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 March 31, 2009
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
Incorporation or organization)
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(I.R.S. Employer
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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files).
Yes o 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
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
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 May 4, 2009, 90,380,043 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, 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, 2008,
including: (1) our business has been and may continue to be adversely affected by conditions in
the global financial markets and economic conditions generally; (2) general business, economic and
political conditions may significantly affect our earnings; (3) we depend on our institutional
counterparties to provide services that are critical to our business. If one of more of our
institutional counterparties defaults on its obligations to us or becomes insolvent, it could have
a material adverse affect our earnings, liquidity, capital position and financial condition; (4)
defaults by another larger financial institution could adversely affect financial markets
generally; (5) if we cannot effectively manage the impact of the volatility of interest rates, our
earnings could be adversely affected; (6) the value of our mortgage servicing rights could decline
with reduction in interest rates; (7) 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; (8) 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; (9) changes in the fair value or ratings downgrades of our
securities may reduce our stockholders equity, net earnings, or regulatory capital ratios; (10)
current and further deterioration in the housing and commercial real estate markets may lead to
increased loss severities and further increases in delinquencies and non-performing assets in our
loan portfolios. Additionally, the performance of our standby and commercial letters of credit may
be adversely affected as well. Consequently, our allowance for loan losses and guarantee liability
may not be adequate to cover actual losses, and we may be required to materially increase our
reserves; (11) our secondary market reserve for losses could be insufficient; (12) our home lending
profitability could be significantly reduced if we are not able to resell mortgages; (13) our
commercial real estate and commercial business loan portfolios carry heightened credit risk; (14)
our ability to borrow funds maintain or increase deposits or raise capital could be limited, which
could adversely affect our liquidity and earnings; (15) our inability to realize our deferred tax
assets may have a material adverse affect on our consolidated results of operations and our
financial condition; (16) we may be required to raise capital at terms that are materially adverse
to our stockholders; (17) our holding company is dependent on the Bank for funding of obligations
and dividends; (18) future dividend payments and common stock repurchases are restricted by the
terms of the Treasurys equity investment in us; (19) we may not be able to replace key members of
senior management or attract and retain qualified relationship managers in the future; (20) the
network and computer systems on which we depend could fail or experience a security breach; (21)
our business is highly regulated; (22) our business has volatile earnings because it operates based
on a multi-year cycle; (23) our loans are geographically concentrated in only a few states; (24) we
are subject to heightened regulatory scrutiny with respect to bank secrecy and anti-money
laundering statutes and regulations; (25) we are a controlled company that is exempt from certain
NYSE corporate governance requirements.
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 MARCH 31, 2009
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION |
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Item 1. Financial Statements |
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4 |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
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30 |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
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46 |
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Item 4. Controls and Procedures |
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46 |
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PART II. OTHER INFORMATION |
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Item 1. Legal Proceedings |
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47 |
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Item 1A. Risk Factors |
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47 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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47 |
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Item 3. Defaults upon Senior Securities |
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47 |
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Item 4. Submission of Matters to a Vote of Security Holders |
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47 |
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Item 5. Other Information |
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47 |
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Item 6. Exhibits |
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48 |
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SIGNATURES |
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49 |
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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 March 31, 2009 (unaudited) and December 31,
2008.
Unaudited Consolidated Statements of Operations For the three months ended March 31,
2009 and 2008.
Consolidated Statements of Stockholders Equity and Comprehensive Loss For the three
months ended
March 31, 2009 (unaudited) and for the year ended December 31, 2008.
Unaudited Consolidated Statements of Cash Flows For the three months ended March 31, 2009
and 2008.
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 March 31, |
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At December 31, |
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2009 |
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2008 |
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(Unaudited) |
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Assets |
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Cash and cash items |
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$ |
221,926 |
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$ |
300,989 |
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Interest-bearing deposits |
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87,492 |
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205,916 |
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Cash and cash equivalents |
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309,418 |
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506,905 |
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Securities classified as trading |
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1,693,140 |
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542,539 |
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Securities classified as available for sale |
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775,812 |
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1,118,453 |
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Other investments |
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36,993 |
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34,532 |
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Loans available for sale ($3,573,997 at fair value on March 31, 2009) |
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3,660,259 |
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1,484,680 |
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Loans held for investment |
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8,946,195 |
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9,082,121 |
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Less: allowance for loan losses |
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(466,000 |
) |
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(376,000 |
) |
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Loans held for investment, net |
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8,480,195 |
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8,706,121 |
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Total interest-earning assets |
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14,733,891 |
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12,092,241 |
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Accrued interest receivable |
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62,848 |
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55,961 |
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Repossessed assets, net |
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106,546 |
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109,297 |
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Federal Home Loan Bank stock |
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373,443 |
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373,443 |
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Premises and equipment, net |
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246,203 |
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246,229 |
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Mortgage servicing rights at fair value |
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515,500 |
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511,294 |
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Mortgage servicing rights, net |
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7,271 |
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9,469 |
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Other assets |
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542,189 |
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504,734 |
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Total assets |
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$ |
16,809,817 |
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$ |
14,203,657 |
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Liabilities and Stockholders Equity
Liabilities |
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Deposits |
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$ |
9,785,701 |
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$ |
7,841,005 |
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Federal Home Loan Bank advances |
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5,200,000 |
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5,200,000 |
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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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248,660 |
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Total interest-bearing liabilities |
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15,342,361 |
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13,397,665 |
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Accrued interest payable |
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29,537 |
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36,062 |
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Secondary market reserve |
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48,900 |
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42,500 |
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Other liabilities |
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458,285 |
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255,137 |
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Total liabilities |
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15,879,083 |
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13,731,364 |
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Commitments and Contingencies |
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Stockholders Equity |
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Preferred stock $0.01 par value, liquidation value $1,000 per share
25,000,000 shares authorized; 566,657 issued and outstanding at
March 31, 2009 |
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6 |
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Common stock $0.01 par value, 150,000,000 shares authorized;
90,379,297
and 83,626,726 shares issued and outstanding at March 31, 2009 and
December 31, 2008, respectively |
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904 |
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836 |
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Additional paid in capital preferred |
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511,148 |
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Additional paid in capital common |
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124,034 |
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119,024 |
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Accumulated other comprehensive loss |
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(105,029 |
) |
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(81,742 |
) |
Retained earnings |
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399,671 |
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434,175 |
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Total stockholders equity |
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930,734 |
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472,293 |
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Total liabilities and stockholders equity |
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$ |
16,809,817 |
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$ |
14,203,657 |
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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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March 31, |
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2009 |
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2008 |
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(Unaudited) |
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Interest Income |
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Loans |
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$ |
158,622 |
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$ |
176,294 |
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Mortgage-backed securities held to maturity |
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15,576 |
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Securities classified as available for sale and trading |
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25,477 |
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15,591 |
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Interest-bearing deposits |
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856 |
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2,768 |
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Other |
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23 |
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624 |
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Total interest income |
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184,978 |
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210,853 |
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Interest Expense |
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Deposits |
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67,350 |
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84,050 |
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FHLB advances |
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56,809 |
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64,558 |
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Security repurchase agreements |
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1,153 |
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3,155 |
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Other |
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2,936 |
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4,292 |
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Total interest expense |
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128,248 |
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156,055 |
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Net interest income |
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56,730 |
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54,798 |
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Provision for loan losses |
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158,214 |
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34,262 |
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Net interest (loss) income after provision for loan losses |
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(101,484 |
) |
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20,536 |
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Non-Interest Income |
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Loan fees and charges |
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32,922 |
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|
884 |
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Deposit fees and charges |
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7,233 |
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6,031 |
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Loan administration |
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(31,801 |
) |
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(17,046 |
) |
Net gain on loan sales |
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195,694 |
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63,425 |
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Net (loss) gain on sales of mortgage servicing rights |
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(82 |
) |
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287 |
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Total other-than-temporary impairment losses |
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(126,172 |
) |
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Loss recognized in other comprehensive income (before taxes) |
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(108,930 |
) |
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Net impairment losses recognized in earnings |
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(17,242 |
) |
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Gain (loss) on trading securities |
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11,212 |
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(9,482 |
) |
Other fees and charges |
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(6,977 |
) |
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8,575 |
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Total non-interest income |
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190,959 |
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52,674 |
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Non-Interest Expense |
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Compensation and benefits |
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91,789 |
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53,993 |
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Occupancy and equipment |
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18,879 |
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19,821 |
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Asset resolution |
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24,873 |
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3,741 |
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Communication |
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1,722 |
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1,785 |
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Other taxes |
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1,007 |
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|
891 |
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General and administrative |
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44,399 |
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8,937 |
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Total non-interest expense |
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182,669 |
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89,168 |
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Loss before federal income taxes |
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(93,194 |
) |
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(15,958 |
) |
Benefit for federal income taxes |
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(28,696 |
) |
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(5,359 |
) |
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Net Loss |
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(64,498 |
) |
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(10,599 |
) |
Preferred stock dividends |
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(2,919 |
) |
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Net Loss Applicable To Common Stock |
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$ |
(67,417 |
) |
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$ |
(10,599 |
) |
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Loss per share |
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Basic |
|
$ |
(0.76 |
) |
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$ |
(0.18 |
) |
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Diluted |
|
$ |
(0.76 |
) |
|
$ |
(0.18 |
) |
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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)
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Accumulated |
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Other |
|
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|
Total |
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|
Preferred |
|
|
Common |
|
|
Additional Paid in Capital |
|
|
Comprehensive |
|
|
Treasury |
|
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Retained |
|
|
Stockholders |
|
|
|
Stock |
|
|
Stock |
|
|
Preferred |
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Common |
|
|
Loss |
|
|
Stock |
|
|
Earnings |
|
|
Equity |
|
|
|
|
Balance at January 1, 2008 |
|
$ |
|
|
|
$ |
637 |
|
|
$ |
|
|
|
$ |
64,350 |
|
|
$ |
(11,495 |
) |
|
$ |
(41,679 |
) |
|
$ |
681,165 |
|
|
$ |
692,978 |
|
Net loss |
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
(275,407 |
) |
|
|
(275,407 |
) |
Reclassification of gain on
dedesignation of swaps used in
cash flow hedges |
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|
|
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|
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|
|
|
|
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|
|
|
(236 |
) |
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|
|
|
|
|
|
|
|
|
(236 |
) |
Reclassification of gain on sale of
securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,262 |
) |
|
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|
|
|
|
|
|
|
|
(3,262 |
) |
Reclassification of loss on securities
available for sale due to other than
temporary impairment |
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|
|
|
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|
|
|
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|
|
|
|
|
|
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|
40,541 |
|
|
|
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|
|
|
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|
|
40,541 |
|
Change in net unrealized loss on
securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(107,290 |
) |
|
|
|
|
|
|
|
|
|
|
(107,290 |
) |
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|
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|
|
|
|
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|
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|
Total comprehensive loss |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(345,654 |
) |
Cumulative effect adjustment due to
change of accounting for residential
MSR mortgage servicing rights |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,417 |
|
|
|
28,417 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,227 |
|
Tax effect from stock-based
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(205 |
) |
|
|
|
Balance at December 31, 2008
(Unaudited) |
|
|
|
|
|
|
836 |
|
|
|
|
|
|
|
119,024 |
|
|
|
(81,742 |
) |
|
|
|
|
|
|
434,175 |
|
|
|
472,293 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64,498 |
) |
|
|
(64,498 |
) |
Reclassification of loss on securities
available for sale due to other-than-
temporary impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,208 |
|
|
|
|
|
|
|
|
|
|
|
11,208 |
|
Change in net unrealized loss on
securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,581 |
) |
|
|
|
|
|
|
|
|
|
|
(1,581 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54,871 |
) |
Cumulative effect for adoption of FSP
FAS 115-2 and FAS 124-2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,914 |
) |
|
|
|
|
|
|
32,914 |
|
|
|
|
|
Issuance of preferred stock |
|
|
6 |
|
|
|
|
|
|
|
510,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
510,493 |
|
Issuance of common stock |
|
|
|
|
|
|
67 |
|
|
|
|
|
|
|
5,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,321 |
|
Restricted stock issued |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45 |
) |
Dividends preferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,259 |
) |
|
|
(2,259 |
) |
Accretion of preferred stock |
|
|
|
|
|
|
|
|
|
|
661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(661 |
) |
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
255 |
|
Tax effect from stock-based
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(453 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(453 |
) |
|
|
|
Balance at March 31, 2009 |
|
$ |
6 |
|
|
$ |
904 |
|
|
$ |
511,148 |
|
|
$ |
124,034 |
|
|
$ |
(105,029 |
) |
|
$ |
|
|
|
$ |
399,671 |
|
|
$ |
930,734 |
|
|
|
|
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 Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Unaudited) |
|
Operating Activities |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(64,498 |
) |
|
$ |
(10,599 |
) |
Adjustments to net loss to net cash used in operating activities |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
158,214 |
|
|
|
34,262 |
|
Depreciation and amortization |
|
|
5,776 |
|
|
|
6,434 |
|
Increase (decrease) in valuation allowance in mortgage servicing rights |
|
|
1,548 |
|
|
|
(119 |
) |
Loss on fair value of residential mortgage servicing rights, net of hedging gains |
|
|
69,571 |
|
|
|
46,961 |
|
Stock-based compensation expense |
|
|
255 |
|
|
|
130 |
|
Loss on interest rate swap |
|
|
99 |
|
|
|
1,611 |
|
Net loss (gain) on the sale of assets |
|
|
1,262 |
|
|
|
(370 |
) |
Net gain on loan sales |
|
|
(195,694 |
) |
|
|
(63,425 |
) |
Net loss (gain) on sales of mortgage servicing rights |
|
|
82 |
|
|
|
(287 |
) |
Net loss on securities classified as available for sale |
|
|
17,242 |
|
|
|
|
|
Net (gain) loss on trading securities |
|
|
(11,212 |
) |
|
|
9,482 |
|
Proceeds from sales of trading securities |
|
|
518,793 |
|
|
|
|
|
Proceeds from sales of loans available for sale |
|
|
6,776,177 |
|
|
|
6,271,453 |
|
Origination and repurchase of mortgage loans available for sale, net of principal
repayments |
|
|
(9,379,932 |
) |
|
|
(6,489,510 |
) |
Purchase of trading securities, net of principal repayments |
|
|
(831,552 |
) |
|
|
|
|
(Increase) decrease in accrued interest receivable |
|
|
(6,887 |
) |
|
|
2,082 |
|
Increase in other assets |
|
|
(30,219 |
) |
|
|
(123,830 |
) |
Decrease in accrued interest payable |
|
|
(6,525 |
) |
|
|
(6,822 |
) |
Net tax effect for stock grants issued |
|
|
453 |
|
|
|
198 |
|
Decrease in federal income taxes payable |
|
|
(5,637 |
) |
|
|
(14,592 |
) |
Increase in other liabilities |
|
|
50,163 |
|
|
|
10,244 |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(2,932,521 |
) |
|
|
(326,697 |
) |
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Net change in other investments |
|
|
(2,461 |
) |
|
|
(1,589 |
) |
Repayment of mortgage-backed securities held to maturity |
|
|
|
|
|
|
90,846 |
|
Repayment of investment securities available for sale |
|
|
42,717 |
|
|
|
26,157 |
|
Proceeds from sales of portfolio loans |
|
|
16,403 |
|
|
|
|
|
Origination of portfolio loans, net of principal repayments |
|
|
13,800 |
|
|
|
100,244 |
|
Proceeds from the disposition of repossessed assets |
|
|
50,737 |
|
|
|
18,990 |
|
Acquisitions of premises and equipment, net of proceeds |
|
|
(4,787 |
) |
|
|
(9,815 |
) |
Proceeds from the sale of mortgage servicing rights |
|
|
1,543 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
117,952 |
|
|
|
224,833 |
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Net increase in deposit accounts |
|
|
1,944,696 |
|
|
|
191,060 |
|
Net decrease in Federal Home Loan Bank advances |
|
|
|
|
|
|
(94,000 |
) |
Net receipt of payments of loans serviced for others |
|
|
107,915 |
|
|
|
5,213 |
|
Net receipt of escrow payments |
|
|
15,238 |
|
|
|
7,287 |
|
Proceeds from the exercise of stock options |
|
|
|
|
|
|
42 |
|
Net tax effect of stock grants issued |
|
|
(453 |
) |
|
|
(198 |
) |
Issuance of preferred stock U.S. Treasury |
|
|
266,657 |
|
|
|
|
|
Issuance of preferred stock |
|
|
277,708 |
|
|
|
|
|
Issuance of common stock |
|
|
5,321 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
2,617,082 |
|
|
|
109,404 |
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(197,487 |
) |
|
|
7,540 |
|
Beginning cash and cash equivalents |
|
|
506,905 |
|
|
|
340,169 |
|
|
|
|
|
|
|
|
Ending cash and cash equivalents |
|
$ |
309,418 |
|
|
$ |
347,709 |
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Unaudited) |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Loans held for investment transferred to repossessed assets |
|
$ |
117,462 |
|
|
$ |
62,699 |
|
|
|
|
|
|
|
|
Total interest payments made on deposits and other borrowings |
|
$ |
134,773 |
|
|
$ |
162,876 |
|
|
|
|
|
|
|
|
Federal income taxes paid |
|
$ |
590 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Reclassification of mortgage loans originated available for sale then transferred to portfolio
loans |
|
$ |
16,403 |
|
|
$ |
592,874 |
|
|
|
|
|
|
|
|
Mortgage servicing rights resulting from sale or securitization of loans |
|
$ |
82,680 |
|
|
$ |
100,752 |
|
|
|
|
|
|
|
|
Reclassification of mortgage backed securities held to maturity to securities available for
sale |
|
$ |
|
|
|
$ |
1,163,681 |
|
|
|
|
|
|
|
|
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 $16.8
billion in assets at March 31, 2009, Flagstar is the largest savings institution and banking
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 may also originate consumer loans, commercial real estate loans, and non-real estate
commercial loans and services a significant volume of residential mortgage loans for others.
