e10vk
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO
SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1933
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OR
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þ
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2006
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OR
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File No.:
001-16577
FLAGSTAR BANCORP,
INC.
(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)
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Registrants telephone number, including area code:
(248) 312-2000
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
registered
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Common Stock, par value
$0.01 per share
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New York Stock
Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
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
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act
Large Accelerated
Filer o Accelerated
Filer þ Non-Accelerated
Filer o
Indicate by check mark whether the registrant is a shell company
(as defined in Exchange Act
Rule 12b-2). Yes o No þ
The estimated aggregate market value of the voting common stock
held by non-affiliates of the registrant, computed by reference
to the closing sale price ($15.96 per share) as reported on
the New York Stock Exchange on June 30, 2006, was
approximately $607.5 million. The registrant does not have
any non-voting common equity shares.
As of February 23, 2007, 63,625,870 shares of the
registrants Common Stock, $0.01 par value, were
issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement relating to
its 2007 Annual Meeting of Stockholders have been
incorporated into Part III of this Report on
Form 10-K.
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BUSINESS
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RISK
FACTORS
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UNRESOLVED STAFF
COMMENTS
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20
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PROPERTIES
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LEGAL
PROCEEDINGS
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SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
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MARKET FOR
REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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SELECTED FINANCIAL
DATA
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MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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CONTROLS AND
PROCEDURES
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OTHER
INFORMATION
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108
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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EXECUTIVE
COMPENSATION
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SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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108
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
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EXHIBITS, FINANCIAL
STATEMENT SCHEDULES
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109
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Employment Agreement dated February 28, 2007 of Thomas J. Hammond |
Employment Agreement dated February 28, 2007 of Mark T. Hammond |
Employment Agreement dated February 28, 2007 of Paul D. Borja |
Employment Agreement dated February 28, 2007 of Kirstin A. Hammond |
Employment Agreement dated February 28, 2007 of Robert O. Rondeau Jr. |
List of Subsidiaries |
Consent of Virchow, Krause & Company LLP |
Consent of Grant Thornton LLP |
Section 302 Certification of Chief Executive Officer |
Section 302 Certification of Chief Financial Officer |
Section 906 Certification of Chief Executive Officer |
Section 906 Certification of Chief Financial Officer |
List of Subsidiaries of the Company
Consent of Virchow, Krause & Company, LLP
Consent of Grant Thornton LLP
Section 302 Certification of Chief Executive Officer
Section 302 Certification of Chief Financial Officer
Section 906 Certification of Chief Executive Officer
Section 906 Certification of Chief Financial Officer
Cautions
Regarding Forward-Looking 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 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 our 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 this
Form 10-K.
The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect
occurrences or unanticipated events or circumstances after the
date of such statements.
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PART I
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 (FCMC), its
wholly-owned subsidiary, which we collectively refer to as the
Bank.
General
The Company is a Michigan-based savings and loan holding
company. Our business is primarily conducted through our
principal subsidiary, Flagstar Bank, FSB (the Bank),
a federally chartered stock savings bank. At December 31,
2006, our total assets were $15.5 billion, making us the
largest publicly held savings bank in the Midwest and the
17th largest savings bank in the United States.
The Bank is a member of the Federal Home Loan Bank of
Indianapolis (FHLB) and is subject to regulation,
examination and supervision by the Office of Thrift Supervision
(OTS) and the Federal Deposit Insurance Corporation
(FDIC). The Banks deposits are insured by the
FDIC through the Deposit Insurance Fund (DIF).
At December 31, 2006, we operated 151 banking centers
located in Michigan, Indiana and Georgia (of which 41 are
located in retail stores such as Wal-Mart) and 76 home loan
centers located in 20 states. This includes an additional
14 banking centers we opened during 2006, including eight in
Georgia. Our plan over the next five years is to increase our
earning asset base and banking center network. To do this, we
plan to continue to add banking centers and grow our lending
channels in an effort to expand our market share in the markets
we serve and to penetrate new markets. Toward this goal, during
2007, we expect to expand our banking center network by up to 13
new banking centers, with seven in Georgia.
Our earnings are from our retail banking activities, which
generate net interest income, and non-interest income from sales
of residential mortgage loans to the secondary market, the
servicing of loans for others, the sale of servicing rights
related to mortgage loans serviced and fee-based services
provided to our customers. Approximately 96% of our total loan
production during 2006 represented mortgage loans and home
equity lines of credit that were secured by first or second
mortgages on single-family residences.
On May 30, 2006, we formed Flagstar Capital Markets
Corporation (FCMC) as a wholly-owned subsidiary of
the Bank. FCMC performs the capital market functions that were
previously handled by the Bank. These functions include holding
investment loans, purchasing securities, selling and
securitizing mortgage loans, maintaining and selling mortgage
servicing rights, developing new loan products, establishing
pricing for mortgage loans to be acquired, providing for lock-in
support, and managing the interest rate risk associated with
these activities.
At December 31, 2006, we had 2,510 full-time
equivalent salaried employees and 444 account executives and
loan officers.
Operating
Segments
Our business is comprised of two operating
segments banking and home lending. Our banking
operation offers a line of consumer and commercial financial
products and services to individuals and to small and middle
market businesses through a network of banking centers (i.e.,
our bank branches) in Michigan, Indiana, and Georgia. Our home
lending operation originates, acquires, sells and services
mortgage loans on
one-to-four
family residences. Each operating segment supports and
complements the operations of the other, with funding for the
home lending operation primarily provided by deposits and
borrowings obtained through the banking operation. Financial
information regarding our two operating segments is set forth in
Note 28 to our consolidated financial statements included
in this report under Item 8. Financial Statements and
Supplementary Data. A more detailed discussion of our two
operating segments is set forth below.
Banking Operation. Our banking operation collects
deposits and offers a broad base of banking services to consumer
and commercial customers. We collect deposits at our 151 banking
centers and via the Internet. We also sell certificates of
deposit through independent brokerage firms. We borrow funds by
obtaining
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advances from the FHLB and by entering into repurchase
agreements using as collateral our mortgage-backed securities
that we hold as investments. The banking operation invests these
funds in a variety of consumer and commercial loan products.
We have developed a variety of deposit products ranging in
maturity from demand-type accounts to certificates with
maturities of up to ten years, savings accounts and money market
accounts. We primarily rely upon our network of strategically
located banking centers, the quality and efficiency of our
customer service, and our pricing policies to attract deposits.
In past years, our national accounts division garnered funds
through nationwide advertising of deposit rates and the use of
investment banking firms. Since 2005, we have not solicited any
funds through the division as we have been able to access more
attractive funding sources through FHLB advances, security
repurchase agreements and other forms of deposits that provide
the potential for a long term customer relationship.
While our primary investment vehicle is single-family first
mortgage loans originated or acquired by our home lending
operation, our banking operation offers consumer and commercial
financial products and services to individuals and to small to
middle market businesses. During the past three years, we have
placed increasing emphasis on commercial real estate lending,
and on second mortgage lending as an add-on to our national
mortgage lending platform. In 2006, we expanded our commercial
real estate lending to add 17 states to diversify our
lending activity beyond Michigan, Indiana, and Georgia.
We offer the following consumer loan products through our
banking operation:
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second mortgage loans, including home-equity lines of credit;
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automobile loans, including loans for used cars;
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boat loans;
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student loans; and
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personal loans and lines of credit, both secured and unsecured.
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During 2006, we originated a total of $1.1 billion in
consumer loans versus $1.2 billion originated in 2005. At
December 31, 2006, our consumer loan portfolio totaled
$1.1 billion or 9.0% of our investment loan portfolio, and
contained $715.2 million of second mortgage loans,
$284.4 million of home equity lines of credit, and
$93.8 million of various other consumer loans.
We also offer a full line of commercial loan products and
banking services especially developed for our commercial
customers. Among the commercial loan products we offer are the
following:
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business lines of credit, including warehouse lines of credit to
other mortgage lenders;
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loans secured by real estate; and
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working capital loans.
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Commercial loans are made on a secured or unsecured basis but a
vast majority are also secured by personal guarantees. Assets
providing collateral for secured commercial loans require an
appraised value sufficient to satisfy our
loan-to-value
ratio requirements. We also generally require that our
commercial customers maintain a minimum debt-service coverage
ratio. In addition, we consider the creditworthiness and
managerial ability of our borrowers, the enforceability and
collectibility of any relevant guarantees and the quality of the
collateral.
At December 31, 2006, our commercial real estate loan
portfolio totaled $1.3 billion, or 14.6% of our investment
loan portfolio, and our non-real estate commercial loan
portfolio was $14.6 million, or 0.2% of our investment loan
portfolio. At December 31, 2005, our commercial real estate
portfolio totaled $995.4 million and our non-real estate
commercial loan portfolio totaled $8.4 million, or 9.4% of
our investment loan portfolio. During 2006, we originated
$671.5 million of commercial loans versus
$555.5 million in 2005.
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We also offer warehouse lines of credit to other mortgage
lenders. These lines allow the lender to fund the closing of a
mortgage loan. Each extension or drawdown on the line is
collateralized by a mortgage loan and in many cases we
subsequently acquire the mortgage loan. These lines of credit
are, in most cases, personally guaranteed by a qualified
principal officer of the borrower. The aggregate amount of
warehouse lines of credit granted to other mortgage lenders at
December 31, 2006, was $1.2 billion, of which
$291.7 million was outstanding at December 31, 2006.
At December 31, 2005, $1.3 billion in warehouse lines
of credit had been granted, of which $146.7 million was
outstanding.
Our banking operation offers a variety of other value-added,
fee-based banking services.
Home Lending Operation. Our home lending operation
originates, acquires, sells and services single-family
residential mortgage loans. The origination or acquisition of
residential mortgage loans constitutes our most significant
lending activity. At December 31, 2006, approximately 64.1%
of our earning assets consisted of first mortgage loans on
single-family residences.
During 2006, we were one of the countrys leading mortgage
loan originators. We utilize three production channels to
originate or acquire mortgage loans Retail, Broker
and Correspondent. Each production channel produces similar
mortgage loan products and applies, in most instances, the same
underwriting standards.
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Retail. In a retail transaction, we originate
the loan through our nationwide network of 76 home loan centers
as well as from our 151 banking centers located in Michigan,
Indiana and Georgia and our national call center located in
Troy, Michigan. When we originate loans on a retail basis, we
complete all the loan paperwork and other aspects of the lending
process and fund the transaction ourselves. During 2006, we
closed $2.1 billion of loans utilizing this origination
channel, which equaled 11.7% of total originations as compared
to $4.0 billion or 14.2% of total originations in 2005 and
$3.9 billion or 11.5% of total originations in 2004.
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Broker. In a broker transaction, an
unaffiliated mortgage brokerage company completes all of the
loan paperwork, but we supply the funding for the loan at
closing (also known as table funding) and become the
lender of record. At closing, the broker may receive an
origination fee from the borrower and we may also pay the broker
a fee to acquire the mortgage servicing rights on the loan. We
currently have active broker relationships with over 5,000
mortgage brokerage companies located in all 50 states.
Brokers remain our largest loan production channel. During 2006,
we closed $9.0 billion utilizing this origination channel,
which equaled 48.3% of total originations, as compared to
$16.1 billion or 57.1% in 2005 and $19.7 billion or
57.9% in 2004.
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Correspondent. In a correspondent
transaction, an unaffiliated mortgage company completes all of
the loan paperwork and also supplies the funding for the loan at
closing. We acquire the loan after the mortgage company has
funded the transaction, usually paying the mortgage company a
market price for the loan plus a fee to acquire the mortgage
servicing rights on the loan. We have active correspondent
relationships with over 1000 mortgage companies located in all
50 states. During 2006, we closed $7.2 billion
utilizing this origination channel, which equaled 40% of total
originations versus the $8.1 billion or 28.7% originated in
2005 and $10.4 billion or 30.6% originated in 2004.
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We maintain 12 sales support offices that assist our brokers and
correspondents nationwide. We also continue to make increasing
use of the Internet as a tool to facilitate the mortgage loan
origination process through our broker and correspondent
production channels. Our brokers and correspondents are able to
register and lock loans, check the status of in-process
inventory, deliver documents in electronic format, generate
closing documents, and request funds through the Internet.
During 2006, virtually all mortgage loans that closed, used the
Internet in the completion of the mortgage origination or
acquisition process. We expect to continue to utilize technology
to streamline the mortgage origination process and bring service
and convenience to our correspondent partners and customers.
We offer permanent residential mortgage loans, which are either
fixed-rate or adjustable-rate loans with terms ranging up to
forty years. These mortgage loans originated or acquired are
made either for the purpose of purchasing a
one-to-four
family residence or the refinancing of an existing mortgage on a
one-to-four
family residence.
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Underwriting. Mortgage loans acquired or
originated by the home lending operation are underwritten on a
loan-by-loan basis rather than on a pool basis. In general,
mortgage loans produced through any of our production channels
are reviewed by one of our in-house loan underwriters or by a
contract underwriter employed by a mortgage insurance company.
However, certain of our correspondents have delegated
underwriting authority. Any loan not underwritten by a Flagstar
employed underwriter must be warranted by the underwriters
employer, whether it is a mortgage insurance company or
correspondent mortgage brokerage company.
We believe that our underwriting process, which relies on the
electronic submission of data and images and is based on an
imaging workflow process, allows for underwriting at a higher
level of accuracy and timeliness than exists with processes that
rely on paper submissions. We also provide our underwriters with
integrated quality control tools, such as automated valuation
models (AVMs), multiple fraud detection engines and
the ability to electronically submit IRS Form 4506s, to
ensure underwriters have the information that they need to make
informed decisions. The process begins with the submission of an
electronic application and an initial determination of
eligibility. The application and required documents are then
faxed or uploaded to our corporate underwriting department and
all documents are identified by optical character recognition or
our underwriting staff. The underwriter is responsible for
checking the data integrity and reviewing credit. The file is
then reviewed in accordance with the applicable guidelines
established by us for the particular product. Quality control
checks are performed by underwriting, as necessary using the
tools outlined above, and a decision is made and notice
communicated to the prospective borrower.
Mortgage Loans. All mortgage loans acquired
or originated by our home lending operation are secured by a
mortgage on a
one-to-four
family residential property. A large majority of our mortgage
loan products conform to the respective underwriting guidelines
established by Fannie Mae, Ginnie Mae or Freddie Mac, which we
collectively refer to as the Agencies. We generally
require that any first mortgage loan with a
loan-to-value
ratio in excess of 80% carry mortgage insurance. A
loan-to-value
ratio is the percentage that the original principal amount of a
loan bears to the appraised value of the mortgaged property at
the time of underwriting. In the case of a purchase money
mortgage, we use the lower of the appraised value of the
property or the purchase price of the property securing the loan
in determining this ratio. We also verify the reasonableness of
the appraised value of loans by utilizing an AVM. We generally
require a lower
loan-to-value
ratio, and thus a higher down payment, for loans on homes that
are not occupied as a principal residence by the borrower. In
addition, all first mortgage loans originated are subject to
requirements for title, flood, windstorm, fire, and hazard
insurance. Real estate taxes are generally collected and held in
escrow for disbursement. We are also protected against fire or
casualty loss on home mortgage loans by a blanket mortgage
impairment insurance policy that insures us when the
mortgagors insurance is inadequate.
Construction Loans. Our home lending
operation also makes loans for the construction of
one-to-four
family residential housing throughout the United States, with a
large concentration in our southern Michigan market area. These
construction loans usually convert to permanent financing upon
completion of construction. All construction loans are secured
by a first lien on the property under construction. Loan
proceeds are disbursed in increments as construction progresses
and as inspections warrant. Construction/permanent loans may
have adjustable or fixed interest rates and are underwritten in
accordance with the same terms and requirements as permanent
mortgages, except that during a construction period, generally
up to nine months, the borrower is required to make
interest-only monthly payments. Monthly payments of principal
and interest commence one month from the date the loan is
converted to permanent financing. Borrowers must satisfy all
credit requirements that would apply to permanent mortgage loan
financing prior to receiving construction financing for the
subject property. During 2006, we originated a total of
$114.8 million in construction loans versus
$103.9 million originated in 2005 and $112.3 million
originated in 2004. At December 31, 2006, our portfolio of
loans held for investment included $64.5 million of loans
secured by properties under construction, or 0.7% of total loans
held for investment.
Secondary Market Loan Sales. 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. As a part of our overall mortgage
banking strategy, we securitize a majority of our mortgage loans
through the Agencies. We generally securitize our longer-term,
fixed-rate loans for sale while we hold the shorter duration and
adjustable rate loans for investment. Securitization is the
process by which mortgage loans are aggregated and used to
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collateralize mortgage-backed securities that are issued or
guaranteed by the Agencies or through private-label
securitizations. These mortgage-backed securities are generally
sold to a secondary market investor. We generally retain the
servicing of the securitized loans, but we may also sell these
mortgage servicing rights (MSRs) to other secondary
market investors. In general, we do not sell the servicing
rights to mortgage loans that we originate for our own portfolio
or that we privately securitize.
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. 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 might 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 amount
of our secondary market reserve equaled $24.2 million and
$17.6 million at December 31, 2006 and 2005,
respectively.
Loan Servicing. The home lending operation
also services mortgage loans for others. Servicing residential
mortgage loans for third parties generates fee income and
represents a significant business activity for us. During 2006,
2005 and 2004, we serviced portfolios of mortgage loans that
averaged $20.3 billion, $26.8 billion and
$26.4 billion, respectively. The servicing generated gross
revenue of $82.6 million, $103.3 million and
$106.2 million in 2006, 2005, and 2004, respectively. This
revenue stream was offset by the amortization of
$69.6 million, $94.5 million and $76.1 million in
previously capitalized values of MSRs in 2006, 2005, and 2004,
respectively. When a loan is prepaid or refinanced, any
remaining MSR for that loan is fully amortized and therefore
amortization expense in a period could increase at a greater
rate than the increase in loan administration income. During a
period of falling or low interest rates, the amount of
amortization typically increases because of prepayments and
refinancing of the underlying mortgage loans. During a period of
higher or rising interest rates, payoffs and refinancing
typically slows reducing the rate of amortization.
As part of our business model we occasionally sell MSRs into the
secondary market if we determine that market prices provide us
with an opportunity for appropriate profit. Over the past five
years, we sold $130.6 billion of the MSRs. During 2006, we
sold $27.6 billion of the MSRs. The MSRs are sold in
separate transactions from the sale of the underlying loans. At
the time of the sale we record a gain or loss on such sale based
on the selling price of the MSRs less the carrying value and
transaction costs. The market price of MSRs changes with demand
and the general level of interest rates.
Other
Business Activities
We conduct business through a number of wholly-owned
subsidiaries in addition to the Bank.
Douglas Insurance Agency, Inc. Douglas
Insurance Agency, Inc. (Douglas) acts as an agent
for life insurance and health and casualty insurance companies.
Douglas primary purpose is to act as the agent that
provides group life and health insurance to the Companys
employees. Douglas also acts as a broker with regard to certain
insurance product offerings to employees and customers.
Douglas activities are not material to our business.
Flagstar Credit Corporation. Flagstar Credit
Corporation (Credit), a wholly-owned subsidiary of
the Company, participates in private mortgage insurance
operations with unaffiliated private mortgage insurers. Credit
collects up to 25% of the mortgage insurance premiums paid by
the borrowers in exchange for providing certain performance
guarantees on certain pools of loans underwritten and originated
by our home lending operation. As such, Credit provides second
tier loss protection when foreclosure losses on the pool of
7
loans exceed 5% of the original principal balances. The loans
are insured for any loss greater than 10% by third party
insurance carriers.
Other Flagstar Subsidiaries. In addition to
the Bank, Douglas and Credit, we have a number of wholly-owned
subsidiaries that are inactive. We also own 7 statutory trusts
that are not consolidated with our operations. For additional
information, see Notes 2 and 17 of the Notes to the
Consolidated Financial Statements, in Item 8. Financial
Statements and Supplemental Data, herein.
Flagstar Bank. The Bank, our primary
subsidiary, is a federally chartered, stock savings bank
headquartered in Troy, Michigan. The Bank is the sole
shareholder of Flagstar Intermediate Holding Company
(IHC). IHC is the holding company for Flagstar LLC.
The Bank is also the sole shareholder of FCMC. IHCs
operations were discontinued in 2006.
Flagstar Capital Markets Corporation. FCMC is
a wholly-owned subsidiary of the Bank and its functions include
holding investment loans, purchasing securities, selling and
securitizing mortgage loans, maintaining and selling mortgage
servicing rights, developing new loan products, establishing
pricing for mortgage loans to be acquired, providing for lock-in
support, and managing interest rate risk associated with these
activities.
Flagstar ABS LLC. Flagstar ABS LLC
(ABS) is a bankruptcy remote special purpose entity
that has been created to hold trust certificates in connection
with our private securitization offerings.
Other Bank Subsidiaries. The Bank, in
addition to IHC and FCMC, also wholly-owns several other
subsidiaries, all of which are inactive at December 31,
2006.
Regulation
and Supervision
Both the Company and the Bank are subject to regulation by the
OTS. Also, the Bank is a member of the FHLB and our deposits are
insured by the FDIC through the DIF. Accordingly, we are subject
to an extensive regulatory framework which imposes restrictions
on our activities, minimum capital requirements, lending and
deposit restrictions and numerous other requirements primarily
intended for the protection of depositors, federal deposit
insurance funds and the banking system as a whole, rather than
for the protection of shareholders and creditors. Many of these
laws and regulations have undergone significant change in recent
years and are likely to change in the future. Future legislative
or regulatory change, or changes in enforcement practices or
court rulings, may have a significant and potentially adverse
impact on our operations and financial condition. Our non-bank
financial subsidiaries are also subject to various federal and
state laws and regulations.
Federal Home Loan Bank System. The
primary purpose of the Federal Home Loan Banks (the
FHLBs) is to provide funding to their members in the
form of repayable advances for making housing loans as well as
for affordable housing and community development lending. The
FHLBs are generally able to make advances to their member
institutions at interest rates that are lower than the members
could otherwise obtain. The FHLB System consists of 12 regional
FHLBs; each being federally chartered but privately owned by its
member institutions. The Federal Housing Finance Board, a
government agency, is generally responsible for regulating the
FHLB System. The Bank is currently a member of the FHLB located
in Indianapolis.
Holding Company Status and Acquisitions. We
are a savings and loan holding company, as defined by federal
law. We may not acquire control of another savings association
unless the OTS approves such transaction and we may not be
acquired by a company other than a bank holding company unless
the OTS approves such transaction, or by an individual
unless the OTS does not object after receiving notice. We may
not be acquired by a bank holding company unless the Board of
Governors of the Federal Reserve System (the Federal
Reserve) approves such transaction. In any case, the
public must have an opportunity to comment on any such proposed
acquisition and the OTS or Federal Reserve must complete an
application review. Without prior approval from the OTS, we may
not acquire more than 5% of the voting stock of any savings
institution. In addition, the federal Gramm-Leach-Bliley Act
generally restricts any non-financial entity from acquiring us
unless such non-financial entity was, or had submitted an
application to become, a savings
8
and loan holding company on or before May 4, 1999. Also,
because we were a savings and loan holding company prior to that
date, we may engage in non-financial activities and acquire
non-financial subsidiaries.
Capital Adequacy. The Bank must maintain a
minimum amount of capital to satisfy various regulatory capital
requirements under OTS regulations and federal law. There is no
such requirement that applies to the Company. Federal law and
regulations establish five levels of capital compliance:
well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
As of December 31, 2006, the Bank met all capital
requirements to which it was subject and satisfied the
requirements to be treated as well-capitalized under
OTS regulations. An institution is treated as well-capitalized
if its ratio of total risk-based capital to risk-weighted assets
is 10.0% or more, its ratio of Tier 1 capital to
risk-weighted assets is 6.0% or more, its leverage ratio is 5.0%
or more, and it is not subject to any federal supervisory order
or directive to meet a specific capital level. In contrast, an
institution is only considered to be adequately
capitalized if its capital structure satisfies lesser
required levels, such as a total risk-based capital ratio of not
less than 8.0%, a Tier 1 risk-based capital ratio of not
less than 4.0%, and (unless it is in the most highly-rated
category) a leverage ratio of not less than 4.0%. Any
institution that is neither well capitalized nor adequately
capitalized will be considered undercapitalized. Any institution
with a tangible equity ratio of 2.0% or less will be considered
critically undercapitalized.
The various U.S. banking agencies and the Basel Committee
on Banking Supervision are developing a new set of regulatory
risk-based capital requirements that would apply to the 20
largest banks in the United States initially and to us soon
afterwards. The Basel Committee on Banking Supervision is a
committee established by the central bank governors of certain
industrialized nations, including the United States. The new
requirements are commonly referred to as Basel II or The
New Basel Capital Accord. We are assessing the potential impact
that The New Basel Capital Accord may have on our business
practices as well as the broader competitive effects within the
industry.
In October 2005, and subsequently revised in June 2006 and
December 2006, the various U.S. banking agencies issued an
advance rulemaking notice that contemplated possible
modifications to the risk-based capital framework applicable to
those domestic banking organizations that would not be affected
by Basel II. These possible modifications, known
colloquially as Basel 1A, are intended to avoid future
competitive inequalities between Basel I and Basel II
organizations and include: (i) increasing the number of
risk-weight categories; (ii) expanding the use of external
ratings for credit risk; (iii) expanding the range of
collateral and guarantors to qualify for a lower risk weight;
and (iv) basing residential mortgage risk ratings on
loan-to-value
ratios. The banking regulators indicated an intention to publish
proposed rules for implementation of Basel I and Basel II
in similar time frames, which we currently expect may occur
during 2007.
Commercial Real Estate Lending Guidelines. In
January 2006, federal banking regulators issued a joint
interagency proposal on lending guidelines that would apply to
commercial loans secured by real estate. Under the proposal, an
institution would need to hold additional capital for regulatory
purposes if its origination and holding of commercial real
estate loans rise above certain asset levels and contain certain
risk characteristics. In December 2006, the OTS issued its final
version of those guidelines, which did not contain the asset
level limits but were otherwise substantially unchanged. We do
not believe these guidelines will materially affect our current
operations.
Non-Traditional Lending Guidelines. In
December 2005, the federal banking agencies, including the OTS,
issued proposed lending guidelines that would effectively
require increased capital for holding loans in its portfolio
that were considered non-traditional. These
guidelines were finalized in 2006 in substantially the same
form. Under these guidelines, such loans included interest-only
loans and payment option adjustable rate mortgage loans which
permit a borrower to make regular payments less than the amount
of the scheduled principal amortization, thereby increasing the
loan balance (known as negative amortization). At
December 31, 2006, approximately 47.4% of our residential
mortgage loans that we held for investment were comprised of
adjustable rate loans with interest-only payments required
during the first ten years. We do not anticipate that these
guidelines will materially affect our current operations.
Payment of Dividends. The Company is a legal
entity separate and distinct from the Bank and our non-banking
subsidiaries. The Companys principal sources of funds are
cash dividends paid by the Bank and other
9
subsidiaries, investment income and borrowings. Federal laws
limit the amount of dividends or other capital distributions
that the Bank may pay us. The Bank has an internal policy to
remain well-capitalized under OTS capital adequacy
regulations (discussed immediately above). Accordingly, the Bank
does not currently expect to pay dividends to the Company if
such payment would result in the Bank not being well
capitalized. In addition, the Bank must file a notice with the
OTS at least 30 days before it may pay a dividend to the
Company.
FDIC Assessment. The FDIC insures the
deposits of the Bank and such insurance is backed by the full
faith and credit of the United States government. Through
March 31, 2006, the FDIC administered two separate deposit
insurance funds, the Bank Insurance Fund (the BIF)
and the Savings Association Insurance Fund (the
SAIF). The SAIF was the deposit insurance fund for
most savings associations, including the Bank. In February 2006,
President Bush signed into law the Federal Deposit Insurance
Reform Conforming Amendments Act of 2005, which among other
things allowed for the merger of the BIF and the SAIF to form
the DIF. Under FDIC guidelines issued in November 2006, the
Banks premiums would increase, as would those of other
banks, to increase the capitalization of the DIF. For 2007, the
assessment is currently expected to increase to approximately
$5.0 million, before any credits, as compared to
$1.1 million in 2006.
If the Bank were to fail, claims for administrative expenses of
the receiver and for deposits in all of our branches (including
claims of the FDIC as subrogee) would have priority over the
claims of general unsecured creditors and shareholders.
Affiliate Transaction Restrictions. The Bank
is subject to the affiliate and insider transaction rules
applicable to member banks of the Federal Reserve System as well
as additional limitations imposed by the OTS. These provisions
prohibit or limit a banking institution from extending credit
to, or entering into certain transactions with, affiliates,
principal stockholders, directors and executive officers of the
banking institution and its affiliates.
Federal Reserve, Consumer and Other
Regulation. Numerous regulations promulgated by the
Federal Reserve affect the business operations of the Bank.
These include regulations relating to equal credit opportunity,
electronic fund transfers, collection of checks, truth in
lending, truth in savings and availability of funds.
Under Federal Reserve Board regulations, the Bank is required to
maintain a reserve against its transaction accounts (primarily
interest-bearing and non-interest-bearing checking accounts).
Because reserves must generally be maintained in cash or in
non-interest-bearing accounts, the effect of the reserve
requirements is to increase the Banks cost of funds.
The federal Gramm-Leach-Bliley Act includes provisions that
protect consumers from the unauthorized transfer and use of
their nonpublic personal information by financial institutions.
In addition, states are permitted under the Gramm-Leach-Bliley
Act to have their own privacy laws, which may offer greater
protection to consumers than the Gramm-Leach-Bliley Act.
Numerous states in which we do business have enacted such laws.
The USA PATRIOT Act, which was enacted following the events of
September 11, 2001, includes numerous provisions designed
to detect and prevent international money laundering and to
block terrorist access to the U.S. financial system. We
have established policies and procedures intended to fully
comply with the USA PATRIOT Acts provisions, as well as
other aspects of anti-money laundering legislation and the Bank
Secrecy Act.
Consumer Protection Laws and
Regulations. Examination and enforcement by bank
regulatory agencies for non-compliance with consumer protection
laws and their implementing regulations have become more intense
in nature. The Bank is subject to many federal consumer
protection statutes and regulations, some of which are discussed
below.
Federal regulations requires extra disclosures and consumer
protections to borrowers for certain lending practices. The term
predatory lending, much like the terms safety
and soundness and, unfair and deceptive
practices, is far-reaching and covers a potentially broad
range of behavior. As such, it does not lend
10
itself to a concise or a comprehensive definition. Predatory
lending typically involves at least one, and perhaps all three,
of the following elements:
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Making unaffordable loans based on the assets of the borrower
rather than on the borrowers ability to repay an
obligation (asset-based lending);
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Inducing a borrower to refinance a loan repeatedly in order to
charge high points and fees each time the loan is refinanced
(loan flipping); and/or
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Engaging in fraud or deception to conceal the true nature of the
loan obligation from an unsuspecting or unsophisticated borrower.
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Privacy policies are required by federal banking regulations
which limit the ability of banks and other financial
institutions to disclose non-public information about consumers
to nonaffiliated third parties. Pursuant to those rules,
financial institutions must provide:
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Initial notices to customers about their privacy policies,
describing the conditions under which they may disclose
nonpublic personal information to nonaffiliated third parties
and affiliates;
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Annual notices of their privacy policies to current
customers; and
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A reasonable method for customers to opt out of
disclosures to nonaffiliated third parties.
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These privacy protections affect how consumer information is
transmitted through diversified financial companies and conveyed
to outside vendors.
The Fair Credit Reporting Act, as amended by the Fair and
Accurate Credit Transactions Act, or FACT Act, requires
financial firms to help deter identity theft, including
developing appropriate fraud response programs, and gives
consumers more control of their credit data. It also
reauthorizes a federal ban on state laws that interfere with
corporate credit granting and marketing practices. In connection
with FACT Act, financial institution regulatory agencies
proposed rules that would prohibit an institution from using
certain information about a consumer it received from an
affiliate to make a solicitation to the consumer, unless the
consumer has been notified and given a chance to opt out of such
solicitations. A consumers election to opt out would be
applicable for at least five years.
The Check Clearing for the
21st Century
Act, or Check 21, facilitates check truncation and
electronic check exchange by authorizing a new negotiable
instrument called a substitute check, which is the
legal equivalent of an original check. Check 21 does not require
banks to create substitute checks or accept checks
electronically; however, it does require banks to accept a
legally equivalent substitute check in place of an original. In
addition to its issuance of regulations governing substitute
checks, the Federal Reserve has issued final rules governing the
treatment of remotely created checks (sometimes referred to as
demand drafts) and electronic check conversion
transactions (involving checks that are converted to electronic
transactions by merchants and other payees).
The Equal Credit Opportunity Act, or ECOA, generally prohibits
discrimination in any credit transaction, whether for consumer
or business purposes, on the basis of race, color, religion,
national origin, sex, marital status, age (except in limited
circumstances), receipt of income from public assistance
programs, or good faith exercise of any rights under the
Consumer Credit Protection Act.
The Truth in Lending Act, or TILA, is designed to ensure that
credit terms are disclosed in a meaningful way so that consumers
may compare credit terms more readily and knowledgeably. As a
result of the TILA, all creditors must use the same credit
terminology to express rates and payments, including the annual
percentage rate, the finance charge, the amount financed, the
total of payments and the payment schedule, among other things.
The Fair Housing Act, or FH Act, regulates many practices,
including making it unlawful for any lender to discriminate in
its housing-related lending activities against any person
because of race, color, religion, national origin, sex, handicap
or familial status. A number of lending practices have been
found by the courts
11
to be, or may be considered illegal under the FH Act, including
some that are not specifically mentioned in the FH Act itself.
The Home Mortgage Disclosure Act, or HMDA, grew out of public
concern over credit shortages in certain urban neighborhoods and
provides public information that will help show whether
financial institutions are serving the housing credit needs of
the neighborhoods and communities in which they are located. The
HMDA also includes a fair lending aspect that
requires the collection and disclosure of data about applicant
and borrower characteristics as a way of identifying possible
discriminatory lending patterns and enforcing
anti-discrimination statutes. In 2004, the Federal Reserve Board
amended regulations issued under HMDA to require the reporting
of certain pricing data with respect to higher-priced mortgage
loans. This expanded reporting is being reviewed by federal
banking agencies and others from a fair lending perspective.
The Real Estate Settlement Procedures Act, or RESPA, requires
lenders to provide borrowers with disclosures regarding the
nature and cost of real estate settlements. Also, RESPA
prohibits certain abusive practices, such as kickbacks, and
places limitations on the amount of escrow accounts.
Penalties under the above laws may include fines, reimbursements
and other penalties. Due to heightened regulatory concern
related to compliance with the FACT Act, ECOA, TILA, FH Act,
HMDA and RESPA generally, the Bank may incur additional
compliance costs or be required to expend additional funds for
investments in its local community.
Community Reinvestment Act. The Community
Reinvestment Act (CRA) requires the Bank to
ascertain and help meet the credit needs of the communities it
serves, including low- to moderate-income neighborhoods, while
maintaining safe and sound banking practices. The primary
federal regulatory agency assigns one of four possible ratings
to an institutions CRA performance and is required to make
public an institutions rating and written evaluation. The
four possible ratings of meeting community credit needs are
outstanding, satisfactory, needs to improve and substantial
noncompliance. In 2006, the Bank received an
outstanding CRA rating from the OTS.
Regulatory Enforcement. The OTS and the FDIC
may take regulatory enforcement actions against any of their
regulated institutions that do not operate in accordance with
applicable regulations, policies and directives. Proceedings may
be instituted against any banking institution, or any
institution-affiliated party, such as a director,
officer, employee, agent or controlling person, who engages in
unsafe and unsound practices, including violations of applicable
laws and regulations. Both the OTS and the FDIC have authority
under various circumstances to appoint a receiver or conservator
for an insured institution that it regulates to issue cease and
desist orders, to obtain injunctions restraining or prohibiting
unsafe or unsound practices, to revalue assets and to require
the establishment of reserves. The FDIC has additional authority
to terminate insurance of accounts, after notice and hearing,
upon a finding that the insured institution is or has engaged in
any unsafe or unsound practice that has not been corrected, is
operating in an unsafe or unsound condition or has violated any
applicable law, regulation, rule, or order of, or condition
imposed by, the FDIC.
Environmental
Regulation
Our business and properties are subject to federal and state
laws and regulations governing environmental matters, including
the regulation of hazardous substances and wastes. For example,
under the federal Comprehensive Environmental Response,
Compensation, and Liability Act and similar state laws, owners
and operators of contaminated properties may be liable for the
costs of cleaning up hazardous substances without regard to
whether such persons actually caused the contamination. Such
laws may affect us both as an owner or former owner of
properties used in or held for our business, and as a secured
lender on property that is found to contain hazardous substances
or wastes. If we foreclose on a defaulted mortgage loan to
recover our investment in such mortgage loan, we may be subject
to environmental liabilities in connection with the underlying
real property. We may also have to pay for the entire cost of
any removal and clean up without the contribution of any other
third parties. These liabilities and costs could exceed the fair
value of the real property and may make the property impossible
to sell. Our general policy is to obtain an environmental
assessment prior to foreclosing on commercial property. We may
elect not to foreclose on properties that
12
contain such hazardous substances or wastes, thereby limiting,
and in some instances precluding, the liquidation of such
properties.
Competition
We face substantial competition in attracting deposits and
making loans. Our most direct competition for deposits has
historically come from other savings institutions, commercial
banks and credit unions in our local market areas. Money market
funds and full-service securities brokerage firms also compete
with us for deposits. We compete for deposits by offering high
quality and convenient banking services at a large number of
convenient locations, including longer banking hours and
sit-down banking in which a customer is served at a
desk rather than in a teller line. We also compete by offering
competitive interest rates on our deposit products.
From a lending perspective, there are a large number of
institutions offering mortgage loans, consumer loans and
commercial loans, including many mortgage lenders that operate
on a national scale, as well as local savings institutions,
commercial banks, and other lenders. We compete by offering
competitive interest rates, fees and other loan terms and by
offering efficient and rapid service.
Additional
information
Our executive offices are located at 5151 Corporate Drive, Troy,
Michigan 48098, and our telephone number is
(248) 312-2000.
Our stock is traded on the New York Stock Exchange under the
symbol FBC.
We make our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act available free
of charge on our website at www.flagstar.com as soon as
reasonably practicable after we electronically file such
material with the Securities and Exchange Commission. These
reports are also available without charge on the SEC website, at
www.sec.gov.
Our financial condition and results of operations may be
adversely affected by various factors, many of which are beyond
our control. These risk factors include the following:
General
business, economic and political conditions may significantly
affect our earnings.
Our business and earnings are sensitive to general business and
economic conditions in the United States. These conditions
include short-term and long-term interest rates, inflation,
recession, unemployment, real estate values, fluctuations in
both debt and equity capital markets, the value of the
U.S. dollar as compared to foreign currencies, and the
strength of the U.S. economy, as well as the local
economies in which we conduct business. If any of these
conditions worsen, our business and earnings could be adversely
affected. For example, business and economic conditions that
negatively impact household incomes could decrease the demand
for our home loans and increase the number of customers who
become delinquent or default on their loans; or, a rising
interest rate environment could decrease the demand for loans.
In addition, our business and earnings are significantly
affected by the fiscal and monetary policies of the federal
government and its agencies. We are particularly affected by the
policies of the Federal Reserve, which regulates the supply of
money and credit in the United States. The Federal
Reserves policies influence the size of the mortgage
origination market, which significantly impacts the earnings of
our mortgage lending operation and the value of our investment
in MSRs and other retained interests. The Federal Reserves
policies also influence the yield on our interest-earning assets
and the cost of our interest-bearing liabilities. Changes in
those policies are beyond our control and difficult to predict
and could have a material adverse effect on our business,
results of operations and financial condition.
13
If we
cannot effectively manage the impact of the volatility of
interest rates, our earnings could be adversely
affected.
Our main objective in managing interest rate risk is to maximize
the benefit and minimize the adverse effect of changes in
interest rates on our earnings over an extended period of time.
In managing these risks, we look at, among other things, yield
curves and hedging strategies. As such, our interest rate risk
management strategies may result in significant earnings
volatility in the short term because the market value of our
assets and related hedges may be significantly impacted either
positively or negatively by unanticipated variations in interest
rates.
Our profitability depends in substantial part on our net
interest margin, which is the difference between the rates we
receive on loans made to others and investments and the rates we
pay for deposits and other sources of funds. Our profitability
also depends in substantial part on the volume of loan
originations and the related fees received in our mortgage
banking operations. Our net interest margin and our volume of
mortgage originations will depend on many factors that are
partly or entirely outside our control, including competition,
federal economic, monetary and fiscal policies, and economic
conditions generally. Historically, net interest margin and the
mortgage origination volumes for the Bank and for other
financial institutions have widened and narrowed in response to
these and other factors. Our goal has been to structure our
asset and liability management strategies to maximize the
benefit of changes in market interest rate on our net interest
margin and revenues related to mortgage origination volume.
However, we can not give any assurance that a sudden or
significant change in prevailing interest rates will not have a
material adverse effect on our operating results.
Since June 30, 2004, the U.S. Federal Reserve has
increased short-term interest rates significantly, while
long-term rates have increased more moderately, resulting in a
flattened and then inverted yield curve. Our profitability
levels on loan sales have been adversely affected by the rapidly
rising interest rate environment. We manage the strategic
interest rate risk in our home lending operation primarily
through the natural counterbalance of our loan production and
servicing operations. Increasing interest rates may decrease our
mortgage loan originations and sales. Generally, the volume of
mortgage loan originations is inversely related to the level of
long-term interest rates. During periods of low interest rates,
a significant number of our customers may elect to refinance
their mortgages (i.e., pay off their existing higher rate
mortgage loans with new mortgage loans obtained at lower
interest rates). Our profitability levels and those of others in
the mortgage banking industry have generally been strongest
during periods of low
and/or
declining interest rates, as we have historically been able to
sell the resulting increased volume of loans into the secondary
market at a gain. We have also benefited from periods of wide
spreads between short and long term interest rates. If interest
rates rise after we fix a price for a loan or commitment but
before we close or sell such loan, the value of the loan will
decrease and the amount we receive from selling the loan may be
less than its cost to originate.
When interest rates fluctuate, repricing risks arise from the
timing difference in the maturity
and/or
repricing of assets, liabilities and off-balance sheet
positions. While such repricing mismatches are fundamental to
our business, they can expose us to fluctuations in income and
economic value as interest rates vary. Our interest rate risk
management strategies do not completely eliminate repricing
risk. A significant amount of our deposit liabilities are
higher-priced jumbo accounts which we attribute to the current
highly competitive market for deposits and, in part, to our
practice of using attractive deposit rates when we open new
banking centers in new markets. These account holders are more
sensitive to the interest rate paid on their account than most
depositors. There is no guarantee that in a changing rate
environment we will be able to retain all of these
depositors accounts. We also call on local municipal
agencies as another source for deposit funding. While a valuable
source of liquidity, we believe that municipal deposits are
usually extremely rate sensitive and, therefore, prone to
withdrawal if higher interest rates are offered elsewhere.
Because of the interest rate sensitivity of these depositors,
there is no guarantee that in a changing rate environment we
will be able to retain all funds in these accounts.
Changes in interest rates may cause a mismatch in our mortgage
origination flow of loans, or pipeline and adversely
affect our profitability. In our mortgage banking operation, we
are exposed to interest rate risk
14
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 estimate the percentage of mortgage loans we
expect to sell for delivery at a future date. The amount of
loans that we commit to sell is based in part on our expectation
of the pull-through percentage, which is the ratio of mortgage
loans closed divided by the number of mortgage loans on which we
have issued binding commitments (and thereby locked in the
interest rate) but have not yet closed (pipeline
loans) . 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 commitments
to fund mortgage loans and commitments to sell mortgage loans
may have an adverse effect on the results of operations in any
such period. For instance, we may not have made commitments to
sell these additional pipeline loans and therefore may incur
significant losses upon their sale if the market rate of
interest is higher than the mortgage interest rate to which we
committed on such additional pipeline loans. Alternatively, we
may have made commitments to sell more loans than actually
closed or at prices that are no longer profitable to us. Our
profitability may be adversely affected to the extent our
economic hedging strategy for pipeline loans is not effective.
Our
allowance for possible loan losses may be
insufficient.
We maintain an allowance for possible loan losses, which is a
reserve established through a provision for possible loan losses
charged to expense, that represents managements best
estimate of probable losses that have been incurred within the
existing portfolio of loans. The allowance, in the judgment of
management, is necessary to reserve for estimated loan losses
and risks inherent in the loan portfolio. The level of the
allowance reflects managements continuing evaluation of
industry concentrations; specific credit risks; loan loss
experience; current loan portfolio quality; present economic,
political and regulatory conditions and unidentified losses
inherent in the current loan portfolio. The determination of the
appropriate level of the allowance for possible loan losses
inherently involves a high degree of subjectivity and requires
us to make significant estimates of current credit risks and
future trends, all of which may undergo material changes.
Changes in economic conditions affecting borrowers, new
information regarding existing loans, identification of
additional problem loans and other factors, both within and
outside our control, may require an increase in the allowance
for possible loan losses. In addition, bank regulatory agencies
periodically review our allowance for loan losses and may
require an increase in the provision for possible loan losses or
the recognition of further loan charge-offs, based on judgments
different than those of management. In addition, if charge-offs
in future periods exceed the allowance for possible loan losses
we will need additional provisions to increase the allowance for
possible loan losses. Any increases in the allowance for
possible loan losses will result in a decrease in net earnings
and, possibly, capital, and may have a material adverse effect
on our financial condition and results of operations.
Our
secondary market reserve for losses on repurchased loans could
be insufficient.
We currently maintain a secondary market reserve, which is a
liability on our statement of financial condition, to reflect
our best estimate of expected losses that we have incurred on
loans that we have sold or securitized into the secondary market
and must subsequently repurchase or with respect to which we
must indemnify the purchasers because of violations of customary
representations and warranties. Increases to this reserve for
current loan sales reduce our net gain on loan sales, with
adjustments to our previous estimates recorded as an increase or
decrease to our other fees and charges. The level of the reserve
reflects managements continuing evaluation of loss
experience on repurchased loans, recovery history, and present
economic conditions, among other things. The determination of
the appropriate level of the secondary market reserve inherently
involves a high degree of subjectivity and requires us to make
significant estimates of repurchase risks and expected losses.
Both the assumptions and estimates used could change materially,
resulting in a level of reserve that is less than actual losses.
Further, our bank regulators periodically review us and may, in
their discretion and based on their own judgment, which may
differ from that of management, require us to increase the
amount of the reserve through additional provisions. Such
increases will result in a reduction in net earnings and could
have an adverse effect on our statement of financial condition
and results of operations.
15
The
value of our mortgage servicing rights varies with changes in
interest rates.
The market value of, and earnings from, our mortgage loan
servicing portfolio may be adversely affected by declines in
interest rates. When mortgage rates rise we would generally
expect payoffs in our servicing portfolio to decline, which
increases the fair value of our MSR. When mortgage interest
rates decline mortgage loan prepayments tend to increase as
customers refinance their loans. When this happens, the income
stream from our current mortgage loan servicing portfolio may
decline. In that case, we may be required to amortize the
portfolio over a shorter period of time or reduce the carrying
value of our mortgage loan servicing portfolio.
Our
home lending profitability could be significantly reduced if we
are not able to resell mortgages.
Currently, we sell a substantial portion of the mortgage loans
we originate. The profitability of our mortgage banking
operations depends in large part upon our ability to aggregate a
high volume of loans and to sell them in the secondary market at
a gain. Thus, we are dependent upon (1) the existence of an
active secondary market and (2) our ability to profitably
sell loans or securities into that market.
Our ability to sell mortgage loans readily is dependent upon the
availability of an active secondary market for single-family
mortgage loans, which in turn depends in part upon the
continuation of programs currently offered by Fannie Mae,
Freddie Mac, Ginnie Mae and other institutional and
non-institutional investors. These entities account for a
substantial portion of the secondary market in residential
mortgage loans. Some of the largest participants in the
secondary market, including Fannie Mae, Freddie Mac and Ginnie
Mae, are government-sponsored enterprises whose activities are
governed by federal law. Any future changes in laws that
significantly affect the activity of such government-sponsored
enterprises could, in turn, adversely affect our operations.
In addition, our ability to sell mortgage loans readily is
dependent upon our ability to remain eligible for the programs
offered by Fannie Mae, Freddie Mac, Ginnie Mae and other
institutional and non-institutional investors. We expect to
remain eligible to participate in such programs but any
significant impairment of our eligibility could materially and
adversely affect our operations. Further, the criteria for loans
to be accepted under such programs may be changed from time to
time by the sponsoring entity. The profitability of
participating in specific programs may vary depending on a
number of factors, including our administrative costs of
originating and purchasing qualifying loans.
There
are increased risks involved with commercial real estate and
commercial business lending activities.
In recent years, we have emphasized the origination of
commercial real estate and commercial business loans. At
December 31, 2006, our balance of commercial loans was
$1.3 billion, which was 14.7% of loans held for investment
and 8.4% of total assets. Loans collateralized by commercial
real estate generally involve a greater degree of credit risk
than single-family residential mortgage loans and carry larger
loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited
number of loans and borrowers, the effects of general economic
conditions on income-producing properties, and the greater
difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans collateralized by commercial
real estate is typically dependent upon the successful operation
of the related real estate property. If the cash flow from the
project is reduced, the borrowers ability to repay the
loan may be impaired. Other commercial business loans generally
have a greater credit risk than residential mortgage loans as
well. Conversely residential mortgage loans are generally made
on the basis of the borrowers ability to make repayment
from his or her employment or other income, and are secured by
real property whose value tends to be more easily ascertainable.
As a result, the availability of funds for the repayment of
commercial business loans may depend substantially on the
success of the business itself. Further, any collateral securing
the loans may depreciate over time, may be difficult to appraise
and may fluctuate in value.
16
We
have substantial risks in connection with securitizations and
loan sales.
Securitization and loan sale transactions comprise a significant
source of our overall funding. Our sales channels include whole
loan sales, sales to government-sponsored enterprises and sales
through private-label securitizations. Private-label
securitizations, sponsored by us, involve transfers of loans to
off-balance sheet qualifying special purpose entities who in
turn issue securities to third parties. Residuals, which are
retained interests created in a mortgage loan securitization,
typically represent the first loss position and are not
typically rated by a nationally recognized rating agency. If we
hold the residuals, we are at risk for the initial losses that
might occur with these securitizations.
In a securitization transaction, we may recognize a gain on sale
resulting from related residuals
and/or
servicing rights in the securitized pool of loans when we sell
or securitize the assets. The values assigned to the residuals
and/or
servicing assets depends upon certain assumptions that we make
about the future performance of the securitized loan portfolio,
including the level of credit losses and the rate of
prepayments. If actual credit losses or prepayment rates differ
from the original assumptions, the value of the residuals
and/or
servicing assets may decrease materially, possibly resulting in
a charge against earnings. The value of the residuals
and/or
servicing assets may also decrease materially as a result of
changes in market interest rates.
Changes in the volume of assets securitized or sold due to our
inability to access the asset-backed securitization markets or
other funding sources could have a material adverse effect on
our business, financial condition and results of operations.
Decreases in the value of the residuals
and/or
servicing assets in securitizations that we have completed due
to market interest rate fluctuations or higher than expected
credit losses on prepayments also could have a material adverse
effect on our business, financial condition and results of
operations.
In addition, we retain limited contractual exposure from the
sale of mortgage loans. We make standard representations and
warranties to the transferee in connection with all such
dispositions. These representations and warranties do not insure
the transferee against credit risk associated with the
transferred loans, but if individual mortgage loans are found
not to have complied with the associated representations and
warranties, we may be required to repurchase the loans from the
transferee or to indemnify the transferee against any losses on
the loans. We have established a secondary market reserve for
losses that arise in connection with representations and
warranties for loans sold.
Our
ability to borrow funds and raise capital could be limited,
which could adversely affect our earnings.
Our ability to make mortgage loans depends largely on our
ability to secure funds on terms acceptable to us. Our primary
sources of funds to meet our financing needs include loan sales
and securitizations, deposits, borrowings from the FHLB,
borrowings from investment and commercial banks through
repurchase agreements, and capital-raising activities. Our
ability to maintain borrowing facilities is subject to renewal
of these facilities. If we are unable to renew any of these
financing arrangements or arrange for new financing on terms
acceptable to us, or if we default on any of the restrictions
imposed upon us by our borrowing facilities, then we may have to
reduce the number of loans we are able to originate for sale in
the secondary market or for our own investment. A sudden and
significant reduction in loan originations that occurs as a
result could adversely impact our earnings. There is no
guarantee that we will be able to adequately access capital
markets when or if a need for additional capital arises.
Certain
changes in the economy could effect our financial, funding, and
liquidity risks.
Management of liquidity and related risks is a key function for
our business. Our funding requirements currently are met
principally by deposits, financing from the FHLB and other
financial institutions, and financing using capital markets. In
general, the costs of our funding directly impact our costs of
doing business and, therefore, can positively or negatively
affect our financial results.
A number of factors could make such funding more difficult, more
expensive, or unavailable on affordable terms, including, but
not limited to, our financial results, organizational changes,
adverse impacts on our reputation, changes in the activities of
our business partners, disruptions in the capital markets,
specific events that adversely impact the financial services
industry, counterparty availability, changes affecting our loan
portfolio or other assets, changes affecting our corporate and
regulatory structure, interest rate
17
fluctuations, ratings agency actions, general economic
conditions, and the legal, regulatory, accounting and tax
environments governing our funding transactions. In addition,
our ability to raise funds is strongly affected by the general
state of the U.S. and world economies and financial markets, and
may become increasingly difficult due to economic and other
factors.
Regulatory laws or rules that establish minimum capital levels,
regulate deposit insurance, and govern related funding matters
for banks could be changed in a manner that could increase our
overall cost of capital and thus reduce our earnings.
We may
not be able to replace key members of senior management or
attract and retain qualified relationship managers in the
future.
We depend on the services of existing senior management to carry
out our business and investment strategies. As we expand and as
we continue to refine our business model, we will need to
continue to attract and retain additional senior management and
to recruit qualified individuals to succeed existing key
personnel that leave our employ. In addition, as we continue to
grow our business and plan to continue to expand our locations,
products and services, we will need to continue to attract and
retain qualified banking personnel. Competition for such
personnel is especially keen in our geographic market areas and
competition for the best people in most businesses in which we
engage can be intense. If we are unable to attract and retain
talented people our business could suffer. The loss of the
services of any senior management personnel, or the inability to
recruit and retain qualified personnel in the future, could have
an adverse effect on our results of operations, financial
conditions and prospects.
The
network and computer systems on which we depend could fail or
experience a security breach.
Our computer systems could be vulnerable to unforeseen problems.
Because we conduct part of our business over the Internet and
outsource several critical functions to third parties,
operations will depend on the ability, as well as that of
third-party service providers, to protect computer systems and
network infrastructure against damage from fire, power loss,
telecommunications failure, physical break-ins or similar
catastrophic events. Any damage or failure that causes
interruptions in operations could have a material adverse effect
on our business, financial condition and results of operations.
In addition, a significant barrier to online financial
transactions is the secure transmission of confidential
information over public networks. Our Internet banking system
relies on encryption and authentication technology to provide
the security and authentication necessary to effect secure
transmission of confidential information. Advances in computer
capabilities, new discoveries in the field of cryptography or
other developments could result in a compromise or breach of the
algorithms our third-party service providers use to protect
customer transaction data. If any such compromise of security
were to occur, it could have a material adverse effect on our
business, financial condition and results of operations.
Market acceptance of Internet banking depends substantially on
widespread adoption of the Internet for general commercial and
financial services transactions. If another provider of
commercial services through the Internet were to suffer damage
from physical break-in, security breach or other disruptive
problems caused by the Internet or other users, the growth and
public acceptance of the Internet for commercial transactions
could suffer. This type of event could deter our potential
customers or cause customers to leave us and thereby materially
and adversely affect our business, financial condition and
results of operations.
Our
business is highly regulated.
The banking industry in general is extensively regulated at the
federal and state levels. Insured depository institutions and
their holding companies are subject to comprehensive regulation
and supervision by financial regulatory authorities covering all
aspects of their organization, management and operations. The
OTS is the primary regulator of the Bank and its affiliated
entities. In addition to its regulatory powers, the OTS also has
significant enforcement authority that it can use to address
unsafe and unsound banking practices, violations of laws, and
capital and operational deficiencies. Such regulation and
supervision are intended primarily for the protection of the
insurance fund and for our depositors and borrowers, and are not
intended to protect the interests of investors in our common
stock. Further, the Banks business is affected by consumer
protection
18
laws and regulation at the state and federal level, including a
variety of consumer protection provisions, many of which provide
for a private right of action and pose a risk of class action
lawsuits. Accordingly, the actions of governmental authorities
responsible for regulatory, fiscal and monetary affairs can have
a significant and immediate impact on the activities of
financial services firms such as ours. See further information
in Item 1. Business Regulation and
Supervision.
Our
business has volatile earnings because it operates based on a
multi-year cycle.
The home lending segment of our business is a cyclical business
that generally performs better in a low interest rate
environment with a yield curve that is lower at the shorter time
frames and higher at the longer time frames. In addition, other
external factors, including tax laws, the strength of various
segments of the economy and demographics of our lending markets,
could influence the level of demand for mortgage loans. Gain on
sale of loans is a large component of our revenue and would be
adversely impacted by a significant decrease in the volume of
our mortgage loan originations.
Geographic
concentrations pose a higher risk of loan losses.
A significant portion of our mortgage loan portfolio is
geographically concentrated in certain states, including
California, Michigan, Florida, Washington, Colorado, Texas and
Arizona, which collectively represent approximately 65.4% of our
mortgage loans held for investment balance at December 31,
2006. In addition, 76.9% of our commercial real estate loans are
in Michigan. Any adverse economic conditions in these markets
could cause the number of loans originated to decrease, likely
resulting in a corresponding decline in revenues and an increase
in credit risk. Also, we could be adversely affected by business
disruptions triggered by natural disasters, or acts of war or
terrorism.
A
large percentage of our loans are collateralized by real estate,
and an adverse change in the real estate market may result in
losses and adversely affect our portfolio.
Approximately 79.7% or our investment loan portfolio as of
December 31, 2006, was comprised of loans collateralized by
real estate. The collateral in each case provides an alternate
source of repayment if the borrower defaults and may deteriorate
in value during the time the credit is extended. An adverse
change in the economy affecting real estate values generally or
in our primary markets specifically could significantly impair
the value of our collateral and our ability to sell the
collateral upon foreclosure. In the event of a default with
respect to any of these loans, amounts received upon sale of the
collateral may be insufficient to recover outstanding principal
and interest on the loan. As a result, our profitability could
be negatively impacted by an adverse change in the real estate
market.
A
significant part of our business strategy involves adding new
branch locations, and our failure to grow may adversely affect
our business, prospects, results of operations and financial
condition.
Our expansion strategy consists principally of adding new branch
locations in Michigan, Indiana and Georgia growth areas that
complement our existing branch network. While we anticipate that
this expansion strategy will enhance long-term shareholder
value, it is possible that our branch expansion strategy may not
become accretive to our earnings over the short term. New
branches generally require a significant initial capital
investment and take several years to become profitable. New
branches require a significant upfront investment for land and
building expenses. Accordingly, we anticipate that, in the short
term, net income will be negatively affected as we incur
significant capital expenditures and noninterest expense in
opening and operating new branches before the new branches can
produce sufficient net interest income to offset the increased
expense. In addition, the need to use capital to fund de novo
branching may limit our ability to pay or increase dividends on
our common stock. There also is implementation risk associated
with new branches. Numerous factors will determine whether our
branch expansion strategy will be successful, such as our
ability to select suitable branch locations, real estate
acquisition costs, competition, interest rates, managerial
resources, our ability to hire and retain qualified personnel,
the effectiveness of our marketing strategy and our ability to
attract deposits.
19
The
state income tax structure in Michigan or other states could
change significantly causing a reduction in our
profitability.
A significant portion of our business is conducted in Michigan
and we are likely to continue to have a significant portion of
our business in Michigan. During 2006, the Michigan legislature
repealed the single business tax that served as a significant
source of revenue for the state. It is currently unknown as to
what type of taxing structure will replace Michigans
single business tax. As such, should the replacement to the
single business tax be less favorable to companies like ours,
our profitability could be adversely impacted. Similarly, the
taxing structure or the interpretation of other state regulation
concerning tax could change in a manner that would be less
favorable to us and therefore adversely impact our profitability.
We are
subject to heightened regulatory scrutiny with respect to bank
secrecy and anti-money laundering statutes and
regulations.
Recently, regulators have intensified their focus on the USA
PATRIOT Acts anti-money laundering and Bank Secrecy Act
compliance requirements. There is also increased scrutiny of our
compliance with the rules enforced by the Office of Foreign
Assets Control. In order to comply with regulations, guidelines
and examination procedures in this area, we have been required
to adopt new policies and procedures and to install new systems.
We can not be certain that the policies, procedures and systems
we have in place are flawless. Therefore, there is no assurance
that in every instance we are in full compliance with these
requirements.
Other
Risk Factors.
The above description of risk factors is not exhaustive. Other
risk factors are described elsewhere herein as well as in other
reports and documents that we file with or furnish to the SEC.
Other factors that could also cause results to differ from our
expectations may not be described in any such report or
document. Each of these factors could by itself, or together
with one or more other factors, adversely affect our business,
results of operations
and/or
financial condition.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
At December 31, 2006, we operated from the headquarters in
Troy, Michigan, a regional office in Jackson, Michigan, and a
regional office in Atlanta, Georgia, 151 banking centers in
Michigan, Indiana and Georgia and 76 home lending centers in
20 states. We also maintain 12 wholesale lending offices.
Our banking centers consist of 76 free-standing office
buildings, 41 in-store banking centers and 35 centers in
buildings in which there are other tenants, typically strip
malls and similar retail centers.
We own the buildings and land for 75 of our offices, own the
building but lease the land for one of our offices, and lease
the remaining 163 offices. The offices that we lease have lease
expiration dates ranging from 2007 to 2017.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
From time to time, we are party to legal proceedings incident to
our business. However, at December 31, 2006, there were no
legal proceedings that we anticipate will have a material
adverse effect on us. See Notes 3 and 21 of the Notes to
Consolidated Financial Statements in Item 8. Financial
Statements and Supplementary Data.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No items were submitted during the fourth quarter of the year
covered by this Report to be voted on by security holders
through a solicitation of proxies or otherwise.
20
PART II
|
|
ITEM 5.
|
MARKET
FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our common stock trades on the New York Stock Exchange under the
trading symbol FBC. At December 31, 2006, there were
63,604,590 shares of our common stock outstanding held by
approximately 18,300 shareholders of record.
Dividends
The following table shows the high and low closing prices for
the Companys common stock during each calendar quarter
during 2006 and 2005, and the cash dividends per common share
declared during each such calendar quarter. We declare dividends
on our common stock on a quarterly basis and currently expect to
continue to do so. However, the amount of and nature of any
dividends declared on our common stock in the future will be
determined by our Board of Directors in their sole discretion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
Highest
|
|
|
Lowest
|
|
|
Declared
|
|
|
|
Closing
|
|
|
Closing
|
|
|
In the
|
|
Quarter Ending
|
|
Price
|
|
|
Price
|
|
|
Period
|
|
|
|
|
December 31, 2006
|
|
$
|
15.46
|
|
|
$
|
14.31
|
|
|
$
|
0.15
|
|
September 30, 2006
|
|
$
|
16.29
|
|
|
$
|
14.01
|
|
|
$
|
0.15
|
|
June 30, 2006
|
|
$
|
16.96
|
|
|
$
|
14.67
|
|
|
$
|
0.15
|
|
March 31, 2006
|
|
$
|
15.60
|
|
|
$
|
14.08
|
|
|
$
|
0.15
|
|
December 31, 2005
|
|
$
|
16.07
|
|
|
$
|
12.69
|
|
|
$
|
0.15
|
|
September 30, 2005
|
|
$
|
19.26
|
|
|
$
|
16.00
|
|
|
$
|
0.25
|
|
June 30, 2005
|
|
$
|
20.39
|
|
|
$
|
18.10
|
|
|
$
|
0.25
|
|
March 31, 2005
|
|
$
|
22.69
|
|
|
$
|
19.18
|
|
|
$
|
0.25
|
|
Equity
Compensation Plan Information
The following table sets forth certain information with respect
to securities to be issued under the Companys equity
compensation plans as of December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Number of Securities
|
|
|
|
Securities to Be
|
|
|
Weighted-Average
|
|
|
Remaining Available
|
|
|
|
Issued Upon
|
|
|
Exercise Price of
|
|
|
for Future Issuance
|
|
|
|
Exercise of
|
|
|
Outstanding
|
|
|
Under Equity
|
|
Plan Category
|
|
Outstanding Options
|
|
|
Options
|
|
|
Compensation Plans
|
|
|
|
|
Equity Compensation Plans approved
by security holders(1)
|
|
|
3,029,737
|
|
|
$
|
13.79
|
|
|
|
5,289,094
|
|
|
|
|
|
|
|
Total
|
|
|
3,029,737
|
|
|
$
|
13.79
|
|
|
|
5,289,094
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of our 2006 Equity Incentive Plan, which provides for
the granting of stock options, incentive stock options,
cash-settled stock appreciation rights, restricted stock units,
performance shares and performance units and other awards. The
2006 Equity Incentive Plan consolidated, merged, amended and
restated our 1997 Employees and Directors Stock Option Plan,
2000 Stock Incentive Plan, and 1997 Incentive Compensation Plan.
Awards still outstanding under any of the prior plans will
continue to be governed by their respective terms. Under the
2006 Equity Incentive Plan, the exercise price of any option
granted must be at least equal to the fair value of our common
stock on the date of grant. Non-qualified stock options granted
to directors expire five years from the date of grant. Grants
other than non-qualified stock options have term limits set by
the board of directors in the applicable agreement. Stock
appreciation rights expire seven years from the date of grant.
All securities remaining for future issuance represent option
and stock awards available for award under the 2006 Equity
Incentive Plan. |
21
Sale of
Unregistered Securities
The Company made no unregistered sales of its common stock
during the quarter ended December 31, 2006.
Issuer
Purchases of Equity Securities
The following table shows shares of our common stock that we
purchased in the fourth quarter of 2006.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
of Shares
|
|
|
|
Total Number of
|
|
|
|
|
|
Shares Purchased
|
|
|
that May Yet
|
|
|
|
Shares
|
|
|
Average Price
|
|
|
as Part of Publicly
|
|
|
Be Purchased
|
|
|
|
Purchased
|
|
|
Paid Per
|
|
|
Announced Plans or
|
|
|
Under the Plans
|
|
Period
|
|
(a)
|
|
|
Share
|
|
|
Programs
|
|
|
or Programs (b)
|
|
|
|
|
October 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 2006
|
|
|
240
|
|
|
$
|
14.76
|
|
|
|
|
|
|
|
|
|
December 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
240
|
|
|
$
|
14.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
All of the shares purchased by the Company during the fourth
quarter of 2006 were related to awards of our common stock our
employees in recognition of their
10th anniversary
with the Company. |
|
(b) |
|
On January 31, 2007, the Company announced that our board
of directors adopted a Stock Repurchase Program under which we
are authorized to repurchase up to $40.0 million worth of
our outstanding common stock. On February 27, 2007, the
Company announced that the board of directors had increased the
authorized repurchase amount from $40.0 million to
$50.0 million. This program expires in twelve months from
January 31, 2007. No shares have been repurchased under
this plan. |
22
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
|
|
|
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|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Summary of
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of
Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
800,866
|
|
|
$
|
708,663
|
|
|
$
|
563,437
|
|
|
$
|
503,068
|
|
|
$
|
441,796
|
|
Interest expense
|
|
|
585,919
|
|
|
|
462,393
|
|
|
|
340,146
|
|
|
|
308,482
|
|
|
|
263,880
|
|
|
|
|
|
|
|
Net interest income
|
|
|
214,947
|
|
|
|
246,270
|
|
|
|
223,291
|
|
|
|
194,586
|
|
|
|
177,916
|
|
Provision for loan losses
|
|
|
25,450
|
|
|
|
18,876
|
|
|
|
16,077
|
|
|
|
20,081
|
|
|
|
27,126
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses
|
|
|
189,497
|
|
|
|
227,394
|
|
|
|
207,214
|
|
|
|
174,505
|
|
|
|
150,790
|
|
Other income
|
|
|
202,161
|
|
|
|
159,448
|
|
|
|
256,121
|
|
|
|
465,877
|
|
|
|
242,737
|
|
Operating and administrative
expenses
|
|
|
275,637
|
|
|
|
262,887
|
|
|
|
243,005
|
|
|
|
252,915
|
|
|
|
226,121
|
|
|
|
|
|
|
|
Earnings before federal income tax
provision
|
|
|
116,021
|
|
|
|
123,955
|
|
|
|
220,330
|
|
|
|
387,467
|
|
|
|
167,406
|
|
Provision for federal income taxes
|
|
|
40,819
|
|
|
|
44,090
|
|
|
|
77,592
|
|
|
|
135,481
|
|
|
|
59,280
|
|
|
|
|
|
|
|
Earnings before a change in
accounting principle
|
|
|
75,202
|
|
|
|
79,865
|
|
|
|
142,738
|
|
|
|
251,986
|
|
|
|
108,126
|
|
Cumulative effect of a change in
accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,716
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
75,202
|
|
|
$
|
79,865
|
|
|
$
|
142,738
|
|
|
$
|
251,986
|
|
|
$
|
126,842
|
|
|
|
|
|
|
|
Earnings per share before a change
in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.18
|
|
|
$
|
1.29
|
|
|
$
|
2.34
|
|
|
$
|
4.21
|
|
|
$
|
1.85
|
|
Diluted
|
|
$
|
1.17
|
|
|
$
|
1.25
|
|
|
$
|
2.22
|
|
|
$
|
3.95
|
|
|
$
|
1.75
|
|
Earnings per share from cumulative
effect of a change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.32
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
Net earnings per share
basic
|
|
$
|
1.18
|
|
|
$
|
1.29
|
|
|
$
|
2.34
|
|
|
$
|
4.21
|
|
|
$
|
2.17
|
|
Net earnings per share
diluted
|
|
$
|
1.17
|
|
|
$
|
1.25
|
|
|
$
|
2.22
|
|
|
$
|
3.95
|
|
|
$
|
2.05
|
|
|
|
|
|
|
|
Dividends per common share
|
|
$
|
0.60
|
|
|
$
|
0.90
|
|
|
$
|
1.00
|
|
|
$
|
0.50
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
Dividend payout ratio
|
|
|
51
|
%
|
|
|
70
|
%
|
|
|
43
|
%
|
|
|
11
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
Summary of Consolidated
Statements of Financial Condition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
15,497,205
|
|
|
$
|
15,075,430
|
|
|
$
|
13,143,014
|
|
|
$
|
10,553,246
|
|
|
$
|
8,195,840
|
|
Mortgage-backed securities held to
maturity
|
|
|
1,565,420
|
|
|
|
1,414,986
|
|
|
|
20,710
|
|
|
|
30,678
|
|
|
|
39,110
|
|
Loans receivable
|
|
|
12,128,480
|
|
|
|
12,349,865
|
|
|
|
12,065,465
|
|
|
|
9,599,803
|
|
|
|
7,287,338
|
|
Mortgage servicing rights
|
|
|
173,288
|
|
|
|
315,678
|
|
|
|
187,975
|
|
|
|
260,128
|
|
|
|
230,756
|
|
Total deposits
|
|
|
7,379,295
|
|
|
|
7,979,000
|
|
|
|
7,379,655
|
|
|
|
5,680,167
|
|
|
|
4,373,889
|
|
FHLB advances
|
|
|
5,407,000
|
|
|
|
4,225,000
|
|
|
|
4,090,000
|
|
|
|
3,246,000
|
|
|
|
2,222,000
|
|
Security repurchase agreements
|
|
|
990,806
|
|
|
|
1,060,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
812,234
|
|
|
|
771,883
|
|
|
|
728,954
|
|
|
|
638,801
|
|
|
|
405,430
|
|
Other Financial and Statistical
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible capital ratio
|
|
|
6.37
|
%
|
|
|
6.26
|
%
|
|
|
6.19
|
%
|
|
|
7.34
|
%
|
|
|
6.61
|
%
|
Core capital ratio
|
|
|
6.37
|
%
|
|
|
6.26
|
%
|
|
|
6.19
|
%
|
|
|
7.34
|
%
|
|
|
6.61
|
%
|
Total risk-based capital ratio
|
|
|
11.55
|
%
|
|
|
11.09
|
%
|
|
|
10.97
|
%
|
|
|
13.30
|
%
|
|
|
11.81
|
%
|
Equity-to-assets
ratio (at the end of the period)
|
|
|
5.24
|
%
|
|
|
5.12
|
%
|
|
|
5.54
|
%
|
|
|
6.05
|
%
|
|
|
4.95
|
%
|
Equity-to-assets
ratio (average for the period)
|
|
|
5.29
|
%
|
|
|
5.07
|
%
|
|
|
5.68
|
%
|
|
|
5.17
|
%
|
|
|
4.68
|
%
|
Book value per share
|
|
$
|
12.77
|
|
|
$
|
12.21
|
|
|
$
|
11.88
|
|
|
$
|
10.53
|
|
|
$
|
6.85
|
|
Shares outstanding
|
|
|
63,605
|
|
|
|
63,208
|
|
|
|
61,358
|
|
|
|
60,675
|
|
|
|
59,190
|
|
Average shares outstanding
|
|
|
63,588
|
|
|
|
62,128
|
|
|
|
61,057
|
|
|
|
59,811
|
|
|
|
58,350
|
|
Mortgage loans originated or
purchased
|
|
$
|
18,966,354
|
|
|
$
|
28,244,561
|
|
|
$
|
34,248,988
|
|
|
$
|
56,550,735
|
|
|
$
|
43,391,116
|
|
Other loans originated or purchased
|
|
|
1,241,588
|
|
|
|
1,706,246
|
|
|
|
995,429
|
|
|
|
609,092
|
|
|
|
388,006
|
|
Loans sold
|
|
|
16,370,925
|
|
|
|
23,451,430
|
|
|
|
28,937,576
|
|
|
|
51,922,757
|
|
|
|
40,495,894
|
|
Mortgage loans serviced for others
|
|
|
15,032,504
|
|
|
|
29,648,088
|
|
|
|
21,354,724
|
|
|
|
30,395,079
|
|
|
|
21,586,797
|
|
Capitalized value of mortgage
servicing rights
|
|
|
1.15
|
%
|
|
|
1.06
|
%
|
|
|
0.88
|
%
|
|
|
0.86
|
%
|
|
|
1.07
|
%
|
Interest rate spread
consolidated
|
|
|
1.42
|
%
|
|
|
1.74
|
%
|
|
|
1.87
|
%
|
|
|
2.01
|
%
|
|
|
2.76
|
%
|
Net interest margin
consolidated
|
|
|
1.54
|
%
|
|
|
1.82
|
%
|
|
|
1.99
|
%
|
|
|
2.16
|
%
|
|
|
2.80
|
%
|
Interest rate spread
bank only
|
|
|
1.41
|
%
|
|
|
1.68
|
%
|
|
|
1.85
|
%
|
|
|
1.91
|
%
|
|
|
2.68
|
%
|
Net interest margin
bank only
|
|
|
1.63
|
%
|
|
|
1.88
|
%
|
|
|
2.08
|
%
|
|
|
2.40
|
%
|
|
|
3.00
|
%
|
Return on average assets
|
|
|
0.49
|
%
|
|
|
0.54
|
%
|
|
|
1.17
|
%
|
|
|
2.50
|
%
|
|
|
1.76
|
%
|
Return on average equity
|
|
|
9.42
|
%
|
|
|
10.66
|
%
|
|
|
20.60
|
%
|
|
|
48.35
|
%
|
|
|
37.61
|
%
|
Efficiency ratio
|
|
|
66.1
|
%
|
|
|
64.8
|
%
|
|
|
50.7
|
%
|
|
|
38.3
|
%
|
|
|
53.8
|
%
|
Net charge off ratio
|
|
|
0.20
|
%
|
|
|
0.16
|
%
|
|
|
0.16
|
%
|
|
|
0.35
|
%
|
|
|
0.51
|
%
|
Ratio of allowance to investment
loans
|
|
|
0.51
|
%
|
|
|
0.37
|
%
|
|
|
0.36
|
%
|
|
|
0.55
|
%
|
|
|
0.99
|
%
|
Ratio of non-performing assets to
total assets
|
|
|
1.03
|
%
|
|
|
0.98
|
%
|
|
|
0.99
|
%
|
|
|
1.01
|
%
|
|
|
1.51
|
%
|
Ratio of allowance to
non-performing loans
|
|
|
80.2
|
%
|
|
|
60.7
|
%
|
|
|
67.2
|
%
|
|
|
64.9
|
%
|
|
|
57.9
|
%
|
Number of banking centers
|
|
|
151
|
|
|
|
137
|
|
|
|
120
|
|
|
|
98
|
|
|
|
86
|
|
Number of home loan centers
|
|
|
76
|
|
|
|
101
|
|
|
|
112
|
|
|
|
128
|
|
|
|
92
|
|
|
|
Note: |
All per share data has been restated for the 2 for 1 stock split
on May 15, 2003, and for the 3 for 2 stock split completed
on May 31, 2002.
|
24
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
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 28 of the Notes to
Consolidated Financial Statements, in Item 8, Financial
Statements, herein.
Banking Operation. We provide a full range of
banking services to consumers and small businesses in Michigan,
Indiana and Georgia. 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 December 31, 2006, we operated a network
of 151 banking centers and provided banking services to
approximately 143,000 customers. We continue to focus on
expanding our branch network in order to increase our access to
retail deposit funding sources. As we open new branches, we
believe that the growth in deposits will continue over time.
During 2006, we opened 14 banking centers, including eight
banking centers in Georgia. During 2007, we expect to open seven
additional branches in the Atlanta, Georgia area and six
branches in Michigan.
Home Lending Operation. Our home lending
operation originates, securitizes and sells residential mortgage
loans in order to generate transactional income. The home
lending operation also services mortgage loans on a fee basis
for others and 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.
The following tables present certain financial information
concerning the results of operations of our banking operation
and home lending operation during the past three years.
BANKING
OPERATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Net interest income
|
|
$
|
159,255
|
|
|
$
|
185,276
|
|
|
$
|
175,403
|
|
Net gain on sale revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
31,353
|
|
|
|
55,813
|
|
|
|
63,227
|
|
Earnings before federal taxes
|
|
|
59,728
|
|
|
|
123,726
|
|
|
|
135,080
|
|
Identifiable assets
|
|
|
14,939,341
|
|
|
|
14,176,340
|
|
|
|
12,136,082
|
|
HOME
LENDING OPERATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Net interest income
|
|
$
|
55,692
|
|
|
$
|
60,994
|
|
|
$
|
47,888
|
|
Net gain on sale revenue
|
|
|
135,002
|
|
|
|
81,737
|
|
|
|
169,559
|
|
Other income
|
|
|
35,806
|
|
|
|
21,898
|
|
|
|
23,335
|
|
Earnings before federal taxes
|
|
|
56,293
|
|
|
|
229
|
|
|
|
85,250
|
|
Identifiable assets
|
|
|
3,597,864
|
|
|
|
2,379,090
|
|
|
|
2,245,932
|
|
25
Net
Earnings Summary
Our net earnings for 2006 of $75.2 million ($1.17 per
diluted share) represents a 5.9% decrease from the
$79.9 million ($1.25 per diluted share) we achieved in
2005 and a decrease of 47.3% from the $142.7 million
($2.22 per diluted share) earned in 2004. The net earnings
during 2006 were affected by the following factors:
|
|
|
|
|
Lower net interest income due to the increase in the average
interest rate that we paid on our deposits and interest-bearing
liabilities offset by average higher interest rate that we
earned on our interest-earning assets.
|
|
|
|
A decrease in loan fees and charges which was a result of a
reduction in loan originations. During the year ended
December 31, 2006, loan originations were down 35.3%
compared to 2005. To a large degree, the decrease in loan
originations during 2006 was attributable to a decline in
mortgage refinancings in the overall market as a result of
stabilizing or increasing interest rates on single family
mortgage loans.
|
|
|
|
Higher gain on sales of MSRs due to higher volume of sales and
improved pricing.
|
|
|
|
Lower gain on loan sales due to decreased volume and more
competitive pricing.
|
|
|
|
Higher overhead costs in our banking group attributable in part
to the 14 additional banking centers that were opened during the
year.
|
|
|
|
A reduction in overhead costs in our home lending operation due
to reduction in the number of salaried and commissioned
personnel in response to decreased loan demand.
|
See Results of Operations, below.
Critical
Accounting Policies
Our consolidated financial statements are prepared in accordance
with U.S. GAAP and reflect general practices within our
industry. Application of these principles requires management to
make estimates or judgments that affect the amounts reported in
the consolidated financial statements and accompanying notes.
These estimates are based on information available to management
as of the date of the consolidated financial statements.
Accordingly, as this information changes, future financial
statements could reflect different estimates or judgments.
Certain policies inherently have a greater reliance on the use
of estimates, and as such have a greater possibility of
producing results that could be materially different than
originally reported. The most significant accounting policies
followed by us are presented in Note 2 to the consolidated
financial statements included in Item 8 herein. These
policies, along with the disclosures presented in the other
financial statement notes and other information presented
herein, provide information on how significant assets and
liabilities are valued in the consolidated financial statements
and how these values are determined. Management views critical
accounting policies to be those that are highly dependent on
subjective or complex judgments, estimates or assumptions, and
where changes in those estimates and assumptions could have a
significant impact on our consolidated financial statements.
Management currently views the determination of the allowance
for loan losses, the valuation of MSRs, the valuation of
residuals, the valuation of derivative instruments, and the
determination of the secondary market reserve to be our critical
accounting policies.
Allowance for Loan Losses. The allowance for
loan losses represents managements estimate of probable
losses that are inherent in our loans held for investment
portfolio, but which have not yet been realized as of the date
of our consolidated statement of financial condition. We
recognize these losses when (a) available information
indicates that it is probable that a loss has occurred and
(b) the amount of the loss can be reasonably estimated. We
believe that the accounting estimates related to the allowance
for loan losses are critical because they require us to make
subjective and complex judgments about the effect of matters
that are inherently uncertain. As a result, subsequent
evaluations of the loan portfolio, in light of the factors then
prevailing, may result in significant changes in the allowance
for loan losses. Our methodology for assessing the adequacy of
the allowance involves a significant amount of judgment based on
various factors such as general economic and business
conditions, credit quality and collateral value trends, loan
concentrations, recent trends in our loss experience, new
product initiatives and other variables. Although management
26
believes its process for determining the allowance for loan
losses adequately considers all of the factors that could
potentially result in loan losses, the process includes
subjective elements and may be susceptible to significant
change. To the extent actual outcomes differ from management
estimates, additional provision for loan losses could be
required that could adversely affect earnings or financial
position in future periods.
Valuation of Mortgage Servicing Rights. 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. At the time the loan is sold on
a servicing retained basis, we record the mortgage servicing
right as an asset at its fair value. Determining the fair value
of MSRs involves a calculation of the present value of a set of
market driven and MSR specific cash flows. MSRs do not trade in
an active market with readily observable market prices. However,
the market price of MSRs are generally a function of demand and
interest rates. When mortgage interest rates decline, mortgage
loan prepayments usually increase as customers refinance their
loans. When this happens, the income stream from a MSR portfolio
will decline. In that case, we may be required to amortize the
portfolio over a shorter period of time or reduce the carrying
value of our MSR portfolio. Accordingly, we must make
assumptions about future interest rates and other market
conditions in order to estimate the current fair value our MSR
portfolio. On an ongoing basis, we compare our fair value
estimates to observable market data where available. On an
annual basis, the value of our MSR portfolio is reviewed by an
outside valuation expert. MSRs are recorded at the lower of
carrying cost or fair market value.
From time to time, we sell some of these MSRs to unaffiliated
purchasers in transactions that are separate from the sale of
the underlying loans. At the time of the sale, we record a gain
or loss based on the selling price of the MSRs less our carrying
value and associated transaction costs.
Valuation of Residuals. Residuals are created
upon the issuance of private-label securitizations. Residuals
represent the first loss position and are not typically rated by
the nationally recognized agencies. The value of residuals
represents the present value of the future cash flows expected
to be received by us from the excess cash flows created in the
securitization transaction. In general, future cash flows are
estimated by taking the coupon rate of the loans underlying the
transaction less the interest rate paid to the investors, less
contractually specified servicing and trustee fees adjusting for
the effect of estimated prepayments and credit losses.
Cash flows are also dependent upon various restrictions and
conditions specified in each transaction. For example, residual
securities are not typically entitled to any cash flows unless
over-collateralization has reached a certain level. The
over-collateralization represents the difference between the
bond balance and the collateral underlying security. A sample of
an over-collateralization structure may require 2% of the
original collateral balance for 36 months. At month 37, it
may require 4%, but on a declining balance basis. Due to
prepayments, that 4% requirement is generally less than the 2%
required on the original balance. In addition, the transaction
may include an over-collateralization trigger event,
the occurrence of which may require the over-collateralization
to be increased. An example of such trigger event is delinquency
rates or cumulative losses on the underlying collateral that
exceed stated levels. If over-collateralization targets were not
met, the trustee would apply cash flows that would otherwise
flow to the residual security until such targets are met. A
delay or reduction in the cash flows received will result in a
lower valuation of the residual.
Residuals are designated as
available-for-sale
securities at the time of securitization and are periodically
evaluated for impairment. These residuals are marked to market
with changes in the value recognized in other comprehensive
income net of tax. If the security is deemed to be impaired and
the impairment is
other-than-temporary,
the impairment is recognized in the current period earnings. We
use an internally developed model to value the residuals. The
model takes into consideration the cash flow structure specific
to each transaction (such as over-collateralization requirements
and trigger events). The key valuation assumptions include
credit losses, prepayment rates and, to a lesser degree,
discount rates. On an annual basis, the value of our residuals
is reviewed by an outside valuation expert.
Valuation of Derivative Instruments. We
utilize certain derivative instruments in the ordinary course of
our business to manage our exposure to changes in interest
rates. These derivative instruments include forward sale
commitments and interest rate swaps. We also issue interest rate
lock commitments to borrowers in connection with single family
mortgage loan originations. We recognize all derivative
instruments on our consolidated statement of financial position
at fair value. The valuation of derivative instruments is
considered
27
critical because many are valued using discounted cash flow
modeling techniques in the absence of market value quotes.
Therefore, we must make estimates regarding the amount and
timing of future cash flows, which are susceptible to
significant change in future periods based on changes in
interest rates. Our interest rate assumptions are based on
current yield curves, forward yield curves and various other
factors. Internally generated valuations are compared to third
party data where available to validate the accuracy of our
valuation models.
Derivative instruments may be designated as either fair value or
cash flow hedges under hedge accounting principles or may be
undesignated. A hedge of the exposure to changes in the fair
value of a recognized asset, liability or unrecognized firm
commitment is referred to as a fair value hedge. A hedge of the
exposure to the variability of cash flows from a recognized
asset, liability or forecasted transaction is referred to as a
cash flow hedge. In the case of a qualifying fair value hedge,
changes in the value of the derivative instruments that are
highly effective are recognized in current earnings along with
the changes in value of the designated hedged item. In the case
of a qualifying cash flow hedge, changes in the value of the
derivative instruments that are highly effective are recognized
in accumulated other comprehensive income until the hedged item
is recognized in earnings. The ineffective portion of a
derivatives change in fair value is recognized through
earnings. Derivatives that are non-designated hedges are
adjusted to fair value through earnings. At December 31,
2005, and throughout 2006, we had no derivatives designated as
fair value hedges.
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. 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 credit 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.
Results
of Operations
Net
Interest Income
2006. During 2006, we recognized $214.9 million
in net interest income, which represented a decrease of 12.7%
compared to the $246.3 million reported in 2005. Net
interest income represented 51.5% of our total revenue in 2006
as compared to 60.7% in 2005. Net interest income is primarily
the dollar value of the average yield we earn on the average
balances of our interest-earning assets, less the dollar value
of the average cost of funds we incur on the average balances of
our interest-bearing liabilities. At December 31, 2006, we
had an average balance of $14.0 billion of interest-earning
assets, of which approximately $12.2 billion were loans
receivable. Interest income recorded on these loans included the
amortization of net premiums and net deferred loan origination
costs. Partially offsetting the increase in earning assets was
an increase in our cost of funds. Our interest-earning assets
are funded with deposits and other short-term liabilities,
primarily borrowings from the FHLB and security repurchase
agreements. Typically, there is a spread between the long-term
rates we earn on these mortgage loans and the short-term rates
we pay on our funding sources. During 2006, the spread between
these interest rates narrowed and then inverted, as short-term
rates increased faster than the increase in long-term rates. The
average cost of interest-bearing liabilities increased 23.8%,
from 3.49% during 2005 to 4.32% in 2006, while the average yield
on interest-earning assets increased only 9.8%, from 5.23%
during 2005 to 5.74% in 2006. As a result, our interest rate
spread during 2006 was 1.42% at year-end. The compression of our
interest rate spread during the year caused our interest rate
margin for 2006 to decrease to 1.54% from 1.82% during 2005. The
adverse effect of the spread
28
compression was offset in part by the increase in our ratio of
interest-earning assets to interest-bearing liabilities, from
102% in 2005 to 103% in 2006. The Bank recorded an interest rate
margin of 1.68% in 2006, as compared to 1.88% in 2005.
2005. During 2005, we recognized $246.3 million
in net interest income, which represented an increase of 10.3%
compared to the $223.3 million reported in 2004. Net
interest income represented 60.7% of our total revenue in 2005
as compared to 46.6% in 2004. Net interest income is primarily
the dollar value of the average yield we earn on the average
balances of our interest-earning assets, less the dollar value
of the average cost of funds we incur on the average balances of
our interest-bearing liabilities. At December 31, 2005, we
had an average balance of $13.6 billion of interest-earning
assets, of which approximately $13.1 billion were loans
receivable. Interest income recorded on these loans included the
amortization of net premiums and net deferred loan origination
costs. Partially offsetting the increase in earning assets was
an increase in our cost of funds. Our interest-earning assets
are funded with deposits and other short-term liabilities,
primarily borrowings from the FHLB and security repurchase
agreements. Typically, there is a spread between the long-term
rates we earn on these mortgage loans and the short-term rates
we pay on our funding sources. During 2005, the spread between
these interest rates narrowed as short-term rates increased. The
average cost of interest-bearing liabilities increased 10.4%
from 3.16%, during 2004 to 3.49% in 2005, while the average
yield on interest-earning assets increased only 4.0%, from 5.03%
during 2004 to 5.23% in 2005. As a result, our interest rate
spread during 2005 was 1.74% at year-end. The compression of our
interest rate spread during the year caused our interest rate
margin for 2005 to decrease to 1.82% from 1.99% during 2004.
This is also reflected in the decline in our ratio of
interest-earning assets to interest-bearing liabilities, from
104% in 2004 to 102% in 2005. The Bank recorded an interest rate
margin of 1.88% in 2005, as compared to 2.08% in 2004.
29
The following table presents interest income from average
earning assets, expressed in dollars and yields, and interest
expense on average interest-bearing liabilities, expressed in
dollars and rates. Interest income from earning assets includes
the $28.3 million, $29.6 million and
$15.8 million of amortization of net premiums and net
deferred loan origination costs in 2006, 2005 and 2004,
respectively. Non-accruing loans were included in the average
loans outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Interest-Earning
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
$
|
12,166,346
|
|
|
$
|
711,037
|
|
|
|
5.84
|
%
|
|
$
|
13,128,224
|
|
|
$
|
688,791
|
|
|
|
5.25
|
%
|
|
$
|
11,103,829
|
|
|
$
|
559,902
|
|
|
|
5.04
|
%
|
Mortgaged backed securities
|
|
|
1,555,930
|
|
|
|
77,607
|
|
|
|
4.99
|
%
|
|
|
370,405
|
|
|
|
19,019
|
|
|
|
5.13
|
%
|
|
|
25,893
|
|
|
|
1,459
|
|
|
|
5.63
|
%
|
Other
|
|
|
229,117
|
|
|
|
12,222
|
|
|
|
5.33
|
%
|
|
|
51,737
|
|
|
|
853
|
|
|
|
1.65
|
%
|
|
|
66,627
|
|
|
|
2,076
|
|
|
|
3.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
13,951,393
|
|
|
$
|
800,866
|
|
|
|
5.74
|
%
|
|
|
13,550,366
|
|
|
$
|
708,663
|
|
|
|
5.23
|
%
|
|
|
11,196,349
|
|
|
$
|
563,437
|
|
|
|
5.03
|
%
|
Other assets
|
|
|
1,330,755
|
|
|
|
|
|
|
|
|
|
|
|
1,240,143
|
|
|
|
|
|
|
|
|
|
|
|
1,002,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
15,282,148
|
|
|
|
|
|
|
|
|
|
|
$
|
14,790,509
|
|
|
|
|
|
|
|
|
|
|
$
|
12,198,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
8,030,276
|
|
|
$
|
331,516
|
|
|
|
4.13
|
%
|
|
$
|
7,971,506
|
|
|
$
|
253,292
|
|
|
|
3.18
|
%
|
|
$
|
6,724,568
|
|
|
$
|
167,765
|
|
|
|
2.49
|
%
|
FHLB advances
|
|
|
4,270,660
|
|
|
|
187,756
|
|
|
|
4.40
|
%
|
|
|
4,742,079
|
|
|
|
182,377
|
|
|
|
3.85
|
%
|
|
|
3,631,851
|
|
|
|
143,914
|
|
|
|
3.96
|
%
|
Security repurchase agreements
|
|
|
1,028,916
|
|
|
|
52,389
|
|
|
|
5.09
|
%
|
|
|
187,585
|
|
|
|
7,953
|
|
|
|
4.24
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
232,149
|
|
|
|
14,258
|
|
|
|
6.14
|
%
|
|
|
347,224
|
|
|
|
18,771
|
|
|
|
5.41
|
%
|
|
|
413,913
|
|
|
|
28,467
|
|
|
|
6.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
13,562,001
|
|
|
$
|
585,919
|
|
|
|
4.32
|
%
|
|
|
13,248,394
|
|
|
$
|
462,393
|
|
|
|
3.49
|
%
|
|
|
10,770,332
|
|
|
$
|
340,146
|
|
|
|
3.16
|
%
|
Other liabilities
|
|
|
921,655
|
|
|
|
|
|
|
|
|
|
|
|
792,781
|
|
|
|
|
|
|
|
|
|
|
|
734,994
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
798,492
|
|
|
|
|
|
|
|
|
|
|
|
749,334
|
|
|
|
|
|
|
|
|
|
|
|
693,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders
equity
|
|
$
|
15,282,148
|
|
|
|
|
|
|
|
|
|
|
$
|
14,790,509
|
|
|
|
|
|
|
|
|
|
|
$
|
12,198,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest-earning assets
|
|
$
|
389,392
|
|
|
|
|
|
|
|
|
|
|
$
|
301,972
|
|
|
|
|
|
|
|
|
|
|
$
|
426,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
214,947
|
|
|
|
|
|
|
|
|
|
|
$
|
246,270
|
|
|
|
|
|
|
|
|
|
|
$
|
223,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
spread(1)
|
|
|
|
|
|
|
|
|
|
|
1.42
|
%
|
|
|
|
|
|
|
|
|
|
|
1.74
|
%
|
|
|
|
|
|
|
|
|
|
|
1.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
margin(2)
|
|
|
|
|
|
|
|
|
|
|
1.54
|
%
|
|
|
|
|
|
|
|
|
|
|
1.82
|
%
|
|
|
|
|
|
|
|
|
|
|
1.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning
assets to interest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
103
|
%
|
|
|
|
|
|
|
|
|
|
|
102
|
%
|
|
|
|
|
|
|
|
|
|
|
104
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest rate spread is the difference between rates of interest
earned on interest-earning assets and rates of interest paid on
interest-bearing liabilities. |
|
(2) |
|
Net interest margin is net interest income divided by average
interest-earning assets. |
30
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 that
are presented in the preceding table. The table below
distinguishes between the changes related to average outstanding
balances (changes in volume while holding the initial rate
constant) and the changes related to average interest rates
(changes in average rates while holding the initial balance
constant). Changes attributable to both a change in volume and a
change in rates were included as changes in rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006 Versus 2005 Increase
|
|
|
2005 Versus 2004 Increase
|
|
|
|
(Decrease) Due to:
|
|
|
(Decrease) Due to:
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Interest-Earning
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
$
|
72.7
|
|
|
$
|
(50.5
|
)
|
|
$
|
22.2
|
|
|
$
|
26.9
|
|
|
$
|
102.0
|
|
|
$
|
128.9
|
|
Mortgage-backed securities
|
|
|
(2.2
|
)
|
|
|
60.8
|
|
|
|
58.6
|
|
|
|
(1.9
|
)
|
|
|
19.4
|
|
|
|
17.5
|
|
Other
|
|
|
8.4
|
|
|
|
2.9
|
|
|
|
11.3
|
|
|
|
(0.6
|
)
|
|
|
(0.6
|
)
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
Total
|
|
$
|
78.9
|
|
|
$
|
13.2
|
|
|
$
|
92.1
|
|
|
$
|
24.4
|
|
|
$
|
120.8
|
|
|
$
|
145.2
|
|
Interest- Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
76.4
|
|
|
$
|
1.8
|
|
|
$
|
78.2
|
|
|
$
|
54.5
|
|
|
$
|
31.0
|
|
|
$
|
85.5
|
|
FHLB advances
|
|
|
23.5
|
|
|
|
(18.2
|
)
|
|
|
5.3
|
|
|
|
(5.5
|
)
|
|
|
44.0
|
|
|
|
38.5
|
|
Security repurchase agreements
|
|
|
8.8
|
|
|
|
35.6
|
|
|
|
44.4
|
|
|
|
|
|
|
|
7.9
|
|
|
|
7.9
|
|
Other
|
|
|
1.7
|
|
|
|
(6.2
|
)
|
|
|
(4.5
|
)
|
|
|
(5.1
|
)
|
|
|
(4.6
|
)
|
|
|
(9.7
|
)
|
|
|
|
|
|
|
Total
|
|
$
|
110.4
|
|
|
$
|
13.0
|
|
|
$
|
123.4
|
|
|
$
|
43.9
|
|
|
$
|
78.3
|
|
|
$
|
122.2
|
|
|
|
|
|
|
|
Change in net interest income
|
|
$
|
(31.5
|
)
|
|
$
|
0.2
|
|
|
$
|
(31.3
|
)
|
|
$
|
(19.5
|
)
|
|
$
|
42.5
|
|
|
$
|
23.0
|
|
|
|
|
|
|
|
The rate/volume table above indicates that, in general, interest
rates on deposits and other liabilities increased to a greater
extent than interest rates on our loan products and securities
during the year ended December 31, 2006. The adverse impact
of these rate changes on our net interest margin for the periods
were offset in part by the effect of the increase in
interest-earning assets over interest-bearing liabilities.
Our interest income on loans increased as a result of increased
yields on new loan production. This increase offset the decline
in interest income attributable to a reduced volume of loans,
which declined as certain loans were pooled and exchanged for
mortgage-backed securities that we hold on our balance sheet as
an investment. Similarly, the increase in interest income
arising from mortgage-backed securities
held-to-maturity
related principally to the increase in the volume of such
securities created using our investment loans.
During 2006, the decrease in net interest income was primarily
due to the 28 basis point decrease in net interest margin,
partially offset by the effect of the increase in interest
earning assets over interest-bearing liabilities. Net interest
margin continued to experience compression due to the lag in the
repricing of the Banks loan portfolio compared to the
increase in the cost of its interest-bearing liabilities.
During 2005, the increase in the net interest income was
primarily due to the increase in the interest earnings assets of
$2.4 billion, partially offset by the 17 basis point
decrease in net interest margin. Net interest margin experienced
compression because the increase in interest rates on our
liabilities increased much more than the rates on our loan
production.
Provision
for Loan Losses
During 2006, we recorded a provision for loan losses of
$25.4 million as compared to $18.9 million recorded
during 2005 and $16.1 million recorded in 2004. The
provisions reflect our estimates to maintain the
31
allowance for loan losses at a level to cover probable losses in
the portfolio for each of the respective periods. Net
charge-offs in 2006 totaled $18.8 million compared to
$18.1 million and $15.6 million in 2005 and 2004,
respectively. Net charge-offs in 2006 totaled 0.20% of average
investment loans compared to 0.16% and 0.16% in 2005 and 2004,
respectively. See the section captioned Allowance for Loan
Losses in this discussion for further analysis of the
provision for loan losses.
Non-Interest
Income
Our non-interest income consists of (i) loan fees and
charges, (ii) deposit fees and charges, (iii) loan
administration fees, (iv) net gains from loan sales,
(v) net gains from sales of MSRs, (vi) net loss on
securities available for sale and (vii) other fees and
charges. Our total non-interest income equaled
$202.2 million during 2006, which was a 26.8% increase from
the $159.4 million of non-interest income that we earned in
2005. The primary reason for the increase was the increase in
2006 of net gains from sales of MSRs.
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. In each period,
we recorded fee income net of any fees deferred for the purposes
of complying with Statement of Financial Accounting Standard
(SFAS) 91, Accounting for Non-Refundable
Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases. During 2006, we
recorded gross loan fees and charges of $50.9 million, a
decrease of $20.7 million from the $71.6 million
recorded in 2005 and the $83.0 million recorded in 2004.
The decline in loan fees and charges resulted from a reduction
in the volume of loans originated during 2006 compared to 2005
and 2004. To a large degree, the decrease in loan originations
during 2006 was attributable to a continuing decline in mortgage
refinancings in the overall market as a result of stabilizing or
increasing interest rates on single-family mortgage loans.
In accordance with SFAS 91, certain 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 2006, we deferred
$43.4 million of fee revenue in accordance with
SFAS 91, compared to $59.0 million and
$65.0 million, respectively, in 2005 and 2004.
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. The amount of these fees tends
to increase as a function of the growth in our deposit base.
Total deposit fees and charges increased 23.7% during 2006 to
$20.9 million compared to $16.9 million during 2005
and $12.1 million during 2004. During that time, total
customer accounts grew from 196,000 at January 1, 2004 to
over 277,900 at December 31, 2006.
Loan Administration Fees. 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. When an underlying loan is prepaid or
refinanced, the mortgage servicing right for that loan is fully
amortized as no further fees will be earned for servicing that
loan. During periods of falling interest rates, prepayments and
refinancings generally increase and, unless we provide
replacement loans, it will usually result in a reduction in loan
servicing fees and increases in amortization recorded on the MSR
portfolio.
Our loan administration fees and MSR amortization can fluctuate
significantly. Such fees are affected by the size of our loans
serviced for others portfolio, which is affected by sales of
MSRs, subservicing fees, late fees and ancillary income and past
due status of serviced loans. When loans serviced for others
become ninety days or more past due we cease accruing servicing
fees on such loans. Amortization of MSRs can be affected by
sales of MSRs and changes in interest rates that cause changes
in prepayments of the underlying loans. Changes in loan
administration fees and changes in amortization of MSRs will not
necessarily occur in proportion.
During 2006, the volume of loans serviced for others averaged
$20.3 billion, which represented a 24.3% decrease from the
$26.8 billion serviced during 2005. During 2006, we
recorded $82.6 million in servicing fee revenue. The fee
revenue recorded in 2006 was offset by $69.6 million of MSR
amortization. During 2006, the amount of loan principal payments
and payoffs received on serviced loans equaled
$3.1 billion, a 26.2%
32
decrease over the 2005 total of $4.2 billion. The decrease
was primarily attributable to the continuing increase in
interest rates and the related decline in mortgage loan
refinancing in 2006.
During 2005, the volume of loans serviced for others averaged
$26.8 billion, which represented a 1.5% increase from the
$26.4 billion during 2004. During 2005, we recorded
$103.3 million in servicing fee revenue. The fee revenue
recorded in 2005 was offset by $94.5 million of MSR
amortization. During 2005, the amount of loan principal payments
and payoffs received on serviced loans equaled
$4.2 billion, a 40.0% decrease over the 2004 total of
$7.0 billion. The decrease was primarily attributable to
the continuing increase in interest rates and the related
decline in mortgage loan refinancing in 2005.
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 sold
and the gain on sale spread achieved, net of related selling
expenses. Net gain on loan sales is also increased or decreased
by any mark to market pricing adjustments on loan commitments
and forward sales commitments in accordance with
SFAS No. 133, Accounting for Derivative
Instruments (SFAS 133), increases to
the secondary market reserve related to loans sold during the
period, and related administrative expenses. The volatility in
the gain on sale spread is attributable to market pricing, which
changes with demand and the general level of interest rates.
Generally, we are able to sell loans into the secondary market
at a higher margin during periods of low or decreasing interest
rates. Typically, as the volume of acquirable loans increases in
a lower or falling interest rate environment, we are able to pay
less to acquire loans and are then able to achieve higher
spreads on the eventual sale of the acquired loans. In contrast,
when interest rates rise, the volume of acquirable loans
decreases and therefore we may need to pay more in the
acquisition phase, thus decreasing our net gain achievable. Our
net gain was also affected by declining spreads available from
securities we sell that are guaranteed by Fannie Mae and Freddie
Mac, and by an over-capacity in the mortgage business that has
placed continuing downward pressure on loan pricing
opportunities for conventional residential mortgage products.
The following table provides a reconciliation of our net gain on
loan sales reported in our consolidated financial statements to
our total gain on loans sold within the period (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Net gain on loan sales
|
|
$
|
42,381
|
|
|
$
|
63,580
|
|
|
$
|
77,819
|
|
Add: SFAS 133 adjustments
|
|
|
(4,498
|
)
|
|
|
2,902
|
|
|
|
357
|
|
Add: LOCOM adjustments
|
|
|
2,011
|
|
|
|
87
|
|
|
|
|
|
Add: provision to secondary market
reserve
|
|
|
5,897
|
|
|
|
5,328
|
|
|
|
5,932
|
|
|
|
|
|
|
|
Total gain on loans sold
|
|
$
|
45,791
|
|
|
$
|
71,897
|
|
|
$
|
84,108
|
|
|
|
|
|
|
|
Loans sold and securitized
|
|
$
|
16,370,925
|
|
|
$
|
23,451,430
|
|
|
$
|
28,937,576
|
|
Spread achieved
|
|
|
0.28
|
%
|
|
|
0.31
|
%
|
|
|
0.29
|
%
|
2006. Net gains on loan sales totaled
$42.4 million during 2006, a 33.3% decrease from the
$63.6 million realized during 2005. During 2006, the volume
of loans sold and securitized totaled $16.4 billion, a
30.2% decrease from the $23.5 billion of loan sales in
2005. We received an average gain on sale spread of 0.28% in
2006 compared to 0.31% in 2005. During 2006, we recorded a
provision of $5.9 million against gain on loan sales
relating to our secondary market reserve for loans sold in the
current year.
2005. Net gains on loan sales totaled
$63.6 million during 2005, an 18.3% decrease from the
$77.8 million realized during 2004. During 2005, the volume
of loans sold and securitized totaled $23.5 billion, a
18.7% decrease from the $28.9 billion of loan sales in
2004. Notwithstanding the lower volume of loans sold in 2005, we
received an average gain on sale spread of 0.31% in 2005
compared to 0.29% in 2004. During 2005, we recorded a provision
of $5.3 million to our secondary market reserve for loans
sold in the current year.
Net Gain on Mortgage Servicing Rights
Sales. 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
33
of the MSR sale, we record a gain or loss based on the selling
price of the MSRs less our carrying value and transaction costs.
Accordingly, the amount of net gains on MSR sales depends upon
the gain on sale spread and the volume of MSRs sold. The spread
is attributable to market pricing, which changes with demand,
and the general level of interest rates. In general, if an MSR
is sold on a flow basis shortly after it is
acquired, little or no gain will be realized on the sale. MSRs
created in a lower interest rate environment generally will have
a higher market value because the underlying loan is less likely
to be prepaid. Conversely, an MSR created in a higher interest
rate environment will generally sell at a market price below the
original fair value recorded because of the increased likelihood
of prepayment of the underlying loans, resulting in a loss.
2006. During 2006, the net gain on the sale of MSRs
totaled $92.6 million compared to a net gain of
$18.2 million in 2005. The $74.4 million increase in
net gain on the sale of MSRs is primarily due to a significant
increase in the volume of MSRs sold in 2006. Throughout 2006, we
believed that the current market price accurately reflected the
MSR value. As a result, we sold more MSRs in 2006 than prior
periods. We sold $2.3 billion in loans on a servicing
released basis and $25.2 billion in bulk servicing sales in
2006.
2005. During 2005, the net gain on the sale of MSRs
totaled only $18.2 million compared to a net gain of
$91.7 million in 2004. The $73.5 million decrease in
net gain on the sale of MSRs is primarily due to a significant
reduction in the volume of MSRs as sold in 2005. Throughout most
of 2005, we believed that the current market for these MSRs did
not fully reflect their value. Accordingly, we retained more
MSRs in 2005 than in prior periods. We sold $1.9 billion of
MSRs on a servicing released basis and $7.2 billion in bulk
servicing sales in 2005.
Net Loss on Securities Available for
Sale. Securities classified as available for sale
are comprised of residual interests from private securitizations
and mortgage-backed and collateralized mortgage obligation
securities. Net loss on securities available for sale is the
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.
During 2006, we recognized a $6.1 million
other-than-temporary
impairment on our residual interest that arose from a
securitization completed in 2005. Although the residual interest
is accounted for as an available for sale asset, we determined
that this impairment was
other-than-temporary
and therefore a loss should be provided for.
Other Fees and Charges. Other fees and
charges include certain miscellaneous fees, including dividends
received on FHLB stock and income generated by our subsidiaries
Flagstar Credit Corporation and Douglas Insurance Agency, Inc.
Flagstar Title Insurance Company also earned fees in 2004
prior to its closing.
During 2006, we recorded $14.7 million in dividends on an
average outstanding balance of FHLB stock of $284.2 million
as compared to $11.1 million and $9.9 million in
dividends on an average balance of FHLB stock outstanding of
$264.2 million and $225.1 million in 2005 and 2004,
respectively. During 2006, Flagstar Credit earned fees of
$4.8 million versus $4.9 million and $5.0 million
in 2005 and 2004, respectively. The amount of fees earned by
Flagstar Credit varies with the volume of loans that were
insured during the respective periods. Flagstar Title reported
revenues of $108,000 in 2004.
34
Non-Interest
Expense
The following table sets forth detailed information regarding
our non-interest expenses during the past three years.
NON-INTEREST
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Compensation and benefits
|
|
$
|
157,751
|
|
|
$
|
150,738
|
|
|
$
|
154,111
|
|
Commissions
|
|
|
74,208
|
|
|
|
87,746
|
|
|
|
105,607
|
|
Occupancy and equipment
|
|
|
70,319
|
|
|
|
69,121
|
|
|
|
66,233
|
|
Advertising
|
|
|
9,394
|
|
|
|
7,550
|
|
|
|
10,174
|
|
FDIC assessments
|
|
|
1,115
|
|
|
|
1,146
|
|
|
|
1,050
|
|
Communication
|
|
|
6,190
|
|
|
|
7,181
|
|
|
|
6,975
|
|
Other taxes
|
|
|
320
|
|
|
|
10,127
|
|
|
|
12,999
|
|
Other
|
|
|
49,824
|
|
|
|
46,362
|
|
|
|
39,926
|
|
|
|
|
|
|
|
Total
|
|
|
369,121
|
|
|
|
379,971
|
|
|
|
397,075
|
|
Less: capitalized direct costs of
loan closings, in accordance with SFAS 91
|
|
|
(93,484
|
)
|
|
|
(117,084
|
)
|
|
|
(154,070
|
)
|
|
|
|
|
|
|
Total, net
|
|
$
|
275,637
|
|
|
$
|
262,887
|
|
|
$
|
243,005
|
|
|
|
|
|
|
|
Efficiency ratio(1)
|
|
|
66.1
|
%
|
|
|
64.8
|
%
|
|
|
50.7
|
%
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total operating and administrative expenses divided by the sum
of net interest income and non-interest income. |
2006. Non-interest expenses, before the
capitalization of direct costs of loan closings, totaled
$369.1 million in 2006 compared to $380.0 million in
2005. The 2.9% decrease in non-interest expense in 2006 was
largely due to lower commissions resulting from a decrease in
the volume of loan originations in our home lending operations
and from our general cost containment efforts. Offsetting the
savings in our home lending operation were certain expenses
associated with the increase in the number of banking centers
operated by our banking operation. During 2006, we opened 14
banking centers, which brings the banking center network total
to 151. As we shift our funding sources to more of those that
are retail in nature and increase the size of the banking center
network, we expect that the operating expenses associated with
the banking center network will continue to increase.
Our gross compensation and benefit expense, before the
capitalization of direct costs of loan closings, totaled
$157.8 million. The 4.7% increase from 2005 is primarily
attributable to normal salary increases and the employees hired
at the new banking centers. Our full-time equivalent
(FTE) salaried employees increased by 105 to 2,510
at December 31, 2006. Commission expense, which is a
variable cost associated with loan production, totaled
$74.2 million, equal to 37 basis points (0.37 %) of
total loan production in 2006. Occupancy and equipment totaled
$70.3 million during 2006, which reflects the continuing
expansion of our deposit banking center network, offset in part
by the closing of various non- profitable home loan centers.
Advertising expense, which totaled $9.4 million at
December 31, 2006, increased $1.8 million, or 24.4%,
from the $7.6 million reported in 2005. Our FDIC assessment
remained the same at $1.1 million as compared to 2005. We
paid $6.2 million in communication expense for the
year-ended December 31, 2006. These expenses typically
include telephone, fax and other types of electronic
communication. The decrease in communication expenses is
reflective of fewer home loan centers. We pay taxes in the
various states and local communities in which we are located
and/or do
business. For the year ended December 31, 2006 our state
and local taxes totaled $0.3 million, a decrease of
$9.8 million, which is the result of a restructuring of our
corporate
35
operations that better aligned our core functions in separate
entities. Other expense totaled $49.8 million during 2006.
The fluctuation in other expenses is reflective of the varied
levels of loan production, the expansion undertaken in our
banking operation offset by the closing of the non-profitable
home loan centers and the dismissal of our lawsuit against an
insurance company in a coverage dispute that resulted in a
charge in November 2006, of $8.7 million, before taxes.
2005. Non-interest expenses, before the
capitalization of direct costs of loan closings, totaled
$380.0 million in 2005 compared to $397.1 million in
2004. The 4.3% decrease in non-interest expense in 2005 was due
to lower compensation expense and lower commissions resulting
from a decrease in the volume of loan originations in our home
lending operations and from our general cost containment
efforts. Offsetting the savings in our home lending operation
were certain expenses associated with the increase in the number
of banking centers operated by our banking operation. During
2005, we opened 17 banking centers, which brought the banking
center network total to 137. As we shift our funding sources to
more those retail in nature and increase the size of the banking
center network, we expect that the operating expenses associated
with the banking center network will continue to increase.
Our gross compensation and benefit expense, before the
capitalization of direct costs of loan closings, totaled
$150.7 million. The 2.2% decrease from 2004 is primarily
attributable to the staff reductions due to the decrease in loan
production offset with normal salary increases and the employees
hired at the new banking centers. Our full-time equivalent
(FTE) employees only increased by nine to 2,405 at
December 31, 2005. Commission expense, which is a variable
cost associated with loan production, totaled
$87.7 million, equal to 29 basis points (0.29%) of
total loan production in 2005. Occupancy and equipment totaled
$69.1 million during 2005, which reflects the continuing
expansion of our deposit banking center network, offset in part
by the closing of various non- profitable home loan centers.
Advertising expense, which totaled $7.6 million at
December 31, 2005, decreased $2.5 million, or 25.7%,
from the $10.1 million reported in 2004. Our FDIC
assessment remained the same at $1.1 million as compared to
2004. The calculation of the premiums is based on our deposit
portfolio and escrow accounts. We paid $7.2 million in
communication expense for the year-ended December 31, 2005.
These expenses typically include telephone, fax and other types
of electronic communication. The slight increase in
communication expenses is reflective of additional branch
locations. We pay taxes in the various states and local
communities in which we are located and do business. For the
year ended December 31, 2005 our state and local taxes
totaled $10.1 million, a decrease of $1.9 million,
which is the result of a decrease in taxable earnings. Other
expense totaled $46.4 million during 2005. The fluctuation
in the expenses is reflective of the varied levels of loan
production, the expansion undertaken in our banking operation
offset by the closing of the non-profitable home loan centers.
SFAS 91
Certain loan origination fees and costs are capitalized and
recorded as an adjustment to the basis of the individual loans
originated. These fees and costs are amortized or accreted into
income as an adjustment to the loan yield over the life of the
loan or expensed when the loan is sold. Accordingly, during
2006, we deferred $93.5 million of gross loan origination
costs, while during 2005 and 2004 the deferred expenses totaled
$117.1 million and $154.1 million, respectively. These
costs have not been offset by the revenue deferred for
SFAS 91 purposes. During the year to date in 2006 and the
years 2005, and 2004, we deferred $43.4 million,
$59.0 million, and $65.0 million in qualifying loan
fee revenue, respectively. For further information, see
Loan Fees and Charges, above.
On a per loan basis, the cost deferrals totaled $992, $816, and
$815 during 2006, 2005, and 2004, respectively. Net of deferred
fee income, the cost deferred per loan totaled $531, $405, and
$471 for years 2006, 2005, and 2004, respectively. While revenue
per loan has remained somewhat constant on a per loan basis, our
loan origination costs have increased over the three-year
period. Inflationary increases and the increased costs
associated with our shift to retail and correspondent funding
versus wholesale funding are the major reasons for these
increases. This shift can also be seen in the cost of
commissions, which is a deferrable item. On a per loan basis,
the cost deferrals for commissions totaled $788, $566, and $559
during 2006, 2005, and 2004, respectively.
36
Provision
for Federal Income Taxes
For the year ended December 31, 2006, our provision for
federal income taxes as a percentage of pretax earnings was
35.2% compared to 35.6% in 2005 and 35.2% in 2004. For each
period, the provision for federal income taxes varies from
statutory rates primarily because of certain non-deductible
corporate expenses. Refer to Note 18 of the Notes to the
Consolidated Financial Statements, in
Item 8. Financial Statements and Supplementary Data
herein for further discussion of our federal income taxes.
Analysis
of Items on Statement of Financial Condition
Mortgage-Backed Securities Held to
Maturity. Mortgage-backed securities held to
maturity increased from $1.4 billion at December 31,
2005 to $1.6 billion at December 31, 2006. The
increase was due to the recharacterization of certain mortgage
loans held for investment to mortgage-backed securities through
guaranteed mortgage securitizations. This allowed us to obtain
credit enhancement on these loans and thereby reduce our credit
risk. During 2006, we converted $558.7 million of mortgage
loans in our portfolio to mortgage-backed securities through a
combination or government sponsored entities and the completion
of a private securitization.
At December 31 2006 and 2005, approximately
$1.0 billion and $1.2 billion, respectively, of these
mortgage-backed securities were pledged as collateral under
security repurchase agreements. This allowed us to obtain funds
at a lower cost than our FHLB advances. In addition, at
December 31, 2005, $2.9 million of the mortgage-backed
securities were pledged as collateral for interest rate swap
agreements.
Securities Available for Sale. Securities
available for sale, which are comprised of mortgage-backed
securities, collateralized mortgage obligations and residual
interests from securitizations of mortgage loan products
increased from $26.1 million at December 31, 2005, to
$617.5 million at December 31, 2006. The increase was
due to the purchase of $574.9 million in mortgage-backed
and collateralized mortgage obligation securities and completion
of two additional private securitizations during the year of
fixed second mortgage loans and home equity revolving lines of
credit loans, that resulted in residual interests of
$21.7 million, offset by a $6.1 million reduction in
fair value of the residual interest related to our December 2005
securitization.
Other Investments. Our investment portfolio
increased from $22.0 million at December 31, 2005 to
$24.0 million at December 31, 2006. 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. We generally sell or securitize our
longer-term, fixed-rate mortgage loans, while we hold the
shorter duration and adjustable rate mortgage loans for
investment. At December 31, 2006, we held loans available
for sale of $3.2 billion, which was an increase of
$1.4 billion from $1.8 billion held at
December 31, 2005. 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.
37
The following table shows the activity in our portfolio of loans
available for sale during the past five years:
LOANS
AVAILABLE FOR SALE ACTIVITY SCHEDULE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance, beginning of year
|
|
$
|
1,773,394
|
|
|
$
|
1,506,311
|
|
|
$
|
2,759,551
|
|
|
$
|
3,302,212
|
|
|
$
|
2,746,791
|
|
Loans originated, net
|
|
|
18,013,671
|
|
|
|
25,172,510
|
|
|
|
31,891,486
|
|
|
|
55,866,218
|
|
|
|
43,703,804
|
|
Loans sold servicing retained, net
|
|
|
(13,974,425
|
)
|
|
|
(21,608,937
|
)
|
|
|
(27,749,138
|
)
|
|
|
(49,681,387
|
)
|
|
|
(39,261,704
|
)
|
Loans sold servicing released, net
|
|
|
(2,395,466
|
)
|
|
|
(1,855,700
|
)
|
|
|
(1,352,789
|
)
|
|
|
(2,461,326
|
)
|
|
|
(1,297,372
|
)
|
Loan amortization/ prepayments
|
|
|
(1,246,419
|
)
|
|
|
(1,040,315
|
)
|
|
|
(1,745,708
|
)
|
|
|
(1,652,811
|
)
|
|
|
(461,983
|
)
|
Loans transferred from (to) various
loan portfolios, net
|
|
|
1,018,040
|
|
|
|
(400,475
|
)
|
|
|
(2,297,091
|
)
|
|
|
(2,613,355
|
)
|
|
|
(2,127,324
|
)
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
3,188,795
|
|
|
$
|
1,773,394
|
|
|
$
|
1,506,311
|
|
|
$
|
2,759,551
|
|
|
$
|
3,302,212
|
|
|
|
|
|
|
|
Loans Held for Investment. Our largest
category of earning assets consists of our loans held for
investment portfolio. Loans held for investment consists of
residential mortgage loans that we do not hold for resale
(usually shorter duration and adjustable rate loans and second
mortgages), other consumer loans, commercial real estate loans,
construction loans, warehouse loans to other mortgage lenders,
and various types of commercial loans such as business lines of
credit, working capital loans and equipment loans. Loans held
for investment decreased from $10.6 billion in December
2005, to $8.9 billion in December 2006. Mortgage loans held
for investment decreased $2.0 billion to $6.2 billion,
second mortgage loans increased $14.7 million to
$715.2 million, commercial real estate loans increased
$0.3 billion to $1.3 billion and consumer loans
decreased $70.7 million to $340.2 million. The
following table sets forth a breakdown of our loans held for
investment portfolio at December 31, 2006:
LOANS
HELD FOR INVESTMENT, BY RATE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
Adjustable
|
|
|
Rate
|
|
|
|
Rate
|
|
|
Rate
|
|
|
Total
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Mortgage loans
|
|
$
|
713,529
|
|
|
$
|
5,498,236
|
|
|
$
|
6,211,765
|
|
Second mortgage loans
|
|
|
594,237
|
|
|
|
120,917
|
|
|
|
715,154
|
|
Commercial real estate loans
|
|
|
616,012
|
|
|
|
685,807
|
|
|
|
1,301,819
|
|
Construction loans
|
|
|
22,508
|
|
|
|
42,020
|
|
|
|
64,528
|
|
Warehouse lending
|
|
|
-
|
|
|
|
291,656
|
|
|
|
291,656
|
|
Consumer
|
|
|
94,593
|
|
|
|
245,564
|
|
|
|
340,157
|
|
Non-real estate commercial loans
|
|
|
4,167
|
|
|
|
10,439
|
|
|
|
14,606
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,045,046
|
|
|
$
|
6,894,639
|
|
|
$
|
8,939,685
|
|
|
|
|
|
|
|
38
The two tables below provide detail for the activity and the
balance in our loans held for investment portfolio over the past
five years.
LOANS
HELD FOR INVESTMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Mortgage loans
|
|
$
|
6,211,765
|
|
|
$
|
8,248,897
|
|
|
$
|
8,693,768
|
|
|
$
|
5,478,200
|
|
|
$
|
2,579,448
|
|
Second mortgage loans
|
|
|
715,154
|
|
|
|
700,492
|
|
|
|
196,518
|
|
|
|
141,010
|
|
|
|
214,485
|
|
Commercial real estate loans
|
|
|
1,301,819
|
|
|
|
995,411
|
|
|
|
751,730
|
|
|
|
549,456
|
|
|
|
445,668
|
|
Construction loans
|
|
|
64,528
|
|
|
|
65,646
|
|
|
|
67,640
|
|
|
|
58,323
|
|
|
|
54,650
|
|
Warehouse lending
|
|
|
291,656
|
|
|
|
146,694
|
|
|
|
249,291
|
|
|
|
346,780
|
|
|
|
558,782
|
|
Consumer loans
|
|
|
340,157
|
|
|
|
410,920
|
|
|
|
591,107
|
|
|
|
259,656
|
|
|
|
124,806
|
|
Non-real estate commercial loans
|
|
|
14,606
|
|
|
|
8,411
|
|
|
|
9,100
|
|
|
|
8,638
|
|
|
|
8,912
|
|
|
|
|
|
|
|
Total loans held for investment
portfolio
|
|
|
8,939,685
|
|
|
|
10,576,471
|
|
|
|
10,559,154
|
|
|
|
6,842,063
|
|
|
|
3,986,751
|
|
Allowance for loan losses
|
|
|
(45,779
|
)
|
|
|
(39,140
|
)
|
|
|
(38,318
|
)
|
|
|
(37,828
|
)
|
|
|
(39,389
|
)
|
|
|
|
|
|
|
Total loans held for investment
portfolio, net
|
|
$
|
8,893,906
|
|
|
$
|
10,537,331
|
|
|
$
|
10,520,836
|
|
|
$
|
6,804,235
|
|
|
$
|
3,947,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOANS
HELD FOR INVESTMENT PORTFOLIO ACTIVITY SCHEDULE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance, beginning of year
|
|
$
|
10,576,471
|
|
|
$
|
10,559,154
|
|
|
$
|
6,842,063
|
|
|
$
|
3,986,751
|
|
|
$
|
3,166,732
|
|
Loans originated
|
|
|
2,406,068
|
|
|
|
5,101,206
|
|
|
|
4,840,028
|
|
|
|
1,901,105
|
|
|
|
586,809
|
|
Change in lines of credit
|
|
|
(244,666
|
)
|
|
|
186,041
|
|
|
|
(189,696
|
)
|
|
|
1,267,338
|
|
|
|
331,826
|
|
Loans transferred (to) from
various portfolios, net
|
|
|
(1,018,040
|
)
|
|
|
400,475
|
|
|
|
2,297,091
|
|
|
|
2,613,355
|
|
|
|
2,127,324
|
|
Loan amortization / prepayments
|
|
|
(2,696,441
|
)
|
|
|
(5,622,989
|
)
|
|
|
(3,190,640
|
)
|
|
|
(2,890,680
|
)
|
|
|
(2,177,918
|
)
|
Loans transferred to repossessed
assets
|
|
|
(83,707
|
)
|
|
|
(47,416
|
)
|
|
|
(39,692
|
)
|
|
|
(35,806
|
)
|
|
|
(48,022
|
)
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
8,939,685
|
|
|
$
|
10,576,471
|
|
|
$
|
10,559,154
|
|
|
$
|
6,842,063
|
|
|
$
|
3,986,751
|
|
|
|
|
|
|
|
39
Quality
of Earning Assets
The following table sets forth certain information about our
non-performing assets as of the end of the last five years. As
of December 31, 2006, we had no other loans outstanding
where known information about possible credit problems of
borrowers caused management concern regarding the ability of the
same borrowers to comply with the loan repayment terms.
NON-PERFORMING
LOANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Non-accrual loans
|
|
$
|
57,071
|
|
|
$
|
64,466
|
|
|
$
|
57,026
|
|
|
$
|
58,334
|
|
|
$
|
68,032
|
|
Repurchased non-performing assets,
net
|
|
|
22,096
|
|
|
|
34,777
|
|
|
|
35,013
|
|
|
|
11,956
|
|
|
|
10,404
|
|
Real estate and other repossessed
assets, net
|
|
|
80,995
|
|
|
|
47,724
|
|
|
|
37,823
|
|
|
|
36,778
|
|
|
|
45,094
|
|
|
|
|
|
|
|
Total non-performing assets, net
|
|
$
|
160,162
|
|
|
$
|
146,967
|
|
|
$
|
129,862
|
|
|
$
|
107,068
|
|
|
$
|
123,530
|
|
|
|
|
|
|
|
Ratio of non-performing assets to
total assets
|
|
|
1.03
|
%
|
|
|
0.98
|
%
|
|
|
0.99
|
%
|
|
|
1.01
|
%
|
|
|
1.51
|
%
|
Ratio of non-performing loans to
loans held for investment
|
|
|
0.64
|
%
|
|
|
0.61
|
%
|
|
|
0.54
|
%
|
|
|
0.85
|
%
|
|
|
1.71
|
%
|
Ratio of allowance to
non-performing loans
|
|
|
80.21
|
%
|
|
|
60.71
|
%
|
|
|
67.19
|
%
|
|
|
64.85
|
%
|
|
|
57.90
|
%
|
Ratio of allowance to loans held
for investment
|
|
|
0.51
|
%
|
|
|
0.37
|
%
|
|
|
0.36
|
%
|
|
|
0.55
|
%
|
|
|
0.99
|
%
|
Ratio of net charge-offs to
average loans held for investment
|
|
|
0.20
|
%
|
|
|
0.16
|
%
|
|
|
0.16
|
%
|
|
|
0.35
|
%
|
|
|
0.51
|
%
|
Delinquent Loans. Loans are considered to be
delinquent when any payment of principal or interest is past
due. While it is the goal of management to work out a
satisfactory repayment schedule with a delinquent borrower, we
will undertake foreclosure proceedings if the delinquency is not
satisfactorily resolved. Our procedures regarding delinquent
loans are designed to assist borrowers in meeting their
contractual obligations. We customarily mail several notices of
past due payments to the borrower within 30 days after the
due date, and late charges are assessed in accordance with
certain parameters. Our collection department makes telephone or
personal contact with borrowers after a
30-day
delinquency. In certain cases, we recommend that the borrower
seek credit-counseling assistance and may grant forbearance if
it is determined that the borrower is likely to correct a loan
delinquency within a reasonable period of time. We cease the
accrual of interest on loans that we classify as
non-performing because they are more than
90 days delinquent. Such interest is recognized as income
only when it is actually collected. At December 31, 2006,
we had $119.4 million in loans that were determined to be
delinquent. Of those delinquent loans, $57.1 million of
loans were non-performing, of which $51.8 million, or
90.7%, were single-family residential mortgage loans.
The following table sets forth information regarding delinquent
loans as of the end of the last three years (in thousands):
DELINQUENT
LOANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
Days Delinquent
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
30
|
|
$
|
40,140
|
|
|
$
|
30,972
|
|
|
$
|
34,346
|
|
60
|
|
|
22,163
|
|
|
|
20,456
|
|
|
|
13,247
|
|
90
|
|
|
57,071
|
|
|
|
64,466
|
|
|
|
57,026
|
|
|
|
|
|
|
|
Total
|
|
$
|
119,374
|
|
|
$
|
115,894
|
|
|
$
|
104,619
|
|
|
|
|
|
|
|
We currently calculate our delinquent loans using a method
required by the Office of Thrift Supervision, when we prepare
regulatory reports that we submit to the OTS each quarter. This
method also called the OTS
40
Method, considers a loan to be delinquent if no payment is
received after the first day of the month following the month of
the missed payment. Other companies with mortgage banking
operations similar to ours usually use the Mortgage Bankers
Association Method (MBA Method) which considers a
loan to be delinquent if payment is not received by the end of
the month of the missed payment. The key difference between the
two methods is that a loan considered delinquent
under the MBA Method would not be considered
delinquent under the OTS Method for another
30 days. Under the MBA Method of calculating delinquent
loans, 30 day delinquencies equaled $117.6 million,
60 day delinquencies equaled $40.1 million and
90 day delinquencies equaled $80.2 million at
December 31, 2006. Total delinquent loans under the MBA
Method total $237.9 million or 2.66% of loans held for
investment at December 31, 2006. By comparison, delinquent
loans at year-end 2005 totaled $252.0 million, or 2.38% of
total loans held for investment at December 31, 2005.
The following table sets forth information regarding
non-performing loans as to which we have ceased accruing
interest (in thousands):
NON-ACCRUAL
LOANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006
|
|
|
|
|
|
|
|
|
|
As a % of
|
|
|
As a % of
|
|
|
|
Investment
|
|
|
Non-
|
|
|
Loan
|
|
|
Non-
|
|
|
|
Loan
|
|
|
Performing
|
|
|
Specified
|
|
|
Performing
|
|
|
|
Portfolio
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Loans
|
|
|
|
|
|
|
Mortgage loans
|
|
$
|
6,211,765
|
|
|
$
|
47,582
|
|
|
|
0.77
|
%
|
|
|
83.4
|
%
|
Second mortgages
|
|
|
715,154
|
|
|
|
497
|
|
|
|
0.07
|
%
|
|
|
0.8
|
%
|
Commercial real estate
|
|
|
1,301,819
|
|
|
|
5,132
|
|
|
|
0.39
|
%
|
|
|
9.0
|
%
|
Construction
|
|
|
64,528
|
|
|
|
1,474
|
|
|
|
2.28
|
%
|
|
|
2.6
|
%
|
Warehouse lending
|
|
|
291,656
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
0.0
|
%
|
Consumer
|
|
|
340,157
|
|
|
|
2,386
|
|
|
|
0.70
|
%
|
|
|
4.2
|
%
|
Commercial non-real estate
|
|
|
14,606
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
Total loans
|
|
|
8,939,685
|
|
|
$
|
57,071
|
|
|
|
0.64
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less allowance for loan losses
|
|
|
(45,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment loans (net of
allowance)
|
|
$
|
8,893,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses. The allowance for loan
losses represents managements estimate of probable losses
in our loans held for investment portfolio as of the date of the
consolidated financial statements. The allowance provides for
probable losses that have been identified with specific customer
relationships and for probable losses believed to be inherent in
the loan portfolio, but that have not been specifically
identified.
We perform a detailed credit quality review annually on large
commercial loans as well as on selected other smaller balance
commercial loans and may allocate a specific portion of the
allowance to such loans based upon this review. Commercial and
commercial real estate loans that are determined to be
substandard and exceed $1.0 million are treated as impaired
and individually evaluated to determine the necessity of a
specific reserve in accordance with the provisions of
SFAS 114, Accounting by Creditors for Impairment of a
Loan. This pronouncement requires a specific allowance to be
established as a component of the allowance for loan losses when
it is probable all amounts due will not be collected pursuant to
the contractual terms of the loan and the recorded investment in
the loan exceeds its fair value. Fair value is measured using
either the present value of the expected future cash flows
discounted at the loans effective interest rate, the
observable market price of the loan, or the fair value of the
collateral if the loan is collateral dependent, reduced by
estimated disposal costs. In estimating the fair value of
collateral, we utilize outside fee-based appraisers to evaluate
various factors, such as occupancy and rental rates in our real
estate markets and the level of obsolescence that may exist on
assets acquired from commercial business loans.
A portion of the allowance is also allocated to the remaining
commercial loans by applying projected loss ratios, based on
numerous factors identified below, to the loans within the
different risk ratings.
41
Additionally, management has
sub-divided
the homogeneous portfolios, including consumer and residential
mortgage loans, into categories that have exhibited a greater
loss exposure (such as
sub-prime
loans and loans that are not salable on the secondary market
because of collateral or documentation issues). The portion of
the allowance allocated to other consumer and residential
mortgage loans is determined by applying projected loss ratios
to various segments of the loan portfolio. Projected loss ratios
incorporate factors such as recent charge-off experience,
current economic conditions and trends, trends with respect to
past due and non-accrual amounts, and are supported by
underlying analysis.
Management maintains an unallocated allowance to recognize the
uncertainty and imprecision underlying the process of estimating
expected loan losses. Determination of the probable losses
inherent in the portfolio, which are not necessarily captured by
the allocation methodology discussed above, involve the exercise
of judgment.
As the process for determining the adequacy of the allowance
requires subjective and complex judgment by management about the
effect of matters that are inherently uncertain, subsequent
evaluations of the loan portfolio, in light of the factors then
prevailing, may result in significant changes in the allowance
for loan losses. In estimating the amount of credit losses
inherent in our loan portfolio, various assumptions are made.
For example, when assessing the condition of the overall
economic environment, assumptions are made regarding current
economic trends and their impact on the loan portfolio. In the
event the national economy were to sustain a prolonged downturn,
the loss factors applied to our portfolios may need to be
revised, which may significantly impact the measurement of the
allowance for loan losses. For impaired loans that are
collateral dependent, the estimated fair value of the collateral
may deviate significantly from the proceeds received when the
collateral is sold.
The allowance for loan losses totaled $45.8 million at
December 31, 2006, an increase of $6.7 million, or
17.1% from the $39.1 million at December 31, 2005. The
allowance for loan losses as a percentage of non-performing
loans was 80.2% and 60.7% at December 31, 2006 and 2005,
respectively. During 2006, we recorded a provision for loan
losses of $25.4 million compared to a provision of
$18.9 million recorded in 2005 and $16.1 million in
2004. Net charge-offs in 2006 equaled $18.8 million
compared to $18.1 million in 2005 and $15.6 million in
2004. Net charge-offs in 2006 equaled 0.20% of average
investment loans compared to 0.16% and 0.16% in 2005 and 2004,
respectively.
The following tables set forth certain information regarding our
allowance for loan losses as of December 31, and activity
in the allowance for loan losses during the past five years:
ALLOWANCE
FOR LOAN LOSSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006
|
|
|
|
Investment
|
|
|
Percent
|
|
|
|
|
|
Percentage
|
|
|
|
Loan
|
|
|
of
|
|
|
Reserve
|
|
|
to Total
|
|
|
|
Portfolio
|
|
|
Portfolio
|
|
|
Amount
|
|
|
Reserve
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Mortgage loans
|
|
$
|
6,211,765
|
|
|
|
69.5
|
%
|
|
$
|
16,355
|
|
|
|
35.7
|
%
|
Second mortgages
|
|
|
715,154
|
|
|
|
8.0
|
|
|
|
6,627
|
|
|
|
14.5
|
|
Commercial real estate
|
|
|
1,301,819
|
|
|
|
14.5
|
|
|
|
7,748
|
|
|
|
16.9
|
|
Construction
|
|
|
64,528
|
|
|
|
0.7
|
|
|
|
762
|
|
|
|
1.7
|
|
Warehouse lending
|
|
|
291,656
|
|
|
|
3.3
|
|
|
|
672
|
|
|
|
1.5
|
|
Consumer
|
|
|
340,157
|
|
|
|
3.8
|
|
|
|
11,091
|
|
|
|
24.2
|
|
Commercial non-real estate
|
|
|
14,606
|
|
|
|
0.2
|
|
|
|
362
|
|
|
|
0.8
|
|
Unallocated
|
|
|
|
|
|
|
0.0
|
|
|
|
2,162
|
|
|
|
4.7
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,939,685
|
|
|
|
100.0
|
%
|
|
$
|
45,779
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
42
ALLOCATION
OF THE ALLOWANCE FOR LOAN LOSSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
Loans
|
|
|
|
|
|
Loans
|
|
|
|
|
|
Loans
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
To
|
|
|
|
|
|
To
|
|
|
|
|
|
To
|
|
|
|
|
|
To
|
|
|
|
|
|
To
|
|
|
|
Reserve
|
|
|
Total
|
|
|
Reserve
|
|
|
Total
|
|
|
Reserve
|
|
|
Total
|
|
|
Reserve
|
|
|
Total
|
|
|
Reserve
|
|
|
Total
|
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
$
|
16,355
|
|
|
|
69.5
|
%
|
|
$
|
20,466
|
|
|
|
78.0
|
%
|
|
$
|
17,304
|
|
|
|
82.0
|
%
|
|
$
|
20,347
|
|
|
|
80.1
|
%
|
|
$
|
26,008
|
|
|
|
64.7
|
%
|
Second mortgages
|
|
|
6,627
|
|
|
|
8.0
|
%
|
|
|
7,156
|
|
|
|
6.6
|
%
|
|
|
3,318
|
|
|
|
1.9
|
%
|
|
|
2,129
|
|
|
|
2.1
|
%
|
|
|
3,502
|
|
|
|
5.4
|
%
|
Commercial real estate
|
|
|
7,748
|
|
|
|
14.5
|
%
|
|
|
5,315
|
|
|
|
9.4
|
%
|
|
|
2,319
|
|
|
|
7.1
|
%
|
|
|
7,532
|
|
|
|
8.0
|
%
|
|
|
2,823
|
|
|
|
11.2
|
%
|
Construction
|
|
|
762
|
|
|
|
0.7
|
%
|
|
|
604
|
|
|
|
0.6
|
%
|
|
|
3,538
|
|
|
|
0.6
|
%
|
|
|
2,380
|
|
|
|
0.8
|
%
|
|
|
2,852
|
|
|
|
1.4
|
%
|
Warehouse lending
|
|
|
672
|
|
|
|
3.3
|
%
|
|
|
334
|
|
|
|
1.4
|
%
|
|
|
5,167
|
|
|
|
2.4
|
%
|
|
|
273
|
|
|
|
5.1
|
%
|
|
|
385
|
|
|
|
14.0
|
%
|
Consumer
|
|
|
11,091
|
|
|
|
3.8
|
%
|
|
|
3,396
|
|
|
|
3.9
|
%
|
|
|
4,924
|
|
|
|
5.9
|
%
|
|
|
3,710
|
|
|
|
3.8
|
%
|
|
|
2,571
|
|
|
|
3.1
|
%
|
Commercial non- real estate
|
|
|
362
|
|
|
|
0.2
|
%
|
|
|
729
|
|
|
|
0.1
|
%
|
|
|
1,748
|
|
|
|
0.1
|
%
|
|
|
1,457
|
|
|
|
0.1
|
%
|
|
|
1,248
|
|
|
|
0.2
|
%
|
Unallocated
|
|
|
2,162
|
|
|
|
|
|
|
|
1,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
45,779
|
|
|
|
100.0
|
%
|
|
$
|
39,140
|
|
|
|
100.0
|
%
|
|
$
|
38,318
|
|
|
|
100.0
|
%
|
|
$
|
37,828
|
|
|
|
100.0
|
%
|
|
$
|
39,389
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACTIVITY
IN THE ALLOWANCE FOR LOAN LOSSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Beginning balance
|
|
$
|
39,140
|
|
|
$
|
38,318
|
|
|
$
|
37,828
|
|
|
$
|
39,389
|
|
|
$
|
29,417
|
|
Provision for loan losses
|
|
|
25,450
|
|
|
|
18,876
|
|
|
|
16,077
|
|
|
|
20,081
|
|
|
|
27,126
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
|
(9,833
|
)
|
|
|
(11,853
|
)
|
|
|
(14,629
|
)
|
|
|
(20,455
|
)
|
|
|
(14,263
|
)
|
Consumer loans
|
|
|
(7,806
|
)
|
|
|
(4,713
|
)
|
|
|
(1,147
|
)
|
|
|
(881
|
)
|
|
|
(1,234
|
)
|
Commercial loans
|
|
|
(1,414
|
)
|
|
|
(3,055
|
)
|
|
|
(680
|
)
|
|
|
(1,048
|
)
|
|
|
(1,067
|
)
|
Construction loans
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(313
|
)
|
|
|
(5
|
)
|
Other
|
|
|
(2,560
|
)
|
|
|
(286
|
)
|
|
|
(717
|
)
|
|
|
(298
|
)
|
|
|
(1,078
|
)
|
|
|
|
|
|
|
Total charge offs
|
|
|
(21,613
|
)
|
|
|
(19,907
|
)
|
|
|
(17,175
|
)
|
|
|
(22,995
|
)
|
|
|
(17,647
|
)
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
|
665
|
|
|
|
1,508
|
|
|
|
1,081
|
|
|
|
641
|
|
|
|
5
|
|
Consumer loans
|
|
|
1,720
|
|
|
|
247
|
|
|
|
242
|
|
|
|
393
|
|
|
|
78
|
|
Commercial loans
|
|
|
40
|
|
|
|
98
|
|
|
|
265
|
|
|
|
114
|
|
|
|
410
|
|
Construction loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
377
|
|
|
|
|
|
|
|
|
|
|
|
205
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
2,802
|
|
|
|
1,853
|
|
|
|
1,588
|
|
|
|
1,353
|
|
|
|
493
|
|
|
|
|
|
|
|
Charge-offs, net of recoveries
|
|
|
(18,811
|
)
|
|
|
(18,054
|
)
|
|
|
(15,587
|
)
|
|
|
(21,642
|
)
|
|
|
(17,154
|
)
|
|
|
|
|
|
|
Ending balance
|
|
$
|
45,779
|
|
|
$
|
39,140
|
|
|
$
|
38,318
|
|
|
$
|
37,828
|
|
|
$
|
39,389
|
|
|
|
|
|
|
|
Net charge-off ratio
|
|
|
0.20
|
%
|
|
|
0.16
|
%
|
|
|
0.16
|
%
|
|
|
0.35
|
%
|
|
|
0.51
|
%
|
|
|
|
|
|
|
Repossessed Assets. Real property that we acquire
as a result of the foreclosure process is classified as
real estate owned until it is sold. Our foreclosure
committee decides whether to rehabilitate the property or sell
it as is and whether to list the property with a
broker. Generally, we are able to dispose of a substantial
portion of this type of real estate and other repossessed assets
during each year, but we invariably acquire
43
additional real estate and other assets through repossession in
the ordinary course of business. At December 31, 2006, we
had $81.0 million of repossessed assets compared to
$47.7 million at December 31, 2005.
The following schedule provides the activity for repossessed
assets during each of the past five years:
NET
REPOSSESSED ASSET ACTIVITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
47,724
|
|
|
$
|
37,823
|
|
|
$
|
36,778
|
|
|
$
|
45,094
|
|
|
$
|
38,868
|
|
Additions
|
|
|
83,707
|
|
|
|
48,546
|
|
|
|
42,668
|
|
|
|
38,991
|
|
|
|
45,488
|
|
Disposals
|
|
|
(50,436
|
)
|
|
|
(38,645
|
)
|
|
|
(41,623
|
)
|
|
|
(47,307
|
)
|
|
|
(39,262
|
)
|
|
|
|
|
|
|
Ending balance
|
|
$
|
80,995
|
|
|
$
|
47,724
|
|
|
$
|
37,823
|
|
|
$
|
36,778
|
|
|
$
|
45,094
|
|
|
|
|
|
|
|
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 we have reacquired because of
representation and warranties issues related to loan sales or
securitizations and that are non-performing. During 2006 and
2005, we repurchased $68.4 million and $56.5 million
in non-performing loans, respectively. The principal balance of
these repurchased assets totaled $9.6 million and
$13.6 million at December 31, 2006 and 2005,
respectively, and is included within other assets in our
consolidated statements of financial condition.
The following table sets forth the amount of non-performing
loans we have repurchased during the past five years, organized
by the year of origination:
REPURCHASED
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Non-performing
|
|
|
|
|
|
|
Total Loan Sales
|
|
|
Repurchased
|
|
|
% of
|
|
Year
|
|
and Securitizations
|
|
|
Loans
|
|
|
Sales
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
2002
|
|
$
|
40,495,894
|
|
|
$
|
50,529
|
|
|
|
0.12
|
%
|
2003
|
|
|
51,922,757
|
|
|
|
29,214
|
|
|
|
0.06
|
%
|
2004
|
|
|
28,937,576
|
|
|
|
35,469
|
|
|
|
0.12
|
%
|
2005
|
|
|
24,703,575
|
|
|
|
18,539
|
|
|
|
0.08
|
%
|
2006
|
|
|
16,968,994
|
|
|
|
452
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
Totals
|
|
$
|
163,028,796
|
|
|
$
|
134,203
|
|
|
|
0.08
|
%
|
|
|
|
|
|
|
Accrued Interest Receivable. Accrued interest
receivable increased from $48.4 million at
December 31, 2005 to $52.8 million at
December 31, 2006 as our total earning assets increased. We
typically collect interest in the month following the month in
which it is earned.
FHLB Stock. Holdings of FHLB stock decreased from
$292.1 million at December 31, 2005, to
$277.6 million at December 31, 2006. This decrease was
the result of the redemption of a portion of our
44
FHLB stock by the FHLB. As a member of the FHLB, we are required
to hold shares of FHLB stock in an amount at least equal to 1%
of the aggregate unpaid principal balance of our mortgage loans,
home purchase contracts and similar obligations at the beginning
of each year, or 1/20th of our FHLB advances, whichever is
greater. Management believes that the volume of our holdings of
FHLB stock do not constitute a controlling or significant
interest in the FHLB. As such, management does not believe that
the FHLB is an affiliate or can in any other way be deemed to be
a related party.
Premises and Equipment. Premises and equipment,
net of accumulated depreciation, totaled $219.2 million at
December 31, 2006, an increase of $18.4 million, or
9.2%, from $200.8 million at December 31, 2005. During
2006, we added 14 additional banking centers and continued to
invest in computer equipment. In addition, we acquired land for
future bank expansion.
Mortgage Servicing Rights. Mortgage servicing
rights totaled $173.3 million at December 31, 2006, a
decrease of $142.4 million, from $315.7 million at
December 31, 2005. The decrease reflects our capitalization
of $223.9 million of MSRs, sales of $296.2 million of
MSRs and amortization of $69.6 million of MSRs. The
recorded amount of the MSR portfolio at December 31, 2006
and 2005 as a percentage of the unpaid principal balance of the
loans we are servicing was 1.15% and 1.06%, respectively. When
our home lending operation sells mortgage loans in the secondary
market, it usually retains the right to continue to service the
mortgage loans for a fee. The weighted average service fee on
loans serviced for others is currently 0.37% of the loan
principal balance outstanding. The amount of MSRs initially
recorded is based on the fair value of the MSRs determined on
the date when the underlying loan is sold. Our determination of
fair value, and thus the amount we record (i.e., the
capitalization amount) is based on estimated values paid by
third party buyers in recent servicing rights sale transactions,
internal valuations, and market pricing. Estimates of fair value
reflect the following variables:
|
|
|
|
|
Anticipated prepayment speeds (also known as the Constant
Prepayment Rate)
|
|
|
|
Product type (i.e., conventional, government, balloon)
|
|
|
|
Fixed or adjustable rate of interest
|
|
|
|
Interest rate
|
|
|
|
Term (i.e. 15 or 30 years)
|
|
|
|
Servicing costs per loan
|
|
|
|
Discounted yield rate
|
|
|
|
Estimate of ancillary income such as late fees, prepayment fees,
etc.
|
The most important assumptions used in the MSR valuation model
are anticipated annual loan prepayment speeds. During 2006,
these speeds ranged between 15% and 30% on new production loans.
The factors used for those assumptions are selected based on
market interest rates and other market assumptions. Their
reasonableness is confirmed through surveys conducted with
independent third parties.
On an ongoing basis, the MSR portfolio is internally valued to
assess any impairment in the asset. These impairment analyses
consider the same variables that we address in determining the
value of the portfolio at the financial statement date. In
addition, a third party valuation of the MSR portfolio is
obtained annually to confirm the reasonableness of the value
generated by the internal valuation model.
At December 31, 2006 and 2005, the fair value of the MSR
portfolio was $197.6 million and $421.1 million,
respectively. At December 31, 2006, the fair value of each
MSR was based upon the following weighted-average assumptions:
(1) a discount rate of 10.3%; (2) an anticipated loan
prepayment rate of 28.5% CPR; and (3) servicing costs per
conventional loan of $42 and $45 for each government or
adjustable-rate loan, respectively.
45
The following table sets forth activity in loans serviced for
others during the past five years (in thousands):
LOANS
SERVICED FOR OTHERS ACTIVITY SCHEDULE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
29,648,088
|
|
|
$
|
21,354,724
|
|
|
$
|
30,395,079
|
|
|
$
|
21,586,797
|
|
|
$
|
14,222,802
|
|
Loans servicing originated
|
|
|
16,370,925
|
|
|
|
21,595,729
|
|
|
|
27,584,787
|
|
|
|
49,461,431
|
|
|
|
39,198,521
|
|
Loan amortization / prepayments
|
|
|
(3,376,219
|
)
|
|
|
(4,220,504
|
)
|
|
|
(6,985,894
|
)
|
|
|
(9,982,414
|
)
|
|
|
(3,329,825
|
)
|
Loan servicing sales
|
|
|
(27,610,290
|
)
|
|
|
(9,081,861
|
)
|
|
|
(29,639,248
|
)
|
|
|
(30,670,735
|
)
|
|
|
(28,504,701
|
)
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
15,032,504
|
|
|
$
|
29,648,088
|
|
|
$
|
21,354,724
|
|
|
$
|
30,395,079
|
|
|
$
|
21,586,797
|
|
|
|
|
|
|
|
Other Assets. Other assets decreased
$69.2 million, or 35.4%, to $126.5 million at
December 31, 2006, from $195.7 million at
December 31, 2005. The majority of this decrease was
attributable to a payments received on receivables recorded in
conjunction with MSR sales transacted during the latter part of
2005. Upon the sale of MSRs, we typically receive a down payment
from the purchaser equivalent to approximately 20% of the total
purchase price and record a receivable account for the balance
of the purchase price due. This recorded receivable is typically
collected within a six-month time frame.
Liabilities
Deposits. Deposit accounts decreased
$0.6 billion, or 7.5%, to $7.4 billion at
December 31, 2006, from $8.0 billion at
December 31, 2005. We believe that this decrease reflects,
in part, our decision to adhere to a pricing discipline on
deposits in highly competitive markets to control our cost of
funds. We increased the number of banking centers from 137 at
December 31, 2005 to 151 at December 31, 2006.
Our deposits can be subdivided into three areas: the retail
division, the municipal division, and the national accounts
division. Retail deposits accounts increased $0.1 billion,
or 2.1% to $4.9 billion at December 31, 2006, from
$4.8 billion at December 31, 2005. Saving and checking
accounts totaled 10.71% of total retail deposits. In addition,
at December 31, 2006, retail certificates of deposit
totaled $3.8 billion, with an average balance of $25,200
and a weighted average cost of 4.86% while money market deposits
totaled $608.3 million, with an average cost of 4.04%.
Overall, the retail division had an average cost of deposits of
4.38%.
We call on local municipal agencies as another source for
deposit funding. Although these deposit accounts remained stable
at $1.4 billion as of December 31, 2006 and 2005, they
fluctuate during the year as the municipalities collect
semi-annual assessments and make necessary disbursements over
the following six-months. These deposits had a weighted average
cost of 5.33% at December 31, 2006. These deposit accounts
include $1.3 billion of certificates of deposit with
maturities typically less than one year and $87.3 million
in checking and savings accounts.
In past years, our national accounts division garnered funds
through nationwide advertising of deposit rates and the use of
investment banking firms. Since 2005, we have not solicited any
funds through the division as we have been able to access more
attractive funding sources through FHLB advances, security
repurchase agreements and other forms of deposits that provide
the potential for a long term customer relationship. These
deposit accounts decreased $0.7 billion, or 38.9%, to
$1.1 billion at December 31, 2006, from
$1.8 billion at December 31, 2005. These deposits had
a weighted average cost of 3.66% at December 31, 2006.
46
The deposit accounts are as follows at December 31, (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Demand accounts
|
|
$
|
380,162
|
|
|
$
|
374,816
|
|
Savings accounts
|
|
|
144,460
|
|
|
|
239,215
|
|
MMDA
|
|
|
608,282
|
|
|
|
781,087
|
|
Certificates of deposit(1)
|
|
|
3,763,781
|
|
|
|
3,450,450
|
|
|
|
|
|
|
|
Total retail deposits
|
|
|
4,896,685
|
|
|
|
4,845,568
|
|
Municipal deposits
|
|
|
1,419,964
|
|
|
|
1,353,633
|
|
National accounts
|
|
|
1,062,646
|
|
|
|
1,779,799
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
7,379,295
|
|
|
$
|
7,979,000
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was approximately $2.6 billion and
$2.4 billion at December 31, 2006 and
December 31, 2005, respectively. |
Interest Rate Swaps. In October 2003, we entered
into a series of interest rate swaps to offset our exposure to
rising rates on a portion of our certificates of deposit
portfolio. The notional amount of these swaps totaled
$500 million. Contractually, we receive a floating rate
tied to LIBOR and pay a fixed rate. The swaps are categorized in
two groups: the first receiving one-month LIBOR and the second
receiving three-month LIBOR. These swaps have maturities ranging
from three to five years. These interest rate swaps effectively
act as a cash flow hedge against a rise in the cost of our
deposits. On December 30, 2004, we extinguished
$250 million of the swaps for an after-tax gain of
$2.6 million. This gain was deferred and is being
reclassified into earnings from accumulated other comprehensive
income over three years, which is the original duration of the
extinguished swaps.
On December 19, 2002, we, through our subsidiary Flagstar
Statutory Trust II, completed a private placement sale of
trust-preferred securities. As part of the transaction, we
entered into an interest rate swap agreement with the placement
agent in which we pay a fixed rate of 6.88% on a notional amount
of $25.0 million and receive a floating rate equal to that
being paid on the Flagstar Statutory Trust II securities.
On September 22, 2005, we, through our subsidiary Flagstar
Statutory Trust VIII, completed a private placement sale of
trust-preferred securities. As part of the transaction, we
entered into an interest rate swap with the placement agent in
which we are required to pay a fixed rate of 4.33% on a notional
amount of $25.0 million and will receive a floating rate
equal to that being paid on the Flagstar Statutory
Trust VIII securities. The swap matures on October 7,
2010. The securities are callable after October 7, 2010.
FHLB Advances. FHLB advances increased
$1.2 billion, or 28.6%, to $5.4 billion at
December 31, 2006, from $4.2 billion at
December 31, 2005. We rely upon advances from the FHLB as a
source of funding for the origination or purchase of loans for
sale in the secondary market and for providing duration-specific
short-term and medium-term financing. The outstanding balance of
FHLB advances fluctuates from time to time depending upon our
current inventory of mortgage loans available for sale and the
availability of lower cost funding from our retail deposit base,
the escrow accounts we hold, or alternative funding sources such
as repurchase agreements. See Note 15 of the Notes to the
Consolidated Financial Statements, in Item 8. Financial
Statements and Supplemental Data, herein for additional
information on FHLB advances.
The portfolio of putable FHLB advances we hold, which matures in
2011, may be called by the FHLB based on FHLB volatility models.
If these advances are called, we will be forced to find an
alternative source of funding, which could be at a higher cost
and, therefore, negatively impact net earnings.
Security Repurchase Agreements. Security
repurchase agreements declined $0.1 billion to
$1.0 billion at December 31, 2006, from
$1.1 billion at December 31, 2005. 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
47
monitored, and additional collateral is obtained or requested to
be returned, as appropriate. See Note 16 of the Notes to
the Consolidated Financial Statements, in Item 8. Financial
Statements and Supplemental Data, herein, for additional
information on security repurchase agreements.
Long-Term Debt. As part of our overall capital
strategy, we may raise capital through the issuance of
trust-preferred securities by our special purpose financing
entities formed for the offerings. The trust preferred
securities outstanding mature 30 years from issuance, are
callable after five years, pay interest quarterly, and the
interest expense is deductible for federal income tax purposes.
The majority of the net proceeds from these offerings was
contributed to the Bank as additional paid in capital and
subject to regulatory limitations, is includable as regulatory
capital.
On April 27, 1999, we, through our subsidiary Flagstar
Trust, completed the sale of 2.99 million shares of 9.50%
trust preferred securities, providing gross proceeds totaling
$74.8 million. On April 30, 2004, the Company redeemed
the preferred securities. Flagstar Trust is currently inactive.
On December 19, 2002, we, through our subsidiary Flagstar
Statutory Trust II, completed a private placement sale of
trust-preferred securities, providing gross proceeds totaling
$25.0 million. The securities pay interest at a floating
rate of three-month LIBOR plus 3.25%, adjustable quarterly,
after an initial rate of 4.66%. As part of the transaction, we
entered into an interest rate swap agreement with the placement
agent in which we pay a fixed rate of 6.88% on a notional amount
of $25.0 million and receive a floating rate equal to that
being paid on the Flagstar Statutory Trust II securities.
On February 19, 2003, we, through our subsidiary Flagstar
Statutory Trust III, completed a private placement sale of
trust-preferred securities, providing gross proceeds totaling
$25.0 million. The securities have an effective cost for
the first five years of 6.55% and a floating rate thereafter
equal to the three-month LIBOR rate plus 3.25% adjustable
quarterly.
On March 19, 2003, we, through our subsidiary Flagstar
Statutory Trust IV, completed a private placement sale of
trust-preferred securities, providing gross proceeds totaling
$25.0 million. The securities have an effective cost for
the first five years of 6.75% and a floating rate thereafter
equal to the three-month LIBOR rate plus 3.25% adjustable
quarterly.
On December 29, 2004, we, through our subsidiary Flagstar
Statutory Trust V, completed a private placement sale
of trust-preferred securities, providing gross proceeds totaling
$25.0 million. The securities have a floating rate that
reprices quarterly thereafter at three-month LIBOR plus 2.00%.
On March 30, 2005, we, through our subsidiary Flagstar
Statutory Trust VI, completed a private placement sale of
trust-preferred securities, providing gross proceeds totaling
$25.0 million. The securities have a floating rate that
reprices quarterly at three-month LIBOR plus 2.00%.
On March 31, 2005, we, through our subsidiary Flagstar
Statutory Trust VII, completed a private placement sale of
trust-preferred securities, providing gross proceeds totaling
$50.0 million. The securities have an effective cost for
the first five years of 6.47% and a floating rate thereafter
equal to the three-month LIBOR rate plus 2.00% adjustable
quarterly.
On September 22, 2005, we, through our subsidiary Flagstar
Statutory Trust VIII, completed a private placement sale of
trust-preferred securities, providing gross proceeds totaling
$25.0 million. The securities have a floating rate that
reprices quarterly at three-month LIBOR plus 1.50%.
Accrued Interest Payable. Accrued interest payable
increased $5.0 million, or 12.1%, to $46.3 million at
December 31, 2006 from $41.3 million at
December 31, 2005. These amounts represent interest
payments that are payable to depositors and other entities from
which we borrowed funds. These balances fluctuate with the size
of our interest-bearing liability portfolio and the average cost
of our interest-bearing liabilities. The interest-bearing
liability portfolio increased 2.4% during the period and we had
an 83 basis points increase in the average cost of liabilities.
Undisbursed Payments. Undisbursed payments on
loans serviced for others decreased $259.7 million, or
63.8%, to $147.4 million at December 31, 2006, from
$407.1 million at December 31, 2005. These amounts
48
represent payments received from borrowers for interest,
principal and related loan charges, which have not been remitted
to loan investors. These balances fluctuate with the size of the
servicing portfolio and the transferring of servicing to the
purchaser in connection with servicing sales. Loans serviced for
others at December 31, 2006, including subservicing of
$0.2 billion, equaled $15.2 billion versus
$34.6 billion at December 31, 2005.
Escrow Accounts. The amount of funds in escrow
accounts decreased $74.5 million, or 34.0%, to
$144.5 million at December 31, 2006, from
$219.0 million at December 31, 2005. These accounts
are maintained on behalf of mortgage customers and include funds
collected for real estate taxes, homeowners insurance, and
other insurance product liabilities. These balances fluctuate
with the amount of loans serviced. The balances also fluctuate
during the year depending upon the scheduled payment dates for
the related liabilities. Total residential mortgage loans
serviced at December 31, 2006, equaled $27.2 billion
versus $41.8 billion at December 31, 2005, a 34.9%
decrease.
Federal Income Taxes Payable. Income taxes payable
decreased $45.6 million, or 60.6%, to $29.7 million at
December 31, 2006, from $75.3 million at
December 31, 2005. See Note 18 of the Notes to the
Consolidated Financial Statements, in Item 8. Financial
Statements and Supplementary Data, herein.
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. 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 might 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 amount of the secondary market reserve equaled
$24.2 million and $17.6 million at December 31,
2006 and 2005, respectively. See Note 19 of the Notes to
the Consolidated Financial Statements, in Item 8. Financial
Statements and Supplemental Data, herein.
Contractual
Obligations and Commitments
We have various financial obligations, including contractual
obligations and commercial commitments, which require future
cash payments. Refer to Item 8. Financial Statements and
Supplemental Data Notes 2, 12, 14, 15, 16 and 17.
The following table presents the aggregate annual maturities of
contractual obligations (based on final maturity dates) at
December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Total
|
|
|
|
|
|
|
Deposits without stated maturities
|
|
$
|
1,220,216
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,220,216
|
|
Certificates of deposits
|
|
|
4,944,416
|
|
|
|
1,103,849
|
|
|
|
98,906
|
|
|
|
11,908
|
|
|
|
6,159,079
|
|
FHLB advances
|
|
|
2,757,000
|
|
|
|
1,250,000
|
|
|
|
1,150,000
|
|
|
|
250,000
|
|
|
|
5,407,000
|
|
Trust preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206,197
|
|
|
|
206,197
|
|
Operating leases
|
|
|
5,911
|
|
|
|
7,300
|
|
|
|
3,464
|
|
|
|
1,983
|
|
|
|
18,658
|
|
Security repurchase agreements
|
|
|
990,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
990,806
|
|
Other debt
|
|
|
25
|
|
|
|
50
|
|
|
|
50
|
|
|
|
1,150
|
|
|
|
1,275
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,918,374
|
|
|
$
|
2,361,199
|
|
|
$
|
1,252,420
|
|
|
$
|
471,238
|
|
|
$
|
14,003,231
|
|
|
|
|
|
|
|
49
Liquidity
and Capital Resources
Our principal uses of funds include loan originations, operating
expenses, the payment of dividends and stock repurchases. At
December 31, 2006, we had outstanding rate-lock commitments
to lend $1.8 billion in mortgage loans, along with
outstanding commitments to make other types of loans totaling
$160.4 million. These commitments may expire without being
drawn upon and, therefore, do not necessarily represent future
cash requirements. Total commercial and consumer unused
collateralized lines of credit totaled $1.6 billion at
December 31, 2006.
Our operating expenses increase as we continue to expand our
banking operations in Michigan, Indiana and Georgia. We
generally do not expect new banking centers to operate
profitably for 18 to 24 months, thereby requiring
additional funding to cover their initial operating deficits.
We paid a total cash dividend of $38.1 million on our
common stock during 2006. Any payment of dividends in the future
is subject to the determination of our board of directors. On
January 30, 2007, our board of directors adopted a Stock
Repurchase Program under which we are authorized to repurchase
up to $40.0 million worth of our outstanding common stock.
On February 27, 2007, the Company announced that the board
of directors had increased the authorized repurchase amount from
$40.0 million to $50.0 million. This program expires
in twelve months from January 31, 2007. No shares have been
repurchased under this plan.
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Banks
assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The
Banks capital amounts and classification are also subject
to qualitative judgments by regulators about components, risk
weightings, and other factors.
Our primary sources of funds are customer deposits, loan
repayments and sales, advances from the FHLB, repurchase
agreements, cash generated from operations, and customer escrow
accounts. Additionally, we have issued trust preferred
securities in seven separate offerings to the capital markets.
We believe that these sources of capital will continue to be
adequate to meet our liquidity needs for the foreseeable future.
The following sets forth certain additional information
regarding our sources of liquidity.
Deposits. The following table sets forth
information relating to our total deposit flows for each of the
years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Beginning deposits
|
|
$
|
7,979,000
|
|
|
$
|
7,379,655
|
|
|
$
|
5,680,167
|
|
|
$
|
4,373,889
|
|
|
$
|
3,608,103
|
|
Interest credited
|
|
|
331,516
|
|
|
|
253,292
|
|
|
|
167,765
|
|
|
|
138,625
|
|
|
|
126,977
|
|
Net deposit increase (decrease)
|
|
|
(931,221
|
)
|
|
|
346,053
|
|
|
|
1,531,723
|
|
|
|
1,167,653
|
|
|
|
638,809
|
|
|
|
|
|
|
|
Total deposits, end of the year
|
|
$
|
7,379,295
|
|
|
$
|
7,979,000
|
|
|
$
|
7,379,655
|
|
|
$
|
5,680,167
|
|
|
$
|
4,373,889
|
|
|
|
|
|
|
|
Our decrease in net deposits in 2006 reflects the heightened
competition for deposits in the Michigan and Indiana markets,
which contain most of our banking centers.
Borrowings. The FHLB provides credit for savings
institutions and other member financial institutions. We are
currently authorized through a board resolution to apply for
advances from the FHLB using our mortgage loans as collateral.
The FHLB generally permits advances up to 50% of a
companys adjusted assets, which are defined as
assets reduced by outstanding advances. At December 31,
2006, our advances from the FHLB totaled $5.4 billion, or
53.6% of adjusted assets. Through January 2007, we had authority
and approval from the FHLB to utilize up to $6.75 billion
in collateralized borrowings. Beginning in February 2007, we
have authority and approval from the FHLB to utilize up to
$7.5 billion in collateralized borrowings.
50
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 obtained or requested to be returned,
as appropriate. At December 31, 2006, security repurchase
agreements amounted to $1.0 billion. Also at
December 31, 2006, security repurchase agreements were
secured by $1.0 billion of mortgage-backed securities held
to maturity.
Loan Sales. Our home lending operation sells a
significant portion of the mortgage loans that it originates.
Sales of loans totaled $16.4 billion, or 87% of
originations in 2006, compared to $23.5 billion, or 78.3%
of originations, in 2005. The reduction in sales during 2006 was
attributable to the decrease in originations and the increased
amount of loans retained by us for our own portfolio. As of
December 31, 2006, we had outstanding commitments to sell
$2.2 billion of mortgage loans. Generally, these
commitments are funded within 120 days.
Loan Principal Payments. In our capacity as an
investor in loans, we derive funds from the repayment of
principal on the loans we hold in portfolio. Payments totaled
$7.3 billion during 2006, an increase of $0.2 billion,
or 2.7%, when compared with the $7.1 billion received in
2005. This large amount of principal repayments was attributable
to the increased loan portfolio offset somewhat from 2005 by the
increase in the interest rate environment.
LOAN
REPAYMENT SCHEDULE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006
|
|
|
|
Within
|
|
|
1 Year to
|
|
|
2 Years to
|
|
|
3 Years to
|
|
|
5 Years to
|
|
|
10 Years to
|
|
|
Over
|
|
|
|
|
|
|
1 Year
|
|
|
2 Years
|
|
|
3 Years
|
|
|
5 Years
|
|
|
10 Years
|
|
|
15 Years
|
|
|
15 Years
|
|
|
Totals
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Mortgage loans
|
|
$
|
90,022
|
|
|
$
|
88,706
|
|
|
$
|
87,408
|
|
|
$
|
172,260
|
|
|
$
|
418,053
|
|
|
$
|
387,482
|
|
|
$
|
4,911,279
|
|
|
$
|
6,155,210
|
|
Second mortgage
|
|
|
22,560
|
|
|
|
21,845
|
|
|
|
21,154
|
|
|
|
40,969
|
|
|
|
95,938
|
|
|
|
80,754
|
|
|
|
429,483
|
|
|
|
712,703
|
|
Commercial real estate
|
|
|
138,400
|
|
|
|
123,729
|
|
|
|
110,613
|
|
|
|
197,774
|
|
|
|
389,607
|
|
|
|
183,100
|
|
|
|
162,347
|
|
|
|
1,305,570
|
|
Construction
|
|
|
64,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,878
|
|
Warehouse lending
|
|
|
291,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
291,656
|
|
Consumer
|
|
|
21,150
|
|
|
|
19,824
|
|
|
|
18,580
|
|
|
|
34,829
|
|
|
|
76,150
|
|
|
|
52,268
|
|
|
|
114,393
|
|
|
|
337,194
|
|
Commercial non-real estate
|
|
|
2,075
|
|
|
|
1,780
|
|
|
|
1,527
|
|
|
|
2,621
|
|
|
|
4,690
|
|
|
|
1,359
|
|
|
|
555
|
|
|
|
14,607
|
|
|
|
|
|
|
|
Total
|
|
$
|
630,741
|
|
|
$
|
255,884
|
|
|
$
|
239,282
|
|
|
$
|
448,453
|
|
|
$
|
984,438
|
|
|
$
|
704,963
|
|
|
$
|
5,618,057
|
|
|
$
|
8,881,818
|
|
|
|
|
|
|
|
Escrow Funds. As a servicer of mortgage loans, we
hold funds in escrow for investors, various insurance entities,
or for the government taxing authorities. At December 31,
2006, we held $144.5 million in these escrows.
Impact of
Off-Balance Sheet Arrangements
Financial Interpretation (FIN) FIN 46R requires
us to separately report, rather than include in our consolidated
financial statements, the separate financial statements of our
wholly-owned subsidiaries Flagstar Trust, Flagstar Statutory
Trust II, Flagstar Statutory Trust III, Flagstar
Statutory Trust IV, Flagstar Statutory Trust V,
Flagstar Statutory Trust VI, Flagstar Statutory
Trust VII and Flagstar Statutory Trust VIII. We did
this by reporting our investment in these entities under
other assets.
Asset Securitization. The Bank, in its efforts to
diversify its funding sources, occasionally transfers loans to a
qualifying special purpose entity (QSPE) in a
process known as a securitization in exchange for asset-backed
securities. A QSPE is generally a trust that is severely limited
in permitted activities, assets it may hold, sell, exchange or
distribute. When a company transfers assets to a QSPE, the
transfer is generally treated as a sale and the transferred
assets are no longer recognized on the transferors balance
sheet. The QSPE in turn will offer the sold loans to investors
in the form of a security. The proceeds the QSPE receives from
51
investors are used to pay the company for the loans sold. The
company will usually recognize a gain or loss on the transfer.
Statements of Financial Accounting Standards (SFAS) 140,
Accounting for the Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, provides specific
criteria to meet the definition of a QSPE. QSPEs are
required to be legally isolated from the transferor and
bankruptcy remote, insulating investors from the impact of
creditors of other entities, including the transferor, and are
not consolidated within the financial statements.
When a company sells or securitizes loans it generally retains
the servicing rights of those loans and may retain senior,
subordinated, residual interests all of which are considered
retained interest on the loans sold. Retained interests in
securitizations were $42.5 million and $26.1 million
at December 31, 2006 and 2005, respectively. Additional
information concerning securitization transactions is included
in Note 9 in the Notes to our Consolidated Financial
Statements, in Item 8 Financial Statements and Supplemental
Data, herein.
Impact of
Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto
presented herein have been prepared in accordance with
U.S. GAAP, which requires the measurement of financial
position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power
of money over time due to inflation. The impact of inflation is
reflected in the increased cost of our operations. Unlike most
industrial companies, nearly all of our assets and liabilities
are monetary in nature. As a result, interest rates have a
greater impact on our performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in
the same direction or to the same extent as the prices of goods
and services.
Accounting
and Reporting Developments
See Note 2 of the Notes to the Consolidated Financial
Statements, Item 8 Financial Statements and Supplementary
Data, herein for details of recently issued accounting
pronouncements and their expected impact on our consolidated
financial statements.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in
the fair value of financial instruments due to changes in
interest rates, currency exchange rates, or equity prices. We do
not have any material foreign currency exchange risk or equity
price risk. Interest rate risk is our primary market risk and
results from timing differences in the repricing of assets and
liabilities, changes in the relationships between rate indices,
and the potential exercise of explicit or embedded options.
Interest rate risk is managed by the Executive Investment
Committee (EIC), which is composed of several of our
executive officers and other members of management, in
accordance with policies approved by our board of directors. The
EIC formulates strategies based on appropriate levels of
interest rate risk. In determining the appropriate level of
interest rate risk, the EIC considers the impact projected
interest rate scenarios have on earnings and capital, potential
changes in interest rates, the economy, liquidity, business
strategies, and other factors. The EIC meets monthly or as
deemed necessary to review, among other things, the sensitivity
of assets and liabilities to interest rate changes, the book and
fair values of assets and liabilities, unrealized gains and
losses, purchase and sale activity, loans available for sale and
commitments to originate loans, and the maturities of
investments, borrowings and time deposits. Any decision or
policy change that requires implementation is directed to the
Asset and Liability Committee (ALCO). The ALCO
implements any directive from the EIC and meets weekly to
monitor liquidity, cash flow flexibility and deposit activity.
Financial instruments used to manage interest rate risk include
financial derivative products such as interest rate swaps and
forward sales commitments. Further discussion of the use of and
the accounting for derivative instruments is included in
Notes 2 and 26 to the consolidated financial statements in
Item 8 of this report. All of our derivatives are accounted
for at fair market value. Although we have and will continue to
economically hedge a portion of our mortgage loans available for
sale, on October 1, 2005, for financial reporting purposes,
we dedesignated all fair value hedges that solely related to our
mortgage lending operation. This means that changes in the fair
value of our forward sales commitments will not necessarily be
offset by corresponding changes in the fair value of our
mortgage loans available for sale because the mortgage loans
52
available for sale are recorded at the lower of cost or market.
In the future, additional volatility may be introduced into our
consolidated financial statements.
To effectively measure and manage interest rate risk, we use
sensitivity analysis to determine the impact on net market value
of various interest rate scenarios, balance sheet trends, and
strategies. From these simulations, interest rate risk is
quantified and appropriate strategies are developed and
implemented. Additionally, duration and net interest income
sensitivity measures are utilized when they provide added value
to the overall interest rate risk management process. The
overall interest rate risk position and strategies reviewed by
our executive management and our board of directors on an
ongoing basis. We have traditionally managed our business to
reduce our overall exposure to changes in interest rates.
However, management has the latitude to increase our interest
rate sensitivity position within certain limits if, in
managements judgment, the increase will enhance
profitability. We manage our exposure to interest rates by
hedging ourselves primarily from rising rates.
In the past, the savings and loan industry measured interest
rate risk using gap analysis. Gap analysis is one indicator of
interest rate risk; however it only provides a glimpse into
expected asset and liability repricing in segmented time frames.
Today the thrift industry utilizes the concept of Net Portfolio
Value (NPV). NPV analysis provides a fair value of
the balance sheet in alternative interest rate scenarios. The
NPV does not take into account management intervention and
assumes the new rate environment is constant and the change is
instantaneous.
The following table is a summary of the changes in our NPV that
are projected to result from hypothetical changes in market
interest rates. NPV is the market value of assets, less the
market value of liabilities, adjusted for the market value of
off-balance sheet instruments. The interest rate scenarios
presented in the table include interest rates at
December 31, 2006 and 2005 and as adjusted by instantaneous
parallel rate changes upward to 300 basis points and
downward to 200 basis points. The 2006 and 2005 scenarios
are not comparable due to differences in the interest rate
environments, including the absolute level of rates and the
shape of the yield curve.
The positive effect of a decline in market interest rates is
reduced by the estimated effect of prepayments on the value of
single-family loans and MSRs. Further, this analysis is based on
our interest rate exposure at December 31, 2006 and 2005,
and does not contemplate any actions that we might undertake in
response to changes in market interest rates, which could impact
NPV. Each rate scenario shows unique prepayment, repricing, and
reinvestment assumptions. Management derives these assumptions
by considering published market prepayment expectations, the
repricing characteristics of individual instruments or groups of
similar instruments, our historical experience, and our asset
and liability management strategy. Further, this analysis
assumes that certain instruments would not be affected by the
changes in interest rates or would be partially affected due to
the characteristics of the instruments.
There are limitations inherent in any methodology used to
estimate the exposure to changes in market interest rates. It is
not possible to fully model the market risk in instruments with
leverage, option, or prepayment risks. Also, we are affected by
basis risk, which is the difference in repricing characteristics
of similar term rate indices. As such, this analysis is not
intended to be a precise forecast of the effect a change in
market interest rates would have on us.
53
While each analysis involves a static model approach to a
dynamic operation, the NPV model is the preferred method. If NPV
rises in an up or down interest rate scenario, that would
dictate an up direction for the margin in that hypothetical rate
scenario. The same would be seen in a falling scenario. A
perfectly matched balance sheet would possess no change in the
NPV, no matter what the rate scenario. The following table
presents the NPV in the stated interest rate scenarios (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
Scenario
|
|
NPV
|
|
|
NPV%
|
|
|
$ Change
|
|
|
% Change
|
|
|
Scenario
|
|
NPV
|
|
|
NPV%
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
300
|
|
$
|
908
|
|
|
|
6.19
|
%
|
|
$
|
(428
|
)
|
|
|
(32.0
|
)%
|
|
300
|
|
$
|
1,022
|
|
|
|
7.10
|
%
|
|
$
|
(288
|
)
|
|
|
(22.0
|
)%
|
200
|
|
|
1,099
|
|
|
|
7.32
|
|
|
|
(237
|
)
|
|
|
(17.7
|
)
|
|
200
|
|
|
1,166
|
|
|
|
7.93
|
|
|
|
(144
|
)
|
|
|
(11.0
|
)
|
100
|
|
|
1,257
|
|
|
|
8.19
|
|
|
|
(79
|
)
|
|
|
(5.9
|
)
|
|
100
|
|
|
1,278
|
|
|
|
8.54
|
|
|
|
(32
|
)
|
|
|
(5.2
|
)
|
Current
|
|
|
1,336
|
|
|
|
8.56
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
1,310
|
|
|
|
8.64
|
|
|
|
|
|
|
|
|
|
−100
|
|
|
1,281
|
|
|
|
8.14
|
|
|
|
(55
|
)
|
|
|
(4.1
|
)
|
|
−100
|
|
|
1,192
|
|
|
|
7.83
|
|
|
|
(118
|
)
|
|
|
(9.0
|
)
|
−200
|
|
|
1,206
|
|
|
|
7.62
|
|
|
|
(130
|
)
|
|
|
(9.8
|
)
|
|
−200
|
|
|
1,053
|
|
|
|
6.90
|
|
|
|
(257
|
)
|
|
|
(19.7
|
)
|
54
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Index to
Consolidated Financial Statements
55
February 26, 2007
Managements
Report
Flagstar Bancorps management is responsible for the
integrity and objectivity of the information contained in this
document. Management is responsible for the consistency of
reporting this information and for ensuring that accounting
principles generally accepted in the United States of America
are used.
In discharging this responsibility, management maintains a
comprehensive system of internal controls and supports an
extensive program of internal audits, has made organizational
arrangements providing appropriate divisions of responsibility
and has established communication programs aimed at assuring
that its policies, procedures and principles of business conduct
are understood and practiced by its employees.
The consolidated financial statements as of and for the years
ended December 31, 2006 and 2005 included in this document
have been audited by Virchow, Krause & Company, LLP, an
independent registered public accounting firm. The consolidated
financial statements for the year ended December 31, 2004
were audited by Grant Thornton LLP, an independent registered
public accounting firm. All audits were conducted using
standards of the Public Company Accounting Oversight Board
(United States) and the independent registered public accounting
firms reports and consents are included herein.
The Board of Directors responsibility for these
consolidated financial statements is pursued mainly through its
Audit Committee. The Audit Committee is composed entirely of
directors who are not officers or employees of Flagstar Bancorp,
Inc., and meets periodically with the internal auditors and
independent registered public accounting firm, both with and
without management present, to assure that their respective
responsibilities are being fulfilled. The internal auditors and
independent registered public accounting firm have full access
to the Audit Committee to discuss auditing and financial
reporting matters.
Mark T. Hammond
President and Chief Executive Officer
Paul D. Borja
Executive Vice-President and Chief Financial Officer
56
Report of
Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Flagstar Bancorp, Inc.
We have audited the accompanying consolidated statements of
financial condition of Flagstar Bancorp, Inc. and subsidiaries
(the Company) as of December 31, 2006 and 2005, and the
related consolidated statements of earnings, stockholders
equity and comprehensive income, and cash flows for the years
then ended. These financial statements are the responsibility of
the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Flagstar Bancorp, Inc. and subsidiaries as
of December 31, 2006 and 2005, and the consolidated results
of their operations and their cash flows for the years then
ended in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Flagstar Bancorp, Inc.s internal control
over financial reporting as of December 31, 2006, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated February 26,
2007 expressed an unqualified opinion thereon.
/s/ Virchow,
Krause & Company, LLP
Southfield, Michigan
February 26, 2007
57
Report of
Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Flagstar Bancorp, Inc.
We have audited the accompanying consolidated statements of
earnings, stockholders equity and comprehensive income,
and cash flows of Flagstar Bancorp, Inc. and Subsidiaries for
the year ended December 31, 2004. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated results of operations and cash flows of Flagstar
Bancorp, Inc. and Subsidiaries for the year ended
December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
Southfield, Michigan
March 21, 2005
58
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash items
|
|
$
|
136,675
|
|
|
$
|
201,163
|
|
Interest bearing deposits
|
|
|
140,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
277,236
|
|
|
|
201,163
|
|
Mortgage backed securities held to
maturity (fair value $1.6 billion and
$1.4 billion at December 31 2006 and 2005, respectively)
|
|
|
1,565,420
|
|
|
|
1,414,986
|
|
Securities available for sale
|
|
|
617,450
|
|
|
|
26,148
|
|
Other investments
|
|
|
24,035
|
|
|
|
21,957
|
|
Loans available for sale
|
|
|
3,188,795
|
|
|
|
1,773,394
|
|
Loans held for investment
|
|
|
8,939,685
|
|
|
|
10,576,471
|
|
Less: allowance for loan losses
|
|
|
(45,779
|
)
|
|
|
(39,140
|
)
|
|
|
|
|
|
|
|
|
|
Loans held for investment, net
|
|
|
8,893,906
|
|
|
|
10,537,331
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
14,430,167
|
|
|
|
13,773,816
|
|
Accrued interest receivable
|
|
|
52,758
|
|
|
|
48,399
|
|
Repossessed assets, net
|
|
|
80,995
|
|
|
|
47,724
|
|
Federal Home Loan Bank stock
|
|
|
277,570
|
|
|
|
292,118
|
|
Premises and equipment, net
|
|
|
219,243
|
|
|
|
200,789
|
|
Mortgage servicing rights, net
|
|
|
173,288
|
|
|
|
315,678
|
|
Other assets
|
|
|
126,509
|
|
|
|
195,743
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
15,497,205
|
|
|
$
|
15,075,430
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Stockholders Equity
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
7,379,295
|
|
|
$
|
7,979,000
|
|
Federal Home Loan Bank advances
|
|
|
5,407,000
|
|
|
|
4,225,000
|
|
Security repurchase agreements
|
|
|
990,806
|
|
|
|
1,060,097
|
|
Long term debt
|
|
|
207,472
|
|
|
|
207,497
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
13,984,573
|
|
|
|
13,471,594
|
|
Accrued interest payable
|
|
|
46,302
|
|
|
|
41,288
|
|
Undisbursed payments on loans
serviced for others
|
|
|
147,417
|
|
|
|
407,104
|
|
Escrow accounts
|
|
|
144,462
|
|
|
|
219,028
|
|
Liability for checks issued
|
|
|
21,623
|
|
|
|
23,222
|
|
Federal income taxes payable
|
|
|
29,674
|
|
|
|
75,271
|
|
Secondary market reserve
|
|
|
24,200
|
|
|
|
17,550
|
|
Payable for securities purchased
|
|
|
249,694
|
|
|
|
|
|
Other liabilities
|
|
|
37,026
|
|
|
|
48,490
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
14,684,971
|
|
|
|
14,303,547
|
|
Commitments and
Contingencies - Note 21
|
|
|
|
|
|
|
|
|
Stockholders
Equity
|
|
|
|
|
|
|
|
|
Common stock $0.01 par
value, 150,000,000 shares authorized,
63,604,590 shares issued and outstanding at
December 31, 2006;
63,208,038 shares issued and outstanding at
December 31, 2005
|
|
|
636
|
|
|
|
632
|
|
Additional paid in capital
|
|
|
63,223
|
|
|
|
57,304
|
|
Accumulated other comprehensive
income
|
|
|
5,182
|
|
|
|
7,834
|
|
Retained earnings
|
|
|
743,193
|
|
|
|
706,113
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
812,234
|
|
|
|
771,883
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
15,497,205
|
|
|
$
|
15,075,430
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
711,037
|
|
|
$
|
688,791
|
|
|
$
|
559,902
|
|
Mortgage-backed securities
|
|
|
77,607
|
|
|
|
19,019
|
|
|
|
1,459
|
|
Interest-bearing deposits
|
|
|
4,183
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
3,041
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
4,998
|
|
|
|
853
|
|
|
|
2,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
800,866
|
|
|
|
708,663
|
|
|
|
563,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
331,516
|
|
|
|
253,292
|
|
|
|
167,765
|
|
FHLB advances
|
|
|
187,756
|
|
|
|
182,377
|
|
|
|
143,914
|
|
Security repurchase agreements
|
|
|
52,389
|
|
|
|
7,953
|
|
|
|
|
|
Other
|
|
|
14,258
|
|
|
|
18,771
|
|
|
|
28,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
585,919
|
|
|
|
462,393
|
|
|
|
340,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
214,947
|
|
|
|
246,270
|
|
|
|
223,291
|
|
Provision for loan losses
|
|
|
25,450
|
|
|
|
18,876
|
|
|
|
16,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses
|
|
|
189,497
|
|
|
|
227,394
|
|
|
|
207,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan fees and charges
|
|
|
7,440
|
|
|
|
12,603
|
|
|
|
18,003
|
|
Deposit fees and charges
|
|
|
20,893
|
|
|
|
16,918
|
|
|
|
12,125
|
|
Loan administration
|
|
|
13,032
|
|
|
|
8,761
|
|
|
|
30,097
|
|
Net gain on loan sales
|
|
|
42,381
|
|
|
|
63,580
|
|
|
|
77,819
|
|
Net gain on sales of mortgage
servicing rights
|
|
|
92,621
|
|
|
|
18,157
|
|
|
|
91,740
|
|
Net loss on securities available
for sale
|
|
|
(6,163
|
)
|
|
|
|
|
|
|
|
|
Other fees and charges
|
|
|
31,957
|
|
|
|
39,429
|
|
|
|
26,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
|
202,161
|
|
|
|
159,448
|
|
|
|
256,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
140,438
|
|
|
|
126,139
|
|
|
|
112,512
|
|
Occupancy and equipment
|
|
|
70,225
|
|
|
|
69,007
|
|
|
|
64,692
|
|
Communication
|
|
|
4,320
|
|
|
|
4,840
|
|
|
|
6,975
|
|
Other taxes
|
|
|
320
|
|
|
|
7,844
|
|
|
|
12,999
|
|
General and administrative
|
|
|
60,334
|
|
|
|
55,057
|
|
|
|
45,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
275,637
|
|
|
|
262,887
|
|
|
|
243,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before federal tax
provision
|
|
|
116,021
|
|
|
|
123,955
|
|
|
|
220,330
|
|
Provision for federal income taxes
|
|
|
40,819
|
|
|
|
44,090
|
|
|
|
77,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings
|
|
$
|
75,202
|
|
|
$
|
79,865
|
|
|
$
|
142,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.18
|
|
|
$
|
1.29
|
|
|
$
|
2.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.17
|
|
|
$
|
1.25
|
|
|
$
|
2.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid in
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Income
|
|
|
Earnings
|
|
|
Equity
|
|
|
Balance at January 1, 2004
|
|
$
|
607
|
|
|
$
|
35,394
|
|
|
$
|
2,173
|
|
|
$
|
600,627
|
|
|
$
|
638,801
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142,738
|
|
|
|
142,738
|
|
Net realized gain on swap
extinguishment
|
|
|
|
|
|
|
|
|
|
|
2,650
|
|
|
|
|
|
|
|
2,650
|
|
Change in net unrealized gain on
swaps used in cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
520
|
|
|
|
|
|
|
|
520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,908
|
|
Stock options exercised and grants
issued, net
|
|
|
7
|
|
|
|
3,311
|
|
|
|
|
|
|
|
|
|
|
|
3,318
|
|
Tax benefit from stock-based
compensation
|
|
|
|
|
|
|
2,049
|
|
|
|
|
|
|
|
|
|
|
|
2,049
|
|
Dividends paid ($1.00 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,122
|
)
|
|
|
(61,122
|
)
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
614
|
|
|
|
40,754
|
|
|
|
5,343
|
|
|
|
682,243
|
|
|
|
728,954
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,865
|
|
|
|
79,865
|
|
Reclassification of gain on swap
extinguishment
|
|
|
|
|
|
|
|
|
|
|
(1,335
|
)
|
|
|
|
|
|
|
(1,335
|
)
|
Change in net unrealized gain on
swaps used in cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
3,328
|
|
|
|
|
|
|
|
3,328
|
|
Change in net unrealized gain on
securities available for sale
|
|
|
|
|
|
|
|
|
|
|
498
|
|
|
|
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,356
|
|
Stock options exercised
|
|
|
18
|
|
|
|
7,426
|
|
|
|
|
|
|
|
|
|
|
|
7,444
|
|
Stock-based compensation
|
|
|
|
|
|
|
745
|
|
|
|
|
|
|
|
|
|
|
|
745
|
|
Tax benefit from stock-based
compensation
|
|
|
|
|
|
|
8,379
|
|
|
|
|
|
|
|
|
|
|
|
8,379
|
|
Dividends paid ($0.90 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,995
|
)
|
|
|
(55,995
|
)
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
632
|
|
|
|
57,304
|
|
|
|
7,834
|
|
|
|
706,113
|
|
|
|
771,883
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,202
|
|
|
|
75,202
|
|
Reclassification of gain on swap
extinguishment
|
|
|
|
|
|
|
|
|
|
|
(1,167
|
)
|
|
|
|
|
|
|
(1,167
|
)
|
Change in net unrealized loss on
swaps used in cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
(1,874
|
)
|
|
|
|
|
|
|
(1,874
|
)
|
Change in net unrealized gain on
securities available for sale
|
|
|
|
|
|
|
|
|
|
|
389
|
|
|
|
|
|
|
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,550
|
|
Stock options exercised
|
|
|
4
|
|
|
|
2,201
|
|
|
|
|
|
|
|
|
|
|
|
2,205
|
|
Stock-based compensation
|
|
|
|
|
|
|
2,718
|
|
|
|
|
|
|
|
|
|
|
|
2,718
|
|
Tax benefit from stock-based
compensation
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
Dividends paid ($0.60 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,122
|
)
|
|
|
(38,122
|
)
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
636
|
|
|
$
|
63,223
|
|
|
$
|
5,182
|
|
|
$
|
743,193
|
|
|
$
|
812,234
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
75,202
|
|
|
$
|
79,865
|
|
|
$
|
142,738
|
|
Adjustments to net earnings to net
cash used in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
25,450
|
|
|
|
18,876
|
|
|
|
16,077
|
|
Depreciation and amortization
|
|
|
100,710
|
|
|
|
125,978
|
|
|
|
106,124
|
|
Increase in valuation allowance in
mortgage servicing rights
|
|
|
599
|
|
|
|
|
|
|
|
|
|
FHLB stock dividends
|
|
|
|
|
|
|
(5,035
|
)
|
|
|
(9,909
|
)
|
Stock-based compensation expense
|
|
|
2,718
|
|
|
|
745
|
|
|
|
|
|
Net gain on the sale of assets
|
|
|
(2,328
|
)
|
|
|
(1,623
|
)
|
|
|
(2,608
|
)
|
Net gain on loan sales
|
|
|
(42,381
|
)
|
|
|
(63,580
|
)
|
|
|
(77,819
|
)
|
Net gain on sales of mortgage
servicing rights
|
|
|
(92,621
|
)
|
|
|
(18,157
|
)
|
|
|
(91,740
|
)
|
Net loss on securities available
for sale
|
|
|
6,163
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of loans
available for sale
|
|
|
16,386,194
|
|
|
|
23,445,645
|
|
|
|
29,497,773
|
|
Origination and repurchase of
mortgage loans available for sale, net of principal repayments
|
|
|
(16,807,310
|
)
|
|
|
(24,558,415
|
)
|
|
|
(30,463,805
|
)
|
Increase in accrued interest
receivable
|
|
|
(4,359
|
)
|
|
|
(13,352
|
)
|
|
|
(7,013
|
)
|
Decrease (increase) in other assets
|
|
|
66,348
|
|
|
|
45,379
|
|
|
|
(117,956
|
)
|
Increase in accrued interest payable
|
|
|
5,014
|
|
|
|
13,143
|
|
|
|
7,817
|
|
Net tax benefit for stock grants
issued
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
Increase (decrease) liability for
checks issued
|
|
|
(1,599
|
)
|
|
|
4,281
|
|
|
|
(8,555
|
)
|
(Decrease) increase in federal
income taxes payable
|
|
|
(44,367
|
)
|
|
|
49,696
|
|
|
|
(39,780
|
)
|
Increase in payable for securities
purchased
|
|
|
249,694
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in other
liabilities
|
|
|
(4,814
|
)
|
|
|
(16,656
|
)
|
|
|
12,099
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(82,687
|
)
|
|
|
(893,210
|
)
|
|
|
(1,036,557
|
)
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in other investments
|
|
|
(2,078
|
)
|
|
|
(3,566
|
)
|
|
|
(4,247
|
)
|
Repayment of mortgage backed
securities held to maturity
|
|
|
404,073
|
|
|
|
71,478
|
|
|
|
9,968
|
|
Purchase of mortgage backed
securities held to maturity
|
|
|
(118,025
|
)
|
|
|
|
|
|
|
|
|
Purchase of investment securities
available for sale
|
|
|
(574,999
|
)
|
|
|
|
|
|
|
|
|
Origination of portfolio loans, net
of principal repayments
|
|
|
119,263
|
|
|
|
(666,145
|
)
|
|
|
(1,476,858
|
)
|
Purchase of Federal Home Loan Bank
stock
|
|
|
(6,762
|
)
|
|
|
(52,238
|
)
|
|
|
(26,580
|
)
|
Redemption of Federal Home Loan
Bank stock
|
|
|
21,310
|
|
|
|
|
|
|
|
|
|
Investment in unconsolidated
subsidiary
|
|
|
|
|
|
|
3,095
|
|
|
|
3,102
|
|
Proceeds from the disposition of
repossessed assets
|
|
|
52,812
|
|
|
|
39,078
|
|
|
|
42,845
|
|
Acquisitions of premises and
equipment, net of proceeds
|
|
|
(45,493
|
)
|
|
|
(51,337
|
)
|
|
|
(49,112
|
)
|
Decrease in mortgage servicing
rights
|
|
|
(223,934
|
)
|
|
|
(328,954
|
)
|
|
|
(318,028
|
)
|
Proceeds from the sale of mortgage
servicing rights
|
|
|
388,784
|
|
|
|
124,860
|
|
|
|
405,864
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
14,951
|
|
|
|
(863,729
|
)
|
|
|
(1,413,046
|
)
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in deposit
accounts
|
|
|
(599,705
|
)
|
|
|
599,345
|
|
|
|
1,699,488
|
|
Net (decrease) increase in security
repurchase agreements
|
|
|
(69,291
|
)
|
|
|
1,060,097
|
|
|
|
|
|
Issuance of junior subordinated debt
|
|
|
|
|
|
|
100,000
|
|
|
|
25,000
|
|
Redemption of preferred securities
|
|
|
|
|
|
|
|
|
|
|
(74,750
|
)
|
Net increase in Federal Home Loan
Bank advances
|
|
|
1,182,000
|
|
|
|
135,000
|
|
|
|
844,000
|
|
Payment on other long term debt
|
|
|
(25
|
)
|
|
|
(25
|
)
|
|
|
(25
|
)
|
Net (disbursement) receipt of
payments of loans serviced for others
|
|
|
(259,687
|
)
|
|
|
(89,106
|
)
|
|
|
20,949
|
|
Net (disbursement) receipt of
escrow payments
|
|
|
(74,566
|
)
|
|
|
24,521
|
|
|
|
2,224
|
|
Proceeds from the exercise of stock
options
|
|
|
2,205
|
|
|
|
7,444
|
|
|
|
3,318
|
|
Net tax benefit for stock grants
issued
|
|
|
1,000
|
|
|
|
8,379
|
|
|
|
2,049
|
|
Dividends paid to stockholders
|
|
|
(38,122
|
)
|
|
|
(55,995
|
)
|
|
|
(61,122
|
)
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
143,809
|
|
|
|
1,789,660
|
|
|
|
2,461,131
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
76,073
|
|
|
|
32,721
|
|
|
|
11,528
|
|
Beginning cash and cash equivalents
|
|
|
201,163
|
|
|
|
168,442
|
|
|
|
156,914
|
|
|
|
|
|
|
|
Ending cash and cash equivalents
|
|
$
|
277,236
|
|
|
$
|
201,163
|
|
|
$
|
168,442
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for investment
transferred to repossessed assets
|
|
$
|
102,446
|
|
|
$
|
47,416
|
|
|
$
|
39,692
|
|
|
|
|
|
|
|
Total interest payments made on
deposits and other borrowings
|
|
$
|
580,905
|
|
|
$
|
449,250
|
|
|
$
|
347,964
|
|
|
|
|
|
|
|
Federal income taxes paid
|
|
$
|
86,953
|
|
|
$
|
|
|
|
$
|
119,500
|
|
|
|
|
|
|
|
Recharacterization of loans held
for investment to mortgage-backed securities held to maturity
|
|
$
|
558,732
|
|
|
$
|
1,466,477
|
|
|
$
|
|
|
|
|
|
|
|
|
Mortgage loans held for investment
transferred to available for sale
|
|
$
|
1,329,032
|
|
|
$
|
452,949
|
|
|
$
|
|
|
|
|
|
|
|
|
Mortgage loans available for sale
transferred to held for investment
|
|
$
|
354,662
|
|
|
$
|
883,119
|
|
|
$
|
2,297,091
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
62
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 $15.5 billion in assets at
December 31, 2006, Flagstar is the largest savings
institution and second largest banking institution headquartered
in Michigan.
The Companys principal business is obtaining funds in the
form of deposits and borrowings and investing those funds in
single-family mortgages and other types of loans. The
acquisition or origination of single-family mortgage loans is
the Companys primary lending activity. The Company also
originates consumer loans, commercial real estate loans, and
non-real estate commercial loans.
The Company sells or securitizes most of the mortgage loans that
it originates. The Company 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
significant amount of its loan production in order to maximize
the Companys leverage ability and to receive the interest
spread between earning assets and paying liabilities. The
Company also acquires funds on a wholesale basis from a variety
of sources and services a significant volume of loans for others.
The Bank is a member of the Federal Home Loan Bank System
(FHLB) and is subject to regulation, examination and
supervision by the Office of Thrift Supervision
(OTS) and the Federal Deposit Insurance Corporation
(FDIC). The Banks deposits are insured by the
FDIC through the Deposit Insurance Fund (DIF).
Note 2
Summary of Significant Accounting Policies
The following significant accounting policies of the Company,
which are applied in the preparation of the accompanying
consolidated financial statements, conform to accounting
principles generally accepted in the United States of America
(U.S. GAAP).
Basis of
Presentation and Consolidation
The 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, our trust
subsidiaries are not consolidated. Certain prior period amounts
have been reclassified to conform to the current period
presentation.
Accounting Research Bulletin 51 (ARB 51),
Consolidated Financial Statements, requires a
companys consolidated financial statements to include
subsidiaries in which the company has a controlling financial
interest. This requirement usually has been applied to
subsidiaries in which a company has a majority voting interest.
Currently, all of the Companys subsidiaries are
wholly-owned.
The voting interest approach defined in ARB 51 is not applicable
in identifying controlling financial interests in entities that
are not controllable through voting interests or in which the
equity investors do not bear the residual economic risks. In
such instances, Financial Accounting Standards Board
Interpretation 46 (FIN 46), Consolidation of
Variable Interest Entities (VIE) and
FIN 46R Implicit Variable Interests under
FIN 46, Consolidation of Variable Interest Entities ,
provide guidance on when a company should include in its
financial statements the assets, liabilities, and activities of
another entity. In general, a VIE is a corporation, partnership,
trust, or any other legal structure used for business purposes
that either does not have equity investors with voting rights or
has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46R
requires a VIE to be consolidated by a company if that company
is subject to a majority of the risk of loss from the VIEs
activities or entitles it to receive a majority of the
63
Flagstar
Bancorp, Inc.
Notes to the Consolidated Financial
Statements - continued
entitys residual returns or both. A company that
consolidates a VIE is called the primary beneficiary of that
entity. The Company has no consolidated VIEs.
The Company uses special-purpose entities
(SPEs), primarily securitization trusts, to
diversify its funding sources. SPEs are not operating
entities, generally have no employees, and usually have a
limited life. The basic SPE structure involves the Bank
transferring assets to the SPE. The SPE funds the purchase of
those assets by issuing asset-backed securities to investors.
The legal documents governing the SPE describe how the cash
received on the assets held in the SPE must be allocated to the
investors and other parties that have rights to these cash flows.
The Bank structures these SPEs to be bankruptcy remote, thereby
insulating investors from the impact of the creditors of other
entities, including the transferor of the assets.
Where the Bank is a transferor of assets to an SPE, the assets
sold to the SPE generally are no longer recorded on the
statement of financial condition and the SPE is not consolidated
when the SPE is a qualifying special-purpose entity
(QSPE). Statement of Financial Accounting Standards
(SFAS) 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities, provides specific criteria for determining when
an SPE meets the definition of a QSPE. In determining whether to
consolidate non-qualifying SPEs where assets are legally
isolated from the Banks creditors, the Company considers
such factors as the amount of third-party equity, the retention
of risks and rewards, and the extent of control available to
third parties. The Bank currently services certain home equity
loans and lines that were sold to securitization trusts.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with U.S. GAAP requires management to make
estimates and assumptions that affect reported amounts of assets
and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could materially differ from those
estimates.
Cash and
Cash Equivalents
Cash on hand, cash items in the process of collection, and
amounts due from correspondent banks and the Federal Reserve
Bank are included in cash and cash equivalents and overnight
deposits.
Securities
Investments in debt securities and certain equity securities
with readily determinable fair values are accounted for under
SFAS 115, Accounting for Certain Investