FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 001-16577
(Exact name of registrant as specified in its charter)
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Michigan
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38-3150651 |
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(State or other jurisdiction of
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(I.R.S. Employer |
Incorporation or organization)
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Identification No.) |
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5151 Corporate Drive, Troy, Michigan
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48098-2639 |
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(Address of principal executive offices)
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(Zip code) |
(248) 312-2000
(Registrants telephone number, including area code)
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 þ No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ.
As of November 6, 2008, 83,626,726 shares of the registrants common stock, $0.01 par value,
were issued and outstanding.
FORWARDLOOKING STATEMENTS
This report contains certain forward-looking statements with respect to the financial
condition, results of operations, plans, objectives, future performance and business of Flagstar
Bancorp, Inc. (Flagstar or the Company) and these statements are subject to risk and
uncertainty. Forward-looking statements, within the meaning of the Private Securities Litigation
Reform Act of 1995, include those using words or phrases such as believes, assumes, expects,
anticipates, plans, trend, objective, continue, remain, pattern or similar
expressions or future or conditional verbs such as will, would, should, could, might,
can, may or similar expressions.
There are a number of important factors that could cause future results to differ materially
from historical performance and these forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed under the heading Risk Factors in
Part I, Item 1A of the Companys Annual Report on Form 10-K for the year ended December 31, 2007
and Part II, Item 1A of this Quarterly Report on Form 10-Q, including: (1) general business,
economic and political conditions may significantly affect our earnings; (2) if we cannot
effectively manage the impact of the volatility of interest rates, our earnings could be adversely
affected; (3) the value of our mortgage servicing rights could decline with reduction in interest
rates; (4) gains on mortgage servicing rights may be difficult to realize due to disruption in the
capital markets; (5) we use estimates in determining fair value of certain of our assets, which
estimates may prove to be incorrect and result in significant declines in valuation; (6) current
and further deterioration in the housing and commercial real estate markets may lead to increased
loss severities and further worsening of delinquencies and non-performing assets in our loan
portfolios. Consequently, our allowance for loan losses may not be adequate to cover actual
losses, and we may be required to materially increase our reserves; (7) our secondary market
reserve for losses could be insufficient; (8) our home lending profitability could be significantly
reduced if we are not able to resell mortgages; (9) our commercial real estate and commercial
business loan portfolios carry heightened credit risk; (10) we have substantial risks in connection
with securitizations and loan sales; (11) our ability to borrow funds, maintain or increase
deposits or raise capital could be limited, which could adversely affect our liquidity and
earnings; (12) we may be required to raise capital at terms that are materially adverse to our
stockholders; (13) our holding company is dependent on the Bank for funding of obligations and
dividends; (14) we may not be able to replace key members of senior management or attract and
retain qualified relationship managers in the future; (15) the network and computer systems on
which we depend could fail or experience a security breach; (16) our business is highly regulated;
(17) our business has volatile earnings because it operates based on a multi-year cycle; (18) our
loans are geographically concentrated in only a few states; (19) a larger percentage or our loans
are collateralized by real estate, and an adverse change in the real estate market may result in
losses and adversely affect our portfolio; (20) a significant part of our business strategy
involves adding new branch locations, and our failure to grow may adversely affect our business,
prospects, and results of operations and financial condition; (21) we are subject to heightened
regulatory scrutiny with respect to bank secrecy and anti-money laundering statutes and
regulations; (22) certain hedging strategies that we use to manage our investment in mortgage
servicing rights may be ineffective to offset any adverse changes in the fair value of these assets
due to changes in interest rate; and (23) we depend on our institutional counterparties to provide
services that are critical to our business. If one or more of our institutional counterparties
defaults on its obligations to us or becomes insolvent, it could materially adversely affect our
earnings, liquidity, capital position and financial condition.
The Company does not undertake, and specifically disclaims any obligation, to update any
forward-looking statements to reflect occurrences or unanticipated events or circumstances after
the date of such statements.
2
FLAGSTAR BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2008
TABLE OF CONTENTS
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited condensed consolidated financial statements of the Company are as follows:
Consolidated Statements of Financial Condition September 30, 2008 (unaudited) and December
31, 2007.
Unaudited Consolidated Statements of Operations For the three and nine months ended
September 30, 2008 and 2007.
Consolidated Statements of Stockholders Equity and Comprehensive Loss For the nine months
ended
September 30, 2008 (unaudited) and for the year ended December 31, 2007.
Unaudited Consolidated Statements of Cash Flows For the nine months ended September 30,
2008 and 2007.
Unaudited Notes to Consolidated Financial Statements.
4
Flagstar Bancorp, Inc.
Consolidated Statements of Financial Condition
(In thousands, except for share data)
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At September 30, |
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At December 31, |
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2008 |
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2007 |
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(Unaudited) |
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Assets |
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Cash and cash items |
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$ |
155,889 |
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$ |
129,992 |
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Interest-bearing deposits |
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192,046 |
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210,177 |
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Cash and cash equivalents |
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347,935 |
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340,169 |
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Securities classified as trading |
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23,074 |
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13,703 |
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Securities classified as available for sale |
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1,041,446 |
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1,308,608 |
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Mortgage-backed securities held to maturity (fair value $1.3 billion at
December 31, 2007) |
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1,255,431 |
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Other investments |
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31,826 |
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26,813 |
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Loans available for sale |
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1,961,352 |
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3,511,310 |
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Loans held for investment |
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9,134,884 |
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8,134,397 |
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Less: allowance for loan losses |
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(224,000 |
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(104,000 |
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Loans held for investment, net |
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8,910,884 |
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8,030,397 |
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Total interest-earning assets |
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12,160,628 |
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14,356,439 |
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Accrued interest receivable |
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53,308 |
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57,888 |
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Repossessed assets, net |
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119,205 |
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95,074 |
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Federal Home Loan Bank stock |
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373,443 |
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348,944 |
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Premises and equipment, net |
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246,340 |
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237,652 |
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Mortgage servicing rights at fair value |
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722,159 |
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Mortgage servicing rights, net |
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9,992 |
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413,986 |
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Other assets |
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318,405 |
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151,120 |
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Total assets |
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$ |
14,159,369 |
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$ |
15,791,095 |
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Liabilities and Stockholders Equity |
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Liabilities |
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Deposits |
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$ |
7,420,804 |
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$ |
8,236,744 |
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Federal Home Loan Bank advances |
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5,438,000 |
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6,301,000 |
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Security repurchase agreements |
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108,000 |
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108,000 |
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Long term debt |
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248,660 |
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248,685 |
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Total interest-bearing liabilities |
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13,215,464 |
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14,894,429 |
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Accrued interest payable |
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27,237 |
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47,070 |
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Secondary market reserve |
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28,600 |
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27,600 |
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Other liabilities |
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211,597 |
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129,018 |
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Total liabilities |
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13,482,898 |
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15,098,117 |
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Commitments and Contingencies |
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Stockholders Equity |
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Preferred stock $0.01 par value, 25,000,000 shares authorized; no
shares outstanding |
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Common stock $0.01 par value, 150,000,000 shares authorized; 83,626,726
and 63,656,979 shares issued, and 83,626,726 and 60,270,624
shares outstanding at September 30, 2008 and December 31, 2007,
respectively |
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836 |
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637 |
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Additional paid in capital |
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118,664 |
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64,350 |
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Accumulated other comprehensive loss |
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(95,668 |
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(11,495 |
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Retained earnings |
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652,639 |
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681,165 |
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Treasury stock, at cost, no shares at September 30, 2008, and
3,386,355 shares at December 31, 2007 |
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(41,679 |
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Total stockholders equity |
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676,471 |
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692,978 |
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Total liabilities and stockholders equity |
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$ |
14,159,369 |
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$ |
15,791,095 |
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The accompanying notes are an integral part of these consolidated financial statements.
5
Flagstar Bancorp, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
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For the Three Months Ended |
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For the Nine Months Ended |
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September 30, |
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September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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(Unaudited) |
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Interest Income |
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Loans |
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$ |
172,163 |
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$ |
201,464 |
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$ |
526,039 |
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$ |
578,673 |
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Mortgage-backed securities held to maturity |
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15,485 |
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15,576 |
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43,869 |
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Securities available for sale |
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14,563 |
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15,212 |
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51,325 |
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42,334 |
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Interest-bearing deposits |
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1,416 |
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3,647 |
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5,561 |
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9,823 |
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Other |
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395 |
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1,343 |
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1,453 |
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5,486 |
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Total interest income |
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188,537 |
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237,151 |
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599,954 |
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680,185 |
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Interest Expense |
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Deposits |
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60,940 |
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91,117 |
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215,807 |
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262,181 |
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FHLB advances |
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62,348 |
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70,534 |
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190,168 |
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203,268 |
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Federal reserve borrowings |
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419 |
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484 |
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Security repurchase agreements |
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1,179 |
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17,982 |
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5,541 |
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48,416 |
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Other |
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3,810 |
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3,582 |
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11,916 |
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10,495 |
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Total interest expense |
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128,696 |
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183,215 |
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423,916 |
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524,360 |
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Net interest income |
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59,841 |
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53,936 |
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176,038 |
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155,825 |
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Provision for loan losses |
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89,612 |
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30,195 |
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167,708 |
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49,941 |
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Net interest income (loss) after provision
for loan losses |
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(29,771 |
) |
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23,741 |
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8,330 |
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105,884 |
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Non-Interest Income |
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Loan fees and charges |
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777 |
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(218 |
) |
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2,278 |
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1,257 |
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Deposit fees and charges |
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7,183 |
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5,808 |
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20,029 |
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16,496 |
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Loan administration |
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25,655 |
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4,333 |
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45,980 |
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10,097 |
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Net gain (loss) on loan sales |
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22,152 |
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(17,457 |
) |
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129,403 |
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35,841 |
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Net gain on sales of mortgage servicing rights |
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896 |
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456 |
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348 |
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6,181 |
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Net gain (loss) on sales of securities
available for sale |
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149 |
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(2,944 |
) |
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5,019 |
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(2,215 |
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(Loss) gain on trading securities |
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(12,899 |
) |
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1,914 |
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(26,485 |
) |
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1,914 |
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Other fees and charges |
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9,475 |
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9,376 |
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29,768 |
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29,039 |
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Total non-interest income |
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53,388 |
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1,268 |
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206,340 |
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98,610 |
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Non-Interest Expense |
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Compensation and benefits |
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51,461 |
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40,037 |
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157,538 |
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118,680 |
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Occupancy and equipment |
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19,462 |
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17,599 |
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59,721 |
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51,380 |
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Asset resolution |
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18,019 |
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1,952 |
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29,799 |
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|
6,912 |
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General and administrative |
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30,222 |
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13,672 |
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55,010 |
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39,920 |
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Total non-interest expense |
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119,164 |
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73,260 |
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302,068 |
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216,892 |
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Loss before federal income taxes |
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(95,547 |
) |
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(48,251 |
) |
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(87,398 |
) |
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(12,398 |
) |
Benefit for federal income taxes |
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(33,456 |
) |
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(16,196 |
) |
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(30,454 |
) |
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(3,233 |
) |
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Net Loss |
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$ |
(62,091 |
) |
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$ |
(32,055 |
) |
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$ |
(56,944 |
) |
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$ |
(9,165 |
) |
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Loss per share |
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|
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Basic |
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$ |
(0.79 |
) |
|
$ |
(0.53 |
) |
|
$ |
(0.83 |
) |
|
$ |
(0.15 |
) |
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Diluted |
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$ |
(0.79 |
) |
|
$ |
(0.53 |
) |
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$ |
(0.83 |
) |
|
$ |
(0.15 |
) |
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|
The accompanying notes are an integral part of these consolidated financial statements.
6
Flagstar Bancorp, Inc.
Consolidated Statements of Stockholders Equity and Comprehensive Loss
(In thousands, except per share data)
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Accumulated |
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Additional |
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Other |
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Total |
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Preferred |
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Common |
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Paid in |
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Comprehensive |
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Retained |
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Treasury |
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Stockholders |
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Stock |
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Stock |
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Capital |
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Income (Loss) |
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Earnings |
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Stock |
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Equity |
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Balance at January 1, 2007 |
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$ |
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|
$ |
636 |
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$ |
63,223 |
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$ |
5,182 |
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$ |
743,193 |
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$ |
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$ |
812,234 |
|
Net loss |
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(39,225 |
) |
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(39,225 |
) |
Reclassification of gain on swap
extinguishment |
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(101 |
) |
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(101 |
) |
Change in net unrealized loss on swaps
used in cash flow hedges |
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|
(3,957 |
) |
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|
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|
|
(3,957 |
) |
Change in net unrealized loss on
securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,619 |
) |
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|
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|
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|
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|
(12,619 |
) |
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Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,902 |
) |
Adjustment to initially apply FIN 48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,428 |
) |
|
|
|
|
|
|
(1,428 |
) |
Stock options exercised |
|
|
|
|
|
|
1 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
1,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,083 |
|
Tax effect from stock-based compensation |
|
|
|
|
|
|
|
|
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25 |
) |
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41,705 |
) |
|
|
(41,705 |
) |
Issuance of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
26 |
|
Dividends paid ($0.35 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,375 |
) |
|
|
|
|
|
|
(21,375 |
) |
|
|
|
Balance at December 31, 2007 |
|
|
|
|
|
|
637 |
|
|
|
64,350 |
|
|
|
(11,495 |
) |
|
|
681,165 |
|
|
|
(41,679 |
) |
|
|
692,978 |
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,944 |
) |
|
|
|
|
|
|
(56,944 |
) |
Reclassification of gain on dedesignation
of swaps used in cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(236 |
) |
|
|
|
|
|
|
|
|
|
|
(236 |
) |
Change in net unrealized loss on
securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83,937 |
) |
|
|
|
|
|
|
|
|
|
|
(83,937 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(141,117 |
) |
Cumulative effect adjustment due to
change of accounting for residential
mortgage servicing rights |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,418 |
|
|
|
|
|
|
|
28,418 |
|
Issuance of preferred stock |
|
|
1 |
|
|
|
|
|
|
|
45,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,797 |
|
Issuance of common stock |
|
|
|
|
|
|
199 |
|
|
|
54,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,361 |
|
Issuance of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,092 |
|
|
|
41,092 |
|
Conversion of preferred stock |
|
|
(1 |
) |
|
|
|
|
|
|
(45,796 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45,797 |
) |
Restricted stock issued |
|
|
|
|
|
|
|
|
|
|
(587 |
) |
|
|
|
|
|
|
|
|
|
|
587 |
|
|
|
|
|
Stock options exercised |
|
|
|
|
|
|
|
|
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
867 |
|
Tax effect from stock-based compensation |
|
|
|
|
|
|
|
|
|
|
(205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(205 |
) |
|
|
|
Balance at September 30, 2008 |
|
$ |
|
|
|
$ |
836 |
|
|
$ |
118,664 |
|
|
$ |
(95,668 |
) |
|
$ |
652,639 |
|
|
$ |
|
|
|
$ |
676,471 |
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
7
Flagstar Bancorp, Inc.
Consolidated Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
Operating Activities |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(56,944 |
) |
|
$ |
(9,165 |
) |
Adjustments to net loss to net cash used in operating activities |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
167,708 |
|
|
|
49,941 |
|
Depreciation |
|
|
17,015 |
|
|
|
19,024 |
|
Amortization of MSRs |
|
|
1,949 |
|
|
|
52,668 |
|
Decrease in valuation allowance in mortgage servicing rights |
|
|
(82 |
) |
|
|
(358 |
) |
Loss on fair value of residential mortgage servicing rights, net of hedging gains (losses) |
|
|
58,839 |
|
|
|
|
|
Stock-based compensation expense |
|
|
867 |
|
|
|
1,119 |
|
Loss on interest rate swaps |
|
|
149 |
|
|
|
|
|
Net gain on the sale of assets |
|
|
(429 |
) |
|
|
(3,041 |
) |
Net gain on loan sales |
|
|
(129,403 |
) |
|
|
(35,841 |
) |
Net gain on sales of mortgage servicing rights |
|
|
(348 |
) |
|
|
(6,181 |
) |
Net (gain) loss on securities classified as available for sale |
|
|
(5,019 |
) |
|
|
2,215 |
|
Unrealized (gain) loss on trading securities |
|
|
26,485 |
|
|
|
(1,914 |
) |
Proceeds from sales and securitization of loans available for sale |
|
|
18,745,006 |
|
|
|
16,031,878 |
|
Origination and repurchase of mortgage loans available for sale, net of principal repayments |
|
|
(21,068,787 |
) |
|
|
(19,018,391 |
) |
Decrease (increase) in accrued interest receivable |
|
|
4,580 |
|
|
|
(11,062 |
) |
(Increase) decrease in other assets |
|
|
(88,256 |
) |
|
|
387 |
|
Decrease in accrued interest payable |
|
|
(19,833 |
) |
|
|
(119 |
) |
Net tax effect of stock grants issued |
|
|
205 |
|
|
|
25 |
|
Decrease in federal income taxes payable |
|
|
(98,996 |
) |
|
|
(21,229 |
) |
Decrease in payable for securities purchased |
|
|
|
|
|
|
(249,694 |
) |
Increase in other liabilities |
|
|
47,591 |
|
|
|
8,318 |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(2,397,703 |
) |
|
|
(3,191,420 |
) |
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Net change in other investments |
|
|
(5,013 |
) |
|
|
(745 |
) |
Repayment of mortgage-backed securities held to maturity |
|
|
90,846 |
|
|
|
249,475 |
|
Proceeds from sale of investment securities available for sale |
|
|
913,798 |
|
|
|
254,937 |
|
Repayment (purchase) of investment securities available for sale |
|
|
138,988 |
|
|
|
(132,755 |
) |
Proceeds from sales of portfolio loans |
|
|
1,312,084 |
|
|
|
693,283 |
|
Origination of portfolio loans, net of principal repayments |
|
|
1,474,806 |
|
|
|
708,063 |
|
Purchase of Federal Home Loan Bank stock |
|
|
(24,499 |
) |
|
|
(53,524 |
) |
Investment in unconsolidated subsidiary |
|
|
|
|
|
|
1,238 |
|
Proceeds from the disposition of repossessed assets |
|
|
78,447 |
|
|
|
70,318 |
|
Acquisitions of premises and equipment, net of proceeds |
|
|
(24,240 |
) |
|
|
(25,891 |
) |
Proceeds from the sale of mortgage servicing rights |
|
|
|
|
|
|
33,915 |
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
3,955,217 |
|
|
|
1,798,314 |
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Net (decrease) increase in deposit accounts |
|
|
(815,940 |
) |
|
|
862,068 |
|
Net decrease in security repurchase agreements |
|
|
|
|
|
|
(522,138 |
) |
Net (decrease) increase in Federal Home Loan Bank advances |
|
|
(863,000 |
) |
|
|
985,000 |
|
Payment on other long term debt |
|
|
(25 |
) |
|
|
|
|
Issuance of junior subordinated debt |
|
|
|
|
|
|
40,000 |
|
Net receipt of payments of loans serviced for others |
|
|
21,005 |
|
|
|
17,069 |
|
Net receipt of escrow payments |
|
|
12,885 |
|
|
|
19,931 |
|
Proceeds from the exercise of stock options |
|
|
77 |
|
|
|
(241 |
) |
Net tax effect of stock grants issued |
|
|
(205 |
) |
|
|
(25 |
) |
Issuance of preferred stock |
|
|
45,797 |
|
|
|
|
|
Issuance of common stock |
|
|
8,566 |
|
|
|
|
|
Issuance of treasury stock |
|
|
41,092 |
|
|
|
26 |
|
8
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
Dividends paid to stockholders |
|
|
|
|
|
|
(18,361 |
) |
Purchase of treasury stock |
|
|
|
|
|
|
(41,705 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(1,549,748 |
) |
|
|
1,341,599 |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
7,766 |
|
|
|
(51,507 |
) |
Beginning cash and cash equivalents |
|
|
340,169 |
|
|
|
277,236 |
|
|
|
|
|
|
|
|
Ending cash and cash equivalents |
|
$ |
347,935 |
|
|
$ |
225,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Loans held for investment transferred to repossessed assets |
|
$ |
149,855 |
|
|
$ |
88,576 |
|
|
|
|
|
|
|
|
Total interest payments made on deposits and other borrowings |
|
$ |
443,748 |
|
|
$ |
524,479 |
|
|
|
|
|
|
|
|
Federal income taxes paid |
|
$ |
5,808 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Reclassification of mortgage loans originated for portfolio to mortgage loans available for
sale |
|
$ |
280,635 |
|
|
$ |
693,283 |
|
|
|
|
|
|
|
|
Reclassification of mortgage loans originated available for sale then transferred to
portfolio loans |
|
$ |
1,583,069 |
|
|
$ |
210,639 |
|
|
|
|
|
|
|
|
Mortgage servicing rights resulting from sale or securitization of loans |
|
$ |
292,004 |
|
|
$ |
247,570 |
|
|
|
|
|
|
|
|
Reclassification of mortgage backed securities held to maturity to securities available for
sale |
|
$ |
1,163,681 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Retention of residual interests in securitization transactions |
|
$ |
|
|
|
$ |
20,487 |
|
|
|
|
|
|
|
|
Recharacterization of mortgage loans available for sale to mortgage-backed securities
available for sale |
|
$ |
|
|
|
$ |
406,094 |
|
|
|
|
|
|
|
|
Recharacterization of loans held for investment to mortgage-backed securities held to
maturity |
|
$ |
|
|
|
$ |
345,794 |
|
|
|
|
|
|
|
|
Conversion of mandatory convertible non-cumulative perpetual preferred stock |
|
$ |
45,797 |
|
|
$ |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
9
Flagstar Bancorp, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
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 $14.2
billion in assets at September 30, 2008, Flagstar is the largest financial institution
headquartered in Michigan.