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) are occasionally sold by the Company in transactions separate from the sale of the
underlying mortgages. The Company may also invest in a portion of its loan production in order to
enhance the Companys leverage ability and to receive the interest spread between earning assets
and paying liabilities.
The Bank is a member of the Federal Home Loan Bank System (FHLB) and is subject to
regulation, examination and supervision by the Office of Thrift Supervision (OTS) and the Federal
Deposit Insurance Corporation (FDIC). The Banks deposits are insured by the FDIC through the
Deposit Insurance Fund (DIF).
Note 2. Recent Developments
Capital Investment
On December 17, 2008, the Company entered into an investment agreement with MP Thrift
Investments L.P. (MatlinPatterson), an entity formed by MP Thrift Global Partners III LLC, an
affiliate of MatlinPatterson Global Advisors LLC, for the purchase by MatlinPatterson of 250,000
shares of a newly authorized series of our convertible participating voting preferred stock for
$250 million. Such preferred shares will automatically convert, at $0.80 per share, into 312.5
million shares of the Companys common stock upon stockholder approval authorizing additional
shares of common stock. On January 30, 2009, MatlinPatterson consummated the purchase. Upon
consummation, the Company became a controlled company, as defined in the rules of the New York
Stock Exchange (the NYSE), based on MatlinPattersons beneficial ownership of a majority of the
Companys voting stock. As a controlled company, the Company is exempt from certain of the
NYSEs corporate governance requirements, including the requirement to maintain a majority of
independent directors and requirements related to the compensation committee and the
nomination/corporate governance committee. The terms of the preferred stock allow MatlinPatterson
to vote such shares on an as-converted basis and, as a result, MatlinPatterson controlled
approximately 77.6% of the voting power of the Company as of January 30, 2009.
As a condition under the investment agreement, on January 30, 2009, certain of the Companys
officers and directors acquired in the aggregate, 6.65 million shares of common stock at a purchase
price of $0.80 per share for a total of $5.32 million. The preferred stock and the common stock
were each offered and sold to individual accredited investors in an offering exempt from the
registration requirements of the Securities Act of 1933, as amended (the Securities Act),
pursuant to Section 4(2) thereof.
Also, on January 30, 2009, the Company entered into a closing agreement with MatlinPatterson
pursuant to which it agreed to sell to MatlinPatterson (i) an additional $50 million of convertible
preferred stock substantially in the form of the Preferred Stock, in two equal parts, on
substantially the same terms as the $250 million investment by MatlinPatterson (the Additional
Preferred Stock) and (ii) $50 million of trust preferred securities with a 10% coupon (the Trust
Preferred Securities). On February 17, 2009, MatlinPatterson acquired the first $25 million of
the Additional Preferred Stock, pursuant to which the Company issued 25,000 shares of the
Additional Preferred Stock with a conversion price of $0.80 per share. On February 27, 2009,
MatlinPatterson acquired the second $25 million of the Additional Preferred Stock, pursuant to
which the Company issued 25,000 shares of the Additional Preferred Stock with a conversion price
of $0.80 per share. Upon receipt of stockholder approval, the 50,000 shares of Additional
Preferred Stock will automatically convert into 62.5 million shares of the Companys common stock.
The $50 million sale of the Trust Preferred Securities is expected to be consummated during the
second quarter of 2009 and will consist of 50,000 shares that will be convertible into common
stock at the option of MatlinPatterson on April 1, 2010 at a conversion price of 90% of the volume
weighted-average price per share of common stock during the period from February 1, 2009 to April
1, 2010, subject to a price per share minimum of $0.80 and maximum
10
of $2.00. If the Trust Preferred Securities are not converted, they will remain outstanding
perpetually unless redeemed by the Company at any time after January 30, 2011.
Troubled Asset Relief Program (TARP)
On January 30, 2009, the Company entered into a Letter Agreement and a Securities Purchase
Agreement with the United States Department of Treasury (the Treasury), pursuant to which the
Company sold to the Treasury 266,657 shares of the Companys fixed rate cumulative non-convertible
perpetual preferred stock for $266.7 million, and a warrant (the Treasury Warrant) to purchase
up to 64.5 million shares of the Companys common stock at an exercise price of $0.62 per share,
subject to certain anti-dilution and other adjustments. The issuance and the sale of the preferred
stock and Treasury Warrant are exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof. The preferred stock qualifies as Tier 1 capital and pays
cumulative dividends quarterly at a rate of 5% per annum for the first five years, and 9% per annum
thereafter. The Treasury Warrant is exercisable upon receipt of stockholder approval and has a 10
year term.
Issuance of Warrants to Certain Stockholders
In full satisfaction of the Companys obligations under anti-dilution provisions applicable to
certain investors (the May Investors) in the Companys May 2008 private placement capital raise,
the Company granted warrants (the May Investor Warrants) to the May Investors on January 30, 2009
for the purchase of 14,259,794 shares of the Companys common stock at $0.62 per share. The
holders of such warrants will be entitled to acquire the Companys common shares for a period of
ten years. EITF 07-5, Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entitys Own Stock became effective for financial statements issued for fiscal years after December
15, 2008. Therefore, this EITF is required to be applied to any outstanding instruments as of the
beginning of the fiscal year in which it is initially applied. EITF 07-5 nullifies the guidance in
EITF 01-6, The Meaning of Indexed to a Companys Own Stock. As such, this EITF is required to be
applied to the May Investor Warrants since they were issued on January 30, 2009.
Based on managements analysis, the May Investor Warrants do not meet the definition of a
contract that is indexed to the Companys own stock under EITF 07-5 and as such the May Investor
Warrants will be classified as a liability and will be measured at fair value, with changes in fair
value recognized through operations. See Note 11, Warrant Liabilities.
Note 3. 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 (the 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 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 month period ended March 31, 2009, 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, 2008, which
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 4. Recent Accounting Developments
In November 2007, the Financial Accounting Standards Board (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 and will require disclosure on the face of the consolidated statement of
operations amounts attributable to the parent and the non-controlling interest. The adoption of
this statement will result in more transparent reporting of the net earnings attributable to the
non-controlling interest. The statement establishes a single method of accounting for changes in a
parents ownership interest in a subsidiary that do 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 was effective for the Company on January 1, 2009. The
adoption of this statement did not have a material impact on the Companys consolidated financial
condition, results of operation or liquidity.
11
In February 2008, the FASB issued FASB Staff Position (FSP) FAS 140-3, Accounting for
Transfers of Financial Assets and Repurchase Financing Transactions. FSP 140-3 requires the
initial transfer of a financial asset and a repurchase financing that was entered into
contemporaneously with or in contemplation of the initial transfer, to be treated as a linked
transaction under SFAS 140, unless certain criteria are met, then the initial transfer and
repurchase will not be evaluated as a linked transaction, but will be evaluated separately under
SFAS 140. FSP FAS 140-3 is effective for fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years. The adoption of FSP FAS 140-3 did not have a material
impact on the Companys consolidated financial condition, results of operations 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 entities to provide
enhanced qualitative disclosures about objectives and strategies with respect to an entitys
derivative and hedging activities. SFAS 161 is effective for fiscal years and interim periods
beginning after November 15, 2008. The adoption of SFAS 161 did not have a material impact on the
Companys consolidated financial condition, results of operations or liquidity.
In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active. FSP FAS 157-3 clarifies the application of
SFAS 157, Fair Value Measurements in an inactive market and provides key considerations in
determining the fair value of an asset where the market is not active. FSP FAS 157-3 was effective
immediately upon issuance. The adoption of FSP FAS 157-3 did not have a material impact on the
Companys consolidated financial condition, results of operations or liquidity.
In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public
Entities (Enterprises) about Transfers of Financial Assets and Interest in Variable Interest
Entities. FSP FAS 140-4 and FIN 46(R)-8 require enhanced disclosures about the transfers of
financial assets and interests in variable interest entities. FSP FAS 140-4 and FIN 46(R)-8 are
effective for interim and annual reporting periods ending after December 15, 2008. The adoption of
FSP FAS 140-4 and FIN 46(R)-8 did not have a material impact on the Companys consolidated
financial condition, results of operations or liquidity.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. FSP FAS 115-2 and FAS 124-2 amends the other-than-temporary
guidance to make the guidance more operational and to improve the presentation of
other-than-temporary impairments in the financial statements. The FSP modifies the current
indicator that, to avoid considering an impairment to be other-than temporary, management must
assert that it has both the intent and ability to hold an impaired security for a period of time
sufficient to allow for any anticipated recovery in fair value. The new FSP would require
management to assert that (a) it does not have the intent to sell the security and (b) it is more
likely than not that it will not have to sell the security before its recovery. The FSP changes
the total amount recognized in earnings when there are factors other than credit losses associated
with an impairment of a debt security. The impairment is separated into impairments related to
credit losses and impairments related to all other factors. The adoption of FSP FAS 115-2 and FAS
124-2 resulted in a cumulative adjustment increasing retained earnings and other comprehensive loss
by $50.6 million offset by a tax benefit of $17.7 million, or $32.9 million net of tax. The
cumulative adjustment represents the non-credit portion of other-than-temporary impairment, related
to securities available for sale, that the Company had recorded prior to January 1, 2009. See
Accumulated other comprehensive loss in Note 12, Stockholders Equity.
In April 2009, FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly. FAS 157-4 provides additional guidance on determining whether a market for a
financial asset is not active and a transaction is not distressed for fair value measurements under
SFAS 157. The adoption of FAS 157-4 did not have a material impact on the Companys consolidated
financial condition, results of operations or liquidity.
In April 2009, FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments, requires disclosures about the fair value of financial instruments in interim
reporting periods of publicly traded companies that were previously only required to be disclosed
in annual financial statements. The provision of FSP FAS 107-1 and APB 28-1 were adopted by the
Company effective January 1, 2009. As FSP FAS 107-1 and APB 28-1 amends only the disclosure
requirements about fair value of financial instruments in interim periods, the adoption of FSP FAS
107-1 and APB 28-1 did not affect the Companys consolidated statements of operations and financial
condition.
Note 5. 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:
12
|
|
|
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 to securities trading to provide
consistency in the accounting for the Companys residual interests.
Effective January 1, 2008, the Company elected the fair value measurement method for
residential 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 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.
Effective January 1, 2009, the Company elected the fair value option in accordance with SFAS
159 for the majority of its loans available for sale. Only loans available for sale originated
subsequent to January 1, 2009 are affected. Prior to the Companys fair value election, loans
available for sale were carried at the lower of aggregate cost or estimated fair value. The effect
on consolidated operations of this election amounted to an increase in gain on loans sales of $22.0
million for the first quarter 2009. See Note 7, Loans Available for Sale.
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 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.
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. |
13
|
|
|
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 comprised of U.S. government sponsored
agency mortgage-backed securities, U.S. Treasury bonds and non-investment grade residual securities
that arose from private-label securitizations of the Company. The U.S. government sponsored agency
mortgage-backed securities and U.S. Treasury bonds trade in an active, open market with readily
observable prices and are classified within the Level 1 valuation hierarchy. The 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. See Note 9, Private Label Securitization Activity for
the key assumptions used in the residual interest valuation process.
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 mortgage-backed
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 available for sale. At March 31, 2009, the majority of the Companys loans originated
and classified as available for sale are reported at fair value and are classified as Level 2 of
the valuation hierarchy. The Company estimates the fair value of mortgage loans based on quoted
market prices for securities backed by similar types of loans. Otherwise, the fair value of loans
are estimated by using discounted cash flows using managements best estimate of market interest
rates for similar collateral. At March 31, 2009, the Company continued to have a small number of
loans which were originated prior to the fair value election and accounted for at lower of cost or
market.
