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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
MARK ONE
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No.: 0-22353
FLAGSTAR BANCORP, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-3150651
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2600 TELEGRAPH ROAD, BLOOMFIELD HILLS, MICHIGAN 48302-0953
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 338-7700
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [ ]
The registrants voting stock is traded on the NASDAQ Stock Market. The aggregate
market value of the voting stock held by non-affiliates of the registrant,
computed by reference to the last sale price ($12.875 per share) at which the
stock was sold on March 17, 2000 was approximately $69.7 million. For purposes
of this calculation, the term "affiliate" refers to all executive officers and
directors of the registrant and all stockholders beneficially owning more than
10% of the registrant's Common Stock.
As of March 17, 2000, 12,535,073 shares of the registrant's Common Stock, $0.01
par value, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following lists the documents incorporated by reference and the Part of
the Form 10-K into which the document is incorporated:
1. Portions of the Annual Report to Shareholders for the year ended
December 31, 1999. (Parts I and II)
2. Portions of Proxy Statement for 1999 Annual Meeting of Shareholders.
(Part III)
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TABLE OF CONTENTS
PART I
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for the Company's Common Stock and Related
Stockholder Matters 11
Management's Report 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 28
Item 8. Financial Statements 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 61
PART III
Item 10. Directors and Executive Officer of the Registrant 61
Item 11. Executive Compensation 61
Item 12. Security Ownership of Certain Beneficial Owners and
Management 61
Item 13. Certain Relationships and Related Transactions 61
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form
8-K 62
Signatures 63
When used in this Form 10-K or future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases or other public or
stockholder communications, or in oral statements made with the approval of an
authorized executive officer, the words or phrases "would be", "will allow",
"intends to", "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project", or similar expressions are intended to
identify "forward looking statement" within the meaning of the Private
Securities Litigation Reform Act of 1996.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
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PART I
ITEM 1. BUSINESS
GENERAL
Flagstar Bancorp, Inc. ("Flagstar" or the "Company"), is the holding company for
Flagstar Bank, FSB (the "Bank"), a federally chartered stock savings bank
founded in 1987. With $4.3 billion in assets at December 31, 1999, Flagstar is
the largest independent savings institution headquartered in Michigan.
Flagstar is a consumer-oriented financial services organization. The Company's
principal business is obtaining funds in the form of deposits and borrowings and
investing those funds in various types of loans. The acquisition or origination
of single family mortgage loans is the Company's primary lending activity. The
Company also originates consumer loans, commercial real estate loans, and
non-real estate commercial loans.
The mortgage loans are securitized and sold in order to generate mortgage
servicing rights. The Company invests in a significant amount of its loan
production in order to maximize the Company's leverage ability and to receive
the interest spread between earning assets and paying liabilities. The Company
also acquires funds on a wholesale basis from a variety of sources and services
a significant volume of loans for others.
The Bank is a member of the Federal Home Loan Bank System ("FHLB") and is
subject to regulation, examination and supervision by the Office of Thrift
Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC"). The
Company's deposits are insured by the FDIC through the Savings Association
Insurance Fund ("SAIF").
The Company's executive office is located at 2600 Telegraph, Bloomfield Hills,
Michigan 48302, and its telephone number at such office is (248) 338-7700.
LENDING ACTIVITIES
Flagstar is a consumer-oriented financial services organization. The Company's
principal business is obtaining funds in the form of deposits and borrowings and
investing those funds in various types of loans. The acquisition or origination
of single family mortgage loans is the Company's primary lending activity.
During 1999, Flagstar continued to be among the country's top twenty largest
originators. Although at a comparatively lesser volume, the Company originates
consumer loans, commercial real estate loans, and non-real estate commercial
loans.
The Company conducts its retail lending operations from 35 bank branches and 38
loan origination centers located in Michigan, Florida, Ohio, and California. The
Company's largest concentration of offices is in southern Michigan, where all of
its bank branches and 33 of its loan centers are located. The Company also has
three loan centers in central Florida, one loan center in central Ohio, and one
loan center in California. At December 31, 1999, the largest percentage of loans
held and serviced by the Company related to properties located in southern
Michigan. The Company also maintains 16 wholesale lending offices which conduct
business with correspondent mortgage lenders nationwide.
MORTGAGE LOANS
The origination or acquisition of residential mortgage loans constitutes the
most significant lending activity of the Company. During 1999, The Company was
credited as the 18th largest originator in the United States. The Company
originated or acquired $14.6 billion, $18.8 billion, and $7.9 billion of
mortgage loans during the years ended December 31, 1999, 1998, and 1997,
respectively. Each loan originated or acquired is for the purpose of acquiring
or refinancing a one to four family residence and is secured by a first mortgage
on the property. The Company offers traditional fixed-rate and adjustable-rate
mortgage loans with terms ranging from one year to 30 years. The majority of the
Company's products conform to the respective underwriting guidelines established
by the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National
Mortgage Association ("FNMA"), and the Government National Mortgage Association
("GNMA"). The Company also offers other residential mortgage loans which meet
the Company's underwriting guidelines but which may have other terms and
conditions customized to meet the needs of the borrower.
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MORTGAGE LOANS (CONTINUED)
The Company, as a part of its overall mortgage banking strategy securitizes the
majority of its mortgage loans through FHLMC, FNMA, or GNMA. The Company
generally only securitizes its longer-term, fixed-rate loans while it invests in
the shorter duration and adjustable rate product it originates. Securitization
is the process by which mortgage loans owned by the Company are exchanged for
mortgage-backed securities that are guaranteed by either FHLMC, FNMA, or GNMA
and are collateralized by the same mortgage loans that were exchanged. These
mortgage-backed securities are then sold to a secondary market investor. The
servicing related to the sold loans is generally retained by the Company and
later sold in bulk sales to other secondary market investors. The Company, for
the most part, does not sell the servicing rights to loans originated within its
retail market area. See Notes 3, 4, and 7 of the Notes to Consolidated Financial
Statements in Item 8. Financial Statements and Supplementary Data, herein.
The Company's written underwriting guidelines for mortgage loans employ a system
of internal controls designed to maintain the quality of the mortgage loan
portfolio. All mortgage loans are reviewed by an underwriter at the Company's
national headquarters or at one of the Company's wholesale lending centers. The
Company also employs contract underwriters employed by mortgage insurance
companies to underwrite loans. Additionally, certain correspondents of the
Company have been delegated underwriting authority. Any loan not underwritten by
a Flagstar employed underwriter is warranted by the individual underwriter's
employer whether it be a mortgage company or a mortgage insurance company. If
the loan amount exceeds the maximum purchase limitation of FHLMC and FNMA, but
is less than $500,000, a senior Bank officer must also approve the loan. If the
loan exceeds $500,000, the Company's Chief Executive Officer or President must
also approve the loan.
In order to further protect the company from loss, the Company generally
requires that any loan with a loan-to-value ratio in excess of 80% must carry
mortgage insurance. A loan-to-value ratio is the ratio that the original
principal amount of a loan bears to the appraised value of the mortgaged
property or, in the case of a purchase money mortgage, the lower of the
appraised value of the property or the purchase price of the property securing
the loan. The Company requires a lower loan-to-value ratio for
non-owner-occupied loans. In addition, all home mortgage loans originated by the
Company are subject to requirements for title, fire, and hazard insurance. Real
estate taxes are generally collected and held in escrow for disbursement by the
Company. The Company is further protected against fire or casualty loss on home
mortgage loans by a blanket mortgage impairment insurance policy covering a lack
or inadequacy of the mortgagor's required insurance.
The Company utilizes three production channels to acquire mortgage loans. Each
production channel produces similar product and each loan acquired is
underwritten by the Company.
WHOLESALE
In a wholesale purchase transaction, the Company supplies the funding for the
transaction at the closing table. The mortgage broker completes all of the
up-front paperwork and receives an origination fee from the mortgagor and a
servicing release premium from the Company. During 1999, the Company closed $7.4
billion utilizing this origination channel. The Company ended 1999 as 11th
largest wholesale originator in the United States.
CORRESPONDENT
In a correspondent purchase transaction, the Company purchases the loan after
the mortgage company has funded the transaction. The mortgage company completes
the whole origination process and the Company pays a servicing release premium
plus a market price for the loan. During 1999, the Company closed $6.0 billion
utilizing this origination channel. The Company ended 1999 as 15th largest
correspondent originator in the United States.
RETAIL
In a retail transaction, the Company originates the loan through a loan officer
representative of the Company. The Company funds the transaction. The Company
completes the whole origination process. During 1999, the Company closed $1.2
billion utilizing this origination channel.
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CONSUMER LOANS
At December 31, 1999, Flagstar's consumer loan portfolio totaled $187.8 million,
or 4.9% of its total loan portfolio. The largest component of the Company's
consumer loan portfolio are loans which are secured by real estate but is
classified as a consumer loan. The adjustable-rate and fixed rate equity line
loans, the second mortgage loans, and the home improvement loans total
approximately $178.0 million, or 94.8% of the total consumer loan portfolio. The
remaining balance of consumer loans, or approximately $9.8 million, consisted of
loans such as personal lines of credit, and automobile loans. Flagstar's
underwriting standards for a consumer loan include an analysis of the
applicant's payment history on other indebtedness and an assessment of the
applicant's ability to meet existing obligations as well as payments on the
proposed loan. Equity line loans, second mortgage loans, and home improvement
loans are secured by a mortgage on the borrower's home. During 1999, the Company
originated a total of $178.9 million in consumer loans.
COMMERCIAL LENDING
During 1996, Flagstar opened its Bloomfield Hills commercial lending division.
This division began to solicit potential customers for commercial loans in the
Detroit metropolitan area. This division has expanded its coverage to include
the full retail market area serviced by the retail banking division. During
1999, the Company originated $94.1 million in commercial loans. Additionally, in
1996 the Company expanded its offering of warehouse lines of credit to a number
of correspondent mortgage lenders headquartered across the United States. During
1999, the Company issued 20,901 advances totaling $2.7 billion.
COMMERCIAL REAL ESTATE LOANS
At December 31, 1999, the Company's commercial real estate loan portfolio
totaled $143.7 million, or 3.7% of the Company's total loan portfolio.
The Company's commercial real estate loans generally range from $50,000 to
$10,000,000, and are typically fixed-rate loans for up to five-year terms or
adjustable-rate loans for up to ten-year terms, with payment schedules based on
amortization periods of up to 25 years. Applications for commercial real estate
loans are reviewed and approved by a committee consisting of senior management
of the Company.
All loans on income-producing properties are evaluated by a qualified, certified
appraiser to ensure that the appraised value of the property to be mortgaged
satisfies the Company's loan-to-value ratio requirements of no higher than 80%.
The Company also generally requires a minimum debt-service ratio of 1.1 to 1. In
addition, the Company considers the experience of the prospective borrower with
similar properties, the creditworthiness and managerial ability of the borrower,
the enforceability and collectibility of any relevant guarantees and the quality
of the asset to be mortgaged. The Company officer processing the loan also
generally performs various feasibility and income absorption studies in
connection with the loan.
NON-REAL ESTATE COMMERCIAL LOANS
The Company offers a variety of non-real estate commercial loans, including
demand, term, and line-of-credit loans. At December 31, 1999, the Company's
non-real estate commercial loan portfolio was $7.0 million, or 0.2% of its total
loan portfolio.
The Company's underwriting policy with respect to non-real estate commercial
loans is based primarily upon the financial stability of the borrower and the
borrower's business, the enforceability and collectibility of any relevant
guarantees and the quality of any assets used as collateral.
WAREHOUSE LENDING
These loans are granted for terms of one day to 30 days. Warehouse lines of
credit are used by mortgage lenders to fund the closing of a mortgage loan which
most often is acquired by the Company. The aggregate amount of warehouse lines
of credit granted by the Company to other mortgage lenders was $335.8 million of
which $46.2 million was outstanding at December 31, 1999 versus $450.8 million
in lines of which $235.7 million was outstanding at December 31, 1998. Each
borrowing consummated under the warehouse lending division is collateralized by
a mortgage loan. These lines of credit are also personally guaranteed by a
qualified principal officer of the borrower. Each mortgage lender which applies
for a warehouse line of credit must be approved under the
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Company's commercial loan standards. It is not a requirement of the warehouse
lending division that the loan collateralizing the borrowing be sold to Flagstar
or that the borrower be a correspondent of the Company.
LOANS BY TYPE
The following table sets forth the Company's total loans at December 31, 1999,
categorized as having fixed interest rates or adjustable interest rates.
Fixed Adjustable
Rate Rate Total
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(In Thousands)
Mortgage loans available for sale $1,196,394 $1,033,987 $2,230,381
Mortgage loans held for investment 290,158 879,623 1,169,781
Second mortgage loans 145,075 -- 145,075
Commercial real estate 127,864 15,788 143,652
Construction 46,838 -- 46,838
Consumer 11,537 31,221 42,758
Non-real estate commercial 1,743 5,281 7,024
Warehouse lending -- 46,222 46,222
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Total $1,819,609 $2,012,122 $3,831,731
===========================================
LOAN REPAYMENT SCHEDULE
The following table sets forth the scheduled principal payments of Flagstar's
loan portfolio at December 31, 1999, assuming that principal repayments are made
in accordance with the contractual terms of the loans.
Within 1 Year 2 Years 3 Years 5 Years 10 Years Over
1 Year To 2 Years To 3 Years To 5 Years To 10 Years To 15 Years 15 Years Totals
---------------------------------------------------------------------------------------------------
(In Thousands)
Mortgage loans available for
sale $195,548 $181,790 $168,987 $314,118 $ 606,958 $369,582 $393,398 $2,230,381
Mortgage loans held for
investment 111,454 103,588 96,177 159,229 313,695 191,847 193,791 1,169,781
Commercial real estate 23,964 22,200 20,552 38,010 38,926 -- -- 143,652
Second mortgage 18,437 16,719 15,161 27,492 55,418 11,848 -- 145,075
Construction 46,838 -- -- -- -- -- -- 46,838
Consumer 5,508 5,014 4,563 8,306 16,859 2,508 -- 42,758
Warehouse lending 46,222 -- -- -- -- -- -- 46,222
Non-real estate commercial 3,008 2,692 1,324 -- -- -- -- 7,024
---------------------------------------------------------------------------------------------------
Total $450,979 $332,003 $306,764 $547,155 $1,031,856 $575,785 $587,189 $3,831,731
===================================================================================================
ASSET QUALITY
Flagstar has implemented comprehensive internal asset review systems to provide
for early detection of problem assets. The Company's asset classifications and
the adequacy of its allowances for losses are analyzed quarterly based on, among
other things, historical loss experience, and current economic conditions.
Although this system will not eliminate future losses due to unanticipated
declines in the real estate market or economic downturns, it should provide for
timely identification of the loans which could cause the Company a potential
loss. Refer to four schedules included hereafter (Tables 10 through 13), on
pages 27-28, which set forth certain information about the Company's
non-performing assets.
DELINQUENT LOANS. Residential property loans are considered by the Company to be
delinquent when any payment of principal and/or interest is past due. While it
is the goal of management to work out a satisfactory repayment schedule with a
delinquent borrower, the Company will undertake foreclosure proceedings if the
delinquency is not satisfactorily resolved. The Company's procedures regarding
delinquent loans are designed to assist borrowers in meeting their contractual
obligations. The Company customarily mails notices of past due payments to the
borrower approximately 15, 30 and 45 days after the due date, and late charges
are assessed in accordance with Company parameters. The Company's Collection
Department makes telephone and/or personal contact with borrowers after a
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ASSET QUALITY (CONTINUED)
30-day delinquency. In certain cases, the Company recommends that the borrower
seek credit counseling assistance and may grant forbearance if the Company
determines that the borrower is likely to correct loan delinquencies within a
reasonable period of time. The Company ceases the accrual of interest on loans
which are more than 90 days delinquent. Such interest is recognized as income
when collected. At December 31, 1999, the Company had $67.5 million in loans
which were determined to be delinquent and $41.8 million which were determined
to be non-performing and for which interest accruals had ceased.
REPOSSESSED ASSETS. Real property which the Company acquires as a result of
foreclosure proceedings is classified as "real estate owned" until it is sold or
otherwise disposed of. The Company's Foreclosure Committee decides whether to
rehabilitate the property or sell it "as is," and whether to list the property
with a broker, sell the property directly to a third party, or sell it at
auction. Generally, the Company is able to dispose of a substantial portion of
this type of real estate and other repossessed assets during each year, but the
Company invariably acquires additional real estate and other assets through
repossession in the ordinary course of its business. At December 31, 1999, the
Company held approximately $21.4 million of repossessed assets.
SOURCES OF FUNDS
Customer deposits, which totaled $2.3 billion at December 31, 1999, represent
the principal funding source for Flagstar's lending and investing activities.
The Company also derives funds from operations, loan principal payments, loan
sales, advances from the FHLB, customer escrow accounts, and the capital
markets.
DEPOSIT ACTIVITIES. Flagstar has developed a variety of deposit products ranging
in maturity from demand-type accounts to certificates with maturities of up to
ten years, including savings accounts, checking and NOW accounts, and various
money market accounts. Flagstar primarily relies upon its network of branches,
their strategic location, the quality and efficiency of its customer service,
and its pricing policies to attract deposits.
