-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J50ETMfNheMRu+7/OxotM6WsMQ7y1jBGR48elA5n8diSmu55GVQyrH4v2wPIvBNo tezJtmj6fkYiJnp5ORq8jA== 0000928385-97-001839.txt : 19971113 0000928385-97-001839.hdr.sgml : 19971113 ACCESSION NUMBER: 0000928385-97-001839 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLAGSTAR BANCORP INC CENTRAL INDEX KEY: 0001033012 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 383150651 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22353 FILM NUMBER: 97715560 BUSINESS ADDRESS: STREET 1: 2600 TELEGRAPH ROAD CITY: BLOOMFIELD HILLS STATE: MI ZIP: 48032-0953 BUSINESS PHONE: 8103387700 10-Q 1 FORM 10-Q FOR 9/30/1997 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Mark One [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No.: 0-22353 ----------------- FLAGSTAR BANCORP, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) MICHIGAN 38-3150651 ------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2600 TELEGRAPH ROAD, BLOOMFIELD HILLS, MICHIGAN 48302-0953 ----------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (248) 338-7700 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes X No. ----- ------ As of November 12, 1997, 13,670,000 shares of the registrant's Common Stock, $0.01 par value, were issued and outstanding. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The unaudited condensed consolidated financial statements of the Registrant and its wholly-owned subsidiaries are as follows: Consolidated Statements of Financial Condition - September 30, 1997 (unaudited) and December 31, 1996. Unaudited Consolidated Statements of Earnings - For the three and nine months ended September 30, 1997 and 1996. Unaudited Consolidated Statements of Cash Flows - For the nine months ended September 30, 1997 and 1996. Condensed Notes to Consolidated Financial Statements. 2
September 30, December 31, 1997 1996 ------------------ ------------------ ( unaudited ) Cash and cash equivalents......................................................... $43,633 $44,187 Mortgage loans available for sale................................................. 1,407,055 840,767 Loans held for investment......................................................... 401,319 273,569 Less allowance for losses......................................................... (4,950) (3,500) ----------------- ----------------- Net loans................................................................. 1,803,424 1,110,836 36,925 19,725 539 887 ----------------- ----------------- Total earning assets.............................................................. 1,840,888 1,131,448 12,273 6,626 17,659 10,363 20,789 20,866 51,713 30,064 46,305 53,672 ================= ================= Total assets..................................................... $2,033,260 $1,297,226 ================= ================= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ LIABILITIES - ----------- Deposit Accounts.................................................................. $1,011,594 $624,485 Federal Home Loan Bank advances................................................... 718,879 389,801 ----------------- ----------------- Total interest bearing liabilities............................... 1,730,473 1,014,286 Accrued interest payable.......................................................... 8,117 2,712 Undisbursed payments on loans serviced for others................................. 36,426 61,445 Escrow accounts................................................................... 56,055 61,009 Liability for checks issued....................................................... 49,080 39,813 Federal income taxes payable...................................................... 16,615 22,548 Other liabilities................................................................. 14,945 16,945 ----------------- ----------------- Total liabilities................................................ 1,911,711 1,218,758 STOCKHOLDERS' EQUITY - -------------------- Common Stock -- $0.01 par value, 40,000,000 shares authorized, 13,670,000 shares issued and outstanding at September 30, 1997 and 11,250,000 at December 31, 1996................................... 137 112 Additional paid in capital........................................................ 30,018 2,816 Retained earnings................................................................. 91,394 75,540 ----------------- ----------------- Total stockholders, equity.............................................. 121,549 78,468 ================= ================= Total liabilities and stockholders, equity....................... $2,033,260 $1,297,226 ================= =================
3 FLAGSTAR BANCORP, INC CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ --------------------------------- 1997 1996 1997 1996 ------------- ------------- -------------- -------------- INTEREST INCOME Loans........................................................ $30,008 $18,239 $83,029 $56,430 Other........................................................ 703 364 1,760 1,249 ------------- ------------- -------------- -------------- Total................................................. 30,711 18,603 84,789 57,679 INTEREST EXPENSE Deposits..................................................... 13,646 7,425 34,982 22,074 FHLB advances................................................ 7,120 3,000 18,774 11,226 Other........................................................ 246 154 841 821 ------------- ------------- -------------- -------------- Total................................................. 21,012 10,579 54,597 34,121 ------------- ------------- -------------- -------------- Net interest income.......................................... 