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. 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 March 31, 2009,
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, less anticipated marketing and selling costs.
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.
14
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 transactions). Residential MSRs are 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 12, 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.
Liabilities
Warrants. The warrant liabilities arose from the investor transactions completed during the
first quarter of 2009. Warrant liabilities are valued using a Binomial Lattice Model and are
classified as Level 2 of the valuation hierarchy.
Assets and liabilities measured at fair value on a recurring basis
The following table presents the financial instruments carried at fair value as of March 31,
2009, by caption on the Consolidated Statement of Financial Condition and by SFAS 157 valuation
hierarchy (as described above) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total carrying |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
value in the |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Condition |
|
|
|
|
Securities classified as trading: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residual interests |
|
$ |
|
|
|
$ |
|
|
|
$ |
18,296 |
|
|
$ |
18,296 |
|
Mortgage-backed securities |
|
|
1,674,844 |
|
|
|
|
|
|
|
|
|
|
|
1,674,844 |
|
Securities classified as available for sale |
|
|
234,843 |
|
|
|
|
|
|
|
540,969 |
|
|
|
775,812 |
|
Loans available for sale |
|
|
|
|
|
|
3,573,997 |
|
|
|
|
|
|
|
3,573,997 |
|
Residential mortgage servicing rights |
|
|
|
|
|
|
|
|
|
|
515,500 |
|
|
|
515,500 |
|
Other investments |
|
|
36,993 |
|
|
|
|
|
|
|
|
|
|
|
36,993 |
|
Derivative financial instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate lock commitments |
|
|
|
|
|
|
|
|
|
|
82,645 |
|
|
|
82,645 |
|
Forward agency and loan sales |
|
|
(58,572 |
) |
|
|
|
|
|
|
|
|
|
|
(58,572 |
) |
Agency forwards |
|
|
33,321 |
|
|
|
|
|
|
|
|
|
|
|
33,321 |
|
Treasury futures |
|
|
3,911 |
|
|
|
|
|
|
|
|
|
|
|
3,911 |
|
Interest rate swaps |
|
|
(1,349 |
) |
|
|
|
|
|
|
|
|
|
|
(1,349 |
) |
Warrant liabilities |
|
|
|
|
|
|
(44,901 |
) |
|
|
|
|
|
|
(44,901 |
) |
|
|
|
Total assets and liabilities at fair
value |
|
$ |
1,923,991 |
|
|
$ |
3,529,096 |
|
|
$ |
1,157,410 |
|
|
$ |
6,610,497 |
|
|
|
|
15
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 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 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 three months ended March 31, 2009 (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 to |
|
|
|
|
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
|
|
|
|
financial |
|
|
|
|
|
|
Total |
|
issuances |
|
Transfers |
|
|
|
|
|
instruments |
|
|
Fair value, |
|
realized/ |
|
and |
|
in and/or |
|
Fair value, |
|
held at |
Three months ended |
|
January 1, |
|
unrealized |
|
settlements, |
|
out of |
|
March 31, |
|
March 31, |
March 31, 2009 |
|
2009 |
|
gains/(losses) |
|
net |
|
Level 3 |
|
2009 |
|
2009 |
|
Securities classified as trading: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residual interests(a) |
|
$ |
24,808 |
|
|
$ |
(6,512 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
18,296 |
|
|
$ |
|
|
Securities classified as
available for sale(b)(c) |
|
|
563,083 |
|
|
|
2,916 |
|
|
|
(25,030 |
) |
|
|
|
|
|
|
540,969 |
|
|
|
(20,158 |
) |
Residential mortgage servicing
rights |
|
|
511,294 |
|
|
|
(78,474 |
) |
|
|
82,680 |
|
|
|
|
|
|
|
515,500 |
|
|
|
|
|
Derivative financial
Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate lock commitments |
|
|
78,613 |
|
|
|
|
|
|
|
4,032 |
|
|
|
|
|
|
|
82,645 |
|
|
|
|
|
|
|
|
Totals |
|
$ |
1,177,798 |
|
|
$ |
(82,070 |
) |
|
$ |
61,682 |
|
|
$ |
|
|
|
$ |
1,157,410 |
|
|
$ |
(20,158 |
) |
|
|
|
|
|
|
(a) |
|
Residual interests are valued using internal inputs. |
|
(b) |
|
U.S. government sponsored agency mortgage-backed 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), including unrealized losses deemed other-than-temporary, are
reported in non-interest income. Unrealized gains (losses) are reported in accumulated
other comprehensive loss. |
The Company also has assets that under certain conditions are subject to measurement at fair
value on a non-recurring 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 |
|
|
|
|
|
|
|
|
March 31, 2009 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Loans held for investment |
|
$ |
452,269 |
|
|
$ |
|
|
|
$ |
452,269 |
|
|
$ |
|
|
Repossessed assets |
|
|
106,546 |
|
|
|
|
|
|
|
106,546 |
|
|
|
|
|
Consumer servicing assets |
|
|
7,271 |
|
|
|
|
|
|
|
|
|
|
|
7,271 |
|
|
|
|
Totals |
|
$ |
566,086 |
|
|
$ |
|
|
|
$ |
558,815 |
|
|
$ |
7,271 |
|
|
|
|
16
Financial Disclosures about Fair Value of Financial Instruments Required by FSP FAS 107-1
FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments,
requires disclosures of the estimated fair value of certain financial instruments and the methods
and significant assumptions used to estimate their fair values. Certain financial instruments and
all nonfinancial instruments are excluded from the scope of FSP FAS 107-1. Accordingly, the fair
value disclosures required by FSP FAS 107-1 are only indicative of the value of individual
financial instruments, as of the dates indicated and should not be considered an indication of the
fair value of the Company.
The following table presents the carrying amount and estimated fair value of certain financial
instruments as required by FSP FAS 107-1 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
December 31, 2008 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|
Value |
|
Value |
|
Value |
|
Value |
Financial instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
309,418 |
|
|
$ |
309,418 |
|
|
$ |
506,905 |
|
|
$ |
506,905 |
|
Securities trading |
|
|
1,693,140 |
|
|
|
1,693,140 |
|
|
|
542,539 |
|
|
|
542,539 |
|
Securities available for sale |
|
|
775,812 |
|
|
|
775,812 |
|
|
|
1,118,453 |
|
|
|
1,118,453 |
|
Other investments |
|
|
36,993 |
|
|
|
36,993 |
|
|
|
34,532 |
|
|
|
34,532 |
|
Loans available for sale |
|
|
3,660,259 |
|
|
|
3,663,142 |
|
|
|
1,484,680 |
|
|
|
1,526,031 |
|
Loans held for investment, net |
|
|
8,480,195 |
|
|
|
8,545,636 |
|
|
|
8,706,121 |
|
|
|
8,845,398 |
|
FHLB stock |
|
|
373,443 |
|
|
|
373,443 |
|
|
|
373,443 |
|
|
|
373,443 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits and savings accounts |
|
|
(1,535,880 |
) |
|
|
(1,535,880 |
) |
|
|
(1,386,330 |
) |
|
|
(1,386,330 |
) |
Certificates of deposit |
|
|
(4,647,037 |
) |
|
|
(4,738,919 |
) |
|
|
(3,967,985 |
) |
|
|
(4,098,135 |
) |
Municipal deposits |
|
|
(616,319 |
) |
|
|
(646,216 |
) |
|
|
(597,638 |
) |
|
|
(599,849 |
) |
National certificates of deposit |
|
|
(2,237,363 |
) |
|
|
(2,294,430 |
) |
|
|
(1,353,558 |
) |
|
|
(1,412,506 |
) |
Company controlled deposit |
|
|
(749,102 |
) |
|
|
(749,102 |
) |
|
|
(535,494 |
) |
|
|
(535,494 |
) |
FHLB advances |
|
|
(5,200,000 |
) |
|
|
(5,569,300 |
) |
|
|
(5,200,000 |
) |
|
|
(5,612,624 |
) |
Security repurchase agreements |
|
|
(108,000 |
) |
|
|
(112,350 |
) |
|
|
(108,000 |
) |
|
|
(113,186 |
) |
Long term debt |
|
|
(248,660 |
) |
|
|
(247,031 |
) |
|
|
(248,660 |
) |
|
|
(247,396 |
) |
Warrant liabilities |
|
|
44,901 |
|
|
|
44,901 |
|
|
|
|
|
|
|
|
|
Derivative Financial Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward delivery contracts |
|
|
(58,572 |
) |
|
|
(58,572 |
) |
|
|
(61,256 |
) |
|
|
(61,256 |
) |
Commitments to extend credit |
|
|
82,645 |
|
|
|
82,645 |
|
|
|
78,613 |
|
|
|
78,613 |
|
Interest rate swaps |
|
|
(1,349 |
) |
|
|
(1,349 |
) |
|
|
(1,280 |
) |
|
|
(1,280 |
) |
Agency Forwards |
|
|
37,232 |
|
|
|
37,232 |
|
|
|
60,813 |
|
|
|
60,813 |
|
Options |
|
|
|
|
|
|
|
|
|
|
17,219 |
|
|
|
17,219 |
|
The methods and assumptions that were used to estimate the fair value of financial assets and
financial liabilities that are measured at fair value on a recurring or non-recurring basis are
discussed above. The following methods and assumptions were used to estimate the fair value for
other financial instruments for which it is practicable to estimate that value:
Cash and cash equivalents. Due to their short term nature, the carrying amount of cash and
cash equivalents approximates fair value.
Loans held for investment. The fair value of loans is estimated by using internally developed
discounted cash flow models using market interest rate inputs as well as managements best estimate
of spreads for similar collateral.
FHLB stock. No secondary market exists for FHLB stock. The stock is bought and sold at par
by the FHLB. Management believes that the recorded value is the fair value.
17
Deposit Accounts. The fair value of demand deposits and savings accounts approximates the
carrying amount. The fair value of fixed-maturity certificates of deposit is estimated using the
rates currently offered for certificates of deposits with similar remaining maturities.
FHLB Advances. Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of the existing debt.
Security Repurchase Agreements. Rates currently available for repurchase agreements with
similar terms and maturities are used to estimate fair values for these agreements.
Long Term Debt. The fair value of the long-term debt is estimated based on a discounted cash
flow model that incorporates the Companys current borrowing rates for similar types of borrowing
arrangements.
Note 6. Investment Securities
As of March 31, 2009 and December 31, 2008, investment securities were comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Securities trading |
|
|
|
|
|
|
|
|
U.S. government sponsored agencies |
|
$ |
1,674,844 |
|
|
$ |
517,731 |
|
Non-investment grade residual |
|
|
18,296 |
|
|
|
24,808 |
|
|
|
|
|
|
|
|
Total securities trading |
|
$ |
1,693,140 |
|
|
$ |
542,539 |
|
|
|
|
|
|
|
|
Securities available-for-sale |
|
|
|
|
|
|
|
|
Non-agencies |
|
$ |
540,969 |
|
|
$ |
563,083 |
|
U.S. government sponsored agencies |
|
|
234,843 |
|
|
|
555,370 |
|
|
|
|
|
|
|
|
Total mortgage-backed securities available-for-sale |
|
$ |
775,812 |
|
|
$ |
1,118,453 |
|
|
|
|
|
|
|
|
Other investments |
|
|
|
|
|
|
|
|
Mutual funds |
|
$ |
36,993 |
|
|
$ |
34,532 |
|
|
|
|
|
|
|
|
Trading
Securities classified as trading are comprised of AAA-rated U.S. government sponsored agency
mortgage-backed securities, U.S. Treasury bonds, and non-investment grade residual interests from
four private-label securitizations. At March 31, 2009 and December 31, 2008 there were $1.7
billion and $517.7 million, respectively, in U.S. government sponsored agency mortgage-backed
securities in trading, all of which were pledged as collateral. U.S. government sponsored agency
mortgage-backed securities held in trading are distinguished from available-for-sale based upon the
intent of management to use them as an economic offset against changes in the valuation of the MSR
portfolio; however, these securities do not qualify as an accounting hedge as defined in SFAS 133,
Accounting for Derivative Instruments.
The non-investment grade residual interests resulting from our private label securitizations
were $18.3 million at March 31, 2009 versus $24.8 million at December 31, 2008. Non-investment
grade residual securities classified as trading decreased as a result of the increase in the actual
and expected losses in the second mortgages and HELOCs that underly these assets.
The fair value of residual securities is determined by discounting estimated net future cash
flows using discount rates that approximate current market rates and expected prepayment 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 ratio, borrower credit scores and property type.
Available-for-Sale
At March 31, 2009 and December 31, 2008, the Company had $0.8 billion and $1.1 billion,
respectively, in securities classified as available-for-sale which were comprised of U.S.
government sponsored agency and non-agency mortgage-backed 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 the
credit related portion is reported as an expense for that period.
18
At March 31, 2009 and December 31, 2008, $441.2 million and $683.0 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.
The following table summarizes the amortized cost and estimated fair value of U.S. government
sponsored agency and non-agency mortgage-backed securities classified as available-for-sale (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Amortized cost |
|
$ |
937,394 |
|
|
$ |
1,244,145 |
|
Gross unrealized holding gains |
|
|
4,048 |
|
|
|
10,522 |
|
Gross unrealized holding losses |
|
|
(165,630 |
) |
|
|
(136,214 |
) |
|
|
|
|
|
|
|
Estimated fair value |
|
$ |
775,812 |
|
|
$ |
1,118,453 |
|
|
|
|
|
|
|
|
The following table summarizes unrealized loss positions, at March 31, 2009, on securities
classified as available-for-sale categorized by the duration of the unrealized loss position
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss Position with Duration |
|
Unrealized Loss Position with |
|
|
12 Months and Over |
|
Duration Under 12 Months |
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
Number of |
|
Unrealized |
|
|
|
|
|
Number of |
|
Unrealized |
Type of Security |
|
Principal |
|
Securities |
|
Loss |
|
Principal |
|
Securities |
|
Loss |
|
U.S. government
sponsored agency
securities |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
5,575 |
|
|
|
12 |
|
|
$ |
(47 |
) |
Collateralized
mortgage
obligations |
|
|
736,942 |
|
|
|
12 |
|
|
|
(165,583 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
736,942 |
|
|
|
12 |
|
|
$ |
(165,583 |
) |
|
$ |
5,575 |
|
|
|
12 |
|
|
$ |
(47 |
) |
|
|
|
The fair value of all other non-agency and U.S. government sponsored agency mortgage-backed
securities is estimated based on market information.