The Companys principal business is obtaining funds in the form of deposits and wholesale
borrowings and investing those funds in single-family mortgages and other types of loans. Its
primary lending activity is the acquisition or origination of single-family mortgage loans. The
Company also originates consumer loans, commercial real estate loans, and non-real estate
commercial loans and it services a significant volume of residential mortgage loans for others,
although the Company has recently suspended originating substantially all loans other than those
that are eligible for sale through Fannie Mae or Freddie Mac or insured through the Federal Housing
Administration (FHA).
The Company sells or securitizes most of the mortgage loans that it originates and generally
retains the right to service the mortgage loans that it sells. These mortgage servicing rights
(MSRs) have occasionally been sold by the Company in transactions separate from the sale of the
underlying mortgages. The Company may also retain a portion of its loan production on its
consolidated statement of financial condition as loans held for investment in order to enhance the
Companys leverage ability and receive the interest spread between earning assets and paying
liabilities over the longer term.
The Bank is a member of the Federal Home Loan Bank of Indianapolis (FHLB) and is subject to
regulation, examination and supervision by the Office of Thrift Supervision (OTS) and the Federal
Deposit Insurance Corporation (FDIC). The Banks deposits are insured by the FDIC up to
applicable limits.
Note 2. Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of the
Company and its consolidated subsidiaries. All significant intercompany balances and transactions
have been eliminated. In accordance with current accounting principles, the Companys trust
subsidiaries are not consolidated. In addition, certain prior period amounts have been
reclassified to conform to the current period presentation.
The unaudited consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles for interim information and in accordance
with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the
Securities and Exchange Commission (SEC). Accordingly, they do not include all the information
and footnotes required by accounting principles generally accepted in the United States of America
(U.S. GAAP) for complete financial statements. The accompanying interim consolidated financial
statements are unaudited; however, in the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have been included. The
results of operations for the three and nine month periods ended September 30, 2008, are not
necessarily indicative of the results that may be expected for the year ending December 31, 2008.
For further information, you should refer to the consolidated financial statements and footnotes
thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2007.
The Form 10-K can be found on the Companys Investor Relations web page, at
www.flagstar.com, and on the website of the SEC, at www.sec.gov.
Note 3. Recent Accounting Developments
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) 157, Fair Value Measurements. SFAS 157 defines the term
fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and
expands disclosures about fair value measurements. SFAS 157 clarifies that the exchange price is
the price in an orderly transaction between market participants to sell an asset or transfer a
liability at the measurement date. SFAS 157 emphasizes that fair value is a market-based
measurement and not an entity-specific measurement. It also establishes a hierarchy used in such
measurement and expands the required disclosures of assets and liabilities measured at fair value.
The Company adopted SFAS 157 as of January 1, 2008. See Note 4, Fair Value Accounting for
further information.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS 159 permits entities to choose to measure financial instruments and
certain other items at fair value that are not currently required to be measured at fair value.
The decision to elect the fair value option may be applied instrument by instrument, is irrevocable
and must be applied to the entire instrument and not to specified risks, specific cash flows or
10
portions of that instrument. An entity is restricted in choosing the dates to elect the fair
value option for an eligible item. The Company adopted SFAS 159 effective January 1, 2008. See
Note 4, Fair Value Accounting for further information.
In November 2007, the FASB issued SFAS 160, Non-controlling Interest in Consolidated
Financial Statements an amendment to ARB No. 51. SFAS 160 changes the way consolidated net
earnings are presented. The new standard requires consolidated net earnings to be reported at
amounts attributable to both the parent and the non-controlling interest on the face of the
consolidated statement of operations. The adoption of this statement will result in more
transparent reporting of the net earnings attributable to non-controlling interests. The statement
establishes a single method of accounting for changes in a parents ownership interest in a
subsidiary which does not result in deconsolidation. The statement also requires that a parent
recognize a gain or loss in net earnings when a subsidiary is deconsolidated. The adoption of SFAS
160 is effective for the Company on January 1, 2009. Management does not expect that the adoption
of this statement will have a material impact on the Companys consolidated financial condition,
results of operation or liquidity.
In November 2007, the SEC issued Staff Accounting Bulletin 109 (SAB 109) regarding the
written loan commitments that are accounted for at fair value through earnings under U.S. GAAP.
SAB 109 supersedes SAB 105 and expresses the current view of the SEC staff that, consistent with
the guidance in SFAS 156, Accounting for Servicing of Financial Assets and SFAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities, the expected net future cash flows
related to the associated servicing of the loans should be included in the measurement of all
written loan commitments that are accounted for at fair value through earnings. The adoption of
SAB 109 was effective on a prospective basis for the Companys derivative loan commitments issued
or modified on or after January 1, 2008. The effect of this change resulted in an increase in the
Companys gain on loan sales by approximately $6.7 million during the three month period ended
September 30, 2008.
In December 2007, the SEC issued Staff Accounting Bulletin 110 (SAB 110). SAB 110 expresses
the views of the SEC regarding the use of a simplified method in developing an estimate of the
expected term of plain vanilla share options as discussed in SAB 107 and issued under SFAS 123
(revised 2004), Share-Based Payment. The SEC indicated in SAB 107 that it would accept a
companys decision to use the simplified method, regardless of whether the company had sufficient
information to make more refined estimates of expected term. Under SAB 107, the SEC had believed
detailed information about employee exercise behavior would be readily available and therefore
would not expect companies to use the simplified method for share option grants after December 31,
2007. SAB 110 states that the SEC will continue to accept, under certain circumstances, the use of
the simplified method beyond December 31, 2007. The Company does not utilize the simplified
method, and therefore management does not expect that this pronouncement will have an impact on the
Companys consolidated financial condition, results of operation or liquidity.
In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging
Activities-an amendment of FASB Statement No. 133. SFAS 161 requires enhanced disclosures about
an entitys derivative and hedging activities and thereby improves on the transparency of financial
reporting. In adopting SFAS 161, entities are required to provide enhanced disclosures about (a)
how and why an entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entitys financial positions, financial
performance and cash flows. Because this pronouncement affects only disclosures, this
pronouncement will not have an impact on the Companys consolidated financial condition, results of
operation or liquidity. The adoption of SFAS 161 is effective for fiscal years beginning after
November 15, 2008, with early adoption permitted. The Company does not expect to elect early
adoption of SFAS 161.
In May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting
Principles. SFAS 162 identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements of non-governmental
entities that are presented in conformity with U.S. GAAP (the GAAP hierarchy). The adoption of
SFAS 162 will be effective 60 days following SEC approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. Management does not expect that the adoption of this
statement will have a material impact of this Companys consolidated financial condition, results
of operation or liquidity.
In May 2008, the FASB issued SFAS 163, Accounting for Financial Guarantee Insurance Contracts
- an interpretation of FASB Statement No. 60. SFAS 163 requires that an insurance enterprise
recognize a claim liability prior to an event of default when there is evidence that credit
deterioration has occurred in an insured financial obligation. The statement also clarifies how
SFAS 60 applies to financial guarantee insurance contracts by insurance enterprises. The statement
also requires expanded disclosures about financial guarantee insurance contracts. The adoption of
SFAS 163 will be effective for financial statements issued for fiscal years beginning after
December 15, 2008, and all interim periods of those years, except for some disclosures about the
risk-management activities. Management does not expect that this statement will have an impact on
the Companys consolidated financial condition, results of operation or liquidity.
11
Note 4. Fair Value Accounting
On January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements and SFAS 159, The
Fair Value Option for Financial Assets and Financial Liabilities. SFAS 157 establishes a
framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157
was issued to establish a uniform definition of fair value. The definition of fair value under
SFAS 157 is market-based as opposed to company-specific and includes the following:
|
|
|
Defines fair value as the price that would be received to sell an asset or paid to
transfer a liability, in either case through an orderly transaction between market
participants at a measurement date, and establishes a framework for measuring fair
value; |
|
|
|
|
Establishes a three-level hierarchy for fair value measurements based upon the
transparency of inputs to the valuation of an asset or liability as of the measurement
date; |
|
|
|
|
Nullifies the guidance in EITF 02-3, which required the deferral of profit at
inception of a transaction involving a derivative financial instrument in the absence of
observable data supporting the valuation technique; |
|
|
|
|
Eliminates large position discounts for financial instruments quoted in active
markets and requires consideration of the companys creditworthiness when valuing
liabilities; and |
|
|
|
|
Expands disclosures about instruments that are measured at fair value. |
SFAS 159 provides an option to elect fair value as an alternative measurement for selected
financial assets, financial liabilities, unrecognized Company commitments and written loan
commitments not previously recorded at fair value. In accordance with the provisions of SFAS 159,
the Company, as of January 1, 2008, elected the fair value option for certain non-investment grade
residual securities from private-label securitizations. The Company elected fair value on these
residual securities and reclassified these investments as securities trading to provide
consistency in the accounting for the Companys residual interests. The Company had recognized a
permanent impairment on these residual securities as of December 31, 2007, thereby reducing the
carrying value to fair value at that time. Thus, the fair value election had no impact on opening
retained earnings. The decrease in fair value for the three and nine months ended September 30,
2008 was $10.7 million and $23.9 million, respectively, before taxes, which is included within the
total loss on trading securities reported in the Companys consolidated statement of operations.
Effective January 1, 2008, the Company elected the fair value measurement method for
residential mortgage servicing rights (MSRs) under SFAS 156 Accounting for Servicing of
Financial Assets an amendment of FASB 140. Upon election, the carrying value of the residential
MSRs was increased to fair value by recognizing a cumulative effect adjustment to retained earnings
of $43.7 million before tax, or $28.4 million after tax. Management elected the fair value
measurement method of accounting for residential MSRs to be consistent with the fair value
accounting method required for its risk management strategy to hedge the fair value of these
assets. Changes in the fair value of residential MSRs, as well as changes in fair value of the
related derivative instruments, are recognized each period within loan administration income (loss)
on the consolidated statement of operations.
Determination of Fair Value
The following is a description of the Companys valuation methodologies for assets measured at
fair value which have been applied to all assets carried at fair value, whether as a result of the
adoption of SFAS 159, SFAS 156 or previously carried at fair value.
The Company has an established process for determining fair values. Fair value is based upon
quoted market prices, where available. If listed prices or quotes are not available, fair value is
based upon internally developed models that use primarily market-based or independently-sourced
market parameters, including interest rate yield curves and option volatilities. Valuation
adjustments may be made to ensure that financial instruments are recorded at fair value. These
adjustments include amounts to reflect counterparty credit quality, creditworthiness, liquidity and
unobservable parameters that are applied consistently over time. Any changes to the valuation
methodology are reviewed by management to determine appropriateness of the changes. As markets
develop and the pricing for certain products becomes more transparent, the Company expects to
continue to refine its valuation methodologies.
The methods described above may produce a fair value estimate that may not be indicative of
net realizable value or reflective of future fair values. Furthermore, while the Company believes
its valuation methods are appropriate and consistent with other market participants, the use of
different methodologies or assumptions to determine the fair value of certain financial instruments
could result in different estimates of fair values of the same financial instruments at the
reporting date.
12
Valuation Hierarchy
SFAS 157 establishes a three-level valuation hierarchy for disclosure of fair value
measurements. The valuation hierarchy favors the transparency of inputs to the valuation of an
asset or liability as of the measurement date. The three levels are defined as follows.
|
|
|
Level 1 Fair value is based upon quoted prices (unadjusted) for identical assets or
liabilities in active markets in which the Company can participate. |
|
|
|
|
Level 2 Fair value is based upon quoted prices for similar (i.e., not identical)
assets and liabilities in active markets, and other inputs that are observable for the
asset or liability, either directly or indirectly, for substantially the full term of the
financial instrument. |
|
|
|
|
Level 3 Fair value is based upon financial models using primarily unobservable inputs. |
A financial instruments categorization within the valuation hierarchy is based upon the
lowest level of input that is significant to the fair value measurement.
The following is a description of the valuation methodologies used by the Company for
instruments measured at fair value, as well as the general classification of such instruments
pursuant to the valuation hierarchy.
Assets
Securities classified as trading. These securities are non-investment grade residual
securities that arose from private-label securitizations of the Company in 2005, 2006 and 2007.
These non-investment grade residual securities do not trade in an active, open market with readily
observable prices and are therefore classified within the Level 3 valuation hierarchy.
Accordingly, the fair value of residual securities is determined by discounting estimated net
future cash flows using expected prepayment rates and discount rates that approximate current
market rates. Estimated net future cash flows include assumptions related to expected credit
losses on these securities. The Company maintains a model that evaluates the default rate and
severity of loss on the residual securities collateral, considering such factors as loss
experience, delinquencies, loan-to-value ratios, borrower credit scores and property type.
Securities classified as available for sale. Where quoted prices for securities are available
in an active market, those securities are classified within Level 1 of the valuation hierarchy. If
such quoted market prices are not available, then fair values are estimated using pricing models,
quoted prices of securities with similar characteristics, or discounted cash flows. Examples of
securities with similar characteristics, which would generally be classified within Level 2 of the
valuation hierarchy, include certain AAA rated U.S. government sponsored agency securities. Due to
illiquidity in the markets, the Company determined the fair value of certain non-agency securities
using internal valuation models and therefore classified them within the Level 3 valuation
hierarchy as these models utilize significant inputs which are unobservable.
Other Investments. Other investments are primarily comprised of various mutual fund holdings.
These mutual funds trade in an active market and quoted prices are available. Other investments
are classified within Level 1 of the valuation hierarchy.
Loans held for investment. The Company does not record these loans at fair value on a
recurring basis. However, from time to time, a loan is considered impaired and an allowance for
loan losses is established. Loans for which it is probable that payment of interest and principal
will not be made in accordance with the contractual terms of the loan agreement are considered
impaired. Once a loan is identified as individually impaired, management measures impairment in
accordance with SFAS 114, Accounting by Creditors for Impairment of a Loan, (SFAS 114). The fair
value of impaired loans is estimated using one of several methods, including collateral value,
market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those
impaired loans not requiring an allowance represent loans for which the fair value of the expected
repayments or collateral exceed the recorded investments in such loans. At September 30, 2008,
substantially all of the total impaired loans were evaluated based on the fair value of the
collateral. In accordance with SFAS 157, impaired loans where an allowance is established based on
the fair value of collateral require classification in the fair value hierarchy. When the fair
value of the collateral is based on an observable market price or a current appraised value, the
Company records the impaired loan as a nonrecurring Level 2 valuation.
Repossessed assets. Loans on which the underlying collateral has been repossessed are
adjusted to fair value upon transfer to repossessed assets. Subsequently, repossessed assets are
carried at the lower of carrying value or fair value. Fair value is based upon independent market
prices, appraised values of the collateral or managements estimation of the value of the
collateral. When the fair value of the collateral is based on an observable market price or a
current appraised value, the Company records the repossessed asset as a nonrecurring Level 2
valuation.
Mortgage Servicing Rights. The Company has obligations to service residential first mortgage
loans and consumer loans (i.e. home equity lines of credit (HELOCs) and second mortgage loans
obtained through private-label securitization
13
transactions). Effective January 1, 2008, the Company elected the fair value measurement method
for residential MSRs under SFAS 156. Upon this election, residential MSRs began to be accounted
for at fair value on a recurring basis. Consumer servicing assets are carried at amortized cost
and are periodically evaluated for impairment.
Residential Mortgage Servicing Rights. The current market for residential mortgage
servicing rights is not sufficiently liquid to provide participants with quoted market prices.
Therefore, the Company uses an option-adjusted spread valuation approach to determine the fair
value of residential MSRs. This approach consists of projecting servicing cash flows under
multiple interest rate scenarios and discounting these cash flows using risk-adjusted discount
rates. The key assumptions used in the valuation of residential MSRs include mortgage prepayment
speeds and discount rates. Management periodically obtains third-party valuations of the
residential MSR portfolio to assess the reasonableness of the fair value calculated by its internal
valuation model. Due to the nature of the valuation inputs, residential MSRs are classified within
Level 3 of the valuation hierarchy. See Note 9, Mortgage Servicing Rights for the key
assumptions used in the residential MSR valuation process.
Consumer Servicing Assets. Consumer servicing assets are subject to periodic
impairment testing. A valuation model, which utilizes a discounted cash flow analysis using
interest rates and prepayment speed assumptions currently quoted for comparable instruments and a
discount rate determined by management, is used in the completion of impairment testing. If the
valuation model reflects a value less than the carrying value, consumer servicing assets are
adjusted to fair value through a valuation allowance as determined by the model. As such, the
Company classifies consumer servicing assets subject to nonrecurring fair value adjustments as
Level 3 valuations.
Derivative Financial Instruments. Certain classes of derivative contracts are listed on an
exchange and are actively traded, and are therefore classified within Level 1 of the valuation
hierarchy. These include U.S. Treasury futures, U.S. Treasury options and interest rate swaps.
The Companys forward loan commitments may be valued based on quoted prices for similar assets in
an active market with inputs that are observable and are classified within Level 2 of the valuation
hierarchy. Rate lock commitments are valued using internal models with significant unobservable
market parameters and therefore are classified within Level 3 of the valuation hierarchy.
Assets measured at fair value on a recurring basis
The following table presents the financial instruments carried at fair value as of September
30, 2008, by caption on the Consolidated Statement of Financial Condition and by SFAS 157
valuation hierarchy (as described above) (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total carrying |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
value in the |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Condition |
|
|
|
Securities classified as trading: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residual interests |
|
$ |
|
|
|
$ |
|
|
|
$ |
23,074 |
|
|
$ |
23,074 |
|
Securities classified as available
for sale |
|
|
|
|
|
|
407,758 |
|
|
|
633,688 |
|
|
|
1,041,446 |
|
Residential mortgage servicing rights |
|
|
|
|
|
|
|
|
|
|
722,159 |
|
|
|
722,159 |
|
Other investments |
|
|
31,826 |
|
|
|
|
|
|
|
|
|
|
|
31,826 |
|
Derivative financial instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate lock commitments |
|
|
|
|
|
|
|
|
|
|
10,216 |
|
|
|
10,216 |
|
Forward agency and loan sales |
|
|
|
|
|
|
21,180 |
|
|
|
|
|
|
|
21,180 |
|
Treasury futures |
|
|
(19,802 |
) |
|
|
|
|
|
|
|
|
|
|
(19,802 |
) |
Treasury options |
|
|
(24,316 |
) |
|
|
|
|
|
|
|
|
|
|
(24,316 |
) |
Interest rate swaps |
|
|
(149 |
) |
|
|
|
|
|
|
|
|
|
|
(149 |
) |
|
|
|
Total assets at fair value |
|
$ |
(12,441 |
) |
|
$ |
428,938 |
|
|
$ |
1,389,137 |
|
|
$ |
1,805,634 |
|
|
|
|
Changes in Level 3 fair value measurements
A determination to classify a financial instrument within Level 3 of the valuation hierarchy
is based upon the significance of the unobservable factors to the overall fair value measurement.
However, Level 3 financial instruments typically include, in addition to the unobservable or Level
3 components, observable components (that is, components that are actively quoted and can be
validated to external sources); accordingly, the gains and losses in the table below include
changes in fair value due in part to observable factors that are included within the valuation
methodology. Also, the Company manages the risk associated with the observable components of
certain Level 3 financial instruments using securities and derivative positions that are classified
within Level 1 or Level 2 of the valuation hierarchy; these Level 1 and Level 2 risk
14
management instruments are not included below, and therefore the gains and losses in the tables do
not reflect the effect of the Companys risk management activities related to such Level 3
instruments.