9,699 8,024 30,192 23,558 Provision for losses......................................... 1,416 488 3,730 1,140 ------------- ------------- -------------- -------------- Net interest income after provision for losses............... 8,283 7,536 26,462 22,418 NON-INTEREST INCOME Loan administration.......................................... 1,104 3,274 5,543 11,111 Net gain on loan sales....................................... 5,723 790 9,269 4,536 Net gain on sales of mortgage servicing rights............... 6,990 2,523 25,472 20,917 Other fees and charges....................................... 1,449 2,349 3,444 5,270 ------------- ------------- -------------- -------------- Total................................................. 15,266 8,936 43,728 41,834 NON-INTEREST EXPENSE Compensation and benefits.................................... 5,241 7,604 19,322 21,155 Occupancy and equipment...................................... 3,296 3,385 9,773 8,712 General and administrative................................... 5,285 8,471 16,149 16,627 ------------- ------------- -------------- -------------- Total................................................. 13,822 19,460 45,244 46,494 ------------- ------------- -------------- -------------- Earnings before federal income taxes......................... 9,727 (2,988) 24,946 17,758 Provision for federal income taxes........................... 3,533 (949) 9,090 6,418 ------------- ------------- -------------- -------------- Net Earnings................................................. $ 6,194 ($2,039) $15,856 $11,340 ============= ============= ============== ============== Earnings per common share.................................... $0.45 ($0.18) $1.26 $1.01 ============= ============= ============== ==============
4 FLAGSTAR BANCORP, INC CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------------- 1997 1996 ---------------- ---------------- OPERATING ACTIVITIES Net Earnings.............................................................. $ 15,856 $ 11,340 Adjustments to reconcile net earnings to net cash used in operating activities: Provision for losses...................................................... 3,730 1,140 Depreciation and amortization............................................. 12,033 12,346 Net gain on the sale of assets............................................ (971) (14) Net gain on loan sales.................................................... (9,269) (4,536) Net gain on sales of mortgage servicing rights............................ (25,472) (20,917) (Benefit) provision for deferred federal income taxes.......................................................... (773) 3,045 Proceeds from sales of loans held for sale................................ 4,522,703 5,302,867 Originations and repurchases of loans held for sale, net of principal repayments..................................... (5,094,493) (5,331,191) Increase in accrued interest receivable................................... (5,647) (1,672) Decrease (increase) in other assets....................................... 5,864 (22,518) Increase (decrease) in accrued interest payable........................... 5,405 (610) Increase (decrease) in liability for checks issued........................ 9,268 (47,582) (Decrease) increase in federal taxes payable.............................. (5,160) 1,073 (Decrease) increase in other liabilities.................................. (1,999) (5,291) ---------------- ---------------- Net cash used in operating activities................................. (568,925) (91,938) INVESTING ACTIVITIES Maturity of other investments............................................. 348 413 Purchase of other investments............................................. - (500) Originations of loans held for investment, net of principal repayments........................................... (127,740) 49,096 Purchase of Federal Home Loan Bank Stock.................................. (17,200) (2,700) Proceeds from the disposition of repossessed assets....................... 5,824 920 Acquisitions of premises and equipment.................................... (6,812) (6,293) Proceeds from the disposition of premises and equipment............................................................. 2,733 - Proceeds from the disposition of real estate held for investment........................................................ 735 - Increase in mortgage servicing rights..................................... (56,607) (50,709) Proceeds from the sale of mortgage servicing rights....................... 53,650 50,070 ---------------- ---------------- Net cash (used in) provided by investing activities................... (145,069) 40,297 FINANCING ACTIVITIES Net increase in deposit accounts.......................................... 387,109 49,940 Net increase in Federal Loan Bank advances................................ 329,077 8,700 Net (decrease) increase in escrow accounts................................ (4,954) 3,129 Net disbursement of payments of loans serviced for others............................................. (25,019) (8,874) Net proceeds from the issuance of common stock............................ 27,227 - Dividends paid to stockholders............................................ - (1,000) ---------------- ---------------- Net cash provided by financing activities............................. 713,440 51,895 Net (decrease) increase in cash and cash equivalents.......................... (554) 254 Beginning cash and cash equivalents........................................... 44,187 29,119 ---------------- ---------------- Ending cash and cash equivalents.............................................. $ 43,633 $ 29,373 ================ ================ Supplemental disclosure of cash flow information: Loans receivable transferred to repossessed assets........................ $ 12,491 $ 3,062 ================ ================ Total interest payments made on deposits and other borrowings.................................................. $ 49,182 $ 34,731 ================ ================ Federal income taxes paid................................................. $ 15,000 $ 2,300 ================ ================