The unrealized losses on securities-available-for-sale amounted to $165.6 million on $742.5
million of agency and non-agency collateralized mortgage obligations (CMOs) at March 31, 2009.
These CMOs consist of interests in investment vehicles backed by mortgage loans. In the first
quarter of 2009, the Company adopted FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. The FSP changes the amount of impairment recognized in
operations when there are credit losses associated with an impairment of a debt security. The
impairment is separated into impairments related to credit losses, which are recorded in
operations, and impairments related to all other factors, which are recorded to other comprehensive
income.
During the fourth quarter of 2008, the Company recognized an other-than-temporary impairment
of $62.4 million on three collateralized mortgage obligations. Under the newly adopted FSP, the
credit loss portion of the other-than-temporary impairment was $11.8 million while the impairment
related to all other factors was $50.6 million. Effective January 1, 2009, the $50.6 million loss,
net of $17.7 million of tax benefit, was reclassified from retained earnings to other comprehensive
loss as a cumulative adjustment.
In the three months ended March 31, 2009, additional credit losses on the original three and
seven additional CMOs totaled $17.2 million, which was recognized in current operations. At March
31, 2009, the total amount of other than temporary impairment credit losses totaled $31.8 million.
At March 31, 2009, the Company had total impairments of $190.3 million on 11 securities in the
available-for-sale portfolio with $31.8 million in total credit losses recognized through
operations.
19
The following table shows the activity for OTTI credit loss for the three months ended March
31, 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions on |
|
Reductions |
|
|
|
|
|
|
|
|
Additions on |
|
securities with |
|
for sold |
|
|
|
|
January 1, 2009 |
|
securities with |
|
previous OTTI |
|
securities |
|
March 31, 2009 |
|
|
balance |
|
no prior OTTI |
|
recognized |
|
with OTTI |
|
balance |
Collateralized
Mortgage
Obligations |
|
$ |
(14,526 |
) |
|
$ |
(10,937 |
) |
|
$ |
(6,304 |
) |
|
$ |
|
|
|
$ |
(31,767 |
) |
Gains (losses) on the sale of U.S. government sponsored agency mortgage-backed securities
available for sale that are recently created with underlying mortgage products originated by the
Company are reported within net gain on loan sale. Securities in this category have typically
remained in the portfolio less than 90 days before sale. During the three months ended March 31,
2009, sales of these agency securities with underlying mortgage products originated by the Company
was $418.7 million resulting in $11.1 million of net gain on loan sale versus $1.5 billion
resulting in $2.9 million of net loss on loan sale during the same period in 2008.
Gain (loss) on sales for all other available for sale securities types are reported in net
gain on sale of available for sales securities. There were no such sales in the three months ended
March 31, 2009 nor for the same period in 2008.
As of March 31, 2009, 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 Market |
|
Name of Issuer |
|
Cost |
|
|
Value |
|
|
|
(In thousands) |
|
Countrywide Alternative Loan Trust |
|
$ |
98,430 |
|
|
$ |
61,869 |
|
Countrywide Home Loans |
|
|
234,402 |
|
|
|
171,531 |
|
Flagstar Home Equity Loan Trust 2006-1 |
|
|
220,285 |
|
|
|
207,197 |
|
|
|
|
|
|
|
|
|
|
$ |
553,117 |
|
|
$ |
440,597 |
|
|
|
|
|
|
|
|
Other Investments
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. These securities had a fair value that approximates their
recorded amount for each period presented.
Note 7. Loans Available for Sale
The following table summarizes loans available for sale (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Mortgage loans |
|
$ |
3,660,258 |
|
|
$ |
1,484,649 |
|
Second mortgage loans |
|
|
1 |
|
|
|
31 |
|
|
|
|
|
|
|
|
Total |
|
$ |
3,660,259 |
|
|
$ |
1,484,680 |
|
|
|
|
|
|
|
|
Through December 31, 2008, loans available for sale were carried at the lower of aggregate
cost or estimated fair value. As of December 31, 2008, these loans had an aggregate fair value
that exceeded their recorded amount. Effective January 1, 2009, the Company elected to record the
majority of its loans available for sale on the fair value method and as such will not apply SFAS
91, Accounting for Non-Refundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases, to these loans. Because the fair value method was required to be
adopted prospectively, only loans originated for sale subsequent to January 1, 2009 are affected.
At March 31, 2009, $3.6 billion of loans available for sale were recorded at fair value. During
the first quarter 2009, the effect on consolidated operations of the adoption of fair value for
these assets amounted to an increase in gain on loan sales of $22.0 million. The Company estimates
the fair value of mortgage loans based on quoted market prices for securities backed by similar
types of loans. 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 for similar
collateral.
20
Note 8. Loans Held for Investment
Loans held for investment are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Mortgage loans |
|
$ |
5,754,604 |
|
|
$ |
5,958,748 |
|
Second mortgage loans |
|
|
266,198 |
|
|
|
287,350 |
|
Commercial real estate loans |
|
|
1,758,612 |
|
|
|
1,779,363 |
|
Construction loans |
|
|
45,187 |
|
|
|
54,749 |
|
Warehouse lending |
|
|
569,120 |
|
|
|
434,140 |
|
Consumer loans |
|
|
527,221 |
|
|
|
543,102 |
|
Commercial loans |
|
|
25,253 |
|
|
|
24,669 |
|
|
|
|
|
|
|
|
Total |
|
|
8,946,195 |
|
|
|
9,082,121 |
|
Less allowance for loan losses |
|
|
(466,000 |
) |
|
|
(376,000 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
8,480,195 |
|
|
$ |
8,706,121 |
|
|
|
|
|
|
|
|
Activity in the allowance for loan losses is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
2009 |
|
2008 |
|
|
|
Balance, beginning of period |
|
$ |
376,000 |
|
|
$ |
104,000 |
|
Provision charged to operations |
|
|
158,214 |
|
|
|
34,262 |
|
Charge-offs |
|
|
(69,442 |
) |
|
|
(17,192 |
) |
Recoveries |
|
|
1,228 |
|
|
|
330 |
|
|
|
|
Balance, end of period |
|
$ |
466,000 |
|
|
$ |
121,400 |
|
|
|
|
Loans on which interest accruals have been discontinued totaled approximately $893.8 million
and $268.3 million at March 31, 2009 and 2008, respectively. Interest on these loans is recognized
as income when collected. Interest that would have been accrued on such loans totaled
approximately $9.8 million and $3.2 million during the three months ended March 31, 2009 and 2008,
respectively. There were no loans greater than 90 days past due still accruing interest on the OTS
method at March 31, 2009 and 2008.
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 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2009 |
|
2008 |
|
|
|
Impaired loans with no allowance for loan losses allocated |
|
$ |
62,384 |
|
|
$ |
77,332 |
|
Impaired loans with allowance for loan losses allocated |
|
|
504,398 |
|
|
|
373,424 |
|
|
|
|
Total impaired loans |
|
$ |
566,782 |
|
|
$ |
450,756 |
|
|
|
|
Amount of the allowance allocated to impaired loans |
|
$ |
144,683 |
|
|
$ |
121,321 |
|
Average investment in impaired loans |
|
$ |
508,769 |
|
|
$ |
265,448 |
|
Cash-basis interest income recognized during impairment |
|
$ |
3,593 |
|
|
$ |
10,601 |
|
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 March 31, 2009, approximately 90.8% of the total impaired loans were
evaluated based on the fair value of related collateral.
Note 9. Private-label Securitization Activity
During the quarters ended March 31, 2009 and 2008, the Company did not consummate any
private-label-securitizations transactions.
21
At March 31 2009, key assumptions used in determining the value of residual interests
resulting from the Companys private-label securitizations were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted - |
|
|
Fair Value |
|
|
|
|
|
Projected |
|
Annual |
|
Average |
|
|
at |
|
Prepayment |
|
Cumulative |
|
Discount |
|
Remaining Life |
|
|
March 31, 2009 |
|
Speed |
|
Credit Losses |
|
Rate |
|
(in years) |
|
2005 HELOC Securitization |
|
$ |
17,523 |
|
|
|
12 |
% |
|
|
5.61 |
% |
|
|
20 |
% |
|
|
3.9 |
|
2006 HELOC Securitization |
|
|
|
|
|
|
7 |
% |
|
|
20.92 |
% |
|
|
20 |
% |
|
|
5.8 |
|
2006 Second Mortgage Securitization |
|
|
773 |
|
|
|
16 |
% |
|
|
4.81 |
% |
|
|
20 |
% |
|
|
4.3 |
|
2007 Second Mortgage Securitization |
|
|
|
|
|
|
13 |
% |
|
|
9.61 |
% |
|
|
20 |
% |
|
|
5.5 |
|
Certain cash flows received from securitization trusts outstanding were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
2009 |
|
2008 |
Proceeds from new securitizations |
|
$ |
|
|
|
$ |
|
|
Proceeds from collections reinvested in securitizations |
|
|
|
|
|
|
6,960 |
|
Servicing fees received |
|
|
1,495 |
|
|
|
1,756 |
|
Loan repurchases for representations and warranties |
|
|
|
|
|
|
|
|
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 reflects 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 March 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of Retained |
|
|
|
Total Loans |
|
|
Assets with Credit |
|
|
|
Serviced |
|
|
Exposure |
|
Private-label securitizations |
|
$ |
1,141,270 |
|
|
$ |
70,546 |
|
U.S. government sponsored agencies |
|
|
57,714,319 |
|
|
|
|
|
Other investors |
|
|
539 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
58,856,128 |
|
|
$ |
70,546 |
|
|
|
|
|
|
|
|
Mortgage loans that have been securitized in private-label securitizations at March 31, 2009
and 2008 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 Three |
|
|
Outstanding |
|
Or More Past Due |
|
Months Ended |
|
|
March 31, |
|
March 31, |
|
March 31, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
|
|
|
|
|
Securitized mortgages
loans |
|
$ |
1,141,270 |
|
|
$ |
1,344,041 |
|
|
$ |
74,415 |
|
|
$ |
28,501 |
|
|
$ |
30,125 |
|
|
$ |
16,266 |
|
22
Note 10. Mortgage Servicing Rights
The Company has obligations to service residential first mortgage loans and consumer loans
(HELOC and second mortgage loans obtained through 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. 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 which are intended to change in value inversely to part or all changes
in the value of MSRs.
Changes in the carrying value of residential MSRs, accounted for at fair value are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
|
|
|
|
Balance at beginning of period |
|
$ |
511,294 |
|
|
$ |
402,243 |
|
Cumulative effect of change in accounting |
|
|
|
|
|
|
43,719 |
|
Additions from loans sold with servicing retained |
|
|
82,680 |
|
|
|
100,680 |
|
Changes in fair value due to: |
|
|
|
|
|
|
|
|
Payoffs(a) |
|
|
(36,303 |
) |
|
|
(17,942 |
) |
All other changes in valuation inputs or assumptions (b) |
|
|
(42,171 |
) |
|
|
(42,116 |
) |
|
|
|
|
|
|
|
Fair value of MSRs at end of period |
|
$ |
515,500 |
|
|
$ |
486,584 |
|
|
|
|
|
|
|
|
Unpaid principal balance of loans serviced for others |
|
$ |
57,714,858 |
|
|
$ |
37,034,015 |
|
|
|
|
|
|
|
|
|
|
|
(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. |
The fair value of residential MSRs are 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 were 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
three month periods ended March 31, 2009 and 2008 periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
2009 |
|
2008 |
Weighted-average life (in years) |
|
|
5.5 |
|
|
|
6.1 |
|
Weighted-average constant prepayment rate (CPR) |
|
|
24.4 |
% |
|
|
13.8 |
% |
Weighted-average discount rate |
|
|
8.6 |
% |
|
|
8.5 |
% |
The key economic assumptions used in determining the fair value of MSRs at period end were as
follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
2009 |
|
2008 |
Weighted-average life (in years) |
|
|
4.3 |
|
|
|
5.3 |
|
Weighted-average CPR |
|
|
23.8 |
% |
|
|
15.2 |
% |
Weighted-average discount rate |
|
|
7.8 |
% |
|
|
8.3 |
% |
23
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 (loss) in the consolidated statement of
operations.
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, prepayments, and servicing costs. 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 Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Consumer servicing assets |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
9,469 |
|
|
$ |
11,914 |
|
Additions: |
|
|
|
|
|
|
|
|
From loans securitized with servicing retained |
|
|
|
|
|
|
72 |
|
Subtractions: |
|
|
|
|
|
|
|
|
Amortization |
|
|
(650 |
) |
|
|
(643 |
) |
|
|
|
|
|
|
|
Carrying value before valuation allowance at end of period |
|
|
8,819 |
|
|
|
11,343 |
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
|
|
|
|
(144 |
) |
Impairment recoveries (charges) |
|
|
(1,548 |
) |
|
|
92 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
(1,548 |
) |
|
|
(52 |
) |
|
|
|
|
|
|
|
Net carrying value of servicing assets at end of period |
|
$ |
7,271 |
|
|
$ |
11,291 |
|
|
|
|
|
|
|
|
Unpaid principal balance of consumer loans serviced for others |
|
$ |
1,141,270 |
|
|
$ |
1,344,041 |
|
|
|
|
|
|
|
|
Fair value of servicing assets: |
|
|
|
|
|
|
|
|
Beginning of period |
|
$ |
12,284 |
|
|
$ |
11,861 |
|
|
|
|
|
|
|
|
End of period |
|
$ |
9,278 |
|
|
$ |
11,555 |
|
|
|
|
|
|
|
|
The key economic assumptions used to estimate the fair value of these servicing assets at
March 31, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31 |
|
|
2009 |
|
2008 |
Weighted-average life (in years) |
|
|
3.8 |
|
|
|
2.7 |
|
Weighted-average discount rate |
|
|
11.7 |
% |
|
|
10.9 |
% |
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 (loss) on the consolidated statements of operations (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Residential real estate |
|
$ |
38,486 |
|
|
$ |
27,967 |
|
Consumer |
|
|
1,482 |
|
|
|
2,442 |
|
|
|
|
|
|
|
|
Total |
|
$ |
39,968 |
|
|
$ |
30,409 |
|
|
|
|
|
|
|
|
24
Note 11. Warrant Liabilities
At March 31, 2009, the Company has liabilities to warrant holders amounting to $44.9 million.
This amount is made up of a liability for the Treasury Warrant of $36.8 million and for the May
Investor Warrants of $8.1 million. These warrant liabilities are included within other liabilities
in the Companys consolidated statement of financial condition.
The Treasury Warrant liability arose in conjunction with the Companys participation in TARP.