Fair value measurements using significant unobservable inputs
The table below includes a rollforward of the Consolidated Statement of Financial Condition
amounts for the nine months ended September 30, 2008 (including the change in fair value) for
financial instruments classified by the Company within Level 3 of the valuation hierarchy (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(losses) related |
|
|
|
|
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
|
|
|
|
to financial |
|
|
|
|
|
|
|
|
|
|
issuances |
|
|
|
|
|
|
|
|
|
instruments |
|
|
Fair value, |
|
Total realized/ |
|
and |
|
Transfers in |
|
Fair value, |
|
held at |
Nine months ended |
|
January 1, |
|
unrealized |
|
settlements, |
|
and/or out |
|
September |
|
September 30, |
September 30, 2008 |
|
2008 |
|
gains/(losses) |
|
net |
|
of Level 3 |
|
30, 2008 |
|
2008(c) |
|
Securities classified as trading: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residual interests(a) |
|
$ |
13,703 |
|
|
$ |
(22,716 |
) |
|
$ |
|
|
|
$ |
32,087 |
|
|
$ |
23,074 |
|
|
$ |
|
|
Securities classified as
available for sale(b) (c) (e) |
|
|
33,333 |
|
|
|
(127,986 |
) |
|
|
(59,571 |
) |
|
|
787,912 |
|
|
|
633,688 |
|
|
|
(127,986 |
) |
Residential mortgage servicing
rights (d) |
|
|
445,962 |
|
|
|
(15,691 |
) |
|
|
291,888 |
|
|
|
|
|
|
|
722,159 |
|
|
|
|
|
Derivative financial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate lock commitments |
|
|
26,129 |
|
|
|
|
|
|
|
(15,913 |
) |
|
|
|
|
|
|
10,216 |
|
|
|
|
|
|
|
|
Totals |
|
$ |
519,127 |
|
|
$ |
(166,393 |
) |
|
$ |
216,404 |
|
|
$ |
819,999 |
|
|
$ |
1,389,137 |
|
|
$ |
(127,986 |
) |
|
|
|
|
|
|
(a) |
|
Residual interests are valued using internal inputs supplemented by independent third party inputs.
|
|
(b) |
|
U.S. government agency securities classified as available for sale are valued predominantly using
quoted broker/dealer prices with adjustments to reflect for any assumptions a willing market
participant would include in its valuation. Non-agency securities
classified as available for sale are valued using internal valuation models and pricing information from third parties. |
|
(c) |
|
Realized gains (losses) are reported in non-interest income.
Unrealized gains (losses) are reported in accumulated other comprehensive income (loss). |
|
(d) |
|
Effective January 1, 2008, the Company elected the fair
value measurement method for residential MSRs under SFAS 156 (See Note 9 Mortgage Servicing Rights). |
|
(e) |
|
Management had anticipated that the non-agency securities would be classified under Level 2 of the
valuation hierarchy. However, due to illiquidity in the markets, the fair value of these
securities will be determined using internal models and therefore is classified within Level 3 of
the valuation hierarchy and pricing information from third parties. |
The Company also has assets that under certain conditions are subject to measurement at fair
value on a nonrecurring basis. These include assets that are measured at the lower of cost or
market and had a fair value below cost at the end of the period as summarized below (in thousands).
Assets Measured at Fair Value on a Nonrecurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
September 30, 2008 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Loans held for investment |
|
$ |
257,995 |
|
|
$ |
|
|
|
$ |
257,995 |
|
|
$ |
|
|
Repossessed assets |
|
|
119,205 |
|
|
|
|
|
|
|
119,205 |
|
|
|
|
|
Consumer servicing assets |
|
|
9,992 |
|
|
|
|
|
|
|
|
|
|
|
9,992 |
|
|
|
|
Totals |
|
$ |
387,192 |
|
|
$ |
|
|
|
$ |
377,200 |
|
|
$ |
9,992 |
|
|
|
|
15
Note 5. Investment Securities
As of September 30, 2008 and December 31, 2007, investment securities were comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Securities trading |
|
$ |
23,074 |
|
|
$ |
13,703 |
|
|
|
|
|
|
|
|
Securities available for sale |
|
|
|
|
|
|
|
|
Non-agencies |
|
$ |
633,688 |
|
|
$ |
821,245 |
|
U.S. government sponsored agencies |
|
|
407,758 |
|
|
|
454,030 |
|
Non-investment grade residual |
|
|
|
|
|
|
33,333 |
|
|
|
|
|
|
|
|
Total securities available for sale |
|
$ |
1,041,446 |
|
|
$ |
1,308,608 |
|
|
|
|
|
|
|
|
Mortgage-backed securities held to maturity |
|
|
|
|
|
|
|
|
AAA-rated U.S. government sponsored agencies |
|
$ |
|
|
|
$ |
1,255,431 |
|
|
|
|
|
|
|
|
Other investments |
|
|
|
|
|
|
|
|
Mutual funds |
|
$ |
31,826 |
|
|
$ |
26,107 |
|
U.S. Treasury bonds |
|
|
|
|
|
|
706 |
|
|
|
|
|
|
|
|
Total other investments |
|
$ |
31,826 |
|
|
$ |
26,813 |
|
|
|
|
|
|
|
|
As of January 1, 2008, non-investment grade residuals amounting to $33.3 million that were
classified as available for sale securities were reclassified to trading securities in accordance
with SFAS 159. No gain or loss was recorded upon reclassification. See Note 4, Fair Value
Accounting for further information. At September 30, 2008, the Company had $23.1 million in
securities classified as trading. These securities are non-investment grade residual securities
from private-label securitizations. The securities are recorded at fair value with any unrealized
gains and losses reported in the consolidated statement of operations. During the quarter ended
September 30, 2008, the Company recognized losses related to these trading securities of $12.9
million as a result of the decrease in the fair value of the securities. During the nine month
period ending September 30, 2008, the Company recognized losses related to these trading securities
of $26.5 million as a result of the decrease in the fair value of the securities. The decline in
the fair value of these residual securities was principally due to the increase in the actual and
expected losses in the second mortgages and home equity lines of credit that underlie these assets.
Additionally, during the third quarter of 2008, the values of certain of these assets were affected
by the tightening of the spread between the three month LIBOR rate and the prime rate. The Company
had gains on trading securities amounting to $1.9 million during the quarter and nine month period
ended September 30, 2007.
At September 30, 2008, the Company had $1.0 billion in securities classified as available for
sale which were comprised of U.S. government sponsored agency securities and non-agency securities.
Securities available for sale are carried at fair value, with unrealized gains and losses reported
as a component of other comprehensive loss to the extent they are temporary in nature. If losses
are, at any time, deemed to have arisen from other-than-temporary impairments (OTTI), then they
are reported as an expense for that period.
At September 30, 2008 and December 31, 2007, $895.7 million and $570.0 million of the
securities classified as available for sale, respectively, were pledged as collateral for security
repurchase agreements or FHLB borrowings. Contractual maturities of the securities generally range
from 2020 to 2038.
As of March 31, 2008, the Company reclassified $1.2 billion of mortgage-backed securities,
which were comprised of AAA-rated U.S. government sponsored agency securities, from
held-to-maturity to available-for sale. Upon reclassification, the Company recorded a decrease in
the carrying value of such securities of $8.5 million with a corresponding increase to other
comprehensive loss. The reclassification was required because the Companys management indicated
it no longer had the intent to hold such securities to maturity because of its sale subsequent to
March 31, 2008 of a significant portion of these securities. During the quarter ended September
30, 2008, the Company sold $13.8 million of these securities resulting in a gain of $0.1 million.
For the nine months ended September 30, 2008, the Company sold $908.8 million of these securities
for a gain of $5.0 million.
The Company has other investments because of interim investment strategies in trust
subsidiaries, collateral requirements required in swap and deposit transactions, and Community
Reinvestment Act investment requirements.
16
The following table summarizes the amortized cost and estimated fair value of agency and
non-agency mortgage-backed securities classified as available for sale (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Amortized cost |
|
$ |
1,188,627 |
|
|
$ |
1,326,656 |
|
Gross unrealized holding gains |
|
|
933 |
|
|
|
4,647 |
|
Gross unrealized holding losses |
|
|
(148,114 |
) |
|
|
(22,695 |
) |
|
|
|
|
|
|
|
Estimated fair value |
|
$ |
1,041,446 |
|
|
$ |
1,308,608 |
|
|
|
|
|
|
|
|
The unrealized losses on securities available for sale include $141.9 million on investments
in non-agency collateralized mortgage obligations (CMOs) at September 30, 2008. These CMOs
consist of interests in investment vehicles backed by mortgage loans. In all of the CMOs, the
Companys investment is senior to a subordinated tranche(s) which have first loss exposure. At
September 30, 2008, $336.1 million of non-agency available for sale securities with unrealized
losses of $61.7 million had been in a continuous unrealized loss position for greater than twelve
months. Management concluded that these unrealized losses are temporary in nature since they are
not related to the underlying credit quality of the issuers and the Company has the intent and
ability to hold these investments for a time necessary to recover its cost or will ultimately
recover its cost at maturity (i.e., these investments have contractual maturities that, absent
credit default, should allow the Company to recover its cost). The Company believes that these
losses are primarily related to market conditions rather than underlying credit issues associated
with the issuers of the obligations.
As of September 30, 2008, the aggregate amount of available for sale securities from each of
the following non-agency issuers were greater than 10% of the Companys stockholders equity.
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
Name of Issuer |
|
Cost |
|
|
Value |
|
|
|
(in thousands) |
|
Countrywide Alternative Loan Trust |
|
$ |
119,869 |
|
|
$ |
62,931 |
|
Countrywide Home Loans |
|
|
250,773 |
|
|
|
213,267 |
|
Flagstar Home Equity Loan Trust 2006-1 |
|
|
236,500 |
|
|
|
207,880 |
|
Goldman Sachs Mortgage Company |
|
|
87,030 |
|
|
|
77,192 |
|
JP Morgan Mortgage Trust |
|
|
81,464 |
|
|
|
72,418 |
|
|
|
|
|
|
|
|
|
|
$ |
775,636 |
|
|
$ |
633,688 |
|
|
|
|
|
|
|
|
The following table summarizes the amortized cost and estimated fair value of agency
mortgage-backed securities classified as held to maturity (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Amortized cost |
|
$ |
|
|
|
$ |
1,255,431 |
|
Gross unrealized holding gains |
|
|
|
|
|
|
33,956 |
|
Gross unrealized holding losses |
|
|
|
|
|
|
(304 |
) |
|
|
|
|
|
|
|
Estimated fair value |
|
$ |
|
|
|
$ |
1,289,083 |
|
|
|
|
|
|
|
|
Note 6. Loans Available for Sale
The following table summarizes loans available for sale (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Mortgage loans |
|
$ |
1,961,341 |
|
|
$ |
3,083,779 |
|
Consumer loans |
|
|
|
|
|
|
170,891 |
|
Second mortgage loans |
|
|
11 |
|
|
|
256,640 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,961,352 |
|
|
$ |
3,511,310 |
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2008, management reclassified approximately $1.6
billion of mortgage loans, consumer loans and second mortgage loans from loans available for sale
to loans held for investment. Such loans were
17
reclassified at fair value and resulted in losses on loan sales of $34.7 million. The loans were
reclassified because management no longer has the intent to sell such loans. The change in
managements intent was caused by the continued disruption of the secondary market.
Loans available for sale are carried at the lower of aggregate cost or estimated fair value.
These loans had an aggregate fair value that exceeded their recorded amount for each period
presented. The Company generally estimates the fair value of mortgage loans based on quoted market
prices for securities backed by similar types of loans. Given the lack of liquidity in the
secondary mortgage market at September 30, 2008 and December 31, 2007, significant management
judgment was necessary to estimate the fair value of loans available for sale. Where quoted market
prices were available, such market prices were utilized as estimates for fair values. Otherwise,
the fair values of loans were estimated by discounting estimated cash flows using managements best
estimate of market interest rates, prepayment speeds and loss assumptions for similar collateral.
Note 7. Loans Held for Investment
Loans held for investment are summarized as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Mortgage loans |
|
$ |
6,134,305 |
|
|
$ |
5,823,952 |
|
Second mortgage loans |
|
|
291,523 |
|
|
|
56,516 |
|
Commercial real estate loans |
|
|
1,737,152 |
|
|
|
1,542,104 |
|
Construction loans |
|
|
65,814 |
|
|
|
90,401 |
|
Warehouse lending |
|
|
344,731 |
|
|
|
316,719 |
|
Consumer loans |
|
|
536,759 |
|
|
|
281,746 |
|
Commercial loans |
|
|
24,600 |
|
|
|
22,959 |
|
|
|
|
|
|
|
|
Total |
|
|
9,134,884 |
|
|
|
8,134,397 |
|
Less allowance for loan losses |
|
|
(224,000 |
) |
|
|
(104,000 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
8,910,884 |
|
|
$ |
8,030,397 |
|
|
|
|
|
|
|
|
Activity in the allowance for loan losses is summarized as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
For the Nine Months |
|
|
Ended September 30, |
|
Ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
Balance, beginning of period |
|
$ |
154,000 |
|
|
$ |
53,400 |
|
|
$ |
104,000 |
|
|
$ |
45,779 |
|
Provision charged to operations |
|
|
89,612 |
|
|
|
30,196 |
|
|
|
167,708 |
|
|
|
49,941 |
|
Charge-offs |
|
|
(20,066 |
) |
|
|
(6,895 |
) |
|
|
(49,246 |
) |
|
|
(20,746 |
) |
Recoveries |
|
|
454 |
|
|
|
1,099 |
|
|
|
1,538 |
|
|
|
2,826 |
|
|
|
|
Balance, end of period |
|
$ |
224,000 |
|
|
$ |
77,800 |
|
|
$ |
224,000 |
|
|
$ |
77,800 |
|
|
|
|
Loans on which interest accruals have been discontinued totaled approximately $485.8 million
and $166.1 million at September 30, 2008 and 2007, respectively. Interest on these loans is
recognized as income when collected. Interest that would have been accrued on such loans totaled
approximately $10.8 million and $2.3 million during the nine months ended September 30, 2008 and
2007, respectively.
A loan is impaired when it is probable that payment of interest and principal will not be made
in accordance with the contractual terms of the loan agreement. Impaired loans were as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2008 |
|
2007 |
|
|
|
Impaired loans with no allowance for loan losses allocated |
|
$ |
51,140 |
|
|
$ |
22,307 |
|
Impaired loans with allowance for loan losses allocated |
|
|
266,536 |
|
|
|
112,044 |
|
|
|
|
Total impaired loans |
|
$ |
317,676 |
|
|
$ |
134,351 |
|
|
|
|
Amount of the allowance allocated to impaired loans |
|
$ |
77,233 |
|
|
$ |
34,937 |
|
Average investment in impaired loans |
|
$ |
186,269 |
|
|
$ |
70,582 |
|
Cash-basis interest income recognized during impairment |
|
$ |
7,248 |
|
|
$ |
2,324 |
|
18
Those impaired loans with no allowance for loan losses allocated represent loans for which the
fair value of the related collateral less estimated selling costs exceeded the recorded investments
in such loans. At September 30, 2008, approximately 97.3% of the total impaired loans were
evaluated based on the fair value of related collateral.
Note 8. Private-label Securitization Activity
At September 30, 2008, key assumptions used in determining the value of residual interests
resulting from the Companys private-label securitizations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual |
|
Weighted |
|
|
Prepayment |
|
Projected |
|
Discount |
|
Average Life |
|
|
Speed |
|
Credit Losses |
|
Rate |
|
(in years) |
|
|
|
2005 HELOC Securitization |
|
|
16 |
% |
|
|
4.10 |
% |
|
|
20 |
% |
|
|
3.2 |
|
2006 HELOC Securitization |
|
|
11 |
% |
|
|
12.22 |
% |
|
|
20 |
% |
|
|
5.7 |
|
2006 Second Mortgage Securitization |
|
|
9 |
% |
|
|
3.53 |
% |
|
|
20 |
% |
|
|
6.2 |
|
2007 Second Mortgage Securitization |
|
|
11 |
% |
|
|
5.52 |
% |
|
|
20 |
% |
|
|
6.4 |
|
Effective as of the beginning of the second quarter of 2008 and in accordance with the terms
of the 2005 HELOC securitization, credit losses in the securitization exceeded losses as originally
modeled. As such, the monoline insurer that protects the bondholders determined that the status of
the securitization should be changed to rapid amortization. During the rapid amortization
period, the Company will no longer be reimbursed for draws on the home equity lines of credit until
after the bondholders are paid off. Therefore, this status has the effect of extending the time
period for which the Companys advances are outstanding and may result in the Company not receiving
reimbursement for all of the funds advanced. The 2006 HELOC securitization became subject to rapid
amortization during the fourth quarter of 2007. Therefore, both of the Companys HELOC
securitizations are in rapid amortization.
Certain cash flows received from securitization trusts outstanding were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
For the Nine Months |
|
|
Ended September 30, |
|
Ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
|
|
Proceeds from new securitizations |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
719,097 |
|
Proceeds from collections reinvested in securitizations |
|
|
|
|
|
|
93,869 |
|
|
|
6,960 |
|
|
|
184,817 |
|
Servicing fees received |
|
|
1,604 |
|
|
|
1,928 |
|
|
|
5,037 |
|
|
|
5,050 |
|
Loan repurchases for representations and warranties |
|
|
|
|
|
|
|
|
|
|
(1,501 |
) |
|
|
(642 |
) |
Credit Risk on Securitization
With respect to the issuance of private-label securitizations, the Company retains certain
limited credit exposure in that it retains non-investment grade residual securities in addition to
customary representations and warranties. The Company does not have credit exposure associated
with non-performing loans in securitizations beyond its residual interests and the amount of draws
on HELOCs that it funds and which are not reimbursed by the respective trust. The value of the
Companys residual interests includes the Companys credit loss assumptions as to the underlying
collateral pool. To the extent that actual credit losses exceed these assumptions, the value of
the Companys residual interests will be diminished.
The following table summarizes the loan balance associated with the Companys servicing
portfolio and the balance of related retained assets with credit exposure, which includes residual
interests that are included as trading securities and unreimbursed HELOC draws that are included in
loans held for investment at September 30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of Retained |
|
|
|
Total Loans |
|
|
Assets with Credit |
|
|
|
Serviced |
|
|
Exposure |
|
Private-label securitizations |
|
$ |
1,242,740 |
|
|
$ |
63,245 |
|
Government sponsored agencies |
|
|
50,587,417 |
|
|
|
|
|
Other investors |
|
|
550 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
51,830,707 |
|
|
$ |
63,245 |
|
|
|
|
|
|
|
|
19
Mortgage loans that have been securitized in private-label securitizations at September 30,
2008 and 2007 that are sixty days or more past due and the credit losses incurred in the
securitization trusts are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Losses |
|
|
Total Principal |
|
Principal Amount |
|
(Net of Recoveries) |
|
|
Amount of Loans |
|
Of Loans 60 Days |
|
For the Nine |
|
|
Outstanding |
|
Or More Past Due |
|
Months Ended |
|
|
September 30, |
|
September 30, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
|
|
|
|
Securitized
mortgages |
|
$ |
1,242,740 |
|
|
$ |
1,467,933 |
|
|
$ |
42,050 |
|
|
$ |
12,869 |
|
|
$ |
42,966 |
|
|
$ |
14,781 |
|
Note 9. Mortgage Servicing Rights
The Company has obligations to service residential first mortgage loans and consumer loans
(HELOC and second mortgage loans resulting from private-label securitization transactions). A
description of these classes of servicing assets follows.
Residential Mortgage Servicing Rights. Servicing of residential first mortgage loans is a
significant business activity of the Company. The Company recognizes MSR assets on residential
first mortgage loans when it retains the obligation to service these loans upon sale and the
servicing fee is more than adequate compensation. MSRs are subject to changes in value from, among
other things, changes in interest rates, prepayments of the underlying loans and changes in credit
quality of the underlying portfolio. Historically, the Company has treated this risk as a
counterbalance to the increased production and gain on loan sale margins that tend to occur in an
environment with increased prepayments. In the quarter ended March 31, 2008, the Company began to
specifically hedge the risk by hedging the fair value of MSRs with derivative instruments that are
intended to change in value inversely to part or all of the changes in the value of MSRs.