5 FLAGSTAR BANCORP, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of Business ------------------ Flagstar Bancorp, Inc. is a non-diversified, unitary thrift holding company. The Company provides retail banking services in southern Michigan and mortgage lending services nationwide. Note 2. Basis of Presentation --------------------- The accompanying consolidated financial statements of Flagstar Bancorp, Inc. (the "Company"), and its subsidiaries, have been prepared in accordance with generally accepted accounting principles for interim information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All interim amounts are subject to year-end audit, the results of operations for the interim period herein are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. Note 3. Initial Public Offering ----------------------- On April 30, 1997, the Company's common stock began trading on the Nasdaq Stock Market under the symbol "FLGS" on a "when-issued" basis. On May 5, 1997, the Company sold 2,200,000 shares of its Common Stock as part of the initial public offering of 5,000,000 shares of Common Stock, including 2,800,000 shares sold by the stockholders of the Company. On May 12, 1997, the Company sold an additional 220,000 shares of its Common Stock in connection with the exercise, by the underwriters in the initial public offering, of an option to acquire additional shares equal to not more than 10% of the shares sold in the initial public offering. The net proceeds received by the Company totaled approximately $27.2 million. Note 4. New Accounting Pronouncement ---------------------------- The FASB has issued Statement of Financial Accounting Standards 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. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF fINANCIAL CONDITION AND RESULTS OF OPERATIONS SELECTED FINANCIAL RATIOS
Three Months Ended September 30, Nine months Ended September 30, -------------------------------- -------------------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- (unaudited) (unaudited) Return on average assets.............. 1.41% - .75% 1.34% 2.04% Return on average equity.............. 21.01% -10.77% 21.32% 32.89% Interest rate spread.................. 1.98% 2.43% 2.27% 2.22% Net interest margin................... 2.43% 3.43% 2.83% 3.19% Efficiency ratio...................... 55.36% 115.01% 61.21% 71.10% CAPITAL RATIOS At September 30, At December 31, 1996 ----------------- -------------------- 1997 % of Assets % of Assets ----------------- -------------------- Equity-to-assets ratio.................. 5.98% 6.05% Tangible capital (1).................... 5.49% 5.58% Core capital (1)........................ 5.71% 5.49% Total risk-based capital (1)............ 10.83% 10.44%
- ------------ (1) Based on adjusted total assets for purposes of tangible capital and core capital requirements, and risk-weighted assets for purposes of the risk- based capital requirement. These ratios are applicable to Flagstar Bank only. RESULTS OF OPERATIONS NET EARNINGS THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1996 Net earnings for the 1997 period were $6.2 million ( $.45 per share ), an $8.2 million increase from the $2.0 million loss ( $.18 loss per share ) reported in 1996. The increase resulted primarily from a $6.4 million increase in non-interest income, and a $1.7 million increase in net interest income, a $5.7 million decrease in non interest expense, offset by a $928,000 increase in the provision for losses and a $4.4 million increase in the provision for federal income taxes. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996 Net earnings increased by 40.7% to $15.9 million ($1.26 per share) in 1997 from $11.3 million ($1.01 per share) in the same period in 1996. These increased earnings were the result of a $6.6 million increase in net interest income, a $1.9 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 $2.7 million increase in the provision for federal income taxes. 7 NET INTEREST INCOME THREE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS THE THREE MONTHS ENDED SEPTEMBER 30, 1996. Net interest income increased $1.7 million, or 21.3%, to $9.7 million for the 1997 period, from $8.0 million for the 1996 period. This increase was due primarily to a $670.2 million increase in average interest-earning assets between the comparable periods, offset by a $710.4 million increase in interest-bearing liabilities necessary to fund the growth and accommodate the $57.6 million decrease in non interest-bearing liabilities. At the same time, the Company's interest rate spread decreased from 2.43% for the 1996 period to 1.98% for the 1997 period. The decreased spread, along with the $40.1 million decrease in the excess of average earning assets over average interest-bearing liabilities, resulted in a decrease in the Company's net interest margin of 1.00% to 2.43% for the 1997 period from 3.43% for the 1996 period. NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS 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 $439.1 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 $985.3 million for the nine months ended September 30, 1996. At the same time, the Company's interest rate spread increased from 2.22% in the 1996 period to 2.27% in the 1997 period. The Company's net interest margin decreased from 3.19% in the 1996 period to 2.83% in the 1997 period. The decrease in the Company's net interest margin was a direct result of the leveraged asset growth employed by the Company. 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 121% for the period ended September 30, 1996. This decrease occurred as a result of the Company funding the total asset growth of $439.1 million with interest-bearing liabilities. Additionally, the Company was forced to replace $33.6 million of non interest-bearing liabilities ( i.e. escrow accounts and undisbursed payments on loans serviced for others ) with interest-bearing liabilities. The Company's interest rate spread was positively affected by an increase in the spread between short-term funding liabilities and longer-term assets. AVERAGE BALANCES, INTEREST RATES AND YIELDS. Net interest income is affected by (i) the difference ("interest rate spread") between rates of interest earned on interest-earning assets and rates of interest paid on interest-bearing liabilities and (ii) the relative amounts of interest-bearing liabilities and interest-earning assets. When the total of interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. Financial institutions have traditionally used interest rate spreads as a measure of net interest income. Another indication of an institution's net interest income is its "net yield on interest-earning assets" or " net interest margin" which is net interest income divided by average interest-earning assets. The following tables set forth certain information relating to the Company's consolidated average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average monthly balance of assets or liabilities, respectively, for the periods presented. During the periods indicated, non-accruing loans, are included in the net loan category. Average balances are derived from daily averages as well as month-end averages, wherever available. 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. 8
For the three months ended September 30, ---------------------------------------------------------------------------------------------- 1997 1996 ---------------------------------------------- -------------------------------------------- Amount Interest % Amount Interest % ---------------------------------------------- -------------------------------------------- Interest-earning assets: Loans receivable, net $1,562,114 $30,008 7.68% $905,050 $18,239 8.06% FHLB stock 32,763 669 8.17% 20,500 343 6.69% Other 2,462 34 5.52% 1,524 21 5.51% ------------------------------ ---------------------------- Total 1,597,339 30,711 7.69% 927,074 18,603 8.03% ------------------------------ ---------------------------- Noninterest-earning assets 162,055 135,048 ------------------ ------------- Total assets $1,759,394 $1,062,122 ================== ============= Interest-bearing liabilities: Demand deposits $61,031 301 1.96% $56,126 $600 4.24% Savings deposits 77,052 871 4.48% 31,662 152 1.90% Certificates of deposit 816,700 12,474 6.06% 455,126 6,674 5.82% FHLB advances 486,181 7,120 5.81% 195,507 3,000 6.09% Other 18,567 246 5.26% 10,714 153 5.67% ------------------------------ ---------------------------- Total interest-bearing liabilities: 1,459,531 21,012 5.71% 749,135 10,579 5.60% Noninterest-bearing liabilities 181,947 239,465 ------------------ ------------- Total liabilities: 1,641,478 988,600 Equity 117,916 73,522 ------------------ ------------- Total liabilities and equity $1,759,394 $1,062,122 ================== ============= Net interest-earning assets $137,808 $177,939 ------------ --------------- Net interest income $9,699 $8,024 ============ =============== ----------- ----------- Interest rate spread 1.98% 2.43% =========== =========== Net interest margin 2.43% 3.43% =========== =========== Ratio of average interest earning assets to interest bearing liabilities 109% 124% =========== ===========
9
For the nine months ended September 30, --------------------------------------------------------------------------------------------- 1997 1996 --------------------------------------------------------------------------------------------- Amount Interest % Amount Interest % -------------------------------------------- --------------------------------------------- Interest-earning assets: Loans receivable, net $1,396,010 $83,029 7.93% $963,956 $56,430 7.81% FHLB stock 25,957 1,654 8.52% 19,370 1,157 7.99% Other 2,448 106 5.79% 1,937 92 6.35% ---------------------------- ---------------------------- Total 1,424,415 84,789 7.94% 985,263 57,679 7.81% ---------------------------- ---------------------------- Noninterest-earning assets 156,755 129,005 ------------- ----------- Total assets $1,581,170 $1,114,268 ============= =========== Interest-bearing liabilities: Demand deposits $65,715 1,061 2.16% $89,754 $1,723 2.57% 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% 244,222 11,226 6.15% Other 19,451 841 5.78% 18,845 821 5.82% ---------------------------- ---------------------------- Total interest-bearing liabilities: 1,288,189 54,597 5.67% 815,458 34,121 5.59% Noninterest-bearing liabilities 193,814 229,849 ------------- ----------- Total liabilities: 1,482,003 1,045,307 Equity 99,167 68,961 ------------- ----------- Total liabilities and equity $1,581,170 $1,114,268 ============= =========== Net interest-earning assets $136,226 $169,805 --------------- ----------------- Net interest income $30,192 $23,558 =============== ================= ---- ---- Interest rate spread 2.27% 2.22% ==== ==== Net interest margin 2.83% 3.19% ==== ==== Ratio of average interest earning assets to interest bearing liabilities 111% 121% ==== ====
10 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.
FOR THE PERIOD ENDED SEPTEMBER 30, THREE MONTHS NINE MONTHS 1997 VS. 1996 1997 VS. 1996 RATE VOLUME NET RATE VOLUME NET ------------------------------- ------------------------------------- (In thousands) INTEREST INCOME: Loans receivable, net................. $(2,729) $14,561 $11,832 $ 871 $25,728 $26,599 FHLB stock............................ 43 221 264 69 428 497 Other 0 13 13 (7) 21 14 ------------------------------- ------------------------------------- Total............................ (2,686) 14,795 12,109 933 26,177 27,110 INTEREST EXPENSE: Demand deposits....................... (697) 398 (299) (134) (528) (662) Savings deposits...................... 994 (275) 719 970 912 1,882 Certificates of deposit............... 988 4,812 5,800 (527) 12,217 11,690 FHLB advances......................... (675) 4,795 4,120 (580) 8,128 7,548 Other (36) 130 94 (6) 24 18 ------------------------------- ------------------------------------- Total............................ 574 9,860 10,434 (277) 20,753 20,476 =============================== ===================================== Net change in net interest income..... $(3,260) $4,935 $1,675 $1,210 $5,424 $ 6,634 =============================== =====================================
PROVISION FOR LOSSES THREE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS THE THREE MONTHS ENDED SEPTEMBER 30, 1996 The provision for losses increased to $1.4 million in the 1997 period from $488,000 in the same period in 1996. The increase in the provision reflects the increase in the level of non-performing loans to $44.1 million at September 30, 1997, from $42.0 million at June 30, 1997, an increase of approximately $2.1 million, or 5.0%, and the increase in the level of net charge-offs to 0.25% (annualized) of average loans outstanding in the 1997 period from .09% in the 1996 period. NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS THE 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 Company's determination of its provision for losses reflects its consideration of the potential loss that may arise from loans in its portfolio or which it services for others. 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. 11 NON-INTEREST INCOME THREE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS THE THREE MONTHS ENDED SEPTEMBER 30, 1996 During 1997, non-interest income increased $6.4 million, or 71.9%, to $15.3 million from $8.9 million. This increase was attributable to an increase in net gain on loan sales, and an increase in net gain on the sales of mortgage servicing rights, offset by a decrease in loan administration fees. NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS THE NINE MONTHS ENDED SEPTEMBER 30, 1996 Non-interest income increased $1.9 million, or 4.5%, to $43.7 million in the 1997 period, from $41.8 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. LOAN ADMINISTRATION THREE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS THE THREE MONTHS ENDED SEPTEMBER 30, 1996 Loan administration fee income decreased $2.2 million, or 66.7%, to $1.1 million for the 1997 period, from $3.3 million for the 1996 period. This decrease resulted primarily from a decrease in mortgage loans serviced for others caused by the sales of mortgage servicing rights completed during the quarter. At September 30, 1997, the unpaid principal balance of loans serviced for others was $4.1 billion versus $6.9 billion serviced at September 30, 1996. At September 30, 1997 and 1996, the weighted average servicing fee on loans serviced for others was 0.273% (i.e., 27.3 basis points) and 0.283%, respectively. NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS 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. Similar to the results of the three month period, this decrease was the direct result of the decrease in the amount of mortgage loans serviced for others. NET GAIN ON LOAN SALES THREE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS THE THREE MONTHS ENDED SEPTEMBER 30, 1996 For the 1997 period, net gain on loan sales increased $4.9 million, to $5.7 million, from $790 thousand in the 1996 period. Although, the 1997 period reflects the sale of $1.5 billion in loans versus $1.8 billion sold in the 1996 period, management believes the interest rate environment in the 1996 period was more volatile, which created more mismatches in the Company's hedging and resulted in the recognition of a smaller gain. In contrast, management believes the interest rate environment in the 1997 period was more stable. 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 is attributable to the Company's decision to retain more loans for its own portfolio. The Company'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 Company's effective hedging. 12 NET GAIN ON SALES OF MORTGAGE SERVICING RIGHTS THREE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS THE THREE MONTHS ENDED SEPTEMBER 30, 1996 For the period ended September 30, 1997, net gain on sales of mortgage servicing rights increased $4.5 million to $7.0 million, from $2.5 million for the same period in 1996. The gain on sale of mortgage servicing rights increased due to a $614 million, or 68.7%, increase in the underlying principal balance of the mortgage servicing rights sold, from $894 million sold during the three months ended September 30, 1996, versus $1.5 billion sold during the three months ended September 30, 1997. Additionally, 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 which was originated in 1996. 