As described in Note 12, Stockholders Equity, the Company initially recorded the Treasury
Warrant on January 30, 2009 at its fair value of $27.7 million. The warrant was marked to market
on March 31, 2009 resulting in an increase to the warrant liability of $9.1 million. This increase
was recorded as warrant expense and included in non-interest expense under general and
administrative. Upon receipt of stockholder approval to increase the amount of authorized common
shares, the Company expects to mark the liability to market at that date and subsequently
reclassify the Treasury warrant liability to additional paid in capital attributable to preferred
stockholders.
As described in Note 2, Issuance of Warrants to Certain Stockholders, the Company, as a
result of the capital investment by MatlinPatterson and the Treasury, granted warrants to the May
Investors for the purchase of 14.3 million shares of the Companys common stock at $0.62 per share.
The warrants expire in ten years if not exercised. The May Investor Warrants, unlike the Treasury
Warrants, contain certain provisions that would allow the $0.62 exercise price to be reduced. As
such, these warrants are required to be accounted for as liabilities and recorded at fair value.
On January 30, 2009, in conjunction with the capital investments, the Company recorded the May
Investor warrants at their fair value of $6.1 million. On March 31, 2009, the Company marked these
warrants to market which resulted in an increase in the liability of $2.0 million. This increase
was recorded as warrant expense and included in non-interest expense under general and
administrative. The Company expects to mark the May Investor warrants to market quarterly until
exercised.
Note 12. Stockholders Equity
Preferred Stock
Preferred stock with a par value of $0.01 and a liquidation value of $1,000 and additional
paid in capital attributable to preferred shares at March 31, 2009 is summarized as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earliest |
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
Redemption |
|
|
Shares |
|
|
Preferred |
|
|
Paid in |
|
|
|
Rate |
|
|
Date |
|
|
Outstanding |
|
|
Shares |
|
|
Capital |
|
Series B convertible |
|
|
|
|
|
|
|
|
|
|
300,000 |
|
|
$ |
3 |
|
|
$ |
271,574 |
|
Series C, TARP
Capital Purchase
Program |
|
|
5 |
% |
|
January 31, 2012 |
|
|
|
266,657 |
|
|
|
3 |
|
|
|
239,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6 |
|
|
$ |
511,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 30, 2009, MatlinPatterson purchased 250,000 shares of the Companys Series B
convertible participating voting preferred stock for $250 million. Such preferred shares will
automatically convert at $0.80 per share, into 312.5 million shares of the Companys common stock
upon stockholder approval authorizing additional shares of common stock. Also on January 30, 2009,
the Company entered into a closing agreement with MatlinPatterson pursuant to which the Company
agreed to sell to MatlinPatterson an additional $50 million of convertible preferred stock
substantially in the form of the Preferred Stock, in two equal parts, on substantially the same
terms as the $250 million investment by MatlinPatterson (the Additional Preferred Stock). On
February 17, 2009, MatlinPatterson acquired the first $25 million of the Additional Preferred
Stock, pursuant to which the Company issued 25,000 shares of the Additional Preferred Stock with a
conversion price of $0.80 per share. On February 27, 2009, MatlinPatterson acquired the second $25
million of the Additional Preferred Stock, pursuant to which the Company issued 25,000 shares of
the Additional Preferred Stock with a conversion price of $0.80 per share. Upon receipt of
stockholder approval, the 50,000 shares of Additional Preferred Stock will automatically convert
into 62.5 million shares of the Companys common stock. The Company received proceeds from these
offerings of $300.0 million less costs attributable to the offerings of $28.4 million. Upon
receipt of stockholder approved to convert these preferred shares to the Companys common stock,
the net proceeds of the offering will be reclassified to common stock and additional paid in
capital attributable to common stockholders.
On January 30, 2009, the Company sold to the Treasury, 266,657 shares of the Companys Series
C fixed rate cumulative non-convertible perpetual preferred stock for $266.7 million, and a warrant
to purchase up to 64.5 million shares of the Companys common stock at an exercise price of $0.62
per share. The preferred stock and warrant qualify as Tier 1 capital. The preferred stock pays
cumulative dividends quarterly at a rate of 5% per annum for the first five years, and 9% per annum
thereafter. The warrant is exercisable over a 10 year period. Because the Company did not have an
adequate number
25
of authorized and unissued common shares at January 30, 2009 or at March 31, 2009,
the Company was required to initially
classify such warrants as a liability and record the warrants at their fair value of $27.7 million.
The Companys Series C fixed rate cumulative non-convertible preferred stock and additional paid
in capital attributable to preferred stock was recorded in stockholders equity as the difference
between the cash received from the Treasury and the amount initially recorded as a warrant
liability, or $239.0 million. The discount on these preferred shares is represented by the initial
fair value of the warrants. This discount will be accreted to additional paid in capital
attributable to preferred shares over seven years using the interest method.
Accumulated Other Comprehensive Loss
The following table sets forth the ending balance in accumulated other comprehensive
loss for each component (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Net unrealized loss on securities available for sale |
|
$ |
(105,029 |
) |
|
$ |
(81,742 |
) |
|
|
|
|
|
|
|
The following table sets forth the changes to other comprehensive loss and the related tax
effect for each component (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
For the Year |
|
|
|
Months Ended |
|
|
Ended |
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
Gain (reclassified to earnings) on interest rate swap derecognition |
|
$ |
|
|
|
$ |
(363 |
) |
Related tax expense |
|
|
|
|
|
|
127 |
|
Gain (reclassified to earnings) on sales of securities available for sale |
|
|
|
|
|
|
(5,019 |
) |
Related tax expense |
|
|
|
|
|
|
1,757 |
|
Loss (reclassified from retained earnings) for adoption of FSP
FAS 115-2 and FAS 124-2 |
|
|
(50,638 |
) |
|
|
|
|
Related tax benefit |
|
|
17,724 |
|
|
|
|
|
Loss (reclassified to earnings) for other than temporary impairment of
securities available for sale |
|
|
17,242 |
|
|
|
62,370 |
|
Related tax benefit |
|
|
(6,034 |
) |
|
|
(21,829 |
) |
Unrealized loss on securities available for sale |
|
|
(2,431 |
) |
|
|
(165,061 |
) |
Related tax benefit |
|
|
850 |
|
|
|
57,771 |
|
|
|
|
|
|
|
|
Change |
|
$ |
(23,287 |
) |
|
$ |
(70,247 |
) |
|
|
|
|
|
|
|
Note 13. 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 March 31, 2009 and December 31, 2008:
-Fannie Mae, Freddie Mac, Ginnie Mae 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. 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 gains
of $6.7 million and $20.8 million for the three months ended March 31, 2009 and 2008, respectively,
on its hedging activity relating to loans held for sale. The Company additionally hedges the risk
of overall changes in fair value of MSRs through the use of various derivatives including
purchasing forward contracts on securities of Fannie Mae and Freddie Mac and the purchase/sale of
Treasury futures contracts and options on Treasury futures contracts.
The Company occasionally 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
26
accumulated other comprehensive loss to current period operations are included in the line item in
which the hedged cash flows are recorded. On January 1, 2008, the Company derecognized all cash
flow hedges.
The Company recognizes changes in hedge values from designated SFAS 133 hedges discussed above
in the same consolidated statement of operations captions where such change occurs.
The Company had the following derivative financial instruments (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
Notional |
|
Fair |
|
Expiration |
|
|
Amounts |
|
Value |
|
Dates |
Mortgage banking derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
Rate lock commitments |
|
$ |
4,403,343 |
|
|
$ |
82,645 |
|
|
|
2009 |
|
Forward agency and loan sales |
|
|
4,624,969 |
|
|
|
(58,572 |
) |
|
|
2009 |
|
Mortgage servicing rights derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
Treasury and agency futures/forwards |
|
|
3,920,000 |
|
|
|
37,232 |
|
|
|
2009 |
|
Borrowings and advances derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps (LIBOR) |
|
|
25,000 |
|
|
|
(1,349 |
) |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
Notional |
|
Fair |
|
Expiration |
|
|
Amounts |
|
Value |
|
Dates |
Mortgage banking derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
Rate lock commitments |
|
$ |
6,250,222 |
|
|
$ |
78,613 |
|
|
|
2009 |
|
Forward agency and loan sales |
|
|
5,216,903 |
|
|
|
(61,256 |
) |
|
|
2009 |
|
Mortgage servicing rights: |
|
|
|
|
|
|
|
|
|
|
|
|
Treasury and agency futures/forwards |
|
|
2,885,000 |
|
|
|
60,813 |
|
|
|
2009 |
|
Treasury options |
|
|
1,000,000 |
|
|
|
17,219 |
|
|
|
2009 |
|
Borrowings and advances hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps (LIBOR) |
|
|
25,000 |
|
|
|
(1,280 |
) |
|
|
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 manages this risk by
selecting only 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 14. Stock-Based Compensation
For the three months ended March 31, 2009 and 2008, the Company recorded stock-based
compensation expense of $0.3 million ($0.2 million net of tax) and $0.8 million ($0.5 million net
of tax), respectively.
Stock Options
During the quarters ended March 31, 2009 and 2008, there were no stock options granted.
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 SARs 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.
27
The Company used the following weighted average assumptions in applying the Black-Scholes
model to determine the fair value of cash-settled SARs issued during the three months ended March
31, 2009: dividend yield of zero; expected volatility of 150.6%; a risk-free rate range of 0.8% to
1.4%; and an expected life range of 2.2 years to 3.8 years.
The following table presents the status and changes in cash-settled SARs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted Average |
|
|
|
|
|
|
Average |
|
Grant Date |
|
|
Shares |
|
Exercise Price |
|
Fair Value |
|
|
|
Stock Appreciation Rights Awarded: |
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested balance at December 31, 2008 |
|
|
1,315,599 |
|
|
$ |
10.47 |
|
|
$ |
0.34 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
Vested |
|
|
(394,230 |
) |
|
|
11.34 |
|
|
|
0.36 |
|
Forfeited |
|
|
(25,346 |
) |
|
|
10.99 |
|
|
|
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested balance at March 31, 2009 |
|
|
896,023 |
|
|
|
10.07 |
|
|
|
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
The Company issues 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 of approximately $0.2
million and $0.3 million with respect to restricted stock for each of the periods ended March 31,
2009 and 2008, respectively. As of March 31, 2009, restricted stock outstanding had a market value
of $0.1 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Grant Date Fair Value |
|
|
Shares |
|
per Share |
|
|
|
Restricted Stock: |
|
|
|
|
|
|
|
|
Non-vested at December 31, 2008 |
|
|
285,588 |
|
|
$ |
8.01 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(161,795 |
) |
|
|
8.79 |
|
Canceled and forfeited |
|
|
(2,882 |
) |
|
|
6.86 |
|
|
|
|
|
|
|
|
|
|
Non-vested at March 31, 2009 |
|
|
120,911 |
|
|
|
6.99 |
|
|
|
|
|
|
|
|
|
|
Note 15. 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.
28
Following is a presentation of financial information by segment for the periods indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2009 |
|
|
|
Bank |
|
|
Home Lending |
|
|
|
|
|
|
|
|
|
Operations |
|
|
Operations |
|
|
Elimination |
|
|
Combined |
|
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
49,273 |
|
|
$ |
7,457 |
|
|
$ |
|
|
|
$ |
56,730 |
|
(Loss) gain on sale revenue |
|
|
(17,242 |
) |
|
|
206,824 |
|
|
|
|
|
|
|
189,582 |
|
Other income (loss) |
|
|
31,026 |
|
|
|
(29,649 |
) |
|
|
|
|
|
|
1,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest income and non-interest income |
|
|
63,057 |
|
|
|
184,632 |
|
|
|
|
|
|
|
247,689 |
|
(Loss) earnings before federal income taxes |
|
|
(145,334 |
) |
|
|
52,140 |
|
|
|
|
|
|
|
(93,194 |
) |
Depreciation and amortization |
|
|
2,563 |
|
|
|
3,213 |
|
|
|
|
|
|
|
5,776 |
|
Capital expenditures |
|
|
1,085 |
|
|
|
3,702 |
|
|
|
|
|
|
|
4,787 |
|
Identifiable assets |
|
|
15,193,765 |
|
|
|
6,471,052 |
|
|
|
(4,855,000 |
) |
|
|
16,809,817 |
|
Inter-segment income (expense) |
|
|
36,413 |
|
|
|
(36,413 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2008 |
|
|
|
Bank |
|
|
Home Lending |
|
|
|
|
|
|
|
|
|
Operations |
|
|
Operations |
|
|
Elimination |
|
|
Combined |
|
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
28,871 |
|
|
$ |
25,927 |
|
|
$ |
|
|
|
$ |
54,798 |
|
Gain on sale revenue |
|
|
|
|
|
|
63,712 |
|
|
|
|
|
|
|
63,712 |
|
Other income (loss) |
|
|
3,855 |
|
|
|
(14,893 |
) |
|
|
|
|
|
|
(11,038 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest income and non-interest income |
|
|
32,726 |
|
|
|
74,746 |
|
|
|
|
|
|
|
107,472 |
|
(Loss) earnings before federal income taxes |
|
|
(31,472 |
) |
|
|
15,514 |
|
|
|
|
|
|
|
(15,958 |
) |
Depreciation and amortization |
|
|
2,983 |
|
|
|
3,451 |
|
|
|
|
|
|
|
6,434 |
|
Capital expenditures |
|
|
9,811 |
|
|
|
|
|
|
|
|
|
|
|
9,811 |
|
Identifiable assets |
|
|
14,803,758 |
|
|
|
4,004,554 |
|
|
|
(2,885,000 |
) |
|
|
15,923,312 |
|
Inter-segment income (expense) |
|
|
21,638 |
|
|
|
(21,638 |
) |
|
|
|
|
|
|
|
|
29
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 15 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 and small
businesses in Michigan, Indiana and Georgia. We also gather deposits within these three states and
also via the internet. 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 March 31,
2009, we operated a network of 177 banking centers and provided banking services to approximately
140,400 customers. During the first three months of 2009, we opened two banking centers, including
one in Michigan and one in Georgia. During 2009, we expect to open one additional branch in the
Atlanta, Georgia area and close up to three branches.
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 three 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) fair value measurements; (b) the determination of our allowance for loan
losses; and (c) 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, 2008, 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.
30
Selected Financial Ratios (Dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
March 31, |
|
|
2009 |
|
2008 |
Return on average assets |
|
|
(1.68 |
)% |
|
|
(0.27 |
)% |
Return on average equity |
|
|
(33.64 |
)% |
|
|
(5.93 |
)% |
Efficiency ratio |
|
|
73.8 |
% |
|
|
83.0 |
% |
Equity/assets ratio (average for the period) |
|
|
5.00 |
% |
|
|
4.48 |
% |
Mortgage loans originated or purchased |
|
$ |
9,499,744 |
|
|
$ |
7,859,988 |
|
Other loans originated or purchased |
|
$ |
20,027 |
|
|
$ |
149,981 |
|
Mortgage loans sold and securitized |
|
$ |
7,699,063 |
|
|
$ |
7,160,328 |
|
Interest rate spread bank only 1 |
|
|
1.63 |
% |
|
|
1.61 |
% |
Net interest margin bank only 2 |
|
|
1.67 |
% |
|
|
1.66 |
% |
Interest rate spread consolidated 1 |
|
|
1.59 |
% |
|
|
1.48 |
% |
Net interest margin consolidated 2 |
|
|
1.59 |
% |
|
|
1.55 |
% |
Dividend payout ratio |
|
|
N/A |
|
|
|
N/A |
|
Average common shares outstanding |
|
|
88,210 |
(4) |
|
|
60,312 |
|
Average fully diluted shares outstanding |
|
|
88,210 |
(4) |
|
|
60,753 |
|
Charge-offs to average investment loans (annualized) |
|
|
3.00 |
% |
|
|
0.80 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
March 31, |
|
|
2009 |
|
2008 |
|
2008 |
Equity-to-assets ratio |
|
|
5.54 |
% |
|
|
3.33 |
% |
|
|
4.42 |
% |
Core capital ratio 3 |
|
|
7.22 |
% |
|
|
4.95 |
% |
|
|
5.64 |
% |
Total risk-based capital ratio 3 |
|
|
13.58 |
% |
|
|
9.10 |
% |
|
|
10.47 |
% |
Book value per common share |
|
$ |
4.03 |
(4) |
|
$ |
5.65 |
|
|
$ |
11.66 |
|
Number of common shares outstanding |
|
|
90,379 |
|
|
|
83,627 |
|
|
|
60,325 |
|
Mortgage loans serviced for others |
|
$ |
58,856,128 |
|
|
$ |
55,870,207 |
|
|
$ |
38,378,056 |
|
Capitalized value of mortgage servicing rights |
|
|
0.88 |
% |
|
|
0.93 |
% |
|
|
1.30 |
% |
Ratio of allowance to non-performing loans |
|
|
58.7 |
% |
|
|
59.7 |
% |
|
|
47.9 |
% |
Ratio of allowance to loans held for investment |
|
|
5.21 |
% |
|
|
4.14 |
% |
|
|
1.42 |
% |
Ratio of non-performing assets to total assets |
|
|
5.46 |
% |
|
|
5.33 |
% |
|
|
2.51 |
% |
Number of banking centers |
|
|
177 |
|
|
|
175 |
|
|
|
167 |
|
Number of home lending centers |
|
|
61 |
|
|
|
104 |
|
|
|
138 |
|
Number of salaried employees |
|
|
3,285 |
|
|
|
3,246 |
|
|
|
3,170 |
|
Number of commissioned employees |
|
|
519 |
|
|
|
674 |
|
|
|
839 |
|
|
|
|
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 |
|
Does not reflect the 300,000 shares of Series B convertible participating voting preferred
stock that upon stockholder approval, will convert to 375,000,000 shares of common stock, the
Treasury warrant to purchase 64.5 million shares of common stock, or the May Investor warrant
to purchase 14.3 million shares of common stock. |
31
Results of Operations
Net Loss
Net loss applicable to common stockholders for the three months ended March 31, 2009 was $67.4
million, $(0.76) per share-diluted, a $56.8 million increase from the loss of $10.6 million,
$(0.18) per share-diluted, reported in the comparable 2008 period. The overall increase resulted
from a $93.5 million increase in non-interest expense and a $122.0 million decrease in net interest
income after provision for loan losses, offset by a $138.3 million increase in non-interest income
and a $23.3 million increase in federal income tax benefit and an increase of $2.9 million
preferred stock dividends.
Net Interest Income
We recorded $56.7 million in net interest income before provision for loan losses for the
three months ended March 31, 2009, a 3.5% increase from $54.8 million recorded for the comparable
2008 period. The increase reflects a $25.9 million decrease in interest income offset by a $27.8
million decrease in interest expense, primarily as a result of rates paid on deposits that
decreased more than the decrease in yields earned on loans and mortgage-backed securities. In
addition, in the three months ended March 31, 2009, as compared to the same period in 2008, our
average interest-earning assets decreased by $0.2 billion and our average interest-paying
liabilities increased by $0.1 billion.
Average interest-earning assets as a whole repriced down 67 basis points during the three
months ended March 31, 2009 and average interest-bearing liabilities repriced down 78 basis points
during the same period, resulting in the increase in our interest rate spread of 11 basis points to
1.59% for the three months ended March 31, 2009, from 1.48% for the comparable 2008 period. The
Company recorded a net interest margin of 1.59% at March 31, 2009 as compared to 1.55% at March 31,
2008. At the Bank level, the net interest margin was 1.67% at March 31, 2009, as compared to 1.66%
at March 31, 2008.
32
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 rather than the Bank.
Interest income from earning assets includes the amortization of net premiums and net deferred loan
origination costs of $1.7 million and $3.1 million for the three months ended March 31, 2009 and
2008, respectively. Non-accruing loans were included in the average loan amounts outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Average |
|
|
|
|
|
|
Annualized |
|
|
Average |
|
|
|
|
|
|
Annualized |
|
|
|
Balance |
|
|
Interest |
|
|
Yield/Rate |
|
|
Balance |
|
|
Interest |
|
|
Yield/Rate |
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans available for sale |
|
$ |
2,852,951 |
|
|
$ |
36,199 |
|
|
|
5.08 |
% |
|
$ |
3,028,584 |
|
|
$ |
49,785 |
|
|
|
6.58 |
% |
Loans held for investment |
|
|
9,090,561 |
|
|
|
122,423 |
|
|
|
5.41 |
% |
|
|
8,519,898 |
|
|
|
126,509 |
|
|
|
5.94 |
% |
Mortgage-backed securities held to
maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,204,907 |
|
|
|
15,576 |
|
|
|
5.20 |
% |
Securities classified as available for
sale
or trading |
|
|
1,822,084 |
|
|
|
25,477 |
|
|
|
5.63 |
% |
|
|
1,098,405 |
|
|
|
15,591 |
|
|
|
5.71 |
% |
Interest-bearing deposits |
|
|
225,940 |
|
|
|
856 |
|
|
|
1.54 |
% |
|
|
294,170 |
|
|
|
2,768 |
|
|
|
3.78 |
% |
Other |
|
|
35,410 |
|
|
|
23 |
|
|
|
0.26 |
% |
|
|
37,332 |
|
|
|
624 |
|
|
|
6.72 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
14,026,946 |
|
|
$ |
184,978 |
|
|
|
5.29 |
% |
|
|
14,183,296 |
|
|
$ |
210,853 |
|
|
|
5.96 |
% |
Other assets |
|
|
2,000,834 |
|
|
|
|
|
|
|
|
|
|
|
1,795,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
16,027,780 |
|
|
|
|
|
|
|
|
|
|
$ |
15,978,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
8,430,158 |
|
|
$ |
67,350 |
|
|
|
3.24 |
% |
|
$ |
7,417,013 |
|
|
$ |
84,050 |
|
|
|
4.56 |
% |
FHLB advances |
|
|
5,270,548 |
|
|
|
56,809 |
|
|
|
4.37 |
% |
|
|
6,008,462 |
|
|
|
64,558 |
|
|
|
4.32 |
% |
Security repurchase agreements |
|
|
108,000 |
|
|
|
1,153 |
|
|
|
4.33 |
% |
|
|
332,936 |
|
|
|
3,155 |
|
|
|
3.81 |
% |
Other |
|
|
248,660 |
|
|
|
2,936 |
|
|
|
4.79 |
% |
|
|
248,695 |
|
|
|
4,292 |
|
|
|
6.94 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
14,057,366 |
|
|
$ |
128,248 |
|
|
|
3.70 |
% |
|
|
14,007,106 |
|
|
$ |
156,055 |
|
|
|
4.48 |
% |
Other liabilities |
|
|
1,168,880 |
|
|
|
|
|
|
|
|
|
|
|
1,256,598 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
801,534 |
|
|
|
|
|
|
|
|
|
|
|
715,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders
equity |
|
$ |
16,027,780 |
|
|
|
|
|
|
|
|
|
|
$ |
15,978,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets |
|
$ |
(30,420 |
) |
|
|
|
|
|
|
|
|
|
$ |
176,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
56,730 |
|
|
|
|
|
|
|
|
|
|
$ |
54,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread 1 |
|
|
|
|
|
|
|
|
|
|
1.59 |
% |
|
|
|
|
|
|
|
|
|
|
1.48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin 2 |
|
|
|
|
|
|
|
|
|
|
1.59 |
% |
|
|
|
|
|
|
|
|
|
|
1.55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets
to average interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
101 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. |
33
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
average rate constant) and the changes related to average interest rates (changes in average rates
while holding the initial average balance constant). Changes attributable to both a change in
volume and a change in rates are included as changes in rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
2009 Versus 2008 |
|
|
|
Increase (Decrease) due to: |
|
|
|
Rate |
|
|
Volume |
|
|
Total |
|
|
|
(In thousands) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans available for sale |
|
$ |
(10,697 |
) |
|
$ |
(2,889 |
) |
|
$ |
(13,586 |
) |
Loans held for investment |
|
|
(12,560 |
) |
|
|
8,474 |
|
|
|
(4,086 |
) |
Mortgage-backed
securities-held to maturity |
|
|
|
|
|
|
(15,576 |
) |
|
|
(15,576 |
) |
Securities classified as
available for sale or
trading |
|
|
(445 |
) |
|
|
10,331 |
|
|
|
9,886 |
|
Interest-earning deposits |
|
|
(1,267 |
) |
|
|
(645 |
) |
|
|
(1,912 |
) |
Other |
|
|
(569 |
) |
|
|
(32 |
) |
|
|
(601 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(25,538 |
) |
|
|
(337 |
) |
|
|
(25,875 |
) |
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
(28,250 |
) |
|
|
11,550 |
|
|
|
(16,700 |
) |
FHLB advances |
|
|
220 |
|
|
|
(7,969 |
) |
|
|
(7,749 |
) |
Security repurchase agreements |
|
|
140 |
|
|
|
(2,142 |
) |
|
|
(2,002 |
) |
Other |
|
|
(1,355 |
) |
|
|
(1 |
) |
|
|
(1,356 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(29,245 |
) |
|
|
1,438 |
|
|
|
(27,807 |
) |
|
|
|
|
|
|
|
|
|
|
Change in net interest income |
|
$ |
3,707 |
|
|
$ |
(1,775 |
) |
|
$ |
1,932 |
|
|
|
|
|
|
|
|
|
|
|
Provision for Loan Losses
During the three months ended March 31, 2009, we recorded a provision for loan losses of
$158.2 million as compared to $34.3 million recorded during the same period in 2008. The
provisions reflect our estimates to maintain the allowance for loan losses at a level management
believes is appropriate to cover probable losses inherent in the portfolio and had the effect of
increasing our allowance for loan losses by $90.0 million. Net charge-offs increased in the 2009
period to $68.2 million, compared to $16.9 million for the same period in 2008, and as a percentage
of investment loans, increased to an annualized 3.00% from 0.80%. The increase in charge-offs as a
percentage of investment loans reflects the Banks worsening credit quality as demonstrated by
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 on loan sales, (v) net gain (loss) on sales of MSRs, (vi)
net gain (loss) on securities available for sale, (vii) net gain (loss) on trading securities and
(viii) other fees and charges. During the three months ended March 31, 2009, non-interest income
increased to $191.0 million from $52.7 million in the comparable 2008 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.
Loan fees recorded during the three months ended March 31, 2009 totaled $32.9 million compared
to $0.9 million collected during the comparable 2008 period. During the three month period ending
March 31, 2009, we recorded gross loan fees and charges of $33.0 million, an increase of $7.4
million from the $25.6 million recorded in 2008. The increases in loan fees and charges resulted
principally from our decision to account for the majority of our loans held for sale at fair value.
As such, we no longer apply SFAS 91 to such loans. Prior to December 31, 2008, we recorded fee
income net of any fees deferred for the purposes of complying with SFAS 91. In accordance with
SFAS 91, loan origination fees are capitalized and added as an adjustment to the basis of the
individual loans originated. These fees are accreted into income as an adjustment to the loan
yield over the life of the loan or when the loan is sold. During the three month ended March 31,
2009, we deferred
34
only $35,000 of fee revenue in accordance with SFAS 91 for loans not accounted
for under fair value, compared to $24.7 million in 2008.
Deposit Fees and Charges. Our banking operation collects 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.
During the three months ended March 31, 2009 we recorded $7.2 million in deposit fees versus
$6.0 million in the comparable 2008 period. This increase is attributable to the increase in our
deposit base 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.
The majority of our MSRs are accounted for on the fair value method. See Note 10 of the Notes to
the Consolidated Financial Statements in Item 1. Financial Statements herein.
The following table summarizes net loan administration loss (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Servicing fees on consumer mortgage servicing |
|
|
|
|
|
|
|
|
Servicing fees, ancillary income and charges |
|
$ |
1,482 |
|
|
$ |
2,442 |
|
Amortization expense consumer |
|
|
(650 |
) |
|
|
(612 |
) |
Impairment (loss) recovery consumer |
|
|
(1,548 |
) |
|
|
119 |
|
|
|
|
|
|
|
|
Total net loan administration (loss) income consumer |
|
|
(716 |
) |
|
|
1,949 |
|
Servicing fees on residential mortgage servicing |
|
|
|
|
|
|
|
|
Servicing fees, ancillary income and charges |
|
|
38,486 |
|
|
|
27,967 |
|
Gain on hedging activity |
|
|
7,060 |
|
|
|
13,128 |
|
Fair value adjustments |
|
|
(76,631 |
) |
|
|
(60,090 |
) |
|
|
|
|
|
|
|
Total net loan administration losses residential |
|
|
(31,085 |
) |
|
|
(18,995 |
) |
|
|
|
|
|
|
|
Total loan administration loss |
|
$ |
(31,801 |
) |
|
$ |
(17,046 |
) |
|
|
|
|
|
|
|
Losses from loan administration increased to $31.8 million for the three months ended March
31, 2009 from $17.0 million for the same period in 2008. Servicing fees, ancillary income, and
charges on our residential mortgage servicing increased during the three month period ended March
31, 2009 compared to the same period ended March 31, 2008, primarily as a result of our increased
loans serviced for others. The total unpaid principal balance of loans serviced for others was
$58.9 billion at March 31, 2009, versus $38.4 billion at March 31, 2008. We recognized a reduction
in the fair value of our residential MSRs of $76.6 million for the three months ended March 31,
2009 as compared to $60.1 million for the same period in 2008. The $76.6 million downward
adjustment in fair value was primarily due to the write off of fair value for payoffs of $36.3 and
the decrease in fair value due to the recognition of service fees collected in the amount of $38.5
million.
The loan administration loss of $31.8 million does not include $23.7 million of gains in
mortgage backed securities that were held on our consolidated statement of financial condition as
economic hedges of our MSR asset during the three month period ending March 31, 2009. These gains
were recorded in gain on trading securities within our consolidated statement of operations, as
appropriate.
During the 2009 period, we recorded revenues from servicing fees, ancillary income and charges
on our consumer MSRs for $1.5 million, which was offset by amortization of $0.6 million and an
impairment of $1.5 million. The decrease in the servicing fees, ancillary income and charges for
the three month period ended March 31, 2009 versus the same period ended in 2008 was due to the
decrease in consumer loans serviced for others. At March 31, 2009, the total unpaid principal
balance of consumer loans serviced for others was $1.1 billion versus $1.3 billion serviced at
March 31, 2008. While the impairment of $1.5 million was the result of increased delinquency
assumptions.
Net Gain 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
originated for sale and the fair value of these loans, net of related selling expenses. Net gain
on loan sales is increased or decreased by any mark to market pricing adjustments on loan
commitments and forward sales commitments in accordance with 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
35
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 need to pay more in the acquisition phase, thus decreasing our net gain
achievable. During 2008 and into 2009, 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 have 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 March 31, |
|
|
|
2009 |
|
|
2008 |
|
Net gain on loan sales |
|
$ |
195,694 |
|
|
$ |
63,425 |
|
|
|
|
|
|
|
|
Loans sold or securitized |
|
$ |
7,699,063 |
|
|
$ |
7,160,328 |
|
Spread achieved |
|
|
2.54 |
% |
|
|
0.89 |
% |
For the three months ended March 31, 2009, there was a net gain on loan sales of $195.7
million, an increase of $132.3 million over the $63.4 million gain in the 2008 period. The 2009
period reflects the sale of $7.7 billion in loans versus $7.2 billion sold in the 2008 period.
Management believes changes in market conditions during the 2009 period resulted in an increased
mortgage loan origination volume ($9.5 billion in the 2009 period versus $7.9 billion in the 2008
period) and an increased overall gain on sale spread (254 basis points in the 2009 period versus 89
basis points in the 2008 period). Our calculation of net gain on loan sales reflects our adoption
of fair value accounting for the majority of our mortgage loans available for sale beginning
January 1, 2009. The effect of our adoption on the current quarters operations amounted to $22.0
million. This amount represents the recording of the mortgage loans available for sale that
remained on our statement of financial condition at March 31, 2009 at their estimated fair value.
The change of method was made on a prospective basis; therefore, only mortgage loans available for
sale that were originated during 2009 have been affected. In addition, we also had 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 $6.7 million and $20.8 million for the three months ended March 31, 2009 and 2008,
respectively. Lower of cost or market adjustments amounted to $0.3 million and $0.2 million for
the three months ended March 31, 2009 and 2008, respectively. Provisions to our secondary market
reserve amounted to $3.8 million and $3.0 million, for the three months ended March 31, 2009 and
2008, respectively. Also included in our net gain on loan sales is the capitalized value of our
MSRs, which totaled $86.5 million and $95.4 million for the three months ended March 31, 2009 and
2008, respectively.
Net Gain on Sales of Mortgage Servicing Rights. As part of our business model, our home
lending operation occasionally sells MSRs in transactions separate from the sale of the underlying
loans. 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. Because we carry most of our MSRs at fair
value, we would not expect to realize significant gains or losses at the time of the sale.
Instead, our income or loss on changes in the valuation of MSRs would be recorded through our loan
administration income.
For the three months ended March 31, 2009, the net gain (loss) on the sale of MSRs decreased
from a $0.3 million gain during the first quarter of 2008 to a loss on sale of MSRs of $0.1 million
during the comparable period in 2009.
Net Gain (Loss) on Securities Available for Sale. Securities classified as available for sale
are comprised of U.S. government sponsored agency mortgage-backed securities and CMOs. In addition
to recognizing any gains or losses upon the sale of the securities, we may also incur net losses on
securities available for sale as a result of a reduction in the estimated fair value of the
security when that decline has been deemed to be an other-than-temporary impairment.
Gains (losses) on the sale of U.S. government sponsored agency mortgage-backed securities
available for sale that are recently created with underlying mortgage products originated by the
Company are reported within net gain on loan sale. Securities in this category have typically
remained in the portfolio less than 90 days before sale. During the three months ended March 31,
2009, sales of these agency securities with underlying mortgage products originated by the Company
were $418.7 million resulting in $11.1 million of net gain on loan sale versus $1.5 billion
resulting in $2.9 million of net loss on loan sale during the same period in 2008.
Gain (loss) on sales for all other available for sale securities types are reported in net
gain on sale of available for sales securities. There were no such sales in the three months ended
March 31, 2009 nor for the same period in 2008.
36
During the fourth quarter of 2008, the Company recognized an other-than-temporary impairment
of $62.4 million on three collateralized mortgage obligations. Under the newly adopted FSP FAS
115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments, the credit loss portion of the
other-than-temporary impairment was $11.8 million while the impairment related to all other factors
was $50.6 million. Effective January 1, 2009, the $50.6 million loss, net of $17.7 million of tax
benefit, was reclassified from retained earnings to other comprehensive income as a cumulative
adjustment.
In the three months ended March 31, 2009, additional credit losses on the original three and
seven additional CMOs totaled $17.2 million, which was recognized in current operations. At March
31, 2009, the total amount of other than temporary impairment credit losses totaled $31.8 million.
Gain (Loss) on Trading Securities. Securities classified as trading are comprised of U.S.
government sponsored agency mortgage-backed securities, U.S. treasury bonds and residual interests
from private-label securitizations. U.S. government sponsored agency mortgage-backed securities
held in trading are distinguished from available-for-sale based upon the intent of management to
use them as an economic hedge against changes in the valuation of the MSR portfolio; however, these
do not qualify as an accounting hedge as defined in SFAS 133. Gain (loss) on securities classified
as trading is the result of a change in the estimated fair value of the securities or actual gain
(loss) on sale of a trading security. Loss on residuals classified as trading is a result of a
reduction in the estimated fair value of the securities with the related loss recorded in the
consolidated statement of operations.
During the first quarter of 2009, we recorded a gain on trading securities of $11.2 million
versus a loss of $9.5 million for the same period in 2008.
We recognized a loss of $12.5 million for the three months ended March 31, 2009 versus a loss
of $9.5 million for the three months ended March 31, 2008 related to the Companys private
securitizations. The losses in 2009 and 2008 are primarily due to continued increases in expected
credit losses underlying the securitizations.
For U.S. government sponsored agency mortgage-backed securities held, we recorded a gain of
$23.7 million for the quarter ended March 31, 2009, with $21.4 million of that gain attributable to
agency mortgage backed securities held at March 31, 2009.
Other Fees and Charges. Other fees and charges include certain miscellaneous fees, including
dividends received on FHLB stock and income generated by our subsidiaries.
During the three months ended March 31, 2009, we recognized a reduction in dividends on FHLB
stock of $5.2 million. We also recorded $2.5 million and $1.5 million in subsidiary income for the
three months ended March 31, 2009 and 2008, respectively. Additionally, other fees and charges
were decreased by $10.8 million during the three months ended March 31, 2009 as opposed to an
increase of $1.4 million for the corresponding period in 2008, related to a change in estimate of
our secondary market reserve which relates to expected credit losses on loans sold to the secondary
market in prior periods. During the three month period ended March 31, 2009, we recognized a gain
on the interest rate swaps of $0.1 million, compared to a loss of $1.6 million during the three
months ended March 31, 2008.
37
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. As
required by SFAS 91, mortgage 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. Effective January 1, 2009, we elected to
account for substantially all of our mortgage loans available for sale using the fair value method
and therefore no longer apply SFAS 91 to those loans (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Compensation and benefits |
|
$ |
58,654 |
|
|
$ |
56,626 |
|
Commissions |
|
|
33,415 |
|
|
|
29,316 |
|
Occupancy and equipment |
|
|
18,879 |
|
|
|
19,854 |
|
Advertising |
|
|
2,494 |
|
|
|
2,324 |
|
Federal insurance premium |
|
|
4,236 |
|
|
|
1,527 |
|
Communications |
|
|
1,725 |
|
|
|
2,108 |
|
Other taxes |
|
|
1,007 |
|
|
|
891 |
|
Asset resolution |
|
|
24,873 |
|
|
|
3,741 |
|
Other |
|
|
37,669 |
|
|
|
5,085 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
182,952 |
|
|
|
121,472 |
|
Less: capitalized direct costs of loan closings, under SFAS 91 |
|
|
(283 |
) |
|
|
(32,304 |
) |
|
|
|
|
|
|
|
Non-interest expense |
|
$ |
182,669 |
|
|
$ |
89,168 |
|
|
|
|
|
|
|
|
Efficiency ratio (1) |
|
|
73.8 |
% |
|
|
83.0 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating and administrative expenses divided by the sum of net interest income and
non-interest income. |
Non-interest expense, before the capitalization of loan origination costs, increased $61.5
million to $183.0 million during the three months ended March 31, 2009, from $121.5 million for the
comparable 2008 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 10 more facilities at March 31, 2009
than at March 31, 2008. |
|
|
|
|
The home lending operation originated $9.5 billion in residential mortgage loans
during the 2009 quarter versus $7.9 billion in the comparable 2008 quarter. |
|
|
|
|
We employed 3,285 salaried employees at March 31, 2009 versus 3,170 salaried
employees at March 31, 2008. |
|
|
|
|
We employed 186 full-time national account executives at March 31, 2009 versus 246
at March 31, 2008. |
|
|
|
|
We employed 333 full-time retail loan originators at March 31, 2009 versus 593 at
March 31, 2008. |
Compensation and benefits expense increased $2.0 million during the 2009 period from the
comparable 2008 period to $58.7 million, with the increase primarily attributable to additional
staff and support personnel for the newly-opened banking centers, additional underwriters who
specialize in governmental loan products and additional loan workout specialists.
The change in commissions paid to the commissioned sales staff, on a period over period basis,
was a $4.1 million increase. This increase reflects the increased loan originations over the
comparable period.
Asset resolution expense consists of foreclosure costs and 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 increased $21.1 million to $24.9 million during
the 2009 period from the comparable 2008 period. Because of the climate in the housing market,
write downs of REO properties increased from $0.9 million to $17.4 million, an increase of $16.1
million net of any gain on REO sales and recovery of related amounts.
38
Other expenses totaled $37.7 million during 2009 compared to $5.1 million in 2008. The 639.2%
increase was primarily due to an $11.1 million increase in the value of warrants issued in January
2009, and a $10.4 million increase in loss reserves related to our reinsurance company.
During the three months ended March 31, 2009, we capitalized direct loan origination costs of
$0.3 million, a decrease of $32.0 million from $32.3 million for the comparable 2008 period. This
99.1% decrease is a result of our adoption of fair value accounting for the majority of our loans
held for sale that were originated during 2009.
Provision for Federal Income Taxes
For the three months ended March 31, 2009, our benefit for federal income taxes as a
percentage of pretax loss was 30.8% compared to 33.6% in 2008. For each period, the provision for
federal income taxes varies from statutory rates primarily because of certain non-deductible
corporate expenses. Additionally, the 2009 period was affected by non-deductible warrant expense
of $11.1 million.
Analysis of Items on Statement of Financial Condition
Assets
Securities Classified as Trading. Securities classified as trading are comprised of U.S.
government sponsored agency mortgage-backed securities, U.S. treasury bonds and residual interests
from private-label securitizations. U.S. government sponsored agency mortgage-backed securities
held in trading are distinguished from available-for-sale based upon the intent of management to
use them for liquidity purposes and as an economic hedge against changes in the valuation of the
MSR portfolio, however, these do not qualify as an accounting hedge as defined in FAS 133.
For the three months ended March 31, 2009 the balance was $1.7 billion compared to $0.5
billion at December 31, 2008. The balance has increased as part of our overall liquidity and MSR
portfolio requirements.
Securities Classified as Available for Sale. Securities classified as available for sale,
which are comprised of U.S. government sponsored agency mortgage-backed securities and CMOs
decreased from $1.1 billion at December 31, 2008, to $0.8 billion at March 31, 2009. See Note 6 of
the Notes to the Consolidated Financial Statements, in Item 1. Financial Statements herein.
Other Investments. Our investment portfolio increased from $34.5 million at December 31,
2008, to $37.0 million at March 31, 2009. Investment securities consist of 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 March 31, 2009, we held loans available for sale of $3.7 billion, which was an
increase of $2.2 billion from $1.5 billion held at December 31, 2008. Our loan production is
typically inversely related to the level of long-term interest rates. As long-term rates decrease,
we tend to originate an increasing number of mortgage loans. A significant amount of the loan
origination activity during periods of falling interest rates is derived from refinancing of
existing mortgage loans. Conversely, during periods of increasing long-term rates increase, loan
originations tend to decrease. Beginning January 1, 2009, we elected to record the majority of
loans available for sale on the fair value method and will not apply SFAS 91 to those loans. At
March 31, 2009, all but approximately $0.1 billion of our loans available for sale were recorded on
a fair value basis. See Note 7 of the Notes to the Consolidated Financial Statements, in Item 1.
Financial Statements herein.
Loans Held for Investment. Loans held for investment at March 31, 2009 decreased $225.9
million from December 31, 2008. The decrease was principally attributable to a decrease in first
mortgage loans and increased reserves. See Note 8 of the Notes to Consolidated Financial
Statements, in Item 1. Financial Statements, herein.
Allowance for Loan Losses. The allowance for loan losses represents managements estimate of
probable and inherent 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 $466.0 million at March 31, 2009 from $376.0
million at December 31, 2008, respectively. The allowance for loan losses as a percentage of
non-performing loans decreased to 58.7% from 59.7% at March 31, 2009 and December 31, 2008,
respectively. Our non-performing loans (i.e., loans that are past due 90 days or more) increased
to $793.7 million at March 31, 2009 from $629.5 million at December 31, 2008. The allowance for
loan losses as a percentage of investment loans increased to 5.21% at March 31, 2009 from 4.14% at
December 31, 2008. The increase in the allowance for loan losses at March 31, 2009 reflects
managements assessment of the effect of increased levels
39
of charge-offs within the higher risk
loan categories, (i.e. commercial real estate, HELOCs, second mortgages and other
consumer loans). The delinquency rate increased in the first quarter to 12.61% as of March
31, 2009, up from 10.59% as of December 31, 2008.
The allowance for loan losses is considered adequate based upon managements assessment of
relevant factors, including the types and amounts of 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 March 31, 2009, 69.6% of all
delinquent loans are loans in which we had a first lien position on residential real estate.
Delinquent Loans
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Days Delinquent |
|
(Dollars in thousands) |
|
30 |
|
$ |
192,142 |
|
|
$ |
157,683 |
|
60 |
|
|
142,521 |
|
|
|
134,685 |
|
90 |
|
|
793,713 |
|
|
|
629,457 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,128,376 |
|
|
$ |
921,825 |
|
|
|
|
|
|
|
|
Investment loans |
|
$ |
8,946,195 |
|
|
$ |
8,706,121 |
|
|
|
|
|
|
|
|
Delinquency % |
|
|
12.61 |
% |
|
|
10.59 |
% |
|
|
|
|
|
|
|
We calculate our delinquent loans using a method required by the OTS 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 may 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, 30 day delinquencies equaled $275.4 million, 60 day
delinquencies equaled $161.5 million and 90 day delinquencies equaled $901.9 million at March 31,
2009. Total delinquent loans under the MBA Method total $1.3 billion or 15.0% of loans held for
investment at March 31, 2009, as compared to, delinquent loans at December 31, 2008 of $1.1
billion, or 13.19% of total loans held for investment.
40
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Year Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
Beginning balance |
|
$ |
376,000 |
|
|
$ |
104,000 |
|
|
$ |
104,000 |
|
Provision for loan losses |
|
|
158,214 |
|
|
|
34,262 |
|
|
|
343,963 |
|
Charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans |
|
|
(38,462 |
) |
|
|
(6,182 |
) |
|
|
(47,814 |
) |
Consumer loans |
|
|
(6,983 |
) |
|
|
(1,674 |
) |
|
|
(6,505 |
) |
Commercial loans |
|
|
(22,633 |
) |
|
|
(8,847 |
) |
|
|
(15,774 |
) |
Construction loans |
|
|
(789 |
) |
|
|
(27 |
) |
|
|
(1,872 |
) |
Other |
|
|
(575 |
) |
|
|
(462 |
) |
|
|
(2,006 |
) |
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
(69,442 |
) |
|
|
(17,192 |
) |
|
|
(73,971 |
) |
|
|
|
|
|
|
|
|
|
|
Recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans |
|
|
918 |
|
|
|
51 |
|
|
|
480 |
|
Consumer loans |
|
|
178 |
|
|
|
141 |
|
|
|
978 |
|
Commercial loans |
|
|
|
|
|
|
7 |
|
|
|
36 |
|
Construction loans |
|
|
33 |
|
|
|
|
|
|
|
|
|
Other |
|
|
99 |
|
|
|
131 |
|
|
|
514 |
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
1,228 |
|
|
|
330 |
|
|
|
2,008 |
|
|
|
|
|
|
|
|
|
|
|
Charge-offs, net of recoveries |
|
|
(68,214 |
) |
|
|
(16,862 |
) |
|
|
(71,963 |
) |
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
466,000 |
|
|
$ |
121,400 |
|
|
$ |
376,000 |
|
|
|
|
|
|
|
|
|
|
|
Net charge-off ratio |
|
|
3.00 |
% |
|
|
0.80 |
% |
|
|
0.79 |
% |
|
|
|
|
|
|
|
|
|
|
Accrued Interest Receivable. Accrued interest receivable increased from $56.0 million at
December 31, 2008, to $62.8 million at March 31, 2009, as our total earning assets increased. 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 March 31, 2009 and 2008, we repurchased $13.2 million and
$5.9 million in unpaid principal balance of non-performing loans, respectively. The estimated fair
value of the remaining repurchased assets totaled $14.8 million at March 31, 2009 and $16.5 million
at December 31, 2008, and is included within other assets in our consolidated statements of
financial condition.
Premises and Equipment. Premises and equipment, net of accumulated depreciation, totaled
$246.2 million at March 31, 2009 and December 31, 2008. Our investment in property and equipment
has essentially remained constant due to our decision to limit our branch expansion.
Mortgage Servicing Rights. At March 31, 2009, MSRs included residential MSRs at fair value
amounting to $515.5 million and consumer MSRs at amortized cost amounting to $7.2 million. At
December 31, 2008, residential MSRs amounted to $511.3 million and consumer MSRs at amortized cost
amounted to $9.5 million. During the three month period ended March 31, 2009 and 2008, we recorded
additions to our residential MSRs of $82.7 million and $100.7 million, respectively, due to loan
sales or securitizations. Changes in interest rates and other environmental factors caused a
reduction in the fair value of our residential class of MSRs for the three month period ended March
31, 2009. The changes were reflected in the
41
servicing fees accrued of approximately $38.5 million,
underlying loan payoffs of $36.3 million and other factors of $3.7
million. During the 2008 period, we recorded fair value adjustments to reduce the fair value of
the residential MSRs by $60.1 million. The adjustment included approximately $17.9 million in
underlying loan payoffs, $28.0 million of servicing fees and $14.1 million of market driven
charges, primarily a decrease in mortgage loan rates that led to an expected increase in prepayment
speeds. See Note 10 of the Notes to the Consolidated Financial Statements in Item 1 Financial
Statements herein.
The principal balance of the loans underlying our total MSRs was $58.9 billion at March 31,
2009 versus $55.9 billion at December 31, 2008, with the increase primarily attributable to our
increased loan origination activity for 2009 and no bulk MSR sales during the period.
Other Assets. Other assets are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Repurchased assets |
|
$ |
14,830 |
|
|
$ |
16,454 |
|
Receivable for FHA insured loans / assets |
|
|
124,690 |
|
|
|
83,709 |
|
Escrow advances |
|
|
60,952 |
|
|
|
56,542 |
|
Tax assets, net |
|
|
205,830 |
|
|
|
181,601 |
|
Derivative assets, including margin accounts |
|
|
73,604 |
|
|
|
93,686 |
|
Other |
|
|
62,283 |
|
|
|
72,742 |
|
|
|
|
|
|
|
|
Total other assets |
|
$ |
542,189 |
|
|
$ |
504,734 |
|
|
|
|
|
|
|
|
Other assets increased $37.5 million, or 7.4%, to $542.2 million at March 31, 2009 from $504.7
million at December 31, 2008. The majority of the increase was attributable to an increase of
$41.0 million of our receivables of repurchased FHA insured loans and a $24.2 million increase in
our tax assets, net, due to our loss for the quarter ended March 31, 2009.
Liabilities
Deposit Accounts. Deposit accounts increased $1.9 billion to $9.8 billion at March 31, 2009,
from $7.8 billion at December 31, 2008. The composition of our deposits was as follows:
Deposit Portfolio
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Weighted |
|
|
Percent |
|
|
|
|
|
|
Weighted |
|
|
Percent |
|
|
|
|
|
|
|
Average |
|
|
of |
|
|
|
|
|
|
Average |
|
|
of |
|
|
|
Balance |
|
|
Rate |
|
|
Balance |
|
|
Balance |
|
|
Rate |
|
|
Balance |
|
Demand accounts |
|
$ |
427,167 |
|
|
|
0.30 |
% |
|
|
4.37 |
% |
|
$ |
416,920 |
|
|
|
0.47 |
% |
|
|
5.32 |
% |
Savings accounts |
|
|
446,440 |
|
|
|
1.80 |
|
|
|
4.56 |
|
|
|
407,501 |
|
|
|
2.24 |
|
|
|
5.20 |
|
MMDA |
|
|
662,273 |
|
|
|
2.11 |
|
|
|
6.77 |
|
|
|
561,909 |
|
|
|
2.61 |
|
|
|
7.17 |
|
Certificates of deposit (1) |
|
|
4,647,037 |
|
|
|
3.67 |
|
|
|
47.48 |
|
|
|
3,967,985 |
|
|
|
3.94 |
|
|
|
50.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail Deposits |
|
|
6,182,917 |
|
|
|
3.13 |
|
|
|
63.18 |
|
|
|
5,354,315 |
|
|
|
3.40 |
|
|
|
68.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal deposits(2) |
|
|
616,319 |
|
|
|
1.80 |
|
|
|
6.30 |
|
|
|
597,638 |
|
|
|
2.84 |
|
|
|
7.62 |
|
National accounts |
|
|
2,237,363 |
|
|
|
3.23 |
|
|
|
22.86 |
|
|
|
1,353,558 |
|
|
|
4.41 |
|
|
|
17.26 |
|
Company controlled deposits(3) |
|
|
749,102 |
|
|
|
|
|
|
|
7.66 |
|
|
|
535,494 |
|
|
|
|
|
|
|
6.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits |
|
$ |
9,785,701 |
|
|
|
2.83 |
% |
|
|
100.0 |
% |
|
$ |
7,841,005 |
|
|
|
3.30 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was
approximately $1.7 billion at March 31, 2009 and December 31, 2008. |
|
(2) |
|
Municipal deposits include funds from municipalities and public units. |
|
(3) |
|
These accounts represent the portion of the investor custodial accounts controlled by
Flagstar that have been placed on deposit with the Bank. |
The municipal deposit channel was $616.3 million and $597.6 million at March 31, 2009 and
December 31, 2008, respectively. 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.
National deposit accounts increased a net $0.9 billion to $2.2 billion at March 31, 2009, from $1.4
billion at December 31, 2008. At March 31, 2009, the national deposit accounts had a weighted
maturity of 12 months.
42
The Company controlled accounts increased $0.2 billion to $0.7 billion at March 31, 2009.
This increase reflects the
increase in mortgage loans serviced for others.
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):
|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Amount |
|
|
Rate |
|
|
Amount |
|
|
Rate |
|
Fixed rate putable advances |
|
$ |
2,150,000 |
|
|
|
4.02 |
% |
|
$ |
2,150,000 |
|
|
|
4.02 |
% |
Short-term fixed rate term advances |
|
|
750,000 |
|
|
|
4.66 |
% |
|
|
650,000 |
|
|
|
4.79 |
% |
Long-term fixed rate term advances |
|
|
2,300,000 |
|
|
|
4.58 |
% |
|
|
2,400,000 |
|
|
|
4.55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,200,000 |
|
|
|
4.36 |
% |
|
$ |
5,200,000 |
|
|
|
4.36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2009, FHLB advances remained unchanged from $5.2 billion at December 31, 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 March 31,
2009.
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, generally mortgage backed 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 March 31, 2009 and December 31, 2008, 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 our special purpose trust subsidiaries under the Company
rather than the Bank. The notes mature 30 years from issuance, are callable after five years and
pay interest quarterly. At both March 31, 2009 and December 31, 2008, we had $248.7 million of
long-term debt.
Accrued Interest Payable. Our accrued interest payable decreased $6.6 million from December
31, 2008 to $29.5 million at March 31, 2009. The decrease was principally due to the decrease in
interest rates during 2009 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, actual credit losses on repurchased loans and recovery history, 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 $6.4 million to $48.9 million at March 31, 2009, from
$42.5 million at December 31, 2008. This increase is attributable to the Companys expected losses
and historical experience of repurchases and claims.
43
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 March 31, |
|
|
|
2009 |
|
|
2008 |
|
Balance, beginning of period |
|
$ |
42,500 |
|
|
$ |
27,600 |
|
Provision |
|
|
|
|
|
|
|
|
Charged to gain on sale for current loan sales |
|
|
3,802 |
|
|
|
2,997 |
|
Charged to other fees and charges for changes in estimates |
|
|
10,829 |
|
|
|
(1,364 |
) |
|
|
|
|
|
|
|
Total |
|
|
14,631 |
|
|
|
1,633 |
|
Charge-offs, net |
|
|
(8,231 |
) |
|
|
(1,833 |
) |
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
48,900 |
|
|
$ |
27,400 |
|
|
|
|
|
|
|
|
Reserve levels are a function of expected losses based on actual pending and expected claims
and repurchase requests, historical experience and loan volume. While the ultimate amount of
repurchases and claims is uncertain, management believes that the amount of reserves at March 31,
2009 is adequate.
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 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 and customer
escrow accounts. We can 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 insured.
Retail deposits increased to $6.2 billion at March 31, 2009, as compared to $5.4 billion at
December 31, 2008.
Mortgage loans sold during the three months ended March 31, 2009 totaled $7.7 billion, an
increase of $0.5 billion from the $7.2 billion sold during the same period in 2008. This increase
reflects our $1.6 billion increase in mortgage loan originations during the three months ended
March 31, 2009. We attribute this increase to a falling interest rate environment, resulting in an
increase in demand for fixed-rate mortgage loans and an increase in market share. We sold 80.1%
and 89.4% of our mortgage loan originations during the three month periods ended March 31, 2009 and
2008, respectively.
We use FHLB advances and 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 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 March 31, 2009, we had available
collateral sufficient to access $5.8 billion of the line of which $0.6 billion was still available
at March 31, 2009. Such advances are usually repaid with the proceeds from the sale of mortgage
loans or from alternative sources of financing.
At March 31, 2009, 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 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 both March 31, 2009 and 2008, our
security repurchase agreements totaled $108.0 million which was secured by $117.7 million of
collateralized mortgage obligations classified as securities available for sale.
At March 31, 2009, we had arrangements with the Federal Reserve Bank of Chicago (FRB) to
borrow as needed from its discount window. The amount we are allowed to borrow is based on the
lendable value of the collateral that we provide. To collateralize the line, we pledge commercial
loans that are eligible based on FRB guidelines. At March 31, 2009,
44
we had pledged commercial
loans amounting to $1.0 billion with a lendable value of $0.7 billion. At March 31, 2009, we had
no borrowings outstanding against this line of credit.
At March 31, 2009, we had outstanding rate-lock commitments to lend $4.4 billion in mortgage
loans, along with outstanding commitments to make other types of loans totaling $3.8 million. As
such commitments may expire without being drawn upon, they do not necessarily represent future cash
commitments. Also, at March 31, 2009, we had outstanding commitments to sell $4.6 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 $1.1 billion at March 31, 2009, including
$618.1 million of unused warehouse lines of credit to various mortgage companies, of which we had
advanced $577.7 million at March 31, 2009. There were $10.8 million in undrawn lines of credit
contained within consumer loans.
Regulatory Capital Adequacy. At March 31, 2009, the Bank exceeded all applicable bank
regulatory minimum capital requirements and was considered well capitalized. 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 March 31, 2009.
45
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 March 31, 2009 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 March 31, 2009, 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.
46
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
There have been no material changes to the risk factors previously disclosed in response to
Item 1A to Part I of the Companys Annual Report on Form 10-K for the fiscal year ended December
31, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Sale of Unregistered Securities
The Company made no unregistered sales of its equity securities during the quarter
ended March 31, 2009 that have not previously been reported.
Issuer Purchases of Equity Securities
The Company made no purchases of its equity securities during the quarter ended March
31, 2009.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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: May 7, 2009 |
/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