Changes in the carrying value of residential MSRs, accounted for at fair value, for the nine
month period ended September 30, 2008 were as follows:
|
|
|
|
|
|
|
For the Nine Month |
|
|
|
Period Ended |
|
|
|
September 30, 2008 |
|
|
|
(In Thousands) |
|
Balance at beginning of period |
|
$ |
402,243 |
|
Cumulative effect of change in accounting |
|
|
43,719 |
|
Additions from loans sold with servicing retained |
|
|
291,888 |
|
Changes in fair value due to: |
|
|
|
|
Payoffs(a) |
|
|
(42,765 |
) |
All other changes in valuation inputs or assumptions (b) |
|
|
27,074 |
|
|
|
|
|
Fair value of MSRs at end of period |
|
$ |
$722,159 |
|
|
|
|
|
Unpaid principal balance of residential mortgage loans serviced for others |
|
$ |
50,587,967 |
|
|
|
|
|
|
|
|
(a) |
|
Represents decrease in MSR value associated with loans that paid off during the period. |
|
(b) |
|
Represents estimated MSR value change resulting primarily from market-driven changes in interest rates. |
20
Prior to January 1, 2008, all residential MSRs were accounted for at the lower of their
initial carrying value, net of accumulated amortization, or fair value. Residential MSRs were
periodically evaluated for impairment and a valuation
allowance established through a charge to operations when the carrying value exceeded the fair
value and was believed to be temporary. Other-than-temporary impairments were recognized if the
recoverability of the carrying value was determined to be remote. There were no
other-than-temporary impairments recognized during 2007. Changes in the carrying value of the
residential MSRs, accounted for using the amortization method, and the associated valuation
allowance for the nine month period ended September 30, 2007 follow:
|
|
|
|
|
|
|
For the Nine Month |
|
|
|
Period Ended |
|
|
|
September 30, 2007 |
|
|
|
(In Thousands) |
|
Balance at beginning of period |
|
$ |
166,705 |
|
Additions from loans sold with servicing retained |
|
|
239,482 |
|
Amortization |
|
|
(50,361 |
) |
Sales |
|
|
(27,733 |
) |
|
|
|
|
Carrying value before valuation allowance at end of period |
|
|
328,093 |
|
|
|
|
|
Valuation allowance |
|
|
|
|
Balance at beginning of period |
|
|
(358 |
) |
Impairment recoveries |
|
|
358 |
|
|
|
|
|
Balance at end of period |
|
|
|
|
|
|
|
|
Net carrying value of amortization method MSRs at end of period |
|
$ |
328,093 |
|
|
|
|
|
Unpaid principal balance of residential mortgage loans serviced for others |
|
$ |
25,197,119 |
|
|
|
|
|
Fair value of residential MSRs: |
|
|
|
|
Beginning of period |
|
$ |
190,875 |
|
|
|
|
|
End of period |
|
$ |
373,309 |
|
|
|
|
|
The fair value of residential MSRs is estimated using a valuation model that calculates the
present value of estimated future net servicing cash flows, taking into consideration actual and
expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic
factors, which are determined based on current market conditions. The Company periodically obtains
third-party valuations of its residential MSRs to assess the reasonableness of the fair value
calculated by the valuation model.
The key economic assumptions used in determining the fair value of MSRs capitalized during the
nine month periods ended September 30, 2008 and 2007 periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
Weighted-average life (in years) |
|
|
6.6 |
|
|
|
6.2 |
|
Weighted-average constant prepayment rate (CPR) |
|
|
12.9 |
% |
|
|
17.7 |
% |
Weighted-average discount rate |
|
|
9.3 |
% |
|
|
9.8 |
% |
The key economic assumptions used in determining the fair value of MSRs at period end were as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
2008 |
|
2007 |
Weighted-average life (in years) |
|
|
6.7 |
|
|
|
5.6 |
|
Weighted-average CPR |
|
|
13.2 |
% |
|
|
16.5 |
% |
Weighted-average discount rate |
|
|
10.7 |
% |
|
|
9.8 |
% |
Consumer Servicing Assets. Consumer servicing assets represent servicing rights related to
HELOC and second mortgage loans that were created in the Companys private-label securitizations.
These servicing assets are initially measured at fair value and subsequently accounted for using
the amortization method. Under this method, the assets are amortized in proportion to and over the
period of estimated servicing income and are evaluated for impairment on a periodic basis. When
the carrying value exceeds the fair value and is believed to be temporary, a valuation allowance is
established by a charge to loan administration income in the consolidated statement of operations.
Other-than-temporary impairment is recognized when the recoverability of the carrying value is
determined to be remote. When this situation occurs, the unrecoverable portion of the valuation
allowance is applied as a direct write-down to the carrying value of the consumer servicing asset.
Unlike a
21
valuation allowance, a direct write-down permanently reduces the carrying value of the consumer
servicing asset and the valuation allowance, precluding recognition of subsequent recoveries.
There were no other-than-temporary impairments on consumer servicing assets recognized during the
three or nine month periods ended September 30, 2008 and 2007.
The fair value of consumer servicing assets is estimated by using an internal valuation model.
This method is based on calculating the present value of estimated future net servicing cash
flows, taking into consideration discount rates, actual and expected loan prepayment rates,
servicing costs and other economic factors. The internal valuation model is validated periodically
through a third-party valuation.
Changes in the carrying value of the consumer servicing assets and the associated valuation
allowance follow:
|
|
|
|
|
|
|
|
|
|
|
For the Nine Month Period Ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In Thousands) |
|
Consumer servicing assets |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
11,914 |
|
|
$ |
6,846 |
|
Additions: |
|
|
|
|
|
|
|
|
From loans securitized with servicing retained |
|
|
116 |
|
|
|
8,078 |
|
Subtractions: |
|
|
|
|
|
|
|
|
Amortization |
|
|
(1,949 |
) |
|
|
(2,462 |
) |
|
|
|
|
|
|
|
Carrying value before valuation allowance at end of period |
|
|
10,081 |
|
|
|
12,462 |
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
(144 |
) |
|
|
(150 |
) |
Impairment recoveries (charges) |
|
|
55 |
|
|
|
(37 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
|
(89 |
) |
|
|
(187 |
) |
|
|
|
|
|
|
|
Net carrying value of servicing assets at end of period |
|
$ |
9,992 |
|
|
$ |
12,275 |
|
|
|
|
|
|
|
|
Unpaid principal balance of consumer loans serviced for others |
|
$ |
1,242,740 |
|
|
$ |
1,467,933 |
|
|
|
|
|
|
|
|
Fair value of servicing assets: |
|
|
|
|
|
|
|
|
Beginning of period |
|
$ |
11,861 |
|
|
$ |
6,757 |
|
|
|
|
|
|
|
|
End of period |
|
$ |
10,167 |
|
|
$ |
12,291 |
|
|
|
|
|
|
|
|
The key economic assumptions used to estimate the fair value of these servicing assets at
September 30, 2008 and
2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
|
2008 |
|
2007 |
Weighted-average life (in years) |
|
|
3.9 |
|
|
|
2.7 |
|
Weighted-average discount rate |
|
|
13.7 |
% |
|
|
12.7 |
% |
Contractual Servicing Fees. Contractual servicing fees, including late fees and ancillary
income, for each type of loan serviced are presented below. Contractual servicing fees are
included within loan administration income on the consolidated statements of operations (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Residential real estate |
|
$ |
39,423 |
|
|
$ |
20,642 |
|
|
$ |
101,691 |
|
|
$ |
54,499 |
|
Consumer |
|
|
2,299 |
|
|
|
2,676 |
|
|
|
4,963 |
|
|
|
5,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
41,722 |
|
|
$ |
23,318 |
|
|
$ |
106,654 |
|
|
$ |
59,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Note 10. Accumulated Other Comprehensive Loss
The following table sets forth the ending balance in accumulated other comprehensive loss for
each component (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Net unrealized gain on derivatives used in cash flow hedges |
|
$ |
|
|
|
$ |
236 |
|
Net unrealized loss on securities available for sale |
|
|
(95,668 |
) |
|
|
(11,731 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
(95,668 |
) |
|
$ |
(11,495 |
) |
|
|
|
|
|
|
|
The following table sets forth the changes to other comprehensive loss and the related tax
effect for each component (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Nine |
|
|
For the Year |
|
|
|
Months Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Gain (reclassified to earnings) on interest rate swap extinguishment |
|
$ |
|
|
|
$ |
(155 |
) |
Related tax benefit |
|
|
|
|
|
|
54 |
|
Unrealized loss on derivatives used in cash flow hedging relationships |
|
|
|
|
|
|
(11,377 |
) |
Related tax (expense) benefit |
|
|
|
|
|
|
3,981 |
|
Reclassification adjustment for gains (losses) included in earnings
relating to cash flow hedging relationships |
|
|
|
|
|
|
5,290 |
|
Related tax expense |
|
|
|
|
|
|
(1,851 |
) |
Gain (reclassified to earnings) on interest rate swap derecognition |
|
|
(363 |
) |
|
|
|
|
Related tax benefit |
|
|
127 |
|
|
|
|
|
Unrealized loss on securities available for sale |
|
|
(129,134 |
) |
|
|
(19,414 |
) |
Related tax benefit |
|
|
45,197 |
|
|
|
6,795 |
|
|
|
|
|
|
|
|
Change |
|
$ |
(84,173 |
) |
|
$ |
(16,677 |
) |
|
|
|
|
|
|
|
Note 11. Derivative Financial Instruments
The Company follows the provisions of SFAS 133, as amended, for its derivative instruments and
hedging activities, which require it to recognize all derivative instruments on the consolidated
statements of financial condition at fair value. The following derivative financial instruments
were identified and recorded at fair value as of September 30, 2008 and December 31, 2007:
Fannie Mae, Freddie Mac and other forward loan sales contracts;
Rate lock commitments;
Interest rate swap agreements; and
Treasury futures and options.
The Company hedges the risk of overall changes in fair value of loans held for sale and rate
lock commitments generally by selling forward contracts on securities of Fannie Mae, Freddie Mac
and Ginnie Mae. Under SFAS 133, certain of these positions may qualify as a fair value hedge of a
portion of the funded loan portfolio and result in adjustments to the carrying value of designated
loans through gain on sale based on value changes attributable to the hedged risk. The forward
contracts used to economically hedge the loan commitments are accounted for as non-designated
hedges and naturally offset rate lock commitment mark-to-market gains and losses recognized as a
component of gain on loan sale. The Bank recognized pre-tax losses of $8.2 million and $8.5
million for the three months ended September 30, 2008 and 2007, respectively, on its hedging
activity relating to loan commitments and loans held for sale. The Bank recognized pre-tax gains
(losses) of $18.8 million and $(1.0) million for the nine months ended September 30, 2008 and 2007,
respectively, on its hedging activity relating to loan commitments and loans held for sale.
The Company uses interest rate swap agreements to reduce its exposure to interest rate risk
inherent in a portion of the current borrowings and anticipated deposits. A swap agreement is a
contract between two parties to exchange cash flows based on specified underlying notional amounts
and indices. Under SFAS 133, the swap agreements used to hedge the Companys anticipated
borrowings and advances qualify as cash flow hedges. Derivative gains and losses reclassed from
accumulated other comprehensive loss to current period operations are included in the line item in
which the hedged cash flows are recorded. At December 31, 2007, accumulated other comprehensive
loss included a deferred after-tax net gain of
23
$0.2 million related to derivatives used to hedge funding cash flows. On January 1, 2008, the
Company derecognized all cash flow hedges. As such, the after-tax net gain of $0.2 million in
accumulated other comprehensive loss at December 31, 2007 was recognized through operations during
2008.
The Company recognizes ineffective changes in hedge values resulting from designated SFAS 133
hedges discussed above in the same statement of operations captions as effective changes when such
material ineffectiveness occurs. There were no components of derivative instruments that were
excluded from the assessment of hedge effectiveness. For 2007, the Company did not recognize any
significant gains or losses due to ineffectiveness of its cash flow hedges. The Company had no
designated cash flow hedges during 2008.
Beginning in the first quarter of 2008, the Company began to hedge its residential MSR asset
through the use of U.S. Treasury futures and options in order to mitigate the effect of changes in
and volatility of the interest rate environment. Changes in the values of these derivative
instruments are included in loan administration income in the non-interest income portion of the
consolidated statement of operations. Because the residential MSRs are accounted for on the fair
value method, gains or losses in hedging activities are expected to be offset by increases or
decreases in the fair value of the residential MSR asset, although such changes may not be
perfectly correlated.
The Company had the following derivative financial instruments (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
Notional |
|
Fair |
|
Expiration |
|
|
Amounts |
|
Value |
|
Dates |
Mortgage banking derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
Rate lock commitments |
|
$ |
3,235,250 |
|
|
$ |
10,216 |
|
|
|
2008 |
|
Forward agency and loan sales |
|
|
3,051,882 |
|
|
|
21,180 |
|
|
|
2008 |
|
Mortgage servicing rights derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
Treasury and agency futures |
|
|
920,000 |
|
|
|
(19,802 |
) |
|
|
2008 |
|
Treasury options |
|
|
1,700,000 |
|
|
|
(24,316 |
) |
|
|
2008 |
|
Borrowings and advances derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps (LIBOR) |
|
|
130,000 |
|
|
|
(149 |
) |
|
|
2008-2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
Notional |
|
Fair |
|
Expiration |
|
|
Amounts |
|
Value |
|
Dates |
Mortgage banking derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
Rate lock commitments |
|
$ |
3,069,134 |
|
|
$ |
26,129 |
|
|
|
2008 |
|
Forward agency and loan sales |
|
|
3,845,065 |
|
|
|
(13,504 |
) |
|
|
2008 |
|
Borrowings and advances hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps (LIBOR) |
|
|
130,000 |
|
|
|
378 |
|
|
|
2008-2010 |
|
Counterparty Credit Risk
The Bank is exposed to credit loss in the event of non-performance by the counterparties to
its various derivative financial instruments. The Company attempts to manage this risk by
selecting large, well-established counterparties, spreading the credit risk among such
counterparties, and by placing contractual limits on the amount of unsecured credit risk from any
single counterparty.
Note 12. Stock-Based Compensation
For the three months ended September 30, 2008 and 2007, the Company recorded stock-based
compensation expense of $0.5 million ($0.4 million net of tax) and $0.4 million ($0.3 million net
of tax), respectively. For the nine months ended September 30, 2008 and 2007, the Company recorded
stock-based compensation expense of $1.4 million ($0.9 million net of tax) and $1.1 million ($0.7
million net of tax), respectively.
Stock Options
During the three month periods ended September 30, 2008 and 2007, there were no stock options
granted.
24
Cash-Settled Stock Appreciation Rights
The Company issues cash-settled stock appreciation rights (SAR) to officers and key
employees in connection with year-end compensation. Cash-settled stock appreciation rights
generally vest at the rate of 25% of the grant on each of the first four annual anniversaries of
the grant date. The standard term of a SAR is seven years beginning on the grant date. Grants of
SARs may be settled only in cash and once made, may not be later amended or modified to be settled
in common stock or a combination of common stock and cash. There were no SARs issued during the
third quarter of 2008 or 2007.
Restricted Stock
The Company issued restricted stock to officers, directors, and key employees in connection
with year-end compensation. Restricted stock generally will vest in 50% increments on each annual
anniversary following the date of grant. The Company incurred expenses during the three month
periods ended September 30, 2008 and 2007 of approximately $0.4 million and $0.3 million,
respectively. During the nine month periods ended September 30, 2008 and 2007, the Company
incurred expenses of approximately $1.1 million and $0.9 million, respectively.
Note 13. Segment Information
The Companys operations are broken down into two business segments: banking and home lending.
Each business operates under the same banking charter but is reported on a segmented basis for
this report. Each of the business lines is complementary to each other. The banking operation
includes the gathering of deposits and investing those deposits in duration-matched assets
primarily originated by the home lending operation. The banking group holds these loans in the
investment portfolio in order to earn income based on the difference or spread between the
interest earned on loans and the interest paid for deposits and other borrowed funds. The home
lending operation involves the origination, packaging, and sale of loans in order to receive
transaction income. The lending operation also services mortgage loans for others and sells MSRs
into the secondary market. Funding for the lending operation is provided by deposits and
borrowings garnered by the banking group. All of the non-bank consolidated subsidiaries are
included in the banking segment. No such subsidiary is material to the Companys overall
operations.
Following is a presentation of financial information by segment for the periods indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2008 |
|
|
|
Bank |
|
|
Home Lending |
|
|
|
|
|
|
|
2008: |
|
Operations |
|
|
Operations |
|
|
Elimination |
|
|
Combined |
|
Net interest income |
|
$ |
45,609 |
|
|
$ |
14,232 |
|
|
$ |
|
|
|
$ |
59,841 |
|
Gain on sale revenue |
|
|
|
|
|
|
23,048 |
|
|
|
|
|
|
|
23,048 |
|
Other (loss) income |
|
|
(2,552 |
) |
|
|
32,892 |
|
|
|
|
|
|
|
30,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest income
and non-interest income |
|
|
43,057 |
|
|
|
70,172 |
|
|
|
|
|
|
|
113,229 |
|
Loss before federal income taxes |
|
|
(85,707 |
) |
|
|
(9,840 |
) |
|
|
|
|
|
|
(95,547 |
) |
Depreciation and amortization |
|
|
2,414 |
|
|
|
4,911 |
|
|
|
|
|
|
|
7,325 |
|
Capital expenditures |
|
|
3,566 |
|
|
|
3,362 |
|
|
|
|
|
|
|
6,928 |
|
Identifiable assets |
|
|
13,345,151 |
|
|
|
3,099,218 |
|
|
|
(2,285,000 |
) |
|
|
14,159,369 |
|
Inter-segment income (expense) |
|
|
17,138 |
|
|
|
(17,138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2008 |
|
|
|
Bank |
|
|
Home Lending |
|
|
|
|
|
|
|
2008: |
|
Operations |
|
|
Operations |
|
|
Elimination |
|
|
Combined |
|
Net interest income |
|
$ |
116,428 |
|
|
$ |
59,610 |
|
|
$ |
|
|
|
$ |
176,038 |
|
Gain on sale revenue |
|
|
|
|
|
|
129,751 |
|
|
|
|
|
|
|
129,751 |
|
Other income |
|
|
16,204 |
|
|
|
60,385 |
|
|
|
|
|
|
|
76,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest income and
non-interest income |
|
|
132,632 |
|
|
|
249,746 |
|
|
|
|
|
|
|
382,378 |
|
(Loss) earnings before federal income taxes |
|
|
(137,681 |
) |
|
|
50,283 |
|
|
|
|
|
|
|
(87,398 |
) |
Depreciation and amortization |
|
|
6,893 |
|
|
|
12,071 |
|
|
|
|
|
|
|
18,964 |
|
Capital expenditures |
|
|
13,967 |
|
|
|
10,259 |
|
|
|
|
|
|
|
24,226 |
|
Identifiable assets |
|
|
13,345,151 |
|
|
|
3,099,218 |
|
|
|
(2,285,000 |
) |
|
|
14,159,369 |
|
Inter-segment income (expense) |
|
|
59,738 |
|
|
|
(59,738 |
) |
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2007 |
|
|
|
Bank |
|
|
Home Lending |
|
|
|
|
|
|
|
2007: |
|
Operations |
|
|
Operations |
|
|
Elimination |
|
|
Combined |
|
Net interest income |
|
$ |
23,806 |
|
|
$ |
30,130 |
|
|
$ |
|
|
|
$ |
53,936 |
|
Gain on sale revenue |
|
|
|
|
|
|
(17,001 |
) |
|
|
|
|
|
|
(17,001 |
) |
Other income |
|
|
10,056 |
|
|
|
8,213 |
|
|
|
|
|
|
|
18,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest income and
non-interest income |
|
|
33,862 |
|
|
|
21,342 |
|
|
|
|
|
|
|
55,204 |
|
(Loss) earnings before federal income taxes |
|
|
(24,469 |
) |
|
|
(23,782 |
) |
|
|
|
|
|
|
(48,251 |
) |
Depreciation and amortization |
|
|
2,482 |
|
|
|
21,815 |
|
|
|
|
|
|
|
24,297 |
|
Capital expenditures |
|
|
4,437 |
|
|
|
6,633 |
|
|
|
|
|
|
|
11,070 |
|
Identifiable assets |
|
|
15,879,011 |
|
|
|
6,175,988 |
|
|
|
(5,490,000 |
) |
|
|
16,564,999 |
|
Inter-segment income (expense) |
|
|
41,175 |
|
|
|
(41,175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2007 |
|
|
|
Bank |
|
|
Home Lending |
|
|
|
|
|
|
|
2007: |
|
Operations |
|
|
Operations |
|
|
Elimination |
|
|
Combined |
|
Net interest income |
|
$ |
87,819 |
|
|
$ |
68,006 |
|
|
$ |
|
|
|
$ |
155,825 |
|
Gain on sale revenue |
|
|
|
|
|
|
42,022 |
|
|
|
|
|
|
|
42,022 |
|
Other income |
|
|
39,261 |
|
|
|
17,327 |
|
|
|
|
|
|
|
56,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest income and
non-interest income |
|
|
127,080 |
|
|
|
127,355 |
|
|
|
|
|
|
|
254,435 |
|
(Loss) earnings before federal income taxes |
|
|
(8,877 |
) |
|
|
(3,521 |
) |
|
|
|
|
|
|
(12,398 |
) |
Depreciation and amortization |
|
|
7,466 |
|
|
|
64,226 |
|
|
|
|
|
|
|
71,692 |
|
Capital expenditures |
|
|
20,267 |
|
|
|
5,616 |
|
|
|
|
|
|
|
25,883 |
|
Identifiable assets |
|
|
15,879,011 |
|
|
|
6,175,988 |
|
|
|
(5,490,000 |
) |
|
|
16,564,999 |
|
Inter-segment income (expense) |
|
|
105,233 |
|
|
|
(105,233 |
) |
|
|
|
|
|
|
|
|
Note 14. Private Placement
The Company entered into purchase agreements with seven institutional investors, Thomas J.
Hammond, Chairman of the Company and Mark T. Hammond, Vice Chairman, President and Chief Executive
Officer of the Company effective May 16, 2008. Pursuant to the terms of the purchase agreements,
the Company raised, in aggregate, approximately $100 million in cash or $94 million net of
placement agent and legal fees, through direct sales to investors of the Company.
Under the terms of the purchase agreements, institutional investors agreed to purchase up to
11,365,000 shares of the Companys common stock at $4.25 per share, and Thomas Hammond and Mark
Hammond agreed to purchase 635,000 shares of the Companys common stock at $5.88 per share.
Additionally, the Company issued 47,982 shares of mandatory convertible non-cumulative perpetual
preferred stock to the institutional investors at a purchase price and liquidation preference of
$1,000 per share. Upon approval by the Companys stockholders, the preferred shares automatically
convert to 11,289,878 shares of the Companys common stock at an initial conversion price of $4.25
per share.
The offering was finalized on May 19, 2008, whereby a total of approximately $100 million of
gross proceeds, or $94 million in net proceeds, were received. The Company invested $72 million
into the Bank for working capital purposes and the remaining $22 million remained at the Company to
be used to service long term debt payments.
A Special Meeting of Stockholders to vote on the approval of the conversion of the preferred
shares to common shares was held on August 12, 2008. On that date, the shareholders approved the
conversion of the Companys mandatory convertible non-cumulative perpetual preferred stock into the
Companys common stock. The preferred stock automatically converted into shares of common stock as
a result.
26
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Where we say we, us, or our, we usually mean Flagstar Bancorp, Inc. In some cases, a
reference to we, us, or our will include our wholly-owned subsidiary Flagstar Bank, FSB, and
Flagstar Capital Markets Corporation, its wholly-owned subsidiary, which we collectively refer to
as the Bank.
General
Operations of the Bank are categorized into two business segments: banking and home lending.
Each segment operates under the same banking charter, but is reported on a segmented basis for
financial reporting purposes. For certain financial information concerning the results of
operations of our banking and home lending operations, see Note 13 of the Notes to Consolidated
Financial Statements, in Item 1, Financial Statements, herein.
Banking Operation. We provide a broad range of banking services to consumers, small
businesses and municipalities in Michigan, Indiana and Georgia as
well as to across the country through our internet banking operations. Our banking operation involves the gathering of deposits and investing those
deposits in duration-matched assets consisting primarily of mortgage loans originated by our home
lending operation. The banking operation holds these loans in its loans held for investment
portfolio in order to earn income based on the difference, or spread, between the interest earned
on loans and investments and the interest paid for deposits and other borrowed funds. At September
30, 2008, we operated a network of 173 banking centers and provided banking services to
approximately 129,100 households. During the third quarter of 2008, we opened three banking
centers in Georgia. During the first nine months of 2008, we consolidated an in-store Indiana
branch into an existing traditional branch. During October 2008, we opened one additional branch
in the Atlanta, Georgia area and one additional branch in Michigan. We do not expect to open any
additional branches during the fourth quarter 2008.
Home Lending Operation. Our home lending operation originates, acquires, securitizes and
sells residential mortgage loans on one-to-four family residences in order to generate
transactional income. The home lending operation also services mortgage loans on a fee basis for
others and occasionally sells mortgage servicing rights into the secondary market. Funding for our
home lending operation is provided primarily by deposits and borrowings obtained by our banking
operation.
Critical Accounting Policies
Various elements of our accounting policies, by their nature, are inherently subject to
estimation techniques, valuation assumptions and other subjective assessments. In particular, we
have identified five policies that, due to the judgment, estimates and assumptions inherent in
those policies, are critical to an understanding of our consolidated financial statements. These
policies relate to: (a) the determination of our allowance for loan losses; (b) the valuation of
our MSRs; (c) the valuation of our residuals; (d) the valuation of our derivative instruments; and
(e) the determination of our secondary market reserve. We believe that the judgment, estimates and
assumptions used in the preparation of our consolidated financial statements are appropriate given
the factual circumstances at the time. However, given the sensitivity of our consolidated
financial statements to these critical accounting policies, the use of other judgments, estimates
and assumptions could result in material differences in our results of operations or financial
condition. For further information on our critical accounting policies, please refer to our Annual
Report on Form 10-K for the year ended December 31, 2007, which is available on our website,
www.flagstar.com, under the Investor Relations section, or on the website of the SEC, at
www.sec.gov.
27
Selected Financial Ratios
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
For the Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Return on average assets |
|
|
(1.72 |
)% |
|
|
(0.77 |
)% |
|
|
(0.50 |
)% |
|
|
(0.08 |
)% |
Return on average equity |
|
|
(32.15 |
)% |
|
|
(17.08 |
)% |
|
|
(10.29 |
)% |
|
|
(1.57 |
)% |
Efficiency ratio |
|
|
105.2 |
% |
|
|
132.7 |
% |
|
|
79.0 |
% |
|
|
85.2 |
% |
Equity/assets ratio (average for the period) |
|
|
5.34 |
% |
|
|
4.51 |
% |
|
|
4.88 |
% |
|
|
4.79 |
% |
Mortgage loans originated or purchased |
|
$ |
6,680,450 |
|
|
$ |
6,566,185 |
|
|
$ |
22,600,324 |
|
|
$ |
19,218,370 |
|
Other loans originated or purchased |
|
$ |
34,666 |
|
|
$ |
262,415 |
|
|
$ |
301,420 |
|
|
$ |
785,169 |
|
Mortgage loans sold |
|
$ |
6,809,608 |
|
|
$ |
5,955,396 |
|
|
$ |
22,076,479 |
|
|
$ |
16,975,645 |
|
Interest rate spread Bank only 1 |
|
|
1.78 |
% |
|
|
1.35 |
% |
|
|
1.69 |
% |
|
|
1.29 |
% |
Net interest margin Bank only 2 |
|
|
1.93 |
% |
|
|
1.52 |
% |
|
|
1.84 |
% |
|
|
1.45 |
% |
Interest rate spread Consolidated 1 |
|
|
1.74 |
% |
|
|
1.27 |
% |
|
|
1.64 |
% |
|
|
1.29 |
% |
Net interest margin Consolidated 2 |
|
|
1.82 |
% |
|
|
1.36 |
% |
|
|
1.73 |
% |
|
|
1.38 |
% |
Dividend payout ratio |
|
|
N/A |
|
|
|
(18.8 |
)% |
|
|
N/A |
|
|
|
(197.3 |
)% |
Average common shares outstanding |
|
|
78,473 |
|
|
|
60,265 |
|
|
|
68,301 |
|
|
|
61,450 |
|
Average fully diluted shares outstanding |
|
|
78,473 |
|
|
|
60,636 |
|
|
|
68,301 |
|
|
|
61,874 |
|
Charge-offs to average investment loans
|
|
|
0.83 |
% |
|
|
0.33 |
% |
|
|
0.71 |
% |
|
|
0.34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
June 30, |
|
December 31, |
|
September 30, |
|
|
2008 |
|
2008 |
|
2007 |
|
2007 |
Equity-to-assets ratio |
|
|
4.78 |
% |
|
|
5.49 |
% |
|
|
4.39 |
% |
|
|
4.40 |
% |
Core capital ratio 3 |
|
|
6.29 |
% |
|
|
6.70 |
% |
|
|
5.78 |
% |
|
|
5.78 |
% |
Total risk-based capital ratio 3 |
|
|
11.10 |
% |
|
|
11.65 |
% |
|
|
10.66 |
% |
|
|
10.65 |
% |
Book value per common share |
|
$ |
8.09 |
|
|
$ |
10.45 |
(4) |
|
$ |
11.50 |
|
|
$ |
12.09 |
|
Number of common shares outstanding |
|
|
83,627 |
|
|
|
72,337 |
|
|
|
60,271 |
|
|
|
60,271 |
|
Mortgage loans serviced for others |
|
$ |
51,830,707 |
|
|
$ |
45,830,865 |
|
|
$ |
32,487,337 |
|
|
$ |
26,665,052 |
|
Capitalized value of mortgage servicing rights |
|
|
1.41 |
% |
|
|
1.47 |
% |
|
|
1.27 |
% |
|
|
1.28 |
% |
Ratio of allowance to non-performing loans |
|
|
54.1 |
% |
|
|
46.3 |
% |
|
|
52.8 |
% |
|
|
61.0 |
% |
Ratio of allowance to loans held for investment |
|
|
2.45 |
% |
|
|
1.69 |
% |
|
|
1.28 |
% |
|
|
1.11 |
% |
Ratio of non-performing assets to total assets |
|
|
3.87 |
% |
|
|
3.17 |
% |
|
|
1.90 |
% |
|
|
1.34 |
% |
Number of banking centers |
|
|
173 |
|
|
|
170 |
|
|
|
164 |
|
|
|
158 |
|
Number of home lending centers |
|
|
111 |
|
|
|
121 |
|
|
|
143 |
|
|
|
151 |
|
Number of salaried employees |
|
|
3,291 |
|
|
|
3,389 |
|
|
|
3,083 |
|
|
|
2,939 |
|
Number of commissioned employees |
|
|
736 |
|
|
|
791 |
|
|
|
877 |
|
|
|
852 |
|
|
|
|
(1) |
|
Interest rate spread is the difference between the annualized average yield earned on average interest-earning assets for the period
and the annualized average rate of interest paid on average interest-bearing liabilities for the period. |
|
(2) |
|
Net interest margin is the annualized effect of the net interest income divided by that periods average interest-earning assets. |
|
(3) |
|
Based on adjusted total assets for purposes of tangible capital and core capital, and risk-weighted assets for purposes of risk-based
capital and total risk based capital. These ratios are applicable to the Bank only. |
|
(4) |
|
The book value per common share assuming the conversion of the Companys mandatory convertible non-cumulative perpetual preferred
stock, series A at June 30, 2008 was $9.54. |
28
Results of Operations
Net Loss
Three Months. Net loss for the three months ended September 30, 2008 was $(62.1) million,
$(0.79) per share-diluted, a $30.0 million decrease from the loss of $(32.1) million, $(0.53) per
share-diluted, reported in the comparable 2007 period. The overall decrease on a pretax basis
resulted primarily from a $52.1 million increase in non-interest income and a $5.9 million increase
in net interest income before provision offset by a $59.4 million increase in the provision for
loan losses and a $45.9 million increase in non-interest expense.
Nine Months. Net loss for the nine months ended September 30, 2008 was $(56.9) million,
$(0.83) per share-diluted, a $47.7 million decrease from the loss of $(9.2) million, $(0.15) per
share-diluted, reported in the comparable 2007 period. The overall decrease on a pretax basis
resulted from a $107.7 million increase in non-interest income and a $20.2 million increase in net
interest income before provision offset by a $117.8 million increase in the provision for loan
losses and an $85.2 million increase in non-interest expense.
Net Interest Income
Three Months. We recorded $59.8 million in net interest income before provision for loan
losses for the three months ended September 30, 2008, a 10.9% increase from $53.9 million recorded
for the comparable 2007 period. The increase reflects a $48.6 million decrease in interest income
offset by a $54.5 million decrease in interest expense, primarily as a result of rates paid on
deposits, FHLB advances and security repurchase agreements that decreased more than the decrease in
yields earned on loans and securities. The increase in net interest income before provision for
loan losses in the three months ended September 30, 2008, as compared to the same period in 2007,
resulted despite a decrease of our average interest-earning assets by $2.8 billion and our average
interest-paying liabilities by $2.4 billion.
Average interest-earning assets as a whole repriced down 28 basis points during the three
months ended September 30, 2008 and average interest-bearing liabilities repriced down 75 basis
points during the same period, resulting in the increase in our interest rate spread of 47 basis
points to 1.74% for the three months ended September 30, 2008, from 1.27% for the comparable 2007
period. The Company recorded a net interest margin of 1.82% at September 30, 2008 as compared to
1.36% at September 30, 2007. At the Bank level, the net interest margin was 1.93% at September 30,
2008, as compared to 1.52% at September 30, 2007.
Nine Months. We recorded $176.0 million in net interest income before provision for loan
losses for the nine months ended September 30, 2008, a 13.0% increase from $155.8 million recorded
for the comparable 2007 period. The increase reflects an $80.2 million decrease in interest income
offset by a $100.5 million decrease in interest expense. The increase in net interest income
before provision for loan losses in the nine months ended September 30, 2008, as compared to the
same period in 2007, resulted despite a decrease of our average interest-earning assets by $1.5
billion and our average interest-paying liabilities by $1.3 billion.
29
Average Yields Earned and Rates Paid. The following table presents interest income from
average interest-earning assets, expressed in dollars and yields, and interest expense on average
interest-bearing liabilities, expressed in dollars and rates at the Company. Interest income from
earning assets includes the amortization of net premiums and net deferred loan origination costs of
$1.9 million and $5.2 million for the three months ended September 30, 2008 and 2007 and $8.5
million and $19.3 million for the nine months ended September 30, 2008 and 2007, respectively.
Non-accruing loans were included in the average loan amounts outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Average |
|
|
|
|
|
|
Annualized |
|
|
Average |
|
|
|
|
|
|
Annualized |
|
|
|
Balance |
|
|
Interest |
|
|
Yield/Rate |
|
|
Balance |
|
|
Interest |
|
|
Yield/Rate |
|
|
|
(Dollars in thousands) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans available for sale |
|
$ |
2,196,230 |
|
|
$ |
40,063 |
|
|
|
7.14 |
% |
|
$ |
5,680,959 |
|
|
$ |
88,510 |
|
|
|
6.23 |
% |
Loans held for investment |
|
|
9,403,920 |
|
|
|
132,100 |
|
|
|
5.52 |
% |
|
|
7,131,286 |
|
|
|
112,954 |
|
|
|
6.34 |
% |
Mortgage-backed securities held to
maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,207,941 |
|
|
|
15,485 |
|
|
|
5.09 |
% |
Securities classified as available for
sale
or trading |
|
|
981,804 |
|
|
|
14,563 |
|
|
|
5.90 |
% |
|
|
1,021,178 |
|
|
|
15,212 |
|
|
|
4.94 |
% |
Interest-bearing deposits |
|
|
258,122 |
|
|
|
1,416 |
|
|
|
2.18 |
% |
|
|
528,857 |
|
|
|
3,647 |
|
|
|
2.74 |
% |
Other |
|
|
30,427 |
|
|
|
395 |
|
|
|
5.16 |
% |
|
|
124,713 |
|
|
|
1,343 |
|
|
|
4.27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
12,870,503 |
|
|
|
188,537 |
|
|
|
5.76 |
% |
|
|
15,694,934 |
|
|
|
237,151 |
|
|
|
6.04 |
% |
Other assets |
|
|
1,598,395 |
|
|
|
|
|
|
|
|
|
|
|
954,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
14,468,898 |
|
|
|
|
|
|
|
|
|
|
$ |
16,649,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
6,640,749 |
|
|
|
60,940 |
|
|
|
3.65 |
% |
|
$ |
7,715,971 |
|
|
|
91,117 |
|
|
|
4.69 |
% |
FHLB advances |
|
|
5,723,217 |
|
|
|
62,348 |
|
|
|
4.33 |
% |
|
|
5,978,691 |
|
|
|
70,534 |
|
|
|
4.68 |
% |
Federal Reserve borrowings |
|
|
73,837 |
|
|
|
419 |
|
|
|
2.26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Security repurchase agreements |
|
|
108,000 |
|
|
|
1,179 |
|
|
|
4.34 |
% |
|
|
1,299,963 |
|
|
|
17,982 |
|
|
|
5.49 |
% |
Other |
|
|
248,661 |
|
|
|
3,810 |
|
|
|
6.00 |
% |
|
|
238,399 |
|
|
|
3,582 |
|
|
|
6.01 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
12,794,464 |
|
|
|
128,696 |
|
|
|
4.02 |
% |
|
|
15,233,024 |
|
|
|
183,215 |
|
|
|
4.77 |
% |
Other liabilities |
|
|
901,824 |
|
|
|
|
|
|
|
|
|
|
|
666,222 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
772,610 |
|
|
|
|
|
|
|
|
|
|
|
750,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
14,468,898 |
|
|
|
|
|
|
|
|
|
|
$ |
16,649,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets |
|
$ |
76,039 |
|
|
|
|
|
|
|
|
|
|
$ |
461,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
59,841 |
|
|
|
|
|
|
|
|
|
|
$ |
53,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread 1 |
|
|
|
|
|
|
|
|
|
|
1.74 |
% |
|
|
|
|
|
|
|
|
|
|
1.27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin 2 |
|
|
|
|
|
|
|
|
|
|
1.82 |
% |
|
|
|
|
|
|
|
|
|
|
1.36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets
to average interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
101 |
% |
|
|
|
|
|
|
|
|
|
|
103 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest rate spread is the difference between the annualized average yield earned on average interest-earning assets for the
period and the annualized average rate of interest paid on average interest-bearing liabilities for the period. |
|
(2) |
|
Net interest margin is the annualized effect of the net interest income divided by that periods average interest-earning assets. |
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Average |
|
|
|
|
|
|
Annualized |
|
|
Average |
|
|
|
|
|
|
Annualized |
|
|
|
Balance |
|
|
Interest |
|
|
Yield/Rate |
|
|
Balance |
|
|
Interest |
|
|
Yield/Rate |
|
|
|
(Dollars in thousands) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans available for sale |
|
$ |
2,761,351 |
|
|
$ |
141,551 |
|
|
|
6.74 |
% |
|
$ |
4,578,248 |
|
|
$ |
211,846 |
|
|
|
6.17 |
% |
Loans held for investment |
|
|
8,978,992 |
|
|
|
384,488 |
|
|
|
5.65 |
% |
|
|
7,973,853 |
|
|
|
366,827 |
|
|
|
6.13 |
% |
Mortgage-backed securities held to
maturity |
|
|
400,169 |
|
|
|
15,576 |
|
|
|
5.20 |
% |
|
|
1,214,867 |
|
|
|
43,869 |
|
|
|
4.83 |
% |
Securities classified as available for
sale |
|
|
1,185,921 |
|
|
|
51,325 |
|
|
|
5.78 |
% |
|
|
910,556 |
|
|
|
42,334 |
|
|
|
6.22 |
% |
Interest-bearing deposits |
|
|
254,227 |
|
|
|
5,561 |
|
|
|
2.92 |
% |
|
|
292,631 |
|
|
|
9,823 |
|
|
|
4.49 |
% |
Other |
|
|
28,907 |
|
|
|
1,453 |
|
|
|
6.71 |
% |
|
|
92,988 |
|
|
|
5,486 |
|
|
|
7.89 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
13,609,567 |
|
|
|
599,954 |
|
|
|
5.82 |
% |
|
|
15,063,143 |
|
|
|
680,185 |
|
|
|
6.02 |
% |
Other assets |
|
|
1,528,888 |
|
|
|
|
|
|
|
|
|
|
|
1,168,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
15,138,455 |
|
|
|
|
|
|
|
|
|
|
$ |
16,231,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
7,153,942 |
|
|
|
215,807 |
|
|
|
4.03 |
% |
|
$ |
7,592,261 |
|
|
|
262,181 |
|
|
|
4.62 |
% |
FHLB advances |
|
|
5,917,985 |
|
|
|
190,168 |
|
|
|
4.29 |
% |
|
|
5,800,591 |
|
|
|
203,268 |
|
|
|
4.69 |
% |
Federal Reserve borrowings |
|
|
28,631 |
|
|
|
484 |
|
|
|
2.26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Security repurchase agreements |
|
|
184,873 |
|
|
|
5,541 |
|
|
|
4.00 |
% |
|
|
1,191,851 |
|
|
|
48,416 |
|
|
|
5.43 |
% |
Other |
|
|
248,677 |
|
|
|
11,916 |
|
|
|
6.30 |
% |
|
|
218,175 |
|
|
|
10,495 |
|
|
|
6.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
13,534,108 |
|
|
|
423,916 |
|
|
|
4.18 |
% |
|
|
14,802,878 |
|
|
|
524,360 |
|
|
|
4.73 |
% |
Other liabilities |
|
|
866,208 |
|
|
|
|
|
|
|
|
|
|
|
651,669 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
738,139 |
|
|
|
|
|
|
|
|
|
|
|
776,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
15,138,455 |
|
|
|
|
|
|
|
|
|
|
$ |
16,231,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets |
|
$ |
75,459 |
|
|
|
|
|
|
|
|
|
|
$ |
260,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
176,038 |
|
|
|
|
|
|
|
|
|
|
$ |
155,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread 1 |
|
|
|
|
|
|
|
|
|
|
1.64 |
% |
|
|
|
|
|
|
|
|
|
|
1.29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin 2 |
|
|
|
|
|
|
|
|
|
|
1.73 |
% |
|
|
|
|
|
|
|
|
|
|
1.38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets
to average interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
101 |
% |
|
|
|
|
|
|
|
|
|
|
102 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest rate spread is the difference between the annualized average yield earned on average interest-earning assets for the
period and the annualized average rate of interest paid on average interest-bearing liabilities for the period. |
|
(2) |
|
Net interest margin is the annualized effect of the net interest income divided by that periods average interest-earning assets. |
31
Rate/Volume Analysis. The following table presents the dollar amount of changes in interest
income and interest expense for the components of interest-earning assets and interest-bearing
liabilities, which are presented in the preceding table. The table below 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). Changes attributable to both a change in volume and a change in
rates are included as changes in rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2008 Versus 2007 |
|
|
|
Increase (Decrease) due to: |
|
|
|
Rate |
|
|
Volume |
|
|
Total |
|
|
|
|
|
(In thousands) |
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans available for sale |
|
$ |
5,828 |
|
|
$ |
(54,275 |
) |
|
$ |
(48,447 |
) |
Loans held for investment |
|
|
(16,876 |
) |
|
|
36,022 |
|
|
|
19,146 |
|
Mortgage-backed securities-held to maturity |
|
|
(114 |
) |
|
|
(15,371 |
) |
|
|
(15,485 |
) |
Securities classified as available for sale |
|
|
(163 |
) |
|
|
(486 |
) |
|
|
(649 |
) |
Interest-earning deposits |
|
|
(376 |
) |
|
|
(1,855 |
) |
|
|
(2,231 |
) |
Other |
|
|
60 |
|
|
|
(1,008 |
) |
|
|
(948 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(11,641 |
) |
|
|
(36,973 |
) |
|
|
(48,614 |
) |
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
(17,639 |
) |
|
|
(12,538 |
) |
|
|
(30,177 |
) |
FHLB advances |
|
|
(5,213 |
) |
|
|
(2,973 |
) |
|
|
(8,186 |
) |
Federal Reserve borrowings |
|
|
419 |
|
|
|
|
|
|
|
419 |
|
Security repurchase agreements |
|
|
(533 |
) |
|
|
(16,270 |
) |
|
|
(16,803 |
) |
Other |
|
|
75 |
|
|
|
153 |
|
|
|
228 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(22,891 |
) |
|
|
(31,628 |
) |
|
|
(54,519 |
) |
|
|
|
|
|
|
|
|
|
|
Change in net interest income |
|
$ |
11,250 |
|
|
$ |
(5,345 |
) |
|
$ |
5,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2008 Versus 2007 |
|
|
|
Increase (Decrease) due to: |
|
|
|
Rate |
|
|
Volume |
|
|
Total |
|
|
|
(In thousands) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans available for sale |
|
$ |
(32,927 |
) |
|
$ |
(37,368 |
) |
|
$ |
(70,295 |
) |
Loans held for investment |
|
|
(2,877 |
) |
|
|
20,538 |
|
|
|
17,661 |
|
Mortgage-backed securities-held to maturity |
|
|
(15,176 |
) |
|
|
(13,117 |
) |
|
|
(28,293 |
) |
Securities classified as available for sale |
|
|
3,282 |
|
|
|
5,709 |
|
|
|
8,991 |
|
Interest-earning deposits |
|
|
(3,687 |
) |
|
|
(575 |
) |
|
|
(4,262 |
) |
Other |
|
|
(2,348 |
) |
|
|
(1,685 |
) |
|
|
(4,033 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(53,733 |
) |
|
|
(26,498 |
) |
|
|
(80,231 |
) |
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
(31,269 |
) |
|
|
(15,105 |
) |
|
|
(46,374 |
) |
FHLB advances |
|
|
(17,207 |
) |
|
|
4,107 |
|
|
|
(13,100 |
) |
Federal Reserve borrowings |
|
|
484 |
|
|
|
|
|
|
|
484 |
|
Security repurchase agreements |
|
|
(2,090 |
) |
|
|
(40,785 |
) |
|
|
(42,875 |
) |
Other |
|
|
(37 |
) |
|
|
1,458 |
|
|
|
1,421 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(50,119 |
) |
|
|
(50,325 |
) |
|
|
(100,444 |
) |
|
|
|
|
|
|
|
|
|
|
Change in net interest income |
|
$ |
(3,614 |
) |
|
$ |
23,827 |
|
|
$ |
20,213 |
|
|
|
|
|
|
|
|
|
|
|
Provision for Loan Losses
Three Months. During the three months ended September 30, 2008, we recorded a provision for
loan losses of $89.6 million as compared to $30.2 million recorded during the same period in 2007.