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 were $25.5 million versus $20.9 million in the 1996 period. The 1997 period contained the sale of $3.6 billion in bulk sales and $582 million in loans sold servicing released (i.e., a total of $4.2 billion) versus the $3.5 billion sold 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. OTHER FEES AND CHARGES THREE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS THE THREE MONTHS ENDED SEPTEMBER 30, 1996 In the 1997 period, other fees and charges, which include certain loan fees and charges, deposit-related fees and escrow waiver fees, decreased $900,000 from the 1996 period to $1.4 million. NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS THE NINE MONTHS ENDED SEPTEMBER 30, 1996 Other fees and charges decreased $1.9 million, or 35.8%, to $3.4 million for the 1997 period from $5.3 million for same period in 1996. NON-INTEREST EXPENSE The following table sets forth components of the Company's non-interest expense, prior to allocation of expenses related to loan originations that are deferred pursuant to SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." As required by SFAS No. 91, mortgage loan fees and certain direct origination costs (principally compensation and benefits) are capitalized and amortized rather than immediately expensed. Certain other expenses associated with loan production, however, are not required to be capitalized. These expense amounts are reflected on the Company's statement of earnings net of the portion that must be capitalized under SFAS No. 91. However, management believes that the analysis of non-interest expense on a "gross" basis ( i.e., prior to the deferral of capitalized loan origination costs ) more clearly reflects the changes in total overhead costs associated with increased loan production. 13
For the period ended September 30, Three months Nine months 1997 1996 1997 1996 -------- -------- -------- -------- (In thousands) Compensation and benefits............................. $ 10,270 $ 10,163 $ 31,854 $ 30,327 Commissions........................................... 3,895 2,778 9,802 9,339 Occupancy and equipment............................... 3,296 3,385 9,773 8,712 Advertising........................................... 357 210 1,190 654 Core deposit premium amortization..................... 323 323 968 968 Federal deposit insurance premiums.................... 129 3,324 305 4,184 General and administrative............................ 6,633 5,811 19,057 14,853 -------- -------- --------- -------- Subtotal.................................... 24,903 25,994 72,949 69,037 Less: deferral of capitalized loan origination costs.. (11,081) (6,534) (27,705) (22,543) -------- -------- --------- -------- Total....................................... $ 13,822 $ 19,460 $ 45,244 $ 46,494 ======== ======== ======== ========
THREE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS THE THREE MONTHS ENDED SEPTEMBER 30, 1996 Non-interest expense, excluding the capitalization of direct loan origination costs, decreased by $1.1 million, or 4.2%, to $24.9 million for the 1997 period from $26.0 million for the 1996 period. Excluding the $3.2 million one time Savings Association Insurance Fund assessment charged to the Bank on September 30, 1996, the Bank had a $2.1 million increase in other expenses. The largest changes occurred in the amount of commissions paid and the general and administrative expenses reported. The increased commission expense of $1.1 million is the direct result of the $900.0 million increase in mortgage loan originations. The $800,000 increase in general and administrative expenses represents increased contract underwriting costs along with other costs associated with the increased mortgage loan production. NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS 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 $72.9 million from $69.0 million for the same period in 1996. Excluding the $3.2 million one time SAIF assessment charged to the Bank on September 30, 1996, the Bank had a $7.1 million, or 10.3%, increase in other expenses. This increase was primarily caused by increased compensation and benefits of $1.6 million, increased general and administrative expenses of $4.2 million, and increased occupancy and equipment costs of $1.1 million. Compensation and benefits totaled $31.9 million, and $30.3 million for the 1997 and 1996 periods, respectively. This increase 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. FINANCIAL CONDITION ASSETS The Company's assets totaled $2.0 billion at September 30, 1997, an increase of $736.0 million, or 56.7%, 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. 