in net interest income. The increase in net interest income
resulted primarily from a 14.0% increase in average interest-earning assets
reflecting continued strong growth in the Bank's loan production volume, offset
in part by a decrease in the net interest spread caused by a continued
flattening of the yield curve. These increases in net interest income and non-
interest income were offset by increases in the provision for losses, higher
compensation and benefit expenses, reflecting staff increases and merit raises,
and an increase in general and administrative expenses resulting from increased
loan production levels and expansion of the Bank's branch network.
1995 COMPARED TO 1994. Net earnings decreased by 3.7% to $15.5 million in
1995 from $16.1 million in 1994 as a result of an $11.2 million reduction in the
level of gains on loan sales and sales of mortgage servicing rights ($16.2
million in 1995 compared to $27.4 million in 1994) and an increase in other non-
interest expenses of $2.3 million (from
OC-28
<PAGE>
$19.0 million in 1994 to $21.3 million in 1995), which more than offset a
substantial increase in net interest income (from $20.6 million to $29.9
million) and significant increases in loan administration income. The reduction
in gains on sales of mortgage servicing in part resulted from a $300 million
decrease in unpaid principal balance of the mortgage loans underlying the
mortgage servicing rights sold as well as the sale of currently originated
higher coupon mortgage servicing rights sold in 1995.
NET INTEREST INCOME. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 1996. Net interest income for the period ended
September 30, 1997 increased $6.6 million, or 28.0%, to $30.2 million as
compared to $23.6 million for the period ended September 30, 1996. This increase
was caused primarily by a $400 million increase in average interest-earning
assets between the comparable periods. Average interest-earning assets
increased to $1.4 billion for the nine months ended September 30, 1997 from $1.0
billion for the nine months ended September 30, 1996. At the same time, the
Bank's interest rate spread increased from 2.13% in the 1996 period to 2.27% in
the 1997 period. The Bank's net interest margin decreased from 3.21% in the 1996
period to 2.83% in the 1997 period.
The decrease in the Bank's net interest margin was a direct result of the
leveraged asset growth employed by the Bank. The ratio of average interest-
earning assets to average interest-bearing liabilities decreased to 111% for the
period ended September 30, 1997, as compared to 123% for the period ended
September 30, 1996. This decrease occurred as a result of the Bank's funding the
total asset growth of $500 million with interest-bearing liabilities.
Additionally, the Bank was forced to replace $39.8 million of non interest-
bearing liabilities ( i.e., escrow accounts and undisbursed payments on loans
serviced for others) with interest-bearing liabilities. The Bank's interest rate
spread was positively affected by an increase in the spread between short-term
funding liabilities and longer-term assets.
1996 COMPARED TO 1995. Net interest income increased $300,000, or 1.0%, to
$30.2 million for the year ended December 31, 1996, from $29.9 million for the
year ended December 31, 1995. This increase was due primarily to a $121.3
million increase in average interest-earning assets between the comparable
periods, offset in part by the related increase in interest-bearing liabilities
necessary to fund such growth. At the same time, the Bank's interest rate
spread declined from 2.36% for the year ended December 31, 1995 to 2.13% for
1996, which resulted in a decrease in the Bank's net yield on interest-earning
assets to 3.07% for the year ended December 31, 1996 from 3.46% for 1995. This
decrease was caused by a slight compression in the yield curve for interest-
earning assets priced off of 10-year and 15-year U. S. Treasury securities as
compared to funding sources priced off of the one-year U. S. Treasury
Securities.
1995 COMPARED TO 1994. Net interest income for the year ended December 31,
1995 increased $9.3 million, or 45.2%, to $29.9 million as compared to $20.6
million in net interest income for the year ended December 31, 1994. This
increase was caused primarily by substantial increases in interest earning
assets. Average earning assets were $864.0 million and $445.6 million for the
years ended December 31, 1995 and 1994, respectively. At the same time, the
Bank's interest rate spread declined from 3.37% for the year ended December 31,
1994 to 2.36% for 1995 and the net interest margin declined from 4.63% to 3.46%
during such periods. These decreases resulted primarily from the substantial
growth in the Bank's average assets between 1994 and 1995. In order to fund such
growth, the Bank significantly increased its use of brokered deposits, which
typically have a higher interest rate than retail deposits, and FHLB advances,
which are subject to daily repricing. The average cost of such funding sources
increased from 4.79% and 4.44%, respectively, in 1994 to 6.21% and 6.35%,
respectively, in 1995. During the same periods, the average yields on the Bank's
loans increased by 32 basis points, from 8.00% in 1994 to 8.32% in 1995. In
addition, as a result of the asset growth, the ratio of average interest-earning
assets to average interest-bearing liabilities decreased to 123% for the year
ended December 31, 1995, as compared to 139% for the year ended December
31,1994, and the ratio of non-interest bearing funding sources to interest-
earning assets declined. The Bank's interest rate spread and net interest margin
were also adversely affected by a significant compression in the yield curve
between short-term funding liabilities and longer-term assets.
AVERAGE BALANCES, INTEREST RATES AND YIELDS. Net interest income is affected
by (i) the difference ("interest rate spread") between rates of interest earned
on interest-earning assets and rates of interest paid on interest-bearing
liabilities and (ii) the relative amounts of interest-bearing liabilities and
interest-earning assets. When the total of interest-earning assets approximates
or exceeds the total of interest-bearing liabilities, any positive interest rate
spread will generate net interest income. Financial institutions have
traditionally used interest rate spreads as a measure of net interest income.
Another indication of an institution's net interest income is its "net yield on
interest-earning assets" or "net interest margin," which is net interest income
divided by average interest-earning assets.
OC-29
<PAGE>
The following table sets forth certain information relating to the Bank's
consolidated average interest-earning assets and interest-bearing liabilities
and reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of assets or liabilities, respectively,
for the periods presented. During the periods indicated, non-accruing loans, if
any, are included in the net loan category. Average balances are derived from
month-end average balances. Management does not believe that the use of month-
end average balances instead of average daily balances has caused any material
difference in the information presented.
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
------------------------------------------------------------------------
1997 1996
------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
---------- -------- ---------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net................. $1,396,010 $83,029 7.93% $ 952,395 $56,430 7.90%
FHLB stock............................ 25,957 1,654 8.52% 19,844 975 6.57%
Other................................. 2,448 106 5.79% 7,138 274 5.13%
---------- -------- ---------- --------
Total............................... 1,424,415 84,789 7.94% 979,377 57,679 7.85%
-------- --------
Non-interest-earning assets........... 155,610 126,367
---------- ----------
Total assets.......................... $1,580,025 $1,105,744
========== ==========
Interest-bearing liabilities:
Demand Deposits....................... $ 65,715 1,061 2.16% $ 73,154 1,723 3.15%
Savings Deposits...................... 70,888 2,164 4.08% 28,050 282 1.34%
Certificates of deposit............... 704,825 31,757 6.02% 434,587 20,069 6.17%
FHLB advances......................... 427,310 18,774 5.87% 243,564 11,226 6.16%
Other................................. 19,451 841 5.78% 18,837 821 5.83%
---------- -------- ---------- --------
Total interest-bearing
liabilities.......................... 1,288,189 54,597 5.67% 798,192 34,121 5.72%
Non-interest-bearing liabilities..... 193,814 240,176
---------- ----------
Total liabilities..................... 1,482,003 1,038,368
Equity................................ 98,022 67,376
---------- ----------
Total liabilities and equity.......... $1,580,025 $1,105,744
========== ==========
Net interest-earning assets........... $ 136,226 $ 181,185
========== ==========
________ -------
Net interest income................... $30,192 $23,558
======== =======
Interest rate spread.................. 2.27% 2.13%
Net interest margin................... 2.83% 3.21%
Ratio of average
interest-earning assets to
interest-bearing
liabilities........................... 111% 123%
</TABLE>
OC-30
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- ------------------------------- --------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
---------- -------- ---------- ---------- -------- ---------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net...... $ 964,257 $74,588 7.74% $835,600 $69,543 8.32% $419,147 $33,533 8.00%
FHLB stock................. 18,776 1,471 7.83% 16,304 1,285 7.88% 9,534 553 5.80%
Other...................... 2,230 120 5.38% 12,098 476 3.93% 16,871 1,026 6.08%
---------- -------- ---------- -------- ---------- --------
Total...................... 985,263 76,179 7.73% 864,002 71,304 8.25% 445,552 35,112 7.88%
---------- -------- ---------- -------- ---------- --------
Non-interest-earning
assets.................... 129,005 85,686 60,254
---------- -------- --------
Total assets............ $1,114,268 $949,688 $505,806
========== ======== ========
Interest-bearing
liabilities:
Demand deposits............ $ 86,650 2,499 2.88% $ 63,844 1,824 2.86% $ 27,892 773 2.77%
Savings deposits........... 18,933 428 2.26% 10,119 228 2.25% 5,385 127 2.36%
Certificates of deposit.... 446,808 27,504 6.16% 371,756 23,071 6.21% 169,986 8,137 4.79%
FHLB advances.............. 247,204 14,291 5.78% 237,535 15,072 6.35% 83,912 3,726 4.44%
Other...................... 21,227 1,245 5.87% 19,703 1,248 6.33% 34,267 1,719 5.03%
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
liabilities................ 820,822 45,967 5.60% 702,957 41,443 5.89% 321,442 14,482 4.51%
Non-interest-bearing
liabilities................ 224,484 194,128 139,278
---------- ---------- ----------
Total liabilities....... 1,045,306 897,085 460,720
Equity..................... 68,962 52,603 45,086
---------- ---------- ----------
Total Liabilities and
Equity.................... $1,114,268 $949,688 $505,806
========== ======== ========
Net interest-earning assets. $ 164,441 $161,045 $124,110
========== ======== ========
-------- -------- --------
Net interest income......... $30,212 $29,861 $20,630
======== ======== ========
Interest rate spread........ 2.13% 2.36% 3.37%
Net interest margin......... 3.07% 3.46% 4.63%
Ratio of average
interest-earning assets to
interest-bearing
liabilities................ 120% 123% 139%
</TABLE>
OC-31
<PAGE>
RATE/VOLUME ANALYSIS. The following table analyzes net interest income in
terms of changes in the volume of interest-earning assets and interest-bearing
liabilities and changes in yields and rates. The table reflects the extent to
which changes in the interest income and interest expense are attributable to
changes in volume (changes in volume multiplied by prior year rate) and changes
in rate (changes in rate multiplied by prior year volume). Changes attributable
to the combined impact of volume and rate have been allocated proportionately to
changes due to volume and changes due to rate.
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30, For the Years Ended December 31,
---------------------------- ---------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995 1995 vs. 1994
---------------------------- ----------------------------- -------------------------------
Rate Volume Net Rate Volume Net Rate Volume Net
-------- -------- -------- --------- -------- -------- --------- --------- ---------
(In thousands)
Interest Income:
- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans
receivable, net..... $ 315 $26,284 $26,599 $(5,663) $10,708 $5,045 $ 2,693 $33,317 $36,010
FHLB stock.......... 380 299 679 (9) 195 186 339 393 732
Other............... 12 (180) (168) 32 (388) (356) (260) (290) (550)
------ ------- ------- ------- ------- ------ ------- ------- -------
Total............. $ 707 $26,403 $27,110 $(5,640) $10,515 $4,875 $ 2,772 $33,420 $36,192
------ ------- ------- ------- ------- ------ ------- ------- -------
Interest Expense:
- -----------------
Deposits............ $ 173 $12,735 $12,908 $ (199) $ 5,507 $5,308 $ 5,319 $10,767 $16,086
FHLB advances....... (923) 8,471 7,548 (1,395) 614 (781) 4,525 6,821 11,346
Other............... (7) 27 20 (100) 97 (3) 258 (729) (471)
------ ------- ------- ------- ------- ------ ------- ------- -------
Total............. $ (757) $21,233 $20,476 $(1,694) $ 6,218 $4,524 $10,102 $16,859 $26,961
------ ------- ------- ------- ------- ------ ------- ------- -------
Net Change in
Net Interest
Income............ $1,464 $ 5,170 $ 6,634 $(3,946) $ 4,297 $ 351 $(7,330) $16,561 $ 9,231
====== ======= ======= ======= ======= ====== ======= ======= =======
</TABLE>
PROVISION FOR LOSSES. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1996. The provision for losses increased to $3.7
million for the 1997 period from $1.1 million for the same period in 1996. The
Bank's determination of its provision for losses reflects its consideration of
the potential loss that may arise from loans in its portfolio or which it
services for others. The increase in the provision reflected the increase in the
level of non-performing loans to $44.1 million at September 30, 1997, from $30.6
million at December 31, 1996, an increase of approximately $13.5 million, or
44.1%, and the increase in the level of net charge-offs to 0.22% (annualized) of
average loans outstanding in the 1997 period from 0.03% in the 1996 period. See
"Business-Asset Quality."
1996 COMPARED TO 1995. The provision for losses increased to $2.6 million
for 1996 from $238,000 for 1995. The Bank's determination of its provision for
losses reflects its consideration of the potential loss that may arise from
loans in its portfolio or which it services for others. See "Business-Asset
Quality." The increase in the provision reflected the increase in the level of
non-performing loans to $30.6 million at December 31,1996, from $10.7 million at
December 31, 1995, an increase of approximately $19.9 million, or 186%, and the
increase in the level of net charge-offs to 0.13% of average loans in 1996 from
0.00% in 1995. Single family residential mortgage loans comprised approximately
$27.0 million, or 88%, of non-performing loans at December 31, 1996 compared to
94% at December 31, 1995. "See "-Financial Condition- Allowances for Losses"
and "Business-Asset Quality".
1995 COMPARED TO 1994. The provision for losses decreased to $238,000 in
1995 from $290,000 in 1994. This decrease was not significant based on the
minimal amount of net charge-offs during 1995.
NON-INTEREST INCOME. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1996. Non-interest income increased $1.8 million, or
4.3%, to $43.4 million in the 1997 period, from $41.6 million for the 1996
period. This increase resulted from an increase in net gain on loan sales, and
an increase in net gain on the sales of mortgage servicing rights, offset by
decreases in loan administration fees and other fees and charges during the 1997
period.
1996 COMPARED TO 1995. Non-interest income increased $23.2 million, or
66.1%, to $58.3 million for 1996, from $35.1 million for 1995. The majority of
this increase resulted from increased net gains on loan sales and sales of
mortgage servicing rights.
OC-32
<PAGE>
1995 COMPARED TO 1994. Non-interest income for the year ended December 31,
1995 decreased $7.6 million, or 17.8%, to $35.1 million from $42.7 million for
the year ended December 31, 1994. The majority of the decrease was attributed
to a decrease in the net gains on mortgage loan sales and sales of mortgage
servicing rights, together with a slight decrease in the volume of mortgage
servicing rights sold.
LOAN ADMINISTRATION. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 1996. Loan administration fee income decreased
$5.6 million, or 50.5%, to $5.5 million for the 1997 period, from $11.1 million
for the 1996 period. This decrease was the direct result of the decrease in the
amount of mortgage loans serviced for others from $6.9 billion to $4.1 billion.
The decline in mortgage loans serviced for others reflects the Bank's sale of
higher coupon mortgage servicing rights in a low interest rate environment,
because of the relatively higher value of such rights and the greater likelihood
of prepayments in such a portfolio. Since a number of these loans were sold,
loan administration volume, and correspondingly loan administration income,
decreased.
1996 COMPARED TO 1995. Loan administration income decreased $2.3 million or
16.2%, to $11.9 million for 1996, from $14.2 million for 1995. This decrease
resulted primarily from a decrease in mortgage loans serviced. At December 31,
1996, the unpaid principal balance of loans serviced for others decreased $2.0
billion, or 29.4%, to $4.8 billion, from $6.8 billion at December 31, 1995. At
December 31, 1996 and 1995, the weighted average servicing fee on loans serviced
for others was 0.289% (i.e., 28.9 basis points) and 0.287%, respectively.
1995 COMPARED TO 1994. Loan administration income for the year ended
December 31, 1995 increased $900,000, or 6.8%, to $14.2 million from $13.3
million for the year ended December 31, 1994. This increase was attributable to
an increase in loans being serviced, of $1.1 billion, or 19.3% from $5.7 billion
at December 31, 1994 to $6.8 billion at December 31, 1995. The weighted average
servicing fee on loans serviced for others (excluding subserviced loans) was
0.287% at December 31, 1995 and 1994.
NET GAIN ON LOAN SALES. NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS THE
NINE MONTHS ENDED SEPTEMBER 30, 1996. For the 1997 period, net gain on loan
sales reported was $9.3 million versus $4.5 million in the 1996 period. The
1997 period contained the sale of $4.5 billion in loans versus $5.3 billion sold
in the 1996 period. The reduced amount of loan sales was attributable to the
Bank's decision to retain more loans for its own portfolio. The Bank's ability
to recognize more gain in 1997 despite the reduced sale volume is, in
management's opinion, a reflection of the more stable interest rate environment
in 1997 and the Bank's effective hedging.
1996 COMPARED TO 1995. For 1996, net gain on loan sales increased $1.6
million, or 55.2%, to $4.5 million, from $2.9 million for 1995. These higher
levels of gains were attributable to increases in the amount of loans sold. For
1995 versus 1996, the principal balance of the loans sold increased from $4.8
billion to $6.6 billion.
1995 COMPARED TO 1994. For the year ended December 31, 1995, net gain on
loan sales increased $4.0 million to $2.9 million, from a $1.1 million loss.
The increase in the gain on the mortgage loans sold was principally the result
of the increase in the volume of loans sold in the year ended 1995 of $1.2
billion, from $3.6 billion in 1994 to $4.8 billion in 1995.
NET GAIN ON SALES OF MORTGAGE SERVICING RIGHTS. NINE MONTHS ENDED SEPTEMBER
30, 1997 VERSUS THE NINE MONTHS ENDED SEPTEMBER 30, 1996. For the 1997 period,
net gain on sales of mortgage servicing rights was $25.5 million versus $20.9
million in the 1996 period. The 1997 period contained $3.6 billion in bulk
sales and the sale of $582 million in loans sold servicing released (i.e., a
total of $4.2 billion) versus $3.5 billion in bulk sales and $706 million in
loans sold servicing released (i.e., a total of $4.2 billion) in the 1996
period. The bulk servicing sold in 1997 was aged product which was being
carried at a lower book value and generated a higher gain than the bulk
servicing sold in the 1996 period.
1996 COMPARED TO 1995. For 1996, net gain on sales of mortgage servicing
rights increased $21.7 million, or 161.9%, to $35.1 million, from $13.4 million
for 1995. This increase primarily resulted from the increased amount of
mortgage servicing rights sold. These higher levels of gains were attributable
to increases in the amount of mortgage servicing rights sold. For 1995 versus
1996, the principal balance of the loans underlying the mortgage servicing
rights sold increased from $2.3 billion to $6.5 billion. The $21.7 million
increase in the gain on sale of mortgage servicing
OC-33
<PAGE>
rights reflects $22.6 million attributable to the $4.2 billion increase in the
volume of mortgage servicing rights sold, less $900,000 attributable to an
increase in the cost of the mortgage servicing rights sold.
1995 COMPARED TO 1994. For the year ended December 31, 1995, net gain on
sales of mortgage servicing rights decreased $15.1 million, or 53.0%, to $13.4
million, from $28.5 million for 1994. The gain on sale of mortgage servicing
rights decreased approximately $3.0 million due to a $300 million decrease in
the principal balance of the loans underlying the mortgage servicing rights
sold, from $2.6 billion to $2.3 billion, and approximately $12.1 million due to
decreases in the selling prices of such rights and an increase in the cost of
the servicing rights sold. The decreases in the selling prices were due to the
sale of currently originated lower coupon mortgage servicing rights during 1995.
The increase in the cost of the servicing rights was principally due to the
adoption in mid-1995 of Statement of Financial Accounting Standards ("SFAS") No.
122, which required mortgage servicing rights to be capitalized whether they are
originated or purchased by the Bank.
Mortgage servicing rights originated or acquired by the Bank are capitalized
pursuant to SFAS No. 122, "Accounting for Mortgage Servicing Rights," which the
Bank adopted in May 1995. The value of mortgage servicing rights capitalized
are periodically evaluated in relation to the estimated discounted net future
servicing revenues. See Note 3 of Notes to Consolidated Financial Statements.
At September 30, 1997, December 31, 1996 and 1995, the estimated fair value of
the mortgage servicing rights in excess of their stated book value was
approximately $8.7 million, $23.9 million and $42.4 million, respectively. See
Note 7 of Notes to Consolidated Financial Statements.
OTHER FEES AND CHARGES. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 1996. Other fees and charges decreased $1.9
million, or 37.3%, to $3.2 million for the 1997 period from $5.1 million for
same period in 1996. This decrease was due to a decrease in certain loan
origination fees and certain mortgage loan servicing fees.
1996 Compared to 1995. For 1996, other fees and charges, which includes
certain loan fees and charges, deposit-related fees and escrow waiver fees,
increased $2.2 million, or 47.8% to $6.8 million from $4.6 million for 1995.
This increase was a result of an overall increase in mortgage loan originations
in 1996 as compared to 1995.
1995 COMPARED TO 1994. Other fees and charges increased $2.5 million, or
119.0%, to $4.6 million for 1995 from $2.1 million for 1994. This increase was
attributable to an increase in underwriting fees in 1995 as compared to 1994 and
an overall increase in mortgage loan originations in 1995.
OC-34
<PAGE>
NON-INTEREST EXPENSE. The following table sets forth components of the
Bank's non-interest expense, prior to allocation of expenses related to loan
originations that are deferred pursuant to SFAS No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases." As required by SFAS No. 91, mortgage loan fees
and certain direct origination costs (principally compensation and benefits) are
capitalized and amortized rather than immediately expensed. Certain other
expenses associated with loan production, however, are not required to be
capitalized. These expense amounts are reflected on the Bank's statement of
earnings net of the portion that must be capitalized under SFAS No. 91.
However, management believes that the analysis of the components of non-
interest expense on a "gross" basis (i.e., prior to the deferral of capitalized
loan origination costs) more clearly reflects the changes in total overhead
costs associated with increased loan production. See Note 3 of Notes to
Consolidated Financial Statements for further information.
<TABLE>
<CAPTION>
For the nine months ended
September 30, For the years ended December 31,
-------------------------------------- ------------------------------------------------
1997 1996 1996 1995 1994
------------------ ----------------- -------------- --------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Compensation and benefits....... $ 31,836 $ 30,327 $ 40,450 $ 30,809 $ 25,424
Commissions..................... 9,802 9,339 12,367 11,102 9,340
Occupancy and equipment......... 9,764 8,687 12,092 8,873 7,339
Advertising..................... 1,190 654 943 597 1,110
Core deposit premium
amortization.................. 968 968 1,290 1,330 651
Federal deposit insurance
premiums...................... 305 4,184 4,435 1,122 803
Other........................... 18,873 14,636 20,300 13,669 11,943
-------- -------- -------- -------- ---------
Subtotal...................... 72,738 68,795 91,877 67,502 56,610
Less: deferral of capitalized
loan origination costs........ (27,705) (22,543) (33,338) (27,653) (19,026)
-------- -------- ------- -------- ---------
Total......................... $ 45,033 $ 46,252 $ 58,539 $ 39,849 $ 37,584
======== ======== ======== ======== =========
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996. Non-interest expense, before the capitalization of direct
loan origination costs, increased $3.9 million, or 5.7%, to $72.7 million from
$68.8 million for the same period in 1996. Excluding the one-time SAIF
assessment of $3.4 million, before taxes, charged to the Bank on September 30,
1996, the Bank had a $7.3 million, or 11.2%, increase in other expenses. This
increase was primarily caused by increased compensation and benefits of $1.5
million, increased general and administrative expenses of $4.2 million, and
increased occupancy and equipment costs of $1.1 million.
Compensation and benefits totaled $31.8 million, and $30.3 million for the
1997 and 1996 periods, respectively. The increase in the 1997 period was
primarily a result of an increase in the average number of full-time equivalent
employees along with normal cost of living salary adjustments.
Increased general and administrative expenses and occupancy and equipment
expenses for 1997 were attributable to an increased number of bank branches,
from 15 in 1996, to 19 at September 30, 1997. Additionally, an increased amount
of contract underwriting expenses were recorded.
1996 COMPARED TO 1995. Non-interest expense for 1996 increased $18.7
million, or 47.0%, to $58.5 million, from $39.8 million for 1995. The largest
contributing factors to this increase were higher compensation and benefits and
general and administrative expenses.
Compensation and benefits, excluding the capitalization of direct loan
origination costs, increased by $9.7 million, or 31.5%, to $40.5 million 1996
from $30.8 million for 1995. The increase in compensation and benefits was
attributable to an increase in the number of full-time equivalent employees and
increased salaries of senior management and staff . The number of full-time
equivalent employees of the Bank increased to 1,310 persons at December 31, 1996
from 1,142 persons at December 31, 1995.
OC-35
<PAGE>
Higher general and administrative expenses also contributed to the
increased non-interest expense for 1996 as compared to the same period in 1995.
The increase in general and administrative expenses reflected an increase in
overall activity because of increased mortgage loan production recorded during
1996 of $6.8 billion compared to $5.2 billion for 1995. This increase in general
and administrative expenses was also a result of an increase in the number of
the Bank's bank branches from 13 at December 1995 to 15 at December 31, 1996.
In addition, general and administrative expense for 1996 reflects the one-
time special assessment imposed by the FDIC pursuant to federal legislation
adopted on such date. See "Regulation -- Federal Deposit Insurance." Such
assessment affected all thrifts, including the Bank, whose deposits were insured
by the SAIF administered by the FDIC and was imposed to capitalize the SAIF to
the same extent as the Bank Insurance Fund and thereby eliminate the disparity
in related premiums charged by the two Funds. Based upon notice received from
the FDIC, the Bank's special assessment totaled $3.4 million, or $2.2 million,
net of tax. In 1997, subsequent to such assessment, the Bank's annual premium
expense for FDIC deposit insurance has been approximately 6.5 basis points
(charged against the Bank's insurable deposit base) as compared to 23 basis
points prior to the assessment.
1995 Compared to 1994. Non-interest expense for the year ended December
31, 1995 increased $2.2 million, or 5.9%, to $39.8 million from $37.6 million
for the year ended 1994. This increase was primarily a result of increased
compensation and benefits and increased general and administrative expenses.
Compensation and benefits totaled $30.8 million, and $25.4 million for the years
ended December 31, 1995 and 1994 respectively. This increase was primarily a
result of an increase in the number of full-time equivalent employees from 869
persons to 1,142 persons at December 31, 1994 and 1995, respectively. Increased
general and administrative expenses for 1995 were attributable to an increase in
the number of branches from 9 at December 31, 1994 to 13 at December 31, 1995.
The increase in general and administrative expenses corresponded to an increase
in mortgage loan originations of $1.5 billion, or 40.5%, from $3.7 billion for
1994 to $5.2 billion for 1995.
Non-interest expense also increased as a result of the Bank's acquisition
of Security Savings on July 1, 1994, a $226 million thrift located in Jackson,
Michigan. Among the costs of acquisition was the continued employment of
approximately 100 former employees of Security Savings. In addition, Security
Savings also had a main office as well as a six-branch network and the Bank's
retention of the main office and branches following the acquisition contributed
to the $2.7 million, or 58.7%, increase in occupancy and equipment expense from
1993 to 1994.
FEDERAL INCOME TAXES. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 1996. Federal income tax expense for the
nine months ended September 30, 1997 increased to $9.0 million from $6.4 million
for the nine months ended September 30, 1996. The Bank's effective rate for the
1997 period was 36.4% versus 35.9% for the 1996 period. See Note 10 of Notes of
Consolidated Financial Statements.
1996 Compared to 1995. Federal income tax expense for 1996 increased to
$10.3 million from $9.3 million for 1995. The Bank's effective rate for 1996
was 37.5% versus 37.6% for 1995.
1995 COMPARED TO 1994. Federal income tax expense totaled $9.3 million
and $9.3 million for the years ended December 31, 1995 and 1994, respectively.
The effective rate was 37.6% and 36.6% for 1995 and 1994, respectively. The
increase in effective rate was due to a higher amount of non-deductible
expenses.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
ASSETS. The Bank's assets totaled $2.0 billion at September 30, 1997, an
increase of $700.0 million, or 53.8%, as compared to $1.3 billion at December
31, 1996. This increase was primarily due to increases in mortgage loans
available for sale and loans held for investment, Federal Home Loan Bank stock,
accrued interest receivable, repossessed assets, and mortgage servicing rights,
offset in part by decreases in cash and cash equivalents and other assets. This
increase in assets was due to the Bank's ability to leverage its capital, which
increased from $77.9 million at December 31, 1996 to $121.1 million at September
30, 1997 primarily due in part to a net earnings growth of 38.6% during the nine
months ended September 30, 1997 as compared to the same period in 1996 and in
part to the Bank's receipt of $27.3 million from Flagstar as a result of
Flagstar's initial public offering consummated in May 1997.
LOANS RECEIVABLE. Mortgage loans available for sale and loans held for
investment increased $700.0 million or 63.6%, from $1.1 billion at December 31,
1996 to $1.8 billion at September 30, 1997. Mortgage loans available for sale
OC-36
<PAGE>
increased $559.2 million, or 66.5%, to $1.4 billion at September 30, 1997, from
$840.8 million at December 31, 1996. Loans held for investment increased $171.0
million, or 62.5%, from $273.6 million at December 31, 1996 to $444.6 million at
September 30, 1997. These increases were attributable to the increased leverage
ability provided by proceeds from the Bank's initial public offering and the
Bank's decision to hold larger portions of its mortgage loan production for
longer periods.
ALLOWANCE FOR LOSSES. The allowance for losses totaled $5.0 million at
September 30, 1997, an increase of $1.5 million, or 42.9%, from $3.5 million at
December 31, 1996. The allowance for losses as a percentage of non-performing
loans was 11.23% and 11.43% at September 30, 1997 and December 31, 1996,
respectively. The Bank's non-performing loans totaled $44.1 million and $30.6
million at September 30, 1997 and December 31, 1996, respectively. The allowance
for losses as a percentage of total loans was 0.27% and 0.31% at September 30,
1997 and December 31, 1996, 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.
The increase in non-performing loans at September 30, 1997 from the amount
at December 31, 1996 resulted primarily from the repurchase of $52.3 million in
mortgage loans from secondary market investors during the first nine months of
1997. Approximately $14.7 million of the loans repurchased in 1997 were non-
performing, $2.0 million were delinquent, and $5.8 million were immediately
classified to a real estate owned status when repurchased. Loan repurchases are
an ongoing part of the Bank's operations since all loans sold in the secondary
market are generally subject to detailed underwriting reviews by the ultimate
purchaser. Although the Bank generally does not sell loans with recourse, it
typically is required to repurchase loans, including defaulted and delinquent
loans, which were not underwritten in strict compliance with the underwriting
standards of secondary market investors. As the volume of the Bank's loan
production has increased substantially over the past several years, the
aggregate amount of loan delinquencies and foreclosures has also increased,
thereby increasing the number of loans potentially subject to repurchase.
The Bank believes that its risk of loss arising from its non-performing
loans, including loans acquired through repurchase from individual investors
after initial sale in the secondary market, has not materially increased as a
result of either the increase in repurchased loans or the overall increase in
non-performing loans. During 1997, 57.2% of the loans repurchased were
performing loans but were required to be repurchased for reasons (such as
failure to meet all of the secondary market investor's criteria for mortgagor
eligibility or failure to meet the investor's program eligibility requirements)
that do not significantly affect the ultimate collectibility of such loans or
significantly increase the Bank's exposure to losses. A portion of the
repurchased loans are eligible for resale in the secondary market to other
investors, and the Bank does not believe that the remaining repurchased loans
that are currently non-performing or that have been foreclosed present risks of
ultimate loss that are significantly different than the Bank has historically
experienced. Of the Bank's $44.1 million of non-performing loans at September
30, 1997, $40.5 million, or 91.8%, were single family residential mortgage
loans, which generally represent minimal risk of ultimate loss because of the
nature of the collateral securing the loans, the presence of private mortgage
insurance for loans with over-80% LTV ratios, and the presence of insurance or
guarantees on certain loans from the FHA or VA. At September 30, 1997, $19.5
million of such loans were the subject of bankruptcy proceedings by the
mortgagor; however, it has been the Bank's experience that such proceedings
usually result in full repayment to the Bank and present minimal risk of loss
because the imposition of judicial scrutiny and related enforcement powers
supersede the less comprehensive collection methods normally available to the
Bank.
ACCRUED INTEREST RECEIVABLE. Accrued interest receivable increased from
$6.6 million at December 31, 1996 to $12.3 million at September 30, 1997 as the
Bank's total loan portfolio increased. The Bank typically collects interest
income in the following month after it is earned.
REPOSSESSED ASSETS. Repossessed assets increased from $10.4 million at
December 31, 1996 to $17.7 million at September 30, 1997 as the Bank's non-
performing loans were foreclosed upon by the Bank. This 70.2% increase is the
direct result of the increased amount of non-performing loans and loan
repurchases made during the period.
FHLB STOCK. Holdings of FHLB stock increased from $19.7 million at
December 31, 1996 to $36.9 million at September 30, 1997 as the Bank's total
mortgage loan portfolio increased. As a member of the FHLB, the Bank is required
to hold shares of FHLB stock in an amount at least equal to 1% of the aggregate
unpaid principal balance of its home mortgage loans, home purchase contracts and
similar obligations at the beginning of each year, or 1/20th of its FHLB
advances, whichever is greater.
OC-37
<PAGE>
MORTGAGE SERVICING RIGHTS. Mortgage servicing rights totaled $51.7
million at September 30, 1997, an increase of $21.6 million, or 71.8%, from
$30.1 million at December 31, 1996. For the nine months ended September 30,
1997, $5.3 billion of mortgage servicing rights were originated, and $5.9
billion were sold, prepaid, or amortized resulting in a net decrease of $600.0
million. The increase in mortgage servicing rights at September 30, 1997 despite
the excess of mortgage servicing rights sold over mortgage servicing rights
originated during the nine months ended September 30, 1997 reflects the Bank's
capitalization beginning in May 1995 of mortgage servicing rights arising from
loans originated as well as purchased, pursuant to the Bank's adoption of SFAS
No. 122, "Accounting for Mortgage Servicing Rights." Mortgage servicing rights
sold during the nine months ended September 30, 1997 included rights related to
loans originated prior to May 1995 and therefore not capitalized by the Bank.
OTHER ASSETS. Other assets decreased $7.2 million, or 13.5%, to $46.2
million at September 30, 1997, from $53.4 million at December 31, 1996. The
majority of this decrease was attributable to the collection of receivables
recorded in conjunction with the sales of mortgage servicing rights completed
during 1996. Upon a sale of mortgage servicing rights, the Bank receives a down
payment from the purchaser equivalent to approximately 20% of the total purchase
price and records a receivable account for the balance of the purchase price
due. In connection with the sale of mortgage servicing rights, the Bank had
receivables of $30.0 million at September 30, 1997. The balance due is paid upon
transfer by the Bank of the related mortgage loan servicing documents, usually
within 180 days after the initial closing.
LIABILITIES. The Bank's total liabilities increased $700 million, or
58.3%, to $1.9 billion at September 30, 1997, from $1.2 billion at December 31,
1996. This increase was primarily attributable to an increase in the Bank's
deposit accounts, FHLB advances, liabilities for checks issued, offset in part
by a decrease in the amount of undisbursed payments on loans serviced for
others, escrow accounts, and the amount of federal income taxes payable.
DEPOSIT ACCOUNTS. Deposit accounts increased $375.3 million, or 60.1%, to
$1.0 billion at September 30, 1997, from $624.7 million at December 31, 1996.
This increase reflects the Bank's deposit growth strategy through both its
branch network and the secondary market. The number of bank branches increased
from 15 at December 31, 1996 to 19 at September 30, 1997. The bank branches
have generated $119.7 million in net new deposits, a 29.0% increase, since
December 31, 1996. At September 30, 1997, the Bank's certificates of deposit
totaled $877.3 million, or 86.7% of total deposits and carried an average
balance of $41,502 and a weighted average cost of 6.04%. Approximately $480.4
million of the certificates of deposit were brokered deposits or deposits
garnered through secondary markets and carried a weighted average cost of 6.03%.
FHLB ADVANCES. FHLB advances increased $329.1 million, or 84.4%, to
$718.9 million at September 30, 1997, from $389.8 million at December 31, 1996.
The Bank relies upon such advances as a source of funding for the origination or
purchase of loans which are later sold into the secondary market. The
outstanding balance of FHLB advances fluctuates from time to time depending upon
the Bank's current inventory of loans held for sale and the availability of
lower cost funding from its deposit base and its escrow accounts.
UNDISBURSED PAYMENTS. Undisbursed payments on loans serviced for others
decreased $25.0 million, or 40.7%, to $36.4 million at September 30, 1997, from
$61.4 million at December 31, 1996. 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 decrease during a time of low payoff or
refinance volume.
LIABILITY FOR CHECKS ISSUED. Liability for checks issued increased $9.3
million, or 23.4%, to $49.1 million at September 30, 1997, from $39.8 million at
December 31, 1996. These amounts represent checks issued to acquire mortgage
loans which have not cleared for payment. These balances fluctuate with the size
of the mortgage pipeline, increasing in lower interest rate scenarios and
decreasing during a time of low origination or refinance volume.
FEDERAL INCOME TAXES PAYABLE. Federal income taxes payable decreased $6.0
million, or 26.7%, to $16.5 million at September 30, 1997, from $22.5 million at
December 31, 1996. This decrease was primarily attributable to the timing of
payments and a decrease in the current tax liability.
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<PAGE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND DECEMBER 31, 1995
ASSETS. The Bank's assets totaled $1.3 billion at December 31, 1996, an
increase of approximately $300.0 million, or 30.0%, as compared to $1.0 billion
at December 31, 1995. This increase was primarily due to increases in mortgage
loans held for sale, premises and equipment, mortgage servicing rights, and
other assets, offset in part by decreases in loans held for investment.
LOANS RECEIVABLE. Mortgage loans available for sale and mortgage loans held
for investment increased, in the aggregate, $163.0 million from $798.7 million
at December 31, 1995 to $961.7 million at December 31, 1996. Mortgage loans
available for sale increased $220.3 million, or 35.5%, to $840.8 million at
December 31, 1996, from $620.5 million at December 31, 1995. Mortgage loans held
for investment decreased $57.3 million, or 32.2%, from $178.2 million at
December 31, 1995 to $120.9 million at December 31, 1996. See "Business--
Lending." Loans held for investment decreased $32.0 million, or 10.5%, to
$273.6 million at December 31, 1996, from $305.6 million at December 31, 1995.
Loans held for investment include both loans originated for the Bank's own
portfolio through the retail banking operation and loans with characteristics
that do not conform to underwriting standards for sale as conforming loans in
the secondary market. See "Business--Lending."
ALLOWANCE FOR LOSSES. The allowance for losses totaled $3.5 million at
December 31, 1996, an increase of $1.4 million, or 66.7%, from $2.1 million at
December 31, 1995. The allowance for losses as a percentage of non-performing
loans was 11.43% and 19.67% at December 31, 1996 and 1995, respectively. The
Bank's non-performing loans totaled $30.6 million and $10.7 million at December
31, 1996 and 1995, respectively, and, as a percentage of total loans, were 2.75%
and 1.15% at December 31, 1996 and 1995, respectively. The increase in the
allowance for losses was based upon management's assessment of relevant factors,
including the types and amounts of non-performing loans, historical and
anticipated loss experience on such types of loans, and current and projected
economic conditions. Management also considered the likelihood that the Bank
would be required to repurchase additional loans from secondary market investors
over the next year at levels above the Bank's historical experience, as
discussed below.
The increase in non-performing loans at December 31, 1996 resulted primarily
from the repurchase of $54.8 million in mortgage loans from secondary market
investors during 1996 (compared to $4.5 million during 1995). Such loans
included approximately $10.3 million of loans sold during 1996, $32.7 million of
loans sold in 1995 and $11.8 million of loans sold prior to 1995. Approximately
$10.1 million of the loans repurchased in 1996 were non-performing at December
31, 1996 and $3.7 million had been foreclosed and were held as other repossessed
assets. Loan repurchases are an ongoing part of the Bank's operations since all
loans sold in the secondary market are generally subject to detailed
underwriting reviews by the ultimate purchaser. Although the Bank generally does
not sell loans with recourse, it typically is required to repurchase loans,
including defaulted and delinquent loans, that were not underwritten in strict
compliance with the underwriting standards of secondary market investors. As the
volume of the Bank's new loan production has increased substantially over the
past several years, the aggregate amount of loan delinquencies and foreclosures
has also increased, thereby increasing the number of loans potentially subject
to repurchase. In addition, during 1996 two of the largest secondary market
purchasers of loans implemented automated underwriting review systems which
enabled them to review delinquent and other loans on a much faster basis,
thereby accelerating the process of returning to the Bank loans originated in
prior periods.
The Bank believes that its risk of loss arising from its non-performing loans,
including loans acquired through repurchase from individual investors after
initial sale in the secondary market, has not materially increased as a result
of either the increase in repurchased loans or the overall increase in non-
performing loans. In most cases the repurchased loans were required to be
repurchased for reasons (such as failure to meet all of the secondary market
investor's criteria for mortgagor eligibility or failure to meet the investor's
program eligibility requirements) that do not significantly affect the ultimate
collectibility of such loans or significantly increase the Bank's exposure to
losses. A substantial majority of the repurchased loans are eligible for resale
in the secondary market to other investors, and the Bank does not believe that
the remaining repurchased loans that are currently non-performing or that have
been foreclosed present risks of ultimate loss that are significantly different
than the Bank has historically experienced. Of the Bank's $30.6 million of non-
performing loans at December 31, 1996, $27.0 million, or 88%, were single family
residential mortgage loans, which generally represent minimal risk of ultimate
loss because of the nature of the collateral securing the loans, private
mortgage insurance for loans with over-80% LTV ratios and insurance or
guarantees on certain loans from the FHA or VA. At December 31, 1996,
approximately $8.0 million of such loans were the subject of bankruptcy
proceedings by the mortgagor; however, it has been the Bank's experience that
such proceedings usually result in full repayment to the Bank
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<PAGE>
and present minimal risk of loss because the imposition of judicial scrutiny and
related enforcement powers supersede the less comprehensive collection methods
normally available to the Bank. For further information regarding the Bank's
asset quality, see "Business--Asset Quality."
FHLB STOCK. Holdings of FHLB stock increased from $17.8 million at December
31, 1995 to $19.7 million at December 31, 1996 as the Bank's total mortgage loan
portfolio increased. As a member of the FHLB, the Bank is required to hold
shares of FHLB stock in an amount at least equal to 1% of the aggregate unpaid
principal balance of its home mortgage loans, home purchase contracts and
similar obligations at the beginning of each year, or 1/20th of its FHLB
advances, whichever is greater. See "Regulation--Regulation and Supervision of
the Bank--Federal Home Loan Bank System."
PREMISES AND EQUIPMENT. Premises and equipment, net of accumulated
depreciation, totaled $20.8 million at December 31, 1996, an increase of $2.9
million, or 16.2%, from $17.9 million at December 31, 1995. This increase
reflects the Bank's investment in technology, along with the expansion of the
retail deposit branch offices, and the increased national presence in the
mortgage acquisition area. See "Business--Technology," "--Lending" and "--Retail
Loan Production."
MORTGAGE SERVICING RIGHTS. Mortgage servicing rights totaled $30.1 million
at December 31, 1996, an increase of $2.1 million, or 7.5%, from $28.0 million
at December 31, 1995. For the year ended December 31, 1996, $5.6 billion of
loans underlying mortgage servicing rights were originated and purchased, and
$7.6 billion were reduced through sales, prepayments, and amortization
(including a $3 billion sale of mortgage servicing rights in December 1996)
resulting in a net decrease at year-end of $2 billion. However, because of sales
during 1996 of servicing acquired during earlier periods, the mortgage servicing
portfolio at December 31, 1996 contained a greater percentage of capitalized
servicing rights which were reflected as assets on the Bank's statement of
financial condition (reflecting largely servicing rights originated after the
Bank's mid-1995 adoption of SFAS No. 122, "Accounting for Mortgage Servicing
Rights") than it did at December 31, 1995. See "Business--Lending."
OTHER ASSETS. Other assets increased $32.7 million, or 158.0%, to $53.4
million at December 31, 1996, from $20.7 million at December 31, 1995. The
majority of this increase was attributable to receivables recorded in
conjunction with a $700 million sale of mortgage servicing rights during
September 1996 and a $3.0 billion sale of mortgage servicing rights in December
1996. Upon a sale of mortgage servicing rights, the Bank receives a down payment
from the purchaser equivalent to approximately 20% of the total purchase price
and records a receivable account for the balance of the purchase price due. In
connection with the sale of mortgage servicing rights during 1996, the Bank had
receivables of $35.7 million at December 31, 1996. The balance due is paid upon
transfer by the Bank of the related mortgage loan servicing documents, usually
within 180 days after the initial closing. See "Business-- Mortgage Loan
Servicing."
LIABILITIES. The Bank's total liabilities increased $200 million, or 20.0%,
to $1.2 billion at December 31, 1996, from $1.0 billion at December 31, 1995.
This increase was primarily attributable to an increase in the Bank's deposit
portfolio as well as changes in the amount of escrows held on mortgage loans,
and the amount of FHLB advances, offset in part by a decrease in the amount of
undisbursed payments on loans serviced for others and the amount of liability
for checks issued.
DEPOSITS. Deposit accounts increased $95.5 million, or 18.0%, to $624.7
million at December 31, 1996, from $529.2 million at December 31, 1995. This
increase reflects the Bank's deposit growth strategy through its branch network
and its pricing strategy. The number of bank branches has increased from 13 at
December 31, 1995 to 15 at December 31, 1996. The Bank's aggressive pricing
strategy attracts one-year certificates of deposit and brokered funds. The Bank
relies upon both its retail customer base and nationwide advertising of its
deposit rates to attract deposits through the pricing of deposits at up to 0.25%
over the prevailing market rate. At December 31, 1996, the Bank's certificates
of deposit totaled $500.6 million, with an average balance of $26,235 and a
weighted average cost of 5.95%. Of such amount, approximately $212.6 million
were brokered deposits with a weighted average cost of 5.88%. See "Business--
Funding Sources."
FHLB Advances. FHLB advances increased $198.6 million, or 103.9%, to $389.8
million at December 31, 1996, from $191.2 million at December 31, 1995. The Bank
relies upon such advances as a source of funding for the origination or purchase
of loans for sale in the secondary market. See "Capitalization." The outstanding
balance of FHLB advances fluctuates from time to time depending upon the Bank's
current inventory of loans held for sale and the availability of
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<PAGE>
lower cost funding from its retail deposit base and its escrow accounts. The
increase in the outstanding balance of FHLB advances from December 31, 1995 to
December 31, 1996 was attributable to an increase in the amount of loans held
for sale. See "--Liquidity and Capital Resources."
UNDISBURSED PAYMENTS. Undisbursed payments on loans serviced for others
increased $1.4 million, or 2.3%, to $61.4 million at December 31, 1996, from
$60.0 million at December 31, 1995. The month-end average amount of these funds
was $67.3 million and $49.6 million during 1996 and 1995, respectively. These
amounts represent payments received from borrowers for interest, principal and
related loan charges that have not been remitted. These balances fluctuate with
the size of the servicing portfolio and increase during a time of high payoff or
refinance volume.
ESCROW ACCOUNTS. The amount of funds in escrow accounts decreased $27.9
million, or 31.4%, to $61.0 million at December 31, 1996, from $88.9 million at
December 31, 1995. The average of the month end balances in these accounts was
$82.3 million and $86.5 million during 1996 and 1995, respectively. These
accounts are maintained on behalf of mortgage customers and include funds
earmarked for real estate taxes, homeowner's insurance, and other insurance
product liabilities. These balances fluctuate with the size of the servicing for
others portfolio and also depend upon the scheduled payment dates for the
related expenses.
LIABILITY FOR CHECKS ISSUED. The liability for checks issued decreased $46.0
million, or 53.6%, to $39.8 million at December 31, 1996, from $85.8 million at
December 31, 1995. This liability reflects the outstanding amount of checks the
Bank has written in conjunction with acquiring mortgage loans. This account
grows or contracts in conjunction with the amount of loans that are in the
Bank's mortgage pipeline.
FEDERAL INCOME TAXES PAYABLE. Federal income taxes payable increased $7.9
million, or 54.1%, to $22.5 million at December 31, 1996, from $14.6 million at
December 31, 1995. This increase was primarily attributable to the timing of
payments and an increase in the current tax liability.
OTHER LIABILITIES. Other liabilities increased $5.0 million, or 42.0%, to
$16.9 million at December 31, 1996, from $11.9 million at December 31, 1995.
This liability primarily reflects amounts received in conjunction with acquiring
mortgage loans, but not yet applied. This account grows or contracts in
conjunction with the amount of loans that are in the Bank's mortgage pipeline.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Liquidity refers to the ability or the financial flexibility to
manage future cash flows to meet the needs of depositors and borrowers and fund
operations on a timely and cost-effective basis. The Bank is required by OTS
regulations to maintain minimum levels of liquid assets. This requirement,
which may be changed at the direction of the OTS depending upon economic
conditions and deposit flows, is based upon a percentage of deposits and short-
term borrowings. The required minimum ratio is currently 4.0%. While the
Bank's liquidity ratio varies from time to time, the Bank has generally
maintained liquid assets substantially in excess of the minimum requirements.
The Bank's average daily liquidity ratios were 8.5% and 21.5% during September
1997 and December 1996, respectively.
A significant source of cash flow for the Bank is the sale of mortgage loans
available for sale. Additionally, the Bank receives funds from net interest
income, mortgage loan servicing fees, loan principal repayments, advances from
the FHLB, deposits from customers and cash generated from operations. Mortgage
loans sold during the nine months ended September 30, 1997, totaled $4.5
billion, a decrease of $800.0 million, or 15.1%, from $5.3 billion sold during
the comparable 1996 period. This decrease in mortgage loan sales was directly
attributable to the growth achieved in comparable periods. The Bank sold 84.9%
and 98.1% of its mortgage loan originations during the nine months ended
September 30, 1997 and 1996, respectively. Mortgage loans sold during 1996
totaled $6.6 billion, compared to $4.8 billion and $3.6 billion during 1995 and
1994, respectively. The fluctuation in this activity was directly related to
the amount of mortgage loan originations. The Bank sold 96.9%, 91.6%, and 95.5%
of its mortgage loan originations during 1996, 1995 and 1994, respectively.
The Bank typically uses FHLB advances to fund its daily operational liquidity
needs and to assist in funding loan originations. The Bank will continue to use
this source of funds unless a more stable source of funds becomes available.
FHLB advances are used because of their flexibility. These funds are typically
borrowed for up to 90 days with no prepayment penalty, of which $718.9 million
was outstanding at September 30, 1997. Such advances are repaid with the
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<PAGE>
proceeds from the sale of mortgage loans held for sale. The Bank currently has
an authorized line of credit equal to $850 million. This line is collateralized
by non-delinquent mortgage loans. To the extent the amount of retail deposits or
customer escrow accounts can be increased, the Bank expects that they will
eventually replace FHLB advances as a funding source.
At September 30, 1997, the Bank had outstanding rate-lock commitments to lend
$823.2 million for mortgage loans, along with outstanding commitments to make
other types of loans totaling $35.9 million. Because such commitments may
expire without being drawn upon, they do not necessarily represent future cash
commitments. Also, as of September 30, 1997, the Bank had outstanding
commitments to sell $1.1 billion of mortgage loans. These commitments will be
funded within 90 days. Total commercial and consumer unused collateralized lines
of credit totaled $108.1 million at September 30, 1997. Such commitments include
$121.5 million in warehouse lines of credit to various mortgage companies, of
which $53.3 million was drawn upon as of September 30, 1997.
CAPITAL RESOURCES. At September 30, 1997, the Bank exceeded all applicable
regulatory minimum capital requirements. For a detailed discussion of the
regulatory capital requirements to which the Bank is subject, and for a tabular
presentation of compliance with such requirements, see "Regulation -- Regulation
and Supervision of the Bank -- Capital Requirements" and Note 13 of Notes to
Financial Statements.
ASSET/LIABILITY MANAGEMENT
The Bank has sought to manage its exposure to changes in interest rates by
matching more closely the effective maturities or repricing characteristics of
the Bank's interest-earning assets and interest-bearing liabilities. The
matching of the Bank's assets and liabilities may be analyzed by examining the
extent to which its assets and liabilities are interest rate sensitive and by
monitoring the expected effects of interest rate changes on its net interest
income.
An asset or liability is interest rate sensitive within a specific time period
if it will mature or reprice within that time period. If the Bank's assets
mature or reprice more quickly or to a greater extent than its liabilities, the
Bank's net portfolio value and net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling interest
rates. If the Bank's assets mature or reprice more slowly or to a lesser extent
than its liabilities, its net portfolio value and net interest income would tend
to decrease during periods of rising interest rates but increase during periods
of falling interest rates. Because the Bank sells a significant portion of its
loan production in the secondary market, its interest rate risk is somewhat
mitigated. The Bank has pursued certain strategies designed to decrease the
vulnerability of its earnings to material and prolonged changes in interest
rates in connection with its banking operations.
As part of its overall interest rate risk policy, the Bank has focused on the
development of a long-term deposit base to support its asset growth as well as
its ability to sell residential mortgage loans in the secondary market while
retaining both the mortgage servicing rights and the generally non-interest
bearing escrow accounts. In addition to its deposit base and funds from the
escrow accounts, the Bank also uses FHLB advances as a means to match
efficiently maturities of funding sources with the expected selling time of the
related loans. Management believes that this approach to loan originations
allows the Bank to respond to customer demand while minimizing interest rate and
credit risk without significantly increasing operating expenses.
INTEREST RATE SENSITIVITY ANALYSIS. The matching of assets and liabilities
may be analyzed by examining the extent to which such assets and liabilities are
"interest rate sensitive" and by monitoring an institution's interest rate
sensitivity "gap." An asset or liability is said to be interest rate sensitive
within a specific period if it will mature or reprice within that period. The
interest rate sensitivity "gap" is the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities, and
is considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. During a period of rising
interest rates, a negative gap would be expected to adversely affect net
interest income while a positive gap would be expected to result in an increase
in net interest income, while conversely during a period of declining interest
rates, a negative gap would be expected to result in an increase in net interest
income and a positive gap would be expected to adversely affect net interest
income. At September 30, 1997, the Bank's cumulative one-year interest rate gap
position was a positive $55.3 million, or 3.00% of total interest earning
assets. This is a one-day position which is continually changing and is not
necessarily indicative of the Bank's
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<PAGE>
position at any other time. The Bank's current one-year gap is within the
guidelines established by management and approved by the Board of Directors.
Management considers numerous factors when establishing these guidelines,
including current interest rate margins, capital levels, and any guidelines
provided by the OTS.
Different types of assets and liabilities with the same or similar maturities
may react differently to changes in overall market rates or conditions, and thus
changes in interest rates may affect net interest income positively or
negatively even if an institution were perfectly matched in each maturity
category. Additionally, the gap analysis does not consider the many factors as
Banking interest rate moves. While the interest rate sensitivity gap is a
useful measurement and contributes toward effective asset and liability
management, it is difficult to predict the effect of changing interest rates
solely on that measure, without accounting for alterations in the maturity or
repricing characteristics of the balance sheet that occur during changes in
market interest rates. During periods of rising interest rates, the Bank's
assets tend to have prepayments that are slower than those in an interest rate
sensitivity gap and would increase the negative gap position. Conversely,
during a period of falling interest rates, the Bank's assets would tend to
prepay faster than originally expected thus decreasing the negative gap. In
addition, some of the Bank's assets, such as adjustable rate mortgages, have
caps on the amount by which their interest rates can change in any single
period, and therefore may not reprice as quickly as liabilities in the same
maturity category.
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<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1997 which are
expected to mature or reprice in each of the time periods shown.
<TABLE>
<CAPTION>
Due Due
Within 12 months One to five years
------------------------- ------------------------
Amount Rate Amount Rate Amount Rate
--------------- ------ -------------- --------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS (1):
Mortgage loans held for investment..... $ 272,667 7.93% $ 199,537 7.79% $ 38,095 7.21%
Mortgage loans held for sale........... 1,363,822 7.76% 462,642 7.80% 163,758 7.43%
Other mortgage loans................... 18,641 10.48% 18,641 10.48% -- --
Construction loans.................... 37,812 9.31% 37,812 9.31% -- --
Commercial real estate loans.......... 19,347 9.00% 6,921 9.53% 12,426 8.71%
Commercial loans...................... 56,216 8.83% 55,574 8.81% 642 10.10%
Consumer loans........................ 34,919 10.34% 26,656 10.29% 6,167 10.50%
FHLB stock............................. 36,925 5.00% 36,925 5.00% -- --
Other investments...................... 539 5.57% 39 -- 500 6.00%
------------ ----- ---------- -------- ---------- -----
Total................................. $ 1,840,888 7.88% $ 844,747 7.54% $ 221,588 7.56%
------------ ---------- ----------
INTEREST-BEARING LIABILITIES (2):
Savings Deposits....................... $ 78,878 4.67% $ 11,832 4.67% $ 50,285 4.67%
Certificates of Deposits............... 877,261 5.98% 496,468 5.99% 380,793 5.96%
Demand deposits........................ 55,981 2.20% 55,981 2.20% -- --
------------ ----- ---------- ----- ---------- -----
Total deposits....................... 1,012,120 5.66% 564,281 5.58% 431,078 5.81%
FHLB advances.......................... 718,878 5.88% 705,378 5.89% 13,500 5.32%
------------ ----- ---------- ----- ---------- -----
Total................................. $ 1,730,998 5.75% $1,269,659 5.75% $ 444,578 5.80%
------------ ---------- ----------
OFF-BALANCE SHEET:
Commitments to sell loans.............. $ (1,148,000) 7.13% $1,046,694 7.13% $ (78,431) 7.00%
Commitments to originate loans......... 576,209 7.58% (566,488) 7.38% 48,607 7.38%
------------ ----- ---------- ----- ---------- -----
Total................................. $ (571,791) 6.67% $ 480,206 6.83% $ (29,824) 6.39%
------------ ---------- ----------
Interest rate spread................... 2.13%
Excess (Deficiency) of repricing
earning assets over (to) interest-
bearing liabilities
(Interest sensitivity gap)............. $ 109,890(3) $ 55,294 $ (252,814)
============ ========== ==========
Cumulative excess (deficiency) of
repricing earning assets over (to)
interest-bearing liabilities
(Cumulative gap)....................... $ 55,294 $ (197,520)
========== ==========
Cumulative gap as a percentage of
total interest-earning assets......... 3.00% (10.73%)
==== ======
</TABLE>
(continued)
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<PAGE>
<TABLE>
<CAPTION>
Due From Five to Ten Years Due After Ten Years Total
----------------------------- ---------------------- ------------------
Amount Rate Amount Rate Amount Rate
---------------- ----------- ------------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS (1):
Mortgage loans held for investment...... $ 9,527 7.60% $ 25,508 9.03% $ 232,154 7.64%
Mortgage loans held for sale............ 78,877 7.62% 658,545 7.82% 1,363,822 7.76%
Other mortgage loans.................... -- -- -- -- 18,641 10.48%
Construction loans..................... -- -- -- -- 37,812 9.31%
Commercial real estate loans........... -- -- -- -- 19,347 9.00%
Commercial loans....................... -- -- -- -- 56,216 8.83%
Consumer loans......................... 2,095 10.50% -- -- 34,918 10.34%
FHLB stock.............................. -- -- -- -- 36,925 5.00%
Other investments....................... -- -- -- -- 539 5.57%
---------- ----- ---------- ---- ---------- -----
Total.................................. $ 90,499 7.68% $ 684,053 7.87% $1,800,374 7.84%
INTEREST-BEARING LIABILITIES (2):
Savings Deposits........................ $ 16,762 4.67% -- -- $ 78,878 4.67%
Certificates of Deposits................ -- -- -- -- 877,261 5.98%
Demand deposits......................... -- -- -- -- 55,981 2.20%
---------- ----- ---------- ---- ---------- -----
Total deposits........................ $ 16,762 4.67% 1,012,120 5.66%
FHLB advances........................... -- -- __ __ 718,878 5.88%
---------- ----- ---------- ---- ---------- -----
Total.................................. $ 16,762 4.67% $1,730,998 5.75%
OFF-BALANCE SHEET:
Commitments to sell loans............... $ (102,509) 7.01% $ (865,754) 7.15%
Commitments to originate loans.......... 57,073 7.45% 460,808 7.62%
---------- ----- ---------- ------
Total.................................. $ (45,436) 6.45% $ (404,946) 6.62%
Interest rate spread....................
Excess (Deficiency) of repricing
earning assets over (to)
interest-bearing $ 28,301 $ 279,107 $ 109,890
liabilities (Interest Sensitivity gap)..
Cumulative excess (deficiency)
of repricing earning assets over
(to) interest-bearing liabilities
(Cumulative gap) ....................... $ (169,218) $ 109,890 $ 109,890
Cumulative gap as a percentage of
total interest-earning assets.......... (9.19)% 5.97%
</TABLE>
(1) Fixed-rate loans are distributed based on their contractual maturity
adjusted for projected or anticipated prepayments, and variable rate loans
are distributed based on the interest rate reset date and contractual
maturity adjusted for prepayments. Mortgage loans are presented assuming a
15.94% annual prepayment rate .
(2) Passbook savings are presented assuming a 15% annual decay rate. Demand
deposits are presented in the earliest repricing period since amounts in
these accounts are subject to withdrawal on demand. Savings certificates
are distributed assuming no withdrawal prior to maturity.
(3) This excess of earning assets has the effect of increasing the indicated
spread by 0.34% and does not include off-balance sheet items.
OC-45
<PAGE>
EFFECT OF NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 128,
"Earnings Per Share," which is effective for financial statements issued after
December 15, 1997. Early adoption of the standard is not permitted. The new
standard eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share together with disclosure of
how the per share amounts were computed. The adoption of this new standard is
not expected to have a material impact on the disclosure of earnings per share
in the financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting of Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of financial statements. This statement also requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This statement is effective
for fiscal years beginning after December 15, 1997. Earlier application is
permitted. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Bank does not anticipate
that adoption of SFAS No. 130 will have a material effect on the Bank.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. This statement also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement requires the reporting of financial and descriptive information about
an enterprise's reportable operating segments. This statement is effective for
financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to be
restated. The Bank does not anticipate that the adoption of SFAS No. 131 will
have a material effect on the Bank.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the changes in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Bank's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Bank are monetary in
nature. As a result, interest rates have a greater impact on the Bank's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
OC-46
<PAGE>
BUSINESS
GENERAL
Flagstar Bank, FSB, is a federally chartered stock savings bank which is also
the largest independent Michigan-based savings institution based on asset size
as of September 30, 1997, according to SNL Securities. The Bank is also
one of the largest originators of conforming single-family mortgage loans in the
United States according to Inside Mortgage Finance. The Bank is engaged in the
business of providing a full range of retail banking services in southern and
western Michigan and in originating, purchasing and servicing residential
mortgage loans on a nationwide basis. For 1996, the Bank ranked fourth in the
United States among thrifts in mortgage loan originations and sixteenth in total
mortgage loan production according to SMR Research Corp. All of the outstanding
stock of the Bank is owned by Flagstar, a Michigan corporation whose common
stock is listed for trading on Nasdaq under the symbol "FLGS."
As of September 30, 1997, the Bank had consolidated total assets of $2.0
billion, net loans of $1.8 billion, total deposits of $1.0 billion and total
stockholder's equity of $121.1 million. For the nine months ended September 30,
1997, the Bank's net earnings were $15.8 million and its return on average
assets and return on average equity (as annualized) were 1.34% and 21.53%,
respectively. At December 31, 1996, the Bank had consolidated total assets of
$1.3 billion, net loans of $1.1 billion, total deposits of $624.7 million and
total stockholder's equity of $77.9 million. For the year ended December 31,
1996, the Bank's net earnings were $17.1 million and its return on average
assets and return on average equity were 1.54% and 24.82%, respectively ($19.3
million, 1.73% and 27.97%, respectively, excluding the special deposit insurance
assessment imposed on September 30, 1996 on all depository institutions insured
by the Savings Association Insurance Fund (the "SAIF")).
The Bank's operations are segregated into two segments, mortgage banking and
retail banking, with most of the Bank's revenue (net interest income and non-
interest income) and earnings before income taxes attributable to the mortgage
banking segment. The Bank believes that its retail banking business provides
it with a strategic advantage because it affords the Bank access to funding
sources for its mortgage origination business that would not otherwise be
available. These additional funding sources include lower cost retail deposits,
FHLB advances and escrowed funds. The Bank benefits as compared to mortgage
originators with no retail banking operations because it has access to a lower
cost of funds and is therefore able to generate greater net interest income.
The Bank did not have any significant retail banking operations prior to
1994. See "-- Retail Banking Operations." For further information, see Note 17
of Notes to Consolidated Financial Statements.
BUSINESS STRATEGY
The Bank's strategy consists of the following key elements:
- continue to expand the Bank's branch network into demographically
desirable communities adjacent to the Bank's current markets in southern
and western Michigan in order to gain access to additional lower-cost
retail funding sources;
- cross-sell retail banking services to the Bank's large Michigan customer
base of present mortgage customers;
- benefit from economies of scale by increasing the size of the loan
servicing portfolio through the continued origination and purchase of
large volumes of mortgage loans on a diversified, nationwide basis;
- as market conditions warrant, retain more of its mortgage loan
production volume or mortgage servicing rights, or both; and
- utilize advanced technology and automated processes throughout the
Bank's business to improve customer service, reduce costs of loan
production and servicing and increase efficiencies.
OC-47
<PAGE>
TECHNOLOGY
The Bank makes extensive use of advanced technology and automated processes
in order to enhance the competitiveness and reduce the cost of its mortgage
origination operations. The Bank was one of the first mortgage lenders
to utilize video conferencing for loan production. In 1996, the Bank began
full-scale operational use of automated underwriting system technologies,
including Fannie Mae's Desktop Underwriter(TM) and Freddie Mac's Loan
Prospector(TM) (of which the Bank is currently one of the largest users), and
has combined the two technologies into its LIVE(R) video conferencing and
underwriting system. The Bank believes that this system, which permits a loan
underwriter to interview and complete a loan application and approve a loan for
a prospective borrower in one session during a live video conference, will give
it a significant competitive edge in writing mortgage loans. During 1997,
substantially all of the Bank's mortgage loan production is being underwritten
using automated systems, which it believes reduces overhead, increases customer
service and facilitates conformity with underwriting guidelines.
LENDING
The Bank originates or acquires loans through its retail banking operations
or through the wholesale, correspondent and retail loan production outlets of
its mortgage banking operations. Loans are either held for investment in the
Bank's portfolio or held available for sale in the secondary market. Wholesale
mortgage loan production involves the origination of loans by a nationwide
network of independent mortgage brokers with funding provided directly by the
Bank (i.e., table funding) and the transfer of such loans to the Bank upon
closing. Correspondent mortgage loan production occurs through the purchase of
loans by the Bank from independent mortgage lenders, commercial banks, savings
and loan associations and other financial intermediaries that originate loans in
their own name using their own source of funds. Retail mortgage loan production
for mortgage banking operations occurs through the Bank's loan centers. For the
nine months ended September 30, 1997, the Bank's combined wholesale and
correspondent loan production totaled $4.8 billion and its retail mortgage loan
production totaled $529.9 million.
In addition to mortgage loan production, the Bank engages to a limited
extent in the origination of commercial, commercial real estate, construction
and consumer loans, primarily through its branches and loan centers.
OC-48
<PAGE>
The following table sets forth selected data relating to the composition of
the Bank's loan portfolio by type of loan at the dates indicated. This table
includes mortgage loans available for sale and mortgage loans held for
investment. At September 30, 1997, the Bank had no concentrations of loans
exceeding 10% of total loans that are not otherwise disclosed below.
<TABLE>
<CAPTION>
At September 30, At December 31,
--------------------- ---------------------------------------------------------------
1997 1996 1995 1994
-------------------- --------------------- ------------------- -------------------
Amount % Amount % Amount % Amount %
----------- ------- ------------ ------- ---------- ------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family..................... $1,625,217 90.68% $ 934,226 84.62% $784,980 85.68% $554,087 87.91%
Construction...................... 37,812 2.11% 59,270 5.37% 48,933 5.34% 25,499 4.05%
Consumer loans.................... 34,919 1.95% 33,608 3.04% 39,331 4.29% 19,271 3.06%
Commercial real estate............ 19,347 1.08% 13,565 1.23% 30,504 3.33% 23,383 3.71%
Commercial........................ 56,216 3.14% 46,212 4.19% 8,576 0.94% 7,546 1.20%
Other mortgage.................... 18,641 1.04% 17,128 1.55% 3,877 0.42% 453 0.07%
---------- ------ ---------- ------ -------- ------ -------- ------
Total............................ 1,792,152 100.00% 1,104,009 100.00% 916,201 100.00% 630,239 100.00%
====== ====== ====== ======
Add (deduct):
Deferred loan fees................ 5,100 3,179 1,621 970
Premiums (discounts).............. 11,122 7,158 8,223 4,071
Allowance for losses.............. (4,950) (3,500) (2,102) (1,871)
---------- ---------- -------- --------
Total........................ $1,803,424 $1,110,846 $923,943 $633,409
========== ========== ======== ========
<CAPTION>
At December 31,
-----------------------------------------
1993 1992
-------------------- ------------------
Amount % Amount %
----------- ------ --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Single-family..................... $ 384,819 93.36% $217,360 90.95%
Construction...................... 19,864 4.82% 20,181 8.44%
Consumer loans.................... 11 --% 18 0.01%
Commercial real estate............ 864 0.21% 1,199 0.50%
Commercial........................ 6,167 1.50% 239 0.10%
Other mortgage.................... 478 0.11% -- -- %
---------- ------ -------- ------
Total........................ 412,203 100.00% 238,997 100.00%
====== ======
Add (deduct):
Deferred loan fees................ 1,243 680
Premiums/(discounts).............. 2,533 226
Allowance for losses.............. (901) (550)
---------- --------
Total........................ $ 415,078 $239,353
========== ========
</TABLE>
In its wholesale and correspondent lending, the Bank competes nationwide by
offering a wide variety of mortgage products designed to respond to consumer
needs and tailored to address market competition. The Bank primarily originates
conforming, fixed rate 30-year mortgage loans, which collectively represented
62.6% its total mortgage loan production for the nine month period ended
September 30, 1997, and 62.2% for the year ended December 31, 1996. In
addition, the Bank offers other products, such as adjustable-rate, 5-year and
7-year balloons and jumbo mortgages as well as loans supported by various FHA
and Veteran's Administration programs. Mortgage loans originated are primarily
for the purchase of single-family residences, although such loans are also
originated for refinancing of existing mortgages.
Approximately 78% of the mortgage loans originated during 1993 were
refinancings of outstanding mortgage loans. In 1995 and 1996, approximately 36%
and 46% of loans originated, respectively, were refinancings. For the nine
months ended September 30, 1997, approximately 44% of loans were refinancings.
The Bank's loan production has, since 1992, increased each successive year,
after excluding the unusual level of refinancing in 1993 that occurred in
response to a low level of interest rates available to consumers over an
extended period of time. To achieve these increases, the Bank has expanded its
wholesale loan production division from 18 employees in 1993 to 95 employees at
September 30, 1997.
In addition to single-family mortgage loans, the Bank relies upon its
wholesale and correspondent loan production networks for the origination or
purchase of single-family residential construction and consumer loans. Its
retail loan production arises through its branches, which originate commercial,
consumer, commercial real estate and construction loans, and its loan centers,
which originate consumer and home equity loans.
Set forth below is a table summarizing the Bank's loan production of single-
family mortgage loans, which comprise the bulk of its loan production, and other
loans for the periods noted.
OC-49
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, For the Years Ended December 31,
----------------------------- --------------------------------------------
1997 1996 1995 1994
----------------------------- ---------- --------------- ---------------
<S> <C> <C> <C> <C>
(In thousands)
Single-family:
Retail................................... $ 529,887 $ 685,288 $ 632,696 $ 705,723
Wholesale................................ 3,080,269 5,435,701 4,562,909 3,014,450
Correspondent............................ 1,677,555 670,676 -- --
---------- ---------- ---------- ----------
Total single-family...................... 5,287,711 6,791,665 5,195,605 3,720,173
Construction.................................. 48,166 79,022 101,532 68,383
Consumer...................................... 28,270 43,354 52,199 13,389
Commercial real estate........................ -- 5,648 6,725 10,319
Commercial.................................... 8,258 1,412 1,681 2,580
---------- ---------- ---------- ----------
Total originations....................... $5,372,405 $6,921,101 $5,357,742 $3,814,844
========== ========== ========== ==========
</TABLE>
The following table sets forth the origination of single-family
mortgage loans for the periods presented by the nature of loan:
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, For the Years Ended December 31,
-------------------------- ----------------------------------------
1997 1996 1995 1994
-------------------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
(In thousands)
Government (GNMA)............................. $ 416,119 $ 425,137 $ 285,293 $ 222,794
Conventional (FNMA and FHLMC)................. 4,620,605 6,238,174 4,831,108 3,426,620
Jumbo/non-conforming.......................... 250,987 128,354 79,204 70,759
---------- ---------- ---------- ----------
Total originations................. $5,287,711 $6,791,665 $5,195,605 $3,720,173
========== ========== ========== ==========
</TABLE>
The following table sets forth certain information at December 31,
1996 regarding the dollar amount of loans held for investment based on their
contractual terms to maturity, including scheduled repayments of principal. The
table does not include any estimate of prepayments, which significantly shorten
the average life of a mortgage loan and may cause the Bank's repayment
experience to differ from that shown below.
<TABLE>
<CAPTION>
Due after Due after 5 Due after 10
3 through 5 years through 10 through 15 Due after 15
Due during the year ending after years after years after years after
December 31, December 31, December 31, December 31, December 31, Total
-------------------------- ----------------- ------------- ------------- ------------ -----
1997 1998 1999 1996 1996 1996 1996
-------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Mortgage loans held for
investment.......... $ 3,331 $ 3,602 $ 3,896 $ 8,428 $24,773 $39,995 $19,771 $103,796
Construction............ 59,270 -- -- -- -- -- -- 59,270
Consumer................ 3,116 3,461 3,849 8,578 14,604 -- -- 33,608
Commercial real estate.. 2,680 2,971 3,312 4,602 -- -- -- 13,565
Commercial.............. 44,035 1,279 898 -- -- -- -- 46,212
Other mortgage.......... 2,076 $ 2,330 2,620 5,918 4,183 -- -- 17,128
-------- ------- ------- ------- ------- ------- ------- --------
Total................... $114,508 $13,643 $14,575 $27,526 $43,560 $39,995 $19,771 $273,579
======== ======= ======= ======= ======= ======= ======= ========
</TABLE>
OC-50
<PAGE>
The following table sets forth at December 31, 1996, the dollar amount
of all loans held for investment that are due one year or more after December
31, 1997, that have predetermined interest rates and have floating or adjustable
interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rate Adjustable Rates Total
--------------------- ------------------ --------------------
(In thousands)
<S> <C> <C> <C>
Mortgage loans held for investment......... $ 59,724 $44,072 $103,796
Construction............................... 59,270 -- 59,270
Consumer................................... 28,107 5,501 33,608
Commercial real estate..................... 7,694 5,871 13,565
Commercial................................. 11,765 34,447 46,212
Other mortgage............................. 17,128 -- 17,128
-------- ------- --------
Total........................ $183,688 $89,891 $273,579
======== ======= ========
</TABLE>
RETAIL BANKING OPERATIONS. The Bank's retail banking operation
constitutes a growing part of its overall operations. The principal aspects of
retail banking include deposit-gathering and consumer, residential, and
commercial lending. The Bank began to emphasize its retail banking operations
upon its acquisition in 1994 of Security Savings, a federal savings bank located
in Jackson, Michigan. Security Savings was a long standing community
institution which received its charter in 1936. At the time of acquisition,
Security Savings had $226.0 million in assets and six retail banking branches in
southern Michigan with deposits of $197.2 million. Security Savings was merged
into Flagstar Bank on February 1, 1996.
The Bank generally has authority to originate and purchase loans
collateralized by real estate located throughout the United States. Consistent
with its emphasis on being a community-oriented financial institution, the Bank
concentrates the lending activities of its retail banking operations in the
southern and western Michigan market areas of its branches.
The Bank's loan originations for its retail banking operations are
derived from a number of sources, including referrals by realtors, depositors
and borrowers, as well as walk-in customers. The Bank's solicitation programs
consist of advertisements in local media, in addition to occasional
participation in various community organizations and events. The Bank's loan
personnel in its retail banking operations are salaried, and the Bank does not
compensate these loan personnel on a commission basis for loans originated.
Loan applications are accepted at all of the Bank's branch offices.
Under applicable law, with certain limited exceptions, outstanding
loans and extensions of credit by a savings institution to a person at one time
shall not exceed 15% of the institution's unimpaired capital and surplus. Loans
and extensions of credit fully secured by readily marketable collateral may
comprise an additional 10% of unimpaired capital and surplus. Applicable law
additionally authorizes savings institutions to make loans to one borrower, for
any purpose, in an amount not to exceed $500,000 or in an amount not to exceed
the lesser of $30,000,000 or 30% of unimpaired capital and surplus to develop
residential housing, provided: (i) the purchase price of each single-family
dwelling in the development does not exceed $500,000; (ii) the savings
institution is and continues to be in compliance with its fully phased-in
regulatory capital requirements; (iii) the loans comply with applicable loan-to-
value requirements; (iv) the aggregate amount of loans made under this authority
does not exceed 150% of unimpaired capital and surplus; and (v) the Director of
OTS, by order, permits the savings institution to avail itself of this higher
limit. Under these limits, the Bank's loans to one borrower were limited to
$18.2 million at September 30, 1997. At that date, the Bank had no lending
relationships in excess of the loans-to-one-borrower limit.
Interest rates charged by the Bank on loans are affected principally
by competitive factors, the demand for such loans and the supply of funds
available for lending purposes. These factors are, in turn, affected by general
economic conditions, monetary policies of the federal government, including the
Federal Reserve Board, legislative tax policies and government budgetary
matters.
SINGLE-FAMILY MORTGAGE LENDING. The Bank's retail banking operation
has historically invested its deposits in single-family, residential real estate
loans. At September 30, 1997, single-family mortgage loans totaled
approximately $296.3 million, or 66.6% of the Bank's loans held for investment.
OC-51
<PAGE>
The Bank acquired a portion of its fixed rate single-family mortgage
loans held for investment through its 1994 acquisition of Security Savings. In
each case, such loans are secured by first mortgages on single-family, owner-
occupied residential real property located in the Bank's market area. At
September 30, 1997, $155.9 million, or 52.6%, of the Bank's portfolio of
mortgage loans held for investment consisted of fixed-rate mortgage loans.
The Bank also originates residential mortgage loans with adjustable
rates ("ARMs"). As of September 30, 1997, $140.4 million, or 47.4%, of single-
family mortgage loans in the Bank's portfolio of mortgage loans held for
investment carried adjustable rates. Such loans are primarily for terms of 30
years, although the Bank does occasionally originate ARMs for other terms, in
each case amortized on a monthly basis with principal and interest due each
month. The interest rates on these mortgages are adjusted once a year, with a
maximum adjustment of 2.0% per adjustment period and a maximum aggregate
adjustment of 6.0% over the life of the loan. Rate adjustments on the Bank's
adjustable-rate loans are indexed to a rate that adjusts annually based upon
changes in an index based on the weekly average yield on U.S. Treasury
securities adjusted to a constant comparable maturity of one year, as made
available by the Federal Reserve Board, and the adjusted interest rate is equal
to such Treasury rate plus a spread, typically 3.0%. The adjustable-rate
mortgage loans offered by the Bank provide for initial rates of interest below
the rates that would prevail when the index used for repricing is applied.
The retention of adjustable-rate loans in the Bank's portfolio helps
reduce the Bank's exposure to increases in prevailing market interest rates.
However, there are unquantifiable credit risks resulting from potential
increases in costs to borrowers in the event of upward repricing of adjustable-
rate loans. It is possible that during periods of rising interest rates, the
risk of default on adjustable-rate loans may increase due to increases in
interest costs to borrowers. Further, although adjustable-rate loans allow the
Bank to increase the sensitivity of its interest-earning assets to changes in
interest rates, the extent of this interest sensitivity is limited by the
initial fixed-rate period before the first adjustment and the lifetime interest
rate adjustment limitations. Accordingly, there can be no assurance that yields
on the Bank's adjustable-rate loans will fully adjust to compensate for
increases in the Bank's cost of funds.
COMMERCIAL AND COMMERCIAL REAL ESTATE LENDING. The Bank originates
commercial loans on a selected basis and in limited amounts for retention in its
portfolio. At September 30, 1997, the Bank had $2.9 million in commercial loans
associated with its retail banking operations, which comprised 0.65% of its
loans held for investment and are primarily inventory and other business loans
to small businesses in the Bank's southern and western Michigan market area.
Warehouse lines are granted under the Bank's commercial lending
program and are a major component of the Bank's commercial lending strategy.
Warehouse lines of credit are used by correspondents to fund loan production
which for the most part are acquired by the Bank. At September 30, 1997 the
aggregate amount of warehouse lines of credit granted by the Bank to its
correspondents was $121.5 million of which $53.3 million was outstanding.
Also as part of the Bank's retail banking operations, the Bank makes
commercial real estate loans in its southern and western Michigan market area.
At September 30, 1997, there were $19.3 million in commercial real estate loans
outstanding, which comprised 4.34% of total loans held for investment and 1.07%
of total loans. Such loans are generally made to small businesses in the Bank's
southern and western Michigan market area.
Commercial real estate loans are generally underwritten in amounts of
up to 80% of the appraised value of the underlying property. Appraisals on
properties securing commercial real estate loans originated by the Bank are
performed by an independent fee appraiser designated by the Bank before the loan
is made. All appraisals for commercial real estate loans are reviewed by the
Bank's management.
Underwriting procedures include an analysis of the property, borrower,
market and levels of risks. Underwriting procedures require verification of the
borrower's credit history, financial statements, references and income
projections for the property. All commercial real estate loans in excess of
$500,000 must be approved by the Bank's Executive Loan Committee. The Bank's
commercial real estate loans are secured by the property and, in many
circumstances, require the borrower to be personally liable for all or a portion
of the loan. The Bank's lending policy requires that commercial real estate
properties securing loans be inspected at least annually. In addition, the Bank
reviews updated financial information regarding the borrower on a regular basis.
OC-52
<PAGE>
Commercial and commercial real estate loans generally present a higher
level of risk than do loans secured by one- to four-family residences. This
greater risk is due to several factors, including the concentration of large
amounts of principal in a limited number of loans and borrowers, the effects of
general economic conditions on commercial properties, and the difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by commercial real estate is typically dependent upon the
successful operation of the related real estate project. If the cash flow from
the project is reduced (for example, if leases are not obtained or renewed), the
borrower's ability to repay the loan may be impaired.
CONSUMER LOANS. The Bank originates consumer loans secured by
passbook savings accounts, personal property or home equity. At September 30,
1997, the Bank's consumer loans totaled $34.9 million, or 7.85%, of the Bank's
loans held for investments, of which $24.9 million were home equity loans.
Consumer loans tend to be originated at higher interest rates than
mortgage loans and for shorter terms. However, consumer loans generally involve
more risk than single-family mortgage loans. Repossessed collateral for a
defaulted loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of damage, loss or depreciation, and the
remaining deficiency often does not warrant further substantial collection
efforts against the borrower. In addition, loan collections are dependent on
the borrower's continuing financial stability and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Further, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount that may be
recovered. In underwriting consumer loans, the Bank considers the borrower's
credit history, an analysis of the borrower's income and ability to repay the
loan, and the value of the collateral.
MORTGAGE BANKING OPERATIONS. The Bank actively participates in the
mortgage banking market, ranking fourteenth in the United States in total
mortgage loan production for 1997. Mortgage banking generally involves the
origination or purchase of single-family mortgage loans for sale in the
secondary mortgage market. The secondary mortgage market and its evolution have
been significantly influenced by two government-sponsored enterprises, Fannie
Mae and Freddie Mac, and one government agency, GNMA (collectively, the
"Agencies"). Through these entities, the United States government provides
support and liquidity to the market for residential mortgage debt.
Mortgage originators sell their loans directly to Fannie Mae and
Freddie Mac either as whole loans or, more typically, as pools of loans used to
collateralize mortgage-backed securities ("MBS") issued or guaranteed by these
entities. Similarly, the originators can issue MBS collateralized by pools of
loans that are guaranteed by GNMA. In order to arrange these sales or obtain
these guarantees, the originator must underwrite its loans to conform
("conforming loans") with standards established by Fannie Mae and Freddie Mac or
by the FHA or VA in the case of GNMA. All loans other than FHA and VA loans
("government loans") are considered conventional loans. Loans with principal
balances exceeding Agency guidelines ("jumbo loans"), currently those in excess
of $214,600, are typically sold to private investors.
Mortgage bankers operate in a highly competitive market. The
underwriting guidelines and servicing requirements set by the participants in
the secondary markets are standardized. As a result, mortgage banking products
(i.e., mortgage loans and the servicing of these loans) have become difficult to
differentiate. Therefore, mortgage bankers compete primarily on the basis of
price or service, making effective cost management essential. Mortgage bankers
generally seek to develop cost efficiencies in one of two ways: economies of
scale or specialization. Large, full-service national or regional mortgage
bankers such as the Bank have sought economies of scale through an emphasis on
wholesale originations and the introduction of automated processing systems.
The Bank pursues its loan production strategy as part of its mortgage
banking operations through the Bank's wholesale, correspondent and retail loan
production outlets and, to a limited extent, through direct solicitation of
commercial banks, savings associations and credit unions.
WHOLESALE LOAN PRODUCTION. Under its wholesale operations, the Bank
funds mortgage loans originated by a network of approximately 1,800 independent
mortgage brokers nationwide. Approximately 1,200 of these brokers originate
mortgage loans for the Bank on a monthly basis and 1,800 originate mortgage
loans for the Bank on a quarterly basis. This network is maintained by the
Bank's approximately sixty regional account executives, who are compensated
through a salary and commission package. Many of the larger brokers are
provided with loan data entry software by the Bank for the entry of loan
applicant data in a format familiar to the Bank's underwriters and for
transmission to the Bank's automated underwriting systems for review. All loans
originated through brokers are underwritten according to the Bank's standards.
OC-53
<PAGE>
The Bank's underwriters or contract representatives review the loan
data provided by the loan applicant, including the review of appropriate loan
documentation, and request additional information as necessary from the broker.
To speed the information gathering phase of underwriting and thus the loan
approval process, the Bank is utilizing an interview process referred to as
LIVE(R) underwriting, which involves an interview of the potential borrower
directly by a Bank underwriter using its proprietary combination of computer
video technology and automated underwriting technology. Loans originated by
such brokers are typically funded directly by the Bank through table funding
arrangements. In most cases, the loan is closed in the broker's name and
thereafter transferred to the Bank together with related mortgage servicing
rights for which the Bank generally pays a servicing release premium that is
included in the loan price paid to the broker by the Bank. Broker participants
in this program are prequalified on the basis of creditworthiness, mortgage
lending experience and reputation. Each broker is subject to annual and ongoing
reviews by the Bank.
CORRESPONDENT LOAN PRODUCTION. In addition, the Bank acquires
mortgage loans from mortgage lenders, commercial banks, savings and loan
associations and other financial intermediaries. Correspondents have a separate
approval process and higher net worth requirements than wholesale brokers and
use their own source of funds to close loans. The prices of such loan
acquisitions are separately negotiated. Warehouse lines of credit, obtained
from either the Bank or other parties, may be used by the mortgage lenders to
finance their respective mortgage loan originations. At September 30, 1997, the
aggregate amount of warehouse lines of credit granted by the Bank to its
correspondents was $121.5 million, of which $53.3 million was outstanding.
Independent lenders who obtain warehouse lines of credit from the Bank are not
required by the terms of such lines to sell their loan production to the Bank.
All loans acquired from correspondents are expected to satisfy the Bank's
underwriting standards and may be subject to repurchase by the correspondent in
the event of default of the loan due to fraud or misrepresentation in the
origination process and for certain other reasons, including the failure to
satisfy underwriting requirements imposed by the Bank.
RETAIL LOAN PRODUCTION. The Bank's retail loan production involves
the origination of loans through its loan centers. The Bank has 33 loan
centers located in Michigan, Ohio, California and Florida. These loan centers
originate primarily single-family mortgage loans and, to a lesser extent,
construction and home equity loans. Such loan centers generally provide the
Bank with a source of loan production at a lower cost per loan than loans
acquired through brokers or correspondents because the cost of operating such
branches is more than offset by cost savings through the Bank's ability to avoid
payment of the servicing release premium for the related mortgage servicing
rights. Managers of loan centers and loan officers are compensated solely on a
commission basis as measured by loan production.
To encourage loan production, the Bank allows managers of loan centers
to elect to operate their respective centers as "100% offices," subject to
approval by the Bank. Such offices are treated for incentive compensation
purposes as free-standing operations where each office is responsible for its
own operating expenses. Each office is required to satisfy minimum loan
production levels. The manager receives compensation based on the office's
profitability. As of September 30, 1997, eight loan centers were operated as
100% offices.
CONSTRUCTION LENDING. The Bank also engages in construction lending
involving loans to individuals for construction of one- to- four-family
residential housing primarily located within the Bank's southern Michigan market
area, with such loans converting to permanent financing upon completion of
construction. At September 30, 1997, the Bank's portfolio of loans held for
investment included $37.8 million of net loans secured by properties under
construction, or 8.50% of loans held for investment. These loans may be
construction/permanent loans structured to become permanent loans upon the
completion of construction, or may be interim construction loans structured to
be repaid in full upon completion of construction and receipt of permanent
financing. All construction loans are secured by a first lien on the property
under construction. Loan proceeds are disbursed in increments as construction
progresses and as inspections warrant. Construction/permanent loans may have
adjustable or fixed interest rates and are underwritten in accordance with the
same terms and requirements as the Bank's permanent mortgages, except the loans
generally provide for disbursement in stages during a construction period of up
to nine months, during which period the borrower is required to make interest-
only monthly payments. Monthly payments of principal and interest commence one
month from the date the loan is converted to permanent financing. Borrowers
must satisfy all credit requirements that would apply to the Bank's permanent
mortgage loan financing prior to receiving construction financing for the
subject property.
OC-54
<PAGE>
Construction financing generally is considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is largely dependent upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result
in delays and cost overruns. If the estimate of construction costs proves to be
inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the development. If the estimate of
value proves to be inaccurate, the Bank may be confronted, at or prior to the
maturity of the loan, with a project having value which is insufficient to
assure full repayment. The ability of the developer to sell developed lots or
completed dwelling units will depend on, among other things, demand, pricing,
availability of comparable properties and economic conditions. The Bank has
sought to minimize this risk by limiting construction lending to qualified
borrowers in the Bank's southern Michigan market area, by requiring the
involvement of qualified builders, and by limiting the aggregate amount of
outstanding construction loans.
SECONDARY MARKETING
The Bank sells a significant portion of the mortgage loans that it
originates or purchases through its mortgage and retail banking operations while
retaining the servicing rights to such loans. During the nine months ended
September 30, 1997 and year ended December 31, 1996, the Bank originated $5.3
billion and $6.8 billion in total mortgage loans, respectively, and sold $4.5
billion and $6.6 billion of mortgage loans, respectively, in the secondary
market. Mortgage loans are aggregated into pools and sold, or are sold as
individual mortgage loans, to investors principally at prices established at the
time of sale or under forward sales commitments. Conforming conventional
mortgage loans are generally pooled and exchanged under the purchase and
guarantee programs sponsored by Fannie Mae and Freddie Mac and GNMA for Fannie
Mae MBS, Freddie Mac MBS or GNMA MBS, respectively. A limited number of
mortgage loans (i.e. non-conforming loans) are sold to other institutional and
non-institutional investors. For the nine months ended September 30, 1997, a
significant portion of such loans were exchanged for Fannie Mae and Freddie Mac
securities. The remainder were sold to other institutional and non-
institutional investors.
OC-55
<PAGE>
The Bank exchanges and sells mortgage loans on a non-recourse basis.
In connection with the Bank's loan exchanges and sales, the Bank makes
representations and warranties customary in the industry relating to, among
other things, compliance with laws, regulations and program standards, and to
accuracy of information. In the event of a breach of those Bank representations
and warranties, the Bank typically corrects such flaws. If the flaws cannot be
corrected, the Bank may be required to repurchase such loans. See
"--Allowance for Losses." In cases where loans are acquired from a broker or
correspondent and there have been material misrepresentations made to the Bank,
the Bank has the right to resell the flawed loan back to the broker or
correspondent. Otherwise, such loans are refinanced or the Bank is indemnified
against loss on such loans by the broker. In addition, the Bank relies upon
contract underwriters for a portion of its loan production, and these
underwriters must indemnify the Bank for loans that are eventually determined to
have been flawed upon origination.
The following table sets forth the activity in the Bank's mortgage
loans available for sale and its loans held for investment in its portfolio.
<TABLE>
<CAPTION>
For the Nine
Months Ended For the Years Ended December 31,
September 30, ----------------------------------------
1997 1996 1995 1994
----------------- ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Beginning balance ................................... $ 840,767 $ 620,455 $ 205,480 $ 389,073
Originations(1) ..................................... 5,337,574 6,850,277 5,251,510 3,752,650
Repurchases ......................................... 52,293 54,788 4,477 2,683
Sales(1) ............................................ (4,513,434) (6,599,568) (4,780,198) (3,670,002)
Amortization ........................................ (214,525) (74,683) (244,144) (161,225)
Transfers to repossessed assets or
mortgage-backed securities ......................... (12,491) (10,502) (1,781) (1,438)
Transfers (to) from held for investment ............. (126,362) -- 185,111 (106,261)
----------- ----------- ----------- -----------
Ending balance ...................................... $ 1,363,822 $ 840,767 $ 620,455 $ 205,480
=========== =========== =========== ===========
HELD FOR INVESTMENT:
Beginning balance ................................... $ 273,579 $ 305,590 $ 429,800 $ 26,906
Originations(1) ..................................... 84,704 129,446 162,147 236,700
Amortization ........................................ (40,093) (161,382) (101,246) (79,002)
Transfers to repossessed assets ..................... -- (75) -- (1,367)
Acquired through acquisition ........................ -- -- -- 140,302
Transfers (to) from available for sale .............. 126,362 -- (185,111) 106,261
----------- ----------- ----------- -----------
Ending balance ...................................... $ 444,552 $ 273,579 $ 305,590 $ 429,800
=========== =========== =========== ===========
</TABLE>
__________
(1) Originations and sales are presented at cost, including deferred loan
origination fees and costs, premiums and discounts.
OC-56
<PAGE>
The Bank assesses the interest rate risk associated with outstanding
commitments that it has extended to fund loans and hedges the interest rate risk
of these commitments based upon a number of factors, including the remaining
term of the commitment, the interest rate at which the commitment was provided,
current interest rates and interest rate volatility. These factors are
monitored on a daily basis, and the Bank adjusts its hedging on a daily basis as
needed. The Bank hedges its "available for sale" mortgage loan portfolio and
its interest rate risk inherent in its unfunded mortgage commitments (its
"mortgage pipeline") primarily through the use of forward sale commitments.
Under such commitments, the Bank enters into commitments with terms of not more
than 90 days to sell these loans to Freddie Mac and Fannie Mae. In addition,
the Bank occasionally establishes futures positions in U.S. Treasury bonds under
which the Bank contracts to sell notional principal contracts. At September 30,
1997, the Bank did not have any open futures positions. See "Management's
Discussion and Analysis of Changes in Financial Condition and Results of
Operations -- Results of Operations -- Net Gain on Loan Sales and Sales of
Mortgage Servicing Rights."
ASSET QUALITY
The Bank is exposed to certain credit risks related to the value of the
collateral that secures loans held in its portfolio and the ability of borrowers
to repay their loans during the term thereof. The Bank has an Asset
Classification Committee, which is comprised of senior officers of the Bank,
that closely monitors the loan and real estate owned portfolios for potential
problems on a continuing basis and reports to the Board of Directors of the Bank
at regularly scheduled meetings. This committee reviews the classification of
assets and reviews the allowance for losses. This committee reviews all assets
and periodically reports its findings directly to the Board of Directors of the
Bank. The asset classification policy sets forth certain requirements with
respect to how to classify certain assets. The Bank also has a Quality Control
Department, the function of which is to provide to the Board of Directors of the
Bank an independent ongoing review and evaluation of the quality of the process
by which lending assets are generated.
Non-performing assets consist of non-accrual loans and real estate owned.
Loans are usually placed on non-accrual status when the loan is past due 90 days
or more, or the ability of a borrower to repay principal and interest is in
doubt. Real estate acquired by the Bank as a result of foreclosure is
classified as real estate owned until such time as it is sold. The Bank
generally tries to sell the property at a price no less than its net book value,
but will consider discounts where appropriate to expedite the return of the
funds to an earning status. When such property is acquired, it is recorded at
the lower of cost of market. Any required write-down of the loan to its
appraised fair market value upon foreclosure is charged against the allowance
for losses.
The Bank establishes an allowance for loan losses based upon a quarterly or
more frequent evaluation by management of various factors including the
estimated market value of the underlying collateral, the growth and composition
of the loan portfolio, current delinquency trends and prevailing and prospective
economic conditions, including property values, employment and occupancy rates,
interest rates and other conditions that may affect borrowers' abilities to
comply with repayment terms. If actual losses exceed the amount of the
allowance for loan losses, earnings could be adversely affected. As the Bank's
provision for loan losses is based on management's assessment of the general
risk inherent in the loan portfolio based on all relevant factors and
conditions, the allowance for loan losses represents general, rather than
specific, reserves.
OC-57
<PAGE>
The following table sets forth information with respect to the Bank's non-
performing assets at the dates indicated. No loans were recorded as
restructured loans within the meaning of SFAS No. 15 at the dates indicated. The
increase in the mortgage loan category is attributable in large part to the
Bank's required repurchase of non-performing loans from Freddie Mac and Fannie
Mae but also resulted from the effects of a significant increase in loan
originations in the previous three years. See "Management's Discussion and
Analysis of Changes in Financial Condition and Results of Operation -- Financial
Condition -- Allowance for Losses."
<TABLE>
<CAPTION>
At At December 31,
September 30, ----------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------- ----------- ----------- ------------ ------------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual
basis:
Mortgage loans held for investment $40,513 $27,017 $10,096 $1,477 $1,314 $1,179
Construction 2,026 2,801 -- 140 140 650
Commercial 1,009 476 464 57 88 210
Consumer 531 327 126 65 7 10
------- ------- ------- ------ ------ ------
Total non-performing loans 44,079 30,621 10,686 1,739 1,549 2,049
Real estate owned 17,659 10,363 2,359 1,271 1,249 802
------- ------- ------- ------ ------ ------
Total non-performing assets $61,738 $40,984 $13,045 $3,010 $2,798 $2,851
======= ======= ======= ====== ====== ======
</TABLE>
If non-accrual loans at September 30, 1997 had been current according to their
original terms and had been outstanding throughout 1997, or since origination if
originated during the year, interest income on these loans for 1997 would have
been $4.5 million. Interest actually recognized on these loans during 1997 was
not significant.
At September 30, 1997, the Bank did not have any loans which are not currently
classified as non-accrual, 90 days past due or restructured and where known
information about possible credit problems of borrowers caused management to
have serious concerns as to the ability of the borrowers to comply with present
loan repayment terms. At September 30, 1997, the Bank had $3.6 million of
impaired loans within the meaning of SFAS No. 114, as amended by SFAS No. 118.
Historically, the Bank has incurred minimal losses from its residential
mortgage loan production. Net charge-offs as a percentage of average loans
outstanding declined from 0.09% in 1992 to 0.00% in 1995, rose during 1996 to
0.13%, and continued on that upward trend in 1997 to 0.22% at September 30,
1997. Over this period non-performing assets as a percentage of total assets
ranged from 0.94% in 1992 to a low of 0.42% in 1994 and increased to 3.04% at
September 30, 1997. The increases in 1997 and 1996 resulted primarily from
increased repurchases of delinquent residential mortgage loans from secondary
market investors. Although the Bank generally does not sell loans with
recourse, it typically is required to repurchase delinquent and defaulted loans
that were not underwritten strictly in compliance with the underwriting
standards of secondary market investors. As the volume of the Bank's new loan
production has increased over the past several years, the level of loan
delinquencies and foreclosures has also increased, thereby increasing the number
of loans potentially subject to repurchase. In addition, during 1996 two of the
largest secondary market purchasers of loans implemented automated underwriting
review systems which enabled them to review delinquent loans on a much faster
basis, thereby accelerating the process of returning to the Bank loans
originated in prior periods.
It has been the Bank's experience that non-performing loans do not necessarily
result in an ultimate loss to the Bank. Approximately 92% of the Bank's non-
performing loans at September 30, 1997 were residential mortgage loans (88% at
December 31, 1996), which generally represent minimal risk of ultimate loss
because of low loan-to-value ratios, private mortgage insurance for loans with
over-80% loan-to-value ratios and insurance on certain loans from the FHA and
VA. In addition, the Bank may also have the right to sell the repurchased loan
back to the broker or correspondent which originated the loan or to seek
indemnity from the applicable mortgage insurance company in the case of loans
which are underwritten on a contract basis for the Bank by such insurers.
The Bank anticipates that its level of loan repurchases and non-performing
assets may continue to be above historical levels during 1997 as a result of the
factors described above. As a result of several actions taken by
OC-58
<PAGE>
the Bank during 1997, however, including a tightening of credit standards and
the implementation of automated underwriting systems (which do not permit
secondary market investors to require repurchase of loans absent material
misrepresentation), the Bank anticipates that the level of loan repurchases will
decline over time.
The Bank experienced an increase in its non-performing construction loans from
December 31, 1995 to September 30, 1997 from zero to $2.0 million. This
increase was the result of a significant increase in the single family
residential construction loans originated in the period subsequent to December
31, 1994. During the years ended December 31, 1994 and 1995 the origination of
such loans increased from $68.4 million to $101.5 million, respectively. During
the nine months ended September 30, 1997, the Bank originated $48.2 million of
construction loans. The non-performing construction loans resulted from a
particular construction lending program that was determined to be problematic.
The program has been discontinued and, with the exception of two loans totaling
approximately $450,000, all other loans originated under the program have been
paid off.
The Bank's repossessed assets were $17.7 million at September 30, 1997,
compared with $10.4 million and $2.4 million at December 31, 1996 and 1995,
respectively, representing an increase of 333.3% from December 31, 1995 to 1996,
and 70.2% from December 31, 1996 to September 30, 1997. Total non-accrual loans
increased from $10.7 million at December 31, 1995 to $30.6 million at December
31, 1996, to $44.1 million at September 30, 1997 of which single family loans
increased from $10.1 million to $27.0 million to $40.5 million over the
respective dates. Each of these increases is consistent with the Bank's
experience with non-performing loans and is generally the result of the
significantly higher loan origination volume in the period beginning in 1993
which has resulted in a higher dollar volume of non-performing loans, defaults
and subsequently repossessed assets. However, as a proportion of loans
originated, this dollar volume is well within management's acceptable levels.
The Bank's allowance for loan losses increased to $4.95 million at September
30, 1997 from $3.50 million at December 31, 1996. The Bank's ratio of allowance
for losses to non-accrual loans, however, declined to 11.23% at September 30,
1997 from 11.43% at December 31, 1996. Because 91.8% of the non-accrual loans
at September 30, 1997 were single-family mortgages, the allowance required is
lower. Of the remaining 8.2% of non-accrual loans, 4.5% is represented by $2.0
million of construction loans. Historically, the Bank's experience with loan
losses on single family loans held in portfolio or repurchased from investors
has been low. The high collateral value, private mortgage insurance and the
ability to seek recoveries from the correspondent lenders have resulted in a
consistently low charge-off record and consequently management believes that the
allowance for losses is adequate to cover the losses currently inherent in the
loan portfolio. Future changes in economic conditions or interest rates,
however, could require additional reserves.
The Bank's allowance for losses increased to $3.5 million at December 31, 1996
from $2.1 million at December 31, 1995. The Bank's ratio of allowance for
losses to non-accrual loans, however, declined to 11.43% at December 31, 1996
from 19.67% at December 31, 1995.
OC-59
<PAGE>
The following table sets forth an analysis of the Bank's consolidated
allowance for losses and ratio of net charge-offs for the periods indicated.
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, For the Years Ended December 31,
---------------------------- ------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------------- ------------ ------------ ------------ ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period....................... $ 3,500 $2,102 $ 2,102 $1,871 $ 901 $ 550 $ 345
Charge-offs, net of
recoveries................... (2,280) (216) (1,206) (7) (321) (293) (175)
Provision..................... 3,730 1,140 2,604 238 290 644 380
Provision acquired in
acquisition.................. -- -- -- -- 1,001 -- --
------- ------ ------- ------ ------ ----- -----
Balance at end of period...... $ 4,950 $3,026 $ 3,500 $2,102 $1,871 $ 901 $ 550
======= ====== ======= ====== ====== ===== =====
Ratio of net charge-offs to
average loans outstanding
during the period............ 0.22% 0.03% 0.13% 0.00% 0.08% 0.08% 0.09%
======= ====== ======= ====== ====== ===== =====
</TABLE>
OC-60
<PAGE>
The following table sets forth the breakdown of the allowance for losses by
loan category at the dates indicated. Management believes that the allowance
can be allocated by category only on an approximate basis, and therefore
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any category. The unallocated portion of the allowance represents an amount
that is not specifically allocable to one of the held for investment loan
portfolios.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------
At September 30, 1997 1996 1995 1994
----------------------- ---------------------- ---------------------- ----------------------
Percent of Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each Loans in Each
Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------- -------------- ------- -------------- ------- -------------- ------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgages:
Available for sale............ $2,000 75.62% $1,000 75.45% $ 248 67.00% $ 289 32.34%
Held for investment.......... 300 16.15% 200 10.85% 78 19.25% 531 55.74%
Construction....................... 400 2.10% 400 5.32% 367 5.28% 191 4.01%
Consumer........................... 300 1.94% 300 3.02% 393 4.25% 193 3.03%
Commercial......................... 400 3.12% 200 4.15% 43 0.93% 38 1.19%
Commercial real estate............. 100 1.07% 100 1.21% 305 3.29% 234 3.69%
Unallocated........................ 1,450 --% 1,300 --% 668 --% 395 --%
------ ------ ------ ------ ------ ------ ------ ------
Total allowance for losses......... $4,950 100.00% $3,500 100.00% $2,102 100.00% $1,871 100.00%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
OC-61
<PAGE>
At September 30, 1997, the Bank's percentage of allowance for losses to
loans for its mortgage loans held for investment and its construction, consumer,
commercial and commercial real estate loans held for investment were 0.11%,
1.06%, 0.86%, 0.71% and 0.52%, respectively.
UNDERWRITING
The Bank's mortgage loans are underwritten either in accordance with
applicable Fannie Mae, Freddie Mac and FHA/VA guidelines or with requirements
set by other investors.
All mortgage loans originated or acquired by the Bank, whether through its
retail loan origination offices or through its wholesale or correspondent
networks, must satisfy the Bank's underwriting standards. The Bank permits a
few originating correspondent lenders operating under the Bank's delegated
underwriting program to perform initial underwriting reviews. The Bank employs
an automated underwriting process on most loans that is based upon data provided
through the Bank's initial loan data entry software and is available from Fannie
Mae through its Desktop Underwriter(TM) software and from Freddie Mac through
its Loan Prospector(TM) software. This process incorporates credit scoring and
an appraisal evaluation system, which in turn employs rules-based and
statistical technologies to evaluate the borrower, property and the sale of the
loan in the secondary market. This process is intended to reduce processing and
underwriting time, to improve overall loan approval productivity, to improve
credit quality and to reduce potential investor repurchase requests.
Approximately one-third of loans underwritten by the Bank are initially
underwritten on a contractual basis by mortgage insurance companies, in their
capacity as contract underwriters. The contract underwriter may be required to
repurchase loans that are determined not to be in compliance with such
underwriting criteria.
Loans underwritten directly by the Bank are subject to a complete review of
all information prior to loan approval. This process involves the transfer of
loan data to the Bank by wholesalers or correspondents using loan data entry
software provided by the Bank plus certain other physical documentation or
through the physical transfer of loan files to the Bank. Further, the Bank has
introduced the use of video-based computer technology, known as LIVEsm, to
expedite the loan approval process by allowing its underwriters to conduct face-
to-face interviews with loan applicants using personal computers with cameras
mounted on them. These facilities are installed and can be used on an as-needed
or pre-scheduled basis in the offices of certain mortgage brokers. See " --
Technology."
To a limited extent, the Bank delegates underwriting authority to select
correspondent lenders who meet financial strength, delinquency, underwriting and
quality control standards. The lenders may be required to agree to repurchase
loans that later become delinquent or to indemnify the Bank from loss.
QUALITY CONTROL
The Bank maintains a quality control department that, among other things,
reviews compliance and quality assurance issues relating to loan production and
underwriting. For its production compliance process, the Bank randomly selects
a statistical sample of, generally, at least 5% of all loans closed each month.
This review includes a credit scoring and re-underwriting of such loans;
ordering second appraisals on 10% of the sample; reverifying funds, employment
and final applications; and reordering credit reports on the entire sample. In
addition, a full underwriting review is conducted on loans that go into default
during the first twelve months from the date of origination. Document and file
reviews are also undertaken to ensure regulatory compliance.
The Bank also monitors the performance of delegated underwriters through
quality assurance reports prepared by its quality control department, FHA/VA
reports and audits, reviews and audits by regulatory agencies, investor reports
and mortgage insurance Bank audits. Deficiencies in loans are generally
corrected; otherwise, the Bank may exercise its option to require that the loan
be repurchased by the originating broker or correspondent, or the Bank may
insist that the broker who originated the loan indemnify the Bank against any
losses.
MORTGAGE LOAN SERVICING
The Bank derives a significant portion of its revenues from the servicing
of mortgage loans for others. For the nine months ended September 30, 1997 and
the year ended December 31, 1996, the Bank realized net
OC-62
<PAGE>
servicing fee revenue from its mortgage loan servicing operations of $5.5
million and $11.9 million, respectively, which represented 12.7% and 20.4% of
the Bank's non-interest income for the respective periods. Servicing arises in
connection with mortgage loans originated or purchased and then sold in the
secondary market with mortgage servicing rights retained.
Mortgage loan servicing includes collecting payments of principal and
interest from borrowers, remitting aggregate mortgage loan payments to
investors, accounting for principal and interest payments, holding escrow funds
for payment of mortgage related expenses such as taxes and insurance, making
advances to cover delinquent payments, inspecting the mortgaged premises as
required, contacting delinquent mortgagors, supervising foreclosures and
property dispositions in the event of unremedied defaults, and other
miscellaneous duties related to loan administration. The Bank collects servicing
fees from monthly mortgage payments generally ranging from 0.25% (i.e., 25 basis
points) to 0.75% (i.e., 75 basis points) of the declining principal balances of
the loans per annum. At September 30, 1997 and December 31, 1996, the weighted
average servicing fee earned on this portfolio was 0.273% and 0.289%,
respectively.
The Bank services mortgage loans nationwide. The broad geographic
distribution of the Bank's servicing portfolio reflects the national scope of
the Bank's originations and loan acquisitions. The Bank actively monitors the
geographic distribution of its servicing portfolio to maintain a mix that it
deems appropriate to balance its risks and makes adjustments as it deems
necessary. At September 30, 1997, the Bank's servicing portfolio consisted of
$5.3 million of FHA/VA servicing and $4.1 billion of conventional servicing
(excluding subservicing). Such amounts are in addition to loans serviced by the
Bank which were recorded on its books as loans receivable (i.e., available for
sale and held for investment).
The value of the Bank's mortgage servicing rights ("MSRs"), is subject to
prepayment risk in the event that declining interest rates provide borrowers
with refinancing opportunities. At September 30, 1997 and December 31, 1996,
the amounts of the MSRs recorded on the Bank's books were $51.7 million and
$30.1 million, respectively, and their estimated fair values were $60.4 million
and $54.0 million, respectively. For further information, see Note 7 of Notes
to Consolidated Financial Statements. During the nine months ended September
30, 1997, the Bank sold MSRs for gains amounting to $25.5 million.
Gains on the sale of MSRs are affected by changes in interest rates as well
as the amount of MSRs capitalized at the time of the loan origination or MSR
acquisition. Purchasers of MSRs analyze a variety of factors, including
prepayment sensitivity, to assess the purchase price they are willing to pay.
Lower market interest rates prompt an increase in prepayments as consumers
refinance their mortgages at lower rates of interest. As prepayments increase,
the life of the servicing portfolio is reduced, decreasing the servicing fee
revenue that will be earned over the life of that portfolio and the price third
party purchasers are willing to pay. The fair value of servicing is also
influenced by the supply and demand of servicing available for purchase at any
point in time. Conversely, as interest rates rise, prepayments generally
decrease, resulting in an increase in the value of the servicing portfolio as
well as the gains on sales of MSRs.
OC-63
<PAGE>
The following table sets forth information regarding the mortgage loan
servicing portfolio.
<TABLE>
<CAPTION>
For The Nine Months
Ended September 30, For the Years Ended December 31,
------------------- ---------------------------------------
1997 1996 1995
------ ------------------ -------------------
<S> <C> <C> <C>
(In thousands)
Balance at beginning of period... $4,801,581 $6,788,530 $5,691,421
Add: Servicing acquisitions
Originated.................... 538,426 563,355 87,370
Purchased..................... 4,740,264 5,070,190 4,133,015
---------- ---------- ----------
Total additions.............. 5,278,690 5,633,545 4,220,385
---------- ----------
Less:
Prepayments/Amortizations........ 1,718,811 1,146,564 851,188
Sales(1)......................... 4,218,108 6,473,930 2,272,088
---------- ---------- ----------
Total Reductions.............. 5,936,919 7,620,494 3,123,276
---------- ---------- ----------
Balance at end of period......... $4,143,352 $4,801,581 $6,788,530
========== ========== ==========
Composition at end of period:
GNMA........................... $ 5,299 $ 6,458 $ 7,217
Fannie Mae/Freddie Mac......... 3,931,738 4,658,056 6,638,435
Other Private.................. 206,315 137,067 142,878
---------- ---------- ----------
Subtotal..................... 4,143,352 4,801,581 6,788,530
Subservicing on sold servicing
rights(2)........................ 2,027,578 3,619,373 536,324
---------- ---------- ----------
Total servicing for others..... $6,170,930 $8,420,954 $7,324,854
========== ========== ==========
Loans receivable, net(3)....... $1,803,424 $1,110,836 $ 923,943
========== ========== ==========
</TABLE>
(1) The actual release or transfer of servicing does not necessarily take place
during the same period as the related sale of MSRs.
(2) Reflects mortgage servicing rights sold by the Bank but as to which the
purchaser has not yet taken delivery. The Bank's costs of subservicing are
generally equivalent to the fees charged by the Bank for this service.
(3) Represents loans which the Bank also services, including loans available for
sale.
The Bank originates and purchases MSRs nationwide. The broad geographic
distribution of the Bank's MSR portfolio reflects the national scope of the
Bank's mortgage loan originations and MSR acquisitions. The ten largest states
accounted for 76.5% of the total number of mortgage loans serviced and 73.0% of
the dollar value of the mortgage loans serviced, at September 30, 1997, while
the largest volume by state was Michigan with 35.0% and 28.6% of the mortgage
loans serviced by number and value, respectively.
The Bank's mortgage servicing portfolio includes servicing for adjustable
rate, balloon payment and fixed rate fully amortizing loans. At September 30,
1997, 2.3% of the mortgage servicing rights related to adjustable rate loans,
which had a weighted average coupon rate of 7.869%; 19.3% related to fixed rate
balloon payment loans, which had a weighted average coupon rate of 7.263%; and
the remaining 78.4% related to fixed rate fully amortizing loans, which had a
weighted average coupon rate of 8.067%. At that date, the Bank's mortgage
servicing portfolio had an aggregate weighted average coupon rate of 7.905%.
The following table sets forth, as of September 30, 1997, the percentage of
fixed-rate, single-family mortgage loans being serviced for others by the Bank,
by interest rate category.
OC-64
<PAGE>
<TABLE>
<CAPTION>
Coupon Range Percentage of Portfolio
- ------------ -----------------------
<S> <C>
Less than 7.00%................. 2.66%
7.00 - 8.00%.................... 36.32%
8.01 - 9.00%.................... 57.15%
9.01 - 10.00%................... 3.30%
10.01 - 11.00%.................. 0.50%
11.01 - 12.00%.................. 0.05%
12.01 & above................... 0.02%
------
100.00%
======
</TABLE>
The following table sets forth information regarding the mortgage loan
servicing portfolio, broken down by state.
<TABLE>
<CAPTION>
At September 30, 1997
---------------------------------------------------------------------------------------------------
Number of Percentage of total Percentage of
mortgage loans number of mortgage total dollar
serviced loans serviced Amount amount
-------------------- ------------------------- ----------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Michigan................. 15,675 34.99% $1,183,217 28.56%
Ohio..................... 3,932 8.78% 220,750 5.33%
California............... 3,740 8.35% 549,417 13.26%
Texas.................... 2,050 4.58% 172,043 4.15%
Florida.................. 2,032 4.54% 153,761 3.71%
Illinois................. 1,748 3.90% 179,660 4.34%
Colorado................. 1,485 3.31% 157,588 3.80%
Washington............... 1,250 2.79% 152,939 3.69%
Georgia.................. 1,222 2.73% 106,404 2.57%
New York................. 1,145 2.56% 136,529 3.30%
Maryland................. 1,072 2.39% 116,290 2.81%
Oregon................... 949 2.12% 110,894 2.68%
Missouri................. 633 1.41% 44,812 1.08%
Utah..................... 598 1.33% 63,812 1.54%
New Jersey............... 555 1.24% 63,608 1.53%
Indiana.................. 535 1.19% 42,098 1.02%
Minnesota................ 504 1.13% 40,214 0.97%
Virginia................. 483 1.08% 56,485 1.36%
Pennsylvania............. 469 1.05% 43,805 1.06%
North Carolina........... 468 1.04% 36,063 0.87%
Tennessee................ 451 1.01% 37,128 0.90%
Other.................... 3,803 8.48% 475,835 11.47%
------ ------ ---------- ------
Total.................. 44,799 100.00% $4,143,352 100.00%
====== ====== ========== ======
</TABLE>
OC-65
<PAGE>
At September 30, 1997, the Bank was servicing 44,799 mortgage loans for
others with an aggregate unpaid principal balance of $4.1 billion (excluding
subservicing). Of such loans, 2.30% were delinquent and an additional 1.11%
were in foreclosure. The following table presents certain information regarding
the number of delinquent single family mortgage loans as of the dates indicated.
<TABLE>
<CAPTION>
At September 30, At December 31,
--------------------- ---------------------------------------------
1997 1996 1995 1994
--------------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
30 - 59 Days Past Due......... 1.36% 2.52% 1.77% 0.81%
60 - 89 Days Past Due......... 0.30% 0.51% 0.24% 0.09%
90+ days Past Due............. 0.64% 0.25% 0.14% 0.02%
Loans in foreclosure.......... 1.11% 0.88% 0.40% 0.23%
---- ---- ---- ----
Total.................... 3.41% 4.16% 2.55% 1.15%
==== ==== ==== ====
</TABLE>
The Bank is materially affected by loan delinquencies and defaults on loans
that it services for others. Under a portion of its servicing contracts, the
Bank must forward all or part of the scheduled payments to the owner of the
loan, even when loan payments are delinquent. At September 30, 1997, the Bank's
delinquency rates on loans serviced for Freddie Mac and Fannie Mae were 3.00%
and 3.96%, respectively. Also, to protect their liens on mortgage properties,
owners of loans usually require a servicer to advance scheduled mortgage and
hazard insurance and tax payments even if sufficient escrow funds are not
available. The Bank is generally reimbursed by the mortgage owner or from
liquidation proceeds for payments advanced that the servicer is unable to
recover from the mortgagor, although the timing of such reimbursement is
typically uncertain. In the interim, the Bank absorbs the cost of funds
advanced during the time the advance is outstanding. Further, the Bank bears
the costs of collection activities on delinquent and defaulted loans.
FUNDING SOURCES
The Bank funds its operations through its retail deposit base, the funds
available in escrow accounts held in connection with its mortgage loan servicing
operations, and FHLB advances. See "Liquidity and Capital Resources."
Deposits are a significant source of the Bank's funds for lending,
investment activities and general operational purposes. In addition to
deposits, the Bank derives funds from loan principal and interest repayments,
sales of loans, mortgage loan servicing income and sales of mortgage servicing
rights.
The Bank attracts deposits principally from its primary market area in
Michigan by offering a variety of deposit instruments, including checking
accounts, money market accounts, regular savings accounts and certificates of
deposit. Deposit terms vary according to the minimum balance required and the
interest rate. Maturities, terms, service fees and withdrawal fees are
established on a periodic basis. Management of the Bank generally reviews its
deposit mix and pricing on a daily basis. In determining the characteristics of
its deposit accounts, the Bank considers the rates offered by competing
institutions in the Bank's market areas, the acquisition of brokered funds,
liquidity requirements, growth goals and federal regulations.
The Bank competes for deposits with other institutions in its market area
and nationwide (through print advertisements and a commercial wire service) by
offering deposit instruments that are competitively priced and by providing
customer service through convenient and attractive offices, knowledgeable and
efficient staff and hours of service that meet customers' needs. Most of the
Bank's depositors are Michigan residents.
Among deposits which the Bank attracts and retains are brokered deposits,
which are pools of deposits purchased from a broker acting as an agent for
depositors seeking the highest certificate of deposit rates offered by insured
financial institutions and its certificates of deposits. At September 30, 1997,
the Bank had $877.3 million in certificates of deposit, of which $480.4 million,
or 54.8%, were brokered deposits. Because brokered deposits are inherently
interest-rate sensitive, the Bank is subject to the risk of a significant
outflow of funds in the event of a sudden increase in interest rates. Further,
the Bank's net earnings may be adversely affected by attempts by the Bank to
match interest rates to stem any such outflow of funds. The Bank believes that
this risk is appropriately
OC-66
<PAGE>
mitigated by the availability of its $850 million FHLB line of credit, as to
which its maximum outstanding month-end balance for the nine months ended
September 30, 1997 was $718.9 million. Based upon the Bank's current cost of its
funds, the Bank does not believe that reliance on the FHLB as a short-term
replacement funding source would have a significant adverse effect on its
financial condition. For the nine months ended September 30, 1997, the average
cost of funds for the Bank's deposits, including brokered deposits, and its FHLB
advances were 5.55% and 5.87%, respectively. Further, the Bank believes its
reliance on brokered funds will diminish as the Bank develops its retail deposit
base through its existing and future branch network.
The following table sets forth by account types the aggregate amount and
weighted average rate of the Bank's deposits.
<TABLE>
<CAPTION>
At September 30, At December 31,
--------------------- ------------------------------------------------------------
1997 1996 1995 1994
--------------------- ------------------- ------------------- ------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
---------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction Accounts:
Non-interest
bearing accounts........ $ 21,321 --% $ 36,935 -- % $ 13,171 --% $ 13,691 --%
Interest bearing
accounts................ 34,660 3.04% 29,973 3.56% 29,239 3.05% 49,226 2.96%
---------- -------- -------- --------
Subtotal................ 55,981 2.20% 66,908 1.60% 42,410 2.22% 62,917 2.35%
Passbook savings accounts.. 78,879 4.67% 57,211 4.30% 38,094 2.25% 9,744 2.25%
Certificates of deposit.... 877,261 6.04% 500,613 5.95% 448,714 6.27% 235,836 5.47%
---------- -------- -------- --------
Total deposits.......... $1,012,121 5.72% $624,732 5.34% $529,218 5.73% $308,497 4.74%
========== ======== ======== ========
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposits by time remaining until maturity as of September 30, 1997.
<TABLE>
<CAPTION>
Maturity Period Certificates of Deposits
--------------- ------------------------
(In thousands)
<S> <C>
Three months or less................. $129,844
Over three through six months........ 168,644
Over six through 12 months........... 197,980
Over 12 months....................... 380,793
--------
Total................................ $877,261
========
</TABLE>
The Bank considers all its certificates of deposit to be highly
interest-rate sensitive regardless of amount.
OC-67
<PAGE>
Savings deposits in the Bank at September 30, 1997 were represented by
the various types of savings programs described below.
<TABLE>
<CAPTION>
Interest Minimum Minimum Balance Percentage of
Rate* Term Category Amount (In thousands) Total Deposits
- ----- --------------------- ------------------------------ ------------- -------------------- --------------
<S> <C> <C> <C> <C> <C>
-- None Non-interest bearing accounts $ 50 $ 21,321 2.11%
3.04% None Demand/NOW accounts 50 34,660 3.42%
4.67% None Passbook accounts 50 78,879 7.79%
---------- ------
$ 134,860 13.32%
<CAPTION>
Certificates of Deposit
------------------------------
<S> <C> <C> <C> <C> <C>
5.99% 3 months or less Fixed-term, fixed-rate $500 $ 129,844 12.84%
5.98% Over 3 to 12 months Fixed-term, fixed-rate 500 366,625 36.23%
6.08% Over 12 to 24 months Fixed-term, fixed-rate 500 221,106 21.85%
6.06% Over 24 to 36 months Fixed-term, fixed-rate 500 95,995 9.48%
6.24% Over 36 to 48 months Fixed-term, fixed-rate 500 37,264 3.68%
6.53% Over 48 to 60 months Fixed-term, fixed-rate 500 24,578 2.42%
6.46% Over 60 months Fixed-term, fixed-rate 500 1,849 .18%
---------- ------
877,261 86.68%
---------- ------
$1,012,121 100.00%
========== ======
</TABLE>
- -------------------------
* Represents weighted average interest rate.
OC-68
<PAGE>
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by the Bank between the dates indicated.
<TABLE>
<CAPTION>
Increase
Balance at (Decrease) from Balance at Increase
September 30, % of December 31, December 31, % of (Decrease) from
1997 Deposits 1996 1996 Deposits December 31, 1995
------------- -------- --------------- ------------ -------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing
accounts.............. $ 21,321 2.11% $(15,614) $ 36,935 5.91% $23,764
Demand and NOW
accounts............. 34,660 3.42% 4,687 29,973 4.80% 734
Passbook savings....... 78,879 7.79% 21,668 57,211 9.16% 19,117
Other time deposits.... 877,261 86.68% 376,648 500,613 80.13% 51,899
---------- ------ -------- -------- ------ -------
$1,012,121 100.00% $387,389 $624,732 100.00% $95,514
---------- ------ ======== ======== ====== =======
</TABLE>
<TABLE>
<CAPTION>
Balance at Increase Balance at
December 31, % of (Decrease) from December 31, % of
1995 Deposits December 31, 1994 1994 Deposits
------------ -------- ----------------- ------------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-interest bearing
accounts............... $ 13,171 2.49% $ (520) $ 13,691 4.44%
Demand and NOW
accounts................ 29,239 5.52% (19,987) 49,226 15.96%
Passbook savings........ 38,094 7.20% 28,350 9,744 3.16%
Other time deposits..... 448,714 84.79% 212,878 235,836 76.44%
-------- ------ -------- -------- ------
Total................... $529,218 100.00% $220,721 $308,497 100.00%
======== ====== ======== ======== ======
</TABLE>
The following table sets forth the time deposits in the Bank classified by
rates at the dates indicated.
<TABLE>
<CAPTION>
At September 30, At December 31,
------------------ ---------------------
1997 1996
------------------ ---------------------
(In thousands)
<S> <C> <C>
2.01 - 4.00%....... $ 137 $ 1,019
4.01 - 6.00%....... 433,646 298,879
6.01 - 8.00%....... 442,930 198,610
8.01% and over...... 548 2,105
-------- --------
Total.............. $877,261 $500,613
======== ========
</TABLE>
The following table sets forth the amount and maturities of time
deposits at September 30, 1997.
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------------------------
Less Than One Year 1-2 Years 2-3 Years After 3 Years Total
------------------ --------- --------- ------------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
2.01 - 4.00%.................. $ 125 $ -- $ 12 $ -- $ 137
4.01 - 6.00%.................. 248,295 130,364 33,970 21,017 433,646
6.01 - 8.00%.................. 209,632 111,777 61,141 60,380 442,930
8.01 - over................... 309 76 44 119 548
-------- -------- ------- ------- --------
Total......................... $458,361 $242,217 $95,167 $81,516 $877,261
======== ======== ======= ======= ========
</TABLE>
OC-69
<PAGE>
Deposits have historically been the primary source of funds for the
Bank's lending and general operating activities. However, the Bank also
utilizes the FHLB to provide both short-term and long-term borrowings and also
relies to a limited extent on short-term reverse repurchases of pools of single-
family mortgage loans for advance funding of securitized loans.
The Bank's principal source of borrowings has been FHLB advances. The
Bank is authorized to use advances from the FHLB to supplement its supply of
funds and to satisfy deposit withdrawal requirements. The Federal Home Loan
Bank System functions as a twelve-bank central reserve bank providing credit for
savings institutions and certain other member financial institutions. As a
member of the FHLB System, the Bank is required to own stock in the FHLB and is
authorized to apply for advances, which are made pursuant to several different
programs with their own interest rates and range of maturities. Advances from
the FHLB are secured by the Bank's stock in the FHLB and a portion of the Bank's
mortgage loan portfolio.
The following table sets forth certain information regarding the
borrowings of the Bank as of or for the period indicated.
<TABLE>
<CAPTION>
At or for the Nine Months AT OR FOR THE YEARS ENDED
Ended September 30, DECEMBER 31,
------------------------- ---------------------------------
1997 1996 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
FHLB Advances
Balance outstanding at period-end.............. $718,878 $389,801 $191,156 $200,750
Maximum outstanding at any month-end......... 718,878 $389,801 $315,000 $200,750
Monthly average balance........................ 427,310 $247,204 $237,535 $ 83,912
Average interest rate.......................... 5.87% 5.78% 6.35% 4.44%
</TABLE>
See Note 9 of Notes to Consolidated Financial Statements for additional
information.
OC-70
<PAGE>
EMPLOYEES
As of September 30, 1997, the Bank and its subsidiaries had 1,110 full-
time equivalent employees, none of whom were represented by a collective
bargaining agreement. Management of the Bank considers their relationship with
such employees to be satisfactory.
PROPERTIES
The Bank's principal executive offices are located at 2600 Telegraph Road,
Bloomfield Hills, Michigan 48302 in leased facilities. At September 30, 1997,
the Bank maintained 19 branches, 33 loan centers, 10 correspondent service
centers, 5 wholesale/correspondent satellite offices, 1 mortgage loan servicing
center, and three corporate operations offices. Other than nine of the branches
and one of the loan centers, the Bank leased its operating premises. See Note 6
of Notes to Consolidated Financial Statements. See "Business -- Business
Strategy."
SUBSIDIARY ACTIVITIES
The Bank is a federally chartered, stock savings bank headquartered in
Bloomfield Hills, Michigan. See "Business." The Bank owns five subsidiaries:
FSSB Mortgage Corporation ("Mortgage"), Mortgage Affiliated Services, Inc.
("MAS"), Mid-michigan Service Corporation ("Mid-Michigan"), SSB Funding
Corporation ("Funding"), and Flagstar Capital Corporation ("Capital"). Mortgage
and Funding are currently inactive subsidiaries. MAS provides appraisal and
document preparation services, primarily in conjunction with the Bank's loan
closings. Mid-Michigan is engaged in the business of leasing and sub-leasing
commercial real estate. Capital purchases Bank loans and holds them for
investment purposes.
LEGAL PROCEEDINGS
From time to time, the Bank and its subsidiaries are parties to various
legal proceedings incident to its business. At September 30, 1997, there were
no legal proceedings which management anticipates would have a material adverse
effect on the Bank.
OC-71
<PAGE>
REGULATION
GENERAL
The Bank is chartered as a federal savings bank under the Home Owners' Loan
Act, as amended (the "HOLA"), which is implemented by regulations adopted and
administered by the OTS. As a federal savings bank, the Bank is subject to
regulation, supervision and regular examination by the OTS. The OTS also has
extensive enforcement authority over all savings institutions and their holding
companies, including the Bank and Flagstar Bancorp, Inc. Federal banking laws
and regulations control, among other things, the Bank's required reserves,
investments, loans, mergers and consolidations, payment of dividends and other
aspects of the Bank's operations. The deposits of the Bank are insured by the
SAIF administered by the FDIC to the maximum extent provided by law ($100,000
for each depositor). In addition, the FDIC has certain regulatory and
examination authority over OTS-regulated savings institutions and may recommend
enforcement actions against savings institutions to the OTS. The supervision
and regulation of the Bank is intended primarily for the protection of the
deposit insurance fund and depositors rather than for holders of the Bank's
stock or for Flagstar Bancorp, Inc. as the holder of the stock of the Bank.
The following discussion is intended to be a summary of certain statutes,
rules and regulations affecting the Bank. A number of other statutes and
regulations have an impact on their operations. The following summary of
applicable statutes and regulations does not purport to be complete and is
qualified in its entirety by reference to such statutes and regulations.
REGULATION OF THE BANK
PROPOSED LEGISLATION. Legislation currently pending before the United
States Congress would, if enacted, require all federal savings institutions
(such as the Bank) to convert to a national bank or a state bank or savings bank
charter. In addition, the proposed changes would require the Bank's parent,
Flagstar Bancorp, Inc., to be regulated as a bank holding company or a
"Financial Services" holding company. If the pending legislation were to be
adopted in its current form, it would eliminate certain advantages now enjoyed
by federal savings institutions, such as unrestricted interstate branching.
The Bank cannot predict whether or in what form the proposed legislation
will be enacted. However, based upon the provisions of the currently pending
legislation, the management of the Bank does not believe that the enactment of
such legislation would have a material adverse effect on its financial condition
or results of operations.
BUSINESS ACTIVITIES. The Bank derives its lending and investment powers
from the HOLA and the regulations of the OTS thereunder. Under these laws and
regulations, the Bank may invest in mortgage loans secured by residential and
commercial real estate, commercial and consumer loans, certain types of
commercial paper and debt securities, and certain other assets. The Bank may
also establish service corporations that may engage in activities not otherwise
permissible for the Bank, including certain real estate equity investments and
securities and insurance brokerage. These investment powers are subject to
various limitations.
BRANCHING. Subject to certain limitations, OTS regulations currently
permit a federally chartered savings institution like the Bank to establish
branches in any state of the United States, provided that the federal savings
institution qualifies as a "domestic building and loan association" under the
Internal Revenue Code. See "-- Qualified Thrift Lender Test." The authority
for a federal savings institution to establish an interstate branch network
would facilitate a geographic diversification of the institution's activities.
However, recently proposed federal legislation could, if enacted, restrict the
Bank's ability to open branches in states other than Michigan. See "-- Proposed
Legislation."
REGULATORY CAPITAL. The OTS has adopted capital adequacy regulations that
require savings institutions such as the Bank to meet three minimum capital
standards: a "core" capital requirement of 3% of adjusted total assets, a
"tangible" capital requirement of 1.5% of adjusted total assets, and a "risk-
based" capital requirement of 8% of total risk-based capital to total risk-
weighted assets. In addition, the OTS has adopted regulations imposing certain
restrictions on savings institutions that have a total risk-based capital ratio
of less than 8%, a ratio of Tier 1 capital to risk-weighted assets of less than
4% or a ratio of Tier 1 capital to total assets of less than 4% (or 3% if the
institution is rated Composite 1 under the CAMEL examination rating system).
See "-- Prompt Corrective Regulatory Action."
OC-72
<PAGE>
The core capital, or "leverage ratio," requirement mandates that a savings
institution maintain core capital equal to at least 3% of its adjusted total
assets. "Core capital" includes common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries and certain
nonwithdrawable accounts and pledged deposits and is generally reduced by the
amount of the savings institution's intangible assets, with limited exceptions
for permissible mortgage servicing rights ("MSRs"), purchased credit card
relationships and certain intangible assets arising from prior regulatory
accounting practices. Core capital is further reduced by the amount of a savings
institution's investments in and loans to subsidiaries engaged in activities not
permissible for national banks. At September 30, 1997, the Bank had no such
investments.
The risk-based capital standards of the OTS require maintenance of core
capital equal to at least 4% of risk-weighted assets and total capital equal to
at least 8% of risk-weighted assets. For purposes of the risk-based capital
requirement, "total capital" includes core capital plus supplementary capital,
provided that the amount of supplementary capital does not exceed the amount of
core capital. Supplementary capital includes preferred stock that does not
qualify as core capital, nonwithdrawable accounts and pledged deposits to the
extent not included in core capital, perpetual and mandatory convertible
subordinated debt and maturing capital instruments meeting specified
requirements and a portion of the institution's loan and lease loss allowance.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each asset and the credit-equivalent amount of
each off-balance sheet item after being multiplied by an assigned risk weight,
which range from 0% to 100% as assigned by the OTS capital regulations based on
the risks the OTS believes are inherent in the type of asset. Comparable risk
weights are assigned to off-balance sheet assets.
The OTS risk-based capital regulation also includes an interest rate risk
("IRR") component that requires savings institutions with greater than normal
IRR, when determining compliance with the risk-based capital requirements, to
maintain additional total capital. The OTS has, however, indefinitely deferred
enforcement of its IRR requirements.
The following table sets forth the Bank's compliance with its regulatory
capital requirements at September 30, 1997.
<TABLE>
<CAPTION>
The Bank's Capital Capital Requirements Excess Capital
-------------------------- -------------------------- --------------------------
Amount Percent Amount Percent Amount Percent
------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Tangible capital.............. $116,218 5.73% $30,425 1.50% $85,793 4.23%
Core capital.................. $121,055 5.95% $60,996 3.00% $60,059 2.95%
Total Risk-based capital...... $125,695 11.25% $89,413 8.00% $36,282 3.25%
</TABLE>
PROMPT CORRECTIVE REGULATORY ACTION. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action in respect of depository
institutions that do not meet certain minimum capital requirements, including a
leverage limit and a risk-based capital requirement. All institutions,
regardless of their capital levels, are restricted from making any capital
distribution or paying any management fees that would cause the institution to
become undercapitalized. As required by FDICIA, banking regulators, including
the OTS, have issued regulations that classify insured depository institutions
by capital levels and provide that the applicable agency will take various
prompt corrective actions to resolve the problems of any institution that fails
to satisfy the capital standards.
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<PAGE>
Under the joint prompt corrective action regulations, a "well-capitalized"
institution is one that is not subject to any regulatory order or directive to
meet any specific capital level and that has or exceeds the following capital
levels: a total risk-based capital ratio of 10%, a Tier 1 risk-based capital
ratio of 6%, and a ratio of Tier 1 capital to total assets ('leverage ratio") of
5%. An "adequately capitalized" institution is one that does not qualify as
"well capitalized" but meets or exceeds the following capital requirements: a
total risk-based capital of 8%, a Tier 1 risk-based capital ratio of 4%, and a
leverage ratio of either (i) 4% or (ii) 3% if the institution has the highest
composite examination rating. An institution not meeting these criteria is
treated as "undercapitalized," "significantly undercapitalized," or "critically
undercapitalized" depending on the extent to which its capital levels are below
these standards. An institution that fails within any of the three
"undercapitalized" categories will be subject to certain severe regulatory
sanctions required by FDICIA and the implementing regulations. As of September
30, 1997, the Bank was "well-capitalized" as defined by the regulations.
FEDERAL DEPOSIT INSURANCE. The Bank is required to pay assessments, based
on a percentage of its insured deposits, to the FDIC for insurance of its
deposits by the SAIF.
Under the FDIC's risk-based deposit insurance assessment system, the
insurance assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution. Institutions are
assigned by the FDIC to one of three capital groups -- well-capitalized,
adequately capitalized, or undercapitalized -- and, within each capital
category, to one of three supervisory subgroups.
In order to recapitalize the SAIF and to equalize the deposit insurance
premiums paid by SAIF-insured institutions and institutions with deposits
insured by the Bank Insurance Fund, Congress enacted the Deposit Insurance Funds
Act of 1996 (the "1996 Act"), which authorized the FDIC to impose a one-time
special assessment on all institutions with SAIF-assessable deposits in the
amount necessary to recapitalize the SAIF to the statutorily designated reserve
ratio of 1.25% of insured deposits. Institutions were assessed at the rate of
65.7 basis points per $100 of each institution's SAIF-assessable deposits as of
March 31, 1995. The 1996 Act provides the amount of the special assessment will
be deductible for federal income tax purposes for the taxable year in which the
special assessment is paid.
As a result of the recapitalization of the SAIF by the 1996 Act, the FDIC
reduced the insurance assessment rate for SAIF-assessable deposits for periods
beginning on October 1, 1996. For 1997, the FDIC set the effective insurance
assessment rates for SAIF-insured institutions, such as the Bank, at zero to 27
basis points. In addition, SAIF-insured institutions will be required, until
December 31, 1999, to pay assessments to the FDIC at an annual rate of between
6.0 and 6.5 basis points to help fund interest payments on certain bonds issued
by the Financing Corporation ("FICO"), an agency of the federal government
established to recapitalize the predecessor to the SAIF. During this period,
BIF member banks will be assessed for payment of the FICO obligations at one-
fifth the annual rate applicable to SAIF member institutions. After December
31, 1999, BIF and SAIF members will be assessed at the same rate (currently
estimated at approximately 2.4 basis points) to service the FICO obligations.
The 1996 Act also provides that the FDIC may not assess regular insurance
assessments for the SAIF unless required to maintain or to achieve the
designated reserve ratio of 1.25%, except for such assessments on those
institutions that are not classified as "well-capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weaknesses. The Bank is classified as "well-capitalized" and has not
been found by the OTS to have such supervisory weaknesses.
QUALIFIED THRIFT LENDER TEST. The HOLA and OTS regulations require all
savings institutions to satisfy one of two Qualified Thrift Lender ("QTL") tests
or to suffer a number of sanctions, including restrictions on activities. To
qualify as a QTL, a savings institution must either (i) be deemed a "domestic
building and loan association" under the Internal Revenue Code (the "Code") by
maintaining at least 60% of its total assets in specified types of assets,
including cash, certain government securities, loans secured by and other assets
related to residential real property, educational loans, and investments in
premises of the institution or (ii) satisfy the HOLA's QTL test by maintaining
at least 65% of "portfolio assets" in certain "Qualified Thrift Investments."
For purposes of the HOLA's QTL test, portfolio assets are defined as total
assets less intangibles, property used by a savings institution in its business
and liquidity investments in an amount not exceeding 20% of assets. Qualified
Thrift Investments consist of (a) loans, equity positions or securities related
to domestic, residential real estate or manufactured housing, (b) 50% of the
dollar amount of residential mortgage loans subject to sale under certain
conditions, and (c) loans to small businesses, student loans and credit card
loans. In addition, subject to a 20% of portfolio assets limit, savings
institutions are able to treat as Qualified Thrift Investments
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200% of their investments in loans to finance "starter homes" and loans for
construction, development or improvement of housing and community service
facilities or for financing small business in "credit needy" areas.
A savings institution must maintain its status as a QTL on a monthly basis
in at least nine out of every 12 months. An initial failure to qualify as a QTL
results in a number of sanctions, including the imposition of certain operating
restrictions and a restriction on obtaining additional advances from its Federal
Home Loan Bank. If a savings institution does not requalify under the QTL test
within the three-year period after it fails the QTL test, it would be required
to terminate any activity not permissible for a national bank and repay as
promptly as possible any outstanding advances from its Federal Home Loan Bank.
In addition, the holding Bank of such an institution would similarly be required
to register as a bank holding Bank with the Federal Reserve Board. At September
30, 1997, the Bank qualified as a QTL.
SAFETY AND SOUNDNESS STANDARDS. FDICIA, as amended by the Riegle Community
Development and Regulatory Improvement Act of 1994, requires the OTS, together
with the other federal bank regulatory agencies, to prescribe standards, by
regulation or guideline, relating to internal controls, information systems and
internal audit systems, loan documentation, credit underwriting, interest rate
risk exposure, asset growth, asset quality, earnings, stock valuation, and
compensation, fees and benefits and such other operational and managerial
standards as the agencies deem appropriate. The OTS and the federal bank
regulatory agencies have adopted a set of guidelines prescribing safety and
soundness standards pursuant to the statute. The safety and soundness
guidelines establish general standards relating to internal controls and
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director or principal stockholder.
In addition, on July 10, 1995, the OTS and the federal bank regulatory
agencies proposed guidelines for asset quality and earnings standards. Under
the proposed standards, a savings institution would be required to maintain
systems, commensurate with its size and the nature and scope of its operations,
to identify problem assets and prevent deterioration in those assets as well as
to evaluate and monitor earnings and ensure that earnings are sufficient to
maintain adequate capital and reserves. Management believes that the asset
quality and earnings standards, in the form proposed by banking agencies, would
not have a material effect on the operations of the Bank.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. A savings institution must give notice to the OTS at least 30
days before declaration of a proposed capital distribution to its holding
company, and capital distributions in excess of specified earnings or by certain
institutions are subject to approval by the OTS. A savings institution that has
capital in excess of all regulatory capital requirements before and after a
proposed capital distribution and that is not otherwise restricted in making
capital distributions, may, after prior notice but without the approval of the
OTS, make capital distributions during a calendar year equal to the greater of
(a) 100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the excess capital over
its fully phased-in capital requirements) at the beginning of the calendar year,
or (b) 75% of its net income for the previous four quarters. Any additional
capital distributions would require prior OTS approval.
The OTS has proposed regulations that would simplify the existing
procedures governing capital distributions by savings institutions. Under the
proposed regulations, the approval of the OTS would be required only for capital
distributions by an institution that is deemed to be in troubled condition or
that is undercapitalized or would be undercapitalized after the capital
distribution. A savings institution would be able to make a capital
distribution without notice to or approval of the OTS if it is not held by a
savings and loan holding company, is not deemed to be in troubled condition, has
received either of the two highest composite supervisory ratings and would
continue to be adequately capitalized after such distribution. Notice would
have to be given to the OTS by any institution that is held by a savings and
loan holding company or that had received a composite supervisory rating below
the highest two composite supervisory ratings. An institution's capital rating
would be determined under the prompt corrective action regulations. See "--
Prompt Corrective Regulatory Action."
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Under OTS regulations, the Bank would not be permitted to pay dividends on
its capital stock if its regulatory capital would thereby be reduced below the
amount then required for the liquidation account established for the benefit of
certain depositors of the Bank at the time of the Conversion. In addition,
under the OTC's prompt corrective action regulations, the Bank would be
prohibited from paying dividends if the Bank were classified as
"undercapitalized" under such rules. See "-- Prompt Corrective Regulatory
Action."
In addition to the foregoing, earnings of the Bank appropriated to bad debt
reserves and deducted for federal income tax purposes are not available for
payment of dividends or other distributions to the Bank without payment of taxes
at the then current tax rate by the Bank on the amount of earnings removed from
the reserves for such distributions. See "Taxation."
CONSUMER CREDIT REGULATION. The Bank's mortgage lending activities are
subject to the provisions of various federal and state statutes, including,
among others, the Truth in Lending Act, the Equal Credit Opportunity Act, the
Real Estate Settlement Procedures Act, the Fair Housing Act, and the regulations
promulgated thereunder. These statutes and regulations, among other provisions,
prohibit discrimination, prohibit unfair and deceptive trade practices, require
the disclosure of certain basic information to mortgage borrowers concerning
credit terms and settlement costs, and otherwise regulate terms and conditions
of credit and the procedures by which credit is offered and administered. Many
of the above regulatory requirements are designed to protect the interests of
consumers, while others protect the owners or insurers of mortgage loans.
Failure to comply with these requirements can lead to administrative enforcement
actions, class action lawsuits and demands for restitution or loan rescission.
TRANSACTIONS WITH AFFILIATES. The Bank is subject to restrictions imposed
by Sections 23A and 23B of the Federal Reserve Act on extensions of credit to,
and certain other transactions with, its holding company and other affiliates,
and on investments in the stock or other securities thereof. Such restrictions
prevent Flagstar and such other affiliates from borrowing from the Bank unless
the loans are secured by specified collateral, and require such transactions to
have terms comparable to terms of arms-length transactions with third persons.
Further, such secured loans and other transactions and investments by the Bank
are generally limited in amount as to Flagstar and as to any other affiliate to
10% of the Bank's capital and surplus and as to Flagstar and all other
affiliates to an aggregate of 20% of the Bank's capital and surplus.
LOANS TO DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS. The
Bank's ability to extend credit to its directors, executive officers, and 10%
stockholders, as well as to entities controlled by such persons, is governed by
the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and
Regulation O of the Federal Reserve Board thereunder. Among other things, these
provisions require that an institution's extensions of credit to insiders (a) be
made on terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the
normal risk of repayment or present other unfavorable features and (b) not
exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of the institution's capital. In addition, extensions of credit in
excess of certain limits must be approved by the institution's Board of
Directors.
RESERVE REQUIREMENTS. Pursuant to regulations of the Federal Reserve
Board, all FDIC-insured depository institutions must maintain average daily
reserves against their transaction accounts. No reserves are required to be
maintained on the first $4.4 million of transaction accounts, and reserves
equal to 3% must be maintained on the next $49.3 million of transaction
accounts, plus reserves equal to 10% on the remainder. These percentages are
subject to adjustment by the Federal Reserve Board. Because required reserves
must be maintained in the form of vault cash or in a non-interest-bearing
account at a Federal Reserve Bank, the effect of the reserve requirement is to
reduce the amount of the institution's interest-earning assets. As of
September 30, 1997, the Bank met its reserve requirements.
LIQUIDITY REQUIREMENTS. The Bank is required by OTS regulation to maintain
an average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances, highly rated corporate debt and commercial paper, qualifying
mortgage-related securities and mortgage loans, securities of certain mutual
funds, and specified United Sates government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable short-term savings deposits
plus short-term borrowings. The average daily liquidity ratio of the Bank for
the month ended September 30, 1997 was 8.49%.
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FEDERAL HOME LOAN BANK SYSTEM. The Federal Home Loan Bank System consists
of 12 district Federal Home Loan Banks subject to supervision and regulation by
the Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide
a central credit facility primarily for member institutions. As a member of the
FHLB, the Bank is required to acquire and hold shares of capital stock in the
FHLB in an amount at least equal to 1% of the aggregate unpaid principal of its
home mortgage loans, home purchase contracts, and similar obligations at the
beginning of each year, or 1/20 of its advances (borrowings) from the FHLB,
whichever is greater. The Bank was in compliance with this requirement, with an
investment in FHLB stock at September 30, 1997 of $36.9 million. Long-term FHLB
advances may only be made for the purpose of providing funds for residential
housing finance.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Board of Directors of the Bank is divided into three classes. Directors
of the Bank each serve for three year terms or until their successors are
elected and qualified, with one-third of the directors being elected at each
annual meeting of shareholders.
The executive officers of the Bank also serve as executive officers of
Flagstar. Since the formation of Flagstar, none of the Bank's executive
officers have received compensation from Flagstar in their capacity as such.
The following table sets forth the name, age and position with the Bank of
each person who is an executive officer or director of the Bank and also sets
forth the expiration of each director's term.
<TABLE>
<CAPTION>
Director Term
Name Age(1) Position with the Bank to Expire
---- ---- ---------------------- -------------
<S> <C> <C> <C>
Thomas J. Hammond 54 Chairman and 1999
Chief Executive Officer
Mark T. Hammond 32 Vice Chairman and 1998
President
Mary Kay McGuire 41 Director, Senior Vice 1997
President and Secretary
Ronald I. Nichols, Sr. 63 Director 1997
Charles Bazzy 68 Director 1998
William B. Bortels 62 Director 1998
Harry S. Ellman 50 Director 1999
Executive Officers Who Are Not Directors:
- ----------------------------------------
Michael W. Carrie 43 Executive Vice President, Chief N/A
Financial Officer and Treasurer
Joan H. Anderson 47 Executive President N/A
</TABLE>
______________
(1) As of September 30, 1997
THOMAS J. HAMMOND has served as Chairman of the Board of Directors and
Chief Executive Officer of the Bank since the Bank's formation in 1987 and
served as President of the Bank from 1987 to September 1995. Mr. Hammond has
also served as Chairman of the Board of Directors and Chief Executive Officer of
Flagstar since its formation in 1993. In addition, Mr. Hammond has served as
Chairman of the Board of Directors and Chief Executive Officer of the Company, a
subsidiary whose common stock is wholly owned by the Bank, since the Company's
organization in 1997. Mr. Hammond has over 29 years of experience in the
mortgage lending industry. After earning a BSBA and an MBA in finance, Mr.
Hammond began his career as a Staff Financial Analyst for Ford Motor Company in
1966. Prior to founding the Bank in 1987, Mr. Hammond formed and managed a
series of companies in the financial services industry, including Hammond
Mortgage Corporation, Seller's & Homeowner's Uniform Receipt of Equity, Inc. and
First Security Mortgage Corporation (formerly known as Oak Hills Mortgage
Corporation) dating back to 1969. Mr. Hammond founded Hammond Mortgage
Corporation, a residential mortgage brokerage firm, in 1969. This Bank did
business nationwide and operated branches in eight different states and was one
of the country's largest FHA mortgage lenders prior to being sold to Michigan
National Bank in 1981. It eventually became known as Independence One and is now
part of Norwest Mortgage, Inc. Mr. Hammond is the father of Mark T. Hammond, the
Vice Chairman and President of the Bank.
MARK T. HAMMOND has served as President of the Bank since September 1995.
He has served as a member of the Bank's Board of Directors since 1991 and as its
Vice Chairman since 1993. Mr. Hammond has served as Vice Chairman of the Board
of Directors and President of Flagstar since January 1997. Mr. Hammond also
serves as the Vice
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Chairman of the Board of Directors and President of the Company, a position he
has held since its organization in 1997. He has also served as Executive Vice
President of the Bank from 1991 to September 1995 in charge of mortgage
operations, wholesale lending and construction lending. From 1989 to 1991, he
served as the Bank's Senior Vice President in charge of secondary marketing and
mortgage production. Mr. Hammond was a loan officer in 1987 for the Bank, worked
part-time in the financial services industry from 1982 to 1986 and is a graduate
of Wharton Business School. Mr. Hammond was responsible for the national
expansion of the Bank's loan production offices and has played a lead role in
the development and implementation of new technology for the Bank. Mr. Hammond
recently served on one of Fannie Mae's regional advisory councils. Mr. Hammond
is the son of Thomas J. Hammond, the Chairman and Chief Executive Officer of the
Bank.
MARY KAY MCGUIRE has been a Director of the Bank since September 1987. She has
also served as the Bank's Secretary since its formation in 1987, and Senior Vice
President of the Bank in charge of human resources, purchasing and facilities
management since 1988 and advertising since 1996. She also served as a Vice
President of the Bank from 1987 to 1988. In addition, Ms. McGuire is a Director
of the Company. Prior to that time, Ms. McGuire served with Mr. Thomas Hammond
since 1977 and has worked in the financial services industry since 1974.
RONALD I. NICHOLS, SR. has served as a Director of the Bank since 1988. He has
been President of Nichols Sales Associates, Inc. located in Bloomfield Hills,
Michigan since 1969.
CHARLES BAZZY has served as a Director of the Bank since 1988. He has been a
manufacturer's sales representative for and principal of Charles Bazzy &
Associates located in Bloomfield Hills, Michigan. Prior to 1988, he was a
planning and development manager for Ford Motor Company and was with Ford Motor
Company for 33 years.
WILLIAM B. BORTELS has been a Director of the Bank since 1991. He has been a
self-employed single-family home builder in Brighton, Michigan since 1964.
HARRY S. ELLMAN has served as a Director of the Bank since 1990. He has been
a title insurance agent and attorney with Fidelity Title Co. located in Bingham
Farms, Michigan since 1987. He is also a member of the State Bar of Michigan,
the Building Industry Association of Southeast Michigan and is a past chairman
of the Income Producing Committee of the Mortgage Bankers' Association.
EXECUTIVE OFFICERS OF THE BANK WHO ARE NOT DIRECTORS
MICHAEL W. CARRIE has served as Chief Financial Officer of the Bank since 1993
and has been a director of Flagstar since 1997, and its Executive Vice President
in charge of financial planning, financial accounting, cash management, investor
reporting, regulatory accounting, loan funding and information services since
1995. Mr. Carrie has also served as a Director of the Company since its
organization in 1997. From 1993 to 1995 he served as Senior Vice President of
the Bank. From 1985 until 1993, he served as Vice President and Manager of
Financial Analysis of Standard Federal Bank, F.S.B., a major regional federal
savings bank. From July 1994 to February 1996, Mr. Carrie also served as a
director of Security Savings after its acquisition by the Bank.
JOAN H. ANDERSON has been the Bank's Executive Vice President in charge of
mortgage loan servicing, collections and real estate holdings since 1988. Ms.
Anderson is also an Executive Vice President of Flagstar, a position she has
held since 1994. She has also been a director of Flagstar since January 1997.
Prior to Ms. Anderson's service on Flagstar's Board of Directors, she served on
the Bank's board from 1987 until 1997. Ms. Anderson has also served on the
Board of Directors of the Company since its organization in 1997. Ms. Anderson
served as a Senior Vice President of the Bank from 1987 to 1988. Prior to that
time, she held various positions with mortgage lending companies owned by Thomas
J. Hammond and has worked in the financial services industry since 1970.
KEY EMPLOYEES OF THE BANK
The Bank has eleven Senior Vice Presidents, many of whom have been with the
Bank since its formation in 1987. The Senior Vice Presidents in charge of
treasury management, administration, risk management and underwriting previously
worked for Hammond Mortgage Bank, Thomas Hammond's prior Bank, during the
1970's.
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COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Bank holds regular monthly meetings and special
meetings as needed. During the year ended December 31, 1996, the Bank's Board
met 12 times. No director attended fewer than 75% in the aggregate of the total
number of such Board meetings held while such director was a member during the
year ended December 31, 1996 and the total number of meetings held by committees
on which such director served during such year.
The Bank's full Board of Directors acts as a compensation committee for the
Bank and met 12 times in this capacity during 1996 to examine the performance
and approve the compensation of the officers.
The Bank's Audit Committee consists of directors Bazzy (Chairman), Nichols and
Bortels and performs the functions of the Bank's audit committee. The Audit
Committee is responsible for reviewing the Bank's auditing programs, overseeing
the quarterly regulatory reporting process, overseeing internal compliance
audits as necessary, receiving and reviewing the results of each external audit,
reviewing management's response to auditors' recommendations, and reviewing
management's reports on cases of financial misconduct by employees, officers or
directors. The Audit Committee met 12 times in 1996.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the cash and
noncash compensation for each of the last three years awarded to or earned by
certain executive officers of the Bank for services rendered in all capacities
to the Bank and its subsidiaries.
<TABLE>
<CAPTION>
Other
Annual All other
Compen- Compen-
Name and Principal Position Year Salary Bonus sation sation(1)
--------------------------- ---- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Thomas J. Hammond ........................... 1996 $1,000,000(2) $793,580 - $49,300(5)
Chairman of the Board and Chief Executive 1995 529,600 737,102 - 56,340(6)
Officer 1994 529,600 616,301 - 43,580(7)
Mark T. Hammond(3) .......................... 1996 $ 405,002 $ 12,600 - $23,418(5)
Vice Chairman of the Board and President 1995 298,369 12,779 - 32,491(6)
1994 276,694 17,450 - 23,683(7)
Michael W. Carrie(4) ........................ 1996 $ 204,314 $ 8,568 - $11,700(5)
Executive Vice President and Chief Financial 1995 160,640 8,042 - 18,900(6)
Officer 1994 147,577 5,143 - 8,477 (7)
Joan H. Anderson ............................ 1996 $ 149,450 $ 10,080 - $27,300(5)
Executive Vice President 1995 137,169 10,989 - 23,978(6)
1994 120,738 27,450 - 20,988(7)
</TABLE>
(1) Executive officers of the Bank receive certain perquisites and other
personal benefits. In each case, the amount of such benefits received by
each executive officer in each of the years 1996, 1995 and 1994 did not
exceed $50,000 or 10% of such executive officer's salary and bonus.
(2) In conjunction with the adoption of the 1997 Incentive Compensation Plan as
of May 1, 1997, Thomas J. Hammond's annual salary was reduced to $600,000.
(3) Mark T. Hammond was elected President of the Bank and the Bank in September
1995.
(4) Michael W. Carrie joined the Bank and the Bank in January 1993 as Chief
Financial Officer. He assumed his current position as Executive Vice
President in November 1995.
(5) Includes payments to Thomas J. Hammond, Mark T. Hammond, Michael W. Carrie
and Joan H. Anderson of $13,200, $14,400, $0 and $14,400, respectively, for
Board fees, $4,500, $3,219, $4,500 and $4,500, respectively, in 401(k)
contributions, and $31,600, $5,799, $7,200 and $8,400, respectively, in term
life insurance premium equivalent payments.
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(6) Includes payments to Thomas J. Hammond, Mark T. Hammond, Michael W. Carrie
and Joan H. Anderson of $25,200, $25,200, $9,600 and $15,600, respectively,
for Board fees, $4,500, $3,500, $4,500 and $2,378, respectively, in 401(k)
contributions and $26,640, $3,791, $4,800 and $6,000, respectively, in term
life insurance premium equivalent payments for such persons.
(7) Includes payments to Thomas J. Hammond, Mark T. Hammond, Michael W. Carrie
and Joan H. Anderson of $17,400, $17,400, $4,000 and $13,400, respectively,
for Board fees, $4,500, $4,500, $2,077 and $3,988, respectively, in 401(k)
contributions, and $21,680, $1,783, $2,400 and $3,600, respectively, in term
life insurance premium equivalent payments.
DIRECTOR COMPENSATION
Directors of the Bank receive fees of $1,200 for each meeting attended.
During 1996, directors' fees for each director of the Bank totaled $14,400 plus
a $1,200 bonus. The directors do not receive any additional compensation for
serving on committees.
CERTAIN BENEFIT PLANS AND AGREEMENTS
THRIFT PLAN. The Bank maintains a defined contribution plan, which is
designed to qualify under Sections 401(a) and 401(k) of the Code (the "Thrift
Plan"). The Thrift Plan permits each participant to make before-tax
contributions, through regular salary reduction, in amounts ranging up to 6% of
the participant's annual salary, not to exceed $9,500 in total annual
contributions. The Bank makes matching contributions up to 3% of each eligible
participant's monthly salary. Participants are at all times 100% vested in
their entire account balances under the Thrift Plan attributed to their
contributions, and vest 100% after seven years as to the Bank's contribution.
The Thrift Plan is intended to comply with all the rights and protection
afforded employees pursuant to the Employee Retirement Income Security Act of
1974, as amended.
EMPLOYMENT AGREEMENTS. The Bank entered into separate employment
agreements pursuant to which Thomas J. Hammond will serve as Chief Executive
Officer of the Bank and Mark T. Hammond will serve as President of the Bank. In
such capacities, Messrs. Hammond and Hammond are responsible for overseeing all
operations of the Bank, and for implementing the policies adopted by the Boards
of Directors. In addition, the Bank entered into separate employment agreements
with Mr. Carrie in his capacity as Executive Vice President and Chief Financial
Officer and Ms. Anderson in her capacity as Executive Vice President. All such
employment agreements are referred to herein collectively as "Employment
Agreements" and all persons who have entered into such Employment Agreements are
referred to herein as "Employees."
The Board of Directors of the Bank each believe that the Employment
Agreements assure fair treatment of the Employees in relation to their career
with the Bank by providing them with a limited form of financial security while
committing such persons to future employment with the Bank for the term of their
respective agreements. In the event that any Employee prevails over the Bank in
a legal dispute as to an Employment Agreement, he or she will be reimbursed for
his or her legal and other expenses.
The terms of the agreements are three years for Messrs. Hammond, Hammond
and Carrie and Ms. Anderson. The agreements provide for annual base salaries of
$600,000, $405,000, $203,314, and $149,450, respectively. On each anniversary
date from the date of commencement of the Employment Agreements, the term of the
Employee's employment under the Employment Agreements will be extended for an
additional one-year period beyond the then effective expiration date, upon a
determination by the Board of Directors that the performance of the Employee has
met the required performance standards and that such Employment Agreements
should be extended. The Employment Agreements provide the Employee with a
salary review by the Board of Directors not less often than annually, as well as
with inclusion in any discretionary bonus plans, retirement and medical plans,
customary fringe benefits, vacation and sick leave.
The Employment Agreements terminate upon the Employee's death or
disability, and are terminable by the Bank for "just cause" as defined in the
Employment Agreements. In the event of termination for just cause, no severance
benefits are available. If the Bank terminates the Employee without just cause,
the Employee will be entitled to a continuation of his or her salary and
benefits from the date of termination through the remaining term of such
Employee's Employment Agreement, plus an additional 12-month period, and, at the
Employee's election, either cash in an amount
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equal to the cost to the Employee of obtaining health, life, disability, and
other benefits which the Employee would have been eligible to participate in
through the Employment Agreement's expiration date or continued participation in
such benefits plans through the agreement's expiration date, provided the
Employee continued to qualify for participation therein. If the Employment
Agreements are terminated due to the Employee's "disability" (as defined in the
Employment Agreements), the Employee will be entitled to a continuation of his
or her salary and benefits for up to 180 days following such termination. In the
event of the Employee's death during the term of the Employment Agreement, his
or her estate will be entitled to receive his or her salary through the last day
of the calendar month in which the Employee's death occurred. The Employee is
able to terminate voluntarily his or her Employment Agreement by providing 90
days' written notice to the Board of Directors of the Bank, in which case the
Employee is entitled to receive only his compensation, vested rights and
benefits up to the date of termination.
The Employment Agreements contain provisions stating that in the event of
the Employee's involuntary termination of employment in connection with, or
within one year after, any change in control of the Bank or Flagstar Bancorp,
Inc., other than for "just cause," the Employee will be paid within 10 days of
such termination an amount equal to the difference between (i) 2.99 times his or
her "base amount," as defined in Section 280G(b)(3) of the Code, and (ii) the
sum of any other parachute payments, as defined under Section 280G(b)(2) of the
Code, that the Employee receives on account of the change in control. "Control"
generally refers to the acquisition, by any person or entity, of the ownership
or power to vote more than 25% of the Bank's or Flagstar's voting stock, the
control of the election of a majority of the Bank's or Flagstar's directors, or
the exercise of a controlling influence over the management or policies of the
Bank or Flagstar. In addition, under the Employment Agreements, a change in
control occurs when, during any consecutive two-year period, directors of the
Bank or Flagstar at the beginning of such period cease to constitute at least a
majority of the Board of Directors of the Bank or Flagstar. The amount
determined using the forgoing formula would also be paid (i) in the event of an
Employee's voluntary termination of employment within 30 days following a change
in control, or (ii) in the event of the Employee's voluntary termination of
employment within one year following a change in control, upon the occurrence,
or within 90 days thereafter, of certain specified events following the change
in control, which have not been consented to in writing by the Employee,
including (i) the requirement that the Employee perform his or her principal
executive functions more than 50 miles from his or her primary office, (ii) a
reduction in the Employee's base compensation as then in effect, (iii) the
failure of Flagstar or the Bank to increase the Employee's salary or to pay the
Employee discretionary bonuses, (iv) the failure of Flagstar or the Bank to
continue to provide the Employee with compensation and benefits, including
material vacation, fringe benefits, stock option and retirement plans, (v) the
assignment to the Employee of duties and responsibilities which are other than
those normally associated with his or her position with the Bank and Flagstar,
(vi) a material reduction in the Employee's authority and responsibility, and
(vii) in the case of an employee who is also a director, the failure to re-elect
the Employee to Flagstar's or the Bank's Board of Directors. The aggregate
payments that would be made to Messrs. Thomas J. Hammond, Mark T. Hammond and
Carrie and Ms. Anderson, assuming termination of employment, other than for just
cause, within one year of the change in control at January 1, 1998, would be
approximately $3.0 million, $851,000, $476,000 and $438,000, respectively.
These provisions may have an anti-takeover effect by making it more expensive
for a potential acquirer to obtain control of the Bank or Flagstar. For more
information regarding anti-takeover matters, see "Description of Capital Stock."
WHOLE LIFE INSURANCE POLICY. The Bank also pays the premiums of variable
whole life insurance policies which are available to all officers of the Bank.
The beneficiary of each such policy is the estate of the officer, except that
the Bank is the beneficiary to the extent of all premiums paid by the Bank for
such policy.
TRANSACTIONS WITH MANAGEMENT
The Bank offers loans to its directors, officers and employees. These
loans currently are made in the ordinary course of business with the same
collateral, interest rates and underwriting criteria as those of comparable
transactions prevailing at the time and do not involve more than the normal risk
of collectibility or present other unfavorable features. Under federal law, the
Bank's loans to directors and executive officers are required to be made on
substantially the same terms, including interest rates, as those prevailing for
comparable transactions and must not involve more than the normal risk of
repayment or present other unfavorable features. At September 30, 1997, all of
the Bank's loans to directors and executive officers satisfied these
requirements.
OC-82
<PAGE>
DESCRIPTION OF THE BANK PREFERRED SHARES
The following summary sets forth the material terms and provisions of the
Bank Preferred Shares, and is qualified in its entirety by reference to the
terms and provisions of the Certificate of Designation establishing the Bank
Preferred Shares and the Bank's charter, as amended, the forms of which have
been filed with the OTS as exhibits to the registration statement of which this
Offering Circular forms a part.
GENERAL
The Bank Preferred Shares form an initial series of preferred stock of the
Bank, which preferred stock may be issued from time to time in one or more
series with such rights, preferences and limitations as are determined by the
Bank's Board of Directors or, if then constituted, a duly authorized committee
thereof. The Board of Directors has authorized the Bank to issue the Bank
Preferred Shares.
When issued, the Bank Preferred Shares will be validly issued, fully paid
and nonassessable. The holders of the Bank Preferred Shares will have no
preemptive rights with respect to any shares of the capital stock of the Bank or
any other securities of the Bank convertible into or carrying rights or options
to purchase any such shares. The Bank Preferred Shares will not be convertible
into shares of Common Stock or any other class or series of capital stock of the
Bank and will not be subject to any sinking fund or other obligation of the Bank
for their repurchase or retirement.
The transfer agent, registrar and dividend disbursement agent for the Bank
Preferred Shares will be Registrar and Transfer Company, Cranford, New Jersey.
The registrar for the Bank Preferred Shares will send notices to shareholders of
any meetings at which holders of such shares have the right to elect directors
of the Bank or to vote on any other matter.
DIVIDENDS
Holders of Bank Preferred Shares shall be entitled to receive, if, when,
and, as declared by the Board of Directors of the Bank out of assets of the Bank
legally available therefor, cash dividends at the rate of _____% per annum of
the initial liquidation preference (equivalent to $[______] per share per
annum). If declared, dividends on the Bank Preferred Shares shall be payable
quarterly in arrears on the last day of March, June, September, and December of
each year, or, if such day is not a business day, on the next business day, at
such annual rate. Dividends in each quarterly period will accrue from the first
day of such period. Each declared dividend shall be payable to holders of
record as they appear at the close of business on the stock register of the Bank
on such record dates, not exceeding 45 days preceding the payment dates thereof,
as shall be fixed by the Board of Directors of the Bank or a duly authorized
committee thereof. Upon the exchange of Series A Preferred Shares for Bank
Preferred Shares, any accrued and unpaid dividends for the most recent quarter
of the Series A Preferred Shares at the time of the conversion will be deemed to
be accrued and unpaid dividends for the most recent quarter on the Bank
Preferred Shares.
The right of holders of Bank Preferred Shares to receive dividends is
noncumulative. Accordingly, if the Board of Directors fails to declare a
dividend on the Bank Preferred Shares for a quarterly dividend period, then
holders of the Bank Preferred Shares will have no right to receive a dividend
for that period, and the Bank will have no obligation to pay a dividend for that
period, whether or not dividends are declared and paid for any future period
with respect to either the preferred stock or the Common Stock. If the Bank
fails to declare and pay or declare and set aside for payment a quarterly
dividend on the Bank Preferred Shares, holders of the preferred stock of the
Bank, including the Bank Preferred Shares, will be entitled to elect two
directors. See " --Voting Rights."
If full dividends on the Bank Preferred Shares for any dividend period
shall not have been declared and paid, or declared and a sum sufficient for the
payment thereof shall not have been set apart for such payments, no dividends
shall be declared and paid or set aside for payment and no other distribution
shall be declared or made or set aside for payment upon the Common Stock or any
other capital stock of the Bank ranking junior to or on a parity with the Bank
Preferred Shares as to dividends or amounts upon liquidation, nor shall any
Common Stock or any other capital stock of the Bank ranking junior to or on a
parity with the Bank Preferred Shares as to dividends or amounts upon
liquidation be redeemed, purchased or otherwise acquired for any consideration
(or any monies to be paid to or made available for a sinking fund for the
redemption of any such stock) by the Bank, except by conversion into, or
exchange for, other capital stock of the Bank ranking junior to the Bank
Preferred Shares as to dividends and amounts upon liquidation), until such time
as
OC-83
<PAGE>
dividends on all outstanding Bank Preferred Shares have been (i) declared and
paid or declared and a sum sufficient for the payment thereof has been set apart
for payment for three consecutive dividend periods and (ii) declared and paid or
declared and a sum sufficient for the payment thereof has been set apart for
payment for the fourth consecutive dividend period.
If any Bank Preferred Shares are outstanding, no full dividends shall be
declared and paid or set apart for payment and no other distribution shall be
declared and made or set aside for payment on any series of capital stock of the
Bank ranking, as to dividends, on a parity with or junior to the Bank Preferred
Shares for any dividend period unless full dividends have been or
contemporaneously are declared and paid, or declared and a sum sufficient for
the payment thereof is set apart for such payments on the Bank Preferred Shares,
for the then-current dividend period. When dividends are not paid in full (or a
sum sufficient for such full payment is not set apart) upon the Bank Preferred
Shares and the shares of any other series of capital stock ranking on a parity
as to dividends with the Bank Preferred Shares, all dividends declared upon Bank
Preferred Shares and any other series of capital stock ranking on a parity as to
dividends with the Bank Preferred Shares shall be declared pro rata so that the
amount of dividends declared per share on the Bank Preferred Shares and such
other series of capital stock shall in all cases bear to each other the same
ratio that full dividends, for the then-current dividend period, per share on
the Bank Preferred Shares, which shall not include any accumulation in respect
of unpaid dividends for prior dividend periods, and full dividends, including
required or permitted accumulations, if any, on such other series of capital
stock bear to each other.
REDEMPTION
The Bank Preferred Shares will not be redeemable prior to _________, 2003.
On or after such date, the Bank Preferred Shares will be redeemable at the
option of the Bank, in whole or in part, at any time or from time to time on not
less than 30 nor more than 60 days' notice by mail, at a redemption price of
$25.00 per share, plus the accrued and unpaid dividends for the most recent
quarter to the date of redemption, if any, thereon.
Any such redemption must comply with the prompt corrective action and capital
distribution regulations of the OTS, which may prohibit a redemption or require
the OTS' prior approval of a redemption. Unless full dividends on the Bank
Preferred Shares have been, or contemporaneously are, declared and paid or
declared and a sum sufficient for the payment thereof has been set apart for
payment for the then current dividend period, no Bank Preferred Shares shall be
redeemed unless all outstanding Bank Preferred Shares are redeemed and the Bank
shall not purchase or otherwise acquire any Bank Preferred Shares; provided,
however, that the Bank may purchase or acquire Bank Preferred Shares pursuant to
a purchase or exchange offer made on the same terms to holders of all
outstanding Bank Preferred Shares.
VOTING RIGHTS
Except as expressly required by applicable law, or except as indicated below,
the holders of the Bank Preferred Shares will not be entitled to vote. In the
event the holders of Bank Preferred Shares are entitled to vote as indicated
below, each Bank Preferred Share will be entitled to one vote on matters on
which holders of the Bank Preferred Shares are entitled to vote.
If at the time of any annual meeting of the Bank's stockholders, the Bank has
declared and failed to pay or declared and failed to set aside for payment a
quarterly dividend during any of the four preceding quarterly dividend periods
on any series of preferred stock of the Bank, including the Bank Preferred
Shares, the number of directors then constituting the Board of Directors of the
Bank will be increased by two (if not already increased by two due to a default
in preference dividends), and the holders of the Bank Preferred Shares, voting
together as a single class with the holders of all other series of preferred
stock as a single class will be entitled to elect such two additional directors
to serve on the Bank's Board of Directors at each such annual meeting. Each
director elected by the holders of shares of the preferred stock shall continue
to serve as such director until the later of (i) the expiration of the term of
such director or (ii) the payment of four consecutive quarterly dividends on the
Bank Preferred Shares.
The affirmative vote or consent of the holders of at least 66-2/3% of the
outstanding shares of each series of preferred stock of the Bank, including the
Bank Preferred Shares, voting as a single class without regard to series, will
be required (a) to create any class or series of stock which shall have
preference as to dividends or distribution of assets over any outstanding series
of preferred stock of the Bank other than a series which shall not have any
right to object to such creation or (b) to alter or change the provisions of the
Bank's Charter (including the Certificate of Designation
OC-84
<PAGE>
establishing the Bank Preferred Shares) so as to adversely affect the voting
powers, preferences or special rights of the holders of a series of preferred
stock of the Bank; provided that if such amendment shall not adversely affect
all series of preferred stock of the Bank, such amendment need only be approved
by at least 66-2/3% of the holders of shares of all series of preferred stock
adversely affected thereby.
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Bank, the holders of the Bank Preferred Shares at the time
outstanding will be entitled to receive or have funds set aside for such
payments out of assets of the Bank available for distribution to stockholders,
before any payment or distribution of assets is made to holders of Common Stock
or any other class of stock ranking junior to the Bank Preferred Shares upon
liquidation, liquidating distributions in the amount of $25.00 per share, plus
the accrued and unpaid dividends for the most recent quarter thereon, if any, to
the date of liquidation.
After receipt of payment of the full amount of the liquidating distributions
to which they are entitled, the holders of Bank Preferred Shares will have no
right or claim to any of the remaining assets of the Bank. In the event that,
upon any such voluntary or involuntary liquidation, dissolution or winding up,
the available assets of the Bank are insufficient to pay the amount of the
liquidation distributions on all outstanding Bank Preferred Shares and the
corresponding amounts payable on all shares of other classes or series of
capital stock of the Bank ranking on a parity with the Bank Preferred Shares in
the distribution of assets upon any liquidation, dissolution or winding up of
the affairs of the Bank, then the holders of the Bank Preferred Shares and such
other classes or series of capital stock shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
For such purposes, the consolidation or merger of the Bank with or into any
other entity or the sale, lease or conveyance of all or substantially all of the
property or business of the Bank, shall not be deemed to constitute liquidation,
dissolution or winding up of the Bank.
APPROVAL OF INDEPENDENT DIRECTORS
The Bank's Certificate of Designation establishing the Bank Preferred Shares
requires that, so long as any Bank Preferred Shares are outstanding, certain
actions by the Bank be approved by a majority of the Independent Directors of
the Bank. At any time that there are only two Independent Directors, any action
that requires the approval of a majority of Independent Directors must be
approved by both Independent Directors. "Independent Director" means any
director of the Bank who (i) is not a current director, officer or employee of
the Bank, of Flagstar Capital Corporation or of any affiliate of the Bank; and
(ii) is not a person or persons that, in the aggregate, own more than one
percent of the Common Stock of Flagstar. In addition, any members of the Board
of Directors of the Bank elected by holders of preferred stock, including the
Bank Preferred Shares, will be deemed to be independent directors for purposes
of approving actions requiring the approval of a majority of the Independent
Directors. The actions which require the prior approval of a majority of the
Independent Directors include:
(i) the issuance of a series of preferred stock on a parity with the Bank
Preferred Shares; and
(ii) the redemption of any shares of Common Stock.
In assessing the benefits to the Bank of any proposed action requiring their
consent, the Independent Directors shall take into account the interests of
holders of both the Common Stock and the preferred stock, including, without
limitation, the holders of the Bank Preferred Shares. In considering the
interests of the holders of the preferred stock, including without limitation
holders of the Bank Preferred Shares, the Independent Directors shall owe the
same duties which the Independent Directors owe to holders of Common Stock.
CERTAIN DEFINITIONS
"Bank Preferred Shares" means the 2,000,000 shares of the ____% Noncumulative
Bank Preferred Shares of the Bank.
"FDIC" means the Federal Deposit Insurance Corporation or any successor
thereto.
OC-85
<PAGE>
"FHLB" means any of the regional Federal Home Loan Banks.
"OTS" means the Office of Thrift Supervision or any successor thereto.
"Person" means any individual, corporation, limited liability Bank,
partnership, joint venture, association, joint-stock Bank, trust, unincorporated
organization or government or any agency or political subdivisions thereof.
"Regulatory Capital Requirements" means the minimum amount of capital required
to meet each of the industry-wide regulatory capital requirements applicable to
the Bank pursuant to 12 U.S.C. Section 1464(t) and 12 C.F.R. Section 567 (and
any amendment to either thereof) or any successor law or regulation, or such
higher amount of capital as the Bank, individually, is required to maintain in
order to meet any individual minimum capital standard applicable to the Bank
pursuant to 12 U.S.C. Section 1464(s) and 12 C.F.R. Section 567.3 (and any
amendment to either such Section) or any successor law or regulation.
AUTOMATIC EXCHANGE
The Bank Preferred Shares are to be issued, if ever, in connection with an
exchange of the Series A Preferred Shares. The Series A Preferred Shares are
subject to an automatic exchange in whole and not in part, on a share-for-share
basis, into Bank Preferred Shares if the appropriate regulatory agency directs
in writing an exchange of the Series A Preferred Shares for Bank Preferred
Shares because (i) the Bank becomes "undercapitalized" under prompt corrective
action regulations established pursuant to FDICIA, (ii) the Bank is placed into
conservatorship or receivership or (iii) the appropriate regulatory agency, in
its sole discretion, anticipates the Bank's becoming "undercapitalized" in the
near term (an "Exchange Event"). The Bank has registered with the OTS a total
of 2,300,000 Bank Preferred Shares to cover an Exchange Event, if necessary, of
the 2,000,000 Series A Preferred Shares offered by the Company and the over-
allotment of 300,000 shares of Bank Preferred Shares granted to the underwriters
of the Series A Preferred Shares.
EXPERTS
The Consolidated Financial Statements of the Bank and subsidiaries as of
December 31, 1996 and 1995, and for each of the three years in the period ended
December 31, 1996, have been audited by Grant Thornton LLP, independent
certified public accountants, as indicated in their report with respect thereto
and are included herein in reliance upon the authority of said firm as experts
in auditing and accounting.
LEGAL MATTERS
The legality of the securities offered by this Offering Circular and certain
other legal matters will be passed upon for the Bank by Kutak Rock, Washington,
D.C. Certain legal matters will be passed upon for the Underwriters by Honigman
Miller Schwartz and Cohn, Detroit, Michigan.
OC-86
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants...........................F-2
Consolidated Statements of Financial Condition as of
September 30, 1997 (unaudited) and December 31, 1996 and 1995............F-3
Consolidated Statements of Earnings for the Nine Months Ended
September 30, 1997 (unaudited) and September 30, 1996
(unaudited) and for the Years Ended December 31, 1996, 1995 and 1994.....F-4
Consolidated Statements of Stockholder's Equity for the Nine Months Ended
September 30, 1997 (unaudited) and for the Years Ended
December 31, 1996, 1995 and 1994........................................F-5
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1997 (unaudited) and September 30, 1996 (unaudited)
and for the Years Ended December 31, 1996, 1995 and 1994................F-6
Notes to Consolidated Financial Statements...................................F-9
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Flagstar Bank, FSB
We have audited the accompanying consolidated statements of financial condition
of Flagstar Bank, FSB and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of earnings, stockholder's equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
a reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Flagstar Bank, FSB and Subsidiaries as of December 31, 1996 and 1995, and the
results of their consolidated operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
As described in notes 3 and 7, in May 1995, the Company adopted Statement of
Financial Accounting Standards No. 122, "Accounting for Certain Mortgage
Servicing Rights".
/s/ Grant Thornton LLP
Detroit, Michigan
March 3, 1997 (except for Note 18
as to which the date is May 5, 1997)
F-2
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------- ------------------------------
ASSETS 1997 1996 1995
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents $ 43,633 $ 44,187 $ 29,119
Loans receivable
Mortgage loans held for sale 1,363,822 840,767 620,455
Loans held for investment 444,552 273,579 305,590
Less allowance for losses (4,950) (3,500) (2,102)
---------- ---------- ----------
1,803,424 1,110,846 923,943
Federal Home Loan Bank stock 36,925 19,725 17,800
Other investments 539 887 818
---------- ---------- ----------
Total earning assets 1,840,888 1,131,458 942,551
Accrued interest receivable 12,273 6,626 4,307
Repossessed assets 17,659 10,363 2,359
Premises and equipment 20,789 20,753 17,875
Mortgage servicing rights 51,713 30,064 27,957
Other assets 46,244 53,359 20,673
---------- ---------- ----------
Total assets $2,033,199 $1,296,810 $1,044,851
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Deposit accounts $1,012,121 $ 624,732 $ 529,218
Federal Home Loan Bank advances 718,878 389,801 191,156
---------- ---------- ----------
Total interest bearing liabilities 1,730,999 1,014,533 720,374
Accrued interest payable 8,117 2,712 2,215
Undisbursed payments on loans serviced for others 36,426 61,445 60,012
Escrow accounts 56,055 61,009 88,863
Liability for checks issued 49,080 39,813 85,849
Federal income taxes payable 16,526 22,506 14,604
Other liabilities 14,941 16,893 11,931
---------- ---------- ----------
Total liabilities 1,912,144 1,218,911 983,848
Commitments and Contingencies (Notes 4, 6, 7, 12 and 16) - - -
STOCKHOLDER'S EQUITY
Common stock - $10 par value, 1,000,000 shares authorized
300,000 shares issued and outstanding at September 30,
1997, December 31, 1996 and December 31, 1995 3,000 3,000 3,000
Additional paid in capital 28,111 783 -
Retained earnings 89,944 74,116 58,003
---------- ---------- ----------
Total stockholder's equity 121,055 77,899 61,003
---------- ---------- ----------
Total liabilities and stockholder's equity $2,033,199 $1,296,810 $1,044,851
========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-3
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEARS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
---------------------- -----------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
INTEREST INCOME
Loans $83,029 $56,430 $74,588 $69,543 $33,533
Other 1,760 1,249 1,591 1,761 1,579
------- ------- ------- ------- -------
84,789 57,679 76,179 71,304 35,112
------- ------- ------- ------- -------
INTEREST EXPENSE
Deposits 34,982 22,074 30,431 25,123 9,037
FHLB advances 18,774 11,226 14,291 15,072 3,726
Other 841 821 1,245 1,248 1,719
------- ------- ------- ------- -------
54,597 34,121 45,967 41,443 14,482
------- ------- ------- ------- -------
Net interest income 30,192 23,558 30,212 29,861 20,630
Provision for losses 3,730 1,140 2,604 238 290
------- ------- ------- ------- -------
Net interest income after provision for losses 26,462 22,418 27,608 29,623 20,340
NON-INTEREST INCOME
Loan administration 5,543 11,110 11,859 14,248 13,261
Net gain (loss) on loan sales 9,269 4,536 4,511 2,872 (1,132)
Net gain on sales of mortgage servicing rights 25,472 20,917 35,129 13,356 28,489
Other fees and charges 3,158 5,085 6,803 4,626 2,065
------- ------- ------- ------- -------
43,442 41,648 58,302 35,102 42,683
------- ------- ------- ------- -------
NON-INTEREST EXPENSE
Compensation and benefits 19,303 18,443 25,479 18,538 18,609
Occupancy and equipment 9,764 8,687 12,092 8,873 7,339
General and administrative 15,966 19,122 20,968 12,438 11,636
------- ------- ------- ------- -------
45,033 46,252 58,539 39,849 37,584
------- ------- ------- ------- -------
Earnings before federal income taxes 24,871 17,814 27,371 24,876 25,439
Provision for federal income taxes 9,043 6,387 10,258 9,348 9,302
------- ------- ------- ------- -------
NET EARNINGS $15,828 $11,427 $17,113 $15,528 $16,137
======= ======= ======= ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-4
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID IN UNREALIZED RETAINED STOCKHOLDER'S
STOCK CAPITAL GAINS EARNINGS EQUITY
---------- ---------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $3,000 $ - $ 126 $31,988 $ 35,114
Net earnings - - - 16,137 16,137
Sale of marketable securities - - (126) - (126)
Dividends paid - - - (3,200) (3,200)
---------- ---------- ----------- ---------- -------------
Balance at December 31, 1994 3,000 - - 44,925 47,925
Net earnings - - - 15,528 15,528
Dividend paid - - - (2,450) (2,450)
---------- ---------- ----------- ---------- -------------
Balance at December 31, 1995 3,000 - - 58,003 61,003
Net earnings - - - 17,113 17,113
Additional paid in capital - 783 - - 783
Dividend paid - - - (1,000) (1,000)
---------- ---------- ----------- ---------- -------------
Balance at December 31, 1996 3,000 783 - 74,116 77,899
Net earnings (unaudited) - - - 15,828 15,828
Additional capital provided by
parent (unaudited) - 27,328 - - 27,328
---------- ---------- ----------- ---------- -------------
Balance at September 30, 1997 $3,000 $28,111 $ - $89,944 $121,055
========== ========== =========== ========== =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-5
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEARS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
------------------------- ----------------------------------------
1997 1996 1996 1995 1994
------------ ----------- ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 15,828 $ 11,427 $ 17,113 $ 15,528 $ 16,137
Adjustments to reconcile net earnings to net cash
(used in) provided by operating activities
Provision for losses 3,730 1,140 2,604 238 290
Depreciation and amortization 12,006 12,309 17,326 11,041 9,005
Net (gains) loss on the sale of assets (737) 66 (27) (493) (569)
Net (gains) loss on loan sales (9,269) (4,536) (4,511) (2,872) 1,132
Gain on sales of mortgage servicing rights (25,472) (20,917) (35,129) (13,356) (28,489)
Provision (benefit) for deferred federal
income taxes 6,125 692 (773) 3,415 2,813
Proceeds from sales of loans held for sale 4,522,703 5,302,867 6,604,080 4,783,070 3,668,870
Originations and repurchases of loans held for
sale, net of principal repayments (5,051,262) (5,333,546) (6,830,383) (5,011,843) (3,594,108)
Increase in accrued interest receivable (5,647) (1,672) (2,319) (1,214) (1,027)
Decrease (increase) in other assets 6,145 (22,306) (34,451) (9,379) (473)
Increase (decrease) in accrued interest payable 5,405 (610) 497 1,254 343
Increase (decrease) in liability for checks issued 9,268 (47,582) (46,037) 46,496 (7,421)
(Decrease) increase in federal taxes payable (12,105) 3,445 8,675 3,710 1,616
(Decrease) increase in other liabilities (1,952) 6,242 4,962 7,324 (723)
(Decrease) in unrealized gains - - - - (126)
----------- ----------- ----------- ----------- -----------
Net cash (used in) provided by
operating activities (525,234) (92,981) (298,373) (167,081) 67,270
INVESTING ACTIVITIES
Cash used to acquire Security Savings Bank,
FSB, (Security), net of cash received - - - - (23,869)
Principal repayments from assets acquired
from Security - - - - 3,251
Proceeds from the disposition of assets acquired
from Security - - - - 74,300
Net decrease in liabilities acquired from Security - - - - (2,918)
Principal repayment from other investments 8 13 31 32 -
Maturity of other investments 340 400 400 - -
Purchase of other investments - (500) (500) - -
Originations of loans held for investment, net of
principal repayments (170,973) 51,345 31,936 (60,891) (157,698)
Principal repayments from mortgage-backed securities - - - - 163
Proceeds from the sale of mortgage-backed securities - - - - 5,176
Purchase of Federal Home Loan Bank Stock (17,200) (2,700) (1,925) (5,034) (2,438)
Initial investment in FSSB Mortgage Corporation - 783 783 - -
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-6
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEARS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------- ---------------------------------------
1997 1996 1996 1995 1994
------------ ------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Proceeds from the disposition of repossessed assets 5,824 920 1,813 675 1,796
Net decrease in real estate held for investment - - - - 505
Acquisitions of premises and equipment (6,811) (6,232) (7,539) (6,546) (6,591)
Proceeds from the disposition of premises and
equipment 2,628 - - - 37
Increase in mortgage servicing rights (56,607) (50,861) (63,499) (31,106) (15,616)
Proceeds from the sale of mortgage servicing rights 53,650 50,222 85,203 29,040 38,183
--------- -------- -------- -------- --------
Net cash (used in) provided by
investing activities (189,141) 43,390 46,703 (73,830) (85,719)
FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts 387,389 47,889 95,514 220,402 (79,651)
Net increase (decrease) in Federal Home Loan
Bank advances 329,077 8,700 198,645 (9,594) 140,750
Net (disbursement) receipt of payments of loans
serviced for other (25,019) (8,874) 1,433 25,023 (22,213)
Net receipt of escrow payments (4,954) 3,129 (27,854) 10,993 33
Additional capital provided by parent 27,328 - - - -
Dividends paid to stockholder - (1,000) (1,000) (2,450) (3,200)
--------- -------- -------- -------- --------
Net cash provided by financing activities 713,821 49,844 266,738 244,374 35,719
--------- -------- -------- -------- --------
Net (decrease) increase in cash and cash equivalents (554) 254 15,068 3,463 17,270
Beginning cash and cash equivalents 44,187 29,119 29,119 25,656 8,386
--------- -------- -------- -------- --------
Ending cash and cash equivalents $ 43,633 $ 29,374 $ 44,187 $ 29,119 $ 25,656
========= ======== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-7
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEARS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
------------------------ ------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosure of cash flow information:
Loans held for sale transferred to loans held for
investment $126,362 $ - $ - $ - $106,261
======== =========== =========== ======== ==========
Loans held for investment transferred to loans held
for sale $ - $ - $ - $185,111 $ -
======== =========== =========== ======== ==========
Loans receivable transferred to repossessed assets $ 12,491 $ 3,142 $10,577 $ 1,781 $ 1,367
======== =========== =========== ======== ==========
Total interest payments made on deposits and
other borrowings $ 49,182 $34,731 $45,470 $ 40,189 $ 14,139
======== =========== =========== ======== ==========
Federal income taxes paid $ 15,000 $ 2,300 $ 2,300 $ 2,500 $ 6,280
======== =========== =========== ======== ==========
</TABLE>
Supplemental schedule of acquisitions:
Flagstar Bank, FSB acquired Security Savings Bank, FSB, in Jackson, Michigan,
at the close of business June 30, 1994 (Note 15).
<TABLE>
<S> <C> <C>
Security Savings Bank Acquisition $ 25,729
Cash paid for common stock
Fair value of assets acquired, including $77,538 $225,934
which were subsequently disposed
Fair value of liabilities acquired, including $2,918 209,241
which were subsequently repaid --------
16,693
Fair value of net assets acquired --------
$ 9,036
Core deposit premium ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-8
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 - NATURE OF BUSINESS
Flagstar Bank, FSB (formerly First Security Savings Bank, FSB) (the "Bank") is a
federally chartered stock savings bank and a member of the Federal Home Loan
Bank System ("FHLB"). The Bank is a subsidiary of Flagstar Bancorp, Inc.
("Flagstar"). The Bank provides retail banking services in southern and western
Michigan and mortgage lending services nationwide.
In January 1996, the Bank changed its name from First Security Savings Bank, FSB
to Flagstar Bank, FSB.
NOTE 2 - CORPORATE STRUCTURE
The following is a listing of the subsidiaries of Bank:
The Bank acquired the stock of Security Savings Bank, F.S.B. ("Security") a
federally chartered stock savings bank and a member of the Federal Home
Loan Bank System ("FHLB") on June 30, 1994. This acquisition was accounted
for using the purchase method of accounting. Security was held as a
subsidiary of the Bank from June 30, 1994 to February 1, 1996. For
regulatory reporting purposes, the Bank and Security filed a consolidated
Thrift Financial Report ("TFR"). On February 1, 1996, Security was merged
with and into the Bank. The consolidation took place to take advantage of
name recognition and operating efficiencies.
Security owned two subsidiaries, Mid Michigan Service Corporation ("MMSC")
and SSB Funding Corporation ("Funding"). MMSC is a Michigan corporation is
engaged in leasing and sub-leasing commercial real estate and Funding is a
finance subsidiary; both subsidiaries are currently inactive.
The Bank owns three other subsidiaries, Boston Credit Corporation ("BCC"),
Mortgage Affiliated Services, Inc. ("MAS"), and FSSB Mortgage Corporation
("Mortgage"). BCC and Mortgage are currently inactive and MAS is an
appraisal and document preparation company. During the first quarter of
1996, FSSB Mortgage Corporation was acquired by the Bank from Flagstar.
This organizational change did not have a significant impact on the
operations of the Bank.
Subsequent to September 30, 1997 the Bank capitalized two additional
subsidiaries, Flagstar Capital Corporation ("Capital") and Flagstar Credit
Corporation ("Credit"). Capital will purchase mortgage loans from the Bank
and hold them for investment purposes. Credit is expected to enter into
agreements with various private mortgage insurance companies for the
purpose of participating in mortgage reinsurance or similar transactions.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following summarizes the significant accounting policies of the Bank and
subsidiaries (the "Group") applied in the preparation of the accompanying
consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Group. All
significant intercompany balances and transactions have been eliminated.
F-9
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION (CONTINUED)
The accompanying consolidated financial statements and information as of
September 30, 1997 and for the nine months ended September 30, 1997 and 1996 are
unaudited, and include all adjustments (consisting of only normal recurring
adjustments), that are necessary, in the opinion of management, for a fair
presentation. Results of operations for the interim periods are not necessarily
indicative of the results of operations for the full years.
STATEMENT OF CASH FLOWS
For purposes of the statements of cash flows, the Group considers its investment
in overnight deposits to be cash equivalents.
LOANS RECEIVABLE
The Group originates loans which are designated to be held for investment or
sale during the origination process. Mortgage loans held for sale are carried
at the lower of aggregate cost or estimated market value. Management
periodically reviews the portfolio and makes necessary adjustments for market
value. Net unrealized losses are recognized in a valuation allowance by charges
to earnings. Gains or losses recognized upon the sale of loans are determined
using the specific identification method. Mortgage loans held for investment
are carried at amortized cost. The Group has both the intent and the ability to
hold all mortgage loans held for investment for the foreseeable future.
ALLOWANCE FOR LOSSES
The allowance is maintained at a level adequate to absorb losses inherent in the
loan portfolio. Management determines the adequacy of the allowance by applying
projected loss ratios to the risk ratings of loans both individually and by
category. The projected loss ratios incorporate such factors as recent loss
experience, current economic conditions, the risk characteristics of the various
categories and concentrations of loans, transfer risk and other pertinent
factors.
Loans which are deemed uncollectible are charged off and deducted from the
allowance. The provision for losses and recoveries on loans previously charged
off are added to the allowance. In addition, a specific provision is made for
expected loan losses to reduce the recorded balances of loans receivable to
their estimated net realizable value. Such specific provision is based on
management's estimate of net realizable value considering the current and
anticipated operating or sales environment. These estimates of collateral value
are particularly susceptible to market changes that could result in adjustments
to the results of earnings in the future. Recovery of the carrying value of
such loans or such loan or the underlying collateral is dependent to a great
extent on economic, operating and other conditions that may beyond the Group's
control.
F-10
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOSSES (CONTINUED)
The Group adopted Statement of Financial Accounting Standards ("SFAS") No. 114
(as amended by SFAS No. 118), "Accounting by Creditors for Impairment of a
Loan", effective January 1, 1995, which addresses the accounting by creditors
for the impairment of certain loans. The provisions of SFAS 114 do not apply to
large groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment and loans that are measured at fair value or at the
lower of cost or fair value. The Group considers its residential mortgage loan
portfolio to represent a pool of smaller balance homogeneous loans. Commercial,
commercial real estate, construction and consumer loan portfolios are
specifically reviewed for impairment. The adoption had no effect on the
recorded allowance for losses.
The Group considers a loan impaired when it is probable, in the opinion of
management, that interest and principal may not be collected according to the
contractual terms of the loan agreement. Consistent with this definition, the
Group considers all non-accrual loans (with the exception of residential
mortgages) to be impaired. Impaired loans which have risk characteristics that
are unique to an individual borrower, are evaluated on a loan-by-loan basis.
However, impaired loans that have risk characteristics in common with other
impaired loans, (such as loan type, geographical location or other
characteristics that would cause the ability of the borrowers to meet
contractual obligations to be similarly affected by changes in economic or other
conditions), are aggregated and historical statistics, such as average recovery
period and average amount recovered, along with a composite effective interest
rate are used as a means of measuring those impaired loans. Loan impairment is
measured by estimating the expected future cash flows and discounting them at
the respective effective interest rate or by valuing the underlying collateral.
LOAN ORIGINATION FEES, COMMITMENT FEES AND RELATED COSTS
Loan fees received are accounted for in accordance with SFAS No. 91, "Accounting
for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases". Mortgage loan fees and certain direct
origination costs are capitalized. On loans held for sale, the net fee or cost
is recognized at the time the loan is sold. For mortgage loans held for
investment, the deferred amount is accounted for as an adjustment to interest
income using a method that approximates the interest method.
REPOSSESSED ASSETS
Repossessed assets include one-to-four family residential property, commercial
property, and one-to-four family homes under construction. At the date of
foreclosure, real estate properties acquired in settlement of loans are recorded
at the lower of cost or net realizable value. Valuations are periodically
performed by management, and a charge to earnings is made if the carrying value
of a property exceeds its estimated fair value. Costs of holding repossessed
assets, principally taxes and legal fees, are expensed as incurred.
FEDERAL INCOME TAXES
The Group accounts for income taxes on the asset and liability method. Deferred
tax assets and liabilities are recorded based on the difference between the tax
bases of assets and liabilities and their carrying amounts for financial
reporting purposes. Current taxes are measured by applying the provisions of
enacted tax laws to taxable income to determine the amount of taxes receivable
or payable.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation. Land
is carried at historical cost. Depreciation is calculated on the straight-line
method over the estimated useful lives of the assets as follows:
Office buildings - 31 years
Computer hardware and software - 3 to 5 years
Furniture, fixtures and equipment - 5 to 7 years
Automobiles - 3 years
F-11
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREMISES AND EQUIPMENT (CONTINUED)
During March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". This Statement requires that long-lived assets and
goodwill related to those assets to be held and used by an entity and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. The Group adopted SFAS No. 121 effective January 1, 1996.
Adoption of this Statement did not have an impact on the financial condition or
results of operations of the Group.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights ("MSR") represent the cost of acquiring the right to
service mortgage loans. These costs are initially capitalized and subsequently
amortized in proportion to, and over the period of, the estimated net loan
servicing income.
In May 1995, the Group adopted SFAS No. 122, "Accounting for Mortgage Servicing
Rights". This requires the capitalization of a mortgage servicing asset for
every origination whether it be originated or purchased. SFAS No. 122 also
dictates prescribed rules for the amortization, periodic valuation, and the
required valuation adjustment. Prior to adoption, a value was capitalized for
purchased mortgage servicing rights. This capitalization was in accordance with
SFAS No. 65, "Accounting for Certain Mortgage Banking Practices".
The value of the mortgage servicing rights are periodically evaluated in
relation to the estimated discounted net future servicing revenues. The
portfolio is aggregated into stratifications based on loan term and type, and
note rate. Estimates of remaining loan lives and prepayment rates are
incorporated into this analysis. Changes in these estimates could materially
change the estimated fair value and any valuation allowance. Valuation
adjustments are recorded when the fair value of the servicing asset is less than
the amortized book value on a stratum basis. Any valuation adjustment is
recorded as an offset to the asset.
LOAN SALES
The Bank sells its held for sale mortgage loans to secondary market investors on
a non-recourse basis. At the time of the sale, the Bank makes certain
representations and warranties to the investors. Should an investor determine
that a breach of such representations or warranties occurred, the Bank may be
required to repurchase loans from the investor. Such representations and
warranties generally relate to the fact that the loans have been underwritten in
accordance with the investor's guidelines and that the loans conform to the laws
of the state of origination. Gain or loss on the sale of such loans is
recognized upon consummation of the sale.
F-12
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The financial condition of a financial services company, and to some extent, its
operating performance, is dependent to a significant degree upon estimates and
appraisals of value, evaluations of creditworthiness and assumptions about
future events and economic conditions. Recent history has demonstrated that
these estimates, appraisals, evaluations and assumptions are subject to rapid
change, and that such changes can materially affect the reported financial
condition of a financial services company and its financial performance, and may
result in restrictions on an institution's ability to continue to operate in its
customary manner.
RECLASSIFICATIONS
Certain amounts within the accompanying consolidated financial statements and
the related notes have been reclassified to conform to the 1997 presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
The FASB has issued SFAS No. 128, "Earnings Per Share," which is effective for
financial statements issued after December 31, 1997. Early adoption of the
standard is not permitted. The standard eliminates primary and fully diluted
earnings per share and requires presentation of basic and diluted earnings per
share together with disclosure of how the per share amounts were computed. The
adoption of this new standard is not expected to have a material impact on the
Group.
In June 1997, the FASB issued SFAS No. 130, "Reporting of Comprehensive Income"
("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components (revenues, expense, gains, and losses)
in a full set of financial statements. This statement also requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This
statement is effective for fiscal years beginning after December 15, 1997.
Earlier application is permitted. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The Group does
not anticipate that adoption of SFAS 130 will have a material effect on the
Group.
F-13
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. This statement also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. This statements requires the reporting of financial and descriptive
information about an enterprise's reportable operating segments. This statement
is effective for financial statements for periods beginning after December 15,
1997. In the initial year of adoption, comparative information for earlier
years is to be restated. The Group does not anticipate that the adoption of
SFAS 131 will have a material effect on the Group.
NOTE 4 - LOANS RECEIVABLE
The loan portfolio is summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- -------------------------
1997 1996 1995
------------- ----------- ----------
<S> <C> <C> <C>
Held for sale - mortgage loans $1,363,822 $ 840,767 $620,455
Held for investment
Mortgage loans 296,258 120,924 178,246
Commercial real estate loans 19,347 13,565 30,504
Commercial loans 56,216 46,212 8,576
Construction loans 37,812 59,270 48,933
Consumer loans 34,919 33,608 39,331
---------- ---------- --------
444,552 273,579 305,590
---------- ---------- --------
1,808,374 1,114,346 926,045
Less allowance for losses (4,950) (3,500) (2,102)
---------- ---------- --------
Total $1,803,424 $1,110,846 $923,943
========== ========== ========
</TABLE>
In 1994, the Group classified a number of loans as held for investment in a
manner similar to SFAS No. 115 ("SFAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities". In 1995, the FASB released the
"Guide to Implementation of Statement 115" (the "Guide"). Upon review of the
Guide, the Group reassessed the prior classifications and reclassified
approximately $185.0 million of mortgage loans to held for sale from held for
investment.
F-14
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE 4 - LOANS RECEIVABLE (CONTINUED)
Activity in the allowance for losses is summarized as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEARS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
---------------------- -------------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 3,500 $2,102 $ 2,102 $1,871 $ 901
Allowance for losses of Security
at date of acquisition - - - - 1,001
Provision charged to earnings 3,730 1,140 2,604 238 290
Charge-offs, net of recoveries (2,280) (216) (1,206) (7) (321)
------- ------ ------- ------ ------
Balance, end of period $ 4,950 $3,026 $ 3,500 $2,102 $1,871
======= ====== ======= ====== ======
</TABLE>
The Group has no commitments to make additional advances on restructured or
other nonperforming loans. Loans on which interest accruals have been
discontinued totaled approximately $30.6 million at December 31, 1996, $10.7
million at December 31, 1995 and $1.7 million at December 31, 1994. Interest
that would have been accrued on such loans totaled approximately $2,668,000,
$862,000, and $245,000 at December 31, 1996, 1995, and 1994, respectively. At
September 30, 1997 and 1996, loans on which interest accruals have been
discontinued totaled approximately $44.1 million and $31.7 million,
respectively. Interest that would have been accrued on such loans totaled
approximately $4.5 million and $2.8 million at September 30, 1997 and 1996,
respectively.
At September 30, 1997 the recorded investment in impaired loans, pursuant to
SFAS No. 114, totaled $3.6 million and the average outstanding balance for the
nine months ended September 30, 1997 was $3.5 million. No allowance for losses
was required on these loans because the measured values of the loans exceeded
the recorded investments in the loans. Interest income recognized on impaired
loans during the nine months ended September 30, 1997, was not material. At
December 31, 1996, the recorded investment in impaired loans totaled $3.9
million and the average outstanding balance for the year ended December 31, 1996
was $3.1 million.
NOTE 5 - REPOSSESSED ASSETS
Repossessed assets include the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- -------------------
1997 1996 1995
------------- -------- --------
<S> <C> <C> <C>
One-to-four family $17,479 $10,133 $2,179
Commercial properties 180 230 180
------- ------- ------
Repossessed assets, net $17,659 $10,363 $2,359
======= ======= ======
</TABLE>
F-15
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment balances are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------- ------------------------
1997 1996 1995
--------------- ----------- -----------
<S> <C> <C> <C>
Land $ 703 $ 3,330 $ 3,330
Office buildings 6,496 2,643 2,312
Computer hardware and software 16,307 15,283 10,856
Furniture, fixtures and equipment 12,007 11,045 8,460
Automobiles 454 571 568
-------- -------- -------
35,967 32,872 25,526
Less accumulated depreciation (15,178) (12,119) (7,651)
-------- -------- -------
Premises and equipment, net $ 20,789 $ 20,753 $17,875
======== ======== =======
</TABLE>
Depreciation expense amounted to approximately $4.3 million and $3.2 million for
the nine month periods ended September 30, 1997 and 1996 and approximately $4.6
million, $3.1 million, and $2.1 million for the years ended December 31, 1996,
1995 and 1994, respectively.
Lease rental expense totaled approximately $2.8 million and $3.1 million for the
nine months ended September 30, 1997 and 1996 and $4.1 million, $3.3 million and
$3.1 million for the years ended 1996, 1995 and 1994, respectively. The
following outlines the Bank's minimum contractual lease obligations as of
December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 $2,603
1998 1,834
1999 1,357
2000 1,079
2001 463
------
Total $7,336
======
</TABLE>
The Bank has committed to the development of additional software and systems to
be utilized in the mortgage banking segment. The amount committed to the
project amounted to approximately $1.8 million, of which approximately $1.6
million was paid through September 30, 1997.
F-16
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE 7 - MORTGAGE SERVICING RIGHTS
Not included in the accompanying consolidated financial statements are mortgage
loans serviced for others. The unpaid principal balances of these loans,
including subservicing of $2.0 billion at September 30, 1997, $3.6 billion at
December 31, 1996 and $536.3 million at December 31, 1995, are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- -----------------------
Mortgage loans serviced for: 1997 1996 1995
------------- ---------- ----------
<S> <C> <C> <C>
FHLMC and FNMA $3,931,738 $4,658,056 $6,638,435
MSHDA 58,078 47,505 31,055
GNMA 5,299 6,458 7,217
Other investors 2,175,815 3,708,935 648,147
---------- ---------- ----------
$6,170,930 $8,420,954 $7,324,854
========== ========== ==========
</TABLE>
Custodial accounts maintained in connection with the above mortgage servicing
rights were approximately $80.6 million at September 30, 1997 and $106.3 million
and $131.4 million at December 31, 1996 and 1995 respectively. These amounts
include payments for principal, interest, taxes, and insurance collected on
behalf of the individual investor.
As discussed in Note 3, the Group adopted SFAS 122 in May 1995. The effect of
the adoption was to increase earnings by approximately $1.5 million before taxes
for 1995.
The following is an analysis of the changes in the mortgage servicing rights (in
thousands):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEARS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
------------------- ---------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 30,064 $ 27,957 $ 27,957 $ 18,179 $17,563
Additions 56,607 50,861 63,499 31,106 15,616
Sales (28,028) (29,218) (50,075) (15,684) (9,475)
Amortization (6,930) (8,177) (11,317) (5,644) (5,525)
-------- -------- -------- -------- -------
Balance, end of period $ 51,713 $ 41,423 $ 30,064 $ 27,957 $18,179
======== ======== ======== ======== =======
</TABLE>
At December 31, 1996 and 1995, the estimated fair value of the mortgage loan
servicing portfolio was approximately $54.0 and $70.4 million, respectively.
The estimated fair value at September 30, 1997 was approximately $60.4 million.
The estimated fair value in excess of book value was approximately $8.7 million
at September 30, 1997 and $23.9 million and $42.4 million at December 31, 1996
and 1995, respectively.
F-17
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE 8 - DEPOSIT ACCOUNTS
The deposit accounts are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- -------------------------
1997 1996 1995
-------------- -------------------------
AMOUNT AMOUNT AMOUNT
-------------- ------------ -----------
<S> <C> <C> <C>
Demand, NOW and
money market accounts $ 55,981 $ 66,908 $ 42,410
Passbook savings 78,879 57,211 38,094
Certificates of deposit 877,261 500,613 448,714
---------- -------- --------
Total deposit accounts $1,012,121 $624,732 $529,218
========== ======== ========
</TABLE>
Non interest-bearing deposits included in the demand, NOW and money market
accounts balances at December 31, 1996 and 1995 were approximately $36.9 million
and $13.2 million, respectively and $21.3 million at September 30, 1997.
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $279.5 million and $223.4 million at December 31,
1996 and 1995, respectively and $445.6 million at September 30, 1997.
The following indicates the scheduled maturities of the Bank's certificates of
deposit as of September 30, 1997:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Three months or less $129,844
Over three through six months 168,644
Over six through twelve months 197,980
One to two years 221,106
Thereafter 159,687
--------
Total $877,261
========
</TABLE>
Interest expense on deposit accounts is summarized as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEARS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
------------------- --------------------------------
1997 1996 1996 1995 1994
--------- ------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Demand, NOW and money
market accounts $ 2,636 $ 1,778 $ 2,499 $ 1,824 $ 773
Passbook savings 664 282 428 228 127
Certificates of deposit 31,682 20,014 27,504 23,071 8,137
--------- ------- ---------- -------- ---------
Total $34,982 $22,074 $ 30,431 $25,123 $9,037
========= ======= ========== ======== =========
</TABLE>
F-18
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
Note 9 - FHLB Advances
The following indicates certain information related to the FHLB advances (in
thousands):
<TABLE>
<CAPTION>
FOR THE NINE FOR THE YEARS ENDED
MONTHS ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------------------
-------------
1997 1996 1995 1994
-------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Maximum outstanding at any month end $718,878 $389,801 $315,000 $200,750
Average balance 427,310 247,204 237,535 83,912
Average interest rate 5.87% 5.78% 6.35% 4.44%
</TABLE>
The Bank has the authority and approval from the FHLB to utilize a total of $850
million in collateralized borrowings. Advances at December 31, 1996 principally
matured during 1997. Advances at September 30, 1997 principally mature during
1997, 1998, and 1999. Pursuant to collateral agreements with the FHLB, advances
are collateralized by non-delinquent single-family residential mortgage loans.
NOTE 10 - FEDERAL INCOME TAXES
Components of the provision for federal income taxes consists of the following
(in thousands):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEARS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
------------------- --------------------------------
1997 1996 1996 1995 1994
--------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Current provision $2,918 $5,695 $11,031 $5,933 $6,489
Deferred provision 6,125 692 (773) 3,415 2,813
--------- -------- ---------- --------- ----------
$9,043 $6,387 $10,258 $9,348 $9,302
========= ======== ========== ========= ==========
</TABLE>
The Group's effective tax rates differ from the statutory federal tax rates.
The following is a summary of such differences (in thousands):
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED FOR THE YEARS
SEPTEMBER 30, ENDED DECEMBER 31,
---------------------- --------------------------
1997 1996 1996 1995 1994
-------- ---------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
Provision at statutory federal income
tax rate $8,705 $6,218 $ 9,580 $8,707 $8,904
Increase (decrease) resulting from:
Amortization of deposit premium 340 340 450 450 225
Other, net (2) (171) 228 191 173
------ ------ ------- ------ ------
Provision at effective federal income
tax rate $9,043 $6,387 $10,258 $9,348 $9,302
====== ====== ======= ====== ======
</TABLE>
F-19
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE 10 - FEDERAL INCOME TAXES (CONTINUED)
The details of the net tax liability are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------- ------------------------------
1997 1996 1995
-------------- ------------ ----------------
<S> <C> <C> <C>
Deferred tax assets:
Mark-to-market adjustments on earning assets $ 990 $ 1,130 $ 1,031
Interest not accrued 1,589 934 255
Other 334 218 9
-------- -------- --------
Total 2,913 2,282 1,295
-------- -------- --------
Deferred tax liabilities:
Deferred fees (1,785) (1,112) (567)
Bad debt reserves (9) (704) (1,246)
Mortgage loan servicing rights (17,427) (10,199) (9,724)
Purchase accounting valuation adjustments (360) (555) (835)
Premises and equipment (773) (885) (463)
Other (41) (226) (623)
-------- -------- --------
Total (20,395) (13,681) (13,458)
-------- -------- --------
Net deferred tax liability (17,482) (11,399) (12,163)
Currently (payable)/receivable 956 (11,107) (2,441)
-------- -------- --------
Net tax liability $(16,526) $(22,506) $(14,604)
======== ======== ========
</TABLE>
Flagstar files a consolidated federal income tax return on a calendar year
basis. Through its tax year ended December 31, 1995, the Bank has determined
its deduction for bad debts based on the reserve method in lieu of the specific
charge-off method. Under the reserve method, the Bank has established and
maintained a reserve for bad debts against which actual loan losses are charged.
As a qualifying thrift institution, the Bank has calculated its addition to its
bad debt reserve under either, (1) the "percentage of taxable income" method or
(2) the "experience" method. The Bank used the percentage of taxable income
method in determining its bad debt reserve addition for its 1995, 1994 and 1993
tax years.
During August 1996, the President signed the Small Business Job Protection Act
of 1996 ("the Jobs Act") which contains certain provisions that require all
savings banks and thrifts to account for bad debts for income tax reporting
purposes in the same manner as banks. The effect on a large thrift such as the
Bank is that it must change its tax method of accounting for determining its
allowable bad debt deduction from the reserve method to the specific charge-off
method. Consequently, the bad debt deduction based on a percentage of taxable
income or the experience method is no longer allowed for years beginning after
December 31, 1995.
F-20
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE 10 - FEDERAL INCOME TAXES (CONTINUED)
The bad debt reserves maintained for tax purposes and accumulated after 1987 are
subject to recapture as part of the change. Base year reserves (generally pre-
1988 bad debt reserves) will not be recaptured unless the Bank, or a successor
institution, liquidates, redeems shares or pays a dividend in excess of earnings
and profits. The recapture will generally be taken into account ratably over
six years beginning with the 1996 tax year. The Bank may defer the recapture up
to an additional two years if it meets certain residential lending requirements
during tax years beginning before January 1, 1998.
Income taxes have been provided for the temporary difference between the
allowance for losses and the increase in the bad debt reserve maintained for tax
purposes since the 1987 base year. The cumulative amount of this difference at
December 31, 1995 was approximately $3.5 million for the Bank. As a result of
the Jobs Act, the cumulative difference of $3.5 million will be recaptured.
Management believes that the Bank has met the conditions to defer the recapture
of the reserve during 1996 and 1997. The Jobs Act had no effect on the base
year reserves of the Bank. Consequently, the Bank has not provided deferred
taxes of approximately $1.4 million on the balance of its tax bad debt reserves
as of the 1987 base year.
NOTE 11- EMPLOYEE BENEFITS
The Group maintains a 401(k) plan for its employees. Under the plan, eligible
employees may contribute up to 6% of their compensation up to a maximum of
$9,000 annually. The Group currently provides a matching contribution up to 3%
of an employee's annual compensation. The Group's contributions vest at a rate
such that an employee is fully vested after seven years of service. The Group's
contributions to the plan for the years ended December 31, 1996, 1995 and 1994
were approximately $594,000, $493,000, and $371,000, respectively. The Group's
contributions to the plan for the nine months ended September 30, 1997 and 1996
were $579,000 and $452,000, respectively. The Group may also make discretionary
contributions to the plan; however, none have been made.
NOTE 12 - CONTINGENCIES
The Group is involved in certain lawsuits incidental to its operations.
Management, after review with its legal counsel, is of the opinion that
settlement of such litigation will not have a material effect on the Group's
financial condition.
A substantial part of the Bank's business has involved the origination,
purchase, and sale of mortgage loans. During the past several years, numerous
individual claims and purported consumer class action claims were commenced
against a number of financial institutions, their subsidiaries and other
mortgage lending institutions generally seeking civil statutory and actual
damages and rescission under the federal Truth in Lending Act (the "TILA"), as
well as remedies for alleged violations of various state unfair trade practices
laws restitution or unjust enrichment in connection with certain mortgage loan
transactions.
F-21
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE 12 - CONTINGENCIES (CONTINUED)
The Bank has a substantial mortgage loan servicing portfolio and maintains
escrow accounts in connection with this servicing. During the past several
years, numerous individual claims and purported consumer class action claims
were commenced against a number of financial institutions, their subsidiaries
and other mortgage lending institutions generally seeking declaratory relief
that certain of the lenders' escrow account servicing practices violate the Real
Estate Settlement Practices Act and breach the lenders' contracts with
borrowers. Such claims also generally seek actual damages and attorney's fees.
In addition to the foregoing, mortgage lending institutions have been subjected
to an increasing number of other types of individual claims and purported
consumer class action claims that relate to various aspects of the origination,
pricing, closing, servicing, and collection of mortgage loans and that allege
inadequate disclosure, breach of contract, or violation of state laws. Claims
have involved, among other things, interest rates and fees charged in connection
with loans, interest rate adjustments on adjustable-rate loans, timely release
of liens upon payoffs, the disclosure and imposition of various fees and charge,
and the placing of collateral protection insurance.
While the Bank has had various claims similar to those discussed above asserted
against it, management does not expect these claims to have a material adverse
effect on the Bank's financial condition, results of operations, or liquidity.
NOTE 13 - REGULATORY MATTERS
The Financial Institutions Reform Recovery and Enforcement Act of 1989
("FIRREA"), which instituted major reforms in the operation and supervision of
the savings and loan industry, contains provisions for capital standards. These
standards require savings institutions to have a minimum regulatory tangible
capital (as defined in the regulation) equal to 1.50% of adjusted total assets
and a minimum 3.00% core capital (as defined) of adjusted total assets.
Additionally, savings institutions are required to meet a total risk-based
capital requirement of 8.00%.
The Bank is also subject to the provisions of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). FDICIA includes significant
changes to the legal and regulatory environment for insured depository
institutions, including reductions in insurance coverage for certain kinds of
deposits, increased supervision by the Federal regulatory agencies, increased
reporting requirements for insured institutions, and new regulations concerning
reporting on internal controls, accounting and operations.
FDICIA's prompt corrective action regulations define specific capital categories
based on an institutions' capital ratios. The capital categories, in declining
order, are "well" capitalized, "adequately capitalized", "undercapitalized",
"significantly undercapitalized", and "critically undercapitalized."
Institutions categorized as "undercapitalized" or worse are subject to certain
restrictions, including the requirement to file a capital plan with OTS, and
increased supervisory monitoring, among other things. Other restrictions may be
imposed on the institution either by the OTS or by the FDIC, including
requirements to raise additional capital, sell assets, or sell the entire
institution.
F-22
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE 13 - REGULATORY MATTERS (CONTINUED)
The following chart delineates the categories as defined in the FDICIA
legislation:
<TABLE>
<CAPTION>
TIER 1 TOTAL
RISK- RISKED-
CORE BASED BASED
CAPITAL CAPITAL CAPITAL
------- ------- -------
<S> <C> <C> <C>
"Well capitalized" 5.0% 6.0% 10.0%
"Adequately capitalized" 4.0% 4.0% 8.0%
"Undercapitalized" Less than 4.0% Less than 4.0% Less than 8.0%
"Significantly undercapitalized" Less than 3.0% Less than 3.0% Less than 6.0%
</TABLE>
At September 30, 1997, Bank's consolidated Core, Tier 1 risk-based, and Total
risk-based capital ratios were 5.95%, 10.88% and 11.25%, respectively. These
ratios place the Bank in the "well capitalized" category.
The following is a calculation of Bank's consolidated regulatory capital (in
thousands) at September 30, 1997:
<TABLE>
<CAPTION>
TIER 1 TOTAL
RISK- RISK-
GAAP TANGIBLE CORE BASED BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
--------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
GAAP capital, as reported $ 121,055 $ 121,055 $ 121,055 $ 121,055 $ 121,055
Nonallowable assets:
Core deposit premium (4,837)
Other assets (310)
Additional capital items:
General valuation allowance 4,950
--------- ---------- --------- ----------
Regulatory capital 116,218 121,055 121,055 125,695
Minimum capital requirement % 1.50% 3.00% 4.00% 8.00%
Minimum capital requirement $ 30,425 60,996 44,521 89,413
-------- -------- -------- ---------
Regulatory capital - excess $ 85,793 $ 60,059 $ 76,534 $ 36,282
======== ======== ======== =========
</TABLE>
F-23
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE 13 - REGULATORY MATTERS (CONTINUED)
At December 31, 1996, Bank's consolidated Core, Tier 1 risk-based, and Total
risk-based capital ratios were 6.01%, 10.48% and 10.91%, respectively. These
ratios place Bank in the "well capitalized" category.
The following is a calculation of Bank's consolidated regulatory capital (in
thousands) at December 31, 1996:
<TABLE>
<CAPTION>
TIER 1 TOTAL
RISK- RISK-
GAAP TANGIBLE CORE BASED BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
--------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
GAAP capital, as reported $ 77,899 $ 77,899 $ 77,899 $ 77,899 $ 77,899
Nonallowable assets:
Core deposit premium (5,805)
Other assets (313)
Additional capital items:
General valuation allowance 3,500
-------- ---------- ---------- ----------
Regulatory capital 72,094 77,899 77,899 81,086
Minimum capital requirement % 1.50% 3.00% 4.00% 8.00%
Minimum capital requirement $ 19,365 38,904 51,872 59,458
------- ------- ------- ----------
Regulatory capital - excess $52,729 $38,995 $26,027 $ 21,628
======= ======= ======= ==========
</TABLE>
At December 31, 1995, Bank's consolidated Core, Tier 1 risk-based, and Total
risk-based capital ratios were 5.84%, 9.83% and 10.12%, respectively. These
ratios place Bank in the "well capitalized" category.
The following is a calculation of Bank's consolidated regulatory capital (in
thousands) at December 31, 1995:
<TABLE>
<CAPTION>
TIER 1 TOTAL
RISK- RISK-
GAAP TANGIBLE CORE BASED BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
--------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
GAAP capital, as reported $ 61,003 $ 61,003 $ 61,003 $ 61,003 $ 61,003
Nonallowable assets:
Core deposit premium (7,095)
Other assets (306)
Additional capital items:
General valuation allowance 2,102
--------- --------- --------- ---------
Regulatory capital 53,908 61,003 61,003 62,799
Minimum capital requirement % 1.50% 3.00% 4.00% 8.00%
Minimum capital requirement $ 15,566 31,346 24,828 49,655
--------- ---------- --------- ---------
Regulatory capital - excess $ 38,342 $ 29,657 $ 36,175 $ 13,144
========= ========== ========== ==========
</TABLE>
F-24
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE 13 - REGULATORY MATTERS (CONTINUED)
The OTS risk-based capital regulation also includes an interest rate risk (IRR)
component that requires savings institutions with greater than normal IRR, when
determining compliance with the risk-based capital requirements, to maintain
additional total capital. The OTS has, however, indefinitely deferred
enforcement of its IRR requirements. Under the regulation, a savings
institution's IRR is measured in terms of the sensitivity of its "net portfolio
value" to changes in interest rates. A savings institution is considered to
have a "normal" level of IRR exposure if the decline in its net portfolio value
after an immediate 200 basis point increase or decrease in market interest rates
is less than 2% of the current estimated economic value of its assets. If the
OTS determines in the future to enforce the regulation's IRR requirements, a
savings institution with a greater than normal IRR would be required to deduct
from total capital, for purposes of calculating its risk-based capital
requirement, an amount equal to one half the difference between the
institution's measured IRR and 2%, multiplied by the economic value of the
institution's total assets. Management does not believe that this regulation,
when enforced, will have a material impact on Bank.
The United States Congress has passed legislation that resulted in an assessment
on all Savings Association Insurance Fund ("SAIF") insured deposits in order to
recapitalize the SAIF Fund. This one-time assessment amounted to approximately
66 basis points on SAIF assessable deposits held as of March 31, 1995. The
assessment was payable no later than November 30, 1996 and amounted to
approximately $3.4 million for Bank. Such amount was charged to earnings at
September 30, 1996.
NOTE 14 - CONCENTRATIONS OF CREDIT
Properties collateralizing loans receivable are geographically disbursed
throughout the United States. As of September 30, 1997, approximately 29% of
these properties are located in Michigan (measured by principal balance), and
another 50% are located in the states of California, Colorado, Ohio, Florida,
Illinois, Texas, Maryland, Washington, Oregon, New York, and Georgia. No other
state contains more than 2% of the properties collateralizing these loans.
NOTE 15 - CORPORATE ACQUISITION
The Bank entered into a definitive agreement on November 16, 1993 to acquire all
of the outstanding stock of Security Savings Bank, F.S.B. of Jackson, Michigan
for $35 per share or approximately $25.9 million. As part of this agreement,
Security maintained its corporate identity and became an operating subsidiary of
the Bank. The completion of this acquisition was finalized on June 30, 1994, at
the close of business. Had Security been a part of the Bank for all of 1994,
the Bank's earnings would have been reduced by $581,000.
In conjunction with Bank's acquisition of Security, a deposit premium was
capitalized in the amount of $9.0 million or 4.67%. This premium, which is
included in other assets, is being amortized over seven years on a straight-line
method. The premium, net of amortization, totals $4.8 million at September 30,
1997, $5.8 million at December 31, 1996 and $7.1 million at December 31, 1995.
Amortization of the deposit premium amounted to approximately $970,000 for the
nine month periods ended September 30, 1997 and 1996 and $1.3 million for the
years ended December 31, 1996 and 1995, respectively.
F-25
<PAGE>
FLAGSTAR BANK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 issued by the Financial Accounting Standards Board, "Disclosures
about Fair Value of Financial Instruments", requires the disclosure of fair
value information about financial instruments, whether or not recognized in the
statement of financial condition, where it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Because
assumptions used in these valuation techniques are inherently subjective in
nature, the estimated fair values cannot always be substantiated by comparison
to independent market quotes and, in many cases, the estimated fair values could
not necessarily be realized in an immediate sale or settlement of the
instrument.
The fair value estimates presented herein are based on relevant information
available to management as of September 30, 1997, December 31, 1996, and 1995.
Management is not aware of any factors that would significantly affect these
estimated fair value amounts. As these reporting requirements exclude certain
financial instruments and all non-financial instruments, the aggregate fair
value amounts presented herein do not represent management's estimate of the
underlying value of the Group. Additionally, such amounts exclude intangible
asset values such as the value of core deposit intangibles.
The following methods and assumptions were used by the Group to estimate the
fair value of each class of financial instruments and certain non-financial
instruments for which it is practicable to estimate that value:
Cash and cash equivalents: The carrying amount of cash and cash equivalents
approximates fair value.
Loans receivable: This portfolio consists of single family mortgage loans held
for sale and investment, collateralized commercial lines of credit, commercial
real estate loans, builder development project loans, consumer credit
obligations, and single family home construction loans. Mortgage loans held for
sale and investment are valued using fair values attributable to similar
mortgage loans. The fair value of the other loans are valued based on the fair
value of obligations with similar credit characteristics.
Other investments: The carrying amount of other investments approximates fair
value.
FHLB stock: No secondary market exists for FHLB stock. The stock is bought and
sold at par by the FHLB. The recorded value, therefore, is the fair value. The
amount of stock required to be purchased is based on total assets and is
determined annually.
Deposit Accounts: The fair value of demand deposits and savings accounts
approximates the carrying amount. The fair value of fixed-maturity certificates
of deposit is estimated using the rates currently offered for deposits with
similar remaining maturities.
FHLB Advances: Rates currently available to the Group for debt with similar
terms and remaining maturities are used to estimate the fair value of the
existing debt.
Mortgage Servicing Rights: See Note 3 for a description of the method used to
value the mortgage servicing rights.
Financial instruments with off-balance-sheet risk: The fair value of financial
futures contracts, forward delivery contracts and fixed rate commitments to
extend credit are based on current market prices.
F-26
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following tables set forth the fair value of the Group's financial
instruments:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------------------------------------------
1997 1996 1995
----------- ------------------------ ------------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Financial instruments:
Assets:
Cash and cash equivalents $ 43,633 $ 43,633 $ 44,187 $ 44,187 $ 29,119 $ 29,119
Mortgage loans held for
sale 1,363,822 1,387,381 840,767 850,455 620,455 621,585
Loans held for investment 439,602 432,134 270,079 274,168 303,488 308,712
Other investments 539 539 887 887 818 818
Federal Home Loan
Bank stock 36,925 36,925 19,725 19,725 17,800 17,800
Liabilities:
Deposits:
Demand deposits and
savings accounts (134,860) (134,860) (124,119) (124,119) (80,504) (80,504)
Certificates of deposit (877,261) (875,619) (500,613) (500,718) (448,714) (451,500)
FHLB advances (718,878) (717,826) (389,801) (389,635) (191,156) (190,800)
Off-balance sheet items:
Financial futures - - - - - -
Forward delivery contracts - 3,239 - (9,868) - (9,366)
Commitments to extend
credit - 11,969 5,362 - 1,789
Non-financial instruments:
Unrealized gains on mortgage
servicing rights ( see Note 7) - 8,700 - 23,900 - 42,400
</TABLE>
The Group enters into certain financial instruments with off-balance-sheet risk
in the ordinary course of business to reduce its exposure to changes in interest
rates. The Group utilizes only traditional financial instruments for this
purpose and does not enter into instruments such as leveraged derivatives or
structured notes. The financial instruments used for hedging interest rate risk
include financial futures contracts and forward delivery contracts. A hedge is
an attempt to reduce risk by creating a relationship whereby any losses on the
hedged asset or liability are expected to be counterbalanced in whole or part by
gains on the hedging financial instrument. Thus, market risk resulting from a
particular off-balance-sheet instrument is normally offset by other on or off-
balance-sheet transactions. The Group seeks to manage credit risk by limiting
the total amount of arrangements outstanding, both by counterparty and in the
aggregate, by monitoring the size and maturity structure of the financial
instruments, by assessing the creditworthiness of the counterparty, and by
applying uniform credit standards for all activities with credit risk.
F-27
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Notional principal amounts indicated in the following table represent the extent
of the Group's involvement in particular classes of financial instruments and
generally exceed the expected future cash requirements relating to the
instruments.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------- ------------------------
1997 1996 1995
-------------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Forward delivery contracts $1,148 $ 665 $ 511
Commitments to extend credit 967 695 489
</TABLE>
All of the Group's financial instruments with off-balance sheet risk expire
within one year.
Financial Futures Contracts: There were no Treasury futures contracts
outstanding at December 31, 1996, December 31, 1995, or September 30, 1997.
Gains or losses on futures transactions are recorded on the specific
identification method in response to adjustments in the fair market value of the
instruments. During 1996 and 1995, the Group recorded losses on financial
futures amounting to approximately $90,000 and $1.3 million, respectively. For
the nine month period ended September 30, 1997 the Group record approximately a
$72,000 gain on financial futures and for the same period ended September 30,
1996, the Group recorded a loss on financial futures of approximately $200,000.
Forward Delivery Contracts: Forward delivery contracts are entered into to sell
single family mortgage loans:
FORWARD DELIVERY CONTRACTS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------- ------------------------
1997 1996 1995
-------------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Types
Fixed $1,128 $ 633 $ 470
Balloon - 23 30
Variable 20 9 11
------ ----- -----
$1,148 $ 665 $ 511
====== ===== =====
</TABLE>
Substantially all forward delivery contracts are entered into with the FHLMC,
FNMA or GNMA.
F-28
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
Commitments to Extend Credit: The Group's exposure to credit loss for
commitments to extend credit is represented by the contractual amount of those
agreements. The Group uses the same credit policies in making funding
commitments as it does for on-balance-sheet instruments. These commitments
generally have fixed expiration dates or other termination clauses. Because
commitments may expire without being drawn upon, the total contract amounts do
not necessarily represent future cash requirements.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------- ------------------------
1997 1996 1995
-------------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Single family $ 823 $ 585 $ 409
Other 144 110 80
----- ----- -----
Total $ 967 $ 695 $ 489
===== ===== =====
Fixed $ 899 $ 670 $ 459
Variable 68 25 30
----- ----- -----
Total $ 967 $ 695 $ 489
===== ===== =====
</TABLE>
NOTE 17 - SEGMENT INFORMATION
The Group operates in both the mortgage banking and retail banking segments.
Following is a presentation of financial information by business segment for the
period indicated.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------------------------
RETAIL MORTGAGE
BANKING BANKING
SEGMENT SEGMENT ELIMINATIONS COMBINED
------------- ------------ -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues $ 16,097 $ 57,537 $ - $ 73,634
Earnings before income taxes 8,429 16,442 - 24,871
Depreciation and amortization
of intangibles 1,851 10,155 - 12,006
Capital expenditures 882 4,031 - 4,913
Identifiable assets 571,464 1,675,840 (214,105) 2,033,199
Intersegment income (expense) 14,987 (14,987) - -
</TABLE>
F-29
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE 17 - SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
-----------------------------------------------------------
RETAIL MORTGAGE
BANKING BANKING
SEGMENT SEGMENT ELIMINATIONS COMBINED
-------------- -------------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues $ 9,309 $ 55,897 $ - $ 65,206
Earnings before income taxes 1,164 16,650 - 17,814
Depreciation and amortization
of intangibles 1,106 11,203 - 12,309
Capital expenditures 110 6,145 - 6,255
Identifiable assets 358,677 886,211 (175,796) 1,069,092
Intersegment income (expense) 12,306 (12,306) - -
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------
RETAIL MORTGAGE
BANKING BANKING
SEGMENT SEGMENT ELIMINATIONS COMBINED
-------------- -------------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues $ 13,791 $ 74,723 $ - $ 88,514
Earnings before income taxes 3,305 24,066 - 27,371
Depreciation and amortization
of intangibles 1,589 15,737 - 17,326
Capital expenditures 312 7,215 - 7,527
Identifiable assets 387,201 1,112,260 (202,651) 1,296,810
Intersegment income (expense) 14,186 (14,186) - -
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------
RETAIL MORTGAGE
BANKING BANKING
SEGMENT SEGMENT ELIMINATIONS COMBINED
-------------- -------------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues $ 12,390 $ 52,573 $ - $ 64,963
Earnings before income taxes 3,549 21,327 - 24,876
Depreciation and amortization
of intangibles 1,728 9,313 - 11,041
Capital expenditures 1,665 4,967 - 6,632
Identifiable assets 307,620 782,559 (45,328) 1,044,851
Loans transferred to (from) (185,111) 185,111 - -
Intersegment income (expense) (4,153) 4,153 - -
</TABLE>
F-30
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE 17 - SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1994
---------------------------------------------------------
RETAIL MORTGAGE
BANKING BANKING
SEGMENT SEGMENT ELIMINATIONS COMBINED
-------------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
Revenues $ 1,432 $ 61,881 $ - $ 63,313
Earnings before income taxes (2,127) 27,566 - 25,439
Depreciation and amortization
of intangibles 746 8,259 - 9,005
Capital expenditures 664 5,927 - 6,591
Identifiable assets 416,023 479,830 (173,384) 722,469
Loans transferred to (from) 106,261 (106,261) - -
Intersegment income (expense) (2,358) 2,358 - -
</TABLE>
Revenues are comprised of net interest income (before the provision for credit
losses) and non-interest income. Non-interest expenses are fully allocated to
each segment. The intersegment income (expense) consists of interest expense
incurred or charged by the mortgage banking segment on intersegment borrowing.
NOTE 18 - INITIAL PUBLIC OFFERING OF FLAGSTAR BANCORP, INC.
STOCK OFFERING
Flagstar completed an initial public offering in May 1997 of 5,000,000 shares of
common stock; including 2,800,000 shares being sold by the shareholders of
Flagstar. Such sale resulted in proceeds to the Bank of $27.3 million.
STOCK OPTION AND PURCHASE PLANS, AND OTHER COMPENSATION PLANS
In 1997, Flagstar's Board of Directors adopted resolutions to implement various
stock option and purchase plans and deferred and incentive compensation plans
effective upon the completion of the common stock offering.
The purpose of the Stock Option Plan ("Option Plan") is to provide an additional
incentive to directors and employees by facilitating their purchase of Common
Stock. The Option Plan will have a term of 10 years from the date of its
approval by Flagstar stockholders, after which no awards may be made, unless the
plan is earlier terminated by the Board of Directors of Flagstar. Pursuant to
the Option Plan, a number of shares equal to 10% of the shares of Common Stock
(1,345,000 shares) that are to be outstanding following the Offering would be
reserved for future issuance by Flagstar.
It is intended that options granted under the Option Plan will constitute both
incentive stock options ("ISOs") and non-incentive stock options ("non-ISOs").
ISOs are options that comply with certain restrictions pursuant the Internal
Revenue Code of 1986, as amended (the "Code") and thereby provide favorable tax
treatment to recipients, although they do not generally result in tax deductions
to Flagstar. Non-ISO's are stock options that fail to qualify as ISO, either at
the time of grant or upon exercise.
F-31
<PAGE>
FLAGSTAR BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
================================================================================
NOTE 18 - INITIAL PUBLIC OFFERING OF FLAGSTAR BANCORP, INC. (CONTINUED)
STOCK OPTION AND PURCHASE PLANS, AND OTHER COMPENSATION PLANS (CONTINUED)
The exercise price for ISOs may not be less than 100% of the fair market value
of the shares on the date of the grant. Non-ISOs may be granted with any
exercise price, although a recipient will recognize taxable income upon the
receipt of a non-ISO with an exercise price that is substantially less than its
fair market value.
The initial grant of stock options under the Option Plan is expected to take
place on the date of the Option Plan's receipt of stockholder approval. It is
anticipated that Flagstar will account for the Option Plan in accordance with
the provisions of APB No. 25, "Accounting for Stock issued to Employees" and
adopt the disclosure requirements of SFAS No. 123.
Under the Employee Stock Purchase Plan ("Purchase Plan") eligible participants,
upon providing evidence of a purchase of Flagstar's common shares from any third
party and on the open market, would receive a payment from Flagstar equal to 15%
of the full price of the shares. Persons who own 5% or more of the outstanding
Common Stock are not eligible to purchase shares under the Purchase Plan. The
Purchase Plan includes limitations on the maximum reimbursement to a participant
during a year. The Purchase Plan has not been designed to comply with the
requirements of the Internal Revenue Code with respect to employee stock
purchase plans.
The Incentive Compensation Plan ("Incentive Plan") is unfunded and benefits are
payable only in the form of cash from the Bank's general assets. The Incentive
Plan is administered by a committee which decides from year to year which
employees of Flagstar will be eligible to participate in the Incentive Plan and
the size of the bonus pool.
The Deferred Compensation Plan allows employees to defer up to 25% of their
annual compensation and directors to defer all of their compensation. Funds
deferred remain the property of Flagstar and are placed in a trust.
Participants may direct that their deferred amounts be invested in stock of
Flagstar. Upon withdrawal, the participant has the option of receiving the
stock or the proceeds of its sale at the market price at the time of withdrawal.
F-32
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee........................ $ 14,750
NASD Filing Fee............................. 6,250
Nasdaq Listing Fee.......................... 21,000*
Printing, Postage and Mailing............... 450,000*
Legal Fees and Expenses..................... 350,000*
Accounting Fees and Expenses................ 200,000*
Blue Sky Fees and Expenses.................. 5,000*
Stock transfer agent fees and certificates.. 5,000*
Other....................................... 110,500
----------
Subtotal................................. $1,162,500
Underwriting Fees........................ 1,737,500**
----------
Total.................................... $2,900,000
==========
</TABLE>
* Estimated
** Based upon the sale of 2,000,000 shares of Series A Preferred Stock
ITEM 32. SALES TO SPECIAL PARTIES.
See response to Item 33 below.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the formation of Flagstar Capital Corporation (the
"Company" or the "Registrant") the Company issued 100 shares of Common Stock,
par value $1.00 per share, to Flagstar Bank, FSB (the "Bank"). Simultaneously
with the consummation of the Offering, the Company will issue an aggregate of
500,000 shares of Common Stock to the Bank. The description of these
transactions in the Prospectus under the heading "Certain Transactions
Constituting The Formation" is incorporated herein by reference. These shares of
Common Stock will be issued in reliance upon the exemption from registration
under Section 4(2) of the Securities Act of 1933 (the Securities Act).
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Amended and Restated Articles of Incorporation contain a
provision, authorized by the Michigan Business Corporation Act ("MBCA"),
designed to eliminate in certain circumstances the personal liability of
directors for monetary damages to the Company or its stockholders for breach of
their fiduciary duty as directors. This provision, however, does not limit the
liability of any director who breached his or her duty of loyalty to the Company
or its stockholders, failed to act in good faith, obtained an improper personal
benefit or paid a dividend or approved a stock repurchase or redemption that was
prohibited under Michigan law. This provision will not limit or eliminate the
rights of the Company or any stockholder to seek an injunction or any other
nonmonetary relief in the event of a breach of a director's duty of care. In
addition, this provision applies only to claims against a director arising out
of his or her role as a director and does not relieve a director from liability
unrelated to his or her fiduciary duty of care or from a violation of statutory
law such as certain liabilities imposed on a director under the federal
securities laws.
The Company's Amended and Restated Articles of Incorporation and Bylaws
also provide that the Company shall indemnify all directors and officers of the
Company to the full extent permitted by the MBCA. Under the provisions of the
MBCA, any director or officer who, in his or her capacity as such, is made or
threatened to be made a party to any suit or proceeding, may be indemnified if
the Board determines such director or officer acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interest of the Company or its stockholders.
<PAGE>
Officers and directors are expected to be covered prior to the consummation
of the Offering within specified monetary limits by insurance against certain
losses arising from claims made by reason of their being directors or officers
of the Company or of the Company's subsidiaries and the Company's officers and
directors are indemnified against such losses by reason of their being or having
been directors or officers of another corporation, partnership, joint venture,
trust or other enterprise at the Company's or its subsidiaries' request.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
See F-1 of the Prospectus for an index to financial statements included as
part of the Prospectus.
(b) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -------------
<S> <C>
1 Form of Underwriting Agreement between the Company, the Bank and the
Underwriters
3(a)(i) Amended and Restated Articles of Incorporation of the Company
3(a)(ii) Form of Certificate of Designation establishing the Series A
Preferred Shares
3(b) Bylaws of the Company
4 Specimen of certificate representing Series A Preferred Shares
5 Opinion of Kutak Rock, special counsel to the Company, relating to the
Series A Preferred Shares
8* Opinion of Kutak Rock, tax adviser to the Company, relating to certain
tax matters
10(a) Form of Mortgage Loan Purchase and Warranties Agreement between the
Company and the Bank
10(b) Form of Servicing Agreement between the Company and the Bank
10(c) Form of Advisory Agreement between the Company and the Bank
23(a) Consent of Grant Thornton L.L.P.
23(b) Consents of Kutak Rock (also included within Exhibit 5)
24 Power of Attorney (reference is made to the Signature Page of the Form
S-11 filed hereby)
27 Financial Data Schedule (for SEC use only)
</TABLE>
___________________
* To be filed via amendment
<PAGE>
ITEM 37. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 33 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding), is asserted by such director, officer, or controlling
person in connection with the securities registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Bloomfield Hills, Michigan, on the 22nd day of December, 1997.
FLAGSTAR CAPITAL CORPORATION
By: /s/ Thomas J. Hammond
-------------------------------------------
Thomas J. Hammond
Chairman of the Board
and Chief Executive Officer
(Duly Authorized Representative)
Each person whose signature appears below hereby appoints Thomas J.
Hammond, his or her true and lawful attorney-in-fact, with power to act and with
full power of substitution, in any and all capacities, to sign any or all
amendments (including post-effective amendments) to the Registration Statement
and file the same with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
/s/ Thomas J. Hammond /s/ Mary Kay McGuire
- --------------------------- ---------------------------
Thomas J. Hammond Mary Kay McGuire
Chairman of the Board and Director and Secretary
Chief Executive Officer
December 22, 1997 December 22, 1997
/s/ Mark T. Hammond /s/ Michael W. Carrie
- --------------------------- ---------------------------
Mark T. Hammond Michael W. Carrie
President and Director Executive Vice President, Chief Financial
Officer, Director
December 22, 1997 December 22, 1997
/s/ Joan Anderson
- ---------------------------
Joan H. Anderson
Executive Vice President and Director
December 22, 1997
<PAGE>
FLAGSTAR CAPITAL CORPORATION
____% Noncumulative Preferred Stock, Series A
(Liquidation Preference $25.00 per share)
Exchangeable into Preferred Stock of
Flagstar Bank, FSB
Underwriting Agreement
_________, 1998
Roney & Co., L.L.C.
McDonald & Company Securities, Inc.
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Roney & Co., L.L.C.,
One Griswold
Detroit, Michigan 48226
Ladies and Gentlemen:
Flagstar Capital Corporation, a Michigan corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate
of 2,000,000 shares (the "Firm Shares") of ____% Noncumulative Preferred Stock,
Series A (the "Preferred Stock") of the Company and up to an aggregate of
300,000 shares (the "Optional Shares") of Preferred Stock (the Firm Shares and
the Optional Shares that the Underwriters elect to purchase pursuant to Section
2 hereof being collectively referred to as the "Shares").
Flagstar Bank, a federally chartered and federally insured savings bank
and the parent of the Company (the "Bank"), has prepared and filed on December
___, 1997 with the Office of Thrift Supervision (the "OTS") a preliminary
offering circular under cover of Form OC (Docket No. ____), also filed with the
Securities and Exchange Commission (the "Commission") as an attachment to the
Registration Statement (as defined below), for the registration of the preferred
stock of the Bank for which the Preferred Stock will be exchanged automatically
under certain conditions (the "Bank Preferred Shares") pursuant to 12 C.F.R.
ss.563g of the rules and regulations of the OTS (all of the rules and
regulations set forth in Chapter V of Title 12 of the Code of Federal
Regulations, including without limitation, 12 C.F.R. ss.563g, and the rules and
regulations of the Commission made applicable to the offering circular by the
rules and regulations of the OTS, are hereinafter collectively referred to as
the "OTS Rules and Regulations"). The Bank will promptly prepare and file an
offering circular, which includes the information (the "Pricing Information")
excluded from the preliminary offering circular in reliance upon 12 C.F.R.
ss.563g.2(c)(2) of the OTS Rules and Regulations and 17 C.F.R. ss.230-430A, in
accordance with the provisions of Rule 424(b). Each
<PAGE>
offering circular used before the time such offering circular is declared
effective by the OTS and any offering circular that omits the Pricing
Information that is used after such effectiveness and prior to the date hereof
is herein called a "Preliminary Offering Circular." Such filing under the cover
of Form OC, and the offering circular constituting a part thereof, as amended at
the time the offering circular becomes effective under the OTS Rules and
Regulations (and including the Pricing Information), including all documents
incorporated by reference therein, are hereinafter referred to as the "Form OC"
and the "Offering Circular," respectively, except that if any amended or
supplemented offering circular shall be provided to the Underwriters by the Bank
for use in connection with the offering of the Bank Preferred Shares which
differs from the Offering Circular at the time it becomes effective, the term
"Offering Circular" shall refer to such newly amended or supplemented offering
circular from and after the time it is first provided to the Underwriters for
such use.
1. (a) The Company represents and warrants to, and agrees with,
each of the Underwriters that:
(i) A registration statement on Form S-11 (File No. 333-_____)
as amended by any pre-effective amendment thereto in respect of the
Shares (the "Initial Registration Statement") has been filed with the
Commission; the Initial Registration Statement and any post-effective
amendment thereto, each in the form heretofore delivered to you, and,
excluding exhibits thereto, as the same may have been amended from time
to time, to each of the other Underwriters, have been declared
effective by the Commission in such form; other than a registration
statement, if any, increasing the size of the offering (a "Rule 462(b)
Registration Statement"), filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended (the "Act"), which became effective
upon filing, no other document with respect to the Initial Registration
Statement has heretofore been filed with the Commission; no stop order
suspending the effectiveness of the Initial Registration Statement, any
post-effective amendment thereto or the Rule 462(b) Registration
Statement, if any, has been issued and no proceeding for that purpose
has been initiated or threatened by the Commission (any preliminary
prospectus included in the Initial Registration Statement or filed with
the Commission pursuant to Rule 424(a) of the rules and regulations of
the Commission under the Act, as amended, is hereinafter called a
"Preliminary Prospectus"); the various parts of the Initial
Registration Statement and the Rule 462(b) Registration Statement, if
any, including all exhibits thereto and including the information
contained in the form of final prospectus filed with the Commission
pursuant to Rule 424(b) under the Act in accordance with Section 5(a)
hereof and deemed by virtue of Rule 430A under the Act to be part of
the Initial Registration Statement at the time it was declared
effective or such part of the Rule 462(b) Registration Statement, if
any, that became or hereafter becomes effective, each as amended at the
time such part of the registration statement became effective, is
hereinafter collectively called the "Registration Statement;" and such
final prospectus, in the form first filed pursuant to Rule 424(b) under
the Act, is hereinafter called the "Prospectus;"
2
<PAGE>
(ii) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each
Preliminary Prospectus, at the time of filing thereof, conformed in all
material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder, and did not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon
and in conformity with information furnished in writing to the Company
by an Underwriter through Roney & Co., L.L.C. or McDonald & Company
Securities, Inc. (the "Representatives") expressly for use therein; and
(iii) The Registration Statement conforms, and the Prospectus
and any further amendments or supplements to the Registration Statement
or the Prospectus will conform, in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder and do not and will not, as of the applicable effective date
of the Registration Statement and any amendment thereto, and as of the
applicable filing date of the Prospectus and any amendment or
supplement thereto, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter
through the Representatives expressly for use therein;
(b) The Company represents and warrants to, and agrees with, each
of the Underwriters that:
(i) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not
been any material adverse change in or affecting the general affairs,
business, management, financial position, stockholders' equity, results
of operations or prospects of the Company, otherwise than as set forth
or contemplated in the Prospectus;
(ii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Michigan, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus, and
has been duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties, or conducts any
business so as to require such qualification and is subject to no
material liability or disability by reason of the failure to be so
qualified in any such jurisdiction;
3
<PAGE>
(iii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital stock
of the Company have been duly and validly authorized and issued and are
fully paid and nonassessable;
(iv) The Shares have been duly and validly authorized and,
when issued and delivered against payment therefor as provided herein,
will be duly and validly issued and fully paid and nonassessable and
will conform in all material respects to the description of the
Preferred Stock contained in the Prospectus;
(v) The issue and sale of the Shares by the Company and the
compliance by the Company with all of the provisions of this Agreement
and the consummation of the transactions herein contemplated will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to which
the Company is a party or by which the Company is bound or to which any
of the property or assets of the Company is subject, nor will such
action result in any violation of the provisions of the Articles of
Incorporation (or other charter document) or By-laws of the Company or
any statute, ordinance, rule or regulation or any order, decree, rule
or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its properties; and no consent,
approval, authorization, order, registration or qualification of or
with any such court or governmental agency or body is required for the
issue and sale of the Shares or the consummation by the Company of the
transactions contemplated by this Agreement and the agreements listed
in Annex II hereto, except the registration under the Act and such
consents, approvals, authorizations, registrations or qualifications as
may be required under state securities or blue sky laws in connection
with the purchase and distribution of the Shares by the Underwriters;
(vi) The Company is not in violation of its Articles of
Incorporation or By-laws or in default in the performance or observance
of any material obligation, agreement, covenant or condition contained
in any indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which it is a party or by which it or
any of its properties may be bound;
(vii) The statements set forth in the Prospectus under the
captions "Description of Series A Preferred Shares," insofar as they
purport to constitute a summary of the terms of the Preferred Stock,
"Description of Capital Stock," insofar as they purport to constitute a
summary of the terms of the capital stock of the Company, and under the
captions "Federal Income Tax Considerations," "ERISA Considerations,"
"Business and Strategy -- Acquisition of Initial Portfolio," "Business
and Strategy -- Servicing," "Management," and "Underwriting," insofar
as they purport to describe the provisions of the laws and documents
referred to therein, are accurate, complete in all material respects
and fair;
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<PAGE>
(viii) Other than as set forth in the Prospectus, there are no
legal or governmental proceedings pending to which the Company is a
party or of which any property of the Company is the subject which, if
determined adversely to the Company would individually or in the
aggregate have a material adverse effect on the financial position,
stockholders' equity or results of operations of the Company; and, to
the best of the Company's knowledge, no such proceedings are threatened
or contemplated by any governmental authorities or threatened by
others;
(ix) Each of the agreements listed in Annex II hereto has
been duly authorized, executed and delivered by the Company and
constitutes the valid and legally binding obligation of the Company and
is enforceable in accordance with its terms, subject to bankruptcy,
insolvency, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights;
(x) The Company is not and, after giving effect to the
offering and sale of the Shares, will not be an "investment company" or
an entity "controlled" by an "investment company," as such terms are
defined in the Investment Company Act of 1940, as Amended (the
"Investment Company Act");
(xi) The Company does not do business with the government of
Cuba or with any person or affiliate located in Cuba within the meaning
of Section 517.075, Florida Statutes;
(xii) Grant Thornton L.L.P., who have certified certain
financial statements of the Company, are independent public accountants
as required by the Act and the rules and regulations of the Commission
thereunder;
(xiii) This Agreement has been duly authorized, executed and
delivered by the Company;
(xiv) There are no contracts or documents which are
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits thereto which have not been so
described and filed as required;
(xv) No filing with, or authorization, approval,
consent, license, order, registration, notification, qualification or
decree of, any court or governmental authority or agency is necessary
or required for the performance by the Company of its obligations
hereunder, in connection with the offering, issuance or sale of the
Preferred Stock hereunder or the consummation of the transactions
contemplated by this Agreement, except such as have been already
obtained or as may be required under the Act or the rules and
regulations thereunder or state securities laws or by the OTS;
(xvi) The Company possesses such permits, licenses,
approvals, consents, and other authorizations (collectively
"Governmental Licenses") issued by the appropriate federal,
5
<PAGE>
state, local or foreign regulatory agencies or bodies necessary to
conduct the business now operated by it; the Company is in compliance
with the terms and conditions of all such Governmental Licenses, except
where the failure so to comply would not have a material adverse effect
on the financial position, stockholders' equity or results of
operations of the Company; all of the Governmental Licenses are valid
and in full force and effect, except where the invalidity of such
Governmental Licenses or the failure of such Governmental Licenses to
be in full force and effect would not have a material adverse effect on
the financial position, stockholders' equity or results of operations
of the Company; the Company has not received any notice of proceedings
relating to the revocation or modification of any such Governmental
Licenses which singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a material
adverse effect on the financial position, stockholders' equity or
results of operations of the Company;
(xvii) There are no persons with registration rights
or other similar rights to have any securities registered pursuant to
the Registration Statement or otherwise registered by the Company under
the Act; and
(xviii) The Company is organized and carries on its
business so as to qualify as a "real estate investment trust" (a
"REIT") under Sections 856 through 860 of the Internal Revenue Code of
1986, as amended (the "Code"), and no transaction or other event has
occurred which would cause the Company not to enable it to qualify as a
REIT for its current taxable year or for future taxable years.
(c) The Bank represents and warrants to, and agrees with, each of the
Underwriters that:
(i) The Bank has been duly organized and is validly existing as a
federally chartered savings bank under the laws of the United States of
America, with power and authority (corporate and other) to own its
properties and conducts its business as now being conducted;
(ii) Since December 31, 1996, there has not been any material
adverse change in or affecting the general affairs, management,
financial position, stockholders' equity, results of operations of
Flagstar Bancorp, Inc., the parent of the Bank (the "Holding Company"),
or the Bank;
(iii) The issue and sale of the Shares by the Company and the
compliance by the Company and the Bank with all of the provisions of
this Agreement and the consummation of the transactions herein
contemplated will not conflict with or result in a breach or violation
of any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Holding Company or any of its
subsidiaries (including the Bank) is a party or by which the Holding
Company or any of its subsidiaries (including the Bank) is bound or to
which any of the property or assets of the Holding Company or any of
its subsidiaries (including the
6
<PAGE>
Bank) is subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation (or other charter
document) or By-laws of the Bank or the Holding Company or any statute
or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Holding Company or any of its
subsidiaries (including the Bank) or any of their properties, except
where such would not result in a material adverse effect on the
financial position, stockholders' equity or results of operations of
the Company; and, except as have been obtained, no consent, approval,
authorization, order, registration or qualification of or with any such
court or governmental agency or body is required to be obtained by the
Holding Company or the Bank for the issue and sale of the Shares by the
Company or the consummation by the Bank of the transactions
contemplated by this Agreement and the agreements listed in Annex II
hereto;
(iv) Each of the agreements listed in Annex II hereto has been
duly authorized, executed and delivered by the Bank and constitutes the
valid and legally binding obligation of the Bank and is enforceable in
accordance with its terms, subject to bankruptcy, insolvency,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights;
(v) The representations and warranties of the Bank contained
in the Residential Mortgage Loan Purchase and Warranties Agreement
between the Company and the Bank, and the Residential Mortgage Loan
Servicing Agreement between the Company and the Bank, each dated
______________, 1998, are as of the date hereof and will be as of the
Time of Delivery true and correct;
(vi) This Agreement has been duly authorized, executed and
delivered by the Bank;
(vii) The Form OC and the Offering Circular, at the respective
times the Form OC and any post-effective amendments thereto became
effective, at the date hereof and at all times subsequent thereto up to
the Time of Delivery (as defined in Section 4 hereof), and if any
Optional Shares are purchased, at the Second Time of Delivery (as
defined in Section 4 hereof), complied and will comply in all material
respects with the requirements of the OTS Rules and Regulations; the
Form OC, at the respective times the Form OC and any post-effective
amendments thereto became effective, and at the date hereof, did not or
will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading; the Offering Circular, at the
respective times the Form OC and any post-effective amendments thereto
up to the Time of Delivery, and if any Optional Shares are purchased,
at the Second Time of Delivery, did not and will not include an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance
7
<PAGE>
upon, and in conformity with, information furnished in writing to the
Bank by an Underwriter through the Representatives expressly for use
therein;
(viii) The documents incorporated or deemed to be incorporated by
reference in the Form OC and the Offering Circular, at the time they
were or hereafter are filed with the OTS, complied and will comply in
all material respects with the requirements of the OTS Rules and
Regulations, and, when read together with the other information in the
Offering Circular, at the time the Form OC became effective, at the
time the Offering Circular was issued and at the Time of Delivery (and
if any Optional Shares are purchased, at the Second Time of Delivery),
did not and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading;
(ix) Grant Thornton L.L.P., who have certified certain financial
statements of the Bank, are independent public accountants as required
by the Act and the rules and regulations of the Commission and the OTS
thereunder;
(x) The financial statements and the related notes thereto included
in the Offering Circular present fairly the financial position of the
Bank and its subsidiaries as of the latest respective dates of such
financial statements, and the results of operations of the Bank and its
subsidiaries for the respective periods covered thereby. Such
statements and related notes have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved; the tables included in the Offering
Circular present fairly the information purported to be shown thereby
at the respective dates thereof and for the respective periods covered
thereby and conform in all material respects with the OTS Rules and
Regulations;
(xi) Except as disclosed in the Offering Circular, the Bank and its
subsidiaries are conducting their respective businesses in compliance
in all material respects with all laws, rules, regulations, decisions,
directives and orders (including, without limitation, all regulations
and orders of, or agreements with, the OTS and the FDIC) applicable to
them. There is no action, suit, investigation or proceeding before or
by any government, governmental instrumentality or court, domestic or
foreign, now pending or, to the knowledge of the Bank, threatened
against or affecting the Bank or any of its subsidiaries (A) that is
required to be disclosed in the Offering Circular and is not disclosed
therein, (B) that would likely result in any material adverse change in
the condition (financial or otherwise), earnings, business affairs of
the Bank and its subsidiaries, (C) that could materially and adversely
affect the properties, assets or leasehold interests thereof, or (D)
that would likely adversely affect the consummation of the transactions
contemplated by this Agreement; all pending legal or governmental
proceedings to which the Bank or any of its subsidiaries is a party or
of which any of their property is subject, which are not described in
the Offering Circular, including ordinary routine litigation incidental
to their respective businesses, would
8
<PAGE>
not have a material adverse effect on the condition (financial or
otherwise), earnings, business affairs of the Bank and its
subsidiaries;
(xii) There are no contracts or documents which are required to
be described in the Registration Statement, the Form OC, the Prospectus
or the Offering Circular or to be filed as exhibits thereto which have
not been so described and filed as required;
(xiii) No filing with, or authorization, approval, consent,
license, order, registration, notification, qualification or decree of,
any court or governmental authority or agency is necessary or required
for the performance by the Bank of its obligations hereunder, in
connection with the offering, issuance or sale of the Preferred Stock
hereunder or the consummation of the transactions contemplated by this
Agreement, except such as have been already obtained or as may be
required under applicable law or the OTS Rules and Regulations or state
securities laws;
(xiv) The Bank possesses such Governmental Licenses issued by the
appropriate federal, state, local or foreign regulatory agencies or
bodies necessary to conduct the business now operated by it; the Bank
is in compliance with the terms and conditions of all such Governmental
Licenses, except where the failure so to comply would not have a
material adverse effect on the financial position, stockholders' equity
or results of operations of the Bank; all of the Governmental Licenses
are valid and in full force and effect, except where the invalidity of
such Governmental Licenses or the failure of such Governmental Licenses
to be in full force and effect would not have a material adverse effect
on the financial position, stockholders' equity or results of
operations of the Bank; the Bank has not received any notice of
proceedings relating to the revocation or modification of any such
Governmental Licenses which singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would result in a
material adverse effect on the financial position, stockholders' equity
or results of operations of the Bank;
(xv) There are no persons with registration rights or other
similar rights to have any securities registered pursuant to the
Registration Statement or otherwise registered by the Bank under the
Act; and
(xvi) The Bank Preferred Shares have been duly authorized and, if
and when issued and delivered by the Bank pursuant to the terms and
conditions set forth in the Registration Statement, will be validly
issued and fully paid and nonassessable; the Bank Preferred Shares
conform to the statements relating thereto in the Offering Circular and
such description conforms to the instruments defining the same; no
holder of the Bank Preferred Shares will be subject to personal
liability by reason of being such a holder and the issuance of the bank
Preferred Shares is not subject to the preemptive or other similar
rights of any stockholder of the Bank.
9
<PAGE>
2. Subject to the terms and conditions herein set forth, (a) the
Company agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company, at
a purchase price per share of $25.00 the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I hereto and (b) in the event
and to the extent that the Underwriters shall exercise the election to purchase
Optional Shares as provided below, the Company agrees to issue and sell to each
of the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at the purchase price per share set forth
in clause (a) of this Section 2, that portion of the number of Optional Shares
as to which such election shall have been exercised (to be adjusted by you so as
to eliminate fractional shares) determined by multiplying such number of
Optional Shares by a fraction, the numerator of which is the maximum number of
Optional Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule I hereto and the denominator
of which is the maximum number of Optional Shares that all of the Underwriters
are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 300,000 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from the Representatives
to the Company, given within a period of 30 business days after the date of this
Agreement, setting forth the aggregate number of Optional Shares to be purchased
and the date on which such Optional Shares are to be delivered, as determined by
you but in no event earlier than the First Time of Delivery (as defined in
Section 4 hereof) or, unless the Representatives and the Company otherwise agree
in writing, earlier than two or later than ten business days after the date of
such notice.
As compensation to the Underwriters for their commitments hereunder,
the Company at each Time of Delivery (as defined in Section 4 hereof) will pay
to Roney & Co., L.L.C. ("Roney"), for the accounts of the several Underwriters,
an amount equal to $_____ per share for the Shares to be delivered by the
Company hereunder at such Time of Delivery.
3. Upon the authorization by you of the release of the Shares, the
several Underwriters propose to offer the Shares for sale upon the terms and
conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder will be
represented by one or more definitive certificates registered in the name of
Roney which will be deposited by or on behalf of the Company with The Depository
Trust Company ("DTC") or its designated custodian. The Company will deliver the
Shares to Roney for the account of each Underwriter, against payment by or on
behalf of such Underwriter of the purchase price therefor by wire transfer to
the account specified by the Company in Federal (same day) funds, by causing DTC
to credit the Shares to the account of Roney at DTC. The Company will cause the
certificates representing the Shares to be made available to Roney for checking
at least twenty-four hours prior to the Time of Delivery at the office of DTC or
its designated custodian (the "Designated Office"). The time and date of such
delivery and payment shall be, with respect to the Firm Shares, 9:30 A.M.,
Detroit time,
10
<PAGE>
on __________, 1998 or such other time and date as Roney and the Company may
agree upon in writing, and, with respect to the Optional Shares, 9:30 A.M.,
Detroit time, on the date specified by the Representatives in the written notice
given by the Representatives of the Underwriters' election to purchase such
Optional Shares, or such other time and date as the Representatives and the
Company may agree upon in writing. Such time and date for delivery of the Firm
Shares is herein called the "First Time of Delivery," such time and date for
delivery of the Optional Shares, if not the First Time of Delivery, is herein
called the "Second Time of Delivery," and each such time and date for delivery
is herein called a "Time of Delivery."
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 8 hereof, including the
cross-receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 8(j) hereof, will be delivered at the offices
of Honigman Miller Schwartz and Cohn, 2290 First National Building, Detroit, MI
48226-3583 (the "Closing Location"), the Shares will be delivered at the
Designated Office, and the wire transfers will be made to the specified
accounts, all at such Time of Delivery. A meeting will be held at the Closing
Location at 2:00 P.M., Detroit time, on the Detroit Business Day next preceding
such Time of Delivery, at which meeting the final drafts of the documents to be
delivered pursuant to the preceding sentence will be available for review by the
parties hereto. For the purposes of this Section 4, "Detroit Business Day' shall
mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on
which banking institutions in Detroit are generally authorized or obligated by
law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus which
shall be disapproved by you promptly after reasonable notice thereof; to advise
you, promptly after it receives notice thereof, of the time when any amendment
to the Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed and to
furnish you with copies thereof; to advise you, promptly after it receives
notice thereof, of the issuance by the Commission of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
prospectus, of the suspension of the qualification of the Shares for offering or
sale in any jurisdiction, of the initiation or threatening of any proceeding for
any of the foregoing purposes, or of any request by the Commission for the
amending or supplementing of the Registration Statement or Prospectus or for
additional information; and, in the event of the issuance of any stop order or
of any order preventing or suspending the use of any Preliminary Prospectus or
prospectus or suspending any such qualification, promptly to use every
reasonable effort to obtain the withdrawal of such order;
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<PAGE>
(b) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Shares for offering and
sale under the securities laws of such jurisdictions as the Representatives may
request and to comply with such laws so as to permit the continuance of sales
and dealings therein in such jurisdictions for as long as may be necessary to
complete the distribution of the Shares, provided that in connection therewith
the Company shall not be required to qualify as a foreign corporation or to file
a general consent to service of process in any jurisdiction;
(c) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as delivery of a
Prospectus is required in connection with the offering or sale of the Shares, to
furnish the Underwriters with copies of the Prospectus in Detroit in such
quantities as the Representatives may from time to time reasonably request, and,
if the delivery of a prospectus is required at any time prior to the expiration
of nine months after the time of issue of the Prospectus in connection with the
offering or sale of the Shares and if at such time any event shall have occurred
as a result of which the Prospectus as then amended or supplemented would
include an untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such Prospectus is delivered, not
misleading, or, if for any other reason it shall be necessary during such period
to amend or supplement the Prospectus in order to comply with the Act, to notify
the Representatives and upon the Representatives' request to prepare and furnish
without charge to each Underwriter and to any dealer in securities as many
copies as you may from time to time reasonably request of an amended Prospectus
or a supplement to the Prospectus which will correct such statement or omission
or effect such compliance, and in case any Underwriter is required to deliver a
prospectus in connection with sales of any of the Shares at any time nine months
or more after the time of issue of the Prospectus, upon the Representatives'
request but at the expense of such Underwriter, to prepare and deliver to such
Underwriter as many copies as you may reasonably request of an amended or
supplemented Prospectus complying with Section 10(a)(3) of the Act;
(d) To make generally available to the Company's security holders as
soon as practicable, but in any event not later than 18 months after the
effective date of the Registration Statement (as defined in Rule 158(c) under
the Act), an earnings statement of the Company complying with Section 11(a) of
the Act and the rules and regulations thereunder (including, at the option of
the Company, Rule 158);
(e) During the period beginning from the date hereof and continuing to
and including the date 180 days after the effective date of the Registration
Statement, not to offer, sell, contract to sell or otherwise dispose of, except
as provided hereunder, any securities of the Company or another subsidiary of
the Holding Company that are substantially similar to the Shares;
(f) To the extent necessary to comply with NASDAQ NMS rules and
regulations or the rules and regulations of any other exchange on which the
Shares are listed, to furnish to holders of the Shares as soon as practicable
after the end of each fiscal year an annual report (including a balance sheet
and statements of income, stockholders, equity and cash flows of the Company
12
<PAGE>
certified by independent public accountants) and, as soon as practicable after
the end of each of the first three quarters of each fiscal year (beginning with
the fiscal quarter ending after the effective date of the Registration
Statement), consolidated summary financial information of the Company for such
quarter in reasonable detail;
(g) During a period of three years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders of the Company,
and to deliver to you (i) as soon as they are available, copies of any reports
and financial statements furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the Company is
listed; and (ii) such additional information concerning the business and
financial condition of the Company as you may from time to time reasonably
request (such financial statements to be on a consolidated basis to the extent
the accounts of the Company and its subsidiaries (if any) are consolidated in
reports furnished to their stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement in the manner specified in the Prospectus under the
caption "Use of Proceeds;"
(i) If the Company elects to rely upon Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance with
Rule 462(b) by 5:00 P.M., Washington, D.C. time, on the date of this Agreement,
and the Company shall at the time of filing either pay to the Commission the
filing fee for the Rule 462(b) Registration Statement or give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act;
and
(j) Except to the extent that a Tax Event (as defined in the
Prospectus) shall have occurred, to make the elections and take the procedural
steps described in the Prospectus under the heading "Federal Income Tax
Considerations" in a timely fashion, to meet the requirements to qualify, for
its taxable year ending December 31, 1998, as a REIT under the Code as in effect
on the date hereof and to otherwise use every reasonable effort to do so.
6. The Bank agrees with each of the Underwriters:
(a) The Bank will notify the Underwriters immediately, and confirm the
notice in writing, (i) of the effectiveness of the Offering Circular and any
amendment thereto, (ii) of the receipt by the Bank or its counsel of any
comments from the OTS with respect to the offering of the Shares, (iii) of any
request to the Bank or its counsel by the OTS for any amendment or supplement to
the Offering Circular or for any additional information, and (iv) of the
issuance or initiation by the OTS or by any other state or federal banking or
securities regulatory authority of any stop order or cease-and-desist proceeding
to suspend the effectiveness of the Offering Circular or interfering with the
offering of the Shares, or of the suspension of the qualification of the Shares
for offering or sale in any jurisdiction, or the initiation or threat of any
other orders or proceedings for such purposes; the Bank will make every
reasonable effort to prevent the issuance or initiation of any such stop orders
or cease-and-desist proceedings and, if any such stop orders
13
<PAGE>
or cease-and-desist proceedings are issued or initiated, to obtain the lifting
or dismissal thereof at the earliest possible moment;
(b) The Bank will give the Representatives notice of its intention to
file or prepare any amendment to the Offering Circular (or to any Preliminary
Offering Circular, as the case may be) or any amendment, supplement or revision
to the Offering Circular, will furnish the Representatives with copies of any
such documents a reasonable amount of time prior to such proposed filing or use,
as the case may be, and will not file or use any such document to which the
Representatives or counsel for the Underwriters shall object;
(c) The Bank has furnished or will deliver to the Representatives and
counsel for the Underwriters, without charge, signed copies of the Form OC, as
originally filed and of each amendment thereto (including exhibits filed
therewith or incorporated by reference therein) and signed copies of all
consents and certificates of experts, and will also deliver to the
Representatives, without charge, a conformed copy of the Form OC, as originally
filed and each amendment thereto (without exhibits) for each of the
Underwriters;
(d) If any event shall occur as a result of which it is necessary, in
the opinion of counsel for the Underwriters, to amend or supplement the Offering
Circular in order to make the Offering Circular not misleading in the light of
the circumstances existing at the time it is delivered to a purchaser, the Bank
will forthwith amend or supplement the Offering Circular by preparing and
furnishing to the Underwriters a reasonable number of copies of an amendment or
amendments of, or a supplement or supplements to, the Offering Circular (in form
and substance reasonably satisfactory to such counsel) so that, as so amended or
supplemented, the Offering Circular will not contain an untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of circumstances existing at the time the
Offering Circular is delivered to a purchaser, not misleading, and the Bank will
furnish to each underwriter such number of copies of such amendment or
supplement as such Underwriter shall reasonably request. For the purposes of
this subsection, the Bank shall furnish such information with respect to itself
to the Representatives, counsel for the Underwriters and counsel for the Bank,
as may be necessary for counsel for the Underwriters and counsel for the Bank
with respect to the need to amend or supplement the Offering Circular and shall
furnish such further information as may from time to time be reasonably
requested; and
(e) The Bank, during the period when the Offering Circular is required
to be delivered under 12 C.F.R. ss.563g, will file all documents required to be
filed with the OTS within the time periods required by 12 C.F.R. ss.563g and the
OTS Rules and Regulations.
7. The Company and the Bank, jointly and severally, covenant and agree
with the several Underwriters to pay or cause to be paid the following: (i) the
fees, disbursements and expenses of their counsel and accountants in connection
with the registration of the Shares under the Act and all other expenses in
connection with the preparation, printing and filing of the Registration
Statement, any Preliminary Prospectus and the Prospectus and amendments and
supplements thereto
14
<PAGE>
and the mailing and delivering of copies thereof to the Underwriters and
dealers; (ii) the cost of printing or producing any Agreement among
Underwriters, this Agreement and blue sky Memoranda, closing documents
(including any compilations thereof) and any other documents in connection with
the offering, purchase, sale and delivery of the Shares; (iii) all expenses in
connection with the qualification of the Shares for offering and sale under
state securities laws as provided in Section 5(b) hereof, including the fees and
disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the blue sky surveys; (iv) all fees and
expenses in connection with listing the Shares on the NASDAQ NMS; (v) the cost
of preparing stock certificates; (vi) the cost and charges of any transfer agent
or registrar; (vii) the cost and charges of DTC; (vii) the out-of-pocket
expenses of the Underwriters, including without limitation, road show expenses
and the Underwriter's legal fees and expenses (provided that the Company's and
the Bank's obligation to pay such out-of-pocket expenses shall not exceed the
amount of $100,000) and (viii) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section.
8. The obligations of the Underwriters hereunder, as to the Shares to
be delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and the Bank herein are, at and as of such Time of Delivery, true
and correct, the condition that the Company and the Bank shall have performed
all of their respective obligations hereunder theretofore to be performed, and
the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such filing by
the rules and regulations under the Act and in accordance with Section 5(a)
hereof; no stop order suspending the effectiveness of the Registration Statement
or any part thereof shall have been issued and no proceeding for that purpose
shall have been initiated or threatened by the Commission; and all requests for
additional information on the part of the Commission shall have been complied
with to your reasonable satisfaction; if the Company has elected to rely upon
Rule 462(b), the Rule 462(b) Registration Statement shall have become effective
by 5:00 P.M., Washington, D.C. time, on the date of this Agreement;
(b) Honigman Miller Schwartz and Cohn, counsel for the Underwriters,
shall have furnished to you such opinion or opinions, dated such Time of
Delivery, with respect to the validity of the Shares as well as such other
related matters as you may reasonably request, and such counsel shall have
received such papers and information as they may reasonably request to enable
them to pass upon such matters;
(c) Kutak Rock, counsel for the Company, shall have furnished to you
their written opinion, dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Michigan, and the Bank has been
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duly organized and is validly existing under the laws of the United
States of America as a federally chartered savings bank, each with
power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital stock
of the Company (including the Shares being delivered at such Time of
Delivery) have been duly and validly authorized and issued and are
fully paid and non-assessable; and the Shares conform in all material
respects to the description of the Preferred Stock contained in the
Prospectus;
(iii) To the knowledge of such counsel, and other than as set
forth in the Prospectus or the Offering Circular, there are no legal or
governmental proceedings pending to which the Company or the Bank is a
party or of which any property of the Company or the Bank is the
subject which, if determined adversely to the Company or the Bank,
would individually or in the aggregate have a material adverse effect
on the current or future consolidated financial position, stockholders'
equity or results of operations of the Company or the Bank; and, to the
knowledge of such counsel, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(iv) This Agreement has been duly authorized, executed and
delivered by the Company and the Bank;
(v) The issue and sale of the Shares being delivered at such
Time of Delivery by the Company and the compliance by the Company with
all of the provisions of this Agreement and the consummation of the
transactions herein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute
a default under, any indenture, mortgage, deed of trust, loan agreement
or other agreement or instrument known to such counsel to which the
Company is a party or by which the Company is bound or to which any of
the property or assets of the Company is subject, nor will such action
result in any violation of the provisions of the Articles of
Incorporation (or other charter document) or By-laws of the Company or
any statute or any order, rule or regulation known to such counsel of
any court or governmental agency or body having jurisdiction over the
Company or any of its properties;
(vi) No consent, approval, authorization, order, registration
or qualification of or with any such court or governmental agency or
body is required for the issue and sale of the Shares or the
consummation by the Company or the Bank of the transactions
contemplated by this Agreement and the agreements listed in Annex II
hereto, except the registration under the Act of the Shares and such
consents, approvals, authorizations, registrations or qualifications as
may be required under the OTS Rules and Regulations, state securities
or blue sky laws in connection with the purchase and distribution of
the Shares by the Underwriters;
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<PAGE>
(vii) The Company is not, to the knowledge of such counsel,
(i) in violation of its Articles of Incorporation (or other charter
documents) or By-laws or (ii) in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust, loan agreement,
lease or other agreement or instrument to which it is a party or by
which it or any of its properties may be bound;
(viii) The statements set forth in the Prospectus under the
captions "Description of Series A Preferred Shares," insofar as they
purport to constitute a summary of the terms of the Preferred Stock and
the Automatic Exchange, "Description of Capital Stock," insofar as they
purport to constitute a summary of the terms of the capital stock of
the Company, and under the captions "Federal Income Tax
Considerations," "ERISA Considerations," "Business and Strategy --
Acquisition of Initial Portfolio," "Business and Strategy --
Servicing," "Business and Strategy -- Legal Proceedings," "Management,"
"Business and Strategy -- Legal Proceedings," and "Underwriting,"
insofar as they constitute or purport to describe matters of law or
legal conclusions, provisions of laws and documents referred to
therein, have been reviewed by such counsel, are accurate in all
material respects and present fairly the information required to be
shown therein;
(ix) Each of the agreements listed in Annex II hereto has
been duly authorized, executed and delivered by the Bank and the
Company and constitutes the valid and legally binding obligation of the
Bank and the Company enforceable in accordance with its terms, subject
to bankruptcy, insolvency, reorganization, moratorium and similar laws
of general applicability relating to or affecting creditors' rights;
(x) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in
the Investment Company Act;
(xi) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior to
such Time of Delivery (other than the financial statements, related
schedules and other financial data therein, as to which such counsel
need express no opinion) comply as to form in all material respects
with the requirements of the Act and the rules and regulations
thereunder; although such counsel does not assume any responsibility
for the accuracy, completeness or fairness of the statements contained
in the Registration Statement or the Prospectus, except as otherwise
indicated in its opinion, such counsel has no reason to believe that,
as of its effective date, the Registration Statement or any further
amendment thereto made by the Company prior to such Time of Delivery
(other than the financial statements, related schedules and other
financial data therein, as to which such counsel need express no
opinion) contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that, as of its date, the
Prospectus or any further amendment or supplement thereto made by the
Company prior to such Time of Delivery (other than the financial
statements, related schedules and other financial data therein, as to
which such counsel need express no opinion) contained an untrue
statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading or that, as of
such Time of Delivery, either the Registration Statement or the
Prospectus or any further amendment or supplement thereto made by the
Company prior to such Time of Delivery (other than the financial
statements, related schedules and other financial data therein, as to
which such counsel need express no opinion) contains an untrue
statement of
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<PAGE>
a material fact or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; and they do not know of any amendment to the
Registration Statement required to be filed or of any contracts or
other documents of a character required to be filed as an exhibit to
the Registration Statement or required to be described in the
Registration Statement or the Prospectus which are not filed or
described as required; and
(d) Albert Gladner, General Counsel of the Bank, shall have furnished
to you his written opinion, dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that the issue and sale of the Shares being
delivered at such Time of Delivery by the Company and the compliance by the
Company and the Bank with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument known to such counsel to which the
Bank is a party or by which the Bank is bound or to which any of the property or
assets of the Bank is subject, nor will such action result in any violation of
the provisions of the Articles of Incorporation (or other charter document) or
By-laws of the Bank or any statute or any order, rule or regulation known to
such counsel of any court or governmental agency or body having jurisdiction
over the Bank or any of its properties;
(e) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:30 A.M., Detroit time, on the effective date of any
post-effective amendment to the Registration Statement filed subsequent to the
date of this Agreement and also at each Time of Delivery, Grant Thornton L.L.P.
shall have furnished to you a letter or letters, dated the respective dates of
delivery thereof, in form and substance satisfactory to you, to the effect set
forth in Annex I hereto (the executed copy of the letter delivered prior to the
execution of this Agreement is attached as Annex I(a) hereto and a draft of the
form of letter to be delivered on the effective date of any post-effective
amendment to the Registration Statement and as of each Time of Delivery is
attached as Annex I(b) hereto);
(f) (i) Neither the Company nor the Bank shall have sustained since the
date of the latest audited financial statements included in the Prospectus or
the Offering Circular, as the case may be, any loss or interference with its
business from fire, explosion, flood or other calamity, whether or not covered
by insurance, or from any labor dispute or court or governmental action, order
or decree, otherwise than as set forth or contemplated in the Prospectus or the
Offering Circular, and (ii) since the respective dates as of which information
is given in the Prospectus or the Offering Circular there shall not have been
any change in the capital stock or long-term debt of the
18
<PAGE>
Company or the Bank or any change in or affecting the general affairs,
management, business, financial position, stockholders' equity, results of
operations of the Company or the Bank, otherwise than as set forth or
contemplated in the Prospectus or the Offering Circular, the effect of which, in
any such case described in clause (i) or (ii), is in the judgment of the
Representatives after discussion with the Company so material and adverse as to
make it impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at such Time of Delivery on the terms and
in the manner contemplated in the Prospectus;
(g) (x) On or after the date hereof (i) trading in securities generally
on the NASDAQ NMS shall not have been suspended or materially limited, (ii)
trading in the common stock of the Holding Company or the Shares on the NASDAQ
NMS shall not have been suspended, (iii) a general moratorium on commercial
banking activities in Detroit shall not have been declared by Federal or Detroit
authorities, (iv) there shall not have occurred any outbreak of hostilities or
escalation thereof or other calamity or crisis having an adverse effect on the
financial markets of the United States or (v) there shall not have occurred any
material adverse development in any of the real estate markets in which the
mortgaged properties are located and (y) the occurrence or consequences of any
one or more of such events shall have, in the reasonable judgment of the
Underwriters, made it impracticable to market the Shares on the terms and in the
manner contemplated by the Prospectus;
(h) The Shares to be sold at such Time of Delivery shall have been duly
listed, subject to notice of issuance, on the NASDAQ NMS;
(i) The Company shall have complied with the provisions of Section 5(c)
hereof with respect to the furnishing of Prospectuses;
(j) The Company shall furnish or cause to be furnished to you at such
Time of Delivery certificates of officers of the Company and the Bank
satisfactory to you as to the accuracy of the representations and warranties of
the Company and the Bank herein at and as of such Time of Delivery, as to the
performance by the Company and the Bank of all of its obligations hereunder to
be performed at or prior to such Time of Delivery, as to the matters set forth
in subsections (a) and (e) of this Section and as to such other matters as you
may reasonably request; and
(k) The Company shall be furnished or caused to be furnished to you at
such Time of Delivery an opinion of Kutak Rock, in form and substance
satisfactory to you, to the effect that commencing with the Company's taxable
year ending December 31, 1998 and assuming that the elections and other
procedural steps described in the Prospectus under the heading "Federal Income
Tax Considerations," are completed by the Company in a timely fashion and based
on the other assumptions stated therein, the Company will be organized, managed
and owned in conformity with the requirements for qualification as a REIT under
the Code and its proposed method of operation will enable it to meet the
requirements for qualification and taxation as a REIT under the Code;
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<PAGE>
(l) The Offering Circular has become effective and at the Time of
Delivery (and, if any of the Optional Shares are purchased, at the Second Time
of Delivery), no stop order or cease-and-desist proceeding suspending the
effectiveness of the Offering Circular or interfering with the offering of the
Shares or the Bank Preferred Shares shall have been issued and no proceedings
for the purposes of issuing a stop order or cease-and-desist proceedings shall
have been instituted or shall be pending, or to the knowledge of the Bank, shall
be contemplated by the OTS or by any other state or federal banking or
securities regulatory authority. Any request on the part of the OTS for
additional information or for the inclusion of additional information in the
Form OC shall have been complied with to the reasonable satisfaction of counsel
for the Underwriters.
9. (a) The Company and the Bank, jointly and severally, will indemnify
and hold harmless each Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, Preliminary Offering Circular, the Registration
Statement, the Form OC, the Prospectus or the Offering Circular, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse each Underwriter for any legal or other expenses reasonably incurred
by such Underwriter in connection with investigating or defending any such
action or claim as such expenses are incurred; provided, however, that neither
the Company nor the Bank shall be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, Preliminary Offering Circular, the Registration
Statement, the Form OC, the Prospectus or the Offering Circular, or any such
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives expressly for use therein; and provided, further, that with
respect to any untrue statement or omission or alleged untrue statement or
omission made in any Preliminary Prospectus or Preliminary Offering Circular,
the indemnity agreement contained in this subsection (a) shall not inure to the
benefit of any Underwriter to the extent that any such loss, claim, damage or
liability of such Underwriter results from the fact that a copy of the
Prospectus or the Offering Circular was not sent or given to any person at or
prior to the written confirmation of the sale of such securities to such person;
and will reimburse the Company and the Bank for any legal or other expenses
reasonably incurred by the Company and the Bank in connection with investigating
or defending any such action or claim as such expenses are incurred.
(b) Each Underwriter will indemnify and hold harmless the Company and
the Bank against any losses, claims, damages or liabilities to which the Company
and the Bank may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, Preliminary Offering
Circular, the Registration Statement, the Form OC, the Prospectus or the
Offering Circular, or any amendment
20
<PAGE>
or supplement thereto, or arise out of or are based on the omission or alleged
omission to state therein a material fact required be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement, alleged untrue
statement or omission or alleged omission was made in any Preliminary
Prospectus, Preliminary Offering Circular, the Registration Statement, the Form
OC, the Prospectus or the Offering Circular, or any such amendment or supplement
thereto in reliance upon and in conformity with written information furnished to
the Company by such Underwriter through the Representatives expressly for use
therein.
(c) Promptly after receipt by an indemnified party under subsections
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against an indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it has notified the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party (who shall not, except with the consent
of the indemnified party, be counsel to the indemnifying party), and, after
notice from the indemnifying party to such indemnified party of its election to
assume the defense thereof, the indemnifying party shall not be liable to such
indemnified party under such subsection for any legal expenses of other counsel
or any other expenses, in each case subsequently incurred by such indemnified
party, in connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the written consent of the
indemnified party, effect the settlement or compromise of, or consent to the
entry of any judgment with respect to, any pending or threatened action or claim
in respect of which indemnification or contribution may be sought hereunder
unless such settlement, compromise or judgment (i) includes an unconditional
release of the indemnified party from all liability arising out of such action
or claim and (ii) does not include a statement as to, or an admission of, fault,
culpability or a failure to act, by or on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 9 is
unavailable or insufficient to hold harmless an indemnified party under
subsections (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) such proportion as is appropriate to reflect the
relative benefits received by the Company and the Bank on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided for by the immediately preceding sentence is not permitted
by applicable law or if the indemnified party failed to give the notice required
under subsection (c) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Bank on the one hand and the Underwriters on the
other in connection with
21
<PAGE>
the statements or omissions which resulted in such losses, claims, damages or
abilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Bank on the one hand and the Underwriters on the other shall be deemed to be in
the same proportion the total net proceeds from the offering (before deducting
expenses) received by the Company and the Bank bear to the total underwriting
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company and the Bank on the one hand or
the Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company, the Bank and the Underwriters agree that it would not be
just and equitable if contributions pursuant to this section (d) were determined
by pro rata allocation (even if the Underwriters are treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(e) The obligations of the Company and the Bank under this Section 9
shall be in addition to any liability which the Company and the Bank may
otherwise have and shall extend, upon the same terms and conditions, to each
person, if any, who controls any Underwriter within the meaning of the Act; and
the obligations of the Underwriters under this Section 9 shall be in addition to
any liability which the respective Underwriters may otherwise have and shall
extend, upon the same terms and conditions, to each officer and director of the
Company or the Bank and to each person, if any, who controls the Company or the
Bank within the meaning of the Act.
10. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within 36 hours after
such default by any Underwriter you do not arrange for the purchase of such
Shares, then the Company shall be entitled to a further period of thirty-six
hours within which to procure another party or other parties satisfactory to you
to purchase such Shares on such terms. In the event that, within the respective
prescribed periods, you notify the Company that you have so arranged for
22
<PAGE>
the purchase of such Shares, or the Company notifies you that it has so arranged
for the purchase of such Shares, you or the Company shall have the right to
postpone such Time of Delivery for a period of not more than seven days, in
order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term "Underwriter" as used in this Agreement shall include
any person substituted under this Section with like effect as if such person had
originally been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-tenth of the aggregate number of all the
Shares to be purchased at such Time of Delivery, then the Company shall have the
right to require each non-defaulting Underwriter to purchase the number of
shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made, but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased exceeds one-tenth of the aggregate number of all the Shares
to be purchased at such Time of Delivery, or if the Company shall not exercise
the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to the Second Time of Delivery, the
obligations of the Underwriters to purchase and of the Company to sell the
Optional Shares) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter, the Company or the Bank, except for the expenses to
be borne by the Company, the Bank, the Holding Company and the Underwriters as
provided in Section 7 hereof and the indemnity and contribution agreements in
Section 9 hereof; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
11. The respective indemnities, agreements, representations, warranties
and other statements of the Company or the Bank and the several Underwriters, as
set forth in this Agreement or made by or on behalf of them, respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless of
any investigation (or any statement as to the results thereof) made by or on
behalf of any Underwriter or any controlling person of any Underwriter, or the
Company or the Bank, or any officer or director or controlling person of the
Company or the Bank, and shall survive delivery of and payment for the Shares.
12. If this Agreement shall be terminated pursuant to Section 10
hereof, neither the Company nor the Bank shall then be under any liability to
any Underwriter except as provided in
23
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Sections 7 and 9 hereof; but, if for any other reason, any Shares are not
delivered by or on behalf of the Company as provided herein, the Company will
reimburse the Underwriters through you for all out-of-pocket expenses approved
in writing by you, including fees and disbursements of counsel, reasonably
incurred by the Underwriters in making preparations for the purchase, sale and
delivery of the Shares not so delivered, but the Company or the Bank shall then
be under no further liability to any Underwriter except as provided in Sections
7 and 9 hereof.
13. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to Roney at One Griswold, Detroit, Michigan 48226,
Attention Syndicate Department; and if to the Company or the Bank shall be
delivered or sent by mail to the address of the Company or the Bank,
respectively set forth in the Registration Statement, Attention: Albert Gladner;
provided, however, that any notice to an Underwriter pursuant to Section 9(c)
hereof shall be delivered or sent by mail, telex or facsimile transmission to
such Underwriter at its address set forth in its Underwriters' Questionnaire, or
telex constituting such Questionnaire, which address will be supplied to the
Company or the Bank by you upon request. Any such statements, requests, notices
or agreements shall take effect upon receipt thereof.
14. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company, the Bank and, to the extent provided
in Sections 9 and 11 hereof, the officers and directors of the Company, the Bank
and each person who controls the Company, the Bank or any Underwriter, and their
respective heirs, executors, administrators, successors and assigns, and no
other person shall acquire or have any right under or by virtue of this
Agreement. No purchaser of any of the Shares from any Underwriter shall be
deemed a successor or assign by reason merely of such purchase.
15. As used herein, the term "business day" shall mean any day when the
Commission's office in Washington, D.C. is open for business.
16. This Agreement shall be governed by and construed in accordance
with the laws of the State of Michigan.
17. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us one counterpart for the Company and the Bank plus one for each
counsel thereof, and upon the acceptance hereof by you, on behalf of each of the
Underwriters, this letter and such acceptance
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<PAGE>
hereof shall constitute a binding agreement between each of the Underwriters,
the Company and the Bank. It is understood that your acceptance of this letter
on behalf of each of the Underwriters is pursuant to the authority set forth in
a form of Agreement among Underwriters, the form of which shall be submitted to
the Company for examination upon request, but without warranty on your part as
to the authority of the signers thereof.
Very truly yours,
Flagstar Capital Corporation
By:__________________________________
Name:
Title:
Flagstar Bank, FSB
By:__________________________________
Name:
Title:
Accepted as of the date hereof:
Roney & Co., L.L.C.
By:_________________________________
Name:
Title:
McDonald & Company Securities, Inc.
By:_________________________________
Name:
Title:
25
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Optional
Shares to be
Total Number of Purchased if
Shares to be Maximum Option
Underwriter Purchased Exercised
----------- --------- ---------
<S> <C> <C>
Roney & Co, L.L.C....................
McDonald & Company Securities, Inc...
--------- --------
Total 2,000,000 300,000
Total
</TABLE>
<PAGE>
ANNEX I
ANNEX 1 (a)
ANNEX 1 (b)
<PAGE>
ANNEX II
Residential Mortgage Loan Purchase and Warranties Agreement
Residential Mortgage Loan Servicing Agreement
Advisory Agreement
<PAGE>
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
FLAGSTAR CAPITAL CORPORATION
Flagstar Capital Corporation, a corporation organized and existing under
the laws of the State of Michigan (the "Corporation"), pursuant to the
provisions of Act 284 of Public Acts of 1972, executes the following Articles:
1. The name of the Corporation is Flagstar Capital Corporation. The
Corporation was originally incorporated under the name "FSB Emergency
Corporation #38," and the date of filing of its original Articles of
Incorporation was June 28, 1995.
2. These Amended and Restated Articles of Incorporation were duly adopted
by the Incorporator of the Corporation in accordance with Section 642 of the
Michigan Business Corporation Act.
3. These Amended and Restated Articles of Incorporation restate,
integrate and further amend the provisions of the Articles of Incorporation of
the Corporation as heretofore amended or supplemented.
4. The Articles of Incorporation of the Corporation are hereby amended
and restated to read as follows:
ARTICLE I
NAME
The name of the corporation is Flagstar Capital Corporation (herein the
"Corporation").
ARTICLE II
PURPOSE
The purpose for which the Corporation is formed is to engage in any
activity within the purposes for which corporations may be formed under the
Michigan Business Corporation Act.
ARTICLE III
CAPITAL STOCK
The aggregate number of shares of all classes of capital stock which the
Corporation has authority to issue is 5,000,000, of which 1,000,000 are to be
shares of common stock, $1.00 par
<PAGE>
value per share, and of which 4,000,000 are to be shares of serial preferred
stock, $25.00 par value per share. The shares may be issued by the Corporation
from time to time as approved by the board of directors of the Corporation
without the approval of the shareholders except as otherwise provided in this
Article III or the rules of a national securities exchange if applicable. The
consideration for the issuance of the shares shall be paid to or received by the
Corporation in full before their issuance and shall not be less than the par
value per share. The consideration for the issuance of the shares shall be cash,
services rendered, personal property (tangible or intangible), real property,
leases of real property or any combination of the foregoing. In the absence of
actual fraud in the transaction, the judgment of the board of directors as to
the value of such consideration shall be conclusive. Upon payment of such
consideration such shares shall be deemed to be fully paid and nonassessable. In
the case of a stock dividend, the part of the surplus of the Corporation which
is transferred to stated capital upon the issuance of shares as a stock dividend
shall be deemed to be the consideration for their issuance.
A description of the different classes and series (if any) of the
Corporation's capital stock, and a statement of the relative powers,
designations, preferences and rights of the shares of each class and series (if
any) of capital stock, and the qualifications, limitations or restrictions
thereof, are as follows:
(A) Common Stock. Except as otherwise required by law or provided in
------------
these Articles of Incorporation or in the resolutions of the board of directors
creating any class of preferred stock, the holders of the common stock shall
exclusively possess all voting power. Each holder of shares of common stock
shall be entitled to one vote for each share held by such holder, except as
otherwise expressly set forth in these Articles of Incorporation.
Whenever there shall have been paid, or declared and set aside for payment,
to the holders of the outstanding shares of any class of stock having preference
over the common stock as to the payment of dividends, the full amount of
dividends and sinking fund or retirement fund or other retirement payments, if
any, to which such holders are respectively entitled in preference to the common
stock, then dividends may be paid on the common stock, and on any class or
series of stock entitled to participate therewith as to dividends, out of any
assets legally available for the payment of dividends, but only when and as
declared by the board of directors.
In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class having preference
over the common stock in any such event, the full preferential amounts to which
they are respectively entitled, the holders of the common stock and of any class
or series of stock entitled to participate therewith, in whole or in part, as to
distribution of assets shall be entitled, after payment or provision for payment
of all debts and liabilities of the Corporation, to receive the remaining assets
of the Corporation available for distribution, in cash or in kind.
Each share of common stock shall have the same relative powers, preferences
and rights as, and shall be identical in all respects with, all the other shares
of common stock of the Corporation, except as otherwise expressly set forth in
these Articles of Incorporation.
2
<PAGE>
(B) Serial Preferred Stock. Except as otherwise provided in these
----------------------
Articles of Incorporation, the board of directors of the Corporation is
authorized, by resolution or resolutions from time to time adopted, to provide
for the issuance of shares of preferred stock in one or more series and to fix
and state the powers, designations preferences and relative, participating,
optional or other special rights of the shares of each such series, and the
qualifications, limitations or restrictions thereof, including, but not limited
to, determination of any of the following:
(1) the distinctive serial designation for each series and the number of
shares constituting such series;
(2) the dividend rates or the amount of dividends to be paid on the shares
of such series, if any, whether dividends shall be cumulative and, if
so, from which date or dates, the payment date or dates for dividends,
and the participating or other special rights, if any, with respect to
dividends;
(3) the voting rights, full or limited, if any, of the shares of such
series;
(4) whether the shares of such series shall be redeemable and, if so, the
price or prices at which, and the terms and conditions upon which such
shares may be redeemed;
(5) the amount or amounts payable upon the shares of such series in the
event of voluntary or involuntary liquidation, dissolution or winding
up of the Corporation;
(6) whether the shares of such series shall be entitled to the benefits of
a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and, if so entitled, the amount of such
fund and the manner of its application, including the price or prices
at which such shares may be redeemed or purchased through the
application of such fund;
(7) whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the
Corporation and, if so convertible or exchangeable, the conversion
price or prices, or the rate or rates of exchange, and the adjustments
thereof, if any, at which such conversion or exchange may be made, and
any other terms and conditions of such conversion or exchange;
(8) the subscription or purchase price and form of consideration for which
the shares of such series shall be issued;
(9) whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial
preferred stock and whether such
3
<PAGE>
shares may be reissued as shares of the same or any other series of
serial preferred stock; and
(10) any other designations, preferences, limitations or rights that are
now or hereafter permitted by applicable law and are not inconsistent
with the provisions of these Articles of Incorporation.
Each share of each series of serial preferred stock shall have the same
relative powers, preferences and rights as, and shall be identical in all
respects with, all the other shares of the Corporation of the same series,
except as otherwise expressly set forth in these Articles of Incorporation.
ARTICLE IV
REGISTERED OFFICE
The address of the registered office of the Corporation is 2600 Telegraph
Road, Bloomfield Hills, Michigan 48302. The name of the Corporation's
registered agent at such address is Albert J. Gladner.
ARTICLE V
PREEMPTIVE RIGHTS
No shareholder of the Corporation shall have, as a matter of right, the
preemptive right to purchase or subscribe for shares of any class, now or
hereafter authorized, or to purchase or subscribe for other securities or
obligations convertible into or exchangeable for such shares or which by
warrants or otherwise entitle the holders thereof to subscribe for or purchase
any such shares.
ARTICLE VI
REPURCHASE OF SHARES
The Corporation may from time to time, pursuant to authorization by the
board of directors of the Corporation and without action by the shareholders,
purchase or otherwise acquire shares of any class, bonds, debentures, notes,
scrip, warrants, obligations, evidences of indebtedness, or other securities of
the Corporation in such manner, upon such terms, and in such amounts as the
board of directors shall determine; subject, however, to such limitations or
restrictions, if any, as are contained in the express terms of any class of
shares of the Corporation outstanding at the time of the purchase or acquisition
in question or as are imposed by law.
4
<PAGE>
ARTICLE VII
VOTING FOR DIRECTORS
There shall be no cumulative voting by shareholders of any class or series
in the election of directors of the Corporation
ARTICLE VIII
NOTICE FOR NOMINATIONS AND PROPOSALS
(A) Nominations for the election of directors and proposals for any new
business to be taken up at any annual or special meeting of shareholders may be
made by the board of directors of the Corporation or by any shareholder of the
Corporation entitled to vote generally in the election of directors. In order
for a shareholder of the Corporation to make any such nominations or proposals,
he shall give notice thereof in writing, delivered or mailed by first class
United States mail, postage prepaid, to the secretary of the Corporation not
fewer than 30 days nor more than 60 days prior to the date of any such meeting;
provided, however, that if notice or public disclosure of the meeting is
effected fewer than 40 days before the date of the meeting, such written notice
shall be delivered or mailed, as prescribed, to the secretary of the Corporation
not later than the close of business on the 10th day following the day on which
notice of the meeting was mailed to shareholders. Each such notice given by a
shareholder with respect to nominations for the election of directors shall set
forth (1) the name, age, business address and, if known, residence address of
each nominee proposed in such notice, (2) the principal occupation or employment
of each such nominee, (3) the number of shares of stock of the Corporation which
are beneficially owned by each such nominee, (4) such other information as would
be required to be included in a proxy statement soliciting proxies for the
election of the proposed nominee pursuant to Regulation 14A of the Securities
Exchange Act of 1934, as amended, including, without limitation, such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director, if elected, and (5) as to the shareholder giving such
notice, (a) his name and address as they appear on the Corporation's books and
(b) the class and number of shares of the Corporation which are beneficially
owned by such shareholder. In addition, the shareholder making such nomination
shall promptly provide any other information reasonably requested by the
Corporation.
(B) Each such notice given by a shareholder to the Secretary with respect
to business proposals to be brought before a meeting shall set forth in writing
as to each matter (1) a brief description of the business desired to be brought
before the meeting and the reasons for conducting such business at the meeting,
(2) the name and address, as they appear on the Corporation's books, of the
shareholder proposing such business, (3) the class and number of shares of the
Corporation which are beneficially owned by the shareholder and (4) any material
interest of the shareholder in such business. Notwithstanding anything in these
Articles of Incorporation to the contrary, no new business shall be conducted at
the meeting except in accordance with the procedures set forth in this Article
VIII.
5
<PAGE>
(C) The chairman of the annual or special meeting of shareholders may, if
the facts warrant, determine and declare to such meeting that a nomination or
proposal was not made in accordance with the foregoing procedure, and, if he
should so determine, he shall so declare to the meeting and the defective
nomination or proposal shall be disregarded and laid over for action at the next
succeeding special or annual meeting of the shareholders taking place 30 days or
more thereafter. This provision shall not require the holding of any adjourned
or special meeting of shareholders for the purpose of considering such defective
nomination or proposal.
ARTICLE IX
ACTION BY WRITTEN CONSENT OF SHAREHOLDERS
Any action required or permitted by the Act to be taken at an annual or
special meeting of shareholders may be taken without a meeting, without prior
notice, and without a vote, if consents in writing, setting forth the action so
taken, are signed by the holders of outstanding shares having not less than the
minimum number of votes that would be necessary to authorize or take the action
at a meeting at which all shares entitled to vote on the action were present and
voting. The written consents shall bear the date of signature of each
shareholder who signs the consent. No written consents shall be effective to
take the corporate action referred to unless, within 60 days after the record
date for determining shareholders entitled to express consent to or to dissent
from a proposal without a meeting, written consents dated not more than 10 days
before the record date and signed by a sufficient number of shareholders to take
the action are delivered to the Corporation. Delivery shall be to the
Corporation's registered office, its principal place of business, or an officer
or agent of the Corporation having custody of the minutes of the proceedings of
its shareholders. Delivery made to a Corporation's registered office shall be
by hand or by certified or registered mail, return receipt requested.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to shareholders who would
have been entitled to notice of the shareholder meeting if the action had been
taken at a meeting and who have not consented in writing.
ARTICLE X
DIRECTORS
(A) Number, Vacancies. The number of directors of the Corporation shall
-----------------
be such number, not less than seven nor more than fifteen (exclusive of
directors, if any, to be elected by holders of preferred stock of the
Corporation, voting separately as a class), as shall be set forth from time to
time in the bylaws. Vacancies in the board of directors of the Corporation,
however caused, and newly created directorships shall be filled by the
affirmative vote of a majority of the directors then in office, whether or not a
quorum, and any director so chosen shall hold office for a term expiring at the
annual meeting of
6
<PAGE>
shareholders at which the term of the class to which the director has been
chosen expires and when the director's successor is elected.
(B) Classified Board. The board of directors of the Corporation shall be
----------------
divided into three classes, which shall be designated Class I, Class II and
Class III. Such classes shall be as nearly equal in number as the then total
number of directors constituting the entire board of directors shall permit,
with the terms of office of all members of one class expiring each year. Subject
to the provisions of this Article X, should the number of directors not be
equally divisible by three, the excess director or directors shall be assigned
to Classes I or II as follows: (1) if there shall be an excess of one
directorship over a number equally divisible by three, such extra directorship
shall be classified in Class III, and (2) if there be an excess of two
directorships over a number equally divisible by three, one shall be classified
in Class III and the other in Class II. At the first annual meeting of
shareholders, directors assigned to Class I shall be elected to hold office for
a term expiring at the next succeeding annual meeting, directors assigned to
Class II shall be elected to hold office for a term expiring at the second
succeeding annual meeting, and directors assigned to Class III shall be elected
to hold office for a term expiring at the third succeeding annual meeting. At
each annual meeting of shareholders following the initial meeting, the
successors to the class of directors whose terms expire at such meeting shall be
elected to hold office for a term expiring at the third succeeding annual
meeting. Notwithstanding the foregoing, the director whose term shall expire at
any annual meeting shall continue to serve until such time as his successor
shall have been duly elected and shall have qualified unless his position on the
board of directors shall have been abolished by action taken to reduce the size
of the board of directors prior to said meeting.
Should the number of directors of the Corporation be reduced, the
directorship(s) eliminated shall be allocated among classes as appropriate so
that the number of directors in each class is as specified in the immediately
preceding paragraph. The board of directors shall designate, by the name of the
incumbent(s), the positions to be abolished. Notwithstanding the foregoing, no
decrease in the number of directors shall have the effect of shortening the term
of any incumbent director. Should the number of directors of the Corporation be
increased, the additional directorships shall be allocated among classes as
appropriate so that the number of directors in each class is as specified in the
immediately preceding paragraph.
Whenever the holders of any one or more series of preferred stock of the
Corporation shall have the right, voting separately as a class, to elect one or
more directors of the Corporation, the board of directors shall consist of said
directors so elected in addition to the number of directors fixed as provided in
this Article X. Notwithstanding the foregoing, and except as otherwise may be
required by law or by the terms and provisions of the preferred stock of the
Corporation, whenever the holders of any one or more series of preferred stock
of the Corporation shall have the right, voting separately as a class, to elect
one or more directors of the Corporation, the terms of the director or directors
elected by such holders shall expire at the next succeeding annual meeting of
shareholders.
7
<PAGE>
ARTICLE XI
REMOVAL OF DIRECTORS
Notwithstanding any other provision of these Articles of Incorporation or
the bylaws of the Corporation, any director or the entire board of directors of
the Corporation may be removed at any time by the affirmative vote of the
holders of at least 80 percent of the outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors (considered
for this purpose as one class) cast at a meeting of the shareholders called for
that purpose. If less than the entire board of directors is to be removed, no
one of the directors may be removed if the votes cast against his or her removal
would be sufficient to elect him or her if then voted at any election of the
entire board of directors, or, if there are classes of directors, at an election
of the class of directors of which he or she is a part. Notwithstanding the
foregoing, whenever the holders of any one or more series of preferred stock of
the Corporation shall have the right, voting separately as a class, to elect one
or more directors of the Corporation, the preceding provisions of this Article
XI shall not apply with respect to the director or directors elected by such
holders of preferred stock.
ARTICLE XII
INDEMNIFICATION
The Corporation shall, to the fullest extent now or hereafter permitted by
the Michigan Business Corporation Act and other applicable law, indemnify any
director, officer, employee or agent of the Corporation who was or is a party to
or threatened to be made a party to any threatened, pending, or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal, including any action by or in the
right of the Corporation, by reason of the fact that such person is or was a
director, officer, employee or agent of the Corporation, or of a subsidiary of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, partner, trustee, employee or agent of another corporation
partnership, joint venture, trust or other enterprise, whether for profit or
not, against expenses (including attorneys' fees and disbursements), judgments,
penalties, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding. At the
discretion of the board of directors, any indemnification hereunder may include
payment by the Corporation of expenses incurred in defending an action, suit or
proceeding in advance of the final disposition of such action, suit or
proceeding if all of the following conditions apply: (A) the person furnishes
the Corporation a written affirmation of his good faith belief that he has met
the applicable standard of conduct set forth in Sections 561 and 562 of the
Michigan Business Corporation Act, (B) the person furnishes the Corporation a
written undertaking to repay the advance if it is ultimately determined that he
did not meet the applicable standard of conduct, and (C) the board of directors
makes a determination that the facts then known to the board would not preclude
indemnification under the Michigan Business Corporation Act. The indemnification
provided for herein shall continue as to a person who has ceased to be a
director, officer, employee or agent of the Corporation. Any indemnification of
a person who was entitled to indemnification
8
<PAGE>
after such person ceased to be a director, officer, employee or agent of the
Corporation shall inure to the benefit of the heirs, personal representatives
and administrators of such person. The indemnification provided by this Article
XII shall not be deemed exclusive of any other rights to which any person may be
entitled under any contract, bylaw, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding office, except to the extent that such
indemnification may be contrary to law. The Corporation may purchase and
maintain insurance to protect itself and any present or former director,
officer, employee or agent or any person who is or was serving at the request of
the Corporation as a director, officer, trustee, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
liability asserted against him and incurred by him in any such capacity, whether
or not the Corporation would have the power to indemnify such person against
liability under the Michigan Business Corporation Act.
ARTICLE XIII
LIMITATION OF DIRECTORS' LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except: (A) for any breach of the director's duty of loyalty
to the Corporation or its shareholders, (B) for acts or omissions that are not
in good faith or that involve intentional misconduct or a knowing violation of
law, (C) for a violation of Section 551(1) of the Michigan Business Corporation
Act, or (D) for any transaction from which the director derived any improper
personal benefit. If the Michigan Business Corporation Act or other Michigan
law is amended or enacted after the date of filing of these Amended and Restated
Articles of Incorporation to eliminate or limit further the personal liability
of directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Michigan Business
Corporation Act or other Michigan law, as so amended. Any repeal or
modification of this Article XIII by the shareholders of the Corporation shall
not adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
ARTICLE XIV
COMPROMISE, ARRANGEMENT OR PLAN OF REORGANIZATION
When a compromise or arrangement or a plan of reorganization of the
Corporation is proposed between the Corporation and its creditors or any class
of them or between the Corporation and its shareholders or any class of them, a
court of equity jurisdiction within the State of Michigan, on application of
this Corporation or of a creditor or shareholder thereof, or on application of a
receiver appointed for the Corporation, may order a meeting of the creditors or
class of creditors or of the shareholders or class of shareholders to be
affected by the proposed compromise or
9
<PAGE>
arrangement or reorganization, to be summoned in such manner as the court
directs. If a majority in number representing 3/4 in value of the creditors or
class of creditors, or of the shareholders or class of shareholders to be
affected by the proposed compromise or arrangement or reorganization, agree to a
compromise or arrangement or reorganization of the Corporation as a consequence
of the compromise or arrangement, the compromise or arrangement and the
reorganization, if sanctioned by the court to which the application has been
made, shall be binding on all the creditors or class of creditors, or on all the
shareholders or class of shareholders and also on the Corporation.
ARTICLE XV
RESTRICTION OF TRANSFER,
ACQUISITION AND REDEMPTION OF SHARES
XV(A) Definitions.
-----------
The following terms shall have the following meanings for purposes this
Article XV of these Amended and Restated Articles of Incorporation:
"Acquire" shall mean the acquisition of Beneficial Ownership of shares of
preferred stock by any means, including, without limitation, the exercise of any
rights under any option, warrant, convertible security, pledge or other security
interest or similar right to acquire shares, but shall not include the
acquisition of any such rights unless, as a result, the acquirer would be
considered a Beneficial Owner. The terms Acquires and Acquisition shall
have correlative meanings.
"Beneficial Ownership" means ownership of shares of any class or series of
common stock or preferred stock by a Person who would be treated as an owner of
such shares under Section 542(a)(2) of the Code either directly or
constructively through the application of Section 544 of the Code as modified by
Section 856(h)(1)(B) of the Code. The terms "Beneficial Owner," "Beneficially
Own" and "Own Beneficially" shall have correlative meanings.
"Beneficiary" means, with respect to the Trust, one or more organizations
named by the Corporation as beneficiary or beneficiaries of the Trust in
accordance with Article XV(L)(1). Each such Beneficiary shall be an organization
described in Section 501(c)(3) of the Code, that is not an "individual" within
the meaning of Section 542 of the Code, contributions to which must be eligible
for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code.
"Board of Directors" means the board of directors of the Corporation.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor statute thereto. Reference to any provision of the Code
shall mean such provision as in effect from time to time, as the same may be
amended, and any successor thereto, as interpreted by any applicable regulations
or other administrative pronouncements as in effect from time to time.
"Excess Shares" has the meaning set forth in Article XV(C).
10
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"Individual" shall mean a natural person or any entity considered an
individual for purposes of Section 542(a)(2) of the Code.
"Initial Public Offering" means the sale of shares of preferred stock to
the public pursuant to the Corporation's first effective registration statement
for such preferred stock filed under the Securities Act of 1933, as amended.
"Market Price" means, with respect to any class or series of preferred
stock, on any date means the Closing Price on the Trading Day immediately
preceding such date of such class or series of preferred stock. The "Closing
Price" means, with respect to any class or series of preferred stock, on any
date, the last sale price or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the principal national securities exchange on
which such class or series of preferred stock is listed or admitted to trading
or, if such class or series of preferred stock is not listed or admitted to
trading on any national securities exchange, the last quoted price, or if not so
quoted, the average of the high bid and low asked prices in the over-the-counter
market, as reported by the Nasdaq System or, if such system is no longer in use,
the principal other automated quotations system that may then be in use or, if
such class or series of preferred stock is not quoted by any such organization,
the average of the closing bid and asked prices as furnished by a professional
market maker making a market in such class or series of preferred stock selected
by the board of directors of the Corporation, or, if there is no such market
maker or such closing prices otherwise are not available, the fair market value
of the affected series of preferred stock as of such day, as determined by the
Board of Directors, in its discretion. "Trading Day" means a day on which the
principal national securities exchange on which the relevant class or series of
preferred stock is listed or admitted to trading is open for the transaction of
business or, if the relevant class or series of preferred stock is not listed or
admitted to trading on any national securities exchange, shall mean any day
other than a Saturday, a Sunday or a day on which banking institutions in the
State of Michigan are authorized or obligated by law or executive order to
close.
"Non-Transfer Event" means any event other than a purported Transfer that
would cause (i) any Person to Own Beneficially shares of preferred stock in
excess of the Ownership Limit, (ii) the Corporation to become "closely held"
within the meaning of Section 856(h) of the Code, or (iii) the Corporation to
otherwise fail to qualify as a REIT (other than as a result of a violation of
the "100-shareholder" requirement of Section 856(a)(5) of the Code), in each
case including, but not limited to, the granting of any option or entering into
any agreement for the sale, transfer or other disposition of shares of preferred
stock or the sale, transfer, assignment or other disposition of any securities
or rights convertible into or exchangeable for shares of preferred stock.
"Ownership Limit" means, for any Person, the Beneficial Ownership of five
percent (5.0%), in number of shares or value, of the outstanding shares of any
class or series of preferred stock of the Corporation. The value of the
outstanding shares of any class or series of preferred stock of the Corporation
shall be determined by the Board of
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Directors in good faith, which determination shall be conclusive for all
purposes hereof.
"Permitted Transferee" means any Person designated as a Permitted
Transferee in accordance with the provisions of Article XV(L)(5) hereof.
"Person" means (a) an individual, corporation, partnership, estate, trust
(including a trust qualified under Section 401(a) or 501(c)(17) of the Code), a
portion of a trust permanently set aside for or to be used exclusively for the
purposes described in Section 642(c) of the Code, association, private
foundation within the meaning of Section 509(a) of the Code, joint stock
company, limited liability company or other entity and (b) also includes a group
as that term is used for purposes of Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended; but does not include an underwriter which participated
in a public offering of preferred stock for a period of sixty (60) days
following the purchase by such underwriter of such preferred stock therein,
provided that the foregoing exclusion shall apply only if the ownership of such
preferred stock by an underwriter or underwriters participating in a public
offering would not cause the Corporation to fail to qualify as a REIT by reason
of being closely held within the meaning of Section 856(a) of the Code or
otherwise cause the Corporation to fail to qualify as a REIT.
"Prohibited Owner" means, with respect to any purported Transfer or Non-
Transfer Event, any Person who, except for the provisions of Article XV(C),
would Beneficially Own shares of preferred stock.
"REIT" means a "real estate investment trust" defined in Sections 856
through 860 of the Code.
"Restriction Termination Date" means the first day after the date of the
Initial Public Offering on which the Board of Directors determines that it is no
longer in the best interests of the Corporation to attempt, or continue, to
qualify as a REIT.
"Transfer" means any sale, transfer, gift, hypothecation, assignment,
devise or other disposition of a direct or indirect interest in any shares of
common stock or preferred stock or the right to vote or receive dividends on
such common stock or preferred stock (including (i) the granting of any option
(including, but not limited to, an option to acquire an option or any series of
such options) or entering into any agreement for the sale, transfer or other
disposition of common stock or preferred stock or the right to vote or receive
dividends on such common stock or preferred stock or (ii) the sale, transfer,
assignment or other disposition of any securities or rights convertible into or
exchangeable for common stock or preferred stock or the exercise of such
rights), whether voluntary or involuntary, whether of record or beneficially,
and whether by operation of law or otherwise (including, but not limited to, any
transfer of an interest in other entities which results in a change in the
Beneficial Ownership of shares of common stock or preferred stock). The terms
"Transfers," "Transferred" and Transferable shall have correlative meanings.
"Trust" means the trust created pursuant to Article XV(L).
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<PAGE>
"Trustee" means any Person or entity unaffiliated with both the Corporation
and any Prohibited Owner who is designated by the Corporation to act as trustee
of the Trust, and any successor trustee appointed by the Corporation.
XV(B) Restriction on Ownership and Transfers.
--------------------------------------
(1) Except as provided in Article XV(I), from and after the date of the
Initial Public Offering and prior to the Restriction Termination Date,
no Person shall Beneficially Own shares of any class or series of
preferred stock in excess of the Ownership Limit.
(2) Except as provided in Article XV(I), and subject to the provisions of
Article XV(M), from and after the date of the Initial Public Offering
and prior to the Restriction Termination Date, any Transfer or other
event that, if effective, would result in any Person Beneficially
Owning shares of any class or series of preferred stock in excess of
the Ownership Limit shall be void ab initio as to the Transfer of such
shares of preferred stock which would be otherwise Beneficially Owned
by such Person in excess of the Ownership Limit, and the intended
transferee shall acquire no rights in such shares of preferred stock.
(3) Subject to the provisions of Article XV(M), from and after the date of
the Initial Public Offering and prior to the Restriction Termination
Date, any Transfer that, if effective, would result in the outstanding
common stock and preferred stock being Beneficially Owned by less than
100 Persons (determined without reference to any rules of attribution)
shall be void ab initio, and the intended transferee shall acquire no
rights in such shares of common stock or preferred stock.
(4) Notwithstanding any other provision herein, subject to the provisions
of Article XV(M), from and after the date of the Initial Public
Offering and prior to the Restriction Termination Date, any Transfer
that, if effective, would result in the Corporation being "closely
held" within the meaning of Section 856(h) of the Code shall be void
ab initio as to the Transfer of that number of shares of common stock
or preferred stock, as the case may be, that would cause the
Corporation to be "closely held" within the meaning of Section 856(h)
of the Code; and the intended transferee shall acquire no rights in
such shares of common stock or preferred stock, as the case may be.
(5) Notwithstanding any other provision herein, subject to the provisions
of Article XV(M), from and after the date of the Initial Public
Offering and prior to the Restriction Termination Date, any Transfer
that, if effective, would cause the Corporation to fail to qualify as
a REIT shall be void ab initio as to the Transfer of that number of
shares of common stock or preferred stock, as the case may be, in
excess of the number that could have been Transferred without such
result; and the intended transferee shall acquire no rights in such
shares of common stock or preferred stock, as the case may be.
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<PAGE>
(6) A Transfer of a share of common stock or preferred stock which is null
and void under paragraphs (2), (3), (4) or (5) of this Article XV(B)
shall not adversely affect the validity of the Transfer of any other
share of common stock or preferred stock in the same or any other
related transaction.
XV(C) Transfer in Trust.
-----------------
(1) If, notwithstanding the other provisions contained in this Article XV,
at any time from and after the date of the Initial Public Offering and
prior to the Restriction Termination Date, there is a purported
Transfer or Non-Transfer Event such that any Person would Own
Beneficially shares of any class or series of preferred stock in
excess of the Ownership Limit, then (a) except as otherwise provided
in Article XV(I), the Prohibited Owner shall acquire no right or
interest (or, in the case of a Non-Transfer Event, shall cease to own
any right or interest) in such number of shares of such class or
series of preferred stock that would cause such Beneficial Owner to
Beneficially Own shares of such class or series of preferred stock in
excess of the Ownership Limit and (b) such number of shares of such
class or series of preferred stock in excess of the Ownership Limit
(rounded up to the nearest whole share) shall be designated as Excess
Shares and, in accordance with Article XV(L), be transferred
automatically and by operation of law to the Trust for the benefit of
the Beneficiary. Such transfer to a Trust and the designation of the
shares as Excess Shares shall be effective as of the close of business
on the business day prior to the date of the purported Transfer or
Non-Transfer Event, as the case may be.
(2) If, notwithstanding the other provisions contained in this Article XV,
at any time from and after the date of the Initial Public Offering and
prior to the Restriction Termination Date, there is a purported
Transfer or Non-Transfer Event that, if effective, would cause the
Corporation to become "closely held" within the meaning of Section
856(h) of the Code or to otherwise fail to qualify as a REIT (other
than as a result of a violation of the 100-shareholder requirement of
Section 856(a)(5) of the Code), then (a) except as otherwise provided
in Article XV(I), the Prohibited Owner shall acquire no right or
interest (or, in the case of a Non-Transfer Event, shall cease to own
any right or interest) in such number of shares of preferred stock,
the ownership of which by such purported transferee or record holder
would cause the Corporation to be "closely held" within the meaning of
Section 856(h) of the Code or to otherwise fail to qualify as a REIT
(other than as a result of a violation of the 100-shareholder
requirement of Section 856(a)(5)) and (b) such number of shares of
preferred stock (rounded up to the nearest whole share) shall be
designated as Excess Shares and, in accordance with the provisions of
Article XV(L), be transferred automatically and by operation of law to
the Trust for the benefit of the Beneficiary. Such transfer to a Trust
and the designation of shares as Excess Shares shall be effective as
of the close of business on the business day prior to the date of the
Transfer or Non-Transfer Event, as the case may be.
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XV(D) Remedies for Breach.
-------------------
If the Board of Directors or a committee thereof shall at any time
determine in good faith that a Non-Transfer Event has occurred, a Transfer has
taken place in violation of Article XV(B) or that a Person intends to acquire or
has attempted to acquire or may acquire Beneficial Ownership of any shares of
common stock or preferred stock in violation of Article XV(B) (whether or not
such violation is intended), the Board of Directors shall be empowered to take
any action it deems advisable to refuse to give effect to or to prevent such
Transfer or Non-Transfer Event, including, but not limited to, refusing to give
effect to such Transfer or Non-Transfer Event on the books of the Corporation or
instituting proceedings to enjoin or rescind such Transfer or acquisition.
XV(E) Notice of Restricted Transfer.
-----------------------------
Any Person who acquires or attempts to acquire shares of common stock or
preferred stock in violation of Article XV(B), or any Person who owned shares of
preferred stock that were transferred to a Trust pursuant to the provisions of
Article XV(C), shall immediately give written notice to the Corporation of such
event and shall provide to the Corporation such other information as the
Corporation may request in order to determine the effect, if any, of such
Transfer or Non-Transfer Event, as the case may be, on the Corporation's status
as a REIT. Failure to give such notice shall not in any way limit the rights and
remedies of the Board of Directors provided herein.
XV(F) Owners Required to Provide Information.
--------------------------------------
From and after the date of the Initial Public Offering and prior to the
Restriction Termination Date:
(1) Every Beneficial Owner of more than 1% (or such lower percentage as
required in the applicable regulations adopted under the Code) of any
class or series of preferred stock of the Corporation outstanding
shall, within 30 days after June 30 and December 31 of each year, give
written notice to the Corporation stating the name and address of such
Beneficial Owner, the number of shares of such class or series of
preferred stock Beneficially Owned by such Beneficial Owner, a full
description of how shares are held and a statement identifying the
actual or constructive owners of such shares. Each such Beneficial
Owner shall, upon demand by the Corporation, disclose to the
Corporation in writing such additional information with respect to its
Beneficial Ownership of such class or series of preferred stock as the
Corporation, in its sole discretion, deems appropriate or necessary,
(a) to comply with the provisions of the Code regarding the
qualification of the Corporation as a REIT and (b) to ensure
compliance with the Ownership Limit.
(2) At the request of the Corporation, any Person who is a Beneficial
Owner of common stock or preferred stock and any Person (including the
shareholder of
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<PAGE>
record) who is holding common stock or preferred stock for a
Beneficial Owner, and any proposed transferee of shares, shall provide
(a) such information as the Corporation, in its sole discretion, may
request from time to time in order (i) to determine the Corporation's
status as a REIT, (ii) to ensure compliance with the requirements of
any taxing authority or other governmental agency or (iii) to ensure
compliance with the Ownership Limit and (b) a statement or affidavit
to the Corporation setting forth the number of shares of each class or
series of common stock or preferred stock Beneficially Owned by such
shareholder or proposed transferee and any related Persons specified,
which statement or affidavit shall be in the form prescribed by the
Corporation for that purpose.
XV(G) Remedies Not Limited.
--------------------
Nothing contained in this Article XV shall limit the authority of the Board
of Directors to take such other action as it deems necessary or advisable
(subject to the provisions of Article XV(M)) to protect the Corporation and the
interests of its shareholders in the preservation of the Corporation's status as
a REIT and to insure compliance with the Ownership Limit.
XV(H) Ambiguity.
---------
In the case of an ambiguity in the application of any of the provisions of
Article XV, including any definition contained in Article XV(A), the Board of
Directors shall have the power to determine the application of such provisions
with respect to any situation based on its reasonable belief, understanding or
knowledge of the circumstances.
XV(I) Exceptions.
----------
(1) The Board of Directors may (1) upon receipt of a ruling from the
Internal Revenue Service or an opinion of tax counsel satisfactory to
it, may waive the application of the Ownership Limit, in whole or in
part, to any person, if such Person is not an individual for purpose
of Section 542(a) of the Code and is a corporation, partnership,
estate or trust; and (2) upon request made by a Person in writing to
the Corporation, waive the Ownership Limit, but only so as to permit
the Person to Own Beneficially up to nine and nine-tenths percent
(9.9%), in number of shares or value, of the outstanding shares of any
class of preferred stock of the Corporation; provided, however, in no
event may the Board of Directors grant any such exception if it would,
in the Board of Directors' judgment, jeopardize the Corporation's
status as a REIT. In connection with any such exemption, the Board of
Directors may require such representations and undertakings from such
Person and may impose such other conditions as the Board of Directors
deems necessary, in its sole discretion to determine the effect, if
any, of the proposed Transfer on the Corporation's status as a REIT.
(2) For a period of 90 days following the acquisition of Preferred
Stock by an underwriter that (a) is a corporation or a partnership and
(b) participates in an offering of the preferred stock, such
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<PAGE>
underwriter shall not be subject to the Ownership Limit with respect
to the preferred stock purchased by it as a part of such offering.
XV(J) Legend.
------
Each certificate for preferred stock shall bear the following legend:
"The shares of preferred stock represented by this certificate are
subject to restrictions on transfer for the purpose of the Corporation's
maintenance of its status as a Real Estate Investment Trust under the
Internal Revenue Code of 1986, as amended. No Person may (1) Beneficially
Own shares of any class or series of preferred stock in excess of the
Ownership Limit, except as set forth in the Corporation's Amended and
Restated Articles of Incorporation, as the same may be amended from time to
time (the "Articles of Incorporation"), or (2) Beneficially Own shares of
preferred stock that would result in the Corporation being "closely held"
under 856(h) of the Code or otherwise to fail to qualify as a REIT. Any
Person who attempts to Own Beneficially shares of preferred stock in excess
of the applicable limitation must immediately notify the Corporation in
writing. No Person may transfer shares of preferred stock if such transfer
would result in the outstanding common stock and preferred stock being
Beneficially Owned by less than 100 Persons (determined without reference
to any rules of attribution). If the restrictions on transfer are violated,
the shares of preferred stock represented hereby will be transferred
automatically and by operation of law to a Trust and shall be designated
Excess Shares. All capitalized terms in this legend have the meanings
ascribed to such terms in the Articles of Incorporation, a copy of which,
including the restrictions on transfer, will be sent without charge to each
stockholder who so requests."
XV(K) Severability.
------------
If any provision of this Article XV or any application of any such
provision is determined to be void, invalid or unenforceable by any federal or
state court having jurisdiction over the issues, the validity and enforceability
of the remaining provisions of these Amended and Restated Articles of
Incorporation (including without limitation this Article XV) shall not be
affected and other applications of such provision shall be affected only to the
extent necessary to comply with the determination of such court.
XV(L) Excess Shares.
-------------
(1) Ownership in Trust. Upon any purported Transfer, Non-Transfer Event,
Acquisition, change in the capital structure of the Corporation or
purported change in Beneficial Ownership or event or transaction that
results in shares of preferred stock being designated Excess Shares
pursuant to Article XV(C), such Excess Shares shall be transferred to
a Trust for the exclusive benefit of the Beneficiary to whom an
interest in such Excess Shares may later be transferred pursuant to
Article XV(L)(5). The Corporation shall name a Beneficiary that is
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<PAGE>
an organization described in Section 501(c)(3) of the Code, that is
not an "individual" within the meaning of Section 542 of the Code, if
one does not already exist, within five (5) days after the discovery
of any Transfer to the Trust. Excess Shares so held in trust shall
remain issued and outstanding stock of the Corporation and shall be
entitled to the same rights and privileges on identical terms and
conditions as all other issued and outstanding shares of the same
class and series. When transferred to the Permitted Transferee in
accordance with the provisions of Article XV(L)(5), such Excess Shares
shall cease to be designated as Excess Shares.
(2) Dividend Rights. Excess Shares shall not be entitled to any dividends
or distributions (except as provided in Paragraph (3) of this Article
XV(L)). Any dividend or distribution paid prior to the discovery by
the Corporation that the shares of preferred stock have been exchanged
for Excess Shares shall be repaid by the original transferee to the
Corporation and by the Corporation to the trustee, and any dividend or
distribution declared but unpaid at the time of such discovery shall
be void ab initio with respect to such Excess Shares.
(3) Rights Upon Liquidation. Except as provided below, in the event of
any voluntary or involuntary liquidation, dissolution or winding up,
or any other distribution of the assets, of the Corporation, each
holder of Excess Shares resulting from the exchange of preferred stock
of any specified series shall only be entitled to receive, ratably
with each other holder of Excess Shares resulting from the exchange of
shares of preferred stock of such series and each holder of shares of
preferred stock of such series, the price paid by the original
transferee for the Excess Shares or, if no value was given, the price
per share equal to the Market Price on the date of the purported
transfer. The trustee of the trust shall promptly sell the shares to
any person whose ownership is not prohibited, whereupon the interest
of the trust shall terminate. Proceeds of the sale shall be paid to
the original transferee up to its purchase price (or, if the original
transferee did not purchase the shares, the value on its date of
acquisition) any remaining proceeds shall be paid to a charity to be
named by the Corporation.
(4) Voting Rights. The holders of Excess Shares shall not be entitled to
vote on any matters. Any vote of the shares while the shares were
held by the original transferee prior to the Corporation's discovery
thereof shall be void ab initio and the original transferee shall be
deemed to have given its proxy to the trustee.
(5) Designation of Permitted Transferee. The Corporation shall have the
exclusive and absolute right to designate a Permitted Transferee of
any and all Excess Shares. As soon as reasonably practicable, in an
orderly fashion so as not materially adversely to affect the Market
Price of the Excess Shares, the Corporation shall designate any Person
as Permitted Transferee; provided, however, that (a) the Permitted
Transferee so designated purchases for valuable consideration (whether
in a public or private sale) the Excess Shares and (b) the
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<PAGE>
Permitted Transferee so designated may acquire such Excess Shares
without such acquisition resulting in a transfer to a Trust and the
redesignation of such shares of preferred stock so acquired as Excess
Shares under Article XV(C). Upon the designation by the Corporation of
a Permitted Transferee in accordance with the provisions of this
paragraph, the Trustee of a Trust shall (x) cause to be transferred to
the Permitted Transferee that number of Excess Shares acquired by the
Permitted Transferee; (y) cause to be recorded on the books of the
Corporation that the Permitted Transferee is the holder of record of
such number of shares of preferred stock; and (z) distribute to the
Beneficiary any and all amounts held with respect to the Excess Shares
after making that payment to the Prohibited Owner pursuant to Article
XV(L)(6).
(6) Compensation to Record Holder of Shares that Become Excess Shares.
Any Prohibited Owner shall be entitled (following discovery of the
Excess Shares and subsequent designation of the Permitted Transferee
in accordance with Article XV(L)(5)) to receive from the Trustee the
lesser of (a) in the case of (i) a purported Transfer in which the
Prohibited Owner gave value for shares of preferred stock and which
Transfer resulted in the transfer of the shares to the Trust, the
price per share, if any, such Prohibited Owner paid for such shares,
or in the case of (ii) a Non-Transfer Event or Transfer in which the
Prohibited Owner did not give value for such shares (e.g., if the
shares were received through a gift or devise) and which Non-Transfer
Event or Transfer, as the case may be, resulted in the transfer of
shares to the Trust, the price per share equal to the Market Price on
the date of such Non-Transfer Event or Transfer, and (b) the price per
share received by the Trustee of the Trust from the sale or other
disposition of such Excess Shares in accordance with Article XV(L)(5).
Any amounts received by the Trustee in respect of such Excess Shares
in excess of such amounts to be paid to the Prohibited Owner pursuant
to this Article XV(L)(6) shall be distributed to the Beneficiary in
accordance with the provisions of Article XV(L)(5). Each Beneficiary
and Prohibited Owner waives any and all claims that they may have
against the Trustee and the Corporation arising out of the disposition
of Excess Shares, except for claims arising out of the gross
negligence or willful misconduct of, or any failure to make payments
in accordance with this Article XV(L) by, such Trustee or the
Corporation.
(7) Purchase Right in Excess Shares. Excess Shares shall be deemed to
have been offered for sale to the Corporation, or its designee, at a
price per share equal to the lesser of (a) the price per share in the
transaction that created such Excess Shares (or, in the case of a
devise or gift, the Market Price on the date of such devise or gift)
and (b) the Market Price on the date the Corporation, or its designee,
accepts such offer. The Corporation shall have the right to accept
such offer for a period of ninety days after the later of (x) the date
of the Transfer which resulted in such Excess Shares and (y) the date
the Board of Directors determines in good faith that a Transfer
resulting in Excess Shares has occurred.
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XV(M) Settlement.
----------
Notwithstanding any provision contained herein to the contrary, nothing in
these Amended and Restated Articles Incorporation shall preclude the settlement
of any transaction with respect to any class or series of preferred stock
entered into through facilities of the Nasdaq System.
ARTICLE XVI
AMENDMENT OF BYLAWS
In furtherance and not in limitation of the powers conferred by statute,
the board of directors of the Corporation is expressly authorized to adopt,
repeal, alter, amend and rescind the bylaws of the Corporation by a vote of the
board of directors. The bylaws also may be adopted, repealed, altered, amended
or rescinded by the shareholders of the Corporation by the affirmative vote of
the holders of at least 80 percent of the outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class) cast at a meeting of the shareholders
called for that purpose (provided that notice of such proposed adoption, repeal,
alteration, amendment or rescission is included in the notice of such meeting).
ARTICLE XVII
AMENDMENT OF ARTICLES OF INCORPORATION
The Corporation reserves the right to repeal, alter, amend or rescind any
provision contained in these Articles of Incorporation in the manner now or
hereafter prescribed by law, and all rights conferred on shareholders herein are
granted subject to this reservation. Notwithstanding the foregoing, the
provisions set forth in Articles X, XI, XII, XIII, XIV, XV, XI and this Article
XVII may not repealed, altered, amended or rescinded in any respect unless the
same is approved by the affirmative vote of the holders of not less than 80
percent of the outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors (considered for this purpose as a
single class) cast at a meeting of the shareholders called for that purpose
(provided that notice of such proposed repeal, alteration, amendment or
rescission is included in the notice of such meeting).
20
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused these Amended and Restated
Articles of Incorporation to be signed by its Chairman and Chief Executive
Officer, this 22nd day of December, 1997.
FLAGSTAR CAPITAL CORPORATION
/s/ Thomas J. Hammond
-------------------------------
Thommas J. Hammond
Chairman and Chief Executive Officer
ATTEST:
/s/ Mary Kay McGuire
- ----------------------------
Mary Kay McGuire
Secretary
21
<PAGE>
CERTIFICATE OF DESIGNATION
OF
% NONCUMULATIVE EXCHANGEABLE
PREFERRED STOCK, SERIES A
OF
FLAGSTAR CAPITAL CORPORATION
Pursuant to the Michigan Business Corporation Act
FLAGSTAR CAPITAL CORPORATION, a corporation organized and existing under
the laws of the State of Michigan (the "Corporation"), HEREBY CERTIFIES that the
following resolution was duly adopted by the Board of Directors of the
Corporation on [____________], 1998, pursuant to authority conferred upon the
Board of Directors by the provisions of the Amended and Restated Articles of
Incorporation of the Corporation, which authorizes the issuance of up to
4,000,000 shares of preferred stock, $25.00 par value per share (the "Preferred
Stock"):
RESOLVED that the issue of [_________] shares of [___]% Noncumulative
Exchangeable Preferred Stock, Series A, $25.00 par value, of the Corporation is
hereby authorized and the designation, preferences, relative, participating,
optional and other special rights, and qualifications or restrictions of all
shares of this Series, in addition to those set forth in the Amended and
Restated Articles of Incorporation of the Corporation, are hereby fixed as
follows:
1. Designation. The designation of this Series shall be [___]%
Noncumulative Exchangeable Preferred Stock, Series A (hereinafter referred to as
this "Series"), and the number of shares constituting this Series shall be
[_________]. Shares of this Series shall have a liquidation preference of $25.00
per share. The number of authorized shares of this Series may be reduced by
further resolution duly adopted by the Board of Directors of the Corporation or
a duly authorized committee thereof and by the filing of a certificate pursuant
to the provisions of the Michigan Business Corporation Act stating that such
reduction has been so authorized, but the number of authorized shares of this
Series shall not be increased.
1
<PAGE>
2. Dividends.
(a) For each quarterly dividend period (a "Dividend Period") dividends
payable on each share of this Series shall be payable at a rate of [___]% per
annum of the liquidation preference per share divided by four. Each Dividend
Period shall commence on the January 1, April 1, July 1 and October 1 following
the last day of the preceding Dividend Period and shall end on and include the
day next preceding the first day of the next Dividend Period. Dividends are
noncumulative and shall be payable, when, as, and if, declared by the Board of
Directors or by a duly authorized committee thereof, on March 31, June 30,
September 30 and December 31 of each year, commencing on [March 30, 1998]. Each
such dividend shall be paid to the holders of record of shares of this Series as
they appear on the stock register of the Corporation on such record date, not
exceeding 45 days preceding the payment date thereof, as shall be fixed by the
Board of Directors of the Corporation or by a duly authorized committee thereof.
(b) Dividends payable on this Series for any Dividend Period less than a
full Dividend Period, shall be computed on the basis of a 360-day year
consisting of twelve 30-day months and the actual number of days elapsed in the
period.
(c) Dividends shall be noncumulative. If the Board of Directors of the
Corporation fails to declare a dividend on the Preferred Stock for a Dividend
Period, then holders of the Preferred Stock will have no right to receive a
dividend for that Dividend Period, and the Corporation will have no obligation
to pay a dividend for that Dividend Period, whether or not dividends are
declared and paid for any future Dividend Period with respect to either the
Preferred Stock or the common stock of the Corporation (the "Common Stock").
(d) If full dividends on the Preferred Stock for any Dividend Period shall
not have been declared and paid, or declared and a sum sufficient for the
payment thereof shall not have been set apart for such payments, no dividends
shall be declared or paid or set aside for payment and no other distribution
shall be declared or made or set aside for payment upon the Common Stock or any
other capital stock of the Corporation ranking junior to or on a parity with the
Preferred Stock as to dividends or amounts upon liquidation, nor shall any
Common Stock or any other capital stock of the Corporation ranking junior to or
on a parity with the Preferred Stock as to dividends or amounts upon liquidation
be redeemed, purchased or otherwise acquired for any consideration (or any
monies to be paid to or made available for a sinking fund for the redemption of
any such stock) by the Corporation (except by conversion into or exchange for
other capital stock of the Corporation ranking junior to the Preferred Stock as
to dividends and amounts upon liquidation), until such time as dividends on all
outstanding Preferred Stock have been (i) declared and paid or declared and a
sum sufficient for the payment thereof has been set apart for payment for three
consecutive dividend periods and (ii) declared and paid or declared and a sum
sufficient for the payment thereof has been set apart for payment for the fourth
consecutive Dividend Period. Notwithstanding the above, nothing in this
2
<PAGE>
subparagraph shall prevent the Corporation from treating an amount consented to
by the holder of the Common Stock under the provisions of section 565 of the
Internal Revenue Code of 1986, as amended (the "Code"), as a dividend for
purposes of the dividends paid deduction under section 561 of the Code.
(e) When dividends are not paid in full (or a sum sufficient for such full
payment is not set apart) upon the Preferred Stock and the shares of any other
series of capital stock ranking on a parity as to dividends with the Preferred
Stock, all dividends declared upon the Preferred Stock and any other series of
capital stock ranking on a parity as to dividends with the Preferred Stock shall
be declared pro rata so that the amount of dividends declared per share on the
Preferred Stock and such other series of capital stock shall in all cases bear
to each other the same ratio that full dividends, for the then-current Dividend
Period, per share on the Preferred Stock (which shall not include any
accumulation in respect of unpaid dividends for prior Dividend Periods) and full
dividends, including required or permitted accumulations, if any, on such other
series of capital stock bear to each other.
(f) Holders of the Preferred Stock shall not be entitled to any dividend,
whether payable in cash, property or stock, in excess of full dividends, as
herein provided, on the Preferred Stock. No interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment or payments on the
Preferred Stock which may be in arrears.
3. Redemption.
(a) The shares of this Series are not redeemable prior to [________],
2003, except upon the occurrence of a Tax Event (as defined in paragraph (b)
below). The Corporation, at its option, may redeem shares of this Series, as a
whole or in part, at any time or from time to time, on or after [_______], 2003,
at a redemption price of $25.00 per share, plus the accrued and unpaid dividends
for the most recent quarter thereon to the date fixed for redemption.
(b) The Corporation will have the right, at any time upon the occurrence
of a Tax Event and with the prior written approval of the Office of Thrift
Supervision, United States Department of the Treasury ("OTS") or a successor
agency, to redeem the shares of this Series, in whole, but not in part, at a
redemption price of $25.00 per share, plus the accrued and unpaid dividends for
the most recent quarter to the date fixed for redemption. "Tax Event" means the
receipt by the Corporation of an opinion of a nationally recognized law or
accounting firm experienced in such matters to the effect that, as a result of
(i) any amendment to, clarification of, or change (including any announced
prospective change) in, the laws or treaties (or any regulations thereunder) of
the United States or any political subdivision or taxing authority thereof or
therein affecting taxation, (ii) any judicial decision, official administrative
pronouncement, published or private ruling, regulatory procedure, notice or
announcement (including any notice or announcement of intent to adopt such
procedures or regulations) ("Administrative Action") or (iii) any amendment to,
clarification of, or change in the official
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position or the interpretation of such Administrative Action or any
interpretation or pronouncement that provides for a position with respect to
such Administrative Action that differs from the theretofore generally accepted
position, in each case, by any legislative body, court, governmental authority
or regulatory body, irrespective of the manner in which such amendment,
clarification or change is made known, which amendment, clarification, or change
is effective or such pronouncement or decision is announced on or after the date
of issuance of the shares of this Series, there is more than an insubstantial
risk that (x) dividends paid or to be paid by the Corporation with respect to
the Common Stock and Preferred Stock of the Corporation are not, or will not be,
fully deductible by the Corporation for United States federal income tax
purposes or (y) the Corporation is, or will be, subject to more than a de
minimis amount of other taxes, duties or other governmental charges.
(c) In the event that fewer than all the outstanding shares of this Series
are to be redeemed, the number of shares to be redeemed shall be determined by
lot or pro rata or by any other method as may be determined by the Board of
Directors of the Corporation or a duly authorized committee thereof in its sole
discretion to be equitable, provided that such method satisfies any applicable
requirements of the Nasdaq System on which this Series is listed.
(d) In the event the Corporation shall redeem shares of this Series,
notice of such redemption shall be given by first class mail, postage prepaid,
mailed not less than 30 nor more than 60 days prior to the redemption date, to
each holder of record of the shares to be redeemed, at such holder's address as
the same appears on the stock register of the Corporation. Each such notice
shall state: (i) the redemption date; (ii) the number of shares of this Series
to be redeemed and, if fewer than all the shares held by such holder are to be
redeemed, the number of such shares to be redeemed from such holder; (iii) the
redemption price; (iv) the place or places where certificates for such shares
are to be surrendered for payment of the redemption price; and (v) that
quarterly dividends on the shares to be redeemed will cease to accrue on the
redemption date.
(e) Notice having been mailed as aforesaid, from and after the redemption
date (unless default shall be made by the Corporation in providing money for the
payment of the redemption price) dividends on the shares of this Series so
called for redemption shall cease to accrue, and said shares shall no longer be
deemed to be outstanding, and all rights of the holders thereof as stockholders
of the Corporation (except the right to receive from the Corporation the
redemption price) shall cease. Upon surrender in accordance with said notice of
the certificates for any shares so redeemed (properly endorsed or assigned for
transfer, if the Board of Directors of the Corporation or a duly authorized
committee thereof shall so require and the notice shall so state), such shares
shall be redeemed by the Corporation at the redemption price aforesaid. In case
fewer than all the shares represented by any such certificate are redeemed, a
new certificate shall be issued representing the unredeemed shares without cost
to the holder thereof.
(f) Any shares of this Series which shall at any time have been redeemed
shall, after
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such redemption, have the status of authorized but unissued shares of Preferred
Stock, without designation as to series until such shares are once more
designated as part of a particular series by the Board of Directors of the
Corporation or a duly authorized committee thereof.
(g) Notwithstanding the foregoing provisions of this Section 3, unless
full dividends on the Preferred Stock have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof has
been set apart for payment for the then-current Dividend Period, no shares of
this Series shall be redeemed unless all outstanding shares of this Series are
simultaneously redeemed, and the Corporation shall not purchase or otherwise
acquire any shares of this Series; provided, however, that the foregoing shall
not prevent the purchase or acquisition of shares of this Series pursuant to a
purchase or exchange offer made on the same terms to holders of all outstanding
shares of this Series.
4. Automatic Exchange.
(a) Subject to the terms and conditions of this Section 4, each share of
Preferred Stock of this Series will be exchanged automatically (the "Automatic
Exchange") for one share of [___]% Noncumulative Preferred Stock, Series A,
$25.00 par value per share (a "Bank Preferred Share"), of Flagstar Bank, FSB
(the "Bank"). The issuance of the Bank Preferred Shares has been duly authorized
by the board of directors of the Bank. Prior to or contemporaneously with the
filing of this Certificate of Designation with the Michigan Department of
Commerce -Corporations and Securities Bureau, the Bank shall file with the OTS a
Certificate of Designation establishing the Bank Preferred Shares. The
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of the
Bank Preferred Shares shall be substantially identical to the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of this Series.
(b) The Automatic Exchange will occur only if the OTS directs in writing
(a "Directive") an exchange of the Preferred Stock for Bank Preferred Shares
because (i) the Bank becomes "undercapitalized" under prompt corrective action
regulations, (ii) the Bank is placed into conservatorship or receivership or
(iii) the OTS, in its sole discretion, anticipates the Bank's becoming
"undercapitalized" in the near term (the "Exchange Event").
(c) Upon the Exchange Event, each holder of the Preferred Stock shall be
unconditionally obligated to surrender to the Bank the certificates representing
each share of the Preferred Stock of such holder, and the Bank shall be
unconditionally obligated to issue to such holder in exchange for each share of
Preferred Stock a certificate representing one Bank Preferred Share.
(d) The Automatic Exchange shall occur as of 8:00 a.m. Eastern Time on the
date for such exchange set forth in the Directive, or, if such date is not set
forth in the Directive, as
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of 8:00 a.m. on the earliest possible date such exchange could occur consistent
with the Directive (the "Time of Exchange"), as evidenced by the issuance by the
Bank of a press release. As of the Time of Exchange, all of the Preferred Stock
required to be exchanged will be deemed canceled without any further action by
the Corporation, all rights of the holders of the Preferred Stock as
stockholders of the Corporation shall cease, and such persons shall thereupon
and thereafter be deemed to be and shall be for all purposes the holders of Bank
Preferred Shares. Notice of the occurrence of the Exchange Event shall be given
by first-class mail, postage prepaid, mailed within 30 days of such event, to
each holder of record of the Preferred Stock, at such holder's address as the
same appears on the stock register of the Corporation. Each such notice shall
indicate the place or places where certificates for the Preferred Stock are to
be surrendered by the holders thereof, and the Bank shall deliver to each such
holder certificates for Bank Preferred Shares upon surrender of certificates for
the Preferred Stock. Until such replacement stock certificates are delivered (or
in the event such replacement certificates are not delivered), certificates
previously representing the Preferred Stock shall be deemed for all purposes to
represent Bank Preferred Shares.
(e) Any Preferred Stock purchased or redeemed by the Corporation in
accordance with Section 3 hereof prior to the Time of Exchange shall not be
deemed outstanding and shall not be subject to the Automatic Exchange. In the
event of the Automatic Exchange, any accrued and unpaid dividends for the most
recent quarter on the Preferred Stock as of the Time of Exchange would be deemed
to be accrued and unpaid dividends on the Bank Preferred Shares.
5. Conversion. The holders of shares of this Series shall not have any
rights to convert such shares into shares of any other class or series of
capital stock of the Corporation or, except as provided herein, of the Bank.
6. Liquidation Rights.
(a) Upon the voluntary or involuntary dissolution, liquidation or winding
up of the Corporation, the holders of the shares of this Series shall be
entitled to be paid or have funds set aside for such payment out of the assets
of the Corporation available for distribution to its stockholders, before any
payment or distribution shall be made on the Common Stock or on any other class
of stock ranking junior to this Series upon liquidation, the amount of $25.00
per share, plus accrued and unpaid dividends for the most recent quarter
thereon.
(b) After the payment to the holders of the shares of this Series of the
full preferential amounts provided for in this Section 6, the holders of this
Series as such shall have no right or claim to any of the remaining assets of
the Corporation.
(c) If, upon any voluntary or involuntary dissolution, liquidation or
winding up of the Corporation, the amounts payable with respect to the stated
value of the shares of this Series and any other shares of stock of the
Corporation ranking as to any such distribution on a parity with
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the shares of this Series are not paid in full, the holders of the shares of
this Series and of such other shares will share ratably in any such distribution
of assets of the Corporation in proportion to the full respective liquidating
distributions to which they are entitled.
(d) Neither the sale of all or substantially all the property or business
of the Corporation, nor the merger or consolidation of the Corporation into or
with any other corporation or the merger or consolidation of any other
corporation into or with the Corporation, shall be deemed to be a dissolution,
liquidation or winding up, voluntary or involuntary, for the purposes of this
Section 6.
(e) Upon the dissolution, liquidation or winding up of the Corporation,
the holders of shares of this Series then outstanding shall be entitled to be
paid out of the assets of the Corporation available for distribution to its
stockholders all amounts to which such holders are entitled pursuant to
paragraph (a) of this Section 6 before any payment shall be made to the holder
of any class of capital stock of the Corporation ranking junior to this Series
upon liquidation.
7. Ranking. For purposes of this resolution, any stock of any class or
classes of the Corporation shall be deemed to rank:
(a) prior to the shares of this Series, either as to dividends or upon
liquidation, if the holders of such class or classes shall be entitled to the
receipt of dividends or of amounts distributable upon dissolution, liquidation
or winding up of the Corporation, as the case may be, in preference or priority
to the holders of shares of this Series;
(b) on a parity with shares of this Series, either as to dividends or upon
liquidation, whether or not the dividend rates, dividend payment dates or
redemption or liquidation prices per share or sinking fund provisions, if any,
be different from those of this Series, if the holders of such stock shall be
entitled to the receipt of dividends or of amounts distributable upon
dissolution, liquidation or winding up of the Corporation, as the case may be,
without preference or priority, one over the other, as between the holders of
such stock and the holders of shares of this Series; and
(c) junior to shares of this Series, either as to dividends or upon
liquidation, if such class shall be Common Stock or if the holders of shares of
this Series shall be entitled to receipt of dividends or of amounts
distributable upon dissolution, liquidation or winding up of the Corporation, as
the case may be, in preference or priority to the holders of shares of such
class or classes.
8. Voting Rights. The shares of this Series shall not have any voting
powers either general or special, except that:
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(a) if at the time of any annual meeting of the Corporation's stockholders
for the election of directors there is a Default in Preference Dividends (as
defined herein below) on the Preferred Stock, the number of directors
constituting the Board of Directors of the Corporation shall be increased by two
(if not already increased by two due to a default in preference dividends), and
the holders of the Preferred Stock of all series (whether or not the holders of
such series of Preferred Stock would be entitled to vote for the election of
directors if such default in preference dividends did not exist), shall have the
right at such meeting, voting together as a single class without regard to
series, to the exclusion of the holders of Common Stock, to elect two additional
directors of the Corporation to fill such newly created directorships. Each
director elected by the holders of shares of the Preferred Stock (a "Preferred
Director") shall continue to serve as such director until the later of: (i) the
full term for which he shall have been elected or (ii) the payment of four
consecutive quarterly dividends on the Preferred Stock. So long as a default in
any preference dividends on the Preferred Stock shall exist, any vacancy in the
office of a Preferred Director may be filled by an instrument in writing signed
by the remaining Preferred Director and filed with the Corporation. Each
director appointed as aforesaid by the remaining Preferred Director shall be
deemed, for all purposes hereof, to be a Preferred Director. Whenever the term
of office of the Preferred Directors shall end and a Default in Preference
Dividends shall no longer exist, the number of directors constituting the Board
of Directors shall be reduced by two. For the purposes hereof, a "Default in
Preference Dividends" on the Preferred Stock shall be deemed to have occurred
whenever the Corporation has failed to pay or declare and set aside for payment
a quarterly dividend during any of the four preceding quarterly dividend periods
on all shares of Preferred Stock of any series then outstanding; and
(b) without the consent of the holders of shares entitled to cast at least
66-2/3% of the votes entitled to be cast by the holders of the total number of
shares of Preferred Stock then outstanding, voting together as a single class
without regard to series, the holders of shares of this series being entitled to
cast one vote per share thereon, the Corporation may not:
(i) create any class or series of stock which shall have preference
as to dividends or distribution of assets over any outstanding series
of preferred stock other than a series which shall not have any right
to object to such creation; or
(ii) alter or change the provisions of the Corporation's Amended and
Restated Articles of Incorporation (including this Certification of
Designation) so as to affect adversely the voting powers, preferences
or special rights of the holders of Preferred Stock; provided,
however, that if such creation or such alteration or change would
adversely affect the voting power, preferences or special rights of
one or more, but not all, series of Preferred Stock at the time
outstanding, consent of the holders of shares entitled to cast at
least 66-2/3% of the votes entitled to be cast by the holders of all
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of the shares of all such series so affected, voting together as a
single class, shall be required in lieu of the consent of the holders
of shares entitled to cast at least 66-2/3% of the votes entitled to
be cast by the holders of the total number of shares of Preferred
Stock at the time outstanding.
9. Approval of Independent Directors.
(a) For so long as any shares of this Series are outstanding, the
Corporation may ot take the following actions without first obtaining the
approval of a majority of the Independent Directors. "Independent Director"
means any director of the Corporation who is either not at the same time a
current director (except a Preferred Director), officer or employee of the
Corporation, Flagstar Bancorp, Inc., the Bank or any affiliate of the Bank; the
owner of not more than one percent of the outstanding common stock of Flagstar
Bancorp, Inc. or a Preferred Director. If at any time there shall be only two
Independent Directors, such approval must be unanimous. The actions which
require the prior approval of a majority of the Independent Directors include:
(i) the issuance of a series of Preferred Stock on a parity with
the shares of this Series ;
(ii) the determination to incur debt for borrowed money in excess of
20% of the aggregate amount of net proceeds received in connection
with the issuance of any Preferred Stock and Common Stock;
(iii) the modification of the general distribution policy or the
declaration of any distribution in respect of Common Stock for any
year if, after taking into account any such proposed distribution,
total distributions on the shares of this Series and on the Common
Stock would exceed an amount equal to the sum of 105% of the
Corporation's "REIT taxable income" (excluding capital gains) for such
year plus net capital gains of the Corporation for that year;
(iv) the acquisition of real estate assets other than mortgage loans
or mortgage securities representing interests in or obligations backed
by pools of mortgage loans that (A) qualify as real estate assets
under Section 856(c)(6)(B) of the Code, (B) are rated investment grade
or better by at least one nationally recognized independent rating
organization, (C) are not interest-only, principal-only or high-risk
securities and (D) represent interests in or obligations backed by
pools of mortgage loans;
(v) the redemption of any shares of Common Stock;
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(vi) the termination or Advisory Agreement, Bank or any mortgage
loans, the or any material dated [_______], 1998, servicing
subcontracting of servicing modification of, between the agreement any
duties under agreement to or election not to Corporation and the
entered into in the Advisory persons who are renew, the connection
with Agreement not affiliates the purchase of the Bank;
(vii) any dissolution, liquidation or termination of the Corporation
prior to [_____________], 2003;
(viii) any material amendment to or modification of any agreements
pursuant to which the Corporation purchases its real estate mortgage
assets; and
(ix) the determination to revoke the Corporation's status as a
REIT.
(b) In assessing the benefits to the Corporation of any proposed action
requiring their consent, the Independent Directors shall take into account the
interests of holders of both the Common Stock and the Preferred Stock,
including, without limitation, the holders of shares of this Series. In
considering the interests of the holders of the Preferred Stock, including
without limitation holders of shares of this Series, the Independent Directors
shall owe the same duties which the Independent Directors owe to holders of
Common Stock.
10. Status as a Reporting Company. For so long as any shares of this
Series are outstanding, the Corporation shall comply with the reporting
requirements of the Securities Exchange Act of 1934, as amended.
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BYLAWS OF
FLAGSTAR CAPITAL CORPORATION
ARTICLE I
OFFICES
1.1 Registered Office. The registered office of the Corporation shall be
located at such place in Michigan as the Board of Directors from time to time
determines.
1.2 Other Offices. The Corporation may also have offices or branches at
such other places as the Board of Directors from time to time determines or the
business of the Corporation requires.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1 Time and Place. All meetings of the shareholders shall be held at such
place and time as the Board of Directors determines.
2.2 Annual Meetings. An annual meeting of shareholders shall be held on
the first Tuesday of the fourth month of each fiscal year of the corporation if
not a legal holiday in the state in which the meeting shall be held, and if a
legal holiday, then on the next secular day following, at such time as
determined by the Board of Directors, or at such other date and time as shall be
designated from time to time by the Board of Directors and stated in the notice
of the meeting. At the annual meeting, the shareholders shall elect directors
and transact such other business as is properly brought before the meeting and
described in the notice of meeting. If the annual meeting is not held on its
designated date, the Board of Directors shall cause it to be held as soon
thereafter as convenient.
2.3 Special Meetings. Special meetings of the shareholders, for any
purpose, may be called by the Corporation's Chairman, President, chief executive
officer or the Board of Directors.
2.4 Notice of Meetings. Written notice of each shareholders' meeting,
stating the place, date and time of the meeting and the purposes for which the
meeting is called, shall be given (in the manner described in Section 5.1 below)
not less than 10 nor more than 60 days
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before the date of the meeting to each shareholder of record entitled to vote at
the meeting. Notice of adjourned meetings is governed by Section 2.6 below.
2.5 List of Shareholders. The officer or agent who has charge of the stock
transfer books for shares of the Corporation shall make and certify a complete
list of the shareholders entitled to vote at a shareholders' meeting or any
adjournment of the meeting. The list shall be arranged alphabetically within
each class and series and shall show the address of, and the number of shares
held by, each shareholder. The list shall be produced at the time and place of
the meeting and may be inspected by any shareholder at any time during the
meeting.
2.6 Quorum; Adjournment. At all shareholders' meetings, the shareholders
present in person or represented by proxy who, as of the record date for the
meeting, were holders of shares entitled to cast a majority of the votes at the
meeting, shall constitute a quorum. Once a quorum is present at a meeting, all
shareholders present in person or represented by proxy at the meeting may
continue to do business until adjournment, notwithstanding the withdrawal of
enough shareholders to leave less than a quorum. Regardless of whether a quorum
is present, a shareholders' meeting may be adjourned to another time and place
by a vote of the shares present in person or by proxy without notice other than
announcement at the meeting; provided, that (a) only such business may be
transacted at the adjourned meeting as might have been transacted at the
original meeting and (b) if the adjournment is for more than 60 days or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting must be given to each shareholder of record entitled to
vote at the meeting.
2.7 Voting. Each shareholder shall at every meeting of the shareholders be
entitled to one vote in person or by proxy for each share having voting power
held by such shareholder and on each matter submitted to a vote. A vote may be
cast either orally or in writing. When an action, other than the election of
directors, is to be taken by vote of the shareholders, it shall be authorized by
a majority of the votes cast by the holders of shares entitled to vote on such
action. Directors shall be elected by a plurality of the votes cast at any
election.
2.8 Proxies. A shareholder entitled to vote at a meeting of shareholders
or to express consent or dissent without a meeting may authorize other persons
to act for him or her by proxy. Each proxy shall be in writing and signed by the
shareholder or the shareholder's authorized agent or representative. A proxy is
not valid after the expiration of three years after its date unless otherwise
provided in the proxy. A proxy is revocable at the pleasure of the shareholder
executing it except as otherwise provided by the laws of the State of Michigan.
2.9 Questions Concerning Elections. The Board of Directors may, in advance
of the meeting, or the presiding officer may, at the meeting, appoint one or
more inspectors to act at a shareholders' meeting. If appointed, the inspectors
shall determine the number of shares outstanding and the voting power of each,
the shares represented at the meeting, the existence
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of a quorum, the validity and effect of proxies, and shall receive votes,
ballots or consents, hear and determine challenges and questions arising in
connection with the right to vote, count and tabulate votes, ballots or
consents, determine the result, and do such acts as are proper to conduct the
election or vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
3.1 Number and Residence. The business and affairs of the Corporation
shall be managed by or under the direction of a Board of Directors consisting of
not less than one nor more than fifteen members. The number of Directors shall
be determined from time to time by the Board of Directors. Directors need not be
Michigan residents or shareholders of the Corporation.
3.2 Election and Term. Except as provided in Section 3.5 below, Directors
shall be elected at the annual shareholders' meeting. Each Director elected
shall hold office for the term for which he or she is elected and until his or
her successor is elected and qualified or until his or her resignation or
removal.
3.3 Resignation. A Director may resign by written notice to the
Corporation. A Director's resignation is effective upon its receipt by the
Corporation or a later time set forth in the notice of resignation.
3.4 Removal. One or more Directors may be removed, with or without cause,
by vote of the holders of a majority of the shares entitled to vote at an
election of Directors.
3.5 Vacancies. Vacancies, including vacancies resulting from an increase
in the number of Directors, may be filled by the Board of Directors, by the
affirmative vote of a majority of all the Directors remaining in office if the
Directors remaining in office constitute less than a quorum, or by the
shareholders. Each Director so chosen shall hold office until the next annual
election of Directors by the shareholders and until his or her successor is
elected and qualified, or until his or her resignation or removal.
3.6 Place of Meetings. The Board of Directors may hold meetings at any
location. The location of annual and regular Board of Directors' meetings shall
be determined by the Board and the location of special meetings shall be
determined by the person calling the meeting.
3.7 Annual Meetings. Each newly elected Board of Directors may meet
promptly after the annual shareholders' meeting for the purposes of electing
officers and transacting such other business as may properly come before the
meeting. No notice of the annual Directors' meeting shall be necessary to the
newly elected Directors in order to legally constitute the
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meeting, provided a quorum is present.
3.8 Regular Meetings. Regular meetings of the Board of Directors or Board
committees may be held without notice at such places and times as the Board or
committee determines at least 30 days before the date of the meeting.
3.9 Special Meetings. Special meetings of the Board of Directors may be
called by the chief executive officer, and shall be called by the President or
Secretary upon the written request of two Directors, on two days notice to each
Director or committee member by mail or 24 hours notice by any other means
provided in Section 5.1. The notice must specify the place, date and time of the
special meeting, but need not specify the business to be transacted at, nor the
purpose of, the meeting. Special meetings of Board committees may be called by
the Chairperson of the committee or a majority of committee members pursuant to
this Section 3.9.
3.10 Quorum. At all meetings of the Board or a Board committee, a majority
of the Directors then in office, or of members of such committee, constitutes a
quorum for transaction of business, unless a higher number is otherwise required
by the Articles of Incorporation, these Bylaws or the Board resolution
establishing such Board committee. If a quorum is not present at any Board or
Board committee meeting, a majority of the Directors present at the meeting may
adjourn the meeting to another time and place without notice other than
announcement at the meeting. Any business may be transacted at the adjourned
meeting which might have been transacted at the original meeting, provided a
quorum is present.
3.11 Voting. The vote of a majority of the members present at any Board or
Board committee meeting at which a quorum is present constitutes the action of
the Board of Directors or of the Board committee, unless a higher vote is
otherwise required by the Michigan Business Corporation Act, the Articles of
Incorporation, these Bylaws, or the Board resolution establishing the Board
committee.
3.12 Telephonic Participation. Members of the Board of Directors or any
Board committee may participate in a Board or Board committee meeting by means
of conference telephone or similar communications equipment through which all
persons participating in the meeting can communicate with each other.
Participation in a meeting pursuant to this Section 3.12 constitutes presence in
person at such meeting.
3.13 Action by Written Consent. Any action required or permitted to be
taken under authorization voted at a Board or Board committee meeting may be
taken without a meeting if before the action all members of the Board then in
office or of the Board committee consent to the action in writing. Such consents
shall be filed with the minutes of the proceedings of the Board or committee and
shall have the same effect as a vote of the Board or committee for all purposes.
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3.14 Committees. The Board of Directors may, by resolution passed by a
majority of the entire Board, designate one or more committees, each consisting
of one or more Directors. The Board may designate one or more Directors as
alternate members of a committee, who may replace an absent or disqualified
member at a committee meeting. In the absence or disqualification of a member of
a committee, the committee members present and not disqualified from voting,
regardless of whether they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in place of such absent
or disqualified member. Any committee, to the extent provided in the resolution
of the Board, may exercise all powers and authority of the Board of Directors in
management of the business and affairs of the Corporation, except a committee
does not have power or authority to:
(a) amend the Articles of Incorporation;
(b) adopt an agreement of merger or share exchange;
(c) recommend to shareholders the sale, lease or
exchange of all or substantially all of the
Corporation's property and assets;
(d) recommend to shareholders a dissolution of the
Corporation or a revocation of a dissolution;
(e) amend the Bylaws of the Corporation;
(f) fill vacancies in the Board; or
(g) unless the resolution designating the committee or a
later Board of Director's resolution expressly so
provides, declare a distribution or dividend or
authorize the issuance of shares.
Each committee and its members shall serve at the pleasure of the Board, which
may at any time change the members and powers of, or discharge, the committee.
Each committee shall keep regular minutes of its meetings and report them to the
Board of Directors when required.
3.15 Compensation. The Board, by affirmative vote of a majority of
Directors in office and irrespective of any personal interest of any of them,
may establish reasonable compensation of Directors for services to the
Corporation as directors, officers or members of a Board committee. No such
payment shall preclude any Director from serving the Corporation in any other
capacity and receiving compensation for such service.
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ARTICLE IV
OFFICERS
4.1 Officers and Agents. The Board of Directors, at its first meeting
after each annual meeting of shareholders, shall elect a President, a Secretary
and a Treasurer, and may also elect and designate as officers a Chairperson of
the Board, a Vice Chairperson of the Board and one or more Executive Vice
Presidents, Vice Presidents, Assistant Vice Presidents, Assistant Secretaries
and Assistant Treasurers. The Board of Directors may also from time to time
appoint, or delegate authority to the Corporation's chief executive officer to
appoint, such other officers and agents as it deems advisable. Any number of
offices may be held by the same person, but an officer shall not execute,
acknowledge or verify an instrument in more than one capacity if the instrument
is required by law to be executed, acknowledged or verified by two or more
officers. An officer has such authority and shall perform such duties in the
management of the Corporation as provided in these Bylaws, or as may be
determined by resolution of the Board of Directors not inconsistent with these
Bylaws, and as generally pertain to their offices, subject to the control of the
Board of Directors.
4.2 Compensation. The compensation of all officers of the Corporation
shall be fixed by the Board of Directors.
4.3 Term. Each officer of the Corporation shall hold office for the term
for which he or she is elected or appointed and until his or her successor is
elected or appointed and qualified, or until his or her resignation or removal.
The election or appointment of an officer does not, by itself, create contract
rights.
4.4 Removal. An officer elected or appointed by the Board of Directors may
be removed by the Board of Directors with or without cause. The removal of an
officer shall be without prejudice to his or her contract rights, if any.
4.5 Resignation. An officer may resign by written notice to the
Corporation. The resignation is effective upon its receipt by the Corporation or
at a subsequent time specified in the notice of resignation.
4.6 Vacancies. Any vacancy occurring in any office of the Corporation
shall be filled by the Board of Directors.
4.7 Chairperson of the Board. The Chairperson of the Board, if such office
is filled, shall be a Director and shall preside at all shareholders' and Board
of Directors' meetings.
4.8 Chief Executive Officer. The Chairperson of the Board, if any, or the
President, as designated by the Board, shall be the chief executive officer of
the Corporation and shall have the general powers of supervision and management
of the business and affairs of the
6
<PAGE>
Corporation usually vested in the chief executive officer of a corporation and
shall see that all orders and resolutions of the Board of Directors are carried
into effect. If no designation of chief executive officer is made, or if there
is no Chairperson of the Board, the President shall be the chief executive
officer. The chief executive officer may delegate to the other officers such of
his or her authority and duties at such time and in such manner as he or she
deems advisable.
4.9 President. If the office of Chairperson of the Board is not filled,
the President shall perform the duties and execute the authority of the
Chairperson of the Board. If the Chairperson of the Board is designated by the
Board as the Corporation's chief executive officer, the President shall be the
chief operating officer of the Corporation, shall assist the Chairperson of the
Board in the supervision and management of the business and affairs of the
Corporation and, in the absence of the Chairperson of the Board, shall preside
at all shareholders' and Board of Directors' meetings. The President may
delegate to the officers other than the Chairperson of the Board, if any, such
of his or her authority and duties at such time and in such manner as he or she
deems appropriate.
4.10 Executive Vice Presidents and Vice Presidents. The Executive Vice
Presidents and Vice Presidents shall assist and act under the direction of the
Chairman of the Board and President. The Board of Directors may designate one or
more Executive Vice Presidents and may grant other Vice Presidents titles which
describe their functions or specify their order of seniority. In the absence or
disability of the President, the authority of the President shall descend to the
Executive Vice Presidents or, if there are none, to the Vice Presidents in the
order of seniority indicated by their titles or otherwise specified by the
Board. If not specified by their titles or the Board, the authority of the
President shall descend to the Executive Vice Presidents or, if there are none,
to the Vice Presidents, in the order of their seniority in such office.
4.11 Secretary. The Secretary shall act under the direction of the
Corporation's chief executive officer and President. The Secretary shall attend
all shareholders' and Board of Directors' meetings, record minutes of the
proceedings and maintain the minutes and all documents evidencing corporate
action taken by written consent of the shareholders and Board of Directors in
the Corporation's minute book. The Secretary shall perform these duties for
Board committees when required. The Secretary shall see to it that all notices
of shareholders' meetings and special Board of Directors' meetings are duly
given in accordance with applicable law, the Articles of Incorporation and these
Bylaws. The Secretary shall have custody of the Corporation's seal and, when
authorized by the Corporation's chief executive officer, President or the Board
of Directors, shall affix the seal to any instrument requiring it and attest
such instrument.
4.12 Treasurer. The Treasurer shall act under the direction of the
Corporation's chief executive officer and President. The Treasurer shall have
custody of the corporate funds
7
<PAGE>
and securities and shall keep full and accurate accounts of the Corporation's
assets, liabilities, receipts and disbursements in books belonging to the
Corporation. The Treasurer shall deposit all moneys and other valuables in the
name and to the credit of the Corporation in such depositories as may be
designated by the Board of Directors. The Treasurer shall disburse the funds of
the Corporation as may be ordered by the Corporation's chief executive officer,
the President or the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the Corporation's chief executive officer,
the President and the Board of Directors (at its regular meetings or whenever
they request it) an account of all his or her transactions as Treasurer and of
the financial condition of the Corporation. If required by the Board of
Directors, the Treasurer shall give the Corporation a bond for the faithful
discharge of his or her duties in such amount and with such surety as the Board
prescribes.
4.13 Assistant Vice Presidents, Secretaries and Treasurers. The Assistant
Vice Presidents, Assistant Secretaries and Assistant Treasurers, if any, shall
act under the direction of the Corporation's chief executive officer, the
President and the officer they assist. In the order of their seniority, the
Assistant Secretaries shall, in the absence or disability of the Secretary,
perform the duties and exercise the authority of the Secretary. The Assistant
Treasurers, in the order of their seniority, shall, in the absence or disability
of the Treasurer, perform the duties and exercise the authority of the
Treasurer.
4.14 Execution of Contracts and Instruments. The Board of Directors may
designate an officer or agent with authority to execute any contract or other
instrument on the Corporation's behalf; the Board may also ratify or confirm any
such execution. If the Board authorizes, ratifies or confirms the execution of a
contract or instrument without specifying the authorized executing officer or
agent, the Corporation's chief executive officer, the President or any Executive
Vice President or Vice President may execute the contract or instrument in the
name and on behalf of the Corporation and may affix the corporate seal to such
document or instrument.
4.15 Voting of Shares and Securities of Other Corporations and Entities.
Unless the Board of Directors otherwise directs, the Corporation's chief
executive officer shall be entitled to vote or designate a proxy to vote all
shares and other securities which the Corporation owns in any other corporation
or entity.
ARTICLE V
NOTICES AND WAIVERS OF NOTICE
5.1 Delivery of Notices. All written notices to shareholders, Directors
and Board committee members shall be given personally or by mail (registered,
certified or other first class mail, with postage pre-paid), addressed to such
person at the address designated by him or her
8
<PAGE>
for that purpose or, if none is designated, at his or her last known address.
Written notices to Directors or Board committee members may also be delivered at
his other office on the Corporation's premises, if any, or by overnight carrier,
telegram, telex, telecopy, radiogram, cablegram, facsimile, computer
transmission or similar form of communication, addressed to the address referred
to in the preceding sentence. Notices given pursuant to this Section 5.1 shall
be deemed to be given when dispatched, or, if mailed, when deposited in a post
office or official depository under the exclusive care and custody of the United
States postal service. Notices given by overnight carrier shall be deemed
"dispatched" at 9:00 a.m. on the day the overnight carrier is reasonably
requested to deliver the notice. The Corporation shall have no duty to change
the written address of any Director, Board committee member or shareholder
unless the Secretary receives written notice of such address change.
5.2 Waiver of Notice. Action may be taken without a required notice and
without lapse of a prescribed period of time, if at any time before the action
is completed the person entitled to notice or to participate in the action to be
taken or, in the case of a shareholder, his or her attorney-in-fact, submits a
signed waiver of the requirements, or if such requirements are waived in such
other manner permitted by applicable law. Neither the business to be transacted
at, nor the purpose of, the meeting need be specified in the written waiver of
notice. Attendance at any shareholders' meeting (in person or by proxy) will
result in both of the following:
(a) waiver of objection to lack of notice or defective notice of
the meeting, unless the shareholder at the beginning of the
meeting objects to holding the meeting or transacting
business at the meeting; and
(b) waiver of objection to consideration of a particular matter
at the meeting that is not within the purpose or purposes
described in the meeting notice, unless the shareholder objects
to considering the matter when it is presented.
A director's attendance at or participation in any Board or Board committee
meeting waives any required notice to him or her of the meeting unless he or
she, at the beginning of the meeting or upon his or her arrival, objects to the
meeting or the transacting of business at the meeting and does not thereafter
vote for or assent to any action taken at the meeting.
ARTICLE VI
SHARE CERTIFICATES AND SHAREHOLDERS OF RECORD
6.1 Certificates for Shares. The shares of the Corporation shall be
represented by certificates signed by the Chairperson of the Board, Vice-
chairperson of the Board, President or a Vice-president and which also may be
signed by another officer of the Corporation. The
9
<PAGE>
officers' signatures may be facsimiles if the certificate is countersigned by a
transfer agent or registered by a registrar other than the Corporation or its
employee. If any officer who has signed or whose facsimile signature has been
placed upon a certificate ceases to be such officer before the certificate is
issued, it may be issued by the Corporation with the same effect as if the
person were such officer at the date of issue.
6.2 Lost or Destroyed Certificates. The Board of Directors may direct or
authorize an officer to direct that a new certificate for shares be issued in
place of any certificate alleged to have been lost or destroyed. When
authorizing such issue of a new certificate, the Board of Directors or officer
may, in its discretion and as a condition precedent to the issuance thereof,
require the owner (or the owner's legal representative) of such lost or
destroyed certificate to give the Corporation an affidavit claiming that the
certificate is lost or destroyed or a bond in such sum as it may direct as
indemnity against any claim that may be made against the Corporation with
respect to such old or new certificate.
6.3 Transfer of Shares. Shares of the Corporation are transferable only on
the Corporation's stock transfer books upon surrender to the Corporation or its
transfer agent of a certificate for the shares, duly endorsed for transfer, and
the presentation of such evidence of ownership and validity of the transfer as
the Corporation requires.
6.4 Record Date. The Board of Directors may fix, in advance, a date as the
record date for determining shareholders for any purpose, including determining
shareholders entitled to (a) notice of, and to vote at, any shareholders'
meeting or any adjournment of such meeting; (b) express consent to, or dissent
from, a proposal without a meeting; or (c) receive payment of a share dividend
or distribution or allotment of a right. The record date shall not be more than
60 nor less than 10 days before the date of the meeting, nor more than 10 days
after the Board resolution fixing a record date for determining shareholders
entitled to express consent to, or dissent from, a proposal without a meeting,
nor more than 60 days before any other action.
If a record date is not fixed:
(a) the record date for determining the shareholders
entitled to notice of, or to vote at, a
shareholders' meeting shall be the close of business
on the day next preceding the day on which notice of
the meeting is given, or, if no notice is given, the
close of business on the day next preceding the day
on which the meeting is held; and
(b) the record date for determining shareholders for any
other purpose shall be the close of business on the
day on which the resolution of the Board of
10
<PAGE>
Directors relating to the action is adopted.
A determination of shareholders of record entitled to notice of, or to vote at,
a shareholders' meeting shall apply to any adjournment of the meeting, unless
the Board of Directors fixes a new record date for the adjourned meeting.
Only shareholders of record on the record date shall be entitled to notice
of, or to participate in, the action relating to the record date,
notwithstanding any transfer of shares on the Corporation's books after the
record date. This Section 6.4 shall not affect the rights of a shareholder and
the shareholder's transferor or transferee as between themselves.
6.5 Registered Shareholders. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of a share for all purposes, including notices, voting, consents, dividends and
distributions, and shall not be bound to recognize any other person's equitable
or other claim to interest in such share, regardless of whether it has actual or
constructive notice of such claim or interest.
ARTICLE VII
INDEMNIFICATION
The Corporation shall, to the fullest extent authorized or permitted by the
Michigan Business Corporation Act, (a) indemnify any person, and his or her
heirs, personal representatives, executors, administrators and legal
representatives, who was, is, or is threatened to be made, a party to any
threatened, pending or completed action, suit or proceeding (whether civil,
criminal, administrative or investigative) by reason of the fact that such
person is or was a director or officer of the Corporation or is or was serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
(collectively, "Covered Matters"); and (b) pay or reimburse the reasonable
expenses incurred by such person and his or her heirs, executors, administrators
and legal representatives in connection with any Covered Matters in advance of
final disposition of such Covered Matters. The Corporation may provide such
other indemnification to directors, officers, employees and agents by insurance,
contract or otherwise as is permitted by law and authorized by the Board of
Directors.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Checks and Funds. All checks, drafts or demands for money and notes of
the Corporation must be signed by such officer or officers or such other person
or persons as the Board of Directors from time to time designates. All funds of
the Corporation not otherwise
11
<PAGE>
employed shall be deposited or used as the Board of Directors from time to time
designates.
8.2 Fiscal Year. The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors.
8.3 Corporate Seal. The Board of Directors may adopt a corporate seal for
the Corporation. The corporate seal, if adopted, shall be circular and contain
the name of the Corporation and the words "Corporate Seal Michigan". The seal
may be used by causing it or a facsimile of it to be impressed, affixed,
reproduced or otherwise.
8.4 Books and Records. The Corporation shall keep within or outside of
Michigan books and records of account and minutes of the proceedings of its
shareholders, Board of Directors and Board committees, if any. The Corporation
shall keep at its registered office or at the office of its transfer agent
within or outside of Michigan records containing the names and addresses of all
shareholders, the number, class and series of shares held by each and the dates
when they respectively became recordholders of shares. Any of such books,
records or minutes may be in written form or in any other form capable of being
converted into written form within a reasonable time.
8.5 Financial Statements. The Corporation shall cause to be made and
distributed to its shareholders, within four months after the end of each fiscal
year, a financial report (including a statement of income, year-end balance
sheet, and, if prepared by the Corporation, its statement of sources and
application of funds) covering the preceding fiscal year of the Corporation.
ARTICLE IX
AMENDMENTS
These Bylaws may be amended or repealed, or new Bylaws may be adopted, by
action of either the shareholders or a majority of the Board of Directors then
in office. The Articles of Incorporation or these Bylaws may from time to time
specify particular provisions of the Bylaws which may not be altered or repealed
by the Board of Directors.
ARTICLE X
SCOPE OF BYLAWS
These Bylaws govern the regulation and management of the affairs of the
Corporation to the extent that they are consistent with applicable law and the
Articles of Incorporation; to the extent they are not consistent, applicable law
and the Articles of Incorporation shall govern.
12
<PAGE>
NUMBER SHARES
- ------ ------
CUSIP
FLAGSTAR CAPITAL CORPORATION
INCORPORATED UNDER THE LAWS
OF THE STATE OF MICHIGAN
FULLY PAID AND NON-ASSESSABLE
[ ]% NONCUMULATIVE EXCHANGEABLE PREFERRED STOCK, SERIES A
THIS IS TO CERTIFY THAT ________________ IS THE OWNER OF THE ABOVE STATED NUMBER
OF SHARES OF [ ]% NONCUMULATIVE EXCHANGEABLE PREFERRED STOCK, SERIES A, PAR
VALUE OF $25.00 PER SHARE, OF FLAGSTAR CAPITAL CORPORATION (THE "CORPORATION").
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE TRANSFERABLE ONLY ON THE STOCK
TRANSFER BOOKS OF THE CORPORATION BY THE HOLDER OF RECORD HEREOF IN PERSON, OR
BY SUCH HOLDERS, DULY, AUTHORIZED ATTORNEY OR LEGAL REPRESENTATIVE, UPON THE
SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED. THIS CERTIFICATE IS NOT VALID
UNTIL COUNTERSIGNED AND REGISTERED BY THE CORPORATION'S TRANSFER AGENT AND
REGISTRAR. THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY
INSURED OR GUARANTEED.
THE INTEREST IN THE CORPORATION REPRESENTED BY THIS CERTIFICATE MAY NOT BE
RETIRED OR WITHDRAWN EXCEPT AS PROVIDED IN THE RESTATED AND AMENDED ARTICLES OF
INCORPORATION AND BYLAWS OF THIS CORPORATION.
IN WITNESS WHEREOF, FLAGSTAR CAPITAL CORPORATION HAS CAUSED THIS
CERTIFICATE TO BE EXECUTED BY THE FACSIMILE SIGNATURES OF ITS DULY AUTHORIZED
OFFICERS AND HAS CAUSED A FACSIMILE OF ITS CORPORATE SEAL TO BE HEREUNTO
AFFIXED.
[SEAL]
--------------------------------
COUNTERSIGNED:
--------------------------------------------
TRANSFER AGENT AND REGISTRAR
BY:
----------------------------------------
AUTHORIZED SIGNATURE
<PAGE>
The securities represented by this Certificate (the "Preferred Stock") are
issued subject to all the provisions of the Amended and Restated Articles of
Incorporation ("Articles of Incorporation") and Bylaws of the Corporation, as
from time to time amended or supplemented (copies of which are on file at the
principal executive offices of the Corporation) to all of which the holder, by
acceptance hereof, assents.
The Articles of Incorporation contains certain limitations on the ownership of
the Preferred Stock. The Preferred Stock may be automatically exchanged, without
the consent of the owner thereof, for identical shares of preferred stock of
Flagstar Bank, FSB, (the "Bank") in the event a conservator or receiver is
appointed for the Bank, the Bank fails to meet its capital requirements or
applicable Bank regulatory authorities believe such failure is likely in the
near future.
The shares of Preferred Stock represented by this certificate are subject to
restrictions on transfer for the purpose of the Corporation's maintenance of its
status as a Real Estate Investment Trust under the Internal Revenue Code of
1986, as amended. No Person may (1) Beneficially Own shares of any class or
series of preferred stock in excess of the Ownership Limit, except as set forth
in the Articles of Incorporation, as the same may be amended from time to time,
or (2) Beneficially Own shares of Preferred Stock that would result in the
Corporation being "closely held" under Section 856 (h) of the Code or otherwise
to fail as a REIT. Any Person who attempts to Own Beneficially shares of
Preferred Stock in excess of the applicable limitation must immediately notify
the Corporation in writing. No Person may transfer shares of Preferred Stock if
such transfer would result in the outstanding Common Stock and Preferred Stock's
being Beneficially Owned by fewer than 100 Persons (determined without reference
to any rules of attribution). If the restrictions on transfer are violated, the
shares of Preferred Stock represented hereby will be transferred automatically
and by operation of law to a Trust and shall be designated Excess Shares. All
capitalized terms in this legend have the meanings ascribed to such terms in the
Articles of Incorporation, a copy of which, including the restrictions on
transfer, will be sent without charge to each stockholder who so requests.
The Preferred Stock will not be redeemable prior to _________________, 2003,
except upon the occurrence of a Tax Event (as defined in the Certificate of
Designation for the Preferred Stock). On or after such date, the Preferred Stock
will be redeemable at the option of the Corporation at $25.00 per share, plus
the quarterly accrued and unpaid dividends to the redemption date.
The Corporation will furnish to any stockholder, upon request and without
charge, a full statement of the powers, designations, preferences and special
rights of each authorized class of stock or series thereof and the
qualifications, limitations or restrictions of any such preferences and/or
rights, to the extent that the same have been fixed, and of the authority of the
Board of Directors to designate the same with respect to other series. Such
request may be made to the Secretary of the Corporation or its Transfer Agent.
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<PAGE>
TEN COM- as tenants in common
TEN ENT- as tenants by the entireties
JT TEN- as joint tenants with right of
survivorship and not as tenants in common
UNIF GIFT MIN ACT- Under Uniform Gifts to Minors Act
Additional abbreviations may also be used though not in the above list.
For Value Received, ____________________ hereby sell, assign and transfer unto
(PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE)
- ------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPE, NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
Shares of preferred stock
- -------------------------------------------------------
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
as Attorney, in fact, to transfer the
- ------------------------------------------
said shares on the books of the within named Corporation with full power of
substitution.
Dated
- ---------------
- ----------------------------------------
(Signature)
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
<PAGE>
[LETTERHEAD OF KUTAK ROCK APPEARS HERE]
December 22, 1997
Board of Directors
Flagstar Capital Corporation
2600 Telegraph Road
Bloomfield Hills, Michigan 48302-0953
Re: Registration Statement on Form S-11
Ladies and Gentlemen:
You have requested our opinion as special counsel to Flagstar Capital
Corporation (the "Company") in connection with the Registration Statement on
Form S-11 to be filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Registration Statement"). The
Registration Statement relates to the initial public offering by the Company of
its shares of _____% Noncumulative Exchangeable Preferred Stock, Series A (the
"Preferred Stock").
In rendering this opinion, we understand that the Preferred Stock will be
offered and sold in the manner described in the Prospectus, which is a part of
the Registration Statement. We have examined such records and documents and
made such examination as we have deemed relevant in connection with this
opinion.
Based upon the foregoing, it is our opinion that the shares of Preferred
Stock will, when issued and sold as contemplated by the Registration Statement,
be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us in the Prospectus under the
heading "Legal Matters."
Very truly yours,
/s/ Kutak Rock
<PAGE>
MORTGAGE LOAN PURCHASE AND WARRANTIES AGREEMENT
FLAGSTAR CAPITAL CORPORATION
PURCHASER
FLAGSTAR BANK, FSB
SELLER
DATED AS OF [__________], 1998
DRAFT
-----
<PAGE>
TABLE OF CONTENTS
<TABLE>
Page
<S> <C> <C>
SECTION 1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2. AGREEMENT TO PURCHASE. . . . . . . . . . . . . . . . . . . . . 9
[SECTION 3. RESERVED.] . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 4. PURCHASE PRICE. . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 5. EXAMINATION OF MORTGAGE FILES. . . . . . . . . . . . . . . . . .10
SECTION 6. CONVEYANCE FROM SELLER TO PURCHASER. . . . . . . . . . . . . . .11
Subsection 6.01. Conveyance of Mortgage Loans; Possession
of Servicing Files. . . . . . . . . . . . . . . . . . 11
Subsection 6.02. Books and Records . . . . . . . . . . . . . . . . . . 11
Subsection 6.03. Delivery of Mortgage Loan Documents . . . . . . . . . 11
SECTION 7. SERVICING OF THE MORTGAGE LOANS . . . . . . . . . . . . . . . . 12
SECTION 8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
SELLER; REMEDIES FOR BREACH . . . . . . . . . . . . . . . . . . 13
Subsection 8.01. Representations and Warranties Regarding the Seller . 13
Subsection 8.02. Representations and Warranties Regarding
Individual Mortgage Loans . . . . . . . . . . . . . . .15
Subsection 8.03. Remedies for Breach of Representations
and Warranties . . . . . . . . . . . . . . . . . . . . 27
SECTION 9. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 10. CLOSING DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 11. COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 12. MERGER OR CONSOLIDATION OF THE SELLER . . . . . . . . . . . . 31
SECTION 13. MANDATORY DELIVERY; GRANT OF SECURITY INTEREST . . . . . . . . 31
SECTION 14. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 15. SEVERABILITY CLAUSE . . . . . . . . . . . . . . . . . . . . . 32
SECTION 16. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 17. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 18. INTENTION OF THE PARTIES . . . . . . . . . . . . . . . . . . . 33
SECTION 19. SUCCESSORS AND ASSIGNS; ASSIGNMENT OF
PURCHASE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 20. WAIVERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 21. EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 22. GENERAL INTERPRETIVE PRINCIPLES . . . . . . . . . . . . . . . 34
SECTION 23. REPRODUCTION OF DOCUMENTS . . . . . . . . . . . . . . . . . . 35
SECTION 24. FURTHER AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 25. RECORDATION OF ASSIGNMENTS OF MORTGAGE . . . . . . . . . . . .35
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
EXHIBIT A CONTENTS OF EACH MORTGAGE FILE
EXHIBIT B FORM OF SERVICING AGREEMENT
EXHIBIT C FORM OF SELLER'S/SERVICER'S OFFICER'S CERTIFICATE
EXHIBIT D FORM OF OPINION OF COUNSEL TO THE SELLER/SERVICER
EXHIBIT E MORTGAGE LOAN SCHEDULE
EXHIBIT F THE UNDERWRITING GUIDELINES OF FLAGSTAR BANK, FSB
</TABLE>
3
<PAGE>
MORTGAGE LOAN PURCHASE AND SALE AGREEMENT
This MORTGAGE LOAN PURCHASE AND SALE AGREEMENT (the "Agreement"),
dated as of [__________,] 1998, by and between Flagstar Capital Corporation, a
Michigan corporation, having an office at 2600 Telegraph Road, Bloomfield Hills,
Michigan 48302 (the "Purchaser") and Flagstar Bank, FSB, a federally chartered
savings bank, having an office at 2600 Telegraph Road, Bloomfield Hills,
Michigan 48302 (the "Seller").
W I T N E S S E T H:
WHEREAS, the Seller desires to sell to the Purchaser, and the
Purchaser desires to purchase from the Seller, certain residential first
mortgage loans (the "Mortgage Loans") on a servicing retained basis as described
herein, and which shall be delivered as whole loans on the Closing Date, as
defined below; and
WHEREAS, each Mortgage Loan is secured by a mortgage, deed of trust or
other security instrument creating a first lien on a residential dwelling
located in the jurisdiction indicated on the Mortgage Loan Schedule; and
WHEREAS, the Purchaser and the Seller wish to prescribe the manner of
the conveyance, servicing and control of the Mortgage Loans.
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Purchaser and the Seller agree as follows:
SECTION 1.
DEFINITIONS.
For purposes of this Agreement the following capitalized terms shall
have the respective meanings set forth below. Other capitalized terms used in
this Agreement and not defined herein shall have the respective meanings set
forth in the Servicing Agreement attached as Exhibit B hereto.
"Accepted Servicing Practices" means, with respect to any Mortgage
Loan, those mortgage servicing practices of prudent mortgage lending
institutions which service mortgage loans of the same type as such Mortgage Loan
in the jurisdiction where the related Mortgaged Property is located.
"Act" means The National Housing Act, as amended from time to time.
4
<PAGE>
"Adjustable Rate Mortgage Loan" means any individual Mortgage Loan
purchased pursuant to this Agreement the interest rate of which adjusts
periodically.
"Affiliate" means, with respect to any specified Person, any other
Person controlling or controlled by or under common control with such specified
Person. For the purposes of this definition, "control" when used with respect
to any specified Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Agreement" means this Mortgage Loan Purchase and Warranties Agreement
and all amendments hereof and supplements hereto.
"ALTA" means The American Land Title Association or any successor
thereto.
"Ancillary Income" means all late charges, assumption fees, escrow
account benefits, reinstatement fees, and similar types of fees arising from or
in connection with any Mortgage Loan to the extent not otherwise payable to the
Mortgagor under applicable law or pursuant to the terms of the related Mortgage
Note.
"Appraised Value" means the value set forth in an appraisal made in
connection with the origination of the related Mortgage Loan as the value of the
Mortgaged Property.
"Assignment and Assumption Agreement" has the meaning set forth in
Section 19.
"Assignment of Mortgage" means an assignment of the Mortgage delivered
in blank, notice of transfer or equivalent instrument in recordable form,
sufficient under the laws of the jurisdiction wherein the related Mortgaged
Property is located to reflect the sale of the Mortgage to the Purchaser.
"Business Day" means any day other than (i) a Saturday or Sunday, or
(ii) a day on which banking and savings and loan institutions, in the State of
Michigan are authorized or obligated by law or executive order to be closed.
"Closing Date" means [_________], 1998, or such other date as is
mutually agreed upon by the parties.
"Code" means Internal Revenue Code of 1986, as amended.
"Condemnation Proceeds" means all awards or settlements in respect of
a Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents.
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"Conventional Loan" means a conventional residential first lien
mortgage loan which is a Mortgage Loan.
"Convertible Mortgage Loan" means any individual Mortgage Loan
purchased pursuant to this Agreement which contains a provision whereby the
Mortgagor is permitted to convert the Mortgage Loan to a fixed rate Mortgage
Loan in accordance with the terms of the related Mortgage Note.
"Custodial Account" means the separate trust account created and
maintained pursuant to Section 2.04 of the Servicing Agreement.
"Cut-off Date" means [__________], 1998.
"Deleted Mortgage Loan" means a Mortgage Loan that is repurchased or
replaced with a Qualified Substitute Mortgage Loan by the Seller in accordance
with the terms of this Agreement.
"Determination Date" means the earlier of two (2) Business Days prior
to the related Remittance Date or the 15th day of the month in which the related
Remittance Date occurs.
"Due Date" means the day of the month on which the Monthly Payment is
due on a Mortgage Loan, exclusive of any days of grace.
"Escrow Account" means the separate account created and maintained
pursuant to Section 2.06 of the Servicing Agreement with respect to each
Mortgage Loan, as specified in the Servicing Agreement.
"Escrow Payments" means, with respect to any Mortgage Loan, the
amounts constituting taxes, assessments, water rates, sewer rents, municipal
charges, mortgage insurance premiums, fire and hazard insurance premiums,
condominium charges, and any other payments required to be escrowed by the
Mortgagor with the mortgagee pursuant to the Mortgage or any other document.
"FHA" means the Federal Housing Administration, an agency within the
United States Department of Housing and Urban Development, or any successor
thereto and including the Federal Housing Commissioner and the Secretary of
Housing and Urban Development where appropriate under the FHA Regulations.
"FHLMC" means the Federal Home Loan Mortgage Corporation, or any
successor thereto.
"FNMA" means the Federal National Mortgage Association, or any
successor thereto.
"Gross Margin" means, with respect to each Adjustable Rate Mortgage
Loan, the fixed percentage amount set forth in the related Mortgage Note which
amount is added to the Index in accordance with the terms of the related
Mortgage Note to determine on each Interest Rate Adjustment Date the Mortgage
Interest Rate for such Mortgage Loan.
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"HUD" means the Department of Housing and Urban Development, or any
federal agency or official thereof which may from time to time succeed to the
functions thereof with regard to FHA mortgage insurance. The term "HUD," for
purposes of this Agreement, is also deemed to include subdivisions thereof such
as the FHA and Government National Mortgage Association.
"Index" means, with respect to each Interest Rate Adjustment Date of
any Adjustable Rate Mortgage Loan sold pursuant to this Agreement, the weekly
average yield on United States Treasury securities adjusted to a constant
maturity of one year, as made available by the Federal Reserve Board.
"Insurance Proceeds" means, with respect to each Mortgage Loan,
proceeds of insurance policies insuring the Mortgage Loan or the related
Mortgaged Property.
"Interest Rate Adjustment Date" means, with respect to each Adjustable
Rate Mortgage Loan, the date, specified in the related Mortgage Note on which
the Mortgage Interest Rate is adjusted.
"Lifetime Rate Cap" means the provision of each Mortgage Note related
to an Adjustable Rate Mortgage Loan which provides for an absolute maximum
Mortgage Interest Rate thereunder. The Mortgage Interest Rate during the term of
each Adjustable Rate Mortgage Loan shall not at any time exceed the amount per
annum set forth on the Mortgage Loan Schedule.
"Liquidation Proceeds" means cash received in connection with the
liquidation of a defaulted Mortgage Loan, whether through the sale or assignment
of such Mortgage Loan, trustee's sale, foreclosure sale or otherwise, or the
sale of the related Mortgaged Property if the Mortgaged Property is acquired in
satisfaction of the Mortgage Loan.
"Loan-to-Value Ratio" or "LTV" means, with respect to any Mortgage
Loan, the ratio (expressed as a percentage) of the original principal amount of
the Mortgage Loan to the lesser of (a) the Appraised Value of the Mortgaged
Property at origination and (b) if the Mortgage Loan was made to finance the
acquisition of the related Mortgaged Property, the purchase price of the
Mortgaged Property.
"Monthly Payment" means the scheduled monthly payment of principal
and interest on a Mortgage Loan.
"Mortgage" means the mortgage, deed of trust or other instrument
securing a Mortgage Note, which creates a first lien on an unsubordinated estate
in fee simple in real property securing the Mortgage Note.
"Mortgage File" means the items pertaining to a particular Mortgage
Loan referred to in Exhibit A annexed hereto, and any additional documents
required to be added to the Mortgage File pursuant to this Agreement.
"Mortgage Interest Rate" means the annual rate of interest borne on a
Mortgage Note, which, in
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the case of an Adjustable Rate Mortgage Loan, shall be adjusted from time to
time, with respect to each Mortgage Loan.
"Mortgage Interest Rate Cap" means, with respect to each Adjustable
Rate Mortgage Loan, the limit on each Mortgage Interest Rate adjustment as set
forth in the related Mortgage Note.
"Mortgage Loan" means an individual Mortgage Loan which is the subject
of this Agreement, each Mortgage Loan originally sold and subject to this
Agreement being identified on the applicable Mortgage Loan Schedule, which
Mortgage Loan includes without limitation the Mortgage File, the Monthly
Payments, Principal Prepayments, Liquidation Proceeds, Condemnation Proceeds,
Insurance Proceeds, and all other rights, benefits, proceeds and obligations
arising from or in connection with such Mortgage Loan, excluding replaced or
repurchased mortgage loans.
"Mortgage Loan Documents" means, with respect to each Mortgage Loan,
the following documents pertaining to such Mortgage Loan:
a. The original Mortgage Note (or a lost note affidavit, executed by
an officer of the Seller, with a copy of the original note
attached thereto) bearing all intervening endorsements, endorsed
"Pay to the order of ______________ without recourse" and signed
in the name of the Seller by an authorized officer. To the extent
that there is no room on the face of the Mortgage Note for
endorsements, the endorsement may be contained on an allonge, if
state law so allows. If the Mortgage Loan was acquired by the
Seller in a merger, the endorsement must be by "[Seller],
successor by merger to [name of predecessor]". If the Mortgage
Loan was acquired or originated by the Seller while doing business
under another name, the endorsement must be by "[Seller], formerly
known as [previous name]"; and
b. The original Assignment of Mortgage for each Mortgage Loan in form
and substance acceptable for recording endorsed "Pay to the order
of _____________" and signed in the name of the Seller. If the
Mortgage Loan was acquired by the Seller in a merger, the
Assignment of Mortgage must be made by "[Seller], successor by
merger to [name of predecessor]". If the Mortgage Loan was
acquired or originated by the
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Seller while doing business under another name, the Assignment of
Mortgage must be by "[Seller], formerly known as [previous name]".
With respect to Co-op Loans, the Assignment of Mortgage shall
include an assignment of Security Instruments.
c. The original of any guarantee executed in connection with the
Mortgage Note.
d. The original Mortgage, with evidence of recording thereon. If in
connection with any Mortgage Loan, the Seller cannot deliver or
cause to be delivered the original Mortgage with evidence of
recording thereon on or prior to the Closing Date because of a
delay caused by the public recording office where such Mortgage
has been delivered for recordation, a photocopy of such Mortgage
certified by the Seller to be true and correct will be delivered;
if such Mortgage has been lost or if such public recording office
retains the original recorded Mortgage, the Seller shall deliver
or cause to be delivered to the Purchaser, a photocopy of such
Mortgage, certified by such public recording office to be a true
and complete copy of the original recorded Mortgage.
e. The originals of all assumption, modification, consolidation or
extension agreements, if any, with evidence of recording thereon
or certified copies of such documents if the originals thereof are
unavailable.
f. Originals of all intervening assignments of the Mortgage with
evidence of recording thereon, if such intervening assignment has
been recorded.
g. The original mortgagee policy of title insurance or, in the event
such original title policy is unavailable, a certified true copy
of the related policy binder or commitment for title certified to
be true and complete by the title insurance company.
h. Any security agreement, chattel mortgage or
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equivalent executed in connection with the Mortgage.
i. For Mortgage Loans with original LTV's greater than
85%, evidence of a Primary Insurance Policy.
"Mortgage Loan Schedule" means the schedule of Mortgage Loans attached
hereto as Exhibit E setting forth at least the following information with
respect to each Mortgage Loan: (1) the Seller's Mortgage Loan identifying
number; (2) the Mortgagor's name; (3) the street address of the Mortgaged
Property including the city, state and zip code; (4) a code indicating whether
the Mortgaged Property is owner occupied, second home or investor owned; (5) the
type of residential units constituting the Mortgaged Property; (6) the original
months to maturity; (7) the remaining months to maturity from the Cut-off Date,
based on the original amortization schedule, and, if different, the maturity
expressed in the same manner but based on the actual amortization schedule; (8)
the Loan-to-Value Ratio at origination; (9) the Mortgage Interest Rate as of the
Cut-off Date; (10) the stated maturity date; (11) the amount of the Monthly
Payment as of the Cut-off Date; (12) the original principal amount of the
Mortgage Loan; (13) the principal balance of the Mortgage Loan as of the close
of business on the Cut-off Date, after deduction of payments of principal due on
or before the Cut-off Date whether or not collected; (14) a code indicating the
purpose of the loan (i.e., purchase, rate and term refinance, equity take-out
refinance); (15) a code indicating the documentation style (i.e. full,
alternative or reduced); (16) a code indicating whether the Mortgage Loan is a
Convertible Mortgage Loan; (17) the number of times during the 12 month period
preceding the Closing Date that any Monthly Payment has been received thirty or
more days after its Due Date; (18) the type of Mortgage Loan product, if any;
(19) the first payment Due Date; (19) the initial Mortgage Interest Rate; (20)
the amount of the first Monthly Payment; (21) the name of any Qualified Insurer
with respect to a PMI Policy; and (22) the Servicing Fee Rate. With respect to
any Adjustable Rate Mortgage Loan, (1) the Interest Rate Adjustment Dates; (2)
the Gross Margin; (3) the Lifetime Rate Cap; (4) any Periodic Rate Caps; (5) any
minimum interest rate, if other than the Gross Margin; (6) the first Rate
Adjustment Date after the Cut-off Date; and (8) the name of the applicable
Index, in each case, under the terms of the Mortgage Note. With respect to the
Mortgage Loans in the aggregate, the Mortgage Loan Schedule shall set forth the
following information, as of the Cut-off Date: (1) the number of Mortgage Loans;
(2) the current aggregate outstanding principal balance of the Mortgage Loans;
(3) the weighted average Mortgage Interest Rate of the Mortgage Loans; and (4)
the weighted average maturity of the Mortgage Loans.
"Mortgage Note" means the note or other evidence of the indebtedness of a
Mortgagor secured by a Mortgage.
"Mortgaged Property" means the real property securing repayment of the
debt evidenced by a Mortgage Note.
"Mortgagor" means the obligor on a Mortgage Note.
"Officer's Certificate" means a certificate signed by the Chairman of the
Board or the Vice
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Chairman of the Board or the President or a Vice President and by the Treasurer
or the Secretary or one of the Assistant Treasurers or Assistant Secretaries of
the Seller, as the case may be, and delivered to the Purchaser as required by
this Agreement.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Seller, reasonably acceptable to the Purchaser.
"Periodic Rate Cap" means the provision of each Mortgage Note related to
each Adjustable Rate Mortgage Loan which provides for an absolute maximum amount
by which the Mortgage Interest Rate therein may increase or decrease on an
Interest Rate Adjustment Date above or below the Mortgage Interest Rate
previously in effect. The Periodic Rate Cap for each Adjustable Rate Mortgage
Loan is the rate set forth on Exhibit E hereto.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, limited liability company,
unincorporated organization, government or any agency or political subdivision
thereof.
"PMI Policy" or "Primary Insurance Policy" means a policy of primary
mortgage guaranty insurance issued by a Qualified Insurer.
"Prime Rate" means the prime rate announced to be in effect from time to
time, as published as the average rate in The Wall Street Journal (Chicago
edition).
"Principal Prepayment" means any payment or other recovery of principal on
a Mortgage Loan which is received in advance of its scheduled Due Date,
including any prepayment penalty or premium thereon and which is not accompanied
by an amount of interest representing scheduled interest due on any date or
dates in any month or months subsequent to the month of prepayment.
"Purchase Price" means the price paid on the Closing Date by the Purchaser
to the Seller in exchange for the Mortgage Loans purchased on the Closing Date
as set forth in Section 4 of this Agreement.
"Purchaser" means Flagstar Capital Corporation or its successor in
interest or assigns or any successor to the Purchaser under this Agreement as
herein provided.
"Qualified Appraiser" means an appraiser who had no interest, direct
or indirect in the Mortgaged Property or in any loan made on the security
thereof, and whose compensation is not affected by the approval or disapproval
of the Mortgage Loan, and such appraiser and the appraisal made by such
appraiser both satisfy the requirements of Title XI of the Federal Institutions
Reform, Recovery, and Enforcement Act of 1989 and the regulations promulgated
thereunder, all as in effect on the date the Mortgage Loan was originated.
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"Qualified Insurer" means an insurance company duly qualified as such under
the laws of the states in which the Mortgaged Properties are located, duly
authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided, approved as an insurer by FNMA and
FHLMC with respect to primary mortgage insurance and, in addition, in the two
highest rating categories by Best's with respect to hazard and flood insurance.
"Qualified Substitute Mortgage Loan" means a mortgage loan eligible to
be substituted by the Seller for a Deleted Mortgage Loan which must, on the date
of such substitution, (i) have an outstanding principal balance, after deduction
of all scheduled payments due in the month of substitution (or in the case of a
substitution of more than one mortgage loan for a Deleted Mortgage Loan, an
aggregate principal balance), not in excess of the outstanding principal balance
of the Deleted Mortgage Loan (the amount of any shortfall will be deposited in
the Custodial Account by the Seller in the month of substitution); (ii) have a
Mortgage Interest Rate not less than and not more than 1.00% greater than the
Mortgage Interest Rate of the Deleted Mortgage Loan; (iii) have a remaining term
to maturity not greater than and not more than one year less than that of the
Deleted Mortgage Loan (iv) be of the same type as the Deleted Mortgage Loan
(i.e., Mortgage Loan with the same Mortgage Interest Rate Caps or fixed rate);
and (v) comply with each representation and warranty (respecting individual
Mortgage Loans) set forth in Section 8.02 hereof.
"Remittance Date" means the date specified in the Servicing Agreement
(with respect to each Mortgage Loan, as specified therein).
"Repurchase Price" means, with respect to any Mortgage Loan, a price equal
to (i) the unpaid principal balance of such Mortgage Loan plus (ii) interest on
such unpaid principal balance of such Mortgage Loan at the Mortgage Interest
Rate from the last date through which interest has been paid and distributed to
the Purchaser to the date of repurchase, less amounts received or advanced, if
any, by the Seller in respect of such repurchased Mortgage Loan.
"RESPA" means Real Estate Settlement Procedures Act, as amended from
time to time.
"Seller" means Flagstar Bank, FSB, its successors in interest and
assigns.
"Servicing Agreement" means the agreement, attached as Exhibit B hereto, to
be entered into by the Purchaser and the Seller, as servicer, providing for the
Seller to service the Mortgage Loans as specified by the Servicing Agreement.
"Servicing Fee" means, with respect to each Mortgage Loan, subject to
the Servicing Agreement, the amount of the annual fee the Purchaser shall pay to
the Seller, which shall for a period of one full month be equal to one-twelfth
of the product of (i) the Servicing Fee Rate and (ii) the outstanding principal
balance of such Mortgage Loan. Such fee shall be payable monthly, and shall be
pro rated for any portion of a month during which the Mortgage Loan is serviced
by the Seller under the Servicing Agreement. The obligation of the Purchaser to
pay the Servicing Fee is limited to, and the Servicing Fee
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is payable solely from, the interest portion (including recoveries with respect
to interest from Liquidation Proceeds, to the extent permitted by this
Agreement) of such Monthly Payment collected by the Seller, or as otherwise
provided under this Agreement. In addition to the Servicing Fee, the Seller
shall be entitled to retain Ancillary Income.
"Servicing Fee Rate" means, with respect to each Mortgage Loan, the rate
specified in the Mortgage Loan Schedule with respect to such Mortgage Loan.
"Servicing File" means with respect to each Mortgage Loan, the file
retained by the Seller during the period in which the Seller is acting as
servicer pursuant to the Servicing Agreement consisting of originals of all
documents in the Mortgage File which are not delivered to the Purchaser or its
designee and copies of the Mortgage Loan Documents.
"Stated Principal Balance" means as to each Mortgage Loan, (i) the
principal balance of the Mortgage Loan at the Cut-off Date after giving effect
to payments of principal due on or before such date, whether or not received,
minus (ii) all amounts previously received by the Purchaser with respect to the
related Mortgage Loan representing payments or recoveries of principal or
advances in lieu thereof.
SECTION 2.
AGREEMENT TO PURCHASE.
The Seller agrees to sell and the Purchaser agrees to purchase Mortgage
Loans having an aggregate principal balance on the Cut-off Date in an amount
equal to $[__________], or in such other amount as agreed by the Purchaser and
the Seller as evidenced by the actual aggregate principal balance of the
Mortgage Loans accepted by the Purchaser on the Closing Date.
[SECTION 3. RESERVED.]
SECTION 4.
PURCHASE PRICE.
The Purchase Price for the Mortgage Loans listed on the Mortgage Loan
Schedule shall be $[__________,] or in such other amount as agreed by the
Purchaser and the Seller as evidenced by the actual aggregate principal balance
of the Mortgage Loans accepted by the Purchaser on the Closing Date. The initial
principal amount of the Mortgage Loans shall be the aggregate principal balance
of the Mortgage Loans, so computed as of the Cut-off Date, after application of
scheduled payments of principal due on or before the Cut-off Date whether or not
collected.
In addition to the Purchase Price as described above, the Purchaser
shall pay to the Seller, at closing, accrued interest on the initial principal
amount of the related Mortgage Loans at the weighted average Mortgage Interest
Rate of those Mortgage Loans, minus any amounts attributable to Servicing Fees
as provided in the Servicing Agreement from the Cut-off Date through the day
prior to the Closing
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Date, inclusive.
The Purchase Price plus accrued interest as set forth in the preceding
paragraph shall be paid on the Closing Date by wire transfer of immediately
available funds.
The Purchaser shall be entitled to (i) all scheduled principal due after
the Cut-off Date, (ii) all other recoveries of principal collected on or after
the Cut-off Date (provided, however, that all scheduled payments of principal
due on or before the Cut-off Date and collected after the Cut-off Date shall
belong to the Seller), and (iii) all payments of interest on the Mortgage Loans
net of applicable Servicing Fees collected on or after the Cut-off Date (minus
that portion of any such payment which is allocable to the period prior to the
Cut-off Date). The outstanding principal balance of each Mortgage Loan as of the
Cut-off Date is determined after application of payments of principal due on or
before the Cut-off Date whether or not collected, together with any unscheduled
principal prepayments collected prior to the Cut-off Date; provided, however,
that payments of scheduled principal and interest prepaid for a Due Date beyond
the Cut-off Date shall not be applied to the principal balance as of the Cut-off
Date. Such prepaid amounts shall be the property of the Purchaser. Any such
prepaid amounts shall be deposited into the Custodial Account, which account is
established for the benefit of the Purchaser for subsequent remittance to the
Purchaser.
SECTION 5.
EXAMINATION OF MORTGAGE FILES.
Prior to the date hereof, the Seller has (i) delivered to the Purchaser
or its designee in escrow, for examination with respect to each Mortgage Loan to
be purchased, the related Mortgage File, including a copy of the Assignment of
Mortgage, pertaining to each Mortgage Loan, or (ii) made the related Mortgage
File available to the Purchaser for examination at the Seller's offices or such
other location as shall otherwise be agreed upon by the Purchaser and the
Seller. The fact that the Purchaser or its designee has conducted or has failed
to conduct any partial or complete examination of the Mortgage Files shall not
affect the Purchaser's (or any of its successor's) rights to demand repurchase,
substitution or other relief as provided herein.
SECTION 6. CONVEYANCE FROM SELLER TO PURCHASER.
SUBSECTION 6.01.
CONVEYANCE OF MORTGAGE LOANS; POSSESSION OF SERVICING FILES.
The Seller hereby agrees to sell, transfer, assign, set over and convey to
the Purchaser on the Closing Date, without recourse, but subject to the terms of
this Agreement, all right, title and interest of the Seller in and to the
Mortgage Loans and the Mortgage Files and all rights and obligations arising
under the documents contained therein. The Servicing File shall be retained by
the Seller in accordance with the terms of the Servicing Agreement and, as
provided therein, shall be appropriately identified in the Seller's computer
system and/or books and records, as appropriate, to clearly reflect the sale of
the
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related Mortgage Loan to the Purchaser.
SUBSECTION 6.02.
BOOKS AND RECORDS.
Record title to each Mortgage Loan as of the Closing Date shall be in
the name of the Seller. Notwithstanding the foregoing, each Mortgage and related
Mortgage Note shall be possessed solely by the Purchaser or the appropriate
designee of the Purchaser, as the case may be. All rights arising out of the
Mortgage Loans including, but not limited to, all funds received by the Seller
after the Cut-off Date on or in connection with a Mortgage Loan shall be vested
in the Purchaser or one or more of its designees; provided, however, that all
funds received on or in connection with a Mortgage Loan shall be received and
held by the Seller in trust for the benefit of the Purchaser or its designee, as
the case may be, as the owner of the Mortgage Loans pursuant to the terms of
this Agreement.
The sale of each Mortgage Loan shall be reflected on the Seller's
balance sheet and other financial statements as a sale of assets by the Seller.
SUBSECTION 6.03.
DELIVERY OF MORTGAGE LOAN DOCUMENTS.
The Seller shall deliver and release to the Purchaser or its designee
on the Closing Date the Mortgage Loan Documents with respect to each Mortgage
Loan set forth on the Mortgage Loan Schedule.
The Seller shall forward to the Purchaser or its designee original
documents evidencing an assumption, modification, consolidation, conversion or
extension of any Mortgage Loan entered into in accordance with this Agreement
within two (2) weeks of their execution, provided, however, that the Seller
shall provide the Purchaser or its designee with a certified true copy of any
such document submitted for recordation within two (2) weeks of its execution,
and shall promptly provide the original of any document submitted for
recordation or a copy of such document certified by the appropriate public
recording office to be a true and complete copy of the original within ninety
(90) days of its submission for recordation. In the event that such original or
copy of any document submitted for recordation to the appropriate public
recording office is not so delivered to the Purchaser or its designee within 90
days following the Closing Date (other than with respect to the Assignments of
Mortgage which shall be delivered to the Purchaser or its designee in blank and
in the event that the Seller does not cure such failure within 30 days of
discovery or receipt of written notification of such failure from the Purchaser,
the related Mortgage Loan shall, upon the request of the Purchaser, be
repurchased by the Seller at the price and in the manner specified in Subsection
8.03. The foregoing repurchase obligation shall not apply in the event that the
Seller cannot deliver, or cause to be delivered, such original or copy of any
document submitted for recordation to the appropriate public recording office
within the specified period due to a delay caused by the recording office in the
applicable jurisdiction; provided that the Seller shall instead deliver, or
cause to be delivered, a recording receipt of such recording office or, if such
recording receipt
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is not available, an officer's certificate of a servicing officer of the Seller,
confirming that such documents have been accepted for recording; provided that,
upon request of the Purchaser and delivery by the Purchaser to the Seller of a
schedule of the related Mortgage Loans, the Seller shall reissue and deliver to
the Purchaser or its designee said officer's certificate relating to the related
Mortgage Loans.
The Seller shall pay all initial recording fees, if any, for the
Assignments of Mortgage and any other fees or costs in transferring all original
documents to the Purchaser or its designee. The Purchaser or its designee shall
be responsible for recording the Assignments of Mortgage and shall be reimbursed
by the Seller for the reasonable costs associated therewith pursuant to the
preceding sentence.
SECTION 7.
SERVICING OF THE MORTGAGE LOANS.
The Mortgage Loans have been sold by the Seller to the Purchaser on a
servicing retained basis.
The Purchaser shall retain the Seller as independent contract servicer
of the Mortgage Loans pursuant to and in accordance with the terms and
conditions contained in the Servicing Agreement. The Purchaser and the Seller
shall execute the Servicing Agreement on the Closing Date in the form attached
hereto as Exhibit B.
Pursuant to the Servicing Agreement, the Seller shall begin servicing
the Mortgage Loans on behalf of the Purchaser and shall be entitled to the
Servicing Fee and any Ancillary Income with respect to such Mortgage Loans from
the Closing Date until the termination of the Servicing Agreement with respect
to any of the Mortgage Loans as set forth in the Servicing Agreement. The
Seller shall conduct such servicing in accordance with the terms of the
Servicing Agreement.
SECTION 8.
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLER;
REMEDIES FOR BREACH.
SUBSECTION 8.01.
REPRESENTATIONS AND WARRANTIES REGARDING THE SELLER.
The Seller represents, warrants and covenants to the following the
Purchaser that as of the date hereof and as of the Closing Date.
(a) Due Organization and Authority; Enforceability. The
Seller is a federally chartered savings bank duly
organized and validly existing under the laws of the
United States and has all licenses necessary to carry
on its business as now being conducted and is
licensed, qualified and in good standing in each
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state wherein it owns or leases any material
properties or where a Mortgaged Property is located,
if the laws of such state require licensing or
qualification in order to conduct business of the
type conducted by the Seller, and in any event the
Seller is in compliance with the laws of any such
state to the extent necessary to ensure the
enforceability of the related Mortgage Loan in
accordance with the terms of this Agreement; the
Seller has the full corporate power, authority and
legal right to hold, transfer and convey the Mortgage
Loans and to execute and deliver this Agreement and
to perform its obligations hereunder; the execution,
delivery and performance of this Agreement (including
all instruments of transfer to be delivered pursuant
to this Agreement) by the Seller and the consummation
of the transactions contemplated hereby have been
duly and validly authorized; this Agreement and all
agreements contemplated hereby have been duly
executed and delivered and constitute the valid,
legal, binding and enforceable obligations of the
Seller subject to bankruptcy laws and other similar
laws of general application affecting rights of
creditors and subject to the application of the rules
of equity, including those respecting the
availability of specific performance, none of which
will materially interfere with the realization of the
benefits provided thereunder, regardless of whether
such enforcement is sought in a proceeding in equity
or at law; and all requisite corporate action has
been taken by the Seller to make this Agreement and
all agreements contemplated hereby valid and binding
upon the Seller in accordance with their terms.
(b) Ordinary Course of Business. The consummation of the
transactions contemplated by this Agreement are in
the ordinary course of business of the Seller, and
the transfer, assignment and conveyance of the
Mortgage Notes and the Mortgages by the Seller
pursuant to this Agreement are not subject to the
bulk transfer or any similar statutory provisions in
effect in any applicable jurisdiction.
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(c) No Conflicts. Neither the execution and delivery of
this Agreement, the sale of the Mortgage Loans to the
Purchaser, the consummation of the transactions
nor compliance with the terms and conditions of
this Agreement, will conflict with or result in a
breach of any of the terms, conditions or provisions
of the Seller's charter or by-laws or any legal
restriction or any agreement or instrument to which
the Seller is now a party or by which it is bound, or
constitute a default or result in an acceleration
under any of the foregoing, nor result in the
violation of any law, rule, regulation, order,
judgment or decree to which the Seller or its
property is subject, or result in the creation or
imposition of any lien, charge or encumbrance that
would have an adverse effect upon any of its
properties pursuant to the terms of any mortgage,
contract, deed of trust or other instrument, or
impair the ability of the Purchaser to realize on the
Mortgage Loans, impair the value of the Mortgage
Loans, or impair the ability of the Purchaser to
realize the full amount of any mortgage insurance
benefits accruing pursuant to this Agreement.
(d) Ability to Perform: Solvency. The Seller does not
believe, nor is it aware any reason or cause to
believe, that it cannot perform each and every
covenant contained in this Agreement. The Seller is
solvent and the sale of the Mortgage Loans will not
cause the Seller to become insolvent. The sale of
the Mortgage Loans is not undertaken with the intent
to hinder, delay or defraud any of the Seller's
creditors.
(e) No Litigation Pending. There is no action, suit,
proceeding or investigation pending or threatened
against the Seller, before any court, administrative
agency or other tribunal asserting the invalidity of
this Agreement, seeking to prevent the consummation
of any of the transactions contemplated by this
Agreement or which, either in any one instance or in
the aggregate, could result in any material adverse
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change in the business, operations, financial
condition, properties or assets of the Seller, or in
any material impairment of the right or ability of
the Seller to carry on its business substantially as
now conducted, or in any material liability on the
part of the Seller, or which would draw into question
the validity of this Agreement or the Mortgage Loans
or of any action taken or to be taken in connection
with the obligations of the Seller contemplated
herein, or which would be likely to impair materially
the ability of the Seller to perform under the terms
of this Agreement.
(f) No Consent Required. No consent, approval,
authorization or order of, or registration or filing
with, or notice to any court or governmental agency
or body including HUD is required for the execution,
delivery and performance by the Seller of or
compliance by the Seller with this Agreement or the
Mortgage Loans, the delivery of a portion of the
Mortgage Files to the Purchaser or its designee or
the sale of the Mortgage Loans or the consummation of
the transactions contemplated by this Agreement, or
if required, such approval has been obtained prior
to the Closing Date.
(g) Selection Process. The Mortgage Loans were selected
from among the outstanding one- to four-family
mortgage loans in the Seller's portfolio at the
Closing Date as to which the representations and
warranties set forth in Subsection 8.02 could be made
and such selection was not made in a manner so as to
affect adversely the interests of the Purchaser;
(h) Initial Portfolio. The aggregate characteristics of
the Mortgage Loans are as set forth under the heading
"Business and Strategy--Description of Initial
Portfolio" in the Prospectus of the Purchaser dated
[___________,] 1998.
(i) No Untrue Information. Neither this Agreement nor
any information, statement, tape, diskette, report,
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form, or other document furnished or to be furnished
pursuant to this Agreement or in connection with the
transactions contemplated hereby contains or will
contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary
to make the statements contained herein or therein
not misleading.
(j) No Brokers. The Seller has not dealt with any
broker, investment banker, agent or other person other
then that Purchaser's Underwriter, that may be
entitled to any commission or compensation in
connection with the sale of the Mortgage Loans.
SUBSECTION 8.02.
REPRESENTATIONS AND WARRANTIES REGARDING INDIVIDUAL
MORTGAGE LOANS.
The Seller hereby represents and warrants the following to the
Purchaser, as to each Mortgage Loan, as of the Closing Date for such Mortgage
Loan.
(a) Mortgage Loans as Described. The information set
forth in the Mortgage Loan Schedule is complete, true
and correct in all material respects.
(b) Payments Current; Status. All payments required to
be made up to, but not including, the Cut-off Date
for the Mortgage Loan under the terms of the Mortgage
Note have been made and credited. No payment
required under the Mortgage Loan is delinquent nor
has any payment under the Mortgage Loan been 30 days
or more delinquent more than once within the period
falling twelve (12) months prior to the Cut-off Date.
The Mortgage Loan is not, and has not been at any
time in the preceding twelve months, (i) classified,
(ii) in nonaccrual status or (iii) renegotiated due
to the financial deterioration of the Mortgagor.
(c) No Outstanding Charges. There are no defaults in
complying with the terms of the Mortgage, and all
taxes, governmental assessments, insurance premiums,
or water, sewer and municipal charges which
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previously became due and owing have been paid, or an
escrow of funds has been established in an amount
sufficient to pay for every such item which remains
unpaid and which has been assessed but is not yet due
and payable. The Seller has not advanced funds, or
induced, solicited or knowingly received any advance
of funds by a party other than the Mortgagor,
directly or indirectly, for the payment of any amount
required under the Mortgage Loan, except for interest
accruing from the date of the Mortgage Note or date
of disbursement of the Mortgage Loan proceeds,
whichever is earlier, to the day which precedes by
one month the Due Date of the first installment of
principal and interest.
(d) Original Terms Unmodified. The terms of the Mortgage
Note and Mortgage have not been impaired, waived,
altered or modified in any respect, from the date of
origination except by a written instrument which has
been recorded, if necessary to protect the interests
of the Purchaser, and which has been delivered to the
Purchaser or its designee and the terms of which are
reflected in the Mortgage Loan Schedule, if
applicable. The substance of any such waiver,
alteration or modification has been approved by the
title insurer, if any, to the extent required by the
policy, and its terms are reflected on the Mortgage
Loan Schedule, if applicable. No Mortgagor has been
released, in whole or in part, except in connection
with an assumption agreement, which assumption
agreement is part of the Mortgage Loan File delivered
to the Purchaser or its designee and the terms of
which are reflected in the Mortgage Loan Schedule.
(e) No Defenses. The Mortgage Loan is not subject to any
right of rescission, set-off, counterclaim or
defense, including without limitation the defense of
usury, nor will the operation of any of the terms of
the Mortgage Note or the Mortgage, or the exercise of
any right thereunder, render either the Mortgage Note
or the Mortgage unenforceable, in whole or in part
and no such right of rescission, set-off,
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counterclaim or defense has been asserted with
respect thereto, and no Mortgagor is now or was, at
the time of origination of the related Mortgage Loan,
a debtor in any state or Federal bankruptcy or
insolvency proceeding.
(f) Hazard Insurance. Pursuant to the terms of the
Mortgage, all buildings or other improvements upon
the Mortgaged Property are insured by a generally
acceptable insurer against loss by fire, hazards of
extended coverage and such other hazards as are set
forth in Section 2.10 of the Servicing Agreement
attached hereto as Exhibit B. If required by the
Flood Disaster Protection Act of 1973, as amended,
the Mortgage Loan is covered by a flood insurance
policy meeting the requirements of the current
guidelines of the Federal Insurance Administration
which policy conforms to FNMA and FHLMC, as well as
all additional requirements set forth in Section 2.10
of the Servicing Agreement attached hereto as Exhibit
B. All individual insurance policies contain a
standard mortgagee clause naming the Seller and its
successors and assigns as mortgagee, and all premiums
thereon have been paid. The Mortgage for each
Mortgage Loan obligates the Mortgagor thereunder to
maintain the hazard insurance policy at the
Mortgagor's cost and expense, and on the Mortgagor's
failure to do so, authorizes the holder of the
Mortgage to obtain and maintain such insurance at
such Mortgagor's cost and expense, and to seek
reimbursement therefor from the Mortgagor. Where
required by state law or regulation, the Mortgagor
has been given an opportunity to choose the carrier
of the required hazard insurance, provided the policy
is not a "master" or "blanket" hazard insurance
policy covering a condominium, or any hazard
insurance policy covering the common facilities of a
planned unit development. The hazard insurance
policy is the valid and binding obligation of the
insurer, is in full force and effect, and will be in
full force and effect and inure to the benefit of the
Purchaser upon the consummation of the transactions
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contemplated by this Agreement. The Seller has not
engaged in, and has no knowledge of the Mortgagor's
having engaged in, any act or omission which would
impair the coverage of any such policy, the benefits
of the endorsement provided for herein, or the
validity and binding effect of either including,
without limitation, no unlawful fee, commission,
kickback or other unlawful compensation or value of
any kind has been or will be received, retained or
realized by any attorney, firm or other person or
entity, and no such unlawful items have been
received, retained or realized by the Seller.
(g) Compliance with Applicable Laws. Any and all
requirements of any federal, state or local law
including, without limitation, usury,
truth-in-lending, real estate settlement procedures,
consumer credit protection, fair housing, equal
credit opportunity and disclosure laws applicable to
the Mortgage Loan have been complied with, the
consummation of the transactions contemplated hereby
will not involve the violation of any such laws or
regulations, and the Seller shall maintain in its
possession, available for the Purchaser's inspection,
and shall deliver to the Purchaser upon demand,
evidence of compliance with all such requirements.
(h) No Satisfaction of Mortgage. The Mortgage has not
been satisfied, canceled, subordinated or rescinded,
in whole or in part, and the Mortgaged Property has
not been released from the lien of the Mortgage, in
whole or in part, nor has any instrument been
executed that would effect any such release,
cancellation, subordination or rescission. The
Seller has not waived the performance by the
Mortgagor of any action, if the Mortgagor's failure
to perform such action would cause the Mortgage Loan
to be in default, nor has the Seller waived any
default resulting from any action or inaction by the
Mortgagor.
(i) Location and Type of Mortgaged Property. The
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Mortgaged Property is located in the state identified
in the Mortgage Loan Schedule and consists of a
single parcel of real property with a detached single
family residence erected thereon, or a townhouse, or
a two- to four-family dwelling, or an individual
condominium unit in a condominium project, or an
individual unit in a planned unit development,
provided, however, that any condominium unit or
planned unit development shall conform with
requirements acceptable to FNMA or FHLMC regarding
such dwellings and that no residence or dwelling is a
single parcel of real property with a cooperative
housing corporation erected thereon, a mobile home or
a manufactured dwelling. As of the date of
origination, no portion of the Mortgaged Property is
used for commercial purposes, and since the date of
origination no portion of the Mortgaged Property is
used for commercial purposes.
(j) Valid First Lien. The Mortgage is a valid,
subsisting, enforceable and perfected first lien on
the Mortgaged Property, including all buildings and
improvements on the Mortgaged Property and all
installations and mechanical, electrical, plumbing,
heating and air conditioning systems located in or
annexed to such buildings, and all additions,
alterations and replacements made at any time with
respect to the foregoing. The lien of the Mortgage
is subject only to:
(1) the lien of current real property taxes and
assessments not yet due and payable;
(2) covenants, conditions and restrictions, rights of
way, easements and other matters of the public
record as of the date of recording acceptable to
prudent mortgage lending institutions generally
and specifically referred to in the lender's
title insurance policy delivered to the
originator of the Mortgage Loan and (a)
specifically referred to or otherwise considered
in the appraisal made for the originator of the
Mortgage Loan
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or (b) which do not adversely affect the
Appraised Value of the Mortgaged Property set
forth in such appraisal; and
(3) other matters to which like properties are
commonly subject which do not materially
interfere with the benefits of the security
intended to be provided by the Mortgage or the
use, enjoyment, value or marketability of the
related Mortgaged Property.
Any security agreement related to and delivered in
connection with the Mortgage Loan establishes and
creates a valid, subsisting, enforceable and perfected
first lien and first priority security interest on the
property described therein and the Seller has full
right to sell and assign the same to the Purchaser.
The Mortgaged Property was not, as of the date of
origination of the Mortgage Loan, subject to a
mortgage, deed of trust, deed to secure debt or other
security instrument creating a lien subordinate to the
lien of the Mortgage (except any such subordinate loan
which was created in connection with the origination
of the related Mortgage Loan details of which are
contained in the related Mortgage File).
(k) Validity of Mortgage Documents. The Mortgage Note
and the Mortgage and any other agreement executed and
delivered by a Mortgagor in connection with a
Mortgage Loan are genuine, and each is the legal,
valid and binding obligation of the maker thereof
enforceable in accordance with its terms. All
parties to the Mortgage Note, the Mortgage and any
other such related agreement had legal capacity to
enter into the Mortgage Loan and to execute and
deliver the Mortgage Note, the Mortgage and any such
agreement, and the Mortgage Note, the Mortgage and any
other such related agreement have been duly and
properly executed by such parties. To the best
knowledge of Seller No fraud, error, omission,
misrepresentation, negligence or similar occurrence
with respect to a Mortgage Loan has taken place on the
part of any Person, including without limitation, the
Mortgagor, any appraiser, any builder or developer, or
any other party involved in the origination of the
Mortgage Loan. The Seller has reviewed all of the
documents constituting the Servicing File and has made
such reasonable inquiries as it deems necessary to
make and confirm the accuracy of
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the representations set forth herein.
(l) Full Disbursement of Proceeds. The Mortgage Loan has
been closed and the proceeds of the Mortgage Loan
have been fully disbursed and there is no requirement
for future advances thereunder, and any and all
requirements as to completion of any on-site or
off-site improvement and as to disbursements of any
escrow funds therefor have been complied with. All
costs, fees and expenses incurred in making or
closing the Mortgage Loan and the recording of the
Mortgage were paid, and the Mortgagor is not entitled
to any refund of any amounts paid or due under the
Mortgage Note or Mortgage.
(m) Ownership. The Seller is the sole owner of record
and holder of the Mortgage Loan and the indebtedness
evidenced by each Mortgage Note, except for the
assignments of mortgage which have been sent for
recording, and upon recordation the Seller will be
the owner of record of each Mortgage and the
indebtedness evidenced by each Mortgage Note, and
upon the sale of the Mortgage Loans to the Purchaser,
the Seller will retain the Mortgage Files or any part
thereof with respect thereto not delivered to the
Purchaser or its designee in trust only for the
purpose of servicing and supervising the servicing of
each Mortgage Loan. The Mortgage Loan is
not assigned or pledged, and the Seller has good,
indefeasible and marketable title thereto, and has
full right to transfer and sell the Mortgage Loan to
the Purchaser free and clear of any encumbrance,
equity, participation interest, lien, pledge, charge,
claim or security interest, and has full right and
authority subject to no interest or participation of,
or agreement with, any other party, to sell and
assign each Mortgage Loan pursuant to this Agreement
and following the sale of each Mortgage Loan, the
Purchaser will own such Mortgage Loan free and clear
of any encumbrance, equity, participation interest,
lien, pledge, charge, claim or security interest.
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The Seller intends to relinquish all rights to
possess, control and monitor the Mortgage Loan,
except indirectly for purposes of servicing the
Mortgage Loan as set forth in the Servicing
Agreement. After the Closing Date, the Seller will
have no right to modify or alter the terms of the
sale of the Mortgage Loan and the Seller will have no
obligation or right to repurchase the Mortgage Loan
or substitute another Mortgage Loan, except as
provided in this Agreement.
(n) Doing Business. To Seller's knowledge all parties
which have had any interest in the Mortgage Loan,
whether as mortgagee, assignee, pledgee or otherwise,
are (or, during the period in which they held and
disposed of such interest, were) (1) in compliance
with any and all applicable licensing requirements of
the laws of the state wherein the Mortgaged Property
is located, and (2) either (i) organized under the
laws of such state, or (ii) qualified to do business
in such state, or (iii) a federal savings and loan
association, a savings bank or a national bank having
a principal office in such state, or (3) not doing
business in such state.
(o) LTV, PMI Policy. No Mortgage Loan has an LTV
greater than 95%. The original LTV of each
Mortgage Loan either was not more than 85% or the
excess over 80% is and will be insured as to payment
defaults by a PMI Policy until the LTV of such
Mortgage Loan is reduced to 85%. All provisions
of such PMI Policy have been and are being complied
with, such policy is valid and remains in full force
and effect, and all premiums due thereunder have been
paid. No action, inaction, or event has occurred and
no state of facts exists that has, or will result in
the exclusion from, denial of, or defense to coverage
by the PMI Policy. Any Mortgage Loan subject to
a PMI Policy obligates the Mortgagor thereunder to
maintain the PMI Policy and to pay all premiums and
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charges in connection therewith. The Mortgage
Interest Rate for each Mortgage Loan as set forth
on the Mortgage Loan Schedule is net of any such
insurance premium.
(p) Title Insurance. The Mortgage Loan is covered by an
ALTA lender's title insurance policy or other
generally acceptable form of policy or insurance
acceptable to FNMA or FHLMC and each such title
insurance policy is issued by a title insurer
acceptable to FNMA or FHLMC and qualified to do
business in the jurisdiction where the Mortgaged
Property is located, insuring the Seller, its
successors and assigns, as to the first priority lien
of the Mortgage in the original principal amount of
the Mortgage Loan, subject only to the exceptions
contained in clauses (1), (2) and (3) of paragraph (j)
of this Subsection 8.02, and against any loss by
reason of the invalidity or unenforceability of the
lien resulting from the provisions of the Mortgage
providing for adjustment to the Mortgage Interest Rate
and Monthly Payment. Where required by state law or
regulation, the Mortgagor has been given the
opportunity to choose the carrier of the required
mortgage title insurance. Additionally, such lender's
title insurance policy affirmatively insures ingress
and egress, and against encroachments by or upon the
Mortgaged Property or any interest therein. The
Seller, its successor and assigns, are the sole
insurers of such lender's title insurance policy, and
such lender's title insurance policy is valid and
remains in full force and effect and will be in force
and effect upon the consummation of the transactions
contemplated by this Agreement. No claims have been
made under such lender's title insurance policy, and
no prior holder of the related Mortgage, including the
Seller, has done, by act or omission, anything which
would impair the coverage of such lender's title
insurance policy, including without limitation, no
unlawful fee, commission, kickback or other unlawful
compensation or value of any kind has been or will be
received, retained or realized by any attorney, firm
or other person or
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entity, and no such unlawful items have been received, retained
or realized by the Seller.
(q) No Defaults. There is no default, breach, violation or event
which would permit acceleration existing under the Mortgage or
the Mortgage Note and no event which, with the passage of time
or with notice and the expiration of any grace or cure period,
would constitute a default, breach, violation or event which
would permit acceleration, and neither the Seller nor its
predecessors have waived any default, breach, violation or
event which would permit acceleration.
(r) No Mechanics' Liens. At the time of the execution hereof there
are, to Seller's actual knowledge no mechanics' or similar
liens or claims which have been filed for work, labor or
material (and no rights are outstanding that under law could
give rise to such liens) affecting the related Mortgaged
Property which are or may be liens prior to, or equal or
coordinate with, the lien of the related Mortgage.
(s) Location of Improvements; No Encroachments. All improvements
which were considered in determining the Appraised Value of the
Mortgaged Property lay wholly within the boundaries and
building restriction lines of the Mortgaged Property, and no
improvements on adjoining properties encroach upon the
Mortgaged Property. No improvement located on or being part of
the Mortgaged Property is in violation of any applicable zoning
law or regulation.
(t) Origination; Payment Terms. The Mortgage Loan was originated by
a mortgagee approved by the Secretary of Housing and Urban
Development pursuant to Sections 203 and 211 of the Act, a
savings and loan association, a savings bank, a commercial
bank, credit union, insurance company or similar institution
which is supervised and examined by a federal or state
authority. The documents, instruments and agreements submitted
for loan
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underwriting were not falsified and contain no untrue statement
of material fact or omit to state a material fact required to
be stated therein or necessary to make the information and
statements therein not misleading. Principal payments on each
Mortgage Loan commenced no more than sixty (60) days after
funds were disbursed in connection with the Mortgage Loan. The
Mortgage Interest Rate, as well as the Lifetime Rate Cap and
the Periodic Rate Cap if the Mortgage Loan is an Adjustable
Rate Mortgage Loan, are as set forth on Exhibit G hereto. The
Mortgage Note is payable on the first day of each month in
equal monthly installments of principal and interest, which
installments of interest are subject to change if the Mortgage
Loan is an Adjustable Rate Mortgage Loan due to the adjustments
to the Mortgage Interest Rate on each Interest Rate Adjustment
Date, with interest calculated and payable in arrears,
sufficient to amortize the Mortgage Loan fully by the stated
maturity date, over an original term of not more than thirty
years from commencement of amortization. There is no negative
amortization with respect to any Mortgage Loan. Each
Convertible Mortgage Loan contains a provision allowing the
Mortgagor to convert the Mortgage Note from an adjustable
interest rate Mortgage Note to a fixed interest rate Mortgage
Note in accordance with the terms of the Mortgage Note or a
rider to the related Mortgage Note;
(u) Customary Provisions. The Mortgage contains customary and
enforceable provisions such as to render the rights and
remedies of the holder thereof adequate for the realization
against the Mortgaged Property of the benefits of the security
provided thereby, including, (i) in the case of a Mortgage
designated as a deed of trust, by trustee's sale, and (ii)
otherwise by judicial foreclosure. Upon default by a Mortgagor
on a Mortgage Loan and foreclosure on, or trustee's sale of,
the Mortgaged Property pursuant to the proper procedures, the
holder of the Mortgage Loan will be able to deliver good and
merchantable
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title to the Mortgaged Property. There is no homestead or other
exemption available to a Mortgagor which would interfere with
the right to sell the Mortgaged Property at a trustee's sale or
the right to foreclose the Mortgage, subject to applicable
federal and state laws and judicial precedent with respect to
bankruptcy and right of redemption or similar law. The Mortgage
contains due-on-sale provisions providing for the acceleration
of the payment of the unpaid principal balance of such Mortgage
Loan in the event that all or any part of the Mortgaged
Property is sold or transferred without the prior written
consent of the Mortgagee.
(v) Conformance with Agency and Underwriting Standards. The
Mortgage Loan was underwritten in accordance with the
underwriting standards of Flagstar Bank, FSB (a copy of which
is attached hereto as Exhibit F), or FNMA's underwriting
standards (except that the principal balance of certain
Mortgage Loans may have exceeded the limits of FNMA), in each
case in effect at the time the Mortgage Loan was originated.
The Mortgage Note and Mortgage are on forms acceptable to FHLMC
or FNMA, except with respect to Mortgage Loans underwritten in
accordance with the underwriting guidelines of Flagstar Bank,
which are on forms acceptable to the Purchaser, in the
Purchaser's sole discretion, as evidenced by the Purchaser's
purchase of the related Mortgage Loans, and, in either case,
the Seller has not made any representations to a Mortgagor that
are inconsistent with the mortgage instruments used. All
Mortgage Loans have full asset verification.
(w) Occupancy of the Mortgaged Property. As of the Closing Date,
the Mortgaged Property is lawfully occupied under applicable
law. All inspections, licenses and certificates required to be
made or issued with respect to all occupied portions of the
Mortgaged Property and, with respect to the use and occupancy
of the same, including but not limited to certificates of
occupancy and fire underwriting
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certificates, have been made or obtained from the appropriate
authorities. Unless otherwise specified on the description of
characteristics for the Mortgage Loans delivered pursuant to
Section 10 on the Closing Date in the Mortgage Loan Schedule
attached as Exhibit E hereto, the Mortgagor represented at the
time of origination of the Mortgage Loan that the Mortgagor
would occupy the Mortgaged Property as the Mortgagor's primary
residence.
(x) Additional Collateral. The Mortgage Note is not and has not
been secured by any collateral except the lien of the
corresponding Mortgage and the security interest of any
applicable security agreement or chattel mortgage referred to
in clause (j) above.
(y) Deeds of Trust. In the event the Mortgage constitutes a deed of
trust, a trustee, authorized and duly qualified under
applicable law to serve as such, has been properly designated
and currently so serves and is named in the Mortgage, and no
fees or expenses are or will become payable by the Purchaser to
the trustee under the deed of trust, except in connection with
a trustee's sale after default by the Mortgagor.
(z) Acceptable Investment. There are no circumstances or conditions
with respect to the Mortgage, the Mortgaged Property, the
Mortgagor, the Mortgage File or the Mortgagor's credit standing
that can reasonably be expected to cause the Mortgage Loan to
become delinquent, or adversely affect the value or
marketability of the Mortgage Loan.
(aa) Delivery of Mortgage Documents. The Mortgage Note, the
Mortgage, the Assignment of Mortgage and any other Mortgage
Loan Documents for each Mortgage Loan have been delivered to
the Purchaser or its designee. The Seller is in possession of a
complete, true and accurate Mortgage File in compliance with
Exhibit A hereto, except for such documents the originals of
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which have been delivered to the Purchaser or its designee.
(bb) Condominiums/Planned Unit Developments. If the Mortgaged
Property is a condominium unit or a planned unit development,
such condominium or planned unit development project is
acceptable to FNMA or FHLMC or is located in a condominium or
planned unit development project which has received project
approval from FNMA or FHLMC.
(cc) Transfer of Mortgage Loans. The Assignment of Mortgage with
respect to each Mortgage Loan is in recordable form and is
acceptable for recording under the laws of the jurisdiction in
which the Mortgaged Property is located.
(dd) Assumability. The Mortgage Loan Documents provide that a
related Mortgage Loan may only be assumed if the party assuming
such Mortgage Loan meets certain credit requirements stated in
the Mortgage Loan Documents.
(ee) No Buydown Provisions; No Graduated Payments or Contingent
Interests. The Mortgage Loan does not contain provisions
pursuant to which Monthly Payments are paid or partially paid
with funds deposited in any separate account established by the
Seller, the Mortgagor, or anyone on behalf of the Mortgagor, or
paid by any source other than the Mortgagor nor does it contain
any other similar provisions which may constitute a "buydown"
provision. The Mortgage Loan is not a graduated payment
mortgage loan and the Mortgage Loan does not have a shared
appreciation or other contingent interest feature.
(ff) RESERVED
(gg) Mortgaged Property Undamaged; No Condemnation Proceedings.
There is no proceeding pending or threatened for the total or
partial condemnation of the Mortgaged Property. The Mortgaged
Property is
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undamaged by waste, fire, earthquake or earth movement,
windstorm, flood, tornado or other casualty so as to affect
adversely the value of the Mortgaged Property as security for
the Mortgage Loan or the use for which the premises were
intended and each Mortgaged Property is in good repair. There
have not been any condemnation proceedings with respect to the
Mortgaged Property and the Seller has no knowledge of any such
proceedings in the future.
(hh) Collection Practices; Escrow Deposits; Interest Rate
Adjustments. The origination and collection practices used by
the Seller with respect to the Mortgage Loan have been in all
respects in compliance with Accepted Servicing Practices,
applicable laws and regulations, and have been in all respects
legal and proper. With respect to escrow deposits and Escrow
Payments, all such payments are in the possession of, or under
the control of, the Seller and there exist no deficiencies in
connection therewith for which customary arrangements for
repayment thereof have not been made. All Escrow Payments have
been collected in full compliance with state and federal law
and the provisions of the related Mortgage Note and Mortgage.
An escrow of funds is not prohibited by applicable law and has
been established in an amount sufficient to pay for every item
that remains unpaid and has been assessed but is not yet due
and payable. No escrow deposits or Escrow Payments or other
charges or payments due the Seller have been capitalized under
the Mortgage or the Mortgage Note. All Mortgage Interest Rate
adjustments to the Monthly Payment, if the Mortgage Loan is an
Adjustable Rate Mortgage Loan, have been made in strict
compliance with state and federal law and the terms of the
related Mortgage and Mortgage Note on the related Interest Rate
Adjustment Date. With respect to each Adjustable Rate Mortgage
Loan, the Mortgage Interest Rate adjusts annually as set forth
herein. If, pursuant to the terms of the Mortgage Note, another
index was selected for determining the Mortgage Interest Rate,
the same
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index was used with respect to each Mortgage Note
which required a new index to be selected, and such
selection did not conflict with the terms of the
related Mortgage Note. The Seller executed and
delivered any and all notices required under
applicable law and the terms of the related Mortgage
Note and Mortgage regarding the Mortgage Interest
Rate and the Monthly Payment adjustments. Any
interest required to be paid pursuant to state,
federal and local law has been properly paid and
credited.
(ii) Other Insurance Policies. No action, inaction or
event has occurred and no state of facts exists or
has existed that has resulted or could result in the
exclusion from, denial of, or defense to coverage
under any hazard insurance policy or PMI Policy. In
connection with the placement of any such insurance,
no commission, fee, or other compensation has been or
will be received by the Seller or by any officer,
director, or employee of the Seller or any designee
of the Seller or any corporation in which the Seller
or any officer, director, or employee had a financial
interest at the time of placement of such insurance.
(jj) No Violation of Environmental Laws. To Seller's
knowledge there is no pending action or proceeding
directly involving the Mortgaged Property in which
compliance with any environmental law, rule or
regulation is an issue; there is no violation of any
environmental law, rule or regulation with respect to
the Mortgaged Property; and nothing further remains to
be done to satisfy in full all requirements of each
such law, rule or regulation constituting a
prerequisite to use and enjoyment of said property.
(kk) Soldiers' and Sailors' Civil Relief Act. The
Mortgagor has not notified the Seller and the Seller
has no knowledge of any relief requested or allowed
to the Mortgagor under the Soldiers' and Sailors'
Civil Relief Act of 1940.
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(ll) Appraisal. The Mortgage File contains an appraisal
of the related Mortgaged Property signed prior to the
approval of the Mortgage Loan application by a
Qualified Appraiser who had no interest, direct or
indirect in the Mortgaged Property or in any loan
made on the security thereof, and whose compensation
is not affected by the approval or disapproval of the
Mortgage Loan, and the appraisal and appraiser both
satisfy the requirements of FNMA or FHLMC and Title
XI of the Federal Institutions Reform, Recovery, and
Enforcement Act of 1989 and the regulations
promulgated thereunder, all as in effect on the date
the Mortgage Loan was originated.
(mm) Disclosure Materials. To Seller's knowledge the
Mortgagor has received all disclosure materials
required by and the Seller complied with all
applicable law with respect to the making of the
Mortgage Loans.
(nn) Construction or Rehabilitation of Mortgaged Property.
No Mortgage Loan was made in connection with the
construction or rehabilitation of a Mortgaged
Property or facilitating the trade-in or exchange of
a Mortgaged Property.
(oo) Value of Mortgaged Property. The Seller has no
knowledge of any circumstances existing that could
reasonably be expected to adversely affect the value
or the marketability of any Mortgaged Property or
Mortgage Loan.
(pp) No Defense to Insurance Coverage. No action has been
taken or failed to be taken, no event has occurred
and no state of facts exists or has existed on or
prior to the Closing Date (whether or not known to
the Seller on or prior to such date) which has
resulted or will result in an exclusion from, denial
of, or defense to coverage under any primary mortgage
insurance policy (including, without limitation, any
exclusions, denials or defenses which would limit or
reduce the availability of the timely payment of the
full amount of the loss otherwise due thereunder to
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the insured) whether arising out of actions,
representations, errors, omissions, negligence, or
fraud of the Seller, the related Mortgagor or any
party involved in the application for such coverage,
including the appraisal, plans and specifications and
other exhibits or documents submitted therewith to
the insurer under such insurance policy, or for any
other reason under such coverage, but not including
the failure of such insurer to pay by reason of such
insurer's breach of such insurance policy or such
insurer's financial inability to pay.
(qq) Escrow Analysis. With respect to each Mortgage,
Seller has within the last twelve months (unless such
Mortgage was originated within such twelve month
period) analyzed the required Escrow Payments for
each Mortgage and adjusted the amount of such
payments so that, assuming all required payments are
timely made, any deficiency will be eliminated on or
before the first anniversary of such analysis, or any
overage will be refunded to the Mortgagor, in
accordance with RESPA and any other applicable law.
(rr) Prior Servicing. Each Mortgage Loan has been
serviced in all material respects in compliance with
Accepted Servicing Practices; provided that, in the
event of any breach of the representation and
warranty set forth in this Subsection (rr), the
Seller shall not be required to repurchase any such
Mortgage Loan unless such breach had, and continues
to have, a material and adverse effect on the value
of the related Mortgage Loan or the interest of the
Purchaser therein.
SUBSECTION 8.03.
REMEDIES FOR BREACH OF REPRESENTATIONS AND WARRANTIES.
It is understood and agreed that the representations and warranties set
forth in Subsections 8.01 and 8.02 shall survive the sale of the Mortgage Loans
to the Purchaser and shall inure to the benefit of the Purchaser,
notwithstanding any restrictive or qualified endorsement on any Mortgage Note or
Assignment of Mortgage or the examination or failure to examine any Mortgage
File. Upon discovery
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by either the Seller or the Purchaser of a breach of any of the foregoing
representations and warranties which materially and adversely affects the value
of the Mortgage Loans or the interest of the Purchaser (or which materially and
adversely affects the interests of the Purchaser in the related Mortgage Loan in
the case of a representation and warranty relating to a particular Mortgage
Loan), the party discovering such breach shall give prompt written notice to the
other.
The Seller, promptly after discovery of a breach of any representation
or warranty, shall notify the Purchaser of such breach and the details thereof.
Within sixty (60) days of the earlier of (i) notice by the Seller pursuant to
the immediately preceding sentence or (ii) notice by the Purchaser to the Seller
of any breach of a representation or warranty with respect to a Mortgage Loan,
the Seller shall use its best efforts promptly to cure such breach in all
material respects and, if such breach cannot be cured, the Seller shall, at the
Purchaser's option and subject to Subsection 8.04, repurchase such Mortgage Loan
at the Repurchase Price, unless the Seller elects to substitute a Qualified
Substitute Mortgage Loan for such Mortgage Loan pursuant to this Subsection. In
the event that a breach shall involve any representation or warranty set forth
in Subsection 8.01, and such breach cannot be cured within sixty (60) days of
the earlier of either discovery by or notice to the Seller of such breach, all
of the Mortgage Loans shall, at the Purchaser's option and subject to Subsection
8.04, be repurchased by the Seller at the Repurchase Price. However, if the
breach shall involve a representation or warranty set forth in Subsection 8.02
and the Seller discovers or receives notice of any such breach within two (2)
years of the Closing Date, the Seller may, at the Seller's option and provided
that the Seller has a Qualified Substitute Mortgage Loan, rather than repurchase
the Mortgage Loan as provided above, remove such Mortgage Loan (a "Deleted
Mortgage Loan") and substitute in its place a Qualified Substitute Mortgage Loan
or Loans, provided that any such substitution shall be effected not later than
two (2) years after the Closing Date. If the Seller has no Qualified Substitute
Mortgage Loan, it shall repurchase the deficient Mortgage Loan. Any repurchase
of a Mortgage Loan or Loans pursuant to the foregoing provisions of this
Subsection 8.03 shall be accomplished by either (a) if the Servicing Agreement
is in effect, deposit in the Custodial Account of the amount of the Repurchase
Price for payment to the Purchaser on the next scheduled Remittance Date, after
deducting therefrom any amount received in respect of such repurchased Mortgage
Loan or Loans and being held in the Custodial Account for future distribution or
(b) if the Servicing Agreement is no longer in effect, by direct remittance of
the Repurchase Price to the Purchaser or its designee in accordance with the
Purchaser's instructions.
At the time of repurchase or substitution, the Purchaser and the
Seller shall arrange for the reassignment of the Deleted Mortgage Loan to the
Seller and the delivery to the Seller of any documents held by the Purchaser or
its designee relating to the Deleted Mortgage Loan. In addition, upon any such
repurchase, all funds maintained in the Escrow Account with respect to such
Deleted Mortgage Loan shall be transferred to the Seller. In the event of a
repurchase or substitution, the Seller shall, simultaneously with such
reassignment, give written notice to the Purchaser that such repurchase or
substitution has taken place, amend the Mortgage Loan Schedule to reflect the
withdrawal of the Deleted Mortgage Loan from this Agreement, and, in the case of
substitution, identify a Qualified Substitute Mortgage Loan and amend the
Mortgage Loan Schedule to reflect the addition of such Qualified Substitute
Mortgage Loan to this Agreement. In connection with any such substitution, the
Seller shall
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be deemed to have made as to such Qualified Substitute Mortgage Loan the
representations and warranties set forth in this Agreement except that all such
representations and warranties set forth in this Agreement shall be deemed made
as of the date of such substitution. The Seller shall effect such substitution
by delivering to the Purchaser or its designee for such Qualified Substitute
Mortgage Loan the documents required by Subsection 6.03, with the Mortgage Note
endorsed as required by Subsection 6.03. No substitution will be made in any
calendar month after the Determination Date for such month. The Seller shall
deposit in the Custodial Account the Monthly Payment, or in the event that the
Servicing Agreement is no longer in effect remit directly to the Purchaser or
its designee in accordance with the Purchaser's instructions the Monthly Payment
less the Servicing Fee due, if any, on such Qualified Substitute Mortgage Loan
or Loans in the month following the date of such substitution. Monthly Payments
due with respect to Qualified Substitute Mortgage Loans in the month of
substitution shall be retained by the Seller. For the month of substitution,
payments to the Purchaser shall include the Monthly Payment due on any Deleted
Mortgage Loan in the month of substitution, and the Seller shall thereafter be
entitled to retain all amounts subsequently received by the Seller in respect of
such Deleted Mortgage Loan.
For any month in which the Seller substitutes a Qualified Substitute
Mortgage Loan for a Deleted Mortgage Loan, the Seller shall determine the amount
(if any) by which the aggregate principal balance of all Qualified Substitute
Mortgage Loans as of the date of substitution is less than the aggregate Stated
Principal Balance of all Deleted Mortgage Loans (after application of scheduled
principal payments due in the month of substitution). The amount of such
shortfall shall be distributed by the Seller directly to the Purchaser or its
designee in accordance with the Purchaser's instructions within two (2) Business
Days of such substitution.
In addition to such repurchase or substitution obligation, the Seller shall
indemnify the Purchaser and hold it harmless against any losses, damages,
penalties, fines, forfeitures, reasonable and necessary legal fees and related
costs, judgments, and other costs and expenses resulting from any claim, demand,
defense or assertion based on or grounded upon, or resulting from, a breach of
the Seller representations and warranties contained in this Agreement. It is
understood and agreed that the obligations of the Seller set forth in this
Subsection 8.03 to cure, substitute for or repurchase a defective Mortgage Loan
and to indemnify the Purchaser as provided in this Subsection 8.03 constitute
the sole remedies of the Purchaser respecting a breach of the foregoing
representations and warranties.
Any cause of action against the Seller relating to or arising out of the
breach of any representations and warranties made in Subsections 8.01 and 8.02
shall accrue as to any Mortgage Loan upon (i) discovery of such breach by the
Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by the
Seller to cure such breach or repurchase such Mortgage Loan as specified above,
and (iii) demand upon the Seller by the Purchaser for compliance with this
Agreement.
SECTION 9.
CLOSING.
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The closing for the purchase and sale of the Mortgage Loans shall take
place on the Closing Date. At the Purchaser's option, the closing shall be
either: by telephone, confirmed by letter or wire as the parties shall agree, or
conducted in person, at such place as the parties shall agree.
The closing for the Mortgage Loans to be purchased on the Closing Date
shall be subject to each of the following conditions:
(a) all of the representations and warranties of the
Seller under this Agreement and under the Servicing
Agreement (with respect to each Mortgage Loan, as
specified therein) shall be true and correct as of
the Closing Date and no event shall have occurred
which, with notice or the passage of time, would
constitute a default under this Agreement or an
Event of Default under the Servicing Agreement;
(b) the Purchaser shall have received, or the Purchaser's
attorneys shall have received in escrow, all closing
documents as specified in Section 10 of this
Agreement, in such forms as are agreed upon and
acceptable to the Purchaser, duly executed by all
signatories other than the Purchaser as required
pursuant to the terms hereof;
(c) the Seller shall have delivered and released to the
Purchaser or its designee all Mortgage Loan Documents
with respect to each Mortgage Loan; and
(d) all other terms and conditions of this Agreement
shall have been complied with.
Subject to the foregoing conditions, the Purchaser shall pay to the
Seller on the Closing Date the Purchase Price, plus accrued interest pursuant to
Section 4 of this Agreement, by wire transfer of immediately available funds to
the account designated by the Seller.
SECTION 10.
CLOSING DOCUMENTS.
The closing documents for the Mortgage Loans to be purchased on the
Closing Date shall consist of fully executed originals of the following
documents:
1. this Agreement;
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2. the Servicing Agreement, dated as of the Cut-off
Date, in the form of Exhibit B hereto;
3. a Custodial Account Letter Agreement or a Custodial
Account Certification, as applicable, as required
under the Servicing Agreement;
4. an Escrow Account Letter Agreement or an Escrow
Account Certification, as applicable, as required
under the Servicing Agreement;
5. an Officer's Certificate, in the form of Exhibit C
hereto, including all attachments thereto;
6. an Opinion of Counsel of the Seller/Servicer (who may
be an employee of the Seller/Servicer), substantially
in the form of Exhibit D hereto;
7. a certificate or other evidence of merger or change
of name, signed or stamped by the applicable
regulatory authority, if any of the Mortgage
Loans were acquired by the Seller by merger or
acquired or originated by the Seller while conducting
business under a name other than its present name, if
applicable; and
8. the underwriting guidelines of Flagstar Bank, FSB, to
be attached hereto as Exhibit F.
The Seller shall bear the risk of loss of the closing documents until
such time as they are received by the Purchaser or its attorneys.
SECTION 11.
COSTS.
The Purchaser shall pay the legal fees and expenses of its attorneys. All
other costs and expenses incurred in connection with the transfer and delivery
of the Mortgage Loans including recording fees, fees for recording Assignments
of Mortgage, fees for title policy endorsements and continuations, if
applicable, the Seller's attorney's fees, shall be paid by the Seller.
SECTION 12.
MERGER OR CONSOLIDATION OF THE SELLER.
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The Seller will keep in full effect its existence, rights and
franchises as a federally chartered savings bank and will obtain and preserve
its qualification to do business as a foreign corporation in each jurisdiction
in which such qualification is or shall be necessary to protect the validity and
enforceability of this Agreement, or any of the Mortgage Loans and to perform
its duties under this Agreement.
Any Person into which the Seller may be merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Seller shall be a party, or any Person succeeding to the business of the Seller,
shall be the successor of the Seller hereunder, without the execution or filing
of any paper or any further act on the part of any of the parties hereto,
anything herein to the contrary notwithstanding; provided, however, that the
successor or surviving Person shall have a tangible net worth of at least
$30,000,000.
SECTION 13.
MANDATORY DELIVERY; GRANT OF SECURITY INTEREST.
The sale and delivery on the Closing Date of the Mortgage Loans
described on the Mortgage Loan Schedule is mandatory from and after the date of
the execution of this Agreement, it being specifically understood and agreed
that each Mortgage Loan is unique and identifiable on the date hereof and that
an award of money damages would be insufficient to compensate the Purchaser for
the losses and damages incurred by the Purchaser (including damages to
prospective purchasers of the Mortgage Loans) in the event of the Seller's
failure to deliver (i) each of the Mortgage Loans or (ii) one or more Qualified
Substitute Mortgage Loans or (iii) one or more Mortgage Loans otherwise
acceptable to the Purchaser on or before the Closing Date. The Seller hereby
grants to the Purchaser a lien on and a continuing security interest in each
Mortgage Loan and each document and instrument evidencing each such Mortgage
Loan to secure the performance by the Seller of its obligations under this
Agreement, and the Seller agrees that it shall hold such Mortgage Loans in
custody for the Purchaser subject to the Purchaser's (i) right to reject any
Mortgage Loan (or Qualified Substitute Mortgage Loan) under the terms of this
Agreement and to require another Mortgage Loan (or Qualified Substitute Mortgage
Loan) to be substituted therefor, and (ii) obligation to pay the Purchase Price
plus accrued interest as set forth in Section 4 hereof for the Mortgage Loans.
All rights and remedies of the Purchaser under this Agreement are distinct from,
and cumulative with, any other rights or remedies under this Agreement or
afforded by law or equity and all such rights and remedies may be exercised
concurrently, independently or successively.
SECTION 14.
NOTICES.
All demands, notices and communications hereunder shall be in writing
and shall be deemed to have been duly given if mailed, by registered or
certified mail, return receipt requested, or, if by other means, when received
by the other party at the address as follows:
(i) if to the Seller:
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Flagstar Bank, FSB
2600 Telegraph Road
Bloomfield Hills, MI 48302
Attention: President
(ii) if to the Purchaser:
Flagstar Capital Corporation
2600 Telegraph Road
Bloomfield Hills, MI 48302
Attention: Corporate Secretary
or such other address as may hereafter be furnished to the other party by like
notice. Any such demand, notice or communication hereunder shall be deemed to
have been received on the date delivered to or received at the premises of the
addressee (as evidenced, in the case of registered or certified mail, by the
date noted on the return receipt).
SECTION 15.
SEVERABILITY CLAUSE.
Any part, provision, representation or warranty of this Agreement which
is prohibited or unenforceable or is held to be void or unenforceable in any
jurisdiction shall be ineffective, as to such jurisdiction, to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction as to any Mortgage Loan shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted
by applicable law, the parties hereto waive any provision of law which prohibits
or renders void or unenforceable any provision hereof. If the invalidity of any
part, provision, representation or warranty of this Agreement shall deprive any
party of the economic benefit intended to be conferred by this Agreement, the
parties shall negotiate, in good faith, to develop a structure the economic
effect of which is nearly as possible the same as the economic effect of this
Agreement without regard to such invalidity.
SECTION 16.
COUNTERPARTS.
This Agreement may be executed simultaneously in any number of
counterparts. Each counterpart shall be deemed to be an original, and all such
counterparts shall constitute one and the same instrument.
SECTION 17.
GOVERNING LAW.
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The Agreement shall be construed in accordance with the laws of the
State of Michigan and the obligations, rights and remedies of the parties
hereunder shall be determined-in accordance with the substantive laws of the
State of Michigan (without regard to conflicts of laws principles), except to
the extent preempted by Federal law.
SECTION 18.
INTENTION OF THE PARTIES.
It is the intention of the parties that the Purchaser is purchasing,
and the Seller is selling the Mortgage Loans and not a debt instrument of the
Seller or another security. Accordingly, the parties hereto each intend to
treat the transaction for Federal income tax purposes as a sale by the Seller,
and a purchase by the Purchaser, of the Mortgage Loans.
SECTION 19.
SUCCESSORS AND ASSIGNS; ASSIGNMENT OF PURCHASE AGREEMENT.
This Agreement shall bind and inure to the benefit of and be
enforceable by the Seller and the Purchaser and the respective permitted
successors and assigns of the Seller and the successors and assigns of the
Purchaser. This Agreement shall not be assigned, pledged or hypothecated by the
Seller to a third party without the consent of the Purchaser. This Agreement
may be assigned, pledged or hypothecated by the Purchaser without the prior
consent of the Seller. If the Purchaser assigns all or any of its rights as
Purchaser hereunder, the assignee of the Purchaser will become the "Purchaser"
hereunder to the extent of such assignment, provided that at no time shall there
be more than fifteen (15) persons having the status of "Purchaser" hereunder.
The Servicer shall be required to remit all amounts required to be remitted to
the Purchaser hereunder to said assignee commencing with the first Remittance
Date falling after receipt of said copy of the related Assignment and Assumption
Agreement provided that the Seller receives said copy no later than three (3)
Business Days immediately prior to the first day of the month of the related
Remittance Date.
SECTION 20.
WAIVERS.
No term or provision of this Agreement may be waived or modified unless
such waiver or modification is in writing and signed by the party against whom
such waiver or modification is sought to be enforced.
SECTION 21.
EXHIBITS.
The exhibits to this Agreement are hereby incorporated and made a part
hereof and are an integral part of this Agreement.
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SECTION 22.
GENERAL INTERPRETIVE PRINCIPLES.
For purposes of this Agreement, except as otherwise expressly provided
or unless the context otherwise requires:
(a) the terms defined in this Agreement have the meanings
assigned to them in this Agreement and include the
plural as well as the singular, and the use of any
gender herein shall be deemed to include the other
gender;
(b) accounting terms not otherwise defined herein have
the meanings assigned to them in accordance with
generally accepted accounting principles;
(c) references herein to "Articles," "Sections,"
"Subsections," "Paragraphs," and other subdivisions
without reference to a document are to designated
Articles, Sections, Subsections, Paragraphs and other
subdivisions of this Agreement;
(d) reference to a Subsection without further reference
to a Section is a reference to such Subsection as
contained in the same Section in which the reference
appears, and this rule shall also apply to Paragraphs
and other subdivisions;
(e) the words "herein," "hereof," "hereunder" and other
words of similar import refer to this Agreement as a
whole and not to any particular provision; and
(f) the term "include" or "including" shall mean without
limitation by reason of enumeration.
SECTION 23.
REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating thereto, including, without
limitation, (a) consents, waivers and modifications which may hereafter be
executed, (b) documents received by any party at the closing, and (c) financial
statements, certificates and other information previously or hereafter
furnished, may be reproduced by any photographic, photostatic, microfilm, micro-
card, miniature photographic or
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other similar process. The parties agree that any such reproduction shall be
admissible in evidence as the original itself in any judicial or administrative
proceeding, whether or not the original is in existence and whether or not such
reproduction was made by a party in the regular course of business, and that any
enlargement, facsimile or further reproduction of such reproduction shall
likewise be admissible in evidence.
SECTION 24.
FURTHER AGREEMENTS.
The Seller and the Purchaser each agree to execute and deliver to the
other such reasonable and appropriate additional documents, instruments or
agreements as may be necessary or appropriate to effectuate the purposes of this
Agreement.
SECTION 25.
RECORDATION OF ASSIGNMENTS OF MORTGAGE.
To the extent permitted by applicable law, each of the Assignments of
Mortgage is subject to recordation in all appropriate public offices for real
property records in all the counties or their comparable jurisdictions in which
any or all of the Mortgaged Properties are situated, and in any other
appropriate public recording office or elsewhere, such recordation to be
effected at the Seller's expense for a single recordation with respect to each
Assignment of Mortgage in the event recordation is either necessary under
applicable law or requested by the Purchaser at its sole option.
IN WITNESS WHEREOF, the parties have executed this Agreement under seal
as of the date and year first above written.
FLAGSTAR CAPITAL CORPORATION
(the Purchaser)
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
FLAGSTAR BANK, FSB
(the Seller)
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By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
Exhibit A
---------
With respect to each Mortgage Loan, the Mortgage File shall include each of the
following items:
1. The original Mortgage Loan, endorsed as required by this Agreement.
2. The original Mortgage, with evidence of recording thereon, or a copy
thereof certified by the public recording office in which such
Mortgage has been recorded, or if the original Mortgage has not yet
been returned from the applicable public recording office, a true copy
of such original mortgage together with certificate of the Company
certifying that the original Mortgage has been delivered for recording
in the appropriate recording office of the jurisdiction in which the
Mortgage Property is located.
3. Original Assignment in blank which assignment shall be in form and
substance acceptable for recording but not recorded. Subject to the
foregoing, such assignments may be by blanket assignments for Mortgage
Loans covering Mortgaged Properties situated within the same county.
If the Assignment is in blanket form, the assignment need not be
included in the individual Mortgage File but a copy of the blanket
assignment shall be included.
4. In the case of a conventional Mortgage Loan, the original Primary
Mortgage Insurance Policy for all Mortgage Loans where such insurance
is required.
5. Original policy of lender's title insurance or a copy thereof
certified by the title insurer, or original attorney's opinion of
title, or if the policy has not yet been issued, a written commitment
or interim binder or preliminary report of title, by the title
insurance or the escrow company dated as of the date of the Mortgage
Loan was funded, with a statement by the title insurance company, or
related mortgage during the period between the date of the funding of
the related Mortgage Loan and the date of the related title policy
(which title policy shall be dated the date or recording of the
related Mortgage) is insured.
6. Originals, or copies thereof certified by he public recording office
in which such
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documents have been recorded, of each assumption, extension,
modification, written assurance or substitution agreements.
7. Original recorded intervening assignments, or copies thereof certified
by the public recording office in which such Assignments have been
recorded, showing a complete chain of title from the originator to the
Company.
8. In the case of any Mortgage Loan identified on the Mortgage Loan
Schedule as a VA or FHA Loan, the original certificate of insurance
or guaranty, as appropriate.
9. Copy of survey of the Mortgaged Property, if applicable.
10. Copy of each instrument necessary to complete identification of any
exception set forth in the exception schedule in the title policy,
i.e.,map or plat, restrictions, easements, sewer agreements, homeowner
association declarations, etc.
11. Original hazard insurance policy and, if required by law, flood
insurance policy, with extended coverage of the hazard insurance
policy.
12. Mortgage Loan closing statement.
13. Residential loan application.
14. Verification of employment and income.
15. Verification of acceptable evidence of source and amount of down
payment.
16. Credit report on the Mortgagor.
17. Residential appraisal report with pictures and addenda.
18. Photograph of the property.
19. (a) Executed final truth-in-lending disclosure statement.
(b) Executed Disclosures for Adjustable Rate Mortgage Loans, if
applicable.
(c) Right of Rescission Notices of Refinances, if applicable.
(d) Executed Servicing Transfer Disclosure Form.
20. Tax receipts, insurance premium receipts, ledger sheets, payment
records, insurance claim files and correspondence, current and
historical computerized data files, underwriting standards used for
origination or such other papers and records required by the Company
to service the Mortgage Loan.
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21. Mortgage Pool Insurance Certificate, if applicable.
22. Payment Histories.
EXHIBIT B
SERVICING AGREEMENT
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EXHIBIT C
1997
Flagstar Capital corporation
2600 Telegraph Road
Bloomfield Hills, MI 48302
OFFICERS CERTIFICATE
--------------------
Now comes _____________________ the _____________________ of Flagstar Bank, FSB,
a federally chartered savings bank (Bank) and hereby certifies as follows:
1. He/She is the duly appointed ___________________ of Bank and is familiar
with the Mortgage Loan Purchase and Warranties Agreement effective __________,
19____ ("Agreement"), with Flagstar Capital Corporation and the transactions
contemplated by these parties ("Transaction").
2. Seller has the full legal authority to sell the Mortgage Loans to Purchaser
pursuant to the Agreement and to enter into the agreement.
3. No approval or other action by any governmental authority, agency or
instrumentality having jurisdiction over Seller is required with respect to any
of the transactions contemplated in the Agreement.
Very Truly Yours,
- --------------------
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EXHIBIT D
, 1997
Flagstar Capital Corporation
2600 Telegraph Road
Bloomfield Hills, MI 48302
RE: Flagstar Bank, FSB, Opinion of Counsel
Dear Sirs:
I have acted as counsel to Flagstar Bank, FSB ("Bank"), a federally chartered
savings bank, concerning the Mortgage Loan Purchase and Warranties Agreement
effective __________, 19____ ("Agreement"), with Flagstar Capital Corporation
and the transactions contemplated by these parties ("Transaction").
OPINION
I have examined the corporate records concerning bank and have made such
examination of law as I deem relevant to this Opinion. Based on the above, and
subject to the qualifications set forth below, it is my opinion that:
1. Bank has the corporate power and authority to execute, deliver, and perform
the Agreement and other related documents and agreements. The execution,
delivery, and performance of the Agreement have been authorized by all
necessary corporate action of Bank. The Agreement has been executed and
delivered by Bank and (assuming Bank's valid authorization, execution, and
delivery of this Agreement) constitutes the valid and binding obligation of
Bank enforceable
51
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against Bank according to its terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium, or other similar laws
affecting the enforcement of creditor's rights in general and subject to
general principles of equity (regardless of whether the enforceability is
considered in a proceeding in equity or at law).
2. Bank is a federally chartered savings bank organized, existing, and in good
standing under the laws of the United States of America.
3. Bank's execution, delivery, or performance of the Agreement will not
constitute a violation of its Charter or Bylaws as currently in effect.
4. To the best of my knowledge after reasonable investigation, there are no
actions, suits, or proceedings (governmental or otherwise) pending against,
threatened against, or affecting Bank in any court or before any arbitrator
or any public board or body (a) in which there is a possibility of an
adverse decision that would directly affect Bank's business or financial
position or the results of Bank's operation or (b) that seeks to restrain,
enjoin, or in any way affect the approval, execution, or delivery of the
Agreement and the related transactions.
QUALIFICATION OF OPINION
This Opinion is subject in its entirety to the following qualifications:
1. This Opinion has been prepared solely for your use in connection with the
closing of the Transaction under the Agreement and may not be quoted in
whole or in part or otherwise referred to (except in a list of closing
documents) without my prior written consent. No one other than the
addressee is entitled to rely on this Opinion.
2. This Opinion is based and relies on the current status of the laws, rules,
and regulations of the State of Michigan and the United States and in all
respects is subject to and may be limited by amendments or other changes in
these laws, rules, and regulations and any future laws, rules, and
regulations, as well as by developing case law.
3. This Opinion is limited to the matters set forth here, and no opinions may
be inferred or implied beyond those expressly stated here.
4. I have relied without investigation on certificates and other
communications from public officials as to matters of fact.
Very truly yours,
______________________________
52
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EXHIBIT E
MORTGAGE LOAN SCHEDULE
53
<PAGE>
EXHIBIT F
UNDERWRITING GUIDELINES OF FLAGSTAR BANK, FSB
54
<PAGE>
EXHIBIT G
ASSIGNMENT AND ASSUMPTION AGREEMENT
55
<PAGE>
SERVICING AGREEMENT
BETWEEN
FLAGSTAR CAPITAL CORPORATION
PURCHASER
AND
FLAGSTAR BANK, FSB
SELLER/SERVICER
DATED AS OF [__________], 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
DEFINITIONS.......................................................................................1
Section 1. Definitions.......................................................................1
ARTICLE II
SERVICING ........................................................................................5
Section 2.01 Bank to Act as Servicer..........................................................5
Section 2.02 Liquidation of Mortgage Loans....................................................7
Section 2.03 Collection of Mortgage Loan Payments.............................................8
Section 2.04 Establishment of and Deposits to Custodial Account...............................8
Section 2.05 Permitted Withdrawals From Custodial Account.....................................9
Section 2.06 Establishment of and Deposits to Escrow Account.................................10
Section 2.07 Permitted Withdrawals From Escrow Account.......................................11
Section 2.08 Payment of Taxes, Insurance and Other Charges, Tax Contracts....................12
Section 2.09 Protection of Accounts..........................................................12
Section 2.10 Maintenance of Hazard Insurance.................................................12
Section 2.11 Maintenance of Mortgage Impairment Insurance....................................13
Section 2.12 Maintenance of Fidelity Bond and Errors and Omissions Insurance.................14
Section 2.13 Inspections.....................................................................14
Section 2.14 Restoration of Mortgaged Property...............................................15
Section 2.15 Maintenance of PMI Policy, Claims...............................................15
Section 2.16 Deteriorating Mortgage Loans....................................................16
Section 2.17 Title, Management and Disposition of REO Property...............................16
Section 2.18 Permitted Withdrawals with respect to REO Property..............................17
Section 2.19 Real Estate Owned Reports.......................................................18
Section 2.20 Liquidation Reports.............................................................18
Section 2.21 Reports Of Foreclosures and Abandonments........................................18
Section 2.22 Notification of Adjustments.....................................................18
Section 2.23 Notification of Maturity Date...................................................18
</TABLE>
2
<PAGE>
ARTICLE III
<TABLE>
<CAPTION>
Page
----
<S> <C>
PAYMENTS TO PURCHASER............................................................................19
Section 3.01 Remittances...............................................................19
Section 3.02 Statements to Purchaser...................................................19
Section 3.03 Advances by Servicer......................................................20
ARTICLE IV
GENERAL SERVICING PROCEDURES.....................................................................21
Section 4.01 Transfers of Mortgaged Property...........................................21
Section 4.02 Satisfaction of Mortgages and Release of Mortgage Files...................21
Section 4.03 Servicing Compensation....................................................22
Section 4.04 Annual Statement as to Compliance.........................................22
Section 4.05 Annual Independent Public Accountants' Servicing Report...................22
Section 4.06 Right to Examine Seller Records...........................................23
ARTICLE V
SERVICER TO COOPERATE............................................................................23
Section 5.01 Provision of Information..................................................23
Section 5.02 Financial Statements; Servicing Facilities................................23
ARTICLE VI
TERMINATION......................................................................................24
Section 6.01 Agency Suspensions........................................................24
Section 6.02 Damages...................................................................24
Section 6.03 Termination...............................................................24
Section 6.04 Termination Without Cause.................................................24
ARTICLE VII
BOOKS AND RECORDS................................................................................24
Section 7.01 Possession of Servicing Files.............................................24
ARTICLE VIII
INDEMNIFICATION AND ASSIGNMENT...................................................................26
Section 8.01 Indemnification...........................................................26
Section 8.02 Limitation on Liability of Seller and Others..............................26
Section 8.03 Limitation on Registration and Assignment by Seller.......................26
Section 8.04 Assignment by Purchaser...................................................27
Section 8.05 Merger or Consolidation of the Seller.....................................27
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 8.06 Successor to the Seller...................................................28
ARTICLE IX
REPRESENTATIONS,WARRANTIESANDCOVENANTS
OF PURCHASER.....................................................................................29
Section 9.01 Due Organization and Authority............................................29
Section 9.02 No Conflicts..............................................................29
Section 9.03 Ability to Perform........................................................29
Section 9.04 No Litigation Pending.....................................................29
Section 9.05 No Consent Required.......................................................30
Section 9.06 Assistance................................................................30
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF SELLER.........................................................30
Section 10.01 Due Organization and Authority...........................................30
Section 10.02 Ordinary Course of Business..............................................30
Section 10.03 No Conflicts.............................................................30
Section 10.04 Ability to Service.......................................................31
Section 10.05 Ability to Perform.......................................................31
Section 10.06 No Litigation Pending....................................................31
Section 10.07 No Consent Required......................................................31
Section 10.08 No Untrue Information....................................................31
Section 10.09 Reasonable Servicing Fee.................................................32
Section 10.10 Financial Statements.....................................................32
Section 10.11 Conflict of Interest.....................................................32
ARTICLE XI
DEFAULT..........................................................................................32
Section 11.01 Events of Default........................................................32
Section 11.02 Waiver of Defaults.......................................................34
ARTICLE XII
MISCELLANEOUS PROVISIONS.........................................................................34
Section 12.01 Notices..................................................................34
Section 12.02 Waivers..................................................................34
Section 12.03 Entire Agreement; Amendment..............................................35
Section 12.04 Execution; Binding Effect................................................35
Section 12.05 Headings.................................................................35
Section 12.06 Applicable Law...........................................................35
Section 12.07 Relationship of Parties..................................................35
Section 12.08 Severability of Provisions...............................................35
Section 12.09 Recordation of Assignments of Mortgage...................................35
Section 12.10 Exhibits.................................................................36
</TABLE>
EXHIBITS
EXHIBIT 1 FORM OF MONTHLY REMITTANCE ADVICE
EXHIBIT 2 FORM OF CUSTODIAL ACCOUNT CERTIFICATION
EXHIBIT 3 FORM OF CUSTODIAL ACCOUNT LETTER AGREEMENT
EXHIBIT 4 FORM OF ESCROW ACCOUNT CERTIFICATION
EXHIBIT 5 FORM OF ESCROW ACCOUNT LETTER AGREEMENT
4
<PAGE>
SERVICING AGREEMENT
This Servicing Agreement (the "Servicing Agreement" or the "Agreement")
is entered into as of [__________,] 1998, by and between Flagstar Bank, FSB (the
"Seller" or "Servicer"), a federally chartered savings bank, and Flagstar
Capital Corporatin, a Michigan, corporation (the "Purchaser").
WHEREAS, the Purchaser and Seller entered into a Mortgage Loan Purchase
and Warranties Agreement dated as of [________,] 1998 (the "Purchase Agreement")
pursuant to which the Purchaser agreed to purchase from the Seller certain
residential, adjustable and fixed rate first mortgage loans (the "Mortgage
Loans") to be delivered as whole loans, with the Servicer retaining servicing
rights in connection with the purchase of such Mortgage Loans; and
WHEREAS, the Purchaser desires to have the Servicer service the
Mortgage Loans, the Servicer desires to service and administer the Mortgage
Loans on behalf of the Purchaser, and the parties desire to provide the terms
and conditions of such servicing by the Servicer.
NOW, THEREFORE, in consideration of the mutual promises and agreements
set forth herein and for other good and valuable consideration, the receipt and
the sufficiency of which are hereby acknowledged, the parties hereto hereby
agree as follows:
5
<PAGE>
ARTICLE
DEFINITIONS
SECTION 1. Definitions. All capitalized terms not otherwise defined herein
have the respective meanings set forth in the Purchase Agreement. The following
terms are defined as follows:
"Accepted Servicing Practices" means, with respect to any Mortgage Loan,
those mortgage servicing practices of prudent mortgage lending institutions
which service mortgage loans of the same type as such Mortgage Loan in the
jurisdiction where the related Mortgaged Property is located.
"Ancillary Income" means all late charges, escrow account benefits,
reinstatement fees, and similar types of fees arising from or in connection with
any Mortgage Loan to the extent not otherwise payable to the Mortgagor under
applicable law or pursuant to the terms of the related Mortgage Note.
"Bank" means Flagstar Bank, FSB.
"Best's" means Best's Key Rating Guide.
"BIF" means The Bank Insurance Fund, or any successor thereto.
"Closing Date" means [_______], 1998, or such other date as is mutually
agreed upon by the parties hereto.
"Condemnation Proceeds" means all awards or settlements in respect of a
Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents
"Custodial Account" means the separate account or accounts created and
maintained pursuant to Section 2.04.
"Cut-off Date" means [__________], 1998.
"Due Period" means with respect to each Remittance Date, the period
commencing on the second day of the month preceding the month of the Remittance
Date and ending on the first day of the month of the Remittance Date.
"Errors and Omissions Insurance Policy" means an errors and omissions
insurance policy to be maintained by the Servicer pursuant to Section 2.12.
6
<PAGE>
"Escrow Account" means the separate account or accounts created and
maintained pursuant to Section 2.06.
"Escrow Payment" means, with respect to any Mortgage Loan, the amounts
constituting taxes, assessments, water rates, sewer rents, municipal charges,
mortgage insurance premiums, fire and hazard insurance premiums, condominium
charges, and any other payments required to be escrowed by the Mortgagor with
the mortgagee pursuant to the Mortgage or any other document.
"Event of Default" means any one of the conditions or circumstances
enumerated in Section 11.01.
"FDIC" means The Federal Deposit Insurance Corporation, or any successor
thereto.
"FHLMC Guide" means the FHLMC Sellers' and Servicers' Guide and all
amendments or additions thereto.
"Fidelity Bond" means a fidelity bond to be maintained by the Servicer
pursuant to Section 2.12.
"FNMA Guides" means the FNMA Sellers' Guide and the FNMA Servicers' Guide
and all amendments or additions thereto.
"Insurance Proceeds" means, with respect to each Mortgage Loan, proceeds of
insurance policies insuring the Mortgage Loan or the related Mortgaged Property.
"Liquidation Proceeds" means cash received in connection with the
liquidation of a defaulted Mortgage Loan, whether through the sale or assignment
of such Mortgage Loan, trustee's sale, foreclosure sale or otherwise, or the
sale of the related Mortgaged Property if the Mortgaged Property is acquired in
satisfaction of the Mortgage Loan.
"Monthly Remittance Advice" means the monthly remittance advice, in the
form of Exhibit A annexed hereto, to be provided to the Purchaser pursuant to
Section 3.02.
"Mortgage Impairment Insurance Policy" means a mortgage impairment or
blanket hazard insurance policy as described in Section 2.11.
"Nonrecoverable Advance" means any advance of principal and interest
previously made or proposed to be made in respect of a Mortgage Loan which, in
the good faith judgment of the Servicer, will not or, in the case of a proposed
advance of principal and interest, would not, be ultimately recoverable from
related Insurance Proceeds, Liquidation Proceeds or otherwise. The determination
by the Servicer that it has made a Nonrecoverable Advance or that any proposed
advance of principal and interest, if made, would constitute a Nonrecoverable
Advance, shall be evidenced by an Officers' Certificate delivered to the
Purchaser.
7
<PAGE>
"Officer's Certificate" means a certificate signed by the Chairman of the
Board or the Vice Chairman of the Board or a President or a Vice President and
by the Treasurer or the Secretary or one of the Assistant Treasurers or
Assistant Secretaries of the Servicer, and delivered to the Purchaser as
required by this Agreement.
"OTS" means Office of Thrift Supervision, or any successor thereto.
"PMI Policy" means a policy of primary mortgage guaranty insurance issued
by a Qualified Insurer, as required by this Agreement with respect to certain
Mortgage Loans.
"Prime Rate" means the prime rate announced to be in effect from time
to time, as published as the average rate in The Wall Street Journal (Chicago
edition).
"Principal Prepayment" means any payment or other recovery of principal on
a Mortgage Loan which is received in advance of its scheduled Due Date,
including any prepayment penalty or premium thereon and which is not accompanied
by an amount of interest representing scheduled interest due on any date or
dates in any month or months subsequent to the month of prepayment.
"Purchase Agreement" means the Mortgage Loan Purchase and Warranties
Agreement between the Purchaser and the Seller related to the purchase of the
Mortgage Loans dated as of [__________,] 1998.
"Qualified Depository" means a depository the accounts of which are insured
by the FDIC through the BIF or the SAIF.
"Qualified Insurer" means an insurance company duly qualified as such under
the laws of the states in which the Mortgaged Properties are located, duly
authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided, approved as an insurer by FNMA and
FHLMC with respect to primary mortgage insurance and, in addition, in the two
highest rating categories by Best's with respect to hazard and flood insurance.
"Remittance Date" means the 18th day (or if such 18th day is not a Business
Day, the first Business Day immediately following) of any month, beginning with
the first Remittance Date on [_______,] 1998.
"REO Property" means a Mortgaged Property acquired by the Servicer on
behalf of the Purchaser through foreclosure or by deed in lieu of foreclosure,
as described in Section 2.17.
"SAIF" means The Savings Association Insurance Fund, or any successor
thereto.
"Servicer Employees" has the meaning set forth in Section 2.12.
"Servicing Advances" means all customary, reasonable and necessary "out of
pocket" costs
8
<PAGE>
and expenses (including reasonable attorneys' fees and disbursements) incurred
in the performance by the Servicer of its servicing obligations, including, but
not limited to, the cost of (a) the preservation, restoration and protection of
the Mortgaged Property, (b) any enforcement or judicial proceedings, including
foreclosures, (c) the management and liquidation of the Mortgaged Property if
the Mortgaged Property is acquired in satisfaction of the Mortgage and (d)
compliance with the obligations under Section 2.08 (except with respect to any
expenses incurred in connection with procuring or transferring Tax Service
Contracts, as provided therein).
"Servicing Agreement" means this agreement between the Purchaser and the
Servicer for the servicing and administration of the Mortgage Loans.
"Servicing Fee" means, with respect to each Mortgage Loan, the amount of
the annual fee the Purchaser shall pay to the Servicer, which shall, for a
period of one (1) full month, be equal to one-twelfth of the product of the
Servicing Fee Rate and (2) the Stated Principal Balance of such Mortgage Loan.
Such fee shall be payable monthly, computed on the basis of the same
principal amount and period in respect of which any related interest payment on
a Mortgage Loan is computed and shall be pro rated for any portion of a month
during which the Mortgage Loan is serviced by the Servicer under this Agreement.
The obligation of the Purchaser to pay the Servicing Fee is limited to, and the
Servicing Fee is payable solely from, the interest portion (including recoveries
with respect to interest from Liquidation Proceeds, to the extent permitted by
Section 4.03) of such Monthly Payment collected by the Servicer, or as otherwise
provided under Section 4.03.
"Servicing Fee Rate" means, with respect to each Mortgage Loan, the rate
specified in the Mortgage Loan Schedule with respect to such Mortgage Loan.
"Servicing File" means, with respect to each Mortgage Loan, the file
retained by the Servicer consisting of originals of all documents in the
Mortgage File which are not delivered to the Purchaser or its designee and
copies of the Mortgage Loan Documents listed on Exhibit A to the Purchase
Agreement.
"Termination Fee" means the amount paid by the Purchaser to the Servicer in
the event of the Servicer's termination, without cause, as servicer. Such fee
shall equal the percentage amount set forth in Section 6.04 hereof of the then
current aggregate unpaid principal balance of the related Mortgage Loans .
ARTICLE II
SERVICING
SECTION 2.01 The Bank to Act as Servicer. From and after the Closing Date,
the Servicer, as an independent contractor, shall service and administer the
Mortgage Loans and shall have full power and authority, acting alone, to do any
and all things in connection with such servicing and
9
<PAGE>
administration which the Servicer may deem necessary or desirable, consistent
with the terms of this Agreement and with Accepted Servicing Practices. Except
as set forth in this Agreement, the Servicer shall service the Mortgage Loans in
strict compliance with the servicing provisions related to the FNMA MBS Program
(Special Servicing Option) of the FNMA Guides. In the event of any conflict,
inconsistency or discrepancy between any of the servicing provisions of this
Agreement and any of the servicing provisions of the FNMA Guides, the provisions
of this Agreement shall control and be binding upon the Purchaser and the
Servicer.
Consistent with the terms of this Agreement, the Servicer may waive,
modify or vary any term of any Mortgage Loan or consent to the postponement of
strict compliance with any such term or in any manner grant indulgence to any
Mortgagor if in the Servicer's reasonable and prudent determination such waiver,
modification, postponement or indulgence is not materially adverse to the
Purchaser, provided, however, that unless the Servicer has obtained the prior
written consent of the Purchaser, the Servicer shall not permit any modification
with respect to any Mortgage Loan that would change the Mortgage Interest Rate,
defer or forgive the payment of principal or interest, reduce or increase the
outstanding principal balance (except for actual payments of principal) or
change the final maturity date on such Mortgage Loan. In the event of any such
modification which permits the deferral of interest or principal payments on any
Mortgage Loan, the Servicer shall, on the Business Day immediately preceding the
Remittance Date in any month in which any such principal or interest payment has
been deferred, deposit in the Custodial Account from its own funds, in
accordance with Section 2.04, the difference between (a) such month's principal
and one (1) month's interest at the Mortgage Interest Rate on the unpaid
principal balance of such Mortgage Loan and (b) the amount paid by the
Mortgagor.
The Servicer shall be entitled to reimbursement for such advances to the
same extent as for all other advances made pursuant to Section 2.05. Without
limiting the generality of the foregoing, the Servicer shall continue, and is
hereby authorized and empowered, to execute and deliver on behalf of itself and
the Purchaser, all instruments of satisfaction or cancellation, or of partial or
full release, discharge and all other comparable instruments, with respect to
the Mortgage Loans and with respect to the Mortgaged Properties. If reasonably
required by the Servicer, the Purchaser shall furnish the Servicer with any
powers of attorney and other documents necessary or appropriate to enable the
Servicer to carry out its servicing and administrative duties under this
Agreement.
In servicing and administering the Mortgage Loans, the Servicer shall
employ procedures (including collection procedures) and exercise the same care
that it customarily employs and exercises in servicing and administering
mortgage loans for its own account, giving due consideration to Accepted
Servicing Practices where such practices do not conflict with the requirements
of this Agreement, the FNMA Guides and the Purchaser's reliance on the Servicer.
The Servicer shall keep at its servicing office books and records in which,
subject to such reasonable regulations as it may prescribe, the Servicer shall
note transfers of Mortgage Loans. No transfer of a Mortgage Loan may be made
unless such transfer is in compliance with the terms hereof. For the purposes of
this Agreement, the Servicer shall be under no obligation to deal with any
Person with respect to this Agreement or the Mortgage Loans unless the Servicer
has been
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<PAGE>
notified of such transfers as provided in this Section 2.01. The Purchaser may
sell and transfer, in whole or in part, the Mortgage Loans, provided that no
such sale and transfer shall be binding upon the Servicer unless such transferee
shall agree in writing in the form of the Assignment and Assumption Agreement
attached to the Purchase Agreement as Exhibit G, to be bound by the terms of
this Agreement and the Purchase Agreement, and an executed copy of the same
shall have been delivered to the Servicer. Upon receipt thereof, the Servicer
shall mark its books and records to reflect the ownership of the Mortgage Loans
by such assignee, and the previous Purchaser shall be released from its
obligations hereunder. The Servicer shall be required to remit all amounts
required to be remitted to the Purchaser hereunder to said transferee commencing
with the first Remittance Date falling after receipt of said copy of the related
Assignment and Assumption Agreement provided that the Servicer receives said
copy no later than three (3) Business Days immediately prior to the first day of
the month of the related Remittance Date. This Agreement shall be binding upon
and inure to the benefit of the Purchaser and the Servicer and their permitted
successors, assignees and designees.
The Servicing File retained by the Servicer pursuant to this Agreement
shall be appropriately marked and identified in the Servicer's computer system
to clearly reflect the sale of the related Mortgage Loan to the Purchaser. The
Servicer shall release from its custody the contents of any Servicing File
retained by it only in accordance with this Agreement, except when such release
is required in connection with a repurchase of any such Mortgage Loan pursuant
to Section 8.03 of the Purchase Agreement.
The Servicer must have an internal quality control program that verifies,
on a regular basis, the existence and accuracy of the legal documents, credit
documents, property appraisals, and underwriting decisions. The program must be
capable of evaluating and monitoring the overall quality of its loan production
and servicing activities. The program is to ensure that the Mortgage Loans are
serviced in accordance with prudent mortgage banking practices and accounting
principles; guard against dishonest, fraudulent, or negligent acts; and guard
against errors and omissions by officers, employees, or other authorized
persons.
SECTION 2.02 Liquidation of Mortgage Loans. In the event that any payment
due under any Mortgage Loan and not postponed pursuant to Section 2.01 is not
paid when the same becomes due and payable, or in the event the Mortgagor fails
to perform any other covenant or obligation under the Mortgage Loan and such
failure continues beyond any applicable grace period, the Servicer shall take
such action as (1) the Servicer would take under similar circumstances with
respect to a similar mortgage loan held for its own account for investment, (2)
shall be consistent with Accepted Servicing Practices, (3) the Servicer shall
determine prudently to be in the best interest of Purchaser, and (4) is
consistent with any related PMI Policy. In the event that any payment due under
any Mortgage Loan is not postponed pursuant to Section 2.01 and remains
delinquent for a period of ninety (90) days or any other default continues for a
period of ninety (90) days beyond the expiration of any grace or cure period (or
such other period as is required by law in the jurisdiction where the related
Mortgaged Property is located), the Servicer shall commence foreclosure
proceedings in accordance with the FNMA Guides, provided that, prior to
commencing foreclosure proceedings, the Servicer shall notify the Purchaser in
writing of the Servicer's intention to do so, and the Servicer
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<PAGE>
shall not commence foreclosure proceedings if the Purchaser objects to such
action within ten (10) Business Days of receiving such notice or, if the
provisions of the next two paragraphs apply, in any event without the prior
written consent of Purchaser. In such connection, the Servicer shall from its
own funds make all necessary and proper Servicing Advances, provided, however,
that the Servicer shall not be required to expend its own funds in connection
with any foreclosure or towards the restoration or preservation of any Mortgaged
Property, unless it shall determine (a) that such preservation, restoration
and/or foreclosure will increase the proceeds of liquidation of the Mortgage
Loan to Purchaser after reimbursement to itself for such expenses and (b) that
such expenses will be recoverable by it either through Liquidation Proceeds (in
respect of which it shall have priority for purposes of withdrawals from the
Custodial Account pursuant to Section 2.05) or through Insurance Proceeds (in
respect of which it shall have similar priority).
Notwithstanding anything to the contrary contained herein, in connection
with a foreclosure, in the event the Servicer has reasonable cause to believe
that a Mortgaged Property is contaminated by hazardous or toxic substances or
wastes, or if the Purchaser otherwise requests an environmental inspection or
review of such Mortgaged Property to be conducted by a qualified inspector, the
Servicer shall cause the Mortgaged Property to be so inspected at the expense of
the Purchaser. Upon completion of the inspection, the Servicer shall promptly
provide the Purchaser with a written report of the environmental inspection.
After reviewing the environmental inspection report, the Purchaser
shall determine how the Servicer shall proceed with respect to the Mortgaged
Property. In the event (a) the environmental inspection report indicates that
the Mortgaged Property is contaminated by hazardous or toxic substances or
wastes and (b) the Purchaser directs the Servicer to proceed with foreclosure or
acceptance of a deed in lieu of foreclosure, the Servicer shall be reimbursed
for all reasonable costs associated with such foreclosure or acceptance of a
deed in lieu of foreclosure and any related environmental clean up costs, as
applicable, from the related Liquidation Proceeds, or if the Liquidation
Proceeds are insufficient to fully reimburse the Servicer, the Servicer shall be
entitled to be reimbursed from amounts in the Custodial Account pursuant to
Section 2.05 hereof and to the extent amounts in the Custodial Account are
insufficient to fully reimburse the Servicer, the Servicer shall be entitled to
be reimbursed by the Purchaser for such deficiencies (upon presentation of
evidence of such deficiency). In the event the Purchaser directs the Servicer
not to proceed with foreclosure or acceptance of a deed in lieu of foreclosure,
the Servicer shall be reimbursed for all Servicing Advances made with respect to
the related Mortgaged Property from the Custodial Account pursuant to Section
2.05 hereof.
SECTION 2.03 Collection of Mortgage Loan Payments. Continuously from
the Closing Date, the Servicer shall proceed diligently to collect all payments
due under each of the Mortgage Loans when the same shall become due and payable
and shall take special care in ascertaining and estimating Escrow Payments and
all other charges that will become due and payable with respect to the Mortgage
Loans and each related Mortgaged Property, to the end that the installments
payable by the Mortgagors will be sufficient to pay such charges as and when
they become due and payable.
SECTION 2.04 Establishment of and Deposits to Custodial Account. The
Servicer shall
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<PAGE>
segregate and hold all funds collected and received pursuant to the Mortgage
Loans separate and apart from any of its own funds and general assets and shall
establish and maintain one or more Custodial Accounts, in the form of time
deposit or demand accounts, titled "Flagstar Bank in trust for Purchaser of
Mortgage Loans, and various Mortgagors". The Custodial Account shall be
established with a Qualified Depository acceptable to the Purchaser. Any funds
deposited in the Custodial Account shall at all times be fully insured to the
full extent permitted under applicable law. Funds deposited in the Custodial
Account may be drawn on by the Servicer in accordance with Section 2.05. The
creation of any Custodial Account shall be evidenced by a certification in the
form of Exhibit 2 hereto, in the case of an account established with the
Servicer, or by a letter agreement in the form of Exhibit 3 hereto, in the case
of an account held by a depository other than the Servicer. A copy of such
certification or letter agreement shall be furnished to the Purchaser and, upon
request, to any subsequent Purchaser.
The Servicer shall deposit in the Custodial Account within one Business
Day of receipt, and retain therein, the following collections received by the
Servicer and payments made by the Servicer after the Cut-off Date, other than
payments of principal and interest due on or before the Cut-off Date, or
received by the Servicer prior to the Cut-off Date but allocable to a period
subsequent thereto:
(i) all payments on account of principal on the Mortgage Loans,
including all Principal Prepayments;
(ii) all payments on account of interest on the Mortgage;
(iii) all Liquidation Proceeds and any amount received with respect
to REO Property;
(iv) all Insurance Proceeds including amounts required to be deposited
pursuant to Section 2.10 (other than proceeds to be held in the
Escrow Account and applied to the restoration or repair of the
Mortgaged Property or released to the Mortgagor in accordance with
Section 2.14), and Section 2.11;
(v) all Condemnation Proceeds which are not applied to the restoration or
repair of the Mortgaged Property or released to the Mortgagor in
accordance with Section 2.14;
(vi) any amount required to be deposited in the Custodial Account pursuant
to Section 2.01, 2.09, 2.15, 2.17, 3.01, 3.03 or 4.02;
(vii) any amounts payable in connection with the repurchase of any Mortgage
Loan pursuant to Section 8.03 of the Purchase Agreement; and
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(viii) any amounts required to be deposited by the Servicer pursuant to
Section 2.11 in connection with the deductible clause in any blanket
hazard insurance policy.
The foregoing requirements for deposit into the Custodial Account
shall be exclusive, it being understood and agreed that, without limiting the
generality of the foregoing, Ancillary Income need not be deposited by the
Servicer into the Custodial Account. Any interest paid on funds deposited in the
Custodial Account by the depository institution shall accrue to the benefit of
the Servicer and the Servicer shall be entitled to retain and withdraw such
interest from the Custodial Account pursuant to Section 2.05.
SECTION 2.05 Permitted Withdrawals From Custodial Account. Subject to
Section 2.17 hereof, the Servicer shall, from time to time, withdraw funds from
the Custodial Account for the following purposes:
(i) to make payments to the Purchaser in the amounts and in the manner
provided for in Section 3.01;
(ii) to pay to itself the Servicing Fee;
(iii) to reimburse itself for advances of the Servicer's funds made
pursuant to Section 3.03, the Servicer's right to reimburse itself
pursuant to this subclause (iii) being limited to amounts received
on the related Mortgage Loan which represent late payments of
principal and/or interest in respect of which any such advance was
made, it being understood that, in the case of any such
reimbursement, the Servicer's right thereto shall be prior to the
rights of Purchaser, except that, where the Seller or the Servicer
is required to repurchase a Mortgage Loan pursuant to Section 8.03
of the Purchase Agreement or Section 4.02 of this Agreement,
respectively, the Servicer's right to such reimbursement shall be
subsequent to the payment to the Purchaser of the Repurchase Price
pursuant to such sections and all other amounts required to be paid
to the Purchaser with respect to such Mortgage Loan;
(iv) to reimburse itself for unreimbursed Servicing Advances (except to
the extent reimbursed pursuant to Section 2.07), any accrued but
unpaid Servicing Fees and for unreimbursed advances of Servicer
funds made pursuant to Sections 2.15, 2.17 or 3.03, the Servicer's
right to reimburse itself pursuant to this subclause (iv) with
respect to any Mortgage Loan being limited to related Liquidation
Proceeds, Condemnation Proceeds, Insurance Proceeds and such other
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amounts as may be collected by the Servicer from the Mortgagor or
otherwise relating to the Mortgage Loan, it being understood that,
in the case of any such reimbursement, the Servicer's right thereto
shall be prior to the rights of the Purchaser except that, where the
Seller or the Servicer is required to repurchase a Mortgage Loan
pursuant to Section 8.03 of the Purchase Agreement or Section 4.02
of this Agreement, respectively, the Servicer's right to such
reimbursement shall be subsequent to the payment to the Purchaser of
the Repurchase Price pursuant to such sections and all other amounts
required to be paid to the Purchaser with respect to such Mortgage
Loan;
(v) to pay itself any interest earned on funds deposited in the
Custodial Account (all such interest to be withdrawn monthly not
later than each Remittance Date); and
(vi) to clear and terminate the Custodial Account upon the termination of
this Agreement.
In the event that the Custodial Account is interest bearing, on each
Remittance Date, the Servicer shall withdraw all funds from the Custodial
Account except for those amounts which, pursuant to Section 3.01, the Servicer
is not obligated to remit on such Remittance Date. The Servicer may use such
withdrawn funds only for the purposes described in this Section 2.05.
SECTION 2.06 Establishment of and Deposits to Escrow Account. The
Servicer shall segregate and hold all funds collected and received pursuant to a
Mortgage Loan constituting Escrow Payments separate and apart from any of its
own funds and general assets and shall establish and maintain one or more Escrow
Accounts, in the form of time deposit or demand accounts. The Escrow Account or
Accounts shall be established with a Qualified Depositary, in a manner which
shall provide maximum available insurance thereunder. Funds deposited in the
Escrow Accounts may be drawn on by the Servicer in accordance with Section 2.07.
The creation of any Escrow Account shall be evidenced by a certification in the
form of Exhibit 2 hereto, in the case of an account established with the
Servicer, or by a letter agreement in the form of Exhibit 5 hereto, in the case
of an account held by a depository other than the Servicer. A copy of such
certification shall be furnished to the Purchaser and, upon request, to any
subsequent Purchaser.
The Servicer shall deposit in the Escrow Account or Accounts within one
Business Day of receipt, and retain therein:
(i) all Escrow Payments collected on account of the Mortgage
Loans, for the purpose of effecting timely payment of any such
items as required under the terms of this Agreement; and
(ii) all amounts representing Insurance Proceeds or Condemnation
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Proceeds which are to be applied to the restoration or repair
of any Mortgaged Property.
The Servicer shall make withdrawals from the Escrow Account only to
effect such payments as are required under this Agreement, as set forth in
Section 2.07. The Servicer shall be entitled to retain any interest paid on
funds deposited in the Escrow Account by the depository institution, other than
interest on escrowed funds required by law to be paid to the Mortgagor. To the
extent required by law, the Servicer shall pay from its own funds interest on
escrowed funds to the Mortgagor notwithstanding that the Escrow Account may be
noninterest bearing or that interest paid thereon is insufficient for such
purposes.
SECTION 2.07 Permitted Withdrawals From Escrow Account. Withdrawals
from each Escrow Account may be made by the Servicer only:
(i) to effect timely payments of taxes, assessments, water rates,
mortgage insurance premiums, condominium charges, fire and hazard
insurance premiums or other items constituting Escrow Payments for
the related Mortgage;
(ii) to reimburse the Servicer for any Servicing Advance made by the
Servicer pursuant to Section 2.08 with respect to a related
Mortgage Loan, but only from amounts received on the related
Mortgage Loan which represent late collections of Escrow Payments
thereunder;
(iii) to refund to the related Mortgagor any funds found to be in
excess of the amounts required under the terms of the related
Mortgage Loan or applicable federal or state law or judicial or
administrative ruling;
(iv) for transfer to the Custodial Account and application to reduce the
principal balance of the Mortgage Loan in accordance with the terms
of the related Mortgage and Mortgage Note;
(v) for application to restoration or repair of the related Mortgaged
Property in accordance with the procedures outlined in Section
2.14;
(vi) to pay to the Servicer, or any Mortgagor to the extent required by
law, any interest paid on the funds deposited in the Escrow
Account; and
(vii) to clear and terminate the Escrow Account on the termination
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of this Agreement.
SECTION 2.08 Payment of Taxes, Insurance and Other Charges, Tax
Contracts. With respect to each Mortgage Loan, the Servicer shall maintain
accurate records reflecting the status of taxes, assessments, water rates, sewer
rents, and other charges, as applicable, which are or may become a lien upon the
Mortgaged Property and the status of PMI Policy premiums and fire and hazard
insurance coverage and shall obtain, from time to time, all bills for the
payment of such charges (including renewal premiums) and shall effect payment
thereof prior to the applicable penalty or termination date, employing for such
purpose deposits of the Mortgagor in the Escrow Account which shall have been
estimated and accumulated by the Servicer in amounts sufficient for such
purposes, as allowed under the terms of the Mortgage. To the extent that a
Mortgage does not provide for Escrow Payments, the Servicer shall determine that
any such payments relating to taxes or maintaining insurance policies are made
by the Mortgagor at the time they first become due. The Servicer assumes full
responsibility for the timely payment of all such bills to the extent it has or
should have notice of such bills and shall effect timely payment of all such
charges irrespective of each Mortgagor's faithful performance in the payment of
same or the making of the Escrow Payments, and the Servicer shall make advances
from its own funds to effect such payments, such advances to be reimbursable to
the same extent as Servicing Advances.
SECTION 2.09 Protection of Accounts. The Servicer may transfer the
Custodial Account or the Escrow Account to a different Qualified Depository from
time to time. Such transfer shall be made only upon obtaining the consent of the
Purchaser, which consent shall not be withheld unreasonably. The Servicer shall
bear any expenses, losses or damages sustained by the Purchaser because the
Custodial Account and/or the Escrow Account are not demand deposit accounts.
SECTION 2.10 Maintenance of Hazard Insurance. The Servicer shall cause to
be maintained for each Mortgage Loan, hazard insurance such that all buildings
upon the Mortgaged Property are insured by a generally acceptable insurer rated
A:VI or better in the current Best's against loss by fire, hazards of extended
coverage and such other hazards as are required to be insured pursuant to the
FNMA Guides or the FHLMC Guide, in an amount which is at least equal to the
lesser of (i) the maximum insurable value of the improvements securing such
Mortgage Loan and (ii) the greater of (a) the outstanding principal balance of
the Mortgage Loan and (b) an amount such that the proceeds thereof shall be
sufficient to prevent the Mortgagor or the loss payee from becoming a co-
insurer.
If required by the Flood Disaster Protection Act of 1973, as amended,
each Mortgage Loan is covered by a flood insurance policy meeting the
requirements of the current guidelines of the Federal Insurance Administration
in effect with a generally acceptable insurance carrier rated A:VI or better in
Best's in an amount representing coverage not less than the lesser of (i) the
outstanding principal balance of the related Mortgage Loan and (ii) the maximum
amount of insurance which is available under the Flood Disaster Protection Act
of 1973, as amended. If at any time during the term of the Mortgage Loan, the
Servicer determines in accordance with applicable law and pursuant to the FNMA
Guides that a Mortgaged Property is located in a special flood hazard area and
is not covered by flood insurance or is covered in an amount less than the
amount required by the Flood Disaster Protection Act of 1973, as amended, the
Servicer shall notify the related Mortgagor that the
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Mortgagor must obtain such flood insurance coverage, and if said Mortgagor fails
to obtain the required flood insurance coverage within forty five (45) days
after such notification, the Servicer shall immediately purchase the required
flood insurance on the Mortgagor's behalf.
If a Mortgage is secured by a unit in a condominium project, the Servicer
shall verify that the coverage required of the owner's association, including
hazard, flood, liability, and fidelity coverage, is being maintained in
accordance with then current FNMA requirements, and secure from the owner's
association its agreement to notify the Servicer promptly of any change in the
insurance coverage or of any condemnation or casualty loss that may have a
material effect on the value of the Mortgaged Property as security.
The Servicer shall cause to be maintained on each Mortgaged Property such
other or additional insurance as may be required pursuant to such applicable
laws and regulations as shall at any time be in force and as shall require such
additional insurance, or pursuant to the requirements of any primary mortgage
guaranty insurer.
All policies required hereunder shall name the Servicer and its successors
and assigns as mortgagee and shall be endorsed with non-contributory standard
Michigan mortgagee clauses which shall provide for at least thirty (30) days'
prior written notice of any cancellation, reduction in amount or material change
in coverage.
The Servicer shall not interfere with the Mortgagor's freedom of choice in
selecting either his insurance carrier or agent, provided, however, that the
Servicer shall not accept any such insurance policies from insurance companies
unless such companies are rated A:VI or better in Best's and are licensed to do
business in the jurisdiction in which the Mortgaged Property is located. The
Servicer shall determine that such policies provide sufficient risk coverage and
amounts as required pursuant to the FNMA Guides or the FHLMC Guide, that they
insure the property owner, and that they properly describe the property address.
To the extent reasonably possible the Servicer shall furnish to the Mortgagor a
formal notice of expiration of any such insurance in sufficient time for the
Mortgagor to arrange for renewal coverage by the expiration date; provided,
however, that in the event that no such notice is furnished by the Servicer, the
Servicer shall ensure that replacement insurance policies are in place in the
required coverages and the Servicer shall be solely liable for any losses in the
event such coverage is not provided.
Pursuant to Section 2.04, any amounts collected by the Servicer under any
such policies (other than amounts to be deposited in the Escrow Account and
applied to the restoration or repair of the related Mortgaged Property, or
property acquired in liquidation of the Mortgage Loan, or to be released to the
Mortgagor, in accordance with the Servicer's normal servicing procedures as
specified in Section 2.14) shall be deposited in the Custodial Account subject
to withdrawal pursuant to Section 2.05.
SECTION 2.11 Maintenance of Mortgage Impairment Insurance. In the event
that the Servicer shall obtain and maintain a blanket policy insuring against
losses arising from fire and hazards
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covered under extended coverage on all of the Mortgage Loans, then, to the
extent such policy provides coverage in an amount equal to the amount required
pursuant to Section 2.10 and otherwise complies with all other requirements of
Section 2.10, it shall conclusively be deemed to have satisfied its obligations
as set forth in Section 2.10. Any amounts collected by the Servicer under any
such policy relating to a Mortgage Loan shall be deposited in the Custodial
Account subject to withdrawal pursuant to Section 2.05. Such policy may contain
a deductible clause, in which case, in the event that there shall not have been
maintained on the related Mortgaged Property a policy complying with Section
2.10, and there shall have been a loss which would have been covered by such
policy, the Servicer shall deposit in the Custodial Account at the time of such
loss the amount not otherwise payable under the blanket policy because of such
deductible clause, such amount to be deposited from the Servicer's funds,
without reimbursement therefor. Upon request of the Purchaser, the Servicer
shall cause to be delivered to the Purchaser a certified true copy of such
policy and a statement from the insurer thereunder that such policy shall in no
event be terminated or materially modified without thirty (30) days' prior
written notice to the Purchaser.
SECTION 2.12 Maintenance of Fidelity Bond and Errors and Omissions
Insurance. The Servicer shall maintain with responsible companies, at its own
expense, a blanket Fidelity Bond and an Errors and Omissions Insurance Policy,
with broad coverage on all officers, employees or other persons acting in any
capacity requiring such persons to handle funds, money, documents or papers
relating to the Mortgage Loans ("Servicer Employees"). Any such Fidelity Bond
and Errors and Omissions Insurance Policy shall be in the form of the Mortgage
Banker's Blanket Bond and shall protect and insure the Servicer against losses,
including forgery, theft, embezzlement, fraud, errors and omissions and
negligent acts of such Servicer Employees. Such Fidelity Bond and Errors and
Omissions Insurance Policy also shall protect and insure the Servicer against
losses in connection with the release or satisfaction of a Mortgage Loan without
having obtained payment in full of the indebtedness secured thereby. No
provision of this Section 2.12 requiring such Fidelity Bond and Errors and
Omissions Insurance Policy shall diminish or relieve the Servicer from its
duties and obligations as set forth in this Agreement. The minimum coverage
under any such Fidelity Bond and Errors and Omissions Insurance Policy shall be
at least equal to the corresponding amounts required by FNMA in the FNMA
Mortgage-Backed Securities Selling and Servicing Guide or by FHLMC in the FHLMC
Guide. Upon the request of the Purchaser, the Servicer shall cause to be
delivered to the Purchaser a certified true copy of such Fidelity Bond and
Errors and Omissions Insurance Policy and a statement from the surety and the
insurer that such Fidelity Bond and Errors and Omissions Insurance Policy shall
in no event be terminated or materially modified without thirty (30) days' prior
written notice to the Purchaser. In the event that the surety or insurer charges
the Servicer a fee for providing such evidence, the Purchaser shall reimburse
the Servicer for the reasonable expense incurred by the Servicer in furnishing
such evidence.
SECTION 2.13 Inspections. The Servicer shall inspect the Mortgaged Property
as often as deemed necessary by the Servicer to assure itself that the value of
the Mortgaged Property is being preserved. In addition, if any Mortgage Loan is
more than sixty (60) days delinquent, the Servicer immediately shall inspect the
Mortgaged Property and shall conduct subsequent inspections in accordance with
Accepted Servicing Practices or as may be required by the primary mortgage
guaranty insurer. The Servicer shall keep a written report of each such
inspection.
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SECTION 2.14 Restoration of Mortgaged Property. The Servicer need not
obtain the approval of the Purchaser prior to releasing any Insurance Proceeds
or Condemnation Proceeds to the Mortgagor to be applied to the restoration or
repair of the Mortgaged Property if such release is in accordance with Accepted
Servicing Practices and the terms of this Agreement. At a minimum, the Servicer
shall comply with the following conditions in connection with any such release
of Insurance Proceeds or Condemnation Proceeds:
(i) the Servicer shall receive satisfactory independent
verification of completion of repairs and issuance of any
required approvals with respect thereto;
(ii) the Servicer shall take all steps necessary to preserve the
priority of the lien of the Mortgage, including, but not
limited to requiring waivers with respect to mechanics' and
materialmen's liens;
(iii) the Servicer shall verify that the Mortgage Loan is not in
default; and
(iv) pending repairs or restoration, the Servicer shall place the
Insurance Proceeds or Condemnation Proceeds in the Escrow
Account.
If the Purchaser is named as an additional mortgagee, the Servicer is
hereby empowered to endorse any loss draft issued in respect of such a claim in
the name of the Purchaser.
SECTION 2.15 Maintenance of PMI Policy, Claims. With respect to each
Mortgage Loan with an LTV in excess of 85%, the Servicer shall, without any cost
to the Purchaser, maintain or cause the Mortgagor to maintain in full force and
effect a PMI Policy insuring that portion of the Mortgage Loan in excess of 75%
of value, and shall pay or shall cause the Mortgagor to pay the premium thereon
on a timely basis, until the LTV of such Mortgage Loan is reduced to 85%. In the
event that such PMI Policy shall be terminated, the Servicer shall obtain from
another Qualified Insurer a comparable replacement policy, with a total coverage
equal to the remaining coverage of such terminated PMI Policy. If the insurer
shall cease to be a Qualified Insurer, the Servicer shall determine whether
recoveries under the PMI Policy are jeopardized for reasons related to the
financial condition of such insurer, it being understood that the Servicer shall
in no event have any responsibility or liability for any failure to recover
under the PMI Policy for such reason. If the Servicer determines that recoveries
are so jeopardized, it shall notify the Purchaser and the Mortgagor, if
required, and obtain from another Qualified Insurer a replacement insurance
policy. The Servicer shall not take any action which would result in noncoverage
under any applicable PMI Policy of any loss which, but for the actions of the
Servicer, would have been covered thereunder. In connection with any assumption
or substitution agreement entered into or to be entered into pursuant to Section
4.01, the Servicer shall promptly notify the insurer under the related PMI
Policy, if any, of such assumption or substitution of liability in accordance
with the terms of such PMI
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Policy and shall take all actions which may be required by such insurer as a
condition to the continuation of coverage under such PMI Policy. If such PMI
Policy is terminated as a result of such assumption or substitution of
liability, the Servicer shall obtain a replacement PMI Policy as provided above.
In connection with its activities as servicer, the Servicer agrees to
prepare and present, on behalf of itself and the Purchaser, claims to the
insurer under any PMI Policy in a timely fashion in accordance with the terms of
such PMI Policy and, in this regard, to take such action as shall be necessary
to permit recovery under any PMI Policy with respect to a defaulted Mortgage
Loan. Pursuant to Section 2.04, any amounts collected by the Servicer under any
PMI Policy shall be deposited in the Custodial Account, subject to withdrawal
pursuant to Section 2.05.
SECTION 2.16 Deteriorating Mortgage Loans. If, in the course of carrying
out its obligations under this Agreement, the Servicer discovers that a Mortgage
Loan (or an interest therein) (i) is or has been, at any time during the
preceding twelve months, (a) classified, (b) in nonaccrual status or (c)
renegotiated due to the financial deterioration of the Mortgagor or (ii) has
been, more than once during the preceding twelve months, more than 30 days past
due in the payment of principal and interest, the Servicer shall notify the
Purchaser as soon as possible and cooperate with the Purchaser in the
disposition of any such Mortgage Loan as soon as possible.
SECTION 2.17 Title, Management and Disposition of REO Property. In the
event that title to any Mortgaged Property is acquired in foreclosure or by deed
in lieu of foreclosure, the deed or certificate of sale shall be taken in the
name of the Purchaser, or in the event the Purchaser is not authorized or
permitted to hold title to real property in the state where the REO Property is
located, or would be adversely affected under the "doing business" or tax laws
of such state by so holding title, the deed or certificate of sale shall be
taken in the name of such Person or Persons as shall be consistent with an
Opinion of Counsel obtained by the Servicer from any attorney duly licensed to
practice law in the state where the REO Property is located. The Person or
Persons holding such title other than the Purchaser shall acknowledge in writing
that such title is being held as nominee for the Purchaser.
The Servicer shall manage, conserve, protect and operate each REO Property
for the Purchaser solely for the purpose of its prompt disposition and sale. The
Servicer, either itself or through an agent selected by the Servicer and
reasonably acceptable to the Purchaser, shall manage, conserve, protect and
operate the REO Property in the same manner that it manages, conserves, protects
and operates other foreclosed property for its own account, and in the same
manner that similar property in the same locality as the REO Property is
managed. The Servicer shall attempt to sell the same (and may temporarily rent
the same for a period not greater than one (1) year, except as otherwise
provided below) on such terms and conditions as the Servicer deems to be in the
best interest of the Purchaser.
The Servicer shall use its best efforts to dispose of the REO Property as
soon as possible and shall sell such REO Property in any event within one year
after title has been taken to such REO Property, unless the Servicer determines,
and gives an appropriate notice to the Purchaser to such
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effect, that a longer period is necessary for the orderly liquidation of such
REO Property. If a period longer than one (1) year is permitted under the
foregoing sentence and is necessary to sell any REO Property, the Servicer shall
report monthly to the Purchaser as to the progress being made in selling such
REO Property.
The Servicer shall also maintain on each REO Property fire and hazard
insurance with extended coverage in an amount which is at least equal to the
maximum insurable value of the improvements which are a part of such property,
liability insurance and, to the extent required and available under the Flood
Disaster Protection Act of 1973, as amended, flood insurance in the amount
required above.
The disposition of REO Property shall be carried out by the Servicer at
such price, and upon such terms and conditions, as the Servicer deems to be in
the best interests of the Purchaser. The proceeds of sale of the REO Property
shall be promptly deposited in the Custodial Account. As soon as practical
thereafter the expenses of such sale shall be paid and the Servicer shall
reimburse itself pursuant to Section 2.05(iii) or 2.05(iv) hereof, as
applicable, for any related unreimbursed Servicing Advances, unpaid Servicing
Fees and unreimbursed advances made pursuant to this Section, and on the
Remittance Date immediately following the Due Period in which such sale proceeds
are received the net cash proceeds of such sale remaining in the Custodial
Account shall be distributed to the Purchaser; provided that such distribution
shall, in any event, be made within ninety (90) days from and after the closing
of the sale of such REO Property.
In addition to the Servicer's obligations set forth in this Section 2.17,
the Servicer shall deliver written notice to the Purchaser whenever title to any
Mortgaged Property is acquired in foreclosure or by deed in lieu of foreclosure
together with a copy of the drive-by appraisal of the related Mortgaged Property
obtained by the Servicer on or prior to the date of such acquisition.
Notwithstanding anything to the contrary contained herein, the Purchaser may, at
the Purchaser's sole option, terminate the Servicer as servicer of any such REO
Property without payment of any Termination Fee with respect thereto, provided
that (i) the Purchaser gives the Servicer notice of such termination within ten
(10) Business Days of receipt of said written notice from the Servicer which
termination shall be effective no more than fifteen (15) Business Days from and
after the date of said notice from the Purchaser and (ii) the Servicer shall on
the date said termination takes effect be reimbursed by Purchaser for any
unreimbursed advances of the Servicer's funds made pursuant to Section 3.02 and
any unreimbursed Servicing Advances in each case relating to the Mortgage Loan
underlying such REO Property. In the event of any such termination, the
provisions of Section 8.06 hereof shall apply to said termination and the
transfer of servicing responsibilities with respect to such REO Property to the
Purchaser or its designee.
With respect to each REO Property, the Servicer shall deposit all funds
collected and received in connection with the operation of the REO Property in
the Custodial Account. The Servicer shall cause to be deposited on a daily basis
upon the receipt thereof in the Custodial Account all revenues received with
respect to the conservation and disposition of the related REO Property.
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SECTION 2.18 Permitted Withdrawals with respect to REO Property. For so
long as the Servicer is acting as servicer of any Mortgage Loan relating to any
REO Property, the Servicer shall withdraw funds on deposit in the Custodial
Account with respect to each related REO Property necessary for the proper
operation, management and maintenance of the REO Property, including the cost of
maintaining any hazard insurance pursuant to Section 2.10 and the fees of any
managing agent acting on behalf of the Servicer. The Servicer shall make monthly
distributions on each Remittance Date to the Purchaser of the net cash flow from
the REO Property (which shall equal the revenues from such REO Property net of
the expenses described in Section 2.17 and of any reserves reasonably required
from time to time to be maintained to satisfy anticipated liabilities for such
expenses).
SECTION 2.19 Real Estate Owned Reports. For so long as the Servicer is
acting as servicer of any Mortgage Loan relating to any REO Property, the
Servicer shall furnish to the Purchaser on or before the 15th day of each month
a statement with respect to any REO Property covering the operation of such REO
Property for the previous month and the Servicer's efforts in connection with
the sale of such REO Property and any rental of such REO Property incidental to
the sale thereof for the previous month. That statement shall be accompanied by
such other information as the Purchaser shall reasonably request.
SECTION 2.20 Liquidation Reports. For so long as the Servicer is acting as
servicer of any Mortgage Loan relating to any REO Property, upon the foreclosure
sale of any Mortgaged Property or the acquisition thereof by the Purchaser
pursuant to a deed in lieu of foreclosure, the Servicer shall submit to the
Purchaser a liquidation report with respect to such Mortgaged Property.
SECTION 2.21 Reports Of Foreclosures and Abandonments. For so long as the
Servicer is acting as servicer of any Mortgage Loan relating to any REO
Property, following the foreclosure sale or abandonment of any Mortgaged
Property, the Servicer shall report such foreclosure or abandonment as required
pursuant to Section 6050J of the Internal Revenue Code of 1986, as amended
("Code").
SECTION 2.22 Notification of Adjustments. With respect to each Adjustable
Rate Mortgage Loan, the Servicer shall adjust the Mortgage Interest Rate on the
related Interest Rate Adjustment Date and shall adjust the Monthly Payment
accordingly in compliance with the requirements of applicable law and the
related Mortgage and Mortgage Note. If, pursuant to the terms of the Mortgage
Note, another index is selected for determining the Mortgage Interest Rate, the
same index will be used with respect to each Mortgage Note which requires a new
index to be selected, provided that such selection does not conflict with the
terms of the related Mortgage Note. The Servicer shall execute and deliver any
and all necessary notices required under applicable law and the terms of the
related Mortgage Note and Mortgage regarding the Mortgage Interest Rate and the
Monthly Payment adjustments. The Servicer shall promptly upon written request
therefor, deliver to the Purchaser such notifications and any additional
applicable data regarding such adjustments and the methods used to calculate and
implement such adjustments. Upon the discovery by the Servicer or the Purchaser
that the Servicer has failed to adjust a Mortgage Interest Rate or a Monthly
Payment pursuant to the terms of the related Mortgage Note and Mortgage, the
Servicer shall immediately deposit in the
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Custodial Account from its own funds the amount of any interest loss caused the
Purchaser thereby.
SECTION 2.23 Notification of Maturity Date. With respect to each Fixed Rate
Mortgage Loan, the Purchaser shall execute and deliver to the Mortgagor any and
all necessary notices required under applicable law and the terms of the related
Mortgage Note and Mortgage regarding the maturity date if required under
applicable law.
ARTICLE III
PAYMENTS TO PURCHASER
SECTION 3.01 Remittances. On each Remittance Date the Servicer shall remit
by wire transfer of immediately available funds to the Purchaser (a) all amounts
deposited in the Custodial Account as of the close of business on the
Determination Date, except Principal Prepayments received on or after the first
day of the month in which the Remittance Date occurs which shall be remitted to
the Purchaser on the next following Remittance Date; plus (b) an amount
representing compensating interest (up to a maximum amount equal to the
aggregate Servicing Fee for the Mortgage Loans held by the Purchaser with
respect to such Mortgage Loans) which, when added to all amounts allocable to
interest received in connection with such Principal Prepayment equals thirty
(30) days' interest at the Mortgage Interest Rate net of the Servicing Fee on
the amount of principal so prepaid (net of charges against or withdrawals from
the Custodial Account pursuant to Section 2.05), plus (c) all amounts, if any,
which the Servicer is obligated to distribute pursuant to Section 3.03 and minus
(d) any amounts attributable to Monthly Payments collected but due on a Due Date
or Dates subsequent to the first day of the month of the Remittance Date, which
amounts shall be remitted on the Remittance Date next succeeding the Due Period
for such amounts.
With respect to any remittance received by the Purchaser after the second
Business Day following the Business Day on which such payment was due, the
Servicer shall pay to the Purchaser interest on any such late payment at an
annual rate equal to the Prime Rate, adjusted as of the date of each change,
plus one (1) percentage point, but in no event greater than the maximum amount
permitted by applicable law. Such interest shall be deposited in the Custodial
Account by the Servicer on the date such late payment is made and shall cover
the period commencing with and including the day following such second Business
Day and ending with the Business Day on which such payment is made, exclusive of
such Business Day; provided, however, that in the event that the Servicer remits
such amounts after 11:00 A.M. (Michigan time) on any day, such period shall
include such day. Such interest shall be remitted along with the distribution
payable on the next succeeding Remittance Date. The payment by the Servicer of
any such interest shall not be deemed an extension of time for payment or a
waiver of any Event of Default by the Servicer.
SECTION 3.02 Statements to Purchaser. Not later than the twentieth day of
each month, the Servicer shall furnish by modem and/or diskette to the Purchaser
or its designee a listing of the outstanding Mortgage Loans, including with
respect to each Mortgage Loan: the Mortgage Loan number, the actual balance, the
actual paid-through dates and the Mortgage Interest Rate and principal and
interest payment, and with respect to Adjustable Rate Mortgage Loans, the next
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Interest Rate Adjustment Date, the Mortgage Interest Rate and the principal and
interest payment effective as of the next Interest Rate Adjustment Date (if
available), and shall furnish to the Purchaser manually a Monthly Remittance
Advice, with a trial balance report attached thereto, in the form of Exhibit 1
annexed hereto as to the preceding remittance and the period ending on the
preceding Determination Date.
In addition, not more than sixty (60) days after the end of each calendar
year, the Servicer shall furnish to each Person who was a Purchaser at any time
during such calendar year an annual statement in accordance with the
requirements of applicable federal income tax law as to the aggregate of
remittances for the applicable portion of such year.
Such obligation of the Servicer shall be deemed to have been satisfied to
the extent that substantially comparable information shall be provided by the
Servicer pursuant to any requirements of the Code as from time to time are in
force.
The Servicer shall prepare and file, with respect to each Mortgage Loan,
any and all tax returns, information statements or other filings required to be
delivered to any governmental taxing authority or to the Purchaser pursuant to
any applicable law with respect to the Mortgage Loans and the transactions
contemplated hereby. In addition, the Servicer shall provide the Purchaser with
such information concerning the Mortgage Loans as is necessary for the Purchaser
to prepare its federal income tax return as the Purchaser may reasonably request
from time to time.
SECTION 3.03 Advances by Servicer. On the Business Day immediately
preceding each Remittance Date, the Servicer shall deposit in the Custodial
Account from its own funds an amount equal to all Monthly Payments which were
due on the Mortgage Loans during the applicable Due Period and which were
delinquent at the close of business on the immediately preceding Determination
Date or which were deferred pursuant to Section 2.01, provided that the Servicer
shall only be required to make such advances with respect to a Mortgage Loan
until such advances are, in the Servicer's good faith determination as evidenced
by an Officer's Certificate of the Servicer delivered to the Purchaser on the
Business Day next following the Determination Date on or prior to which said
determination is or was made, deemed to be a Nonrecoverable Advance. The
Servicer's obligation to make such advances as to any Mortgage Loan will
continue through the earlier of (i) the disposition of such Mortgage Loan and
(ii) the date of foreclosure sale with respect to such Mortgage Loan. Except as
otherwise provided herein, the Servicer shall be entitled to first priority
reimbursement pursuant to Section 2.05 hereof for principal and interest
advances and for servicing advances from recoveries from the related mortgagor
or from all Liquidation Proceeds and other payments or recoveries (including
Insurance Proceeds and Condemnation Proceeds) with respect to the related
Mortgage Loan.
ARTICLE IV
GENERAL SERVICING PROCEDURES
SECTION 4.01 Transfers of Mortgaged Property. The Servicer shall be
required to enforce
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any "due-on-sale" provision contained in any Mortgage or Mortgage Note and to
deny assumption by the person to whom the Mortgaged Property has been or is
about to be sold whether by absolute conveyance or by contract of sale, whether
or not the Mortgagor remains liable on the Mortgage and the Mortgage Note. When
the Mortgaged Property has been conveyed by the Mortgagor, the Servicer shall,
to the extent it has knowledge of such conveyance, exercise its rights to
accelerate the maturity of such Mortgage Loan under the "due-on-sale" clause
applicable thereto, provided, however, that the Servicer shall not exercise such
rights if prohibited by law from doing so or if the exercise of such rights
would impair or threaten to impair any recovery under the related PMI Policy, if
any.
If the Servicer reasonably believes it is unable under applicable law to
enforce such "due-on-sale" clause, the Servicer, in the Purchaser's name, shall,
to the extent permitted by applicable law, enter into (i) an assumption and
modification agreement with the person to whom such property has been conveyed,
pursuant to which such person becomes liable under the Mortgage Note and the
original Mortgagor remains liable thereon or (ii) in the event the Servicer is
unable under applicable law to require that the original Mortgagor remain liable
under the Mortgage Note and the Servicer has the prior consent of the primary
mortgagee guaranty insurer, a substitution of liability agreement with the
purchaser of the Mortgaged Property pursuant to which the original Mortgagor is
released from liability and the purchaser of the Mortgaged Property is
substituted as Mortgagor and becomes liable under the Mortgage Note. In
connection with any such assumption, neither the Mortgage Interest Rate borne by
the related Mortgage Note, the term of the Mortgage Loan nor the outstanding
principal amount of the Mortgage Loan shall be changed.
To the extent that any Mortgage Loan is assumable, the Servicer shall
inquire diligently into the creditworthiness of the proposed transferee, and
shall use the underwriting criteria for approving the credit of the proposed
transferee which are used by FNMA with respect to underwriting mortgage loans of
the same type as the Mortgage Loans. If the credit of the proposed transferee
does not meet such underwriting criteria, the Servicer diligently shall, to the
extent permitted by the Mortgage or the Mortgage Note and by applicable law,
accelerate the maturity of the Mortgage Loan.
SECTION 4.02 Satisfaction of Mortgages and Release of Mortgage Files. Upon
the payment in full of any Mortgage Loan, or the receipt by the Servicer of a
notification that payment in full will be escrowed in a manner customary for
such purposes, the Servicer shall notify the Purchaser in the Monthly Remittance
Advice as provided in Section 3.02, and may request the release of any Mortgage
Loan Documents from the Purchaser in accordance with this Section 4.02 hereof.
The Servicer shall obtain discharge of the related Mortgage Loan as of record
within any related time limit required by applicable law.
If the Servicer satisfies or releases a Mortgage without first having
obtained payment in full of the indebtedness secured by the Mortgage or should
the Servicer otherwise prejudice any rights the Purchaser may have under the
mortgage instruments, upon written demand of the Purchaser, the Servicer shall
repurchase the related Mortgage Loan at the Repurchase Price by deposit thereof
in the Custodial Account within two (2) Business Days of receipt of such demand
by the Purchaser. Upon such repurchase, all funds maintained in the Escrow
Account with respect to such repurchased
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Mortgage Loan shall be transferred to the Servicer. The Servicer shall maintain
the Fidelity Bond and Errors and Omissions Insurance Policy as provided for in
Section 2.12 insuring the Servicer against any loss it may sustain with respect
to any Mortgage Loan not satisfied in accordance with the procedures set forth
herein.
SECTION 4.03 Servicing Compensation. As consideration for servicing the
Mortgage Loans hereunder, the Servicer shall withdraw the Servicing Fee with
respect to each Mortgage Loan from the Custodial Account pursuant to Section
2.05 hereof. Such Servicing Fee shall be payable monthly, computed on the basis
of the same principal amount and period in respect of which any related interest
payment on a Mortgage Loan is computed. The Servicing Fee shall be pro-rated
when servicing is for less than one month. The obligation of the Purchaser to
pay, and the Servicer's right to withdraw, the Servicing Fee is limited to, and
the Servicing Fee is payable solely from, the interest portion (including
recoveries with respect to interest from Liquidation Proceeds, to the extent
permitted by Section 2.05), of such Monthly Payment collected by the Servicer,
or as otherwise provided under Section 2.05.
Additional servicing compensation in the form of Ancillary Income shall be
retained by the Servicer. The Servicer shall be required to pay all expenses
incurred by it in connection with its servicing activities hereunder and shall
not be entitled to reimbursement thereof except as specifically provided for
herein.
SECTION 4.04 Annual Statement as to Compliance. The Servicer shall deliver
to the Purchaser, on or before March 31 each year beginning March 31, 1998, an
Officer's Certificate, stating that (i) a review of the activities of the
Servicer during the preceding calendar year and of performance under this
Agreement has been made under such officer's supervision, and (ii) the Servicer
has complied in all material respects with the provisions of Article II and
Article IV, and (iii) to the best of such officer's knowledge, based on such
review, the Servicer has fulfilled all its obligations under this Agreement
throughout such year or part thereof, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known to such
officer and the nature and status thereof and the action being taken by the
Servicer to cure such default.
SECTION 4.05 Annual Independent Public Accountants' Servicing Report. On or
before March 31 of each year, beginning with the first March 31 that occurs at
least six months after the Closing Date, the Servicer at its expense shall cause
a firm of independent public accountants (who may also render other services to
the Servicer or any affiliate thereof) which is a member of the American
Institute of Certified Public Accountants to furnish a statement to the
Purchaser to the effect that such firm has, as part of their examination of the
financial statements of the Servicer performed tests embracing the records and
documents relating to mortgage loans serviced by the Servicer in accordance with
the requirements of the Uniform Single Audit Program for Mortgage Bankers and
that their examination disclosed no exceptions that, in their opinion were
material, relating to mortgage loans serviced by the Servicer.
SECTION 4.06 Right to Examine Servicer Records. The Purchaser, upon
reasonable notice, shall have the right to examine and audit any and all of the
books, records, or other information of
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the Servicer, whether held by the Servicer or by another on its behalf, with
respect to or concerning this Agreement or the Mortgage Loans, during business
hours or at such other times as may be reasonable under applicable
circumstances, upon reasonable advance notice.
ARTICLE V
SERVICER TO COOPERATE
SECTION 5.01 Provision of Information. During the term of this Agreement,
the Servicer shall furnish to the Purchaser such periodic, special, or other
reports or information, whether or not provided for herein, as shall be
necessary, reasonable, or appropriate with respect to the Purchaser or the
purposes of this Agreement. All such reports or information shall be provided by
and in accordance with all reasonable instructions and directions which the
Purchaser may give.
The Servicer shall execute and deliver all such instruments and take all
such action as the Purchaser may reasonably request from time to time, in order
to effectuate the purposes and to carry out the terms of this Agreement.
SECTION 5.02 Financial Statements; Servicing Facilities. In connection with
disposition of Mortgage Loans, the Purchaser may make available to a prospective
purchaser audited financial statements of the Servicer for the most recently
completed two (2) fiscal years for which such statements are available, as well
as a Consolidated Statement of Condition at the end of the last two (2) fiscal
years covered by any Consolidated Statement of Operations. If it has not already
done so, the Servicer shall furnish promptly to the Purchaser or a prospective
purchaser copies of the statements specified above; provided, however, that
prior to furnishing such statements or information to any prospective purchaser,
the Servicer may require such prospective purchaser to execute a confidentiality
agreement in form reasonably satisfactory to it.
The Servicer shall make available to the Purchaser or any prospective
Purchaser a knowledgeable financial or accounting officer for the purpose of
answering questions with respect to recent developments affecting the Servicer
or the financial statements of the Servicer, and to permit any prospective
purchaser to inspect the Servicer's servicing facilities for the purpose of
satisfying such prospective purchaser that the Servicer has the ability to
service the Mortgage Loans as provided in this Agreement.
ARTICLE VI
TERMINATION
SECTION 6.01 Agency Suspension. Should the Servicer at any time during the
term of this Agreement have its right to service temporarily or permanently
suspended by FNMA or FHLMC or otherwise cease to be an approved seller/servicer
of conventional residential mortgage loans for FNMA or FHLMC, then the Purchaser
may immediately terminate this Agreement and accelerate
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performance of the provisions of the Purchase Agreement to require immediate
transfer of the Servicing Rights.
SECTION 6.02 Damages. The Purchaser shall have the right at any time to
seek and recover from the Servicer any damages or losses suffered by it as a
result of any failure by the Servicer to observe or perform any duties,
obligations, covenants or agreements herein contained, or as a result of a
party's failure to remain an approved FNMA mortgage servicer.
SECTION 6.03 Termination. The respective obligations and responsibilities
of the Servicer shall terminate upon: (i) the later of the final payment or
other liquidation (or any advance with respect thereto) of the last Mortgage
Loan serviced by the Servicer or the disposition of all REO Property serviced by
the Servicer and the remittance of all funds due hereunder; or (ii) by mutual
consent of the Servicer and the Purchaser in writing, unless earlier terminated
pursuant to this Agreement.
SECTION 6.04 Termination Without Cause. The Purchaser may, at its sole
option, upon not less than thirty (30) days' prior written notice to the
Servicer terminate any rights the Servicer may have hereunder with respect to
any or all of the Mortgage Loans, without cause, upon written notice, provided
that the Servicer shall have an additional period of not more than sixty (60)
days from and after the date of said notice from the Purchaser within which to
effect the related transfer of servicing. Any such notice of termination shall
be in writing and delivered to the Servicer as provided in Section 12.01 of this
Agreement. In the event of such termination, the Servicer shall be entitled to a
Termination Fee, equal to 2.0% of the then current aggregate unpaid principal
balance of the related Mortgage Loans; provided, however, that the successor
servicer is not an Affiliate of the Servicer.
ARTICLE VII
BOOKS AND RECORDS
SECTION 7.01 Possession of Servicing Files. The contents of each Servicing
File are and shall be held in trust by the Servicer for the benefit of the
Purchaser as the owner thereof. The Servicer shall maintain in the Servicing
File a copy of the contents of each Mortgage File and the originals of the
documents in each Mortgage File not delivered to the Purchaser. The possession
of the Servicing File by the Servicer is at the will of the Purchaser for the
sole purpose of servicing the related Mortgage Loan, pursuant to this Agreement,
and such retention and possession by the Servicer is in its capacity as Servicer
only and at the election of the Purchaser. The Servicer shall release its
custody of the contents of any Servicing File only in accordance with written
instructions from the Purchaser or other termination of the Servicer with
respect to the related Mortgage Loans, unless such release is required as
incidental to the Servicer's servicing of the Mortgage Loans pursuant to this
Agreement, or is in connection with a repurchase of any Mortgage Loan pursuant
to Section 8.03 of the Purchase Agreement or Section 4.02 of this Agreement.
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The Servicer shall be responsible for maintaining, and shall maintain, a
complete set of books and records for each Mortgage Loan which shall be marked
clearly to reflect the ownership of each Mortgage Loan by the Purchaser. In
particular, the Servicer shall maintain in its possession, available for
inspection by the Purchaser or its designee during normal business hours, and
shall deliver to the Purchaser or its designee upon reasonable notice, evidence
of compliance with all federal, state and local laws, rules and regulations, and
requirements of FNMA or FHLMC, including but not limited to documentation as to
the method used in determining the applicability of the provisions of the Flood
Disaster Protection Act of 1973, as amended, to the Mortgaged Property,
documentation evidencing insurance coverage and eligibility of any condominium
project for approval by FNMA and periodic inspection reports as required by
Section 2.13 and the FNMA Guides.
To the extent that original documents are not required for purposes of
realization of Liquidation Proceeds or Insurance Proceeds, documents maintained
by the Servicer may be in the form of microfilm or microfiche so long as the
Servicer complies with the requirements of the FNMA Guides.
The Servicer shall keep at its servicing office books and records in which,
subject to such reasonable regulations as it may prescribe, the Servicer shall
note transfers of Mortgage Loans. No transfer of a Mortgage Loan may be made
unless such transfer is in compliance with the terms hereof. For the purposes of
this Agreement, the Servicer shall be under no obligation to deal with any
person with respect to this Agreement or the Mortgage Loans unless the books and
records show such person as the owner of the Mortgage Loan. The Purchaser may,
subject to the terms of this Agreement, sell or transfer one or more of the
Mortgage Loans. The Purchaser also shall advise the Servicer of the transfer.
Upon receipt of notice of the transfer, the Servicer shall mark its books
and records to reflect the ownership of the Mortgage Loans of such assignee, and
shall release the Purchaser from its obligations hereunder with respect to the
Mortgage Loans sold or transferred.
ARTICLE VIII
INDEMNIFICATION AND ASSIGNMENT
SECTION 8.01 Indemnification. The Servicer agrees to indemnify and hold the
Purchaser harmless from any liability, claim, loss or damage (including, without
limitation, any reasonable legal fees, judgments or expenses relating to such
liability, claim, loss or damage) to the Purchaser directly or indirectly
resulting from the Servicer's failure to observe and perform any or all of
Servicer's duties, obligations, covenants, agreements, warranties or
representations contained in this Agreement or in the Purchase Agreement or the
Servicer's failure to comply with all applicable requirements with respect to
the transfer of Servicing Rights as set forth herein.
The Servicer shall notify the Purchaser as soon as reasonably possible if a
claim is made by a third party with respect to this Agreement.
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SECTION 8.02 Limitation on Liability of Servicer and Others. Neither the
Servicer nor any of the directors, officers, employees or agents of the Servicer
shall be under any liability to the Purchaser for any action taken or for
refraining from the taking of any action in good faith pursuant to this
Agreement, or for errors in judgment, provided, however, that this provision
shall not protect the Servicer or any such person against any breach of
warranties or representations made herein, or failure to perform its obligations
in material compliance with any standard of care set forth in this Agreement, or
any liability which would otherwise be imposed by reason of any breach of the
terms and conditions of this Agreement. The Servicer and any director, officer,
employee or agent of the Servicer may rely in good faith on any document of any
kind prima facie properly executed and submitted by any Person with respect to
any matter arising hereunder. The Servicer shall not be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
duties to service the Mortgage Loans in accordance with this Agreement and which
in its opinion may involve it in any expense or liability, provided, however,
that the Servicer may, with the prior written consent of the Purchaser,
undertake any such action which it may deem necessary or desirable in respect to
this Agreement and the rights and duties of the parties hereto. In such event,
the Servicer shall be entitled to reimbursement from the Purchaser of the
reasonable legal expenses and costs of such action.
SECTION 8.03 Limitation on Registration and Assignment by Servicer. The
Purchaser has entered into this Agreement with the Servicer in reliance upon the
independent status of the Servicer, and the representations as to the adequacy
of its servicing facilities, plant, personnel, records and procedures, its
integrity, reputation and financial standing, and the continuance thereof.
Nonetheless, the Servicer may subcontract all or a portion of its servicing
obligations under the Agreement to one or more of its affiliates. However, if
none of its affiliates is engaged in the business of servicing mortgage loans,
the Servicer may subcontract all or a portion of its obligations under the
Servicing Agreement to an unrelated third party subject to approval of a
majority of the Independent Directors. Any delegation of such rights or duties
shall not release the Servicer from its obligations hereunder and the Servicer
shall remain responsible hereunder for all acts and omissions of any delegee as
if such acts or omissions were those of the Servicer and any such assignee or
designee shall satisfy the requirements for a successor or surviving Person set
forth in Section 8.05 and Section 8.06 hereof. The Servicer shall notify the
Purchaser in writing at least 30 days prior to selling or otherwise disposing of
all or substantially all of its assets and receipt of such notice shall entitle
the Purchaser to terminate this Agreement except as set forth in Section 8.05
hereof.
The Servicer shall not resign from the obligations and duties hereby
imposed on it, except by mutual consent of the Servicer and the Purchaser or
upon the determination that its duties hereunder are no longer permissible under
applicable law and such incapacity cannot be cured by the Servicer. Any such
determination permitting the resignation of the Servicer shall be evidenced by
an Opinion of Counsel to such effect delivered to the Purchaser which Opinion of
Counsel shall be in form and substance acceptable to the Purchaser. No such
resignation shall become effective until a successor shall have assumed the
Servicer's responsibilities and obligations hereunder in the manner provided in
Section 8.06.
Without in any way limiting the generality of this Section 8.03, in the
event that the Servicer
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either shall assign this Agreement or the servicing responsibilities hereunder
or delegate its duties hereunder or any portion thereof without satisfying the
requirements set forth herein, then the Purchaser shall have the right to
terminate this Agreement as set forth in Section 6.04, without any payment of
any penalty or damages and without any liability whatsoever to the Servicer
(other than with respect to accrued but unpaid Servicing Fees and Servicing
Advances remaining unpaid) or any third party.
SECTION 8.04 Assignment by Purchaser. The Purchaser shall have the right,
without the consent of the Servicer, to assign, in whole or in part, its
interest under this Agreement with respect to some or all of the Mortgage Loans,
and designate any person to exercise any rights of the Purchaser hereunder, by
executing an Assignment and Assumption Agreement substantially in the form of
Exhibit G to the Purchase Agreement and the assignee or designee shall accede to
the rights and obligations hereunder of the Purchaser with respect to such
Mortgage Loans. All references to the Purchaser in this Agreement shall be
deemed to include its assignee or designee. Notwithstanding the foregoing, at
any one time there shall not be more than fifteen (15) separate Purchasers under
this Agreement.
SECTION 8.05 Merger or Consolidation of the Servicer. The Servicer will
keep in full effect its existence, rights and franchises as a corporation under
the laws of the state of its incorporation except as permitted herein, and will
obtain and preserve its qualification to do business as a foreign corporation in
each jurisdiction in which such qualification is or shall be necessary to
protect the validity and enforceability of this Agreement, or any of the
Mortgage Loans and to perform its duties under this Agreement.
Any Person into which the Servicer may be merged or consolidated, or
any corporation resulting from any merger, conversion or consolidation to which
the Servicer shall be a party, or any Person succeeding to the business of the
Servicer, shall be the successor of the Servicer hereunder, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything herein to the contrary notwithstanding; provided,
however, that the successor or surviving Person shall be an institution whose
deposits are insured by FDIC or a company whose business includes the
origination and servicing of mortgage loans, shall be qualified to service
mortgage loans on behalf of FNMA or FHLMC and shall satisfy the requirements of
Section 8.06 with respect to the qualifications of a successor to the Servicer.
SECTION 8.06 Successor to the Servicer. Prior to termination of Servicer's
responsibilities and duties under this Agreement pursuant to Sections 2.17,
6.04, 8.03 or 11.01, the Purchaser shall (i) succeed to and assume all of the
Servicer's responsibilities, rights, duties and obligations under this
Agreement, or (ii) appoint a successor having a tangible net worth of not less
than $30,000,000 and which shall succeed to all rights and assume all of the
responsibilities, duties and liabilities of the Servicer under this Agreement
prior to the termination of Servicer's responsibilities, duties and liabilities
under this Agreement. Any successor to the Servicer shall be a FNMA- or FHLMC-
approved servicer in good standing. In connection with such appointment and
assumption, the Purchaser may make such arrangements for the compensation of
such successor out of payments on Mortgage Loans as it and such successor shall
agree. In the event that the Servicer's duties,
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responsibilities and liabilities under this Agreement should be terminated
pursuant to the aforementioned sections, the Servicer shall discharge such
duties and responsibilities during the period from the date it acquires
knowledge of such termination until the effective date thereof with the same
degree of diligence and prudence which it is obligated to exercise under this
Agreement, and shall take no action whatsoever that might impair or prejudice
the rights or financial condition of its successor. The resignation or removal
of Servicer pursuant to the aforementioned Sections shall not become effective
until a successor shall be appointed pursuant to Article X hereof this Section
and shall in no event relieve the Servicer of the representations, warranties
and covenants made pursuant to and the remedies available to the Purchaser with
respect thereto, it being understood and agreed that the provisions of such
Article X shall be applicable to the Servicer notwithstanding any such
resignation or termination of the Servicer, or the termination of this
Agreement.
Any successor appointed as provided herein shall execute, acknowledge
and deliver to the Servicer and to the Purchaser, an instrument accepting such
appointment, whereupon such successor shall become fully vested with all the
rights, powers, duties, responsibilities, obligations and liabilities of the
Servicer, with like effect as if originally named as a party to this Agreement.
Any termination of this Agreement pursuant to Section 2.17, 6.04, 8.03 or 11.01
shall not affect any claims that the Purchaser may have against the Servicer
arising prior to any such termination or resignation.
The Servicer shall timely deliver to the successor the funds in the
Custodial Account and the Escrow Account and the Mortgage Files and related
documents and statements held by it hereunder and the Servicer shall account for
all funds. The Servicer shall execute and deliver such instruments and do such
other things all as may reasonably be required to more fully and definitely vest
and confirm in the successor all such rights, powers, duties, responsibilities,
obligations and liabilities of the Servicer. The successor shall make
arrangements as it may deem appropriate to reimburse the Servicer for amounts
the Servicer actually expended pursuant to this Agreement which the successor is
entitled to retain hereunder and which would otherwise have been recovered by
the Servicer pursuant to this Agreement but for the appointment of the successor
servicer.
Upon a successor's acceptance of appointment as such, the Servicer shall
notify by mail the Purchaser of such appointment.
ARTICLE IX
REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER
As of the Closing Date, the Purchaser warrants and represents to, and
covenants and agrees with, the Servicer as follows:
SECTION 9.01 Due Organization and Authority. The Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of the state of Michigan. The
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Purchaser has the full corporate power and authority to execute and deliver this
Agreement and to perform in accordance herewith; the execution, delivery and
performance of this Agreement by the Purchaser and the consummation of the
transactions contemplated hereby have been duly and validly authorized; this
Agreement evidences the valid, binding and enforceable obligation of the
Purchaser; and all requisite corporate action has been taken by the Purchaser to
make this Agreement valid and binding upon the Purchaser in accordance with its
terms.
SECTION 9.02 No Conflicts. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and conditions of
this Agreement, will conflict with or result in a breach of any of the terms,
conditions or provisions of the Purchaser's charter or by-laws or any legal
restriction or any agreement or instrument to which the Purchaser is now a party
or by which it is bound, or constitute a default or result in an acceleration
under any of the foregoing, or result in the violation of any law, rule,
regulation, order, judgment or decree to which the Purchaser or its property is
subject.
SECTION 9.03 Ability to Perform. The Purchaser does not believe, nor
does it have any reason or cause to believe, that it cannot perform each and
every covenant made by it in this Agreement.
SECTION 9.04 No Litigation Pending. There is no action, suit, proceeding or
investigation pending or threatened against the Purchaser, before any court,
administrative agency or other tribunal asserting the invalidity of this
Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of the Purchaser, or in
any material impairment of the right or ability of the Purchaser to carry on its
business substantially as now conducted, or in any material liability on the
part of the Purchaser, or which would draw into question the validity of this
Agreement or of any action taken or to be taken in connection with the
obligations of the Purchaser contemplated herein.
SECTION 9.05 No Consent Required. No consent, approval, authorization or
order of any court or governmental agency or body is required for the execution,
delivery and performance by the Purchaser of, or compliance by the Purchaser
with, this Agreement as evidenced by the consummation of the transactions
contemplated by this Agreement, or if required, such approval has been obtained
prior to the Closing Date.
SECTION 9.06 Assistance. To the extent reasonably possible, the Purchaser
shall cooperate with and assist the Servicer as requested by the Servicer, in
carrying out Servicer's covenants, agreements, duties and responsibilities under
the Purchase Agreement and in connection therewith shall execute and deliver all
such papers, documents and instruments as nay be necessary and appropriate in
furtherance thereof.
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF SERVICER
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<PAGE>
As of the Closing Date, the Servicer warrants and represents to, and
covenants and agrees with, the Purchaser as follows:
SECTION 10.01 Due Organization and Authority. The Servicer is a federally
chartered savings bank duly organized and validly existing under the laws of the
United States and is licensed, qualified and in good standing in each state
where a Mortgaged Property is located if the laws of such state require
licensing or qualification in order to conduct business of the type conducted by
the Servicer, and in any event the Servicer is in compliance with the laws of
any such state to the extent necessary to ensure the enforceability of the
related Mortgage Loan in accordance with the terms of this Agreement; the
Servicer has the full corporate power and authority to execute and deliver this
Agreement and to perform in accordance herewith; the execution, delivery and
performance of this Agreement (including all instruments of transfer to be
delivered pursuant to this Agreement) by the Servicer and the consummation of
the transactions contemplated hereby have been duly and validly authorized; this
Agreement evidences the valid, legal, binding and enforceable obligation of the
Servicer subject to bankruptcy laws and other similar laws of general
application affecting rights of creditors and subject to the application of the
rules of equity, including those respecting the availability of specific
performance, none of which will materially interfere with the realization of the
benefits provided thereunder, regardless of whether such enforcement is sought
in a proceeding in equity or at law; and all requisite corporate action has been
taken by the Servicer to make this Agreement valid and binding upon the Servicer
in accordance with its terms.
SECTION 10.02 Ordinary Course of Business. The consummation of the
transactions contemplated by this Agreement are in the ordinary course of
business of the Servicer.
SECTION 10.03 No Conflicts. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and conditions of
this Agreement, will conflict with or result in a breach of any of the terms,
conditions or provisions of the Servicer's charter or by-laws or any legal
restriction or any agreement or instrument to which the Servicer is now a party
or by which it is bound, or constitute a default or result in an acceleration
under any of the foregoing, or result in the violation of any law, rule,
regulation, order, judgment or decree to which the Servicer or its property is
subject, or impair the ability of the Purchaser to realize on the Mortgage
Loans, impair the value of the Mortgage Loans, or impair the ability of the
Purchaser to realize the full amount of any mortgage insurance benefits accruing
pursuant to this Agreement.
SECTION 10.04 Ability to Service. The Servicer is an approved
seller/servicer of conventional residential mortgage loans for FNMA and FHLMC,
with the facilities, procedures, and experienced personnel necessary for the
sound servicing of mortgage loans of the same type as the Mortgage Loans. The
Servicer is duly qualified, licensed, registered and otherwise authorized under
all applicable federal, state and local laws, and regulations, if applicable,
meets the minimum capital requirements set forth by the OTS, and is in good
standing to enforce, originate, sell mortgage loans to, and service mortgage
loans in the jurisdiction wherein the Mortgaged Properties are located for,
either FNMA or FHLMC, and no event has occurred, including but not limited to a
change in insurance coverage, which would make the Servicer unable to comply
with either FNMA or FHLMC eligibility requirements or which would require
notification to FNMA or FHLMC.
35
<PAGE>
SECTION 10.05 Ability to Perform. The Servicer does not believe, nor does
it have any reason or cause to believe, that it cannot perform each and every
covenant contained in this Agreement.
SECTION 10.06 No Litigation Pending. There is no action, suit, proceeding
or investigation pending or overtly threatened against the Servicer, before any
court, administrative agency or other tribunal asserting the invalidity of this
Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of the Servicer, or in any
material impairment of the right or ability of the Servicer to carry on its
business substantially as now conducted, or in any material liability on the
part of the Servicer, or which would draw into question the validity of this
Agreement or the Mortgage Loans or of any action taken or to be taken in
connection with the obligations of the Servicer contemplated herein, or which
would be likely to impair materially the ability of the Servicer to perform
under the terms of this Agreement.
SECTION 10.07 No Consent Required. No consent, approval, authorization or
order of any court or governmental agency or body is required for the execution,
delivery and performance by the Servicer of or compliance by the Servicer with
this Agreement or the servicing of the Mortgage Loans as evidenced by the
consummation of the transactions contemplated by this Agreement, or if required,
such approval has been obtained prior to the Closing Date.
SECTION 10.08 No Untrue Information. Neither this Agreement nor any
statement, tape, diskette, form, report or other document furnished or to be
furnished pursuant to this Agreement or in connection with the transactions
contemplated hereby contains any untrue statement of fact or omits to state a
fact necessary to make the statements contained therein not misleading.
SECTION 10.09 Reasonable Servicing Fee. The Servicer acknowledges and
agrees that the Servicing Fee represents reasonable compensation for performing
such services and that the entire Servicing Fee shall be treated by the
Servicer, for accounting and tax purposes, as compensation for the servicing and
administration of the Mortgage Loans pursuant to this Agreement.
SECTION 10.10 Financial Statements. The Servicer has delivered to the
Purchaser financial statements as to its last two complete fiscal years. All
such financial statements fairly present the pertinent results of operations and
changes in financial position for each of such periods and the financial
position at the end of each such period of the Servicer and its subsidiaries and
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as set forth in the
notes thereto. There has been no change in the business, operations, financial
condition, properties or assets of the Servicer since the date of the Servicer's
financial statements that would have a material adverse effect on its ability to
perform its obligations under this Agreement.
SECTION 10.11 Conflict of Interest. The Servicer agrees that it shall
service the Mortgage Loans hereunder solely with a view toward the interests of
the Purchaser, and without regard to the
36
<PAGE>
interests of the Seller or its other affiliates.
ARTICLE XI
DEFAULT
SECTION 11.01 Events of Default. The following shall constitute an Event of
Default under this Agreement on the part of the Servicer:
(a) any failure by the Servicer to remit to the Purchaser any payment
required to be made under the terms of this Agreement which continues
unremedied for a period of five (5) Business Days after the date upon
which written notice of such failure, requiring the same to be
remedied, shall have been given to the Servicer by the Purchaser; or
(b) the failure by the Servicer duly to observe or perform in any material
respect any other of the covenants or agreements on the part of the
Servicer set forth in this Agreement which continues unremedied for a
period of thirty (30) days (except that such number of days shall be
fifteen (15) in the case of a failure to pay any premium for any
insurance policy required to be maintained under this Agreement) after
the date on which written notice of such failure, requiring the same
to be remedied, shall have been given to the Servicer by the
Purchaser; or
(c) a decree or order of a court or agency or supervisory authority having
jurisdiction for the appointment of a conservator or receiver or
liquidator in any insolvency, bankruptcy, readjustment of debt,
marshaling of assets and liabilities or similar proceedings, or for
the winding-up or liquidation of its affairs, shall have been entered
against the Servicer and such decree or order shall have remained in
force undischarged or unstayed for a period of sixty (60) days; or
(d) the Servicer shall consent to the appointment of a conservator or
receiver or liquidator in any insolvency, bankruptcy, readjustment of
debt, marshaling of assets and liabilities or similar proceedings of
or relating to the Servicer or of or relating to all or substantially
all of its property; or
37
<PAGE>
(e) the Servicer shall admit in writing its inability to pay its debts
generally as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment
for the benefit of its creditors, or voluntarily suspend payment of
its obligations; or
(f) the Servicer ceases to meet the qualifications of a FNMA or FHLMC
seller/servicer which continues unremedied for a period of thirty (30)
days after the date of such cessation; or
(g) the Servicer, without the consent of the Purchaser, attempts to assign
this Agreement or the servicing responsibilities hereunder or to
delegate any substantial part of its duties hereunder or any portion
thereof; or
(h) the Servicer fails to maintain its license to do business or service
residential mortgage loans in any jurisdiction where the Mortgaged
Properties are located and such failure results in a material adverse
effect on the Mortgage Loans, the servicing of the Mortgage Loans, or
the Purchaser's rights with respect to the Mortgage Loans.
In each and every such case, so long as an Event of Default shall not have
been remedied, in addition to whatsoever rights the Purchaser may have at law or
equity to damages, including injunctive relief and specific performance, the
Purchaser, by notice in writing to the Servicer, may terminate without
compensation or reimbursement (other than Servicing Fees previously earned but
remaining unpaid and Servicing Advances remaining unreimbursed) all the rights
and obligations of the Servicer under this Agreement and in and to the Mortgage
Loans and the proceeds thereof.
Upon receipt by the Servicer of such written notice, all authority and
power of the Servicer under this Agreement, whether with respect to the Mortgage
Loans or otherwise, shall pass to and be vested in the successor appointed
pursuant to Section 8.06. Upon written request from the Purchaser, the Servicer
shall prepare, execute and deliver any and all documents and other instruments
reasonably requested by the Purchaser, place in such successor's possession all
Mortgage Files (to the extent not properly delivered to the Purchaser by the
Servicer previously), and do or accomplish all other acts or things necessary or
appropriate to effect the purposes of such notice of termination, whether to
complete the transfer and endorsement or assignment of the Mortgage Loans and
related documents, or otherwise, at the Servicer's sole expense. The Servicer
agrees to reasonably cooperate with the Purchaser and such successor in
effecting the termination of the Servicer's responsibilities and rights
hereunder, including, without limitation, the transfer to such successor for
administration by it of all cash amounts which shall at the time be credited by
the Servicer to the Custodial Account or Escrow Account or thereafter received
with respect to the Mortgage Loans.
38
<PAGE>
SECTION 11.02 Waiver of Defaults. The Purchaser may waive any default by
the Servicer in the performance of its obligations hereunder and its
consequences. Upon any such waiver of a past default, such default shall cease
to exist, and any Event of Default arising therefrom shall be deemed to have
been remedied for every purpose of this Agreement. No such waiver shall extend
to any subsequent or other default or impair any right consequent thereon except
to the extent expressly so waived.
ARTICLE XII
MISCELLANEOUS PROVISIONS
SECTION 12.01 Notices. All notices, requests, demands and other
communications which are required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly given upon the
delivery or mailing thereof, as the case may be, sent by registered or certified
mail, return receipt requested:
(a) If to Purchaser to:
Flagstar Capital Corporation
2600 Telegraph Road
Bloomfield Hills, MI 48302
Attn: Corporate Secretary
(b) If to Servicer to:
Flagstar Bank, FSB
2600 Telegraph Road
Bloomfield Hills, MI 48302
Attn: President
SECTION 12.02 Waivers. Either the Servicer or the Purchaser may upon
consent of all parties, by written notice to the others:
(a) Waive compliance with any of the terms, conditions or
covenants required to be complied with by the others
hereunder; and
(b) Waive or modify performance of any of the obligations of the
others hereunder.
The waiver by any party hereto of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any other subsequent
breach.
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<PAGE>
SECTION 12.03 Entire Agreement; Amendment. This Agreement and the Purchase
Agreement constitute the entire agreement between the parties with respect to
servicing of the Mortgage Loans. This Agreement may be amended and any provision
hereof waived, but, only in writing signed by the party against whom such
enforcement is sought.
SECTION 12.04 Execution; Binding Effect. This Agreement may be executed in
one or more counterparts and by the different parties hereto on separate
counterparts, each of which, when so executed, shall be deemed to be an
original; such counterparts, together, shall constitute one and the same
agreement. Subject to Sections 8.03 and 8.04, this Agreement shall inure to the
benefit of and be binding upon the Servicer and the Purchaser and their
respective successors and assigns.
SECTION 12.05 Headings. Headings of the Articles and Sections in this
Agreement are for reference purposes only and shall not be deemed to have any
substantive effect.
SECTION 12.06 Applicable Law. This Agreement shall be construed in
accordance with the laws of the State of Michigan and the obligations, rights
and remedies hereunder shall be determined in accordance with the substantive
laws of the State of Michigan (without regard to conflicts of laws principles),
except to the extent preempted by Federal law.
SECTION 12.07 Relationship of Parties. Nothing herein contained shall be
deemed or construed to create a partnership or joint venture between the
parties. The duties and responsibilities of the Servicer shall be rendered by it
as an independent contractor and not as an agent of the Purchaser. The Servicer
shall have full control of all of its acts, doings, proceedings, relating to or
requisite in connection with the discharge of its duties and responsibilities
under this Agreement.
SECTION 12.08 Severability of Provisions. If any one or more of the
covenants, agreements, provisions or terms of this Agreement shall be held
invalid for any reason whatsoever, then such covenants, agreements, provisions
or terms shall be deemed severable from the remaining covenants, agreements,
provisions or terms of this Agreement and shall in no way affect the validity or
enforceability of the other provisions of this Agreement.
SECTION 12.09 Recordation of Assignments of Mortgage. To the extent
permitted by applicable law, each of the Assignments of Mortgage is subject to
recordation in all appropriate public offices for real property records in all
the counties or other comparable jurisdictions in which any or all of the
Mortgaged Properties are situated, and in any other appropriate public recording
office or elsewhere, such recordation to be effected by the Purchaser or the
Purchaser's designee, but in any event, at the Servicer's expense for a single
recordation relating to each Assignment of Mortgage in the event recordation is
either necessary under applicable law or requested by the Purchaser at its sole
option.
SECTION 12.10 Exhibits. The exhibits to this Agreement are hereby
incorporated and made a part hereof and are integral parts of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement under seal
as of the date
40
<PAGE>
and year first above written.
FLAGSTAR CAPITAL CORPORATION
(the Purchaser)
By:
------------------------------------------------
Name:
----------------------------------------------
Title:
---------------------------------------------
FLAGSTAR BANK, FSB
(the Servicer)
By:
------------------------------------------------
Name:
----------------------------------------------
Title:
---------------------------------------------
41
<PAGE>
EXHIBIT 1
MONTHLY REMITTANCE ADVICE
42
<PAGE>
EXHIBIT 2
CUSTODIAL ACCOUNT CERTIFICATION
___________, 1997
_________________ hereby certifies that it has established the account
described below as a Custodial Account pursuant to Section 2.04 of the Servicing
Agreement, dated as of ______, 1997.
Title of Account: "Flagstar Bank, FSB purchaser of Residential Mortgage Loans,
and various Mortgagors."
Account Number:
-------------------
Address of office or branch of the Servicer at which Account is
maintained:
2600 Telegraph Road
Bloomfield Hills, MI 48302
FLASTAR BANK, FSB
By:
------------------------------------------------
Name:
----------------------------------------------
Title:
---------------------------------------------
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<PAGE>
EXHIBIT 3
CUSTODIAL ACCOUNT LETTER AGREEMENT
, 1998
-----------
To:
------------------
(the "Depository")
As Servicer under the Servicing Agreement, dated as of ______, 1998,
(the "Agreement"), we hereby authorize and request you to establish an account,
as a Custodial Account pursuant to Section 2.04 of the Agreement, to be
designated as Flastar Bank, FSB, in trust for Purchaser of Mortgage Loans, and
various Mortgagors." All deposits in the account shall be subject to withdrawal
therefrom by order signed by the Servicer. You may refuse any deposit which
would result in violation of the requirement that the account be fully insured
as described below. This letter is submitted to you in duplicate. Please execute
and return one original to us.
FLAGSTAR BANK, FSB
By:
------------------------------------------------
Name:
----------------------------------------------
Title:
---------------------------------------------
The undersigned, as Depository, hereby certifies that the above
described account has been established under Account Number , at the office of
the Depository indicated above, and agrees to honor withdrawals on such account
as provided above. The full amount deposited at any time in the account will be
insured by the Federal Deposit Insurance Corporation through the Bank Insurance
Fund ("BIF") or the Savings Association Insurance Fund ("SAIF").
------------------------------------------
Depository
By:
------------------------------------------------
Name:
----------------------------------------------
Title:
---------------------------------------------
44
<PAGE>
EXHIBIT 4
ESCROW ACCOUNT CERTIFICATION
, 1998
-------------
____________________________hereby certifies that it has established the
account described below as an Escrow Account pursuant to Section 2.06 of the
Servicing Agreement, dated as of ________, 1997, Conventional Residential
Mortgage Loans.
Title of Account: "Flagstar Bank, FSB, in trust for Purchaser of Mortgage Loans,
and various Mortgagors."
Account Number:
------------------
Address of office or branch of the Servicer at which Account is maintained:
2600 Telegraph Road
Bloomfield Hills, MI 48302
FLAGSTAR BANK, FSB
By:
------------------------------------------------
Name:
----------------------------------------------
Title:
---------------------------------------------
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<PAGE>
EXHIBIT 5
ESCROW ACCOUNT LETTER AGREEMENT
______________, 1998
To: Flagstar Bank, FSB
2600 Telegraph Road
Bloomfield Hills, MI 48302
(the "Depository")
As Servicer under the Servicing Agreement, dated as of ____________, 1997,
Conventional Residential Mortgage Loans (the "Agreement"), we hereby authorize
and request you to establish an account, as an Escrow Account pursuant to
Section 2.06 of the Agreement, to be designated as "Flagstar Bank, FSB in trust
for the Purchaser of Mortgage Loans, and various Mortgagors." All deposits in
the account shall be subject to withdrawal therefrom by order signed by the
Servicer. You may refuse any deposit which would result in violation of the
requirement that the account be fully insured as described below. This letter is
submitted to you in duplicate. Please execute and return one original to us.
FLAGSTAR BANK, FSB
By:
------------------------------------------------
Name:
----------------------------------------------
Title:
---------------------------------------------
The undersigned, as Depository, hereby certifies that the above described
account has been established under Account Number , at the office of the
Depository indicated above, and agrees to honor withdrawals on such account as
provided above. The full amount deposited at any time in the account will be
insured by the Federal Deposit Insurance Corporation through the Bank Insurance
Fund ("BIF") or the Savings Association Insurance Fund ("SAIF").
46
<PAGE>
-----------------------
(Depository)
By:
------------------------------------------------
Name:
----------------------------------------------
Title:
---------------------------------------------
47
<PAGE>
ADVISORY AGREEMENT
THIS AGREEMENT is made this [__] day of [________], 1998 between FLAGSTAR
CAPITAL CORPORATION, a Michigan corporation (the "Company"), and Flagstar Bank,
FSB, a federally chartered savings bank (the "Advisor"). Capitalized terms used
herein shall have the meanings set forth in Section 1 of this Agreement.
WHEREAS, the Company intends to qualify as a "real estate investment trust"
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the Company desires to avail itself of the experience and
assistance of the Advisor and to have the Advisor undertake, on the Company's
behalf, the duties and responsibilities hereinafter set forth, subject to the
control and supervision of the Board of Directors of the Company (the "Board of
Directors") as provided for herein; and
WHEREAS, the Advisor desires to render such services for the Company subject
to the control and supervision of the Board of Directors, on the terms and
conditions hereinafter set forth.
NOW THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions. As used herein, the following terms shall have the
respective meanings set forth below:
"Advisor Termination Date" means the date on which this Agreement
terminates.
"Agreement" means this Advisory Agreement, as amended, modified and
supplemented from time to time.
"Gross Mortgage Assets" means for any month the weighted average book value
of the mortgage assets held by the Company, before reserves for depreciation or
bad debts or other similar noncash reserves, computed as of the end of such
month.
"Independent Directors" means the members of the Board of Directors of the
Company who are (i) not at the same time currently directors, officers or
employees of the Company (except as set forth in (iii) below), Flagstar Bancorp,
Inc., the Advisor or any affiliate of the Advisor; and (ii) owners of not more
than one percent of the outstanding common stock of Flagstar Bancorp, Inc.; or
(iii) persons elected by the holders of the preferred stock of the Company.
"Operating Expenses" for any period means all of the operating
expenses of the Company (with the exception of those expenses to be borne by the
Advisor in accordance with Section 4 hereof), including without limitation the
following:
(a) interest, taxes and other expenses incurred in connection with the
assets of the Company;
(b) expenses related to the officers, directors and employees of the
Company, including without limitation any fees or expenses of the
directors;
<PAGE>
(c) fees and expenses payable to accountants, appraisers, auditors,
consultants, attorneys, collection and paying agents and all other
Persons who contract with or are retained by the Company or by the
Advisor on behalf of the Company;
(d) legal and other expenses incurred in connection with advice
concerning, obtaining or maintaining the Company's status as a REIT,
the determination of the Company's taxable income, any formal or
informal administrative action or legal proceedings which involve a
challenge to the REIT status of the Company or any claim that the
activities of the Company, any member of the Board of Directors or any
officer were improper;
(e) expenses relating to communications and reports to stockholders of the
Company, including without limitation the costs of preparing,
printing, duplicating and mailing the certificates for the stock of
the Company, proxy solicitation materials and reports to stockholders
and the costs of arranging meetings of stockholders;
(f) the costs of insurance including that described in Section 2 hereof,
including directors and officers liability insurance covering the
directors and officers of the Company;
(g) expenses relating to the acquisition, disposition and ownership of
assets, including without limitation and to the extent not paid by
others, legal fees and other expenses for professional services and
fees;
(h) expenses connected with the payments of dividends or interest or
distributions in cash or any other form made or caused to be made by
the Board of Directors;
(i) expenses connected with any office or office facilities maintained by
the Company separate from the office of the Advisor, including without
limitation rent, telephone, utilities, office furniture and equipment
and machinery; and
(j) other miscellaneous expenses of the Company which are not expenses of
the Advisor under Section 4.
"Person" means and includes individuals, corporations, limited
partnerships, general partnerships, joint stock companies or associations,
limited liability companies, joint ventures, associations, consortia, companies,
trusts, banks, savings institutions, trust companies, land trusts, common law
trusts, business trusts or other entities, governments and agencies and
political subdivisions thereof.
SECTION 2. Duties of Advisor. The Advisor shall consult with the Board of
Directors and the officers of the Company and shall, at the request of the Board
of Directors or the officers of the Company, furnish advice and recommendations
with respect to all aspects of the business and affairs of the Company. Subject
to the control and discretion and at the request of the Board of Directors, the
Advisor shall:
(a) administer the day-to-day operations and affairs of the Company,
including without limitation the performance or supervision of the
functions described in this Section 2;
(b) monitor the credit quality of the mortgage loans and other real estate
mortgage assets held by the Company;
(c) advise the Company with respect to the acquisition, management,
financing, disposition of the Company's mortgage loans and other real
estate mortgage assets;
-2-
<PAGE>
(d) represent the Company in its day-to-day dealings with Persons with
whom the Company interacts, including without limitation stockholders
of the Company, transfer agents, consultants, accountants, attorneys,
servicers of the Company's mortgage loans, custodians, insurers and
banks;
(e) establish and provide necessary services for the Company, including
executive, administrative, accounting, stockholder relations,
secretarial, recordkeeping, copying, telephone, mailing and
distribution facilities;
(f) provide the Company with office space, conference room facilities,
office equipment and personnel necessary for the services to be
performed by the Advisor hereunder;
(g) arrange, schedule and coordinate the regular and special matters of
the Board of Directors required for the conduct of the affairs of the
Company or for timely action on any matters the Company is required to
act upon and implement all decisions of the Board of Directors, unless
otherwise instructed, with regard to the Company and its assets;
(h) maintain communications and relations with the stockholders of the
Company, including, but not limited to, responding to inquiries, proxy
solicitations, providing reports to stockholders and arranging and
coordinating all meetings of stockholders; monitor the legal and
beneficial ownership of the Company's stock in connection with
maintenance of the Company's qualification as a REIT and take such
actions as are necessary to continue such qualification, including
without limitation, administration of the ownership limitation
provisions of the Company's Amended and Restated Articles of
Incorporation;
(i) arrange for the investment and management of any short-term
investments of the Company;
(j) arrange for the services of third parties to collect and distribute
funds of the Company and to perform such functions as the Board of
Directors shall from time to time require;
(k) monitor and supervise the performance of all parties who have
contracts to perform services for the Company, provided that the
Advisor shall have no duty to assume the obligations or guarantee the
performance of such parties under such contracts;
(l) establish and maintain such bank accounts in the name of the Company
as may be required by the Company and approved by the Board of
Directors and ensure that all funds collected by the Advisor in the
name or on behalf of the Company shall be held in trust and shall not
be commingled with the Advisor's own funds or accounts;
(m) make payment on behalf of the Company of all Operating Expenses;
(n) arrange for the execution and delivery of such documents and
instruments by the officers of the Company as may be required in order
to perform the functions herein described and to take any other
required action;
(o) arrange for insurance for the Company including liability insurance,
errors and omissions policies and officers and directors policies
which shall cover and insure the Company, members of the Board of
Directors and the officers of the Company in amounts and with
deductibles and insurers approved by the Board of Directors;
(p) maintain proper books and records of the Company's affairs and furnish
or cause to be furnished to the Board of Directors such periodic
reports and accounting information as may be required from
-3-
<PAGE>
time to time by the Board of Directors, including, but not limited to
quarterly reports of all income and expenses of and distribution of
the Company;
(q) consult and work with legal counsel for the Company in implementing
Company decisions and undertaking measures consistent with all
pertinent federal, state and local laws and rules or regulations of
governmental or quasi-governmental agencies, including, but not
limited to, federal and state securities laws, the Code as it relates
to the Company's qualification as a REIT and the regulations
promulgated under each of the foregoing;
(r) consult and work with accountants for the Company in connection with
the preparation of financial statements, annual reports and tax
returns;
(s) arrange for an annual audit of the books and records of the Company by
the accounting firm designated for such purposes by the Board of
Directors;
(t) prepare and distribute in consultation with the accountants for the
Company, annual reports to stockholders which will contain audited
financial statements;
(u) furnish reports to the Board of Directors and provide research,
economical and statistical data in connection with the Company's
investments; and
(v) as reasonably requested by the Company, make reports to the Company of
its performance of the foregoing services and furnish advice and
recommendations with respect to other aspects of the business of the
Company.
SECTION 3. Compensation. The Company shall pay to the Advisor, for
services rendered by the Advisor hereunder, a management fee payable monthly in
arrears in an amount equal to $_____________.
SECTION 4. Expenses of the Advisor.
(a) Without regard to the compensation received pursuant to Section 3, the
Advisor will bear the following expenses:
(i) employment expenses of the personnel employed by the Advisor,
including without limitation salaries, wages, payroll taxes and
the cost of employee benefit plans; and
(ii) rent, telephone equipment, utilities, office furniture and
equipment and machinery and other office expenses of the Advisor
incurred in connection with the maintenance of any office
facility of the Advisor.
(b) The Company shall reimburse the Advisor within 30 days of a written
request by the Advisor for any Operating Expenses paid or incurred by
the Advisor on behalf of the Company.
SECTION 5. Records. The Advisor shall maintain appropriate books of account
and records relating to services performed hereunder, and such books of account
and records shall be accessible for inspection by the Board of Directors or
representatives of the Company at all times.
-4-
<PAGE>
SECTION 6. REIT Qualification and Compliance. The Advisor shall consult and
work with the Company's legal and tax counsel in maintaining the Company's
qualification as a REIT. Notwithstanding any other provisions of this Agreement
to the contrary, the Advisor shall refrain from any action which, in its
reasonable judgment or in the judgment of the Board of Directors (of which the
Advisor has received written notice), would adversely affect the qualification
of the Company as a REIT or which would violate any law, rule or regulation of
any governmental body or agency having jurisdiction over the Company or its
securities, or which would otherwise not be permitted by the certificate of
incorporation or by-laws of the Company. Furthermore, the Advisor shall take any
action which, in its judgment or the judgment of the Board of Directors (of
which the Advisor has received written notice), may be necessary to maintain the
qualification of the Company as a REIT or prevent the violation of any law or
regulation of any governmental body or agency having jurisdiction over the
Company or its securities.
SECTION 7. Term; Termination. This Agreement shall be in full force and
effect for a term beginning on the date hereof with an initial term of five
years, and will be renewed automatically for additional five year periods unless
the Company delivers a notice of nonrenewal to the Advisor not less than 90 days
prior to the expiration of the initial term of this Agreement or 90 days prior
to the expiration of any renewal term. Notwithstanding the foregoing, at any
time after the initial term, the Company may terminate this Agreement at any
time upon 90 days' prior notice.
SECTION 8. Other Activities of the Advisor.
(a) Nothing herein contained shall prevent the Advisor, an affiliate of
the Advisor or an officer, a director, employee or stockholder of the
Advisor from engaging in any activity, including without limitation
originating, purchasing and managing mortgage loans and other real
estate assets, rendering of services and investment advice with
respect to real estate investment opportunities to any other Person
(including other REITs) and managing other investments (including the
investments of the Advisor and its affiliates).
(b) Directors, officers, stockholders, employees and agents of the Advisor
or of the affiliates of the Advisor may serve as directors, officers,
employees or agents of the Company but shall receive no compensation
(other than reimbursement for expenses) from the Company for such
service.
SECTION 9. Binding Effect; Assignment. This Agreement shall inure to the
benefit of and shall be binding upon the parties hereto and their respective
successors and assigns. Neither party may assign this Agreement or any of its
respective rights hereunder (other than an assignment to a successor
organization which acquires substantially all of the property of such party or,
in the case of the Advisor, to an affiliate of the Advisor) without the prior
written consent of the other party to this Agreement.
SECTION 10. Subcontracting. The Advisor may at any time subcontract all or
a portion of its obligations under this Agreement to any affiliate of the
Advisor without the consent of the Company or if no affiliate of the Advisor is
engaged in the business of managing mortgage assets to an unaffiliated third
party with the approval of a majority of the Board of Directors as well as a
majority of the Independent Directors. Notwithstanding the foregoing, the
Advisor will not, in connection with subcontracting any of its obligations under
this Agreement, be relieved or discharged in any respect from its obligations
under this Agreement.
SECTION 11. Liability and Indemnity of the Advisor. The Advisor assumes no
responsibilities under this Agreement other than to perform the services called
for hereunder in good faith. Neither the Advisor nor any of its affiliates,
stockholders, directors, officers or employees will have any liability to the
Company, stockholders of the Company or others except by reason of acts or
omissions constituting gross negligence or willful breach of any of its material
obligations under this agreement. The Company shall indemnify and reimburse (if
necessary) the Advisor,
-5-
<PAGE>
its stockholders, directors, officers, employees and agents for any and all
expenses (including without limitation attorneys' fees), losses, damages,
liabilities, demands and charges of any nature whatsoever in respect of or
arising from any acts or omissions by the Advisor pursuant to this Agreement,
provided that the conduct against which the claim is made was determined by such
person, in good faith, to be in the best interest of the Company and was not the
result of gross negligence by such person or willful breach of any of such
person's material obligations by such person. The Advisor agrees that any such
indemnification is recoverable only from the assets of the Company and not from
the stockholders.
SECTION 12. Action Upon Notice of Non-Renewal or Termination. Forthwith upon
giving of notice of non-renewal of this Agreement by the Company or of
termination of this Agreement by the Company, the Advisor shall not be entitled
to compensation after the Advisor Termination Date for further services under
this Agreement but shall be paid all compensation accruing to the Advisor
Termination Date and shall be reimbursed for all expenses of the Company paid or
incurred by the Advisor as of the Advisor Termination Date which are
reimbursable by the Company under this Agreement. The Advisor shall promptly
after the Advisor Termination Date:
(i) deliver to the Company all assets and documents of the Company
then in the custody of the Advisor; and
(ii) cooperate with the Company and take all reasonable steps
requested to assist the Board of Directors in making an orderly
transfer of the administrative functions of the Company.
SECTION 13. No Joint Venture or Partnership. Nothing in this Agreement shall
be deemed to create a partnership or joint venture between the parties, whether
for purposes of taxation or otherwise.
SECTION 14. Notices. Unless expressly provided otherwise herein, all
notices, request, demands and other communications required or permitted under
this Agreement shall be in writing and shall be made by hand delivery, certified
mail, overnight courier service, telex or telecopier.
Any notice shall be duly addressed to the parties as follows:
If to the Company:
Flagstar Capital Corporation
2600 Telegraph Road
Bloomfield Hills, Michigan 48302
Attention: Corporate Secretary
If to the Advisor:
Flagstar Bank, FSB
2600 Telegraph Road
Bloomfield Hills, Michigan 48302
Attention: Corporate Secretary
Either party may alter the address to which communications or copies are to
be sent by giving notice of such change of address in conformity with the
provisions of this Section 14 for the giving of notice.
-6-
<PAGE>
SECTION 15. Severability. If any term or provision of this Agreement or the
application thereof with respect to any Person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Agreement, or the
application of that term or provision to persons or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected
thereby, and each term and provision of this Agreement shall be valid and be
enforced to the fullest extent permitted by law.
SECTION 16. Governing Law. This Agreement and all questions relating to its
validity, interpretation, performance and enforcement shall be governed by and
construed, interpreted and enforced in accordance with the laws of the State of
Michigan.
SECTION 17. Amendments. This Agreement shall not be amended changed,
modified, terminated or discharged in whole or in part except by an instrument
in writing signed by both parties hereto or their respective successors or
assigns, or otherwise as provided herein.
SECTION 18. Headings. The section headings herein have been inserted for
convenience of reference only and shall not be construed to affect the meaning,
construction or effect of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized as of the day and year
first above written.
FLAGSTAR CAPITAL CORPORATION
By:
----------------------------------------------
Name:
Title:
FLAGSTAR BANK, FSB
By:
----------------------------------------------
Name:
Title:
-7-
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated December 19, 1997, accompanying the balance
sheet of Flagstar Capital Corporation contained in the Registration Statement on
Form S-11 and Prospectus. We consent to the use of the aforementioned report in
the Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts".
We have also issued our report dated March 3, 1997 (except for Note 18, as to
which the date is May 5, 1997) accompanying the consolidated financial
statements of Flagstar Bank, FSB contained in Annex I of the Prospectus
constituting part of the Registration Statement on Form S-11 and Form OC with
the Office of Thrift Supervision. We consent to the use of the aforementioned
report in the Registration Statement and Annex I of the Prospectus and Form OC,
and to the use of our name as it appears under the caption "Experts".
/s/ Grant Thornton LLP
Detroit, Michigan
December 19, 1997
<PAGE>
CONSENT OF KUTAK ROCK
We hereby consent to the use of our firm's name under the headings
"Federal Income Tax Considerations" and "Legal Matters" and the reference to our
firm's opinion under the heading "Federal Income Tax Considerations," all as set
forth in the Prospectus that is contained in the Registration Statement on Form
S-11 filed by Flagstar Capital Corporation with the Securities and Exchange
Commission.
/s/ Kutak Rock
December 22, 1997
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