The provision reflects our estimate to
32
maintain the allowance for loan losses at a level management believes is appropriate to cover
probable and inherent losses in the portfolio and had the effect of increasing our allowance for
loan losses by $70.0 million for the three month period ended September 30, 2008. Net charge-offs
increased in the 2008 period to $19.6 million, compared to $5.8 million for the same period in
2007, and as a percentage of investment loans, increased to an annualized 0.83% from 0.33%. The
increase in charge-offs as a percentage of investment loans reflects the Banks decline in credit
quality reflected in increases in net charge-offs and non-performing loans. See Analysis of Items
on Statement of Financial Condition Assets Allowance for Loan Losses, below, for further
information.
Nine Months. During the nine months ended September 30, 2008, we recorded a provision for
loan losses of $167.7 million as compared to $49.9 million recorded during the same period in 2007.
The provision reflects our estimate to maintain the allowance for loan losses at a level
management believes is appropriate to cover probable and inherent losses in the portfolio. It had
the effect of increasing our allowance for loan losses by $120.0 million. Net charge-offs
increased in the 2008 period to $47.7 million, compared to $17.9 million for the same period in
2007, and as a percentage of investment loans, increased to an annualized 0.71% from 0.34%. The
increase in charge-offs as a percentage of investment loans reflects the Banks decline in credit
quality as reflected in increases in net charge-offs and non-performing loans. See Analysis of
Items on Statement of Financial Condition Assets Allowance for Loan Losses, below, for further
information.
Non-Interest Income
Our non-interest income consists of (i) loan fees and charges, (ii) deposit fees and charges,
(iii) loan administration, (iv) net gain (loss) on loan sales, (v) net gain on sales of MSRs, (vi)
net gain (loss) on sales of securities available for sale, (vii) loss (gain) on trading securities
and (viii) other fees and charges. During the three months ended September 30, 2008, non-interest
income increased to $53.4 million from $1.3 million in the comparable 2007 period. During the nine
months ended September 30, 2008, non-interest income increased to $206.3 million from $98.6 million
in the comparable 2007 period.
Loan Fees and Charges. Both our home lending operation and banking operation earn loan
origination fees and collect other charges in connection with originating residential mortgages and
other types of loans.
Three months. Loan fees recorded during the three months ended September 30, 2008 totaled
$0.8 million compared to a loss of $0.2 million recorded during the comparable 2007 period. This
increase is the result of the increase in non-capitalizable fees during the period as a result of
an increase in our mortgage loan production.
Nine months. Loan fees recorded during the nine months ended September 30, 2008 totaled $2.3
million compared to $1.3 million recorded during the comparable 2007 period. This increase is the
result of the increase in non-capitalizable fees during the year as a result of an increase in our
mortgage loan production.
Deposit Fees and Charges. Our banking operation records deposit fees and other charges such
as fees for non-sufficient funds checks, cashier check fees, ATM fees, overdraft protection, and
other account fees for services we provide to our banking customers.
Three months. During the three months ended September 30, 2008, we recorded $7.2 million in
deposit fees versus $5.8 million in the comparable 2007 period. This increase is attributable to
the increase in our non-sufficient funds fees and other depository fees as our banking franchise
continues to expand.
Nine months. During the nine months ended September 30, 2008, we recorded $20.0 million in
deposit fees versus $16.5 million recorded in the comparable 2007 period. This increase is
attributable to the increase in our non-sufficient funds fees and other depository fees as our
banking franchise continues to expand.
Loan Administration. When our home lending operation sells mortgage loans in the secondary
market it usually retains the right to continue to service these loans and earn a servicing fee.
Until January 1, 2008, our MSRs were accounted for on the amortization method; thereafter, the
majority of our MSRs have been accounted for on the fair value method. See Note 9 Mortgage
Servicing Rights, in Item 1. Financial Statements, herein.
Three Months. The loan administration income during the three month period ended September
30, 2008 increased to $25.7 million from $4.3 million during the comparable 2007 period. During
2008, we recorded revenues from servicing fees and ancillary income of $41.0 million offset by a
mark to market adjustment of $14.8 million on the fair value of the residential MSRs and
amortization on consumer mortgage servicing of $0.6 million. The mark to market adjustment was net
of hedging losses of $14.4 million.
Included in our results of loan administration for both the three month and nine month periods
ended September 30, 2008 is the effect of the failure of Lehman
Brothers in September 2008 to honor its commitment to
buy $65.0 million of excess servicing. The asset was sold in
late August for late September settlement and was removed from
the hedged position. In mid-September, we received confirmation of
Lehman's.
33
failure to
follow through on its commitment to purchase the asset. The asset was
re-bid for indicative levels at
that time at a $17.1 million reduction in value and the
incremental exposure was subsequently re-hedged.
Nine Months. The loan administration income during the nine month period ended September 30,
2008 increased to $46.0 million from $10.1 million during the comparable 2007 period. During 2008,
we recorded revenues from servicing fees and ancillary income of $106.7 million which was offset by
amortization on consumer mortgage servicing of $1.9 million and a mark to market adjustment of
$58.8 million on the fair value of the residential MSRs. The mark to market adjustment was net of
hedging losses of $42.3 million. Although the fair value method of accounting was adopted
effective January 1, 2008, we did not begin hedging the portfolio until the latter portion of the
first quarter. During the 2007 period, we recorded revenues from servicing fees and ancillary
income of $59.8 million which was offset by amortization of $52.7 million. The increase in the
servicing fees and ancillary income in the 2008 period is due to the significant increase in the
loans serviced during the 2008 period over the corresponding period in 2007. The total unpaid
principal balance of loans serviced for others was $51.8 billion at September 30, 2008, versus
$32.5 billion serviced at December 31, 2007, and $26.7 billion serviced at September 30, 2007.
Net Gain (Loss) on Loan Sales. Our home lending operation records the transaction fee income
it generates from the origination, securitization, and sale of mortgage loans in the secondary
market. The amount of net gain on loan sales recognized is a function of the volume of mortgage
loans sold and the gain on sale spread achieved, net of related selling expenses. Net gain on loan
sales is also increased or decreased by any mark to market pricing adjustments on loan commitments
and forward sales commitments in accordance with SFAS 133, Accounting for Derivative Instruments
(SFAS 133), increases to the secondary market reserve related to loans sold during the period,
and related administrative expenses. The volatility in the gain on sale spread is attributable to
market pricing, which changes with demand and the general level of interest rates. Generally, we
are able to sell loans into the secondary market at a higher margin during periods of low or
decreasing interest rates. Typically, as the volume of acquirable loans increases in a lower or
falling interest rate environment, we are able to pay less to acquire loans and are then 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 therefore we may be required to pay more
in the acquisition phase, thus decreasing our net gain achievable. During 2008, our net gain was
also affected by increasing spreads available from securities we sell that are guaranteed by Fannie
Mae and Freddie Mac and by a combination of a significant decline in residential mortgage lenders
and a significant shift in loan demand to Fannie Mae and Freddie Mac conforming residential
mortgage loans and Ginnie Mae-insured loans, which has provided us with loan pricing opportunities
for conventional residential mortgage products.
The following table indicates the net gain on loan sales reported in our consolidated
financial statements to our loans sold or securitized within the period (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
For the Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
|
|
Net (loss) gain on loan sales |
|
$ |
22,152 |
|
|
$ |
(17,457 |
) |
|
$ |
129,403 |
|
|
$ |
35,841 |
|
|
|
|
|
|
Loans sold or securitized |
|
$ |
6,809,608 |
|
|
$ |
5,955,396 |
|
|
$ |
22,076,479 |
|
|
$ |
16,975,645 |
|
|
|
|
|
|
Spread achieved |
|
|
0.33 |
% |
|
|
(0.29 |
)% |
|
|
0.59 |
% |
|
|
0.21 |
% |
|
|
|
|
|
Three months. For the three months ended September 30, 2008, there was a net gain (loss) on
loan sales of $22.2 million, as compared to a loss of $17.5 million in the 2007 period, an increase
of $39.7 million. The 2008 period reflects the sale of $6.8 billion in loans versus $6.0 billion
sold in the 2007 period. Management believes changes in market conditions during the 2008 period
resulted in a slight increase in mortgage loan origination volume ($6.7 billion in the 2008 period
vs. $6.6 billion in the 2007 period), allowing for increased sales in the third quarter of 2008,
and an increased net gain (loss) on sale spread (33 basis points in the 2008 period versus a
negative 29 basis points in the 2007 period).
Our calculation of net gain on loan sales reflects gross gains on loan sales, changes in
amounts related to SFAS 133, lower of cost or market adjustments on loans transferred to held for
investment and provisions to our secondary market reserve. Changes in amounts related to SFAS 133
amounted to $8.2 million and $8.5 million for the three months ended September 30, 2008 and 2007,
respectively. Lower of cost or market adjustments amounted to $12.0 million and $0.1 million for
the three months ended September 30, 2008 and 2007, respectively. Provisions to our secondary
market reserve amounted to $2.4 million and $2.7 million, for the three months ended September 30,
2008 and 2007, respectively. Also included in our net gain (loss) on loan sales is the capitalized
value of our MSRs, which totaled $85.5 million and $93.6 million for the three months ended
September 30, 2008 and 2007, respectively.
Nine months. For the nine months ended September 30, 2008, net gain on loan sales increased
$93.6 million to $129.4 million from the $35.8 million in the 2007 period. The 2008 period
reflects the sale of $22.1 billion in loans versus $17.0 billion sold in the 2007 period.
Management believes changes in market conditions during the 2007 period resulted in
34
an increased mortgage loan origination volume ($22.6 billion in the 2008 period versus $19.2
billion in the 2007 period) and a higher overall gain on sale spread (59 basis points in the 2008
versus 21 basis points in the 2007 period).
Our calculation of net gain on loan sales reflects gross gains on loan sales, changes in
amounts related to SFAS 133, lower of cost or market adjustments on loans transferred to held for
investment and provisions to our secondary market reserve. Changes in amounts related to SFAS 133
amounted to $18.8 million and $0.9 million for the nine months ended September 30, 2008 and 2007,
respectively. Lower of cost or market adjustments amounted to $34.7 million and $0.2 million for
the nine months ended September 30, 2008 and 2007, respectively. Provisions to our secondary
market reserve amounted to $8.2 million and $7.2 million, for the nine months ended September 30,
2008 and 2007, respectively. Also included in our net gain on loan sales is the capitalized value
of our MSRs, which totaled $292.0 million and $247.5 million for the nine months ended September
30, 2008 and 2007, respectively.
Net Gain on Sales of Mortgage Servicing Rights. As part of our business model, our home
lending operation occasionally sells MSRs from time to time in transactions separate from the sale
of the underlying loans. Prior to 2008, at the time of the MSR sale, we record a gain or loss
based on the selling price of the MSRs less our carrying value and transaction costs. Accordingly,
the amount of net gains on MSR sales depends upon the gain on sale spread and the volume of MSRs
sold. The spread is attributable to market pricing, which changes with demand and the general
level of interest rates. Effective January 1, 2008, with the adoption of fair value accounting for
MSRs, we would not expect to realize significant gains or losses at the time of sale. Instead, our
income from MSRs would be recorded through loan administration income.
Three months. During the three month period ending September 30, 2008 and 2007, we did not
sell any servicing rights on a bulk basis. For the three months ended September 30, 2008, we
recognized a gain of $0.9 million on our change in the estimate of amounts receivable from past MSR
sales. The $0.5 million gain on MSR sales for the three months ended September 30, 2007 resulted
from the $95.5 million of servicing rights sold on a servicing released basis during that period.
Nine months. During the nine month period ending September 30, 2008, we did not sell any
servicing rights on a bulk basis; however, for the same period in 2007 we sold servicing rights
related to $2.0 billion of loans serviced for others on a bulk basis. For the nine months ended
September 30, 2008, we recognized a gain of $0.3 million on our change in estimate of amounts
receivable from past MSR sales.
Net (Loss) Gain on Sales of Securities Available for Sale. Securities classified as available
for sale are comprised of
U.S. government sponsored agency securities as well as non-agency securities. During 2007,
securities classified as available
for sale also included certain residual interests from private securitizations.
Three Months. Gains (losses) on the sale of agency securities available for sale that are
recently created with underlying mortgage products originated by Flagstar are reported within net
gain on loan sale. Securities in this category have typically
remained in the portfolio less than 30 days before sale. During the three months ended
September 30, 2008, sales of these agency
securities with underlying mortgage products originated by Flagstar were $36.4 million
resulting in $172,000 of net gain on loan
sale.
During the three months ended September 30, 2008, we sold $13.8 million in available for sales
securities consisting of
agency securities. Gain (loss) on sales for these available for sale securities types are
reported in net gain on sale of available for sales securities. These sales generated a $149,000
net gain on sale of available for sale securities.
During the three months ended September 30, 2007, we sold $84.2 million of securities
available for sale which resulted
in gains of $668,000. Also, during the three months ended September 30, 2007, we had a $3.6
million other-than-temporary
impairment of our residual interests that arose from securitizations completed in 2005 and
2006. The other-than-temporary
impairment arose during the third quarter of 2007 primarily from the increase in our credit
loss assumptions for these securitizations.
The increase was caused by our recognition of the increasing losses in the underlying
mortgages. The credit loss assumptions have
increased by as much as 80% for certain securitizations.
Nine Months. During the nine months ended September 30, 2008, sales of agency securities with
underlying mortgage products originated by Flagstar were $2.8 billion resulting in $1.7 million of
net gain on loan sale. There were no such
sales in the nine months ended September 30, 2007.
During the nine months ended September 30, 2008, we sold $908.8 million in available for sales
securities consisting of
agency securities. These sales generated a $5.0 million net gain on sale of available for
sale securities. In the nine months ended
September 30, 2007, we sold $255.2 million in purchased agency and non-agency securities
available for sale. These sales
generated net gains on sale of available for sale securities of $1.4 million. During the nine
months ended September 30, 2007, we recognized a $3.6 million other-than-temporary impairment as
described above. In 2008, such losses are recognized as (loss) gain
on trading securities.
35
(Loss) Gain on Trading Securities. Securities classified as trading are comprised of residual
interests from private-label securitizations. (Loss) gain on securities classified as trading is
the result of a change in the estimated fair value of the securities.
Three Months. During the three months ended September 30, 2008, we recorded a $12.9 million
loss on trading securities. The loss was primarily due to the increase in the estimated cumulative
loss expectations which were only partially offset by the changes to prepayment speeds related to
the loans underlying the residual interests. Additionally, during the third quarter certain of
these assets were affected by the tightening of the spread between LIBOR and prime interest rates.
These changes caused a reduction in the fair value of the residual interests from our private-label
securitizations.
During the three and nine months ended September 30, 2007, we recognized an unrealized gain on
trading securities of $1.9 million. Although certain assumptions relating to these residual
interests were negatively adjusted during the third quarter of 2007, the value of these residual
interests increased based on the reduction in interest rate paid to the senior investors. A
significant portion of the bonds issued in the securitization are variable rate and as such the
reduction of the interest rate on such bonds results in additional expected cash flow available to
residual interests.
Nine Months. During the nine months ended September 30, 2008, we recorded a $26.5 million
loss on trading securities. The loss was primarily due to the increase in the estimated cumulative
loss expectations which were only partially offset by the changes to prepayment speeds related to
the loans underlying the residual interests. These changes caused a reduction in the fair value of
the residual interests from our private-label securitizations.
Other Fees and Charges. Other fees and charges include certain miscellaneous fees, including
dividends received on FHLB stock and income generated by our subsidiaries.
Three months. During the three months ended September 30, 2008, we recorded $4.8 million in
cash dividends received on FHLB stock, compared to $3.7 million received during the three months
ended September 30, 2007. At September 30, 2008 and 2007, we owned $373.4 million and $331.1
million of FHLB stock, respectively. We also recorded $2.1 million and $0.9 million in subsidiary
income for the three months ended September 30, 2008 and 2007, respectively. We recorded $0.9
million and $0.6 million of penalty fees during the three months ended September 30, 2008 and 2007,
respectively. In addition, we recorded expense of $1.1 million and an income of $1.0 million
related to adjustments to our estimates in calculating our secondary market reserve, for the three
months ended September 30, 2008 and 2007, respectively.
Nine months. During the nine months ended September 30, 2008, we recorded $14.5 million in
cash dividends received on FHLB stock, compared to the $11.1 million received during the nine
months ended September 30, 2007. We also recorded $5.4 million and $2.5 million in subsidiary
income for the nine months ended September 30, 2008 and 2007, respectively. We recorded $7.7
million and $6.4 million in various fee and miscellaneous income during the nine months ended
September 31, 2008 and 2007, respectively. In addition, we recorded income of $0.5 million and an
expense of $4.4 million relating to adjustments to our estimates in calculating our secondary
market reserve for the nine months ended September 30, 2008 and 2007, respectively.