14 LOANS RECEIVABLE Mortgage loans available for sale and loans held for investment increased $694.1 million, from $1.1 billion at December 31, 1996 to $1.8 billion at September 30, 1997. Mortgage loans available for sale increased $566.3 million, or 67.4%, to $1.4 billion at September 30, 1997, from $840.8 million at December 31, 1996. Loans held for investment increased $127.8 million, or 46.7%, from $273.6 million at December 31, 1996 to $401.3 million at September 30, 1997. These increases are attributable to the increased leverage ability provided by proceeds from the Company's initial public offering and the Company'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 Company'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 .27% and .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 Company's operations since all loans sold in the secondary market are generally subject to detailed underwriting reviews by the ultimate purchaser. Although the Company generally does not sell loans with recourse, it typically is required to repurchase loans, including defaulted and delinquent loans, which were not underwritten in strict compliance with the underwriting standards of secondary market investors. As the volume of the Company's 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 Company believes that its risk of loss arising from its non-performing loans, including loans acquired through repurchase from individual investors after initial sale in the secondary market, has not materially increased as a result of either the increase in repurchased loans or the overall increase in non-performing loans. 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 Company's exposure to losses. A portion of the repurchased loans are eligible for resale in the secondary market to other investors, and the Company does not believe that the remaining repurchased loans which are currently non-performing or which have been foreclosed, present any risks of ultimate loss that are significantly different than the Company has historically experienced. Of the Company's $44.1 million of non-performing loans at September 30, 1997, $40.5 million, or 91.9%, 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, $19.4 million of such loans were the subject of bankruptcy proceedings by the mortgagor; however, it has been the Company's experience that such proceedings usually result in full repayment to the Company and present minimal risk of loss because the imposition of judicial scrutiny and related enforcement powers supersede the less comprehensive collection methods normally available to the Company. 15 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 Company'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 Company'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 Company's total mortgage loan portfolio increased. As a member of the FHLB, the Bank is required to hold shares of FHLB stock in an amount at least equal to 1% of the aggregate unpaid principal balance of its home mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or 1/20th of its FHLB advances, whichever is greater. 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, $4.5 billion of mortgage servicing rights were originated, and $5.2 billion were sold, prepaid, or amortized resulting in a net decrease of $658.2 million. However, because the sales of servicing rights completed in 1997 contained a larger percentage of servicing rights which were originated during periods prior to 1997, the mortgage servicing portfolio at September 30, 1997 contained a greater percentage of recently originated and capitalized servicing rights than at December 31, 1996. OTHER ASSETS Other assets decreased $7.4 million, or 13.8%, to $46.3 million at September 30, 1997, from $53.7 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 Company receives a down payment from the purchaser equivalent to approximately 20% of the total purchase price and records a receivable account for the balance of the purchase price due. In connection with the sale of mortgage servicing rights, the Company had receivables of $30.0 million at September 30, 1997. The balance due is paid upon transfer by the Company of the related mortgage loan servicing documents, usually within 180 days after the initial closing. LIABILITIES The Company's total liabilities increased $693.0 million, or 56.9%, 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 Company's deposit accounts, Federal Home Loan Bank 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. 16 DEPOSIT ACCOUNTS Deposit accounts increased $387.1 million, or 62.0%, to $1.0 billion at September 30, 1997, from $624.5 million at December 31, 1996. This increase reflects the Company's deposit growth strategy through both its branch network and the secondary market. The number of bank branches increased from 15 at December 31, 1996 to 19 at September 30, 1997. These bank branches have generated $119.3 million in net new deposits, a 29.0% increase, since December 31, 1996. At September 30, 1997, the Company's certificates of deposit totaled $877.3 million, or 86.7% of total deposits. These certificates carry 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 Company 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 Company'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 $5.9 million, or 26.2%, to $16.6 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. 