The following table sets forth information relating to the Company's deposit
flows for each of the years indicated:
For the years ended December 31,
1999 1998 1997 1996 1995
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(In Thousands)
Total deposits at the beginning of the
year $1,923,370 $1,109,933 $ 624,485 $526,974 $307,624
Interest credited 112,493 82,452 50,143 30,431 25,123
Net deposit increase/(decrease) 225,100 730,985 435,305 67,080 194,227
--------------------------------------------------------------
Total deposits at the end of the year $2,260,963 $1,923,370 $1,109,933 $624,485 $526,974
==============================================================
BORROWINGS. The FHLB provides credit for savings institutions and other member
financial institutions. As a member of the FHLB, Flagstar is required to own
stock in the FHLB. Flagstar is authorized to apply for advances from the FHLB
using its mortgage loans as collateral. The FHLB generally permits advances up
to 50% of the Company's "adjusted assets", which are defined as assets reduced
by outstanding advances. At December 31, 1999, advances to the Company by the
FHLB totaled $1.5 billion, or 52.1% of adjusted assets. Of the $1.5 billion
outstanding at year-end, $377.0 million, or 25.5% of the Company's total FHLB
advances, consisted of daily borrowings which may be "put" back or paid off at
the Company's option without penalty. Refer to Note 9 of the Notes to
Consolidated Financial Statements, in Item 8. Financial Statements and
Supplementary Data, herein for further discussion of the Company's FHLB
advances.
LOAN PRINCIPAL PAYMENTS. In its capacity as an investor in loans, the Company
will derive funds from the repayment of principal on the loans it holds in its
portfolio. Payments totaled $928.8 million during 1999, representing an increase
of $439.4 million, or 89.7%, compared to 1998. This increase, was attributable
to the increased asset base and the continuation of the lower interest rate
environment during the first half of 1999 similar to the environment experienced
in 1998. This lower rate environment allowed for an increase in the amount of
loan refinancings and payoffs.
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SOURCES OF FUNDS (CONTINUED)
LOAN SALES. As part of the Company's mortgage banking operation, the Company
originates loans and then sells these loans to other investors. Sales of
mortgage loans totaled $12.9 billion in 1999, compared to $17.8 billion sold in
1998. The sales recorded during 1999 were lower than in 1998 for two reasons.
Primarily, they were lower because of the decreased loan origination volume but,
the Company also retained a portion of the loans for investment purposes.
CUSTOMER ESCROW ACCOUNTS. As a servicer of mortgage loans for others and for
that matter as the servicer of its own loans, the Company holds funds in escrow
for the other investors, various insurance entities or for the government taxing
authorities. Escrow accounts on mortgage loans decreased from $104.5 million at
December 31, 1998 to $75.3 million at December 31, 1999. This decrease was
caused by a decrease in the amount of total residential mortgage loans serviced
by the Company at December 31, 1999 from $21.0 billion at December 31, 1998 to
$16.2 billion.
CAPITAL MARKETS. Since 1997, The Company and its subsidiaries has completed
three public offerings to generate funds to be utilized by the Company and more
importantly has utilized these funds to increase regulatory capital in the Bank.
In May 1997, the Company completed an initial public offering of its common
stock. The net proceeds received by the Company totaled $27.3 million. The
common stock is traded on the Nasdaq Stock Market under the symbol "FLGS".
In February and March of 1998, Flagstar Capital Corporation offered to the
public and sold 2,300,000 shares of its 8.50%, non-cumulative, Series A
Preferred Shares, $25 par value per share, providing gross proceeds totaling
$57.5 million. The preferred stock is traded on the Nasdaq Stock Market under
the symbol "FLGSP".
On April 27, 1999, Flagstar Trust completed the sale of 2.99 million shares of
preferred securities, providing gross proceeds totaling $74.8 million. The
securities pay interest at a rate of 9.50% per annum. The preferred securities
are traded on the Nasdaq Stock Market under the symbol "FLGSO".
SUBSIDIARY ACTIVITIES
The Company conducts business through a number of wholly-owned subsidiaries in
addition to the Bank. The additional subsidiaries of the Company include Douglas
Insurance Agency, Inc. ("DIA"), Flagstar Commercial Corporation ("FCC"),
Flagstar Credit Corporation ("Credit"), Flagstar Trust (Trust), and Flagstar
Investment Group, Inc. ("Investment"). DIA acts as an agent for life insurance
and property and casualty insurance companies and Investment offers a
full-service brokerage service. Credit participates in mortgage reinsurance
agreements with various private mortgage insurance companies. FCC is the holding
company for cdbid.com, an internet startup company. Trust is a Delaware trust
whose common securities are owned solely by the Company and in 1999 sold 2.99
million shares of preferred securities to the general public in an initial
public offering.
The Bank, the Company's primary subsidiary, is a federally chartered, stock
savings bank headquartered in Bloomfield Hills, Michigan. The Bank owns four
subsidiaries: FSSB Mortgage Corporation ("Mortgage"), Flagstar Capital
Corporation ("Capital"), Mid-Michigan Service Corporation ("Mid-Michigan"), and
SSB Funding Corporation ("Funding"). Mortgage, Mid-Michigan, and Funding are
currently inactive subsidiaries. Capital has issued publicly-owned preferred
stock and is a real estate investment trust whose common stock is owned solely
by the Bank. Capital purchases mortgage loans from the Bank and holds them for
investment purposes.
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 Company and the Bank. 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
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REGULATION (CONTINUED)
insured by the SAIF administered by the FDIC to the maximum extent provided by
law (up to $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 the Company, the
holder of the Bank stock.
REGULATION OF THE COMPANY
The Company is a savings and loan holding company under the HOLA and, as such,
is subject to OTS regulation, supervision and examination. In addition, the OTS
has enforcement authority over the Company and its non-savings institution
subsidiaries and may restrict or prohibit activities that are determined to
represent a serious risk to the safety, soundness or stability of the Bank or
any other subsidiary savings institution.
GRAMM-LEACH-BLILEY. On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act ("the 1999 Act"), which significantly reforms various
aspects of the financial services business. The 1999 Act includes provisions
which: 1) establishes a new framework under which bank holding companies and,
subject to numerous restrictions, banks can own securities firms, insurance
companies and other financial companies; 2) generally causes banks to be subject
to the same securities regulation as other providers of securities products; 3)
prohibits new unitary savings and loan holding companies from engaging in
nonfinancial activities or affiliating with nonfinancial entities; 4) provides
consumers with new protections regarding the transfer and use of their nonpublic
personal information by financial institutions; and 5) changes the FHLB system
in numerous ways, which are described in more detail below.
The provisions in the 1999 Act that permit full affiliations between bank
holding companies or banks and other financial companies do not increase the
Company's authority to affiliate. As a unitary savings and loan holding company,
the Company was generally permitted to have such affiliations prior to the
enactment of the 1999 Act. It is expected, however, that these provisions will
benefit competitors of the Company.
The prohibition on the ability of new unitary savings and loan holding companies
to engage in nonfinancial activities or affiliating with nonfinancial entities
generally applies only to savings and loan holding companies that were not, or
had not submitted an application to become, savings and loan holding companies
as of May 4, 1999. Since the Company was treated as a unitary savings and loan
holding company prior to that date, the 1999 Act will not prohibit the Company
from engaging in nonfinancial activities or acquiring nonfinancial subsidiaries.
However, the 1999 Act generally restricts any nonfinancial entity from acquiring
the Company unless such nonfinancial entity was, or had submitted an application
to become, a savings and loan holding company as of May 4, 1999.
Management does not believe that complying with the new consumer privacy
provision will have a significant impact on the Company's business.
Changes to the FHLB system in the 1999 Act included a change in the manner of
calculating the Resolution Funding Corporation ("REFCORP") obligations payable
by the FHLBs; a broadening in the purposes for which FHLB advances may be used;
and removal of the requirement that federal savings associations be FHLB
members. Previously, the aggregate amount of the annual REFCORP obligation paid
by all FHLBs was $300 million. The 1999 Act imposes an annual obligation equal
to 20% of the net earnings of the FHLBs. This change will result in a greater
obligation in years where FHLBs have high income levels, thereby reducing the
return on members' investments. The broadening in the purpose for which FHLB
advances can be used could result in higher borrowing costs because of increased
demand for advances.
COMPETITION
Based on total assets at December 31, 1999, the Company is the largest
independent savings institution headquartered in Michigan. The Company faces
substantial competition in attracting deposits at its bank branches. Its most
direct competition for deposits has historically come from other savings
institutions, commercial banks and credit unions. Money market funds and
full-service securities brokerage firms also provide competition in this area.
9
10
COMPETITION (CONTINUED)
The primary factors in competing for deposits are the rates offered, the quality
of service, the hours of service, and the location of branch offices.
The Company's competition for lending products comes principally from other
savings institutions, commercial banks, mortgage companies, and other lenders.
The primary factors in competing are the rates and fees charged, the efficiency
and speed of the service provided, and the quality of the services provided.
PERSONNEL
At December 31, 1999, the Company had 1,627 full-time equivalent employees. The
employees are not represented by a collective bargaining unit. The Company
provides its employees with a comprehensive program of benefits, some of which
are on a contributory basis, including comprehensive medical and dental plans,
life insurance, disability insurance, and a 401K savings and investment plan.
Flagstar's management considers its employee relations to be excellent.
EXECUTIVE OFFICERS
Name and Age Position(s) Held
- --------------------------------------------------------------------------------------------------
Thomas J. Hammond, 56 Chief Executive Officer of the Company and the Bank
Mark T. Hammond, 34 President of the Company and the Bank
Joan H. Anderson, 49 Executive Vice President of the Company and the Bank
Michael W. Carrie, 45 Executive Vice President and Chief Financial Officer of the
Company and the Bank
Kirstin Hammond, 34 Executive Vice President of the Bank
Robert O. Rondeau, Jr., 34 Executive Vice President of the Bank
THOMAS J. HAMMOND has served as Chief Executive Officer of the Company since its
formation in 1993 and the Bank since its formation in 1987. Mr. Hammond is the
founder of the Bank.
MARK T. HAMMOND has served as President of the Company since December 1996 and
of the Bank since September 1995. He has been employed by the Bank since 1987.
Mr. Hammond is the son of Thomas J. Hammond, the Chief Executive Officer.
JOAN H. ANDERSON has been an Executive Vice President of the Bank since 1988 and
of the Company since 1993. She has been employed by the Bank since 1987.
MICHAEL W. CARRIE has served as an Executive Vice President of the Company and
the Bank since 1995 and Chief Financial Officer of the Company and the Bank
since 1993.
KIRSTIN HAMMOND has served as an Executive Vice President of the Bank since 1998
and has been employed by the Bank since 1991. Mrs. Hammond is the wife of Mark
T. Hammond, the President, and the daughter-in-law of Thomas J. Hammond, the
Chief Executive Officer.
ROBERT O. RONDEAU, JR. has served as an Executive Vice President of the Bank
since 1998 and as an employee of the Bank since 1995. Mr. Rondeau is the
son-in-law of Thomas J. Hammond, the Chief Executive Officer.
10
11
ITEM 2. PROPERTIES
The Company operates from 35 bank branches and 38 retail loan origination
offices in Michigan, Florida, California, and Ohio. The Company also maintains
sixteen wholesale loan offices. Flagstar owns the buildings and land for 12 of
its offices, owns the building but leases the land for one of its offices, and
leases the remaining 79 offices. The buildings with leases have lease expiration
dates ranging from 2000 to 2012. At December 31, 1999, the total net book value
of all of the Company's offices was approximately $9.8 million.
The Company leases two adjacent buildings in Bloomfield Hills, Michigan, which
house its executive offices. Substantially all of its operational and support
functions for its mortgage lending activities are housed in this facility. The
Company houses its retail banking operation from its owned facility in Jackson,
Michigan.
The Company has begun construction of a new headquarters facility located in
Troy, Michigan. The estimated construction cost for this facility totals $30.0
million with an estimated completion date in Fall 2000. At December 31, 1999,
the Company has capitalized approximately $8.4 million.
The Company utilizes a highly sophisticated server-based data processing system.
At December 31, 1999, the net book value of the Company's computer related
equipment (including both hardware and software) was approximately $9.8 million.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company and its subsidiaries are parties to various legal
proceedings incident to their business. At December 31, 1999, there were no
legal proceedings which management anticipates would have a material adverse
effect on the Company. See Note 13 of Notes to Consolidated Financial
Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted during the fourth quarter of the year covered by this
report for inclusion to be voted on by security holders through a solicitation
of proxies or otherwise.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
The Company's common stock is traded on the NASDAQ Stock Market. The trading
symbol is FLGS. At March 17, 2000, there were 12,535,073 shares of the Company's
common stock outstanding.
QUARTERLY STOCK PRICE/DIVIDEND INFORMATION
The following table summarizes the Company's common stock price and dividend
activity for:
Quarter Ended(2)
12/31/99 9/30/99 6/30/99 3/31/99 12/31/98 9/30/99 6/30/98 3/31/98
High price during the period
$17.250 $26.000 $28.375 $30.125 $30.500 $29.000 $28.875 $27.000
Low price during the period
14.750 12.625 21.000 25.000 20.000 20.750 23.125 17.500
Closing price at the end of the period
17.250 15.375 25.250 26.500 26.125 23.125 24.375 26.500
Price/earnings ratio(1)
6.3x 5.1x 7.8x 8.4x 9.0x 9.5x 11.3x 7.6x
Dividends per common share declared during the period
$0.10 $0.10 $0.08 $0.08 $0.08 $0.07 $0.07 $0.06
(1) Based on most recent twelve-month diluted earnings per share and
end-of-period stock prices.
(2) The over-the-market quotations reflect inter-dealer prices, without retail
mark-up, mark down or commission and may not necessarily represent actual
transactions.
11
12
MANAGEMENT'S REPORT
FINANCIAL STATEMENTS
The management of the Company and the Bank are responsible for the preparation,
integrity, and fair presentation of its published financial statements and all
other information presented in this Form 10-K. The financial statements have
been prepared in accordance with generally accepted accounting principles and,
as such, include amounts based on informed judgements and estimates made by
management.
INTERNAL CONTROL
Management is responsible for establishing and maintaining an effective internal
control structure over financial reporting presented in conformity with both
generally accepted accounting principles ("GAAP") and the regulatory reporting
completed for the Office of Thrift Supervision through the compilation of the
quarterly Thrift Financial Report ("TFR"). The structure contains monitoring
mechanisms, and actions are taken to correct any deficiencies which are
identified.
There are inherent limitations in the effectiveness of any structure of internal
controls, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control structure may vary over time.
Management assessed the Company's internal control structure over financial
reporting presented in conformity with both GAAP and in the creation of the TFR
at of December 31, 1999. This assessment was based on criteria for effective
internal control over financial reporting described in "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that the Company maintained an effective internal control structure
over the financial reporting presented for both GAAP and the TFR, as of December
31, 1999.
The Audit Committee of the Company's Board of Directors consists entirely of
outside directors who are independent of the Company's management. It includes
members with financial management expertise, has access to its own outside
counsel or other advisors it deems necessary to fulfill its responsibilities,
and does not include any large customers of the Company. The Audit Committee is
responsible for recommending to the Board of Directors the selection of
independent auditors. It meets periodically with management, the independent
auditors and the internal auditors to ensure that they are carrying out their
responsibilities. The Audit Committee is also responsible for performing an
oversight role by reviewing and monitoring the financial, accounting and
auditing procedures of the Company in addition to reviewing the Company's
financial reports. The independent auditors and the internal auditors have full
and free access to the Audit Committee, with or without the presence of
management, to discuss the adequacy of the internal control structure for
financial reporting and any other matters which they believe should be brought
to the attention of the Audit Committee.
COMPLIANCE WITH LAWS AND REGULATIONS
Management is also responsible for ensuring compliance with the federal laws and
regulations concerning loans to insiders and the federal and state laws and
regulations concerning dividend restrictions, which are the laws and regulations
relating to safety and soundness which have been designated by the Federal
Deposit Insurance Corporation.
Management assessed its compliance with the designated safety and soundness laws
and regulations and has maintained records of its determinations and assessments
as required by the Federal Deposit Insurance Corporation. Based on this
assessment, management believes that the Company has complied, in all material
respects, with the designated safety and soundness laws and regulations for the
year ended December 31, 1999.
/s/ THOMAS J. HAMMOND /s/ MARK T. HAMMOND /s/ MICHAEL W. CARRIE
Thomas J. Hammond Mark T. Hammond Michael W. Carrie
Chairman of the Board Vice Chairman Executive Vice President
and Chief Executive Officer and President and Chief Financial Officer
March 21, 2000
12
13
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
SUMMARY OF CONSOLIDATED STATEMENTS OF EARNINGS:
At or for the years ended December 31,
1999 1998 1997 1996(1) 1995
--------------------------------------------------------------------
(In thousands, except share data)
Interest income $238,670 $191,261 $122,752 $76,179 $71,304
Interest expense 173,732 137,187 80,033 45,967 41,443
--------------------------------------------------------------------
Net interest income 64,938 54,074 42,719 30,212 29,861
Provisions for losses 7,296 18,631 5,015 2,604 238
--------------------------------------------------------------------
Net interest income after provisions for losses 57,642 35,443 37,704 27,608 29,623
Other income 81,981 118,413 59,836 58,534 36,988
Operating and administrative expenses 80,430 86,843 62,503 58,820 41,716
--------------------------------------------------------------------
Earnings before federal income tax provision 59,193 67,013 35,037 27,322 24,895
Provision for federal income taxes 20,772 25,950 13,265 10,299 9,419
--------------------------------------------------------------------
Net earnings $ 38,421 $ 41,063 $ 21,772 $17,023 $15,476
====================================================================
Basic earnings per share: $2.83 $3.00 $1.70 $1.51 $1.37
Diluted earnings per share: $2.75 $2.90 $1.68 $1.51 $1.37
Dividends per common share $0.36 $0.28 $0.06 $0.09 $0.18
Dividend payout ratio 12.72% 9.32% 3.77% 5.87% 12.92%
SUMMARY OF CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION:
Total assets $ 4,310,039 $ 3,046,445 $1,901,084 $1,297,226 $1,045,094
Loans receivable 3,808,731 2,558,716 1,655,259 1,110,836 923,933
Mortgage servicing rights 131,831 150,258 83,845 30,064 27,957
Deposits 2,260,963 1,923,370 1,109,933 624,485 526,974
FHLB advances 1,477,000 456,019 482,378 389,801 191,156
Stockholders' equity 185,714 163,852 126,617 78,468 62,445
OTHER FINANCIAL AND STATISTICAL DATA:
Tangible capital ratio 6.76% 6.44% 5.40% 5.58% 5.19%
Core capital ratio 6.80% 6.54% 5.62% 6.01% 5.84%
Total risk-based capital ratio 13.16% 12.93% 11.74% 10.91% 10.12%
Equity-to-assets ratio (at the end of the
period) 4.31% 5.38% 6.66% 6.05% 5.98%
Equity-to-assets ratio (average for the
period) 4.69% 5.03% 6.22% 6.19% 5.54%
Book value per share $14.41 $11.98 $9.26 $6.97 $5.55
Shares outstanding 12,891 13,670 13,670 11,250 11,250
Average shares outstanding 13,559 13,670 12,837 11,250 11,274
Mortgage loans originated or purchased $14,550,258 $18,852,885 $7,873,099 $6,791,665 $5,195,605
Mortgage loans sold $12,854,514 $17,803,958 $7,222,394 $6,581,897 $4,760,806
Mortgage loans serviced for others $ 9,519,926 $11,472,211 $6,412,797 $4,801,581 $6,788,530
Capitalized value of mortgage servicing rights 1.38% 1.31% 1.31% 0.63% 0.41%
Interest rate spread 1.85% 1.85% 2.10% 2.13% 2.36%
Net interest margin 2.02% 2.14% 2.74% 3.07% 3.46%
Return on average assets 1.05% 1.45% 1.29% 1.53% 1.63%
Return on average equity 21.37% 28.77% 20.69% 24.68% 29.42%
Efficiency ratio 53.9% 49.6% 59.7% 64.8% 60.4%
Charge off ratio 0.14% 0.17% 0.20% 0.13% 0.00%
Ratio of allowances to total loans 0.60% 0.78% 0.33% 0.31% 0.23%
Ratio of non-performing assets to total assets 1.47% 1.97% 3.29% 3.16% 1.25%
Ratio of allowance to non-performing loans 54.98% 53.78% 12.41% 11.43% 19.67%
Number of Bank branches 35 28 19 15 13
Number of retail loan origination centers 38 31 35 41 31
Number of correspondent offices 16 15 16 10 9
(1) The 1996 earnings reflect the one time SAIF assessment of $3.4 million ($2.2
million after tax) paid in September 1996. Without this assessment, earnings
would have been $19.2 million and return on average equity, return on
average assets and the efficiency ratio would have been 27.87%, 1.73%, and
61.0%, respectively.
13
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PROFILE AND INTRODUCTION
In 1993, Flagstar Bancorp, Inc. ("Flagstar" or the "Company"), was formed in
order to become the holding company for Flagstar Bank, FSB, a federally
chartered stock savings bank founded in 1987. Flagstar completed an initial
public offering ("IPO") of common stock in May 1997. Since 1994, the Company has
worked to increase its retail banking franchise. Initiated by the acquisition of
Security Savings Bank, F.S.B., the Company has increased its bank branch
locations each year. This growth has been achieved by aggressively developing
the Company's core businesses. This consistent focus on retail and wholesale
mortgage lending, retail deposit gathering, and mortgage loan servicing has
allowed the Company to increase its net interest income and recurring fee
income. The Company's continued focus on information processing technology has
allowed Flagstar to maintain double digit annual growth while keeping control
over operating expenses. As a result, Flagstar has continued to be a highly
profitable company over the years, maintaining high returns for its
stockholders. With $4.3 billion in assets at December 31, 1999, Flagstar is the
largest independent savings institution headquartered in Michigan. Flagstar was
the 18th largest mortgage originators in the United States with $14.6 billion in
mortgage originations during 1999.
RESULTS OF OPERATIONS
Flagstar's net income totaled $38.4 million ($2.75 per share - diluted) for the
year ended December 31, 1999, compared to $41.1 million ($2.90 per
share - diluted) in 1998, and $21.8 million ($1.68 per share - diluted) in 1997.
The 1999 earnings constitute a 6.6% decrease in profitability versus 1998. The
1998 earnings constitute a 88.5% increase in profitability from 1997.
The earnings volatility of the Company is a direct byproduct of the dual
operations of the Company. The Company's operations are broken down into two
distinct business lines: mortgage banking and retail banking. During each of the
successive periods between 1997 and 1999 the retail banking operation has
increased its asset base and has increased its net earnings before tax. During
1999, the retail banking operation produced approximately 2/3 of the pre-tax
earnings of the Company. The retail banking operation also controls
approximately 39% of the identifiable assets of the Company.
The mortgage banking operation which also has had substantial growth in its
revenue generating capabilities is a much more volatile source of earnings.
During 1998, the Company experienced a 199.6% increase in pre-tax earnings only
to have a 58.6% decline in pre-tax earnings the following year. This earnings
fluctuation is in direct contrast to the increasing asset base attributable to
the operation.
During each of the last three years, there has been an increased level of
earnings attributable to net interest income. During 1999 there was a 20.0%
increase and in 1998 there was a 26.7% increase. These increases are
attributable to increases in the amount of average earning assets during each
successive period. This increase in revenue has been offset by the fluctuating
gains recorded on the sales of mortgage loans originated in the mortgage banking
operation. These gain fluctuations are the direct result of similar fluctuations
in the amount of mortgage loan originations.
NET INTEREST INCOME
The level of net interest income reported by the Company is impacted primarily
by the volume of average earning assets, the rate paid to acquire the required
funding for those earning assets, and the general level of interest rates.
During 1999, the Company earned $64.9 million in net interest income, which
represents an increase of 20.0% compared to the amount reported in 1998 and
represented 44.2% of the Company's total revenue in 1999. This increase is
primarily attributable to a $687.1 million, or 27.1%, increase in average
earning assets.
During 1998, the Company earned $54.1 million in net interest income, which
represented an increase of 26.7% compared to the $42.7 million reported in 1997
and 31.4% over 1998 revenue. The 1998 increase was primarily attributable to a
$973.0 million increase in average earning assets.
The Company's net interest spread remained constant at 1.85% during 1999 and
1998. During 1998, the spread had decreased .25% in comparison to the 2.10%
recorded in 1997. The majority of the Company's assets are long term mortgage
loans it has originated and is currently preparing to sell which are being
funded with short term liabilities.
14
15
The Company then sells these mortgage loans upon their conversion to a
mortgage-backed security, usually within 90 days. The yield earned on the
Company's earning assets decreased from 7.87% during 1997 to 7.55% in 1998, and
decreased again in 1999 to 7.41%. The Company's cost of interest-bearing
liabilities decreased from 5.77% in 1997 to 5.70% during 1998, and decreased
again in 1999 to 5.56%.
As the Company's spread has decreased over the last two years so too has the
Company's net interest margin. The margin decreased from 2.74% in 1997 to 2.14%
during 1998, and down to 2.02% in 1999. Each of these decreases were the result
of the decrease in the ratio of earning assets to interest-bearing liabilities.
As the Company has increased its earning asset base, each additional asset is
added with a corresponding paying liability. This method of increasing the asset
base has created marginal assets with an interest margin equal to the prevailing
interest spread which has been less than the reported margins.
Table 1 presents interest income from average earning assets, expressed in
dollars and yields, and interest expense on average interest-bearing
liabilities, expressed in dollars and rates. Interest income from earning assets
includes the amortization of net premiums and the amortization of net deferred
loan origination costs. Non-accruing loans were included in the average loan
amounts outstanding.
TABLE 1
AVERAGE YIELDS EARNED AND RATES PAID
For the years ended December 31,
------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------------------
(In Thousands)
INTEREST-EARNING ASSETS:
Loans receivable, net $3,146,798 $233,188 7.41% $2,478,955 $187,124 7.55% $1,526,873 $120,214 7.87%
FHLB stock 60,700 4,858 8.00 49,970 4,000 8.00 30,685 2,471 8.05
Other 11,390 624 5.48 2,851 137 4.81 1,238 67 5.41
--------------------- --------------------- ---------------------
Total 3,218,888 $238,670 7.41% 2,531,776 $191,261 7.55% 1,558,796 $122,752 7.87%
Other assets 436,890 306,904 133,963
---------- ---------- ----------
Total assets $3,655,778 $2,838,680 $1,692,759
========== ========== ==========
INTEREST-BEARING
LIABILITIES:
Deposits $2,099,319 $112,493 5.36% $1,452,325 $ 82,452 5.68% $ 878,064 $ 50,143 5.71%
FHLB advances 889,363 49,136 5.52 833,944 48,332 5.80 480,062 28,709 5.98
Other 135,216 12,103 8.95 119,250 6,403 5.37 28,671 1,181 4.12
--------------------- --------------------- ---------------------
Total interest-bearing
liabilities 3,123,898 $173,732 5.56% 2,405,519 $137,187 5.70% 1,386,797 $ 80,033 5.77%
Other liabilities 352,055 290,442 200,721
Stockholders equity 179,825 142,720 105,241
---------- ---------- ----------
Total liabilities and
Stockholders equity $3,655,778 $2,838,680 $1,692,759
========== ========== ==========
Net interest-earning assets $ 94,990 $ 126,257 $ 171,999
========== -------- ========== -------- ========== --------
Net interest income $ 64,938 $ 54,074 $ 42,719
======== ---- ======== ---- ======== ----
Interest rate spread 1.85% 1.85% 2.10%
==== ==== ====
Net interest margin 2.02% 2.14% 2.74%
==== ==== ====
Ratio of average
interest-earning assets to
interest-bearing
liabilities 103% 105% 112%
==== ==== ====
15
16
Table 2 presents the dollar amount of changes in interest income and interest
expense for the components of earning assets and interest-bearing liabilities
which are presented in Table 1. Table 2 distinguishes between the changes
related to average outstanding balances (changes in volume while holding the
initial rate constant) and the changes related to average interest rates
(changes in average rates while holding the initial balance constant).
TABLE 2
RATE/VOLUME ANALYSIS
For the years ended December 31,
----------------------------------------------------------------------
1999 versus 1998 1998 versus 1997
Increase (Decrease) Increase (Decrease)
Due To: Due To:
Volume Rate Total Volume Rate Total
-------------------------------- --------------------------------
(In Millions)
EARNING ASSETS:
Loans receivable, net $50.4 $(4.3) $46.1 $74.9 $(8.0) $66.9
FHLB stock 0.9 0.0 0.9 1.5 0.0 1.5
Other 0.4 0.0 0.4 0.1 0.0 0.1
-------------------------------- --------------------------------
Total $51.7 $(4.3) $47.4 $76.5 $(8.0) $68.5
INTEREST-BEARING LIABILITIES:
Deposits $36.7 $(6.7) $30.0 $32.8 $(0.5) $32.3
FHLB advances 3.2 (2.4) 0.8 21.2 (1.5) 19.7
Other 0.9 4.8 5.7 3.6 1.5 5.1
-------------------------------- --------------------------------
Total $40.8 $(4.3) $36.5 $57.6 $(0.5) $57.1
-------------------------------- --------------------------------
Change in net interest income $10.9 $(0.0) $10.9 $18.9 $(7.5) $11.4
================================ ================================
NON-INTEREST INCOME
Flagstar's non-interest income totaled $82.0 million for the year ended December
31, 1999, compared to $118.4 million in 1998 and $59.8 million in 1997. The 1999
results constitute a 30.7% decrease over 1998 and the 1998 results reflect a
98.0% increase over 1997.
LOAN ADMINISTRATION
The Company's loan servicing operation produced fee income from loans serviced
for others of $19.9 million for the year ended December 31, 1999, compared to
negative net fees of $2.5 million recorded in 1998 and $6.1 million recorded in
1997. The volatility in this revenue source was the result of the changes in the
levels of prepayment induced amortization recorded on the mortgage servicing
rights portfolio ( "MSR" ) and the changes in the average volume of loans
serviced for others during the respective periods.
During 1999, the volume of loans serviced for others averaged $11.0 billion, a
17.0% increase over the 1998 average servicing portfolio of $9.4 billion, and a
129.2% increase over the average servicing portfolio of $4.8 billion serviced
during 1997. During 1999, the Company recorded $36.4 million, or 33 basis points
(0.33%) in fee revenue versus $29.9 million recorded in 1998, and $16.6 million
recorded in 1997. The fee revenue recorded in 1999 was offset by $16.5 million
of MSR amortization. The Company recorded $32.4 million and $10.5 million of MSR
amortization during 1998 and 1997, respectively.
NET GAIN ON LOAN SALES
Net gains on loan sales totaled $38.7 million, $110.7 million and $21.8 million
for the years ended December 31, 1999, 1998 and 1997, respectively. The amount
of net gain recorded in any one period is directly affected by the amount of
loans sold and the profit spread achieved.
During 1999, the volume of loans sold totaled $12.9 billion, a 27.5% decrease
from 1998 loan sales of $17.8 billion, and a 79.2% increase over 1997 loan sales
of $7.2 billion. During 1999 the Company received an average 0.30% in
16
17
NON-INTEREST INCOME (CONTINUED)
gain versus 0.62% recorded in 1998, and 0.30% recorded in 1997. This volatility
in gains spread is attributable to market pricing which changes with demand and
the general level of interest rates. As the volume of acquirable loans increase
in a lower or falling interest rate environment, the Company is able to achieve
higher spreads on the eventual sale of the acquired loans. In contrast when
interest rates rise, the volume of acquirable loans decreases and the Company is
required to pay more to acquire loans. The Company is then left with a smaller
profit margin.
NET GAIN ON MORTGAGE SERVICING RIGHTS
For 1999, the net gain on the sale of MSR totaled $9.0 million. The 1999 gain
was a $5.2 million increase from the $3.8 million recorded in 1998, and a $18.1
million decrease from the $27.1 million recorded in 1996. The 1999 gain was
.068% of the underlying loans sold versus .035% in 1998, and .630% in 1997. The
gain on sale of mortgage servicing rights recorded is directly affected by the
amount of loan servicing rights sold and the profit spread achieved.
During 1999, the volume of MSR sold totaled $13.2 billion, a 21.1% increase over
1998 MSR sales of $10.9 billion, and a 207.0% increase over 1997 MSR sales of
$4.3 billion. During 1999 and 1998, the Company sold predominantly newly
originated MSR, which had a book value more closely approximating the current
market value of the MSR sold. In 1997, the Company sold some newly originated
MSR, but also sold seasoned MSR which had a book value substantially lower than
the sales price of the MSR. Any MSR that was created from a mortgage loan
originated through the Company's retail production channel prior to May 1995 did
not have a carrying value on the books and records of the Company. The majority
of the remainder of the non-valued MSR's were sold in 1997.
The Company sold $692.2 million, $887.1 million and $86.4 million of servicing
released sales of loans during 1997, 1998, and 1999, respectively. The Company
sold $3.6 billion, $10.0 billion, and $2.5 billion of bulk servicing sales
during 1997, 1998, 1999, respectively. The Company during 1999 sold $10.6
billion of flow servicing.
OTHER FEES AND CHARGES
Other fees and charges, which include certain loan fees, deposit-related fees,
and escrow waiver fees totaled $14.4 million, $6.4 million, and $4.8 million in
1999, 1998, and 1997, respectively. In each period the total fees recorded were
affected by the production volume of loans originated that were not classified
as residential mortgage loans and the size of the retail deposit portfolio. The
large increase in volume during 1999 was attributable to the recognition of fees
generated from the commercial lending division from loan originations.
NON-INTEREST EXPENSE
Operating expenses, before the capitalization of direct costs of loan closings,
totaled $144.5 million, $151.6 million, and $99.9 million for the years ended
December 31, 1999, 1998, and 1997, respectively. The 4.7% decrease in overhead
expense items in 1999 versus 1998 and the 51.7% increase in expenses between
1998 versus 1997 were due to general increases in the price levels for goods and
services, mortgage loan origination volume levels, and the growth of the retail
banking operation.
During 1999, Flagstar opened 7 bank branches, bringing the branch network total
to 35. As the Company shifts its funding sources to more retail in nature and
increases the size of the branch network, management expects that the operating
expenses associated with the branch network will continue to increase while the
cost of funds will begin to decrease.
The Company's gross compensation and benefits expense, before the capitalization
of direct costs of loan closings, totaled $61.4 million, $55.2 million, and
$42.1 million for the years ended December 31, 1999, 1998, and 1997,
respectively. The 11.2% increase in 1999 is primarily attributable to normal
salary increases, the employees hired at the new bank branches, offset by the
decrease in employees employed to accommodate the Company's mortgage loan
production. Total Company staffing decreased by 48, or 2.9%, full-time
equivalents at December 31, 1999, versus December 31, 1998.
Commission expense, which is a variable cost associated with mortgage loan
production, totaled $28.1 million, $28.5 million, and $14.2 million during the
years ended December 31, 1999, 1998, and 1996, respectively.
17
18
NON-INTEREST EXPENSE (CONTINUED)
Commission expense totaled .19%, .15%, and .18% of total mortgage production in
1999, 1998, and 1997, respectively.
Occupancy and equipment expense totaled $21.0 million, $16.0 million, and $12.8
million during the years ended December 31, 1999, 1998, and 1997, respectively.
The continued increase in this expense category is reflective of the expansion
undertaken in the Company's deposit branch network, along with the Company's
continuing investment in computer technology.
Advertising expense, which totaled $3.2 million during the year ended December
31, 1999, increased $.9 million, or 39.1%, over the $2.3 million of expense
incurred during the prior year. Advertising expense totaled $1.6 million in
1997. The continued increase in this expense category is reflective of the
expansion undertaken in the Company deposit branch network.
The Company's FDIC premiums increased by $0.5 million, to $1.3 million during
1999 compared to $.8 million in 1998, and $0.5 million during 1996. In each
successive year, Flagstar has paid higher insurance premiums due to its
increased deposit base.
Other expense is a collection of non-specific expenses incurred during the
respective years. Other expense totaled $28.2 million, $47.5 million, and $27.3
million during the years ended December 31, 1999, 1998, and 1997, respectively.
The fluctuation in this expense category is reflective of the varied levels of
mortgage production, the expansion undertaken in the Company deposit branch
network, the increased costs associated with the enlarged real estate owned
portfolio, the increased amount of loans pending foreclosure, and the increased
amount of loans in a delinquency status.
TABLE 3
NON-INTEREST EXPENSES
For the years ended December 31,
1999 1998 1997
------------------------------------
(In Thousands)
Compensation and benefits $ 61,430 $ 55,170 $ 42,132
Commissions 28,122 28,459 14,231
Occupancy and equipment 20,966 15,964 12,810
Advertising 3,172 2,303 1,637
Core deposit amortization 1,289 1,290 1,290
Federal insurance premium 1,302 837 477
Other 28,198 47,530 27,305
------------------------------------
Total 144,479 151,553 99,882
Less: capitalized direct costs of loan
closings (64,049) (64,710) (37,379)
------------------------------------
Total, net $ 80,430 $ 86,843 $ 62,503
====================================
Efficiency ratio(1) 53.9% 49.6% 59.7%
(1) Total operating and administrative expenses (excluding the
amortization of the core deposit premium) divided by the sum of net
interest income and non-interest income.
In accordance with generally accepted accounting principles, certain loan
origination costs are capitalized and added as an adjustment of the basis of the
individual loans originated. These cost are amortized as an adjustment of the
loan yield over the life of the loan or expensed when the loan is sold.
Accordingly, during 1999 Flagstar deferred $64.0 million of loan origination
costs, while during 1998 and 1997 such deferred expenses totaled $64.7 million
and $37.4 million, respectively. On a per loan basis, the cost deferral totaled
$552.00, $431.00, and $541.00 during 1999, 1998, and 1997, respectively. The
decrease in the cost per loan recorded in 1998 reflects the efficiencies created
when volumes increase substantially. The 1999 and 1998 numbers are also affected
by inflationary increases and the increased costs associated with the Company's
shift to correspondent funding versus wholesale funding which was the
predominant lending channel in 1996. Refer to Page 3 and 4, "Lending Activities,
Mortgage Loans", herein for further discussion of the Company's origination
channels.
18
19
FEDERAL INCOME TAXES
For the year ended December 31, 1999, the Company's provision for federal income
taxes as a percentage of pretax earnings was 35.1%, compared to 38.7% in 1998
and 37.9% in 1997. For all periods presented in the Consolidated Statements of
Earnings, the provision for federal income taxes varies from statutory rates
primarily because of the non-deductibility of the core deposit amortization and
other non-deductible corporate expenses. Refer to Note 11 of the Notes to the
Consolidated Financial Statements, in Item 8. Financial Statements and
Supplementary Data, herein for further discussion of the Company's federal
income taxes.
FINANCIAL CONDITION
The Company's assets totaled $4.3 billion at December 31, 1999, reflecting an
increase of $1.3 billion over December 31, 1998. Loans receivable, net increased
$1.2 billion, reflecting the relatively small increase in the amount of recent
residential mortgage loan production held on the Company's books that is pending
sale and the substantial increase in loans held for investment. During 1999,
mortgage loan originations totaled $14.6 billion, compared to a corporate record
$18.8 billion in 1998, and $7.9 billion in 1997. Table 4, 5, 6 and 7 set forth
the Company's loan portfolio and the activity within the different loan
categories, for the past five years.
TABLE 4
LOAN PORTFOLIO SCHEDULE
At December 31,
DESCRIPTION: 1999 1998 1997 1996 1995
----------------------------------------------------------------
(In Thousands)
Mortgage loans available for sale $2,230,381 $1,831,531 $1,197,152 $ 840,767 $620,455
Loans held for investment:
Mortgage loans 1,169,781 321,271 266,349 104,660 176,322
Second mortgage loans 145,075 43,196 15,875 16,264 1,924
Commercial real estate loans 143,652 80,858 31,751 13,565 30,504
Construction loans 46,838 34,367 35,373 59,270 48,933
Warehouse lending 46,222 235,693 77,545 41,767 4,024
Consumer loans 42,758 28,199 34,004 33,608 39,331
Commercial loans 7,024 3,601 2,710 4,435 4,542
----------------------------------------------------------------
Total loans held for investment 1,601,350 747,185 463,607 273,569 305,580
Allowance for losses (23,000) (20,000) (5,500) (3,500) (2,102)
----------------------------------------------------------------
Total loans receivable (net) $3,808,731 $2,558,716 $1,655,259 $1,110,836 $923,933
================================================================
19
20
FINANCIAL CONDITION (CONTINUED)
TABLE 5
LOANS AVAILABLE FOR SALE ACTIVITY SCHEDULE
For the years ended December 31,
DESCRIPTION: 1999 1998 1997 1996 1995
------------------------------------------------------------------
(In Thousands)
Beginning mortgage loans available for
sale $1,831,531 $1,197,152 $ 840,767 $ 620,455 $ 205,480
Mortgage loans originated, net 14,695,761 19,041,414 7,950,098 6,850,277 5,251,510
Mortgage loans repurchased 30,889 32,337 58,516 54,788 4,477
Mortgage loans transferred from held
for investment -- -- -- -- 185,111
Mortgage loans sold servicing retained,
net 12,895,786 17,081,172 6,559,893 5,651,216 4,239,777
Mortgage loans sold servicing released,
net 86,409 891,907 736,235 948,352 540,421
Mortgage loan amortization /
prepayments 432,932 319,060 273,969 74,683 244,144
Mortgage loans transferred to held for
investment, net 912,673 147,233 82,132 10,502 1,781
------------------------------------------------------------------
Ending mortgage loans available for
sale $2,230,381 $1,831,531 $1,197,152 $ 840,767 $ 620,455
==================================================================
TABLE 6
LOANS HELD FOR INVESTMENT ACTIVITY SCHEDULE
For the years ended December 31,
DESCRIPTION: 1999 1998 1997 1996 1995
------------------------------------------------------------------
(In Thousands)
Beginning loans held for investment $ 747,185 $ 463,607 $ 273,569 $ 305,580 $ 429,800
Loans originated 354,277 176,816 127,576 129,436 162,137
Increase in lines of credit 100,370 148,880 38,859 -- --
Loans transferred from available for
sale 912,673 147,233 82,132 10,502 1,781
Loan amortization / prepayments 495,906 170,534 43,239 161,372 101,246
Loans transferred to available for sale -- -- -- -- 185,111
Loans transferred to repossessed assets 17,249 18,817 15,290 10,577 1,781
------------------------------------------------------------------
Ending loans held for investment $1,601,350 $ 747,185 $ 463,607 $ 273,569 $ 305,580
==================================================================
TABLE 7
LOANS SERVICED FOR OTHERS ACTIVITY SCHEDULE
For the years ended December 31,
DESCRIPTION: 1999 1998 1997 1996 1995
--------------------------------------------------------------------
(In Thousands)
Beginning loans serviced for others $11,472,211 $ 6,412,797 $4,801,581 $6,788,530 $5,691,421
Loans servicing originated 12,768,105 16,912,051 6,530,243 5,633,545 4,220,385
Loan servicing amortization /
prepayments 1,561,766 1,807,014 1,283,336 1,146,564 851,188
Loans servicing sales 13,158,624 10,045,623 3,635,691 6,473,930 2,272,088
--------------------------------------------------------------------
Ending loans serviced for others $ 9,519,926 $11,472,211 $6,412,797 $4,801,581 $6,788,530
====================================================================
LOANS RECEIVABLE. Mortgage loans available for sale and mortgage loans held for
investment increased, in the aggregate, $1.2 billion from $2.2 billion at
December 31, 1998 to $3.4 billion at December 31, 1999. Mortgage loans available
for sale increased $398.9 million, or 21.8%, to $2.2 billion at December 31,
1999, from $1.8 billion at December 31, 1998. Loans held for investment
increased $854.2 million, or 114.3%, from $747.2 million at December 31, 1998 to
$1.6 billion at December 31, 1999. In each case management retained more loans
to maximize the earnings power available because of the leverage available to
the Company.
20
21
FINANCIAL CONDITION (CONTINUED)
ALLOWANCE FOR LOSSES. The allowance for losses totaled $23.0 million at December
31, 1999, an increase of $3.0 million, or 15.0%, from $20.0 million at December
31, 1998. The allowance for losses as a percentage of non-performing loans was
54.9% and 53.8% at December 31, 1999 and 1998, respectively. The Company's non-
performing loans totaled $41.8 million and $37.2 million at December 31, 1999
and 1998, respectively, and, as a percentage of total loans, were 1.09% and
1.45% at December 31, 1999 and 1998, respectively.
The increase in the allowance for losses in 1999 compared to 1998 was based upon
management's assessment of relevant factors, including the types and amounts of
non-performing loans, the continued increase in the amount of historical charge
offs and anticipated loss experience on such types of loans, and the current and
projected economic conditions. Additionally, the allowance was increased to
compensate for the substantial increase in the amount of total loans outstanding
and the amount of loans which have been sold to the secondary market. The
Company is liable for certain representations and warranties made in regards to
the sold loans. See Asset Quality on page 26 and Tables 10 through 13 for
additional information on the Company's provision for losses, loan loss
allowance, and non-performing loans.
FHLB STOCK. Holdings of FHLB stock increased from $57.8 million at December 31,
1998 to $79.9 million at December 31, 1999. This increase was required to
accommodate the Company's increase in FHLB advances used to fund the increase in
the mortgage loan portfolio. As a member of the FHLB, the Company is required to
hold shares of FHLB stock in an amount at least equal to 1% of the aggregate
unpaid principal balance of its mortgage loans, home purchase contracts and
similar obligations at the beginning of each year, or 1/20th of its FHLB
advances, whichever is greater.
PREMISES AND EQUIPMENT. Premises and equipment, net of accumulated depreciation,
totaled $47.0 million at December 31, 1999, an increase of $15.9 million, or
51.1%, from $31.1 million at December 31, 1998. This increase reflects the
Company's investment in technology, along with the expansion of the bank
branches. During 1999, the Company began construction of a new headquarters
facility located in Troy, Michigan. The estimated construction cost for this
facility totals $30.0 million with an estimated completion date in Fall 2000. At
December 31, 1999, the Company has capitalized approximately $8.4 million for
the new building.
MORTGAGE SERVICING RIGHTS. Mortgage servicing rights ("MSR") totaled $131.8
million at December 31, 1999, a decrease of $18.5 million, from $150.3 million
at December 31, 1998. For the year ended December 31, 1999, $12.8 billion of
loans underlying mortgage servicing rights were originated and purchased, and
$14.8 billion were reduced through sales, prepayments, and amortization
resulting in a net decrease in mortgage loans serviced for others of $2.0
billion from $11.5 billion to $9.5 billion at December 31, 1999. The book value
of the portfolio at December 31, 1999 is 1.38% versus 1.31% at December 31,
1998. The increase in the percentage value of the portfolio is indicative of the
increase in the amount of MSR that is fixed rate and salable under the current
flow contract. Refer to Note 7 of the Notes to the Consolidated Financial
Statements, in Item 8. Financial Statements and Supplementary Data, herein for
further discussion of the Company's MSR.
OTHER ASSETS. Other assets decreased $48.4 million, or 38.9%, to $76.0 million
at December 31, 1999, from $124.4 million at December 31, 1998. The majority of
this decrease was attributable to the receipt of receivables recorded in
conjunction with $4.7 billion in MSR sales which transacted on December 31,
1998. Upon the sale of MSR, 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. This
recorded receivable is typically cleared within a six month time frame.
LIABILITIES. The Company's total liabilities increased $1.2 billion, or 41.4%,
to $4.1 billion at December 31, 1999, from $2.9 billion at December 31, 1998.
This increase was attributable to the substantial increase in interest bearing
liabilities.
DEPOSITS. Deposit accounts increased $337.6 million, or 17.8%, to $2.3 billion
at December 31, 1999, from $1.9 billion at December 31, 1998. This increase
reflects the Company's deposit growth strategy through its retail branch network
and its aggressive pricing strategy. The number of bank branches increased from
28 at December 31, 1998 to 35 at December 31, 1999. The Company's aggressive
pricing strategy attracts one-year certificates of deposit and brokered funds.
The Company relies upon both its retail customer base and nationwide
21
22
FINANCIAL CONDITION (CONTINUED)
advertising of its deposit rates to attract deposits. At December 31, 1999, the
Company's certificates of deposit totaled $1.8 billion, with an average balance
of $44,624 and a weighted average cost of 5.74%. Of such amount, approximately
$967.8 million were brokered deposits with a weighted average cost of 5.72%.
FHLB ADVANCES. FHLB advances increased $1.0 billion, or 219.3%, to $1.5 billion
at December 31, 1999, from $456.0 million at December 31, 1998. The Company
relies upon such advances as a source of funding for the origination or purchase
of loans for sale in the secondary market. The outstanding balance of FHLB
advances fluctuates from time to time depending upon the Company's current
inventory of loans available for sale and the availability of lower cost funding
from its retail deposit base and its escrow accounts. The average outstanding
balance of advances from the FHLB totaled $889.3 million and $833.9 million
during 1999 and 1998, respectively.
LONG TERM DEBT. On April 27, 1999, the Company through its subsidiary Trust,
completed the sale of 2.99 million shares of preferred securities, providing
gross proceeds totaling $74.8 million. The securities pay interest at a rate of
9.50% per annum. The securities are traded on the Nasdaq Stock Market under the
symbol "FLGSO". The Company then issued to Trust junior subordinated debentures
totaling $74.8 million. The debentures pay interest at 9.5% per annum.
UNDISBURSED PAYMENTS. Undisbursed payments on loans serviced for others
decreased $115.3 million, or 62.5%, to $69.2 million at December 31, 1999, from
$184.5 million at December 31, 1998. The month-end average amount of these funds
was $94.6 million and $97.6 million during 1999 and 1998, respectively. These
amounts represent payments received from borrowers for interest, principal and
related loan charges, which have not been remitted to loan investors. These
balances fluctuate with the size of the servicing portfolio and increase during
a time of high payoff or refinance volume. Loans serviced for others at December
31, 1999 including subservicing equaled $12.8 billion versus $18.9 billion at
December 31, 1998.
ESCROW ACCOUNTS. The amount of funds in escrow accounts decreased $29.2 million,
or 27.9%, to $75.3 million at December 31, 1999, from $104.5 million at December
31, 1998. The average of the month end balances in these accounts was $109.6
million and $81.3 million during 1999 and 1998, 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 amount loans serviced and also depend upon the
scheduled payment dates for the related expenses. Total residential mortgage
loans serviced at December 31, 1999 equaled $16.2 billion versus $21.0 billion
at December 31, 1998.
LIABILITY FOR CHECKS ISSUED. The liability for checks issued decreased $35.2
million, or 53.7%, to $30.4 million at December 31, 1999, from $65.6 million at
December 31, 1998. This liability reflects the outstanding amount of checks the
Company has written in conjunction with acquiring mortgage loans. This account
grows or contracts in conjunction with the amount of loans that are in the
Company's mortgage pipeline.
FEDERAL INCOME TAXES PAYABLE. Federal income taxes payable increased $0.9
million, or 1.8%, to $50.2 million at December 31, 1999, from $49.3 million at
December 31, 1998. See Note 11 of Notes to the Consolidated Financial
Statements.
OTHER LIABILITIES. Other liabilities decreased $12.0 million, or 14.5%, to $70.7
million at December 31, 1999, from $82.7 million at December 31, 1998. The
decrease at December 31, 1999 was caused by a decrease in accrued payables which
relate to the origination and sale of residential mortgage loans.
22
23
SEGMENT REPORTING
RETAIL BANKING OPERATIONS
The Company provides a full range of Banking services to consumers and small
businesses in southern Michigan. The Company operates a network of 35 bank
branches. Throughout 1999, the Company has focused on expanding its branch
network in these markets in order to increase its access to retail deposit
funding sources. This provides cross-marketing opportunities of consumer banking
services to the Company's mortgage customers in Michigan.
In each successive period the Retail Banking Operation has expanded its asset
base through loan origination and deposit portfolio expansion along with fixed
asset acquisition or de novo branch openings. The result has been that each year
revenues and the pre-tax earnings of this operation increase. During 1999 and
1998, revenues increased 62.1% and 16.4%, respectively, while pre-tax earnings
increased 98.7% and 3.4%, respectively. The major cause of the large increase in
pre-tax earnings is the increase in the amount of mature branches in operation
in 1999. Further expansion of this source of recurring earnings is expected to
continue with the planned expansion of the deposit branch network.
MORTGAGE BANKING OPERATIONS
Flagstar's mortgage banking activity consists of the origination of mortgage
loans or the purchase of mortgage loans from the originating lender. Flagstar
conducts the wholesale portion of its mortgage banking operation through a
network of correspondent lenders consisting of banks, thrifts, mortgage
companies, and mortgage brokers. This mortgage banking network conducts mortgage
lending operations nationwide. These mortgage loans, the majority of which are
subsequently sold in the secondary mortgage market, conform to the underwriting
standards of FHLMC, FNMA, or GNMA
The earnings volatility inherent in the Mortgage Banking Operation is visually
apparent in the revenues and pre-tax earnings of the operation shown below. The
results shows that during 1999 and 1998, revenues decreased 34.5% and increased
89.8%, respectively, while pre-tax earnings decreased 58.6% and increased
199.6%, respectively. The major cause of these large swings is the mortgage loan
production completed during the period. The future earnings of this operation is
fully dependant on production volume and the interest rate environment.
The following tables present certain financial information concerning the
results of operations of Flagstar's retail banking and mortgage banking
operation. See Note 17 of Notes to the Consolidated Financial Statements.
TABLE 8A
RETAIL BANKING OPERATIONS
At or for the years ended December 31,
1999 1998 1997
--------------------------------------------
(In Thousands)
Revenues $ 56,972 $ 35,144 $ 30,202
Earnings before taxes 39,736 19,994 19,341
Identifiable assets 1,670,121 969,485 564,551
TABLE 8B
MORTGAGE BANKING OPERATIONS
At or for the years ended December 31,
1999 1998 1997
------------------------------------------
(In Thousands)
Revenues $ 89,947 $ 137,343 $ 72,353
Earnings before taxes 19,457 47,019 15,696
Identifiable assets 2,852,240 2,260,045 1,463,288
23
24
ASSET AND LIABILITY MANAGEMENT
Flagstar considers that its primary business objective is to provide
shareholders the highest return possible on their investment while maintaining a
certain risk posture. This objective includes the management of credit risk and
interest rate risk.
Interest rate risk generally refers to the potential volatility in net interest
income resulting from changes in interest rates. Flagstar's interest rate risk
management focuses on interest rate sensitivity through the use of simulation
models, in an attempt to measure and project the potential effects of various
market interest-rate scenarios on the Company's balance sheet. In accordance
with the below analysis, Flagstar will record higher levels of net interest
income in a falling interest rate environment and will experience declining net
interest income during periods of rising interest rates. This happens because
the Company's liabilities reprice or mature faster than the majority of the
Company's assets will reset, mature or are sold to the secondary market.
Any difference between the amount of assets and liabilities repricing or
maturing within one year is referred to as the "one-year repricing gap." A
positive one-year repricing gap indicates that more assets reprice than
liabilities. Conversely, a negative one-year repricing gap indicates that more
liabilities reprice than assets. The Company's one-year repricing gap stood at a
negative $239 million, or -5.54% of total assets at December 31, 1999.(See Table
9 - Asset/Liability Repricing Schedule, December 31, 1999).
While gap analysis is the most commonly used indicator of interest rate risk in
the savings and loan industry, there is no single interest rate risk measurement
system that takes into consideration all of the factors which influence the net
interest margin. Other significant factors which impact reported net interest
margins include changes in the shape of the U.S. Treasury yield curve, the
volume and composition of loan originations, and the repayment rates on loans.
Table 9 sets forth the repricing of the Company's earning assets and
interest-bearing liabilities at December 31, 1999, based on the interest rate
scenario at that date. The principal amounts of each asset and liability are
shown in the period in which they are anticipated to mature or reprice. Based on
available published statistics, average prepayment rates with respect to
mortgage loans have been estimated at 10.03%. The decay rate used for savings
accounts was 15%.
TABLE 9
ASSET/LIABILITY REPRICING SCHEDULE
Maturing/Repricing In: FMV
2000 2001 2002 2003 2004 Thereafter Total Rate Total
--------------------------------------------------------------------------
(In Millions)
EARNING ASSETS:
Mortgage loans available for
sale $1,052 $ 177 $ 134 $108 $143 $ 616 $2,230 7.73% $2,233
Loans held for investment 1,014 35 31 30 50 419 1,579 8.15 1,581
Other earning assets 80 -- -- -- -- -- 80 8.00 80
---------------------------------------------------------- ------
Total $2,146 $ 212 $ 165 $138 $193 $1,035 $3,889 7.87% $3,894
INTEREST-BEARING LIABILITIES:
Deposits $1,292 $ 394 $ 201 203 $ 37 $ 134 $2,261 5.44% $2,247
FHLB advances 1,377 -- 100 -- -- -- 1,477 5.25 1,468
Long term debt -- -- -- -- 75 -- 75 9.50 61
---------------------------------------------------------- ------
Total $2,669 $ 394 $ 301 $203 $112 $ 134 $3,813 5.44% $3,716
OFF-BALANCE SHEET:
Commitment to sell loans $ 564 $ (5) $ (7) $ (7) $ (8) $ (537) (7)
Commitment to originate loans (280) 2 19 4 5 250 8
-------------------------------------------------
Total $ 284 $ (3) $ 12 $ (3) $ (3) $ (287)
----
Interest rate spread 2.43%
====
Excess (Deficiency) of
Earning assets over (to)
----------------------------------------------------------
Interest-bearing liabilities $ (239) $(185) $(124) $(68) $ 78 $ 614 $ 76(1)
==========================================================
(1) The excess of earning assets over paying liabilities has the effect of
increasing the indicated spread by .10%.
24
25
ASSET QUALITY
The Company has consistently maintained a conservative posture with respect to
credit risk. Mortgage lending, the Company's primary lending focus, has
historically resulted in minimal charge-offs when viewed as a percent of the
Company's origination volume. At December 31, 1999, approximately 87.4% of the
Company's earning assets consisted of mortgage loans.
The credit quality of the Company's commercial, consumer, and commercial real
estate loan portfolio, which in the aggregate comprise only 11.1% of earning
assets at December 31, 1999, remains good. During the past three years, the
Company has emphasized commercial real estate lending in our retail market area
and second mortgage lending as an add-on to the Company's national mortgage
lending platform. Management plans to increase the size of these loan
portfolios. Management expects to achieve this growth with adherence to sound
underwriting and credit standards.
Management believes, the Company's level of non-performing assets, which totaled
$63.2 million at December 31, 1999, continues to represent an acceptable level
of credit risk for Flagstar. The Company, in accordance with applicable
disclosure requirements, defines an asset as non-performing if it meets any of
the following criteria: 1) a loan more than 90 days past due; 2) real estate
acquired in a settlement of a loan; or 3) a restructured loan whose terms have
been modified due to the borrower's inability to pay as contractually specified
including loans the Company has classified as impaired. Loans are generally
placed into non-accrual status when they become 90 days delinquent. Gross
interest income of approximately $4.0 million, $3.9 million and $4.8 million
would have been recorded in 1999, 1998, and 1997, respectively, on non-accrual
loans if the loans had performed in accordance with their original terms.
TABLE 10
NON-PERFORMING ASSETS
At December 31,
1999 1998 1997 1996 1995
-----------------------------------------------------------
(In Thousands)
Non-accrual loans $41,836 $37,190 $44,329 $30,621 $10,686
Real estate and other repossessed assets 21,364 22,966 18,262 10,363 2,359
-----------------------------------------------------------
Total non-performing assets 63,200 60,156 62,591 40,984 13,045
Less allowance for losses (23,000) (20,000) (5,500) (3,500) (2,102)
-----------------------------------------------------------
Total non-performing assets (net of allowances) $40,200 $40,156 $57,091 $37,484 $10,943
===========================================================
Ratio of non-performing assets to total assets 1.47% 1.97% 3.29% 3.16% 1.25%
Ratio of non-performing loans to total loans 1.09% 1.44% 2.67% 2.75% 1.15%
Ratio of allowances to non-performing loans 54.98% 53.78% 12.41% 11.43% 19.67%
Ratio of allowances to total loans 0.60% 0.78% 0.33% 0.31% 0.23%
Ratio of net charge-offs to average loans 0.14% 0.17% 0.20% 0.13% 0.00%
The Company's 1999 year-end ratio of non-performing assets to total assets was
1.47%. The adequacy of the allowance for losses is evaluated regularly and is
based upon judgements concerning the amount of risk inherent in the Company's
portfolio. At December 31, 1999, $40.4 million, or 96.7% of total non-performing
loans were secured by residential real estate.
During 1999, the Company recorded a provision for losses of $3.0 million, this
increased the allowance for losses to $23.0 million. Management recorded this
additional allowance in order to compensate for the $1.3 billion, or 48.9%
increase in loans receivable and the substantial increase in the amount of loans
that the Company has sold to the secondary market. Generally, for loans sold to
the secondary market, the Company is responsible for certain representations and
warranties regarding the adherence to underwriting and loan program guidelines.
At December 31, 1999, the Company had sold $49.2 billion in loans to the
secondary market over the previous 60 months. This volume of loan sales is $9.3
billion, or 23.3%, larger than the $39.9 billion sold in the sixty months
preceding December 31, 1998. Although all of the loans were sold on a
non-recourse basis, the Company
25
26
ASSET QUALITY (CONTINUED)
repurchased $30.9 million, $32.3 million, and $58.5 million in mortgage loans
from secondary market investors during 1999, 1998, and 1997, respectively. These
loans were required to be repurchased because of their delinquent status and /
or their non-compliance with the underwriting or loan program guidelines that
they were initially sold under. The predominance of the charge-offs recorded by
the Company ($4.3 million, $4.1 million, and $3.0 million in 1999, 1998, and
1997, respectively) were primarily attributed to loans originated within the
prior sixty month period, repurchased from secondary market investors,
foreclosed on, and disposed of at a loss.
The allowances that have been recorded are dependent upon estimates and
appraisals and the possibility exists that changes in these assumptions might be
required because of changing economic conditions. See Tables 10 through 13 for
additional information on the Company's loan loss allowance and non-performing
loans. Also refer to Notes 1 and 4 of Notes to Consolidated Financial Statements
in Item 8. Financial Statements and Supplementary Data, herein for further
discussion of the Company's policies regarding provisions for losses and
allowances for uncollected interest.
TABLE 11
NON-ACCRUAL LOANS AT DECEMBER 31, 1999
As a % of As a % of
Loan Portfolio Non-performing Loan Portfolio Non-performing
Balance Loan Balance Balance Loans
-----------------------------------------------------------------
(In Thousands)
One- to four-family $3,400,162 $ 40,244 1.18% 96.19%
Second mortgages 145,075 134 .09 0.32
Commercial real estate 143,652 8 .01 0.02
Construction 46,838 1,060 2.26 2.53
Warehouse lending 46,222 350 0.76 0.84
Consumer 42,758 40 0.09 0.10
Commercial 7,024 -- -- --
-----------------------------------------------------------------
Total loans 3,831,731 41,836 1.09% 100.00%
Less allowances for losses (23,000) (23,000)
-------------------------------
Total loans (net of allowances) $3,808,731 $ 18,836
===============================
TABLE 12
ALLOCATION OF THE ALLOWANCE FOR LOSSES
At December 31,
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
---------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Mortgage loans:
Available for sale $5,000 58.7% $5,000 71.1% $1,500 72.1% $1,000 75.4% $ 248 67.0%
Held for investment 4,000 29.9% 3,000 14.1% 700 17.0% 200 10.9% 78 19.2%
Construction 1,000 1.2% 1,000 1.3% 300 2.1% 400 5.3% 367 5.3%
Consumer 1,000 1.1% 1,000 1.1% 300 2.0% 300 3.0% 393 4.3%
Commercial 1,000 --% 500 0.2% 100 0.2% 50 0.4% 22 0.5%
Commercial real
estate 4,000 3.8% 3,500 3.1% 700 1.9% 100 1.2% 305 3.3%
Warehouse lending 500 1.2% 1,500 9.1% 100 4.7% 150 3.8% 21 0.4%
Second mortgages 1,500 3.8% -- -- % -- --% -- --% -- --%
Unallocated 5,000 --% 4,500 -- % 1,800 --% 1,300 --% 668 --%
---------------------------------------------------------------------------------------------------
Total $23,000 100.0% $20,000 100.0% $5,500 100.0% $3,500 100.0% $2,102 100.0%
===================================================================================================
26
27
TABLE 13
ACTIVITY WITHIN THE ALLOWANCE FOR LOSSES
1999 1998 1997 1996 1995
------------------------------------------------
(In Thousands)
Balance at the beginning of the period $20,000 $ 5,500 $3,500 $2,102 $1,871
Provision for losses 7,296 18,631 5,015 2,604 238
Charge-offs, net of recoveries (4,296) (4,131) (3,015) (1,206) (7)
------------------------------------------------
Balance at the end of the period $23,000 $20,000 $5,500 $3,500 $2,102
================================================
LIQUIDITY AND CAPITAL RESOURCES
The standard measure of liquidity in the thrift industry is the ratio of cash
and eligible investments, as defined by regulation, to the sum of net
withdrawable savings and borrowings due within one year. The OTS has established
the current minimum liquidity requirement at 4%. The Company, as a component of
its overall asset and liability management strategy, maintains qualifying liquid
assets at levels which exceed regulatory requirements. For the quarter ending
December 31, 1999, the Company's liquidity ratio was 7.1%.
The Company's primary sources of funds are customer deposits, loan repayments
and sales, advances from the FHLB, and cash generated from operations, and
customer escrow accounts. Additionally, during the past three years, the Company
has issued three separate offerings to the capital markets generating over $160
million in gross proceeds. While these sources are expected to continue to be
available to provide funds in the future, the mix and availability of funds will
depend upon future economic and market conditions. Flagstar does not foresee any
difficulty in meeting its liquidity requirements.
Loan principal repayments totaled $928.8 million during 1999, representing an
increase of $439.4 million, or 89.7%, compared to 1998. This increase, was
attributable to an increased asset base and a continuation of the lower interest
rate environment experienced during 1998 which increased the amount of loan
refinancings or payoffs.
Sales of mortgage loans totaled $12.9 billion in principal balance during 1999,
compared to $17.8 billion in 1998. The sales recorded during 1999 were lower
than in 1998 due to the decreased loan origination volume. Additionally, during
1998 and 1999, respectively, the Company sold 94.4% and 88.4% of the loans
originated.
Customer deposits increased $337.6 million, or 17.6%, and totaled $2.3 billion
at December 31, 1999. The increase is directly attributable to the Company's
aggressive approach to increasing retail deposits. During 1999, the Company
increased its borrowings from the FHLB by $1.0 billion, or 219.3%. The Company
utilizes FHLB advances to assist in funding mortgage loan production.
In May 1997, the Company completed an initial public offering of its common
stock. The net proceeds received by the Company totaled $27.3 million.
In February and March of 1998, Capital offered to the public and sold 2,300,000
shares of its 8.50%, non-cumulative, Series A Preferred Shares, $25 par value
per share, providing gross proceeds totaling $57.5 million. The preferred stock
is traded on the Nasdaq Stock Market under the symbol "FLGSP".
On April 27, 1999, Trust completed the sale of 2.99 million shares of preferred
securities, providing gross proceeds totaling $74.8 million. The securities pay
interest at a rate of 9.50% per annum. The securities are traded on the Nasdaq
Stock Market under the symbol "FLGSO".
The Company paid a quarterly cash dividend on its common stock on February 15,
1999, May 14, 1999, August 13, 1999, and November 15, 1999. The cash dividend
was $0.08, $0.08, $0.10, and $0.10 per share, respectively.
Stockholders' equity increased $21.8 million to $185.7 million at December 31,
1999, an increase of 13.3%. This level of stockholders' equity represented 4.31%
of total assets at December 31, 1999.
The board of directors of the Company adopted a Stock Repurchase Program on
September 21, 1999. The Company repurchased a total of 808,350 shares totaling
$12.1 million during 1999. These shares were repurchased
27
28
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
at a weighted price of $14.95 per share. The repurchased shares will be
available for later reissue in connection with future stock dividends, dividend
reinvestment plans, employee benefit plans, and other general corporate
purposes.
At December 31, 1999, the Company had outstanding rate-lock commitments to lend
$380.4 million in mortgage loans, along with outstanding commitments to make
other types of loans totaling $30.9 million. Because such commitments may expire
without being drawn upon, they do not necessarily represent future cash
commitments. Also, as of December 31, 1999, the Company had outstanding
commitments to sell $572.8 billion of mortgage loans. These commitments will be
funded within 90 days. Total commercial and consumer unused collateralized lines
of credit totaled $344.8 million at December 31, 1999. Such commitments include
$289.6 million in unused warehouse lines of credit to various mortgage companies
at December 31, 1999.
ACCOUNTING AND REPORTING DEVELOPMENTS
RECENTLY ISSUED ACCOUNTING STANDARDS. In June 1998, the FASB issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (as
amended) ("SFAS 133"), which requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The statement is effective January 1,
2000 for the Company; however, management has not quantified the impact of this
pronouncement on the Company's financial position.
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
Company's operations. Unlike most industrial companies, nearly all the assets
and liabilities of the Company are monetary in nature. As a result, interest
rates have a greater impact on the Company'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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In its mortgage banking operations, the Company is exposed to market risk in the
form of interest rate risk from the time the interest rate on a mortgage loan
application is committed to by the Company through the time the Company sells or
commits to sell the mortgage loan. On a daily basis, the Company analyzes
various economic and market factors and, based upon these analyses, projects the
amount of mortgage loans it expects to sell for delivery at a future date. The
actual amount of loans sold will be a percentage of the number of mortgage loans
on which the Company has issued binding commitments (and thereby locked in the
interest rate) but has not yet closed ("pipeline loans") to actual closings. If
interest rates change in an unanticipated fashion, the actual percentage of
pipeline loans that close may differ from the projected percentage. The
resultant mismatching of commitments to fund mortgage loans and commitments to
sell mortgage loans may have an adverse effect on the results of operations in
any such period. For instance, a sudden increase in interest rates can cause a
higher percentage of pipeline loans to close than projected. To the degree that
this is not anticipated, the Company will not have made commitments to sell
these additional pipeline loans and may incur losses upon their sale as the
market rate of interest will be higher than the mortgage interest rate committed
to by the Company on such additional pipeline loans. To the extent that the
hedging strategies utilized by the Company are not successful, the Company's
profitability may be adversely affected.
The information set for the under Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Asset/Liability Management"
is incorporated herein.
28
29
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants 30
Consolidated Statements of Financial Condition as of
December 31, 1999 and 1998 31
Consolidated Statements of Earnings for the years ended
December 31, 1999, 1998 and 1997 32
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998, and 1997 33
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997 34
Notes to the Consolidated Financial Statements 35
29
30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Flagstar Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition
of Flagstar Bancorp, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of earnings, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. 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 Bancorp, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the results of their consolidated operations and their consolidated cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
/s/ Grant Thornton LLP
Detroit, Michigan
January 28, 2000
30
31
FLAGSTAR BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
- --------------------------------------------------------------------------------
AT DECEMBER 31,
1999 1998
---------------------------
ASSETS
Cash and cash equivalents $ 118,636 $ 75,799
Loans receivable
Mortgage loans available for sale 2,230,381 1,831,531
Loans held for investment 1,601,350 747,185
Less: allowance for losses (23,000) (20,000)
---------- ----------
Loans receivable, net 3,808,731 2,558,716
Federal Home Loan Bank stock 79,850 57,837
Other investments -- 500
---------- ----------
Total earning assets 3,888,581 2,617,053
Accrued interest receivable 26,629 24,812
Repossessed assets 21,364 22,966
Premises and equipment 46,979 31,124
Mortgage servicing rights 131,831 150,258
Other assets 76,019 124,433
---------- ----------
Total assets $4,310,039 $3,046,445
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts $2,260,963 $1,923,370
Federal Home Loan Bank advances 1,477,000 456,019
Long term debt 74,750 --
---------- ----------
Total interest bearing liabilities 3,812,713 2,379,389
Accrued interest payable 15,689 16,659
Undisbursed payments on loans serviced for others 69,231 184,498
Escrow accounts 75,340 104,455
Liability for checks issued 30,426 65,634
Federal income taxes payable 50,238 49,265
Other liabilities 70,688 82,693
---------- ----------
Total liabilities 4,124,325 2,882,593
Commitments and Contingencies (Notes 4, 6, 7, 13 and 16) -- --
STOCKHOLDERS' EQUITY
Common stock - $.01 par value, 40,000,000 shares authorized,
13,699,823 and 13,670,000 shares issued, 12,891,473 and
13,670,000 shares outstanding at December 31, 1999 and
December 31, 1998, respectively 129 137
Additional paid in capital 18,307 29,988
Retained earnings 167,278 133,727
---------- ----------
Total stockholders' equity 185,714 163,852
---------- ----------
Total liabilities and stockholders' equity $4,310,039 $3,046,445
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
31
32
FLAGSTAR BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
--------------------------------------
INTEREST INCOME
Loans $233,188 $187,124 $120,214
Other 5,482 4,137 2,538
-------- -------- --------
Total 238,670 191,261 122,752
INTEREST EXPENSE
Deposits 112,493 82,452 50,143
FHLB advances 49,136 48,332 28,709
Other 12,103 6,403 1,181
-------- -------- --------
Total 173,732 137,187 80,033
-------- -------- --------
Net interest income 64,938 54,074 42,719
Provision for losses 7,296 18,631 5,015
-------- -------- --------
Net interest income after provision for losses 57,642 35,443 37,704
NON-INTEREST INCOME
Loan administration 19,872 (2,532) 6,127
Net gain on loan sales 38,673 110,682 21,775
Net gain on sales of mortgage servicing rights 9,010 3,820 27,095
Other fees and charges 14,426 6,443 4,839
-------- -------- --------
Total 81,981 118,413 59,836
NON-INTEREST EXPENSE
Compensation and benefits 35,810 32,508 25,930
Occupancy and equipment 20,966 15,964 12,810
General and administrative 23,654 38,371 23,763
-------- -------- --------
Total 80,430 86,843 62,503
-------- -------- --------
Earnings before federal income taxes 59,193 67,013 35,037
Provision for federal income taxes 20,772 25,950 13,265
-------- -------- --------
NET EARNINGS $ 38,421 $ 41,063 $ 21,772
======== ======== ========
EARNINGS PER SHARE - BASIC $ 2.83 $ 3.00 $ 1.70
======== ======== ========
EARNINGS PER SHARE - DILUTED $ 2.75 $ 2.90 $ 1.68
======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
32
33
FLAGSTAR BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
ADDITIONAL TOTAL
COMMON PAID IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
Balance at January 1, 1997 $112 $ 2,816 $75,540 $ 78,468
Net earnings -- -- 21,772 21,772
Initial public offering 25 27,172 -- 27,197
Dividend paid ($0.06 per share) -- -- (820) (820)
---- ------- -------- --------
Balance at December 31, 1997 137 29,988 96,492 126,617
Net earnings -- -- 41,063 41,063
Dividend paid ($0.28 per share) -- -- (3,828) (3,828)
---- ------- -------- --------
Balance at December 31, 1998 137 29,988 133,727 163,852
Net earnings -- -- 38,421 38,421
Stock options exercised -- 393 -- 393
Common stock repurchased (8) (12,074) -- (12,082)
Dividend paid ($0.36 per share) -- -- (4,870) ( 4,870)
---- ------- -------- --------
Balance at December 31, 1999 $129 $18,307 $167,278 $185,714
==== ======= ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
33
34
FLAGSTAR BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
-------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 38,421 $ 41,063 $ 21,772
Adjustments to reconcile net earnings to net cash used in
operating activities
Provision for losses 7,296 18,631 5,015
Depreciation and amortization 25,061 39,897 17,161
Net gain on the sale of assets (169) (868) (1,100)
Net gain on loan sales (38,673) (110,682) (21,775)
Gain on sales of mortgage servicing rights (9,010) (3,820) (27,095)
Proceeds from sales of loans available for sale 12,997,656 18,033,222 7,225,460
Originations and repurchases of loans available for sale,
net of principal repayments (13,379,378) (18,579,866) (7,578,375)
Increase in accrued interest receivable (1,817) (8,320) (9,866)
Decrease (increase) in other assets 47,108 (90,149) 16,250
(Decrease) increase in accrued interest payable (970) 6,104 7,843
(Decrease) increase in liability for checks issued (35,208) 19,738 6,083
Increase (decrease) in federal taxes payable 2,946 16,481 (18,553)
(Benefit) provision for deferred federal income taxes (1,973) 11,977 16,813
(Decrease) increase in other liabilities (12,005) 67,015 (1,268)
------------ ------------ -----------
Net cash used in operating activities (360,715) (539,577) (341,635)
INVESTING ACTIVITIES
Maturity of other investments 500 38 349
Originations of loans held for investment, net of
principal repayments (854,165) (283,578) (190,040)
Purchase of Federal Home Loan Bank stock (22,013) (17,812) (20,300)
Proceeds from the disposition of repossessed assets 19,003 14,994 8,205
Acquisitions of premises and equipment (23,076) (8,189) (16,306)
Proceeds from the disposition of premises and equipment 32 20 2,733
Proceeds from the disposition real estate held for
investment -- -- 735
Increase in mortgage servicing rights (199,912) (245,204) (92,441)
Proceeds from the sale of mortgage servicing rights 210,800 150,197 55,273
------------ ------------ -----------
Net cash used in investing activities (868,831) (389,534) (251,792)
FINANCING ACTIVITIES
Net increase in deposit accounts 337,593 813,437 485,448
Net increase (decrease) in Federal Home Loan Bank advances 1,020,981 (26,359) 92,577
Proceeds from the issuance of long term debt 74,750 -- --
Net (disbursement) receipt of payments of loans serviced
for others (115,267) 138,645 (15,593)
Net (disbursement) receipt of escrow payments (29,115) 61,087 (17,641)
Proceeds from the initial public offering -- -- 27,197
Net proceeds for the exercise of stock options 393 -- --
Common stock repurchased (12,082) -- --
Dividends paid to stockholders (4,870) (3,828) (820)
------------ ------------ -----------
Net cash provided by financing activities 1,272,383 982,982 571,168
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents 42,837 53,871 (22,259)
Beginning cash and cash equivalents 75,799 21,928 44,187
------------ ------------ -----------
Ending cash and cash equivalents $ 118,636 $ 75,799 $ 21,928
============ ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Loans receivable transferred to repossessed assets $ 17,249 $ 18,817 $ 15,290
============ ============ ===========
Total interest payments made on deposits and other
borrowings $ 174,702 $ 131,083 $ 72,189
============ ============ ===========
Federal income taxes paid $ 19,500 $ -- $ 15,000
============ ============ ===========
Loans available for sale transferred to held for
investment $ 912,673 $ 147,233 $ 63,827
============ ============ ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
34
35
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS
Flagstar Bancorp, Inc. ("Flagstar" or the "Company"), is the holding company for
Flagstar Bank, FSB (the "Bank"), a federally chartered stock savings bank
founded in 1987. With $4.3 billion in assets at December 31, 1999, Flagstar is
the largest independent savings institution headquartered in Michigan.
Flagstar is a consumer-oriented financial services organization. The Company's
principal business is obtaining funds in the form of deposits and borrowings and
investing those funds in various types of loans. The acquisition or origination
of single family mortgage loans is the Company's primary lending activity. The
Company also originates consumer loans, commercial real estate loans, and
non-real estate commercial loans.
The mortgage loans are securitized and sold in order to generate mortgage
servicing rights. The Company also invests in a significant amount of its loan
production in order to maximize the Company's leverage ability and to receive
the interest spread between earning assets and paying liabilities. The Company
also acquires funds on a wholesale basis from a variety of sources and services
a significant volume of loans for others.
The Bank is a member of the Federal Home Loan Bank System ("FHLB") and is
subject to regulation, examination and supervision by the Office of Thrift
Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC"). The
Bank's deposits are insured by the FDIC through the Savings Association
Insurance Fund ("SAIF").
NOTE 2 - CORPORATE STRUCTURE
The Company conducts business through a number of wholly-owned subsidiaries in
addition to the Bank. The additional subsidiaries of the Company include Douglas
Insurance Agency, Inc. ("DIA"), Flagstar Commercial Corporation ("FCC"),
Flagstar Credit Corporation ("Credit"), Flagstar Trust ("Trust"), and Flagstar
Investment Group, Inc. ("Investment"). DIA acts as an agent for life insurance
and property and casualty insurance companies and Investment offers a
full-service brokerage service. Credit participates in mortgage reinsurance
agreements with various private mortgage insurance companies. FCC is the holding
company for Cdbid.com, an internet startup company. Trust is a Delaware trust
whose common securities are owned solely by the Company and in 1999 sold 2.99
million shares of preferred securities to the general public in an initial
public offering.
The Bank, the Company's primary subsidiary, is a federally chartered, stock
savings bank headquartered in Bloomfield Hills, Michigan. The Bank owns five
subsidiaries: FSSB Mortgage Corporation ("Mortgage"), Flagstar Capital
Corporation ("Capital"), Mid-Michigan Service Corporation ("Mid-Michigan"), and
SSB Funding Corporation ("Funding"). Mortgage, Mid-Michigan, and Funding are
currently inactive subsidiaries. Capital is a publicly-owned real estate
investment trust whose common stock is owned solely by the Bank and which
purchases mortgage loans from the Bank and holds them for investment purposes.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following summarizes the significant accounting policies of the Company
applied in the preparation of the accompanying consolidated financial
statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company, the
Bank, and their subsidiaries. All significant intercompany balances and
transactions have been eliminated.
STATEMENT OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers its
investment in overnight deposits to be cash equivalents.
35
36
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS RECEIVABLE
The Company originates loans which are designated to be held for investment or
sale during the origination process. Mortgage loans available 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 which is
charged 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 Company has both the intent and
the ability to hold all mortgage loans held for investment for the foreseeable
future.
ALLOWANCE FOR LOSSES
Management believes 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 currently anticipated 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 Company's
control. The Company considers its residential mortgage loan portfolio to
represent a pool of smaller balance homogeneous loans. Commercial, commercial
real estate, construction, second mortgage, warehouse loan, and consumer loan
portfolios are specifically reviewed for impairment.
The Company 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
Company considers all non-accrual loans (with 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 SAFS No. 91, "Accounting
for Non-refundable 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 available 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.
36
37
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Company 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
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights ("MSR") represent the fair value 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.
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. 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
and a charge to current earnings.
LOAN SALES
The Company sells its available for sale mortgage loans to secondary market
investors on a non-recourse basis. At the time of the sale, the Company makes
certain representations and warranties to the investors. Should an investor
determine that a breach of such representation or warranty has occurred, the
Company may be required to repurchase the loan from the investor. Such
representations and warranties generally relate to the fact that the loan has
been underwritten in accordance with the investor's guidelines and that the loan
conforms to the laws of the state of origination. Gain or loss on the sale of
such a loan is recognized upon consummation of the sale.
PREFERRED STOCK OF A SUBSIDIARY
In February and March of 1998, Flagstar Capital Corporation offered to the
public and sold 2,300,000 shares of its 8.50%, non-cumulative, Series A
Preferred Shares, $25 par value per share, providing gross proceeds totaling
$57.5 million. The Series A Preferred Shares are traded on the Nasdaq Stock
Market, under the symbol "FLGSP".
37
38
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Capital used the net proceeds raised from the offering of the Series A Preferred
Shares to acquire mortgage loans from the Bank. Capital is a real estate
investment trust for federal income tax purposes. The net proceeds received by
Capital qualify as regulatory capital, with certain limitations as defined by
regulation. The Series A Preferred Shares are recorded on the books of the
Company as a minority interest and are included in other liabilities. Dividends
paid on the Series A Preferred Shares are deductible for tax purposes and
included in interest expense - other.
The Series A Preferred Shares are generally not redeemable until February 24,
2003. On or after that date, the Series A Preferred Shares are redeemable in
whole or in part by the Company for cash. The Series A Preferred Shares are not
subject to a sinking fund or mandatory redemption and are not convertible into
any securities of the Company.
PREFERRED SECURITIES OF A TRUST SUBSIDIARY
On April 27, 1999, the Company completed the sale of 2.99 million shares of
preferred securities issued by Flagstar Trust, a Delaware trust and subsidiary
of the Company. The securities pay interest at a rate of 9.50% per annum. The
securities are traded on the Nasdaq Stock Market under the symbol "FLGSO".
The preferred securities are generally not redeemable until April 27, 2004. On
or after that date, the securities are redeemable in whole or in part by the
Company for cash. The securities are not subject to a sinking fund or mandatory
redemption and are not convertible into any other securities of the Company.
STOCK BUYBACK
The board of directors of Flagstar Bancorp adopted, on September 21, 1999, the
Company's Stock Repurchase Program The program allowed management to repurchase
up to $15 million of the Company's common stock by September 30, 2000. The
repurchased shares will be reserved for later reissue in connection with future
stock dividends, dividend reinvestment plans, employee benefit plans, and other
general corporate purposes.
The Company released data on January 5, 2000 which stated that the Company had
repurchased a total of 808,350 shares through December 31, 1999. These shares
were repurchased at a weighted price of $14.95 per share.
On January 26, 2000, the Company announced the completion of the first
repurchase program and the approval of an additional 1.0 million shares to be
repurchased. Through March 17, 2000, the Company had repurchased a total of
1,164,750 shares, including the above mentioned 808,350 shares, for a total
price of $17.0 million. The shares were repurchased at a weighted price of
$14.62 per share.
STOCK BASED COMPENSATION
The FASB issued SFAS No. 123, "Accounting for Stock Based Compensation," for
transactions entered into during 1996 and thereafter. The statement establishes
a fair market value method of accounting for employee stock options and similar
instruments such as warrants, and encourages all companies to adopt that method
of accounting for all employee stock option plans. However, the statement allows
companies to continue measuring compensation costs for such plans using
accounting guidance in place prior to SFAS No. 123. Companies that elect to
remain with the former method of accounting must make pro forma disclosures of
net earnings and earnings per share as if the fair value method provided for in
SFAS No. 123 had been adopted. The Company has not adopted the fair value
provisions of SFAS No. 123 but has disclosed the pro forma effects in accordance
with the pronouncement.
EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing earnings
available to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share
38
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FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised and converted into common stock
or resulted in the issuance of common stock that could then share in the
earnings of the Company. The Company adopted SFAS No. 128 at December 31, 1998.
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 1999 presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (as amended) ("SFAS 133"), which requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
statement is effective January 1, 2001 for the Company; however, management has
not quantified the impact of this pronouncement on the Company's financial
position.
39
40
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE
The loan portfolio is summarized as follows (in thousands):
DECEMBER 31,
1999 1998
---------------------------
Available for sale - mortgage loans $2,230,381 $1,831,531
Held for investment
Mortgage loans 1,169,781 321,476
Second mortgage loans 145,075 43,196
Commercial real estate loans 143,652 80,858
Commercial loans 7,024 3,601
Construction loans 46,838 34,367
Warehouse lending 46,222 235,693
Consumer loans 42,758 28,199
---------------------------
Total 1,601,350 747,185
---------------------------
Total loans 3,831,731 2,578,716
Less allowance for losses (23,000) (20,000)
---------------------------
Total $3,808,731 $2,558,716
===========================
Activity in the allowance for losses is summarized as follows (in thousands):
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
---------------------------------------
Balance, beginning of period $20,000 $ 5,500 $ 3,500
Provision charged to earnings 7,296 18,631 5,015
Charge-offs, net of recoveries (4,296) (4,131) (3,015)
---------------------------------------
Balance, end of period $23,000 $20,000 $ 5,500
=======================================
The Company has no commitments to make additional advances on restructured or
other non-performing loans. Loans on which interest accruals have been
discontinued totaled approximately $41.8 million at December 31, 1999 and $37.2
million at December 31, 1998. Interest that would have been accrued on such
loans totaled approximately $4.0 million, $3.9 million, and $4.8 million during
1999, 1998, and 1997, respectively.
At December 31, 1999 the recorded investment in impaired loans, pursuant to SFAS
No. 114, totaled $1.6 million and the average outstanding balance for the year
ended December 31, 1999 was $1.9 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 year ended December 31, 1999, was not significant. At December 31, 1998, the
recorded investment in impaired loans totaled $1.0 million and the average
outstanding balance for the year ended December 31, 1998 was $1.6 million.
40
41
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 5 - REPOSSESSED ASSETS
Repossessed assets include the following (in thousands):
DECEMBER 31,
1999 1998
---------------------
One-to-four family $21,184 $22,786
Commercial properties 180 180
---------------------
Repossessed assets, net $21,364 $22,966
=====================
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment balances are as follows (in thousands):
DECEMBER 31,
1999 1998
-----------------------
Construction in progress $ 8,395 $ --
Land 10,685 9,125
Office buildings 10,800 7,398
Computer hardware and software 26,560 20,733
Furniture, fixtures and equipment 19,130 15,493
Automobiles 497 527
-----------------------
Total 76,067 53,276
Less accumulated depreciation (29,088) (22,152)
-----------------------
Premises and equipment, net $ 46,979 $ 31,124
=======================
Depreciation expense amounted to approximately $7.2 million, $6.2 million, and
$5.2 million for the years ended December 31, 1999, 1998 and 1997, respectively.
The Company conducts a portion of its business from leased facilities. Lease
rental expense totaled approximately $6.2 million, $4.8 million and $3.9 million
for the years ended December 31, 1999, 1998 and 1997, respectively. The
following outlines the Company's minimum contractual lease obligations as of
December 31, 1999 (in thousands):
2000 $ 6,175
2001 3,301
2002 2,966
2003 2,189
2004 1,318
Thereafter 1,635
-------
Total $17,584
=======
The Company has begun construction of a new headquarters facility located in
Troy, Michigan. This building will, when occupied, replace three separate
facilities the Company is now leasing. The estimated construction cost for this
facility totals $30.0 million with an estimated completion date in Fall 2000. At
December 31, 1999, the Company has paid approximately $8.3 million in payments
to the builder and has capitalized $113,000 in interest.
41
42
FLAGSTAR BANCORP, INC.
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 at
December 31, 1999 and 1998 are summarized as follows (in thousands):
DECEMBER 31,
1999 1998
MORTGAGE LOANS SERVICED FOR: ----------------------------
FHLMC and FNMA $9,226,468 $11,084,838
MSHDA 56,339 56,897
GNMA 2,383 932
Other investors 234,736 329,544
----------------------------
Total $9,519,926 $11,472,211
============================
In addition and not included in the above totals are $3.3 billion and $7.4
billion of mortgage loans at December 31, 1999 and 1998, respectively. These
loans are being serviced on a temporary basis in connection with the sale of
mortgage servicing rights.
Custodial accounts maintained in connection with the above mortgage servicing
rights (including the above mentioned subservicing) were approximately $127.6
million and $253.6 million at December 31, 1999 and 1998, respectively. These
amounts include payments for principal, interest, taxes, and insurance collected
on behalf of the individual investor.
The following is an analysis of the changes in mortgage servicing rights (in
thousands):
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
----------------------------------------
Balance, beginning of period $ 150,258 $ 83,845 $ 30,064
Capitalization 199,912 245,204 92,441
Sales (201,790) (146,377) (28,178)
Amortization (16,549) (32,414) (10,482)
----------------------------------------
Balance, end of period $ 131,831 $ 150,258 $ 83,845
========================================
At December 31, 1999, 1998, and 1997, the estimated fair value of the mortgage
loan servicing portfolio was $141.9, $151.2, and $92.4 million, respectively.
NOTE 8 - DEPOSIT ACCOUNTS
The deposit accounts are as follows (in thousands):
DECEMBER 31,
1999 1998
---------------------------
Demand, NOW and money market accounts $ 137,419 $ 97,043
Savings accounts 359,013 181,975
Certificates of deposit 1,764,531 1,644,352
---------------------------
Total deposit accounts $2,260,963 $1,923,370
===========================
Non-interest bearing deposits included in the demand, NOW and money market
accounts balances at December 31, 1999 and 1998 were approximately $92.1 million
and $15.7 million, respectively.
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $1.3 billion and $997.9 million at December 31, 1999
and 1998, respectively.
42
43
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 8 - DEPOSIT ACCOUNTS (CONTINUED)
The following indicates the scheduled maturities of the Company's certificates
of deposit as of December 31, 1999 (in thousands):
DECEMBER 31,
1999
------------
Three months or less $ 304,380
Over three through six months 230,838
Over six through twelve months 565,400
One to two years 348,072
Thereafter 315,841
----------
Total $1,764,531
==========
Interest expense on deposit accounts is summarized as follows (in thousands):
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
----------------------------------------
Demand, NOW and money market accounts $ 2,959 $ 1,692 $ 1,346
Savings accounts 16,133 5,933 3,193
Certificates of deposit 93,401 74,827 45,604
----------------------------------------
Total $112,493 $82,452 $50,143
========================================
NOTE 9 - FHLB ADVANCES
The following indicates certain information related to the FHLB advances (in
thousands):
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
------------------------------------------
Maximum outstanding at any month end $1,477,000 $1,136,750 $718,878
Average balance 889,363 833,944 480,062
Average interest rate 5.52% 5.80% 5.98%
The Company has the authority and approval from the FHLB to utilize a total of
$1.8 billion in collateralized borrowings. Advances at December 31, 1999 totaled
$1.5 billion and carried a weighted rate of 5.25%. Advances totaling $1.0
billion and $100.0 million mature during 2000 and 2003, respectively. The
remaining $377.0 million are daily adjustable rate advances. Pursuant to
collateral agreements with the FHLB, advances are collateralized by
non-delinquent single-family residential mortgage loans.
NOTE 10 - LONG TERM DEBT
On April 27, 1999, the Company completed the sale of 2.99 million shares of
preferred securities issued by Flagstar Trust, a Delaware trust and subsidiary
of the Company. The securities pay interest at a rate of 9.50% per annum. The
securities are traded on the Nasdaq Stock Market under the symbol "FLGSO".
The preferred securities are generally not redeemable until April 27, 2004. On
or after that date, the securities are redeemable in whole or in part by the
Company for cash. The securities are not subject to a sinking fund or mandatory
redemption and are not convertible into any other securities of the Company.
43
44
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 10 - LONG TERM DEBT (CONTINUED)
After the sale of the preferred securities, the Company issued to Trust junior
subordinated debentures totaling $74.8 million. The debentures pay interest at
9.5% per annum.
NOTE 11 - FEDERAL INCOME TAXES
Components of the provision for federal income taxes consists of the following
(in thousands):
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
---------------------------------------
Current provision/(benefit) $22,745 $13,973 $(3,548)
Deferred provision/(benefit) (1,973) 11,977 16,813
---------------------------------------
$20,772 $25,950 $13,265
=======================================
The Company's effective tax rates differ from the statutory federal tax rates.
The following is a summary of such differences (in thousands):
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
---------------------------------------
Provision at statutory federal income tax
rate $20,718 $23,455 $12,263
Increase (decrease) resulting from:
Amortization of deposit premium 452 452 450
Other, net (398) 2,043 552
---------------------------------------
Provision at effective federal income tax
rate $20,772 $25,950 $13,265
=======================================
44
45
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 11 - FEDERAL INCOME TAXES (CONTINUED)
The details of the net tax liability are as follows (in thousands):
DECEMBER 31,
1999 1998
-----------------------
DEFERRED TAX ASSETS:
Mark-to-market adjustments on earning assets $ 1,050 $ 1,050
Delinquent interest 1,399 1,380
Book bad debt reserves 9,068 10,533
Capitalized foreclosure costs 276 --
Premises and equipment 130 --
Other 220 1,733
-----------------------
Total 12,143 14,696
DEFERRED TAX LIABILITIES:
Deferred fees (2,848) (436)
Tax bad debt reserves (1,254) (1,361)
Mortgage loan servicing rights (46,141) (52,590)
Purchase accounting valuation adjustments (158) (164)
Premises and equipment -- (376)
-----------------------
Total (50,401) (54,927)
-----------------------
Net deferred tax liability (38,258) (40,231)
Current payable (11,980) (9,034)
-----------------------
Net tax liability $(50,238) $(49,265)
=======================
Flagstar files a consolidated federal income tax return on a calendar year
basis. Historically, the Company had determined its deduction for bad debts
based on the reserve method in lieu of the specific charge-off method. Under the
reserve method, the Company had established and maintained a reserve for bad
debts against which actual loan losses are charged. As a qualifying thrift
institution, the Company had calculated its addition to its bad debt reserve
under either, (1) the "percentage of taxable income" method or (2) the
"experience" method. The Company used the percentage of taxable income method in
determining its bad debt reserve addition through its 1995 tax year.
The bad debt reserves, maintained for tax purposes and accumulated after 1987,
became subject to recapture into taxable income as part of the 1996 tax
legislation change. Base year reserves (generally pre-1987 bad debt reserves)
will not be recaptured unless the Company, or a successor institution,
liquidates, redeems shares or pays a dividend in excess of earnings and profits.
The recapture is taken ratably over six years beginning in 1996. The Company
deferred the recapture an additional two years because it met certain
residential lending requirements during the tax years beginning before January
1, 1998.
Income taxes have been provided for the $2.2 million 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 Company began
recapturing this difference in 1998 using a six year recapture period. As of
December 31, 1999, the Company had approximately $1.3 million in taxes remaining
to be recaptured.
NOTE 12 - EMPLOYEE BENEFITS
The Company 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
$9,600 annually. The Company currently provides a matching contribution up to 3%
of an employee's annual compensation up to a maximum of $4,800. The Company's
contributions vest at a rate such that an employee is fully vested after seven
years of service. The Company's
45
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FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 12 - EMPLOYEE BENEFITS (CONTINUED)
contributions to the plan for the years ended December 31, 1999, 1998 and 1997
were approximately $1.0 million, $866,000, and $590,000, respectively. The
Company may also make discretionary contributions to the plan; however, none
have been made.
NOTE 13 - CONTINGENCIES
The Company 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 Company's
financial condition.
A substantial part of the Company'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 "TILL"), 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.
The Company 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 Company 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 Company's financial condition, results of operations, or
liquidity.
NOTE 14 - 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 Company 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 "undercapital-
46
47
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 14 - REGULATORY MATTERS (CONTINUED)
ized" 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.
The following chart delineates the categories as defined in the FDICIA
legislation:
TIER 1 TOTAL
RISK- RISKED-
CORE BASED BASED
CAPITAL CAPITAL CAPITAL
--------------------------------------------------
"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%
At December 31, 1999, Company's consolidated Core, Tier 1 risk-based, and Total
risk-based capital ratios were 6.80%, 12.26% and 13.16%, respectively. These
ratios place the Company in the "well capitalized" category.
The following is a calculation of Company's consolidated regulatory capital (in
thousands) at December 31, 1999:
TIER 1 TOTAL
RISK- RISK-
GAAP TANGIBLE CORE BASED BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
----------------------------------------------------------------
GAAP CAPITAL, AS REPORTED $250,912 $250,912 $250,912 $250,912 $250,912
NON-ALLOWABLE ASSETS:
Core deposit premium (1,935)
Mortgage servicing value (13,183) (13,183) (13,183) (13,183)
Other assets (301)
ADDITIONAL CAPITAL ITEMS:
Minority interest in subsidiary 54,373 54,373 54,373 54,373
General valuation allowance 23,000
--------------------------------------------------
Regulatory capital 290,167 292,102 292,102 314,801
Minimum capital requirement % 1.50% 3.00% 4.00% 8.00%
Minimum capital requirement $ 64,363 128,814 95,265 191,425
--------------------------------------------------
Regulatory capital - excess $225,804 $163,288 $196,837 $123,376
==================================================
At December 31, 1998, Company's consolidated Core, Tier 1 risk-based, and Total
risk-based capital ratios were 6.54%, 11.83% and 12.93%, respectively. Those
ratios placed the Company in the "well capitalized" category.
47
48
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 14 - REGULATORY MATTERS (CONTINUED)
The following is a calculation of Company's consolidated regulatory capital (in
thousands) at December 31, 1998:
TIER 1 TOTAL
RISK- RISK-
GAAP TANGIBLE CORE BASED BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
----------------------------------------------------------------
GAAP CAPITAL, AS REPORTED $163,668 $163,668 $163,668 $163,668 $163,668
NON-ALLOWABLE ASSETS:
Core deposit premium (3,225)
Mortgage servicing value (15,026) (15,026) (15,026) (15,026)
Other assets (305)
ADDITIONAL CAPITAL ITEMS:
Minority interest in subsidiary 49,548 49,548 49,548 49,548
General valuation allowance 20,000
--------------------------------------------------
Regulatory capital 194,965 198,190 198,190 217,885
Minimum capital requirement % 1.50% 3.00% 4.00% 8.00%
Minimum capital requirement $ 45,423 90,942 67,031 134,838
--------------------------------------------------
Regulatory capital - excess $149,542 $107,248 $131,159 $ 83,047
==================================================
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.
NOTE 15 - CONCENTRATIONS OF CREDIT
Properties collateralizing loans receivable are geographically disbursed
throughout the United States. As of December 31, 1999, approximately 23.4% of
these properties are located in Michigan (measured by principal balance), and
another 53.9% are located in the states of California, Colorado, Ohio,
Washington, New York, Florida, Texas, Illinois, Maryland, and Utah. No other
state contains more than 2% of the properties collateralizing these loans.
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
48
49
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 December 31, 1999 and 1998. 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
Company. Additionally, such amounts exclude intangible asset values such as the
value of core deposit intangibles.
The following methods and assumptions were used by the Company 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 mortgage loans available 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 available 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 Company for debt with similar
terms and remaining maturities are used to estimate the fair value of the
existing debt.
Long Term Debt: The preferred securities of Flagstar Trust are traded on the
NASDAQ Stock Market under the symbol "FLGSO".
Other Liabilities: Included in other liabilities is the preferred stock of
Flagstar Capital This preferred stock is traded on the NASDAQ Stock Market under
the symbol "FLGSP".
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.
49
50
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following tables set forth the fair value of the Company's financial
instruments:
DECEMBER 31,
1999 1998
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------------------------------------------------------
FINANCIAL INSTRUMENTS:
ASSETS:
Cash and cash equivalents $ 118,636 $ 118,636 $ 75,799 $ 75,799
Mortgage loans available for sale 2,230,381 2,233,385 1,831,531 1,854,928
Loans held for investment 1,578,350 1,580,873 727,185 730,516
Other investments -- -- 500 500
FHLB stock 79,850 79,850 57,837 57,837
LIABILITIES:
Deposits:
Demand deposits and savings
accounts (496,432) (496,432) (279,018) (279,018)
Certificates of deposit (1,764,531) (1,750,810) (1,644,352) (1,657,744)
FHLB advances (1,477,000) (1,468,238) (456,019) (456,973)
Long Term Debt (74,750) (61,295) -- --
Other liabilities (54,373) (43,125) (54,373) (55,200)
OFF-BALANCE SHEET ITEMS:
Forward delivery contracts -- 6,631 -- (16,074)
Commitments to extend credit -- 8,340 -- 13,896
NON-FINANCIAL INSTRUMENTS:
Unrealized gains on mortgage
servicing rights (see Note 7) -- 10,065 -- 984
The Company 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 Company 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. The
Company sells its loans in forward delivery contracts because the price
volatility is eliminated. 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
Company 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.
50
51
FLAGSTAR BANCORP, INC.
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 Company's involvement in particular classes of financial instruments and
generally exceed the expected future cash requirements relating to the
instruments.
DECEMBER 31,
1999 1998
-----------------
(In millions)
Forward delivery contracts $573 $1,837
Commitments to extend credit 756 882
All of the Company'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, 1999 or 1998. 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 1999, the
Company recorded a loss on Treasury future contracts of approximately $13,000.
Forward Delivery Contracts: Forward delivery contracts are entered into to
exchange mortgage loans for mortgage backed securities and to sell mortgage
backed securities:
FORWARD DELIVERY CONTRACTS
DECEMBER 31,
1999 1998
-----------------
(In millions)
MORTGAGE LOAN TYPE:
Fixed $570 $1,837
Balloon -- --
Variable 3 --
-----------------
Total $573 $1,837
=================
Commitments to Extend Credit: The Company's exposure to credit loss for
commitments to extend credit is represented by the contractual amount of those
agreements. The Company 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.
DECEMBER 31,
1999 1998
---------------
(In millions)
Single family mortgage $380 $621
Other 376 261
---------------
Total $756 $882
===============
Fixed $364 $649
Variable 392 233
---------------
Total $756 $882
===============
51
52
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 17 - SEGMENT INFORMATION
The Company operations can be segmented into a mortgage banking and a retail
banking operation. Following is a presentation of financial information by
business for the period indicated.
FOR THE YEAR ENDED DECEMBER 31, 1999
------------------------------------------------------
RETAIL MORTGAGE
BANKING BANKING
OPERATION OPERATION ELIMINATIONS COMBINED
------------------------------------------------------
(In thousands)
Revenues $ 56,972 $ 89,947 $ -- $ 146,919
Earnings before income taxes 39,736 19,457 -- 59,193
Depreciation and amortization 2,577 22,484 -- 25,061
Capital expenditures 4,162 18,194 -- 23,076
Identifiable assets 1,670,121 2,852,240 (212,322) 4,310,039
Intersegment income (expense) 21,690 (21,690) -- --
FOR THE YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------
RETAIL MORTGAGE
BANKING BANKING
OPERATION OPERATION ELIMINATIONS COMBINED
-----------------------------------------------------
(In thousands)
Revenues $ 35,144 $ 137,343 $ -- $ 172,487
Earnings before income taxes 19,994 47,019 -- 67,013
Depreciation and amortization 2,258 37,639 -- 39,897
Capital expenditures 2,922 5,267 -- 8,189
Identifiable assets 969,485 2,260,045 (183,085) 3,046,445
Intersegment income (expense) 6,940 (6,940) -- --
FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------
RETAIL MORTGAGE
BANKING BANKING
OPERATION OPERATION ELIMINATIONS COMBINED
-----------------------------------------------------
(In thousands)
Revenues $ 30,202 $ 72,353 $ -- $ 102,555
Earnings before income taxes 19,341 15,696 -- 35,037
Depreciation and amortization 2,021 15,140 -- 17,161
Capital expenditures 409 15,897 -- 16,306
Identifiable assets 564,551 1,463,288 (126,755) 1,901,084
Intersegment income (expense) 8,873 (8,873) -- --
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 for intersegment borrowing.
52
53
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 18 - EARNINGS PER SHARE
The following is a reconciliation of the numerator and denominator of the basic
and diluted earnings per share calculation for the year ended December 31, 1999
(in thousands):
EARNINGS AVERAGE SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- -------------- ---------
Basic earnings $38,421 13,559 $2.83
Effect of options -- 390 --
------- ------ -----
Diluted earnings $38,421 13,949 $2.75
======= ====== =====
The following is a reconciliation of the numerator and denominator of the basic
and diluted earnings per share calculation for the year ended December 31, 1998
(in thousands):
EARNINGS AVERAGE SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- -------------- ---------
Basic earnings $41,063 13,670 $3.00
Effect of options -- 505 --
------- ------ -----
Diluted earnings $41,063 14,175 $2.90
======= ====== =====
The following is a reconciliation of the numerator and denominator of the basic
and diluted earnings per share calculation for the year ended December 31, 1997
(in thousands):
EARNINGS AVERAGE SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- -------------- ---------
Basic earnings $21,772 12,837 $1.70
Effect of options -- 103 --
------- ------ -----
Diluted earnings $21,772 12,940 $1.68
======= ====== =====
NOTE 18 - INITIAL PUBLIC OFFERING
STOCK OFFERING
The Company completed an initial public offering in May 1997 of 5,500,000 shares
of common stock; including 2,800,000 shares being sold by the stockholders of
Flagstar. That sale resulted in proceeds to the Company of $27.2 million.
NOTE 19 - 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.
Stock Option Plan
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 has a term of 10 years from the date of its approval in
April 1997, after which no awards may be made. Additional shares totaling
439,407 are reserved for future issuance by the Company.
The Option Plan is accounted for in accordance with the provisions of APB No.
25, "Accounting for Stock Issued to Employees" and the Company has adopted the
disclosure requirements of SFAS No. 123.
53
54
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 19 - STOCK OPTION AND PURCHASE PLANS, AND OTHER COMPENSATION PLANS
(CONTINUED)
No compensation has been recognized for the plan. Had compensation costs for the
plan been determined based on the fair value of the options at the grant date
consistent with the method of SFAS No. 123, the Company's earnings per share for
the year ended December 31, 1999, 1998, and 1997 would have been as follows (in
thousands, except per share data):
1999 1998 1997
-----------------------------------
Net Earnings
As reported $38,421 $41,063 $21,772
Pro forma $36,709 $37,391 $19,299
Basic earnings per share
As reported $ 2.83 $ 3.00 $ 1.70
Pro forma $ 2.71 $ 2.74 $ 1.50
Diluted earnings per share
As reported $ 2.75 $ 2.90 $ 1.68
Pro forma $ 2.63 $ 2.64 $ 1.49
The fair value of each option grant is estimated using the Black-Scholes
options-pricing model with the following weighted average assumptions used for
grants in 1999, 1998, and 1997, respectively: dividend yield of 2%; expected
volatility of 35.50%,31.44%, and 39.00%; a risk free rate of 5.81%, 5.60%, and
7.00%; and expected lives of 4.0 years, 3.0 years, and 6.0 years.
The following table summarizes the activity which occurred in the years ended
December 31, 1999, 1998, and 1997:
WEIGHTED AVERAGE NUMBER OF
GRANT PRICE OPTIONS
----------------------------
Options outstanding at January 1, 1997 $ -- --
Granted 13.00 1,108,300
Canceled 13.00 10,500
------
Options outstanding at December 31, 1997 13.00 1,097,800
Granted 21.36 92,658
Canceled 13.00 21,000
-----------------------
Options outstanding at December 31, 1998 13.66 1,169,458
Granted 24.09 451,533
Exercised 13.18 29,823
Canceled 20.02 9,898
-----------------------
Options outstanding at December 31, 1999 $16.61 1,581,270
=======================
54
55
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 19 - STOCK OPTION AND PURCHASE PLANS, AND OTHER COMPENSATION PLANS
(CONTINUED)
The following information pertains to the stock options issued pursuant to the
Option Plan but not exercised at December 31, 1999:
NUMBER OF OPTIONS WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER
GRANT PRICE OUTSTANDING AT REMAINING CONTRACTUAL GRANT EXERCISABLE AT
RANGE DECEMBER 31, 1999 LIFE (YEARS) PRICE DECEMBER 31, 1999
- -----------------------------------------------------------------------------------------------
$ 13.00 1,045,310 3.00 $13.00 1,045,310
$19.44-21.50 74,927 3.81 20.14 --
$23.81-25.56 438,633 6.36 24.03 --
$27.28-28.13 22,400 3.36 27.81 --
--------- ------ ---------
1,581,270 $16.61 1,045,310
========= ====== =========
Stock Purchase Plan
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 on the open market, receive a payment from Flagstar equal to 15% of the
share price. 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. During 1999, 1998 and 1997, respectively, the
Company spent approximately $59,000, $35,000, and $21,000 on the Purchase Plan.
Incentive Compensation Plan
The Incentive Compensation Plan ("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.
During 1999, two member of the executive management team were included in the
Incentive Plan. During 1999, the Company spent $1.6 million on the Incentive
Plan.
Deferred Compensation Plan
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. There were
no participants in this plan.
55
56
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 20 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table represents summarized data for each of the quarters in 1999,
1998, and 1997 (in thousands, except earnings per share data).
1999
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------------------------------------------------
Interest income $67,344 $60,234 $58,663 $52,429
Interest expense 49,062 44,626 41,822 38,222
-------------------------------------------------
Net interest income 18,282 15,608 16,841 14,207
Provision for losses 2,792 1,459 972 2,073
-------------------------------------------------
Net interest income after
Provision for losses 15,490 14,149 15,869 12,134
Loan administration income 4,477 4,725 7,519 3,151
Net gain on loan sales 6,530 1,187 11,748 19,208
Net gain on MSR sales 4,127 3,961 227 695
Other non-interest income 4,052 4,068 3,064 3,242
Non-interest expense 22,067 17,042 20,385 20,936
-------------------------------------------------
Earnings before income taxes 12,609 11,048 18,042 17,494
Provision for federal income taxes 4,454 3,844 6,343 6,131
-------------------------------------------------
Net earnings $ 8,155 $7,204 $11,699 $11,363
=================================================
Basic earnings per share $ 0.62 $ 0.52 $ 0.86 $ 0.83
=================================================
Diluted earnings per share $ 0.61 $ 0.51 $ 0.83 $ 0.80
=================================================
1998
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------------------------------------------------
Interest income $57,257 $49,618 $46,478 $37,908
Interest expense 39,787 35,985 34,003 27,412
-------------------------------------------------
Net interest income 17,470 13,633 12,475 10,496
Provision for losses 5,793 4,599 5,618 2,621
-------------------------------------------------
Net interest income after
Provision for losses 11,677 9,034 6,857 7,875
Loan administration income (2,704) 84 8 80
Net gain on loan sales 37,699 27,008 29,173 16,802
Net gain on MSR sales 731 206 999 1,884
Other non-interest income 2,624 1,423 1,285 1,111
Non-interest expense 33,755 19,650 18,139 15,299
-------------------------------------------------
Earnings before income taxes 16,272 18,105 20,183 12,453
Provision for federal income taxes 3,450 7,800 10,000 4,700
-------------------------------------------------
Net earnings $12,822 $10,305 $10,183 $ 7,753
=================================================
Basic earnings per share $ 0.93 $ 0.76 $ 0.74 $ 0.57
=================================================
Diluted earnings per share $ 0.90 $ 0.73 $ 0.73 $ 0.54
=================================================
56
57
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 20 - QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
1997
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
-------------------------------------------------
Interest income $37,965 $30,711 $28,085 $25,991
Interest expense 25,437 21,012 18,338 15,246
-------------------------------------------------
Net interest income 12,528 9,699 9,747 10,745
Provision for losses 1,261 1,416 1,676 662
-------------------------------------------------
Net interest income after
Provision for losses 11,267 8,283 8,071 10,083
Loan administration income 53 1,104 1,790 3,180
Net gain on loan sales 12,506 5,723 3,669 (123)
Net gain on MSR sales 1,623 6,990 9,167 9,315
Other non-interest income 1,927 1,449 1,249 214
Non-interest expense 17,284 13,822 15,833 15,565
-------------------------------------------------
Earnings before income taxes 10,092 9,727 8,113 7,104
Provision for federal income taxes 4,176 3,533 2,973 2,583
-------------------------------------------------
Net earnings $5,916 $6,194 $5,141 $ 4,521
=================================================
Basic earnings per share $ 0.45 $ 0.45 $ 0.40 $ 0.40
=================================================
Diluted earnings per share $ 0.44 $ 0.44 $ 0.40 $ 0.40
=================================================
57
58
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 21 - HOLDING COMPANY ONLY FINANCIAL STATEMENTS
The following are unconsolidated financial statements for the Company. These
condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
FLAGSTAR BANCORP, INC.
CONDENSED UNCONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS)
DECEMBER 31,
1999 1998
-----------------------
ASSETS
Cash and cash equivalents $ 3,782 $ 54
Investment in subsidiaries 254,489 163,799
Deferred tax benefit 1,858 --
Other assets 2,744 10
-----------------------
Total assets $262,873 $163,863
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Junior subordinated debentures $ 77,062
--------
Total interest paying liabilities 77,062
Other liabilities 97 $ 11
-----------------------
Total liabilities 77,159 11
STOCKHOLDERS' EQUITY
Common stock 129 137
Additional paid in capital 18,307 29,988
Retained earnings 167,278 133,727
-----------------------
Total stockholders' equity 185,714 163,852
-----------------------
Total liabilities and stockholders' equity $262,873 $163,863
=======================
58
59
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 21 - HOLDING COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
FLAGSTAR BANCORP, INC.
CONDENSED UNCONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
---------------------------------------
Income
Dividends from subsidiaries $30,100 $ 3,928 $ 690
Interest 147 -- --
---------------------------------------
Total 30,247 3,928 690
Expenses
Interest 4,904 -- --
General and administrative 467 171 104
---------------------------------------
Total 5,371 171 104
---------------------------------------
Earnings before undistributed earnings of
subsidiaries 24,876 3,757 586
Equity in undistributed earnings of
subsidiaries 11,687 37,306 21,186
---------------------------------------
Earnings before federal income tax benefit 36,563 41,063 21,772
Federal income tax benefit (1,858) -- --
---------------------------------------
Net earnings $38,421 $41,063 $21,772
=======================================
59
60
FLAGSTAR BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 21 - HOLDING COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
FLAGSTAR BANCORP, INC.
CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
------------------------------------
OPERATING ACTIVITIES
Net earnings $ 38,421 $ 41,063 $ 21,772
Adjustments to reconcile net earnings to net cash provided
by operating activities
Equity in undistributed earnings (11,687) (37,306) (21,186)
Change in other assets (2,734) 27 1
Provision for deferred tax benefit (1,858) -- --
Change in other liabilities 86 -- 11
------------------------------------
Net cash provided by operating activities 22,228 3,784 598
INVESTING ACTIVITIES
Net change in investment in subsidiaries (79,003) 38 (26,999)
------------------------------------
Net cash (provided) used in investment activities (79,003) 38 (26,999)
CASH FLOWS FROM FINANCING ACTIVITIES
Provides from the issuance of junior subordinated
debentures 77,062 -- --
Proceeds provided by the initial public offering -- -- 27,197
Proceeds from exercise of stock options 393 -- --
Common stock repurchased (12,082) -- --
Dividends paid (4,870) -- (820)
------------------------------------
Net cash provided by (used in) financing activities 60,503 (3,828) 26,377
------------------------------------
Net increase (decrease) in cash and cash equivalents 3,728 (44) (24)
Cash and cash equivalents at beginning of period 54 98 122
------------------------------------
Cash and cash equivalents at end of period $ 3,782 $ 54 $ 98
====================================
60
61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the section captioned "Proposal 1 - Election of
Directors" in the Company's proxy statement for the Company's 1999 Annual
Meeting of Shareholders (the "Proxy Statement") is incorporated herein by
reference. Reference is also made to the information appearing in Part
I - "Executive Officers," which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the
sections of the Proxy Statement captioned "Meetings and Committees and
Compensation of Directors", "Executive Compensation and Other Benefits", "Report
of the Compensation Committee", and "Stock Performance Graph".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to the
section of the Proxy Statement captioned "Outstanding Voting Securities."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the
section of the Proxy Statement captioned "Election of Directors", "Meetings and
Committees and Compensation of Directors" and "Certain Transactions".
61
62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
(a) The following documents are filed as a part of this report:
1. The following consolidated financial statements of the Company are
included in this Form 10-K under Item 8:
Management's Report
Report of Independent Certified Public Accountant
Consolidated Statements of Financial Condition - December 31, 1999 and
1998
Consolidated Statements of Earnings for the years ended December 31,
1999, 1998, and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998, and 1997
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
2. All of the schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
either not required under the related instructions, the required
information is contained elsewhere in this Form 10-K, or the schedules
are inapplicable and, therefore, have been omitted.
27. Financial Data Schedule (Edgar filing only).
Flagstar Bancorp, Inc., will furnish to any stockholder a copy of any of the
exhibits listed above upon written request and upon payment of a specified
reasonable fee, which fee shall be equal to the Company's reasonable expenses in
furnishing the exhibit to the stockholder. Requests for exhibits and information
regarding the applicable fee should be directed to: Michael W. Carrie, Executive
Vice President, at the address of the principal executive offices set forth on
the cover of this Report on Form 10-K.
62
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, on March 21, 2000.
FLAGSTAR BANCORP, INC.
By: /s/ THOMAS J. HAMMOND
---------------------------------------
Thomas J. Hammond
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 21, 2000.
SIGNATURE TITLE
- -----------------------------------------------------------------------------------------------------------
By: /s/ THOMAS J. HAMMOND Chairman of the Board and Chief Executive Officer
------------------------------------------------
Thomas J. Hammond
By: /s/ MARK T. HAMMOND Vice Chairman of the Board and President
------------------------------------------------
Mark T. Hammond
By: /s/ MICHAEL W. CARRIE Director, Executive Vice President and Chief
------------------------------------------------ Financial Officer (Principal Financial and
Michael W. Carrie Accounting Officer)
By: /s/ JOAN H. ANDERSON Executive Vice President and Director
------------------------------------------------
Joan H. Anderson
By: /s/ JAMES D. COLEMAN Director
------------------------------------------------
James D. Coleman
By: /s/ RICHARD S. ELSEA Director
------------------------------------------------
Richard S. Elsea
By: /s/ C. MICHAEL KOJAIAN Director
------------------------------------------------
C. Michael Kojaian
By: /s/ JAMES D. ISBISTER Director
------------------------------------------------
James D. Isbister
By: /s/ JOHN R. KERSTEN Director
------------------------------------------------
John R. Kersten
63
64
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
1 The following consolidated financial statements of the
Company are included this Form 10-K under Item 8:
Management's Report
Report of Independent Certified Public Accountant
Consolidated Statements of Financial Condition - December
31, 1999 and 1998
Consolidated Statements of Earnings for the years ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
27. Financial Data Schedule (Edgar filing only).
64