36
Non-Interest Expense
The following table sets forth the components of our non-interest expense, along with the
allocation of expenses related to loan originations that are deferred pursuant to SFAS 91,
Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Lease (SFAS 91). As required by SFAS 91, loan fees and direct
origination costs (principally compensation and benefits) are capitalized as an adjustment to the
basis of the loans originated during the period and amortized to expense over the lives of the
respective loans rather than immediately expensed. Other expenses associated with loan production,
however, are not required or allowed to be capitalized and are, therefore, expensed when incurred.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
For the Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(Dollars in thousands) |
Compensation and benefits |
|
$ |
54,487 |
|
|
$ |
44,653 |
|
|
$ |
165,524 |
|
|
$ |
129,924 |
|
Commissions |
|
|
26,298 |
|
|
|
18,136 |
|
|
|
86,401 |
|
|
|
52,959 |
|
Occupancy and equipment |
|
|
19,492 |
|
|
|
17,622 |
|
|
|
59,816 |
|
|
|
51,446 |
|
Advertising |
|
|
3,574 |
|
|
|
3,065 |
|
|
|
8,231 |
|
|
|
7,719 |
|
Federal insurance premium |
|
|
1,566 |
|
|
|
1,257 |
|
|
|
4,911 |
|
|
|
3,078 |
|
Communications |
|
|
1,974 |
|
|
|
1,579 |
|
|
|
6,218 |
|
|
|
4,559 |
|
Other taxes |
|
|
(1,359 |
) |
|
|
(470 |
) |
|
|
(83 |
) |
|
|
(1,053 |
) |
Asset resolution |
|
|
18,019 |
|
|
|
1,952 |
|
|
|
29,798 |
|
|
|
6,912 |
|
Other |
|
|
24,764 |
|
|
|
8,706 |
|
|
|
36,690 |
|
|
|
26,929 |
|
|
|
|
Subtotal |
|
|
148,815 |
|
|
|
96,500 |
|
|
|
397,506 |
|
|
|
282,473 |
|
Less: capitalized direct costs of loan closings,
under SFAS 91 |
|
|
(29,651 |
) |
|
|
(23,240 |
) |
|
|
(95,438 |
) |
|
|
(65,581 |
) |
|
|
|
Non-interest expense |
|
$ |
119,164 |
|
|
$ |
73,260 |
|
|
$ |
302,068 |
|
|
$ |
216,892 |
|
|
|
|
Efficiency ratio (1) |
|
|
105.2 |
% |
|
|
132.7 |
% |
|
|
79.0 |
% |
|
|
85.2 |
% |
|
|
|
|
|
|
(1) |
|
Operating and administrative expenses divided by the sum of net interest income and non-interest income. |
Three Months. Non-interest expense, before the capitalization of loan origination costs,
increased $52.3 million to $148.8 million during the three months ended September 30, 2008, from
$96.5 million for the comparable 2007 period. The following are the major changes affecting
non-interest expense as reflected in the consolidated statements of operations:
|
|
|
The banking operation conducted business from 15 more facilities at September 30,
2008 than at September 30, 2007. |
|
|
|
|
We conducted business from 40 fewer home lending centers at September 30, 2008 than
at September 30, 2007. |
|
|
|
|
The home lending operation originated $6.7 billion in residential mortgage loans
during the 2008 quarter versus $6.6 billion in the comparable 2007 quarter. |
|
|
|
|
We employed 3,291 salaried employees at September 30, 2008 versus 2,939 salaried
employees at September 30, 2007. |
|
|
|
|
We employed 224 full-time national account executives at September 30, 2008 versus
198 at September 30, 2007. |
|
|
|
|
We employed 512 full-time retail loan originators at September 30, 2008 versus 654
at September 30, 2007. |
Compensation and benefits expense increased $9.8 million during the 2008 period from the
comparable 2007 period to $54.5 million, with the increase primarily attributable to regular salary
increases for employees, additional staff and support personnel for the newly-opened banking
centers, additional staff for collections and loss mitigation and additional underwriters and other
support staff to manage the sizeable increase in FHA business.
The increase in commissions earned by the commissioned sales staff during the 2008 period over
the comparable 2007 period was $8.2 million. This change reflects the increase in loan production
in our home lending centers of 46.5% for
37
the third quarter of 2008 as compared to the same period in 2007. Commission percentages are
typically higher for the retail loan originators than the wholesale account executives.
Asset resolution expense consists of foreclosure costs, loss provisions and gains and losses
on the sale of real estate owned (REO) properties that we have obtained through foreclosure
proceedings. Asset resolution expense for the comparable period increased $16.1 million to $18.0
million. Because of the climate of the housing market, provision for REO loss was increased from
$0.9 million to $13.2 million, an increase of $12.3 million net of any gain on REO and recovery of
related debt.
The 184.5% increase in other expense during the 2008 period from the comparable 2007 period is
principally reflective of an increase in expected losses on commercial letters of credit of $9.9
million and an increase in incurred losses under reinsurance contracts of $4.7 million.
During the three months ended September 30, 2008, we capitalized direct loan origination costs
of $29.7 million, an increase of $6.5 million from $23.2 million for the comparable 2007 period.
This 28.0% increase is a result of an $8.2 million, or 45.3%, increase in commission expense and an
increase in the direct loan origination costs during the 2008 period versus the 2007 period.
Nine months. Non-interest expense, before capitalization of direct loan origination costs,
increased $115.0 million to $397.5 million during the nine months ended September 30, 2008, from
$282.5 million for the comparable 2007 period.
Compensation and benefits expense increased $35.6 million during the 2008 period from the
comparable 2007 period to $165.5 million and was primarily attributable to regular salary increases
for employees and additional staff and support personnel for the newly-opened banking centers,
additional staff for collections and loss mitigation and additional underwriters and other support
staff to manage the sizeable increase in FHA business.
Commissions earned by the commissioned sales staff for the comparable period increased $33.4
million. This increase reflects in part the 65.0% increase in the home lending portion of loan
production, for which commissions are higher.
Asset resolution expense for the comparable period increased $22.9 million to $29.8 million.
Because of the climate of the housing market, provision for REO loss was increased to $19.4 million
from $3.4 million, an increase of $16.0 million, offset in part by gain on REO and recovery of
related debt. Legal services related to foreclosure costs increased to $15.5 million from $9.9
million.
The 36.2% increase in other expense during the 2008 period from the comparable 2007 period is
principally reflective of an increase in expected losses on commercial letters of credit of $11.0
million and an increase in incurred losses under reinsurance contracts of $4.7 million.
During the nine months ended September 30, 2008, we capitalized direct loan origination costs
of $95.4 million, an increase of $29.8 million from $65.6 million for the comparable 2007 period.
This 45.5% increase is a result of the increase in commission expense and other direct loan
origination costs resulting from the increase in loan originations.
Benefit for Federal Income Taxes
For the three months ended September 30, 2008, our benefit for federal income taxes as a
percentage of pretax loss was (35.0)% compared to (33.6)% in 2007. For the nine months ended
September 30, 2008, our benefit for federal income taxes as a percentage of pretax loss was (34.8)%
compared to (26.1)% in 2007. For each period, the benefit for federal income taxes varies from
statutory rates primarily because of certain non-deductible corporate expenses.
Analysis of Items on the Consolidated Statement of Financial Condition
Assets
Securities Classified as Trading. Securities classified as trading are comprised of residual
interests from our private-label securitizations. The residual interests in these securitizations
were $23.1 million at September 30, 2008 versus $13.7 million at December 31, 2007. The increase
in securities classified as trading was a result of our election, in conjunction with the fair
value option under SFAS 159, to reclassify (to this account) the residual interests that were
previously classified as securities available for sale. Changes to fair value are recorded in the
consolidated statement of operations.
Securities Classified as Available for Sale. Securities classified as available for sale,
which are comprised of mortgage-backed securities, collateralized mortgage obligations and, prior
to January 1, 2008, residual interests from securitizations of mortgage loan products decreased
from $1.3 billion at December 31, 2007, to $1.0 billion at September 30, 2008. See Note 5 of the
Notes to the Consolidated Financial Statements, in Item 1. Financial Statements herein.
38
Mortgage-backed Securities Held to Maturity. Mortgage-backed securities held to maturity
decreased from $1.3 billion at December 31, 2007 to zero at September 30, 2008. The decrease was
attributable to managements decision to reclassify these securities to the available for sale
category as of March 31, 2008. The reclassification was required because management no longer
intends to hold these securities to maturity. A significant portion of these securities were sold
subsequent to the reclassification. At December 31, 2007, $107.6 million of the mortgage-backed
securities were pledged as collateral under security repurchase agreements.
Other Investments. Our investment portfolio increased from $26.8 million at December 31,
2007, to $31.8 million at September 30, 2008. Investment securities consist of mutual funds held
as contractually required collateral, regulatory required collateral, and investments made by our
non-bank subsidiaries.
Loans Available for Sale. We sell a majority of the mortgage loans we produce into the
secondary market on a whole loan basis or by securitizing the loans into mortgage-backed
securities. At September 30, 2008, we held loans available for sale of $2.0 billion, which was a
decrease of $1.5 billion from $3.5 billion held at December 31, 2007. The decrease was attributed
to managements decision to reclassify approximately $1.6 billion of mortgage loans, consumer loans
and second mortgage loans to loans held for investment during the second and third quarter of 2008,
net of mark downs taken upon transfers, because management no longer had the intent to sell these
loans.
Loans Held for Investment. Loans held for investment at September 30, 2008 increased $880.5
million from December 31, 2007. The increase was principally attributable to reclassifications of
approximately $1.6 billion of mortgage loans, second mortgage loans and consumer loans from loans
available for sale. This increase was partially offset by principal reductions on loans held for
investment from normal payments.
Allowance for Loan Losses. The allowance for loan losses represents managements estimate of
probable losses in our loans held for investment portfolio as of the date of the consolidated
financial statements. The allowance provides for probable losses that have been identified with
specific customer relationships and for probable losses believed to be inherent in the loan
portfolio but that have not been specifically identified.
The allowance for loan losses increased to $224.0 million at September 30, 2008 from $104.0
million at December 31, 2007, respectively. Our non-performing loans (i.e., loans that are past
due 90 days or more) increased to $413.7 million from $197.1 million at September 30, 2008 and
December 31, 2007, respectively. The allowance for loan losses as a percentage of investment loans
increased to 2.45% at September 30, 2008 from 1.28% at December 31, 2007. The increase in the
allowance for loan losses at September 30, 2008 reflects managements assessment of the effect of
increased levels of charge-offs as well as increases in classified and non-performing loans. The
allowance for loan losses as a percentage of non-performing loans increased to 54.1% from 52.8% at
September 30, 2008 and December 31, 2007, respectively. The delinquency rate increased in the
first nine months of the year to 6.92% as of September 30, 2008, up from 3.49% as of December 31,
2007.
The allowance for loan losses is considered adequate based upon managements assessment of
relevant factors, including the types and amounts of delinquent and non-performing loans,
historical and current loss experience on such types of loans, and the current economic
environment. The following table provides the amount of delinquent loans at the dates listed. At
September 30, 2008, 76.3% of all delinquent loans are loans in which we have a first lien position
on residential real estate.
Delinquent Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
% of |
|
|
December 31, |
|
|
% of |
|
|
September 30, |
|
|
% of |
|
|
|
2008 |
|
|
Loans |
|
|
2007 |
|
|
Loans |
|
|
2007 |
|
|
Loans |
|
Days Delinquent |
|
(Dollars in thousands) |
|
30 |
|
$ |
107,313 |
|
|
|
1.18 |
% |
|
$ |
59,811 |
|
|
|
0.74 |
% |
|
$ |
73,382 |
|
|
|
1.05 |
% |
60 |
|
|
110,943 |
|
|
|
1.21 |
|
|
|
70,450 |
|
|
|
0.87 |
|
|
|
44,481 |
|
|
|
0.63 |
|
90 |
|
|
413,717 |
|
|
|
4.53 |
|
|
|
197,149 |
|
|
|
2.42 |
|
|
|
127,506 |
|
|
|
1.81 |
|
|
|
|
Total |
|
$ |
631,973 |
|
|
|
6.92 |
% |
|
$ |
327,410 |
|
|
|
4.03 |
% |
|
$ |
245,369 |
|
|
|
3.49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment loans |
|
$ |
9,134,884 |
|
|
|
|
|
|
$ |
8,134,397 |
|
|
|
|
|
|
$ |
7,034,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We currently calculate our delinquent loans using a method required by the Office of Thrift
Supervision when we prepare regulatory reports that we submit to the OTS each quarter. This
method, also called the OTS Method, treats a loan as delinquent if no payment is received after
the first day of the month following the month of the missed payment. Other companies with
mortgage banking operations similar to ours usually use the Mortgage Bankers Association Method
(MBA Method) which considers a loan to be delinquent if payment is not received by the end of the
month of the missed payment. The key difference between the two methods is that a loan considered
delinquent under the MBA Method would not be considered delinquent under the OTS Method for
another 30 days. Under the MBA Method of calculating delinquent loans,
39
30 day delinquencies equaled $215.9 million, 60 day delinquencies equaled $117.5 million and
90 day delinquencies equaled $503.4 million at September 30, 2008. Total delinquent loans under
the MBA Method total $836.9 million or 9.16% of loans held for investment at September 30, 2008, as
compared to, $478.3 million, or 5.88% of total loans held for investment at December 31, 2007.
The following table shows the activity in the allowance for loan losses during the indicated
periods (dollars in thousands):
Activity Within the Allowance For Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Year Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2007 |
|
Beginning balance |
|
$ |
104,000 |
|
|
$ |
45,779 |
|
|
$ |
45,779 |
|
Provision for loan losses |
|
|
167,708 |
|
|
|
49,941 |
|
|
|
88,297 |
|
Charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans |
|
|
(29,384 |
) |
|
|
(12,453 |
) |
|
|
(17,468 |
) |
Consumer loans |
|
|
(5,127 |
) |
|
|
(6,792 |
) |
|
|
(9,827 |
) |
Commercial loans |
|
|
(13,124 |
) |
|
|
(379 |
) |
|
|
(4,765 |
) |
Construction loans |
|
|
(169 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
(1,442 |
) |
|
|
(1,122 |
) |
|
|
(1,599 |
) |
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
(49,246 |
) |
|
|
(20,746 |
) |
|
|
(33,659 |
) |
|
|
|
|
|
|
|
|
|
|
Recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans |
|
|
330 |
|
|
|
536 |
|
|
|
687 |
|
Consumer loans |
|
|
806 |
|
|
|
1,959 |
|
|
|
2,258 |
|
Commercial loans |
|
|
7 |
|
|
|
1 |
|
|
|
174 |
|
Construction loans |
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
395 |
|
|
|
330 |
|
|
|
464 |
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
1,538 |
|
|
|
2,826 |
|
|
|
3,583 |
|
|
|
|
|
|
|
|
|
|
|
Charge-offs, net of recoveries |
|
|
(47,708 |
) |
|
|
(17,920 |
) |
|
|
(30,076 |
) |
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
224,000 |
|
|
$ |
77,800 |
|
|
$ |
104,000 |
|
|
|
|
|
|
|
|
|
|
|
Net charge-off ratio |
|
|
0.71 |
% |
|
|
0.34 |
% |
|
|
0.38 |
% |
|
|
|
|
|
|
|
|
|
|
Accrued Interest Receivable. Accrued interest receivable decreased from $57.9 million at
December 31, 2007, to $53.3 million at September 30, 2008, due to the timing of payments. We
typically collect interest in the month following the month in which it is earned.
Repurchased Assets. We sell a majority of the mortgage loans we produce into the secondary
market on a whole loan basis or by securitizing the loans into mortgage-backed securities. When we
sell or securitize mortgage loans, we make customary representations and warranties to the
purchasers about various characteristics of each loan, such as the manner of origination, the
nature and extent of underwriting standards applied and the types of documentation being provided.
When a loan that we have sold or securitized fails to perform according to its contractual terms,
the purchaser will typically review the loan file to determine whether defects in the origination
process occurred and if such defects constitute a violation of our representations and warranties.
If there are no such defects, we have no liability to the purchaser for losses it may incur on such
loan. If a defect is identified, we may be required to either repurchase the loan or indemnify the
purchaser for losses it sustains on the loan. Loans that are repurchased and that are performing
according to their terms are included within our loans held for investment portfolio. Repurchased
assets are loans that we have reacquired because of representation and warranties issues related to
loan sales or securitizations and that are non-performing at the time of repurchase. To the extent
we later foreclose on the loan, the underlying property is transferred to repossessed assets for
disposal. During the three months ended September 30, 2008 and 2007, we repurchased $16.0 million
and $13.7 million in unpaid principal balance of non-performing loans, respectively. The estimated
fair value of the remaining repurchased assets totaled $15.4 million at September 30, 2008 and $8.1
million at December 31, 2007, and is included within other assets in our consolidated statements of
financial condition.
Premises and Equipment. Premises and equipment, net of accumulated depreciation, totaled
$246.3 million at September 30, 2008, an increase of $8.6 million, or 3.6%, from $237.7 million at
December 31, 2007. The increase reflects the continued expansion of our retail banking center
network.
40
Mortgage Servicing Rights. At September 30, 2008, MSRs included residential MSRs at fair
value amounting to $722.2 million and consumer MSRs at amortized cost amounting to $10.0 million.
At December 31, 2007, all MSRs were accounted for on an amortized cost basis and amounted to $414.0
million of which $402.2 million were residential. As of January 1, 2008, we elected the fair value
method for residential MSRs and recorded a cumulative effect adjustment to retained earnings of
$43.7 million, which increased the balance of our residential MSRs. During the nine month period
ended September 30, 2008, we recorded additions to our residential MSRs of $291.9 million due to
loan sales or securitizations. Additionally, we recorded a fair value adjustment to decrease the
fair value of the residential MSRs by $15.7 million. The adjustment included approximately $42.8
million in the reduction of fair value due to payoffs offset by $27.1 million of market driven
charges, primarily an increase in mortgage loan rates that led to an expected decrease in
prepayment speeds. The increase in the capitalized value of the MSRs from December 31, 2007 to
September 30, 2008 includes the effect of the change in accounting from amortized cost to fair
value. See Note 9 in Part I, Item 1 Financial Statements, herein.
The principal balance of the loans underlying our total MSRs was $51.8 billion at September
30, 2008 versus $32.5 billion at December 31, 2007, reflecting our 2008 loan origination activity
without any bulk MSR sales during the 2008 period.
Other Assets. Other assets increased $167.3 million, or 110.7%, to $318.4 million at
September 30, 2008, from $151.1 million at December 31, 2007. The majority of this change was
attributable to a net increase of $11.5 million in accounts relating to derivative activities
utilized to hedge our MSR portfolio, a $18.8 million increase in mortgage banking derivatives, an
increase of $64.1 million relating to the estimated fair value of repurchased assets and an
increase in deferred federal and state income tax benefit of $60.8 million and $14.7 million,
respectively.
Liabilities
Deposit Accounts. Deposit accounts decreased $0.8 billion to $7.4 billion at September 30,
2008, from $8.2 billion at December 31, 2007. Although our total deposits decreased, the majority
of the decrease came from a reduction in more expensive certificates of deposit, municipal deposits
and national accounts. This reduction was executed as part of our strategy to shrink the size of
our balance sheet and increase our net interest margin. The composition of our deposits was as
follows:
Deposit Portfolio
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Weighted |
|
|
Percent |
|
|
|
|
|
|
Weighted |
|
|
Percent |
|
|
|
|
|
|
|
Average |
|
|
of |
|
|
|
|
|
|
Average |
|
|
of |
|
|
|
Balance |
|
|
Rate |
|
|
Balance |
|
|
Balance |
|
|
Rate |
|
|
Balance |
|
Demand accounts |
|
$ |
419,109 |
|
|
|
0.63 |
% |
|
|
5.65 |
% |
|
$ |
436,239 |
|
|
|
1.60 |
% |
|
|
5.30 |
% |
Savings accounts |
|
|
410,069 |
|
|
|
2.50 |
% |
|
|
5.53 |
|
|
|
237,762 |
|
|
|
2.90 |
% |
|
|
2.89 |
|
MMDA |
|
|
520,664 |
|
|
|
2.68 |
% |
|
|
7.02 |
|
|
|
531,587 |
|
|
|
3.86 |
% |
|
|
6.45 |
|
Certificates of deposit(1) |
|
|
3,418,840 |
|
|
|
4.05 |
% |
|
|
46.06 |
|
|
|
3,870,828 |
|
|
|
4.99 |
% |
|
|
46.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail Deposits |
|
|
4,768,682 |
|
|
|
3.47 |
% |
|
|
64.26 |
|
|
|
5,076,416 |
|
|
|
4.48 |
% |
|
|
61.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal deposits(2) |
|
|
1,213,150 |
|
|
|
3.01 |
% |
|
|
16.35 |
|
|
|
1,545,395 |
|
|
|
5.04 |
% |
|
|
18.76 |
|
National accounts |
|
|
970,257 |
|
|
|
4.78 |
% |
|
|
13.07 |
|
|
|
1,141,549 |
|
|
|
4.64 |
% |
|
|
13.86 |
|
Company controlled deposits(3) |
|
|
468,715 |
|
|
|
0.00 |
% |
|
|
6.32 |
|
|
|
473,384 |
|
|
|
0.00 |
% |
|
|
5.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits |
|
$ |
7,420,804 |
|
|
|
3.35 |
% |
|
|
100.0 |
% |
|
$ |
8,236,744 |
|
|
|
4.35 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was approximately $2.1 billion and $2.8 billion
at September 30, 2008 and December 31, 2007, respectively. |
|
(2) |
|
Municipal deposits includes funds from municipalities and public schools. |
|
(3) |
|
These accounts represent the portion of the investor custodial accounts
and escrows controlled by Flagstar that have been placed on deposit with
the Bank. |
The municipal deposit channel was $1.2 billion at September 30, 2008 and $1.5 billion at
December 31, 2007. These deposits have been garnered from local government units within our retail
market area.
Our national accounts division garnered funds through the use of investment banking firms and
deposit brokers. National deposit accounts decreased $0.1 billion to $1.0 billion at September 30,
2008, from $1.1 billion at December 31, 2007. At September 30, 2008, the national deposit accounts
had a weighted maturity of 17.5 months.
The Company controlled accounts remained constant at $0.5 billion for September 30, 2008 and
December 31, 2007.
41
FHLB Advances. Our borrowings from the FHLB, known as FHLB advances, may include floating
rate daily adjustable advances, fixed rate convertible (i.e., putable) advances, and fixed rate
term (i.e., bullet) advances. The following is a breakdown of the advances outstanding (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Amount |
|
|
Rate |
|
|
Amount |
|
|
Rate |
|
Fixed rate putable advances |
|
$ |
2,150,000 |
|
|
|
4.02 |
% |
|
$ |
1,900,000 |
|
|
|
4.13 |
% |
Short-term fixed rate term advances |
|
|
638,000 |
|
|
|
3.73 |
% |
|
|
1,851,000 |
|
|
|
4.07 |
% |
Long-term fixed rate term advances |
|
|
2,650,000 |
|
|
|
4.57 |
% |
|
|
2,550,000 |
|
|
|
4.69 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,438,000 |
|
|
|
4.26 |
% |
|
$ |
6,301,000 |
|
|
|
4.34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances decreased $0.9 billion to $5.4 billion at September 30, 2008, from $6.3 billion
at December 31, 2007, as we reduced our asset size from $15.8 billion at December 31, 2007 to $14.2
billion at September 30, 2008. We rely upon such advances as a source of funding for the
origination or purchase of loans for sale in the secondary market and for providing duration
specific medium-term financing. The outstanding balance of FHLB advances fluctuates from time to
time depending upon our current inventory of loans available for sale that we fund with the
advances and upon the availability of lower cost funding from our retail deposit base, the escrow
accounts we hold, or alternative funding sources such as security repurchase agreements. Our
approved line with the FHLB was $7.0 billion at September 30, 2008.
Security Repurchase Agreements. Securities sold under agreements to repurchase are generally
accounted for as collateralized financing transactions and are recorded at the amounts at which the
securities were sold plus accrued interest. Securities are pledged as collateral under these
financing arrangements. The fair value of collateral provided to a party is continually monitored
and additional collateral is provided by or returned to us, as appropriate. At both September 30,
2008 and December 31, 2007, we had security repurchase agreements amounting to $108.0 million.
Long Term Debt. Our long-term debt principally consists of junior subordinated notes related
to trust preferred securities issued by the Companys special purpose trust subsidiaries. The
notes mature 30 years from issuance, are callable after five years and pay interest quarterly. At
both September 30, 2008 and December 31, 2007, we had $248.7 million of long-term debt.
Accrued Interest Payable. Our accrued interest payable decreased $19.9 million from December
31, 2007 to $27.2 million at September 30, 2008. The decrease was principally due to the decrease
in interest rates during 2008 on our interest-bearing liabilities.
Secondary Market Reserve. We sell most of the residential mortgage loans that we originate
into the secondary mortgage market. When we sell mortgage loans, we make customary representations
and warranties to the purchasers about various characteristics of each loan, such as the manner of
origination, the nature and extent of underwriting standards applied and the types of documentation
being provided. Typically these representations and warranties are in place for the life of the
loan. If a defect in the origination process is identified, we may be required to either
repurchase the loan or indemnify the purchaser for losses it sustains on the loan. If there are no
such defects, we have no liability to the purchaser for losses it may incur on such loan. We
maintain a secondary market reserve to account for the expected losses related to loans we may be
required to repurchase (or the indemnity payments we may have to make to purchasers). The
secondary market reserve takes into account both our estimate of expected losses on loans sold
during the current accounting period, as well as adjustments to our previous estimates of expected
losses on loans sold. In each case these estimates are based on our most recent data regarding
loan repurchases, and actual credit losses on repurchased loans, among other factors. Increases to
the secondary market reserve for current loan sales reduce our net gain on loan sales. Adjustments
to our previous estimates are recorded as an increase or decrease in our other fees and charges.
The secondary market reserve increased $1.0 million to $28.6 million at September 30, 2008,
from $27.6 million at December 31, 2007. This increase is attributable to the Companys expected
losses and historical experience of repurchases and claims.
42
The following table provides a reconciliation of the secondary market reserve within the
periods shown (in thousands):
Secondary Market Reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
28,000 |
|
|
$ |
27,300 |
|
|
$ |
27,600 |
|
|
$ |
24,200 |
|
Provision |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged to gain on sale for current
loan sales |
|
|
2,376 |
|
|
|
2,697 |
|
|
|
8,183 |
|
|
|
7,611 |
|
Charged to other fees and charges for
changes in estimates |
|
|
1,087 |
|
|
|
(974 |
) |
|
|
(474 |
) |
|
|
4,046 |
|
|
|
|
|
|
Total |
|
|
3,463 |
|
|
|
1,723 |
|
|
|
7,709 |
|
|
|
11,657 |
|
Charge-offs, net |
|
|
(2,863 |
) |
|
|
(1,523 |
) |
|
|
(6,709 |
) |
|
|
(8,357 |
) |
|
|
|
|
|
Balance, end of period |
|
$ |
28,600 |
|
|
$ |
27,500 |
|
|
$ |
28,600 |
|
|
$ |
27,500 |
|
|
|
|
|
|
Reserve levels are a function of expected losses based on actual pending and expected claims,
historical experience and loan volume. While the ultimate amount of repurchases and claims is
uncertain, management believes that the amount of reserves at September 30, 2008 is adequate.
Other Liabilities. Other liabilities increase $82.6 million, or 64.0%, to $211.6 million at
September 30, 2008 from $129.0 million at December 31, 2007. The majority of the increase was
attributable to an increase of $12.9 million in escrow accounts, a $21.0 million increase in
undisbursed payments to others, a $6.9 million increase in accrued payroll, an increase of $11.0
million in reserves relating to our commercial letters of credit and a $4.1 million increase in our
premium deficiency reserve on our wholly-owned reinsurance company.
Liquidity and Capital
Liquidity. Liquidity refers to the ability or the financial flexibility to manage future cash
flows in order to meet the needs of depositors and borrowers and to fund operations on a timely and
cost-effective basis. Our primary sources of funds are deposits, loan repayments and sales,
advances from the FHLB, security repurchase agreements, cash generated from operations, custodial
accounts and customer escrow accounts. From time to time, we also draw upon our line of credit at
the Federal Reserve discount window. While we believe that these sources of funds will continue to
be adequate to meet our liquidity needs for the foreseeable future, there is currently illiquidity
in the non-agency secondary mortgage market and reduced investor demand for mortgage-backed
securities and loans in that market. Under these conditions, we use our liquidity, as well as our
capital capacity, to hold increased levels of both securities and loans. While our liquidity and
capital positions are currently sufficient, our capacity to retain loans and securities on our
consolidated statement of financial condition is not unlimited and we have revised our lending
guidelines as a result of a prolonged period of secondary market illiquidity to primarily originate
loans that could readily be sold to Fannie Mae and Freddie Mac or be federally insured by Ginnie
Mae.
Retail deposits decreased to $4.8 billion at September 30, 2008, as compared to $5.1 billion
at December 31, 2007. This reduction was executed as part of our strategy to shrink the size of
our balance sheet.
Mortgage loans sold during the nine months ended September 30, 2008 totaled $22.1 billion, an
increase of $5.1 billion from the $17.0 billion sold during the same period in 2007. We attribute
this increase to the interest rate environment, resulting in an increase in demand for fixed-rate
mortgage loans, to an increase in our market share which we believe results in part from the
reduced number of potential competitors and to our decision to sell substantially all of the
residential mortgage loans that we originate during 2008. Among other things, our increase in
market share was driven by a significant increase in FHA volume, as we are now the seventh largest
FHA lender in the United States. We sold 97.7% and 88.3% of our mortgage loan originations during
the nine month periods ended September 30, 2008 and 2007, respectively.
We use FHLB advances and, to a lesser extent, security repurchase agreements to fund our daily
operational liquidity needs and to assist in funding loan originations. We will continue to use
these sources of funds as needed to supplement funds from deposits, loan and MSR sales, custodial
accounts and escrow accounts. We currently have an authorized line of credit equal to $7.0
billion, which we may draw upon subject to providing a sufficient amount of loans as collateral.
At September 30, 2008, we had borrowed $5.4 billion. Such advances are usually repaid with the
proceeds from the sale of mortgage loans or from alternative sources of financing.
At September 30, 2008, we had arrangements to enter into security repurchase agreements, which
is a form of collateralized short-term borrowing, with multiple financial institutions (each of
which is a primary dealer for Federal Reserve
43
purposes). Because we borrow money under these agreements based on the fair value of our
mortgage-backed securities, and because changes in interest rates can negatively impact the
valuation of mortgage-backed securities, our borrowing ability under these agreements could be
limited and lenders could initiate margin calls (i.e., require us to provide additional collateral)
in the event interest rates change or the value of our mortgage-backed securities declines for
other reasons. At September 30, 2008, our security repurchase agreements totaled $108.0 million.
At September 30, 2008, we had arrangements with the Federal Reserve Bank of Chicago (FRB) to
borrow as needed from its discount window. During the third quarter of 2008, the maximum
outstanding at any one time to the FRB was $300 million and the $832 million line was undrawn as of
September 30, 2008. We accessed this line from time to time throughout the quarter in order to
reduce our overall cost of funds. The amount we are allowed to borrow is based on the lendable
value of the collateral that we provide. At September 30, 2008, the lendable value of the
collateral we pledged to the FRB totaled $1.1 billion of which no borrowings were outstanding.
At September 30, 2008, we had outstanding rate-lock commitments to lend $3.2 billion in
mortgage loans, along with outstanding commitments to make other types of loans totaling $2.2
million. As such commitments may expire without being drawn upon, they do not necessarily
represent future cash commitments. Also, at September 30, 2008, we had outstanding commitments to
sell $3.1 billion of mortgage loans. We expect that our lending commitment will be funded within
90 days. Total commercial and consumer unused lines of credit totaled $1.5 billion at September
30, 2008, including $853.7 million of unused warehouse lines of credit to various mortgage
companies, of which we had advanced $344.7 million at September 30, 2008. There was an additional
$11.5 million in undrawn lines of credit contained within consumer loans.
Regulatory Capital Adequacy. At September 30, 2008, the Bank exceeded all applicable bank
regulatory minimum capital requirements and was considered well capitalized for both Tier 1
capital and total risk-based capital purposes. The Company is not subject to regulatory capital
requirements.
The Banks regulatory capital includes proceeds from trust preferred securities that were
issued in nine separate private offerings to the capital markets and as to which $247.4 million of
such securities were outstanding at September 30, 2008.
44
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our exposure to interest rate risk arises from three distinctly managed mechanisms home
lending, mortgage servicing, and structural balance sheet maturity or repricing mismatches.
In our home lending operations, we are exposed to market risk in the form of interest rate
risk from the time we commit to an interest rate on a mortgage loan application through the time we
sell, or commit to sell, the mortgage loan. On a daily basis, we analyze various economic and
market factors to project the amount of mortgage loans we expect to sell for delivery at a future
date. The actual amount of loans sold will be a percentage of the amount of mortgage loans on
which we have issued binding commitments (and thereby locked in the interest rate) but have 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. A mismatch of our commitments to fund mortgage loans and our 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 may cause a higher percentage of pipeline loans to
close than we projected, and thereby exceed our commitments to sell that pipeline of loans. As a
result, we could incur losses upon sale of these additional loans to the extent the market rate of
interest is higher than the mortgage interest rate committed to by us on pipeline loans we had
initially anticipated to close. To the extent that the hedging strategies utilized by us are not
successful, our profitability may be adversely affected.
We also service residential mortgages for various external parties. We receive a service fee
based on the unpaid balances of servicing rights as well as ancillary income (late fees, float on
payments, etc.) as compensation for performing the servicing function. An increase in mortgage
prepayments, as is often associated with declining interest rates, can lead to reduced values on
capitalized mortgage servicing rights and ultimately reduced loan servicing revenues. In the first
quarter of 2008, we began to specifically hedge the market risk associated with mortgage servicing
rights using a portfolio of Treasury note futures and options. To the extent that the hedging
strategies are not effective, our profitability associated with the mortgage servicing activity may
be adversely affected.
In addition to the home lending and mortgage servicing operations, our banking operations may
be exposed to market risk due to differences in the timing of the maturity or repricing of assets
versus liabilities, as well as the potential shift in the yield curve. This risk is evaluated and
managed on a company-wide basis using a net portfolio value (NPV) analysis framework. The NPV
analysis is intended to estimate the net sensitivity of the fair value of the assets and
liabilities to sudden and significant changes in the levels of interest rates.
Item 4. Controls and Procedures
(a) Disclosure Controls and Procedures. A review and evaluation was performed by
our principal executive and financial officers regarding the effectiveness of our disclosure controls and
procedures as of September 30, 2008 pursuant to Rule 13a-15(b) of the Securities Exchange
Act of 1934, as amended. Based on that review and evaluation, the principal executive and
financial officers have concluded that our current disclosure controls and procedures, as
designed and implemented, are operating effectively.
(b) Changes in Internal Controls. During the quarter ended September 30, 2008, there
has been no change in our internal control over financial reporting identified in connection
with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934, as
amended, that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
45
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
Other than as set forth below, there have been no material changes to the risk factors
previously disclosed in response to Item 1A to Part I of our 2007 Annual Report on Form 10-K (the
2007 Form 10-K). The first two risk factors below, previously included in the Form 10-Q for the
quarter ended March 31, 2008, are in addition to the risk factors included in the 2007 Form 10-K,
and the last risk factor below replaces the risk factor in the 2007 Form 10-K labeled Our ability
to borrow funds and raise capital could be limited, which could adversely affect our earnings.
Certain hedging strategies that we use to manage our investment in mortgage servicing rights
may be ineffective to offset any adverse changes in the fair value of these assets due to changes
in interest rates.
We invest in MSRs to support our mortgage banking strategies and to deploy capital at
acceptable returns. The value of these assets and the income they provide tend to be
counter-cyclical to the changes in production volumes and gain on sale of loans that result from
changes in interest rates. We also enter into derivatives to hedge our MSRs to offset losses in
fair value resulting from the actual or anticipated increase in prepayments in declining interest
rate environments. The primary risk associated with MSRs is that they will lose a substantial
portion of their value as a result of higher than anticipated prepayments occasioned by declining
interest rates. Conversely, these assets generally increase in value in a rising interest rate
environment to the extent that prepayments are slower than anticipated. Our hedging strategies are
highly susceptible to prepayment risk, basis risk, market volatility and changes in the shape of
the yield curve, among other factors. In addition, our hedging strategies rely on assumptions and
projections regarding our assets and general market factors. If these assumptions and projections
prove to be incorrect or our hedging strategies do not adequately mitigate the impact of changes in
interest rates or prepayment speeds, we may incur losses that would adversely impact our earnings.
We depend on our institutional counterparties to provide services that are critical to our
business. If one or more of our institutional counterparties defaults on its obligations to us or
becomes insolvent, it could materially adversely affect our earnings, liquidity, capital position
and financial condition.
We face the risk that one or more of our institutional counterparties may fail to fulfill
their contractual obligations to us. Our primary exposures to institutional counterparty risk are
with third-party providers of credit enhancement on the mortgage assets that we hold in our
investment portfolio, including mortgage insurers and financial guarantors, issuers of securities
held on our balance sheet, and derivatives counterparties.
The challenging mortgage and credit market conditions have adversely affected, and will likely
continue to adversely affect, the liquidity and financial condition of a number of our
institutional counterparties, particularly those whose businesses are concentrated in the mortgage
industry. One or more of these institutions may default in its obligations to us for a number of
reasons, such as changes in financial condition that affect their credit ratings, a reduction in
liquidity, operational failures or insolvency. Several of our institutional counterparties have
experienced ratings downgrades and liquidity constraints. These and other key institutional
counterparties may become subject to serious liquidity problems that, either temporarily or
permanently, negatively affect the viability of their business plans or reduce their access to
funding sources. The financial difficulties that a number of our institutional counterparties are
currently experiencing may negatively affect the ability of these counterparties to meet their
obligations to us and the amount or quality of the products or services they provide to us. A
default by a counterparty with significant obligations to us could result in significant financial
losses to us and could materially adversely affect our ability to conduct our operations, which
would adversely affect our earnings, liquidity, capital position and financial condition.
Our ability to borrow funds, maintain or increase deposits or raise capital could be limited,
which could adversely affect our liquidity and earnings.
Our access to external sources of financing, including deposits, as well as the cost of that
financing, is dependent on various factors. Many of these factors depend upon market perceptions
of events that are beyond our control, such as the failure of other banks or financial
institutions. Other factors are dependent upon our results of operations including, but not
limited to material changes in operating margins; earnings trends and volatility; funding and
liquidity management practices; financial leverage on an absolute basis or relative to peers; the
composition of the statement of financial condition and/or capital structure; geographic and
business diversification; and our market share and competitive position in the business segments in
which we operate. The material deterioration in any one or a combination of these factors could
result in a downgrade of our credit or servicer ratings or a decline in our perception within the
marketplace and could result in a limited ability to borrow funds, maintain or increase deposits
(including custodial deposits for our agency servicing portfolio) or to raise capital.
46
Our ability to make mortgage loans depends largely on our ability to secure funds on terms
acceptable to us. Our primary sources of funds to meet our financing needs include loan sales and
securitizations, deposits, which include custodial amounts from our agency servicing portfolio,
borrowings from the FHLB, borrowings from investment and commercial banks through repurchase
agreements, and capital-raising activities. If we are unable to maintain any of these financing
arrangements or arrange for new financing on terms acceptable to us, or if we default on any of the
covenants imposed upon us by our borrowing facilities, then we may have to reduce the number of
loans we are able to originate for sale in the secondary market or for our own investment. A
sudden and significant reduction in loan originations that occurs as a result could adversely
impact our earnings. There is no guarantee that we will able to renew or maintain our financing
arrangements or that we will be able to adequately access capital markets when or if a need for
additional capital arises.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Issuer Purchases of Equity Securities
The Company made no purchases of its equity securities during the quarter ended September
30, 2008.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
At the Companys Special Meeting of Stockholders on August 12, 2008, the Companys
stockholders approved the automatic conversion of 47,982 shares of the Companys mandatory
convertible non-cumulative perpetual preferred stock, series A, into approximately 11,289,878
shares of common stock. The votes for, votes against and abstentions
(there were no broker non-votes) were as follows:
|
|
|
|
|
Votes for |
|
|
39,167,855 |
|
Votes against |
|
|
424,591 |
|
Abstentions |
|
|
100,290 |
|
Item 5. Other Information
None.
47
Item 6. Exhibits
|
11 |
|
Computation of Net Earnings per Share |
|
|
31.1 |
|
Section 302 Certification of Chief Executive Officer |
|
|
31.2 |
|
Section 302 Certification of Chief Financial Officer |
|
|
32.1 |
|
Section 906 Certification, as furnished by the Chief Executive Officer |
|
|
32.2 |
|
Section 906 Certification, as furnished by the Chief Financial Officer |
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
FLAGSTAR BANCORP, INC.
|
|
Date: November 10, 2008 |
/s/ Mark T. Hammond
|
|
|
Mark T. Hammond |
|
|
President and
Chief Executive Officer
(Duly Authorized Officer) |
|
|
|
|
|
|
/s/ Paul D. Borja
|
|
|
Paul D. Borja |
|
|
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer) |
|
49
EXHIBIT INDEX
|
|
|
Ex. No. |
|
Description |
|
|
|
11
|
|
Statement regarding Computation of Net Earnings per Share |
|
|
|
31.1
|
|
Section 302 Certification of Chief Executive Officer |
|
|
|
31.2
|
|
Section 302 Certification of Chief Financial Officer |
|
|
|
32.1
|
|
Section 906 Certification, as furnished by the Chief Executive Officer |
|
|
|
32.2
|
|
Section 906 Certification, as furnished by the Chief Financial Officer |
50