17 LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY Liquidity refers to the ability or the financial flexibility to manage future cash flows to meet the needs of depositors and borrowers and fund operations on a timely and cost-effective basis. The Company has no other significant business other than that of its wholly owned subsidiary, Flagstar Bank, FSB (the "Bank"). The Company's primary source of liquidity is dividends paid by the Bank. Management of the Company believes that dividends that may be paid by the Bank to the Company will provide sufficient funds for its operations and liquidity needs; however, no assurance can be given that the Company will not have a need for additional funds in the future. Further, the Bank is subject to certain regulatory limitations with respect to the payment of dividends to the Company. The Bank is required by the Office of Thrift Supervision ("OTS") regulations to maintain minimum levels of liquid assets. This requirement, which may be changed at the direction of the OTS depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The required minimum ratio is currently 5.00%. While the Bank's liquidity ratio varies from time to time, the Bank has generally maintained liquid assets substantially in excess of the minimum requirements. The Bank's average daily liquidity ratio was 8.49% for the month ended September 30, 1997. A significant source of cash flow for the Company is the sale of mortgage loans held for sale. Additionally, the Company receives funds from net interest income, mortgage loan servicing fees, loan principal repayments, advances from the FHLB, deposits from customers and cash generated from operations. Mortgage loans sold during the three months ended September 30, 1997 totaled $1.8 billion, an increase of $431 million, or 31.0% from $1.4 billion sold during the same period in 1996. This increase in mortgage loan sales was attributable to the 68.0% increase in mortgage loan originations offset by the $566.3 million increase in the amount of mortgage loans available for sale but not yet sold. The Company sold 82.1% and 105.2% of its mortgage loan originations during the three month periods ended September 30, 1997 and 1996, respectively. The Company typically uses FHLB advances to fund its daily operational liquidity needs and to assist in funding loan originations. The Company will continue to use this source of funds unless a more cost-effective source of funds becomes available. FHLB advances are used because of their flexibility. These funds are typically borrowed for 90-day terms with no prepayment penalty. The Company had $718.9 million outstanding at September 30, 1997. Such advances are repaid with the proceeds from the sale of mortgage loans held for sale. The Company currently has an authorized line of credit equal to $850 million. This line is collateralized by non-delinquent mortgage loans. To the extent that the amount of retail deposits or customer escrow accounts can be increased, the Company expects to replace FHLB advances. At September 30, 1997, the Company had outstanding rate-lock commitments to lend $840.3 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 Company 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 bank regulatory minimum capital requirements, See "Capital Ratios" above. The Company is not subject to any such requirements. 18 PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company and its subsidiaries are involved in various claims and legal actions arising in the ordinary course of business. Management currently is not aware of any material legal proceedings to which the Company or any of its subsidiaries is a party or to which any of their property is subject. Item 2. Changes in Securities None. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27 (SEC Use only) (b) Reports on Form 8-K None 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FLAGSTAR BANCORP, INC. Date: November 12, 1997 /s/ Mark T. Hammond ------------------------------ Mark T. Hammond Vice Chairman of the Board and President (Duly Authorized Officer) /s/ Michael W. Carrie ------------------------------ Michael W. Carrie Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 20 EX-27 2 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FLAGSTAR BANCORP, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 9-MOS DEC-31-1997 DEC-31-1997 JUN-30-1997 JAN-01-1997 SEP-30-1997 SEP-30-1997 43,633 43,633 0 0 0 0 0 0 0 0 0 0 0 0 1,808,374 1,808,374 (4,750) (4,750) 2,033,260 2,033,260 1,011,594 1,011,594 718,879 718,879 181,238 181,238 0 0 0 0 0 0 137 137 121,412 121,412 2,033,260 2,033,260 30,008 83,029 0 0 703 1,760 30,711 84,789 13,646 34,982 21,012 54,597 9,689 30,192 1,416 3,730 0 0 13,822 45,244 9,727 24,946 6,194 15,856 0 0 0 0 6,194 15,856 .45 1.26 .45 1.26 1.98 2.27 44,079 44,079 0 0 0 0 0 0 4,500 3,500 966 2,280 0 0 4,950 4,950 0 0 0 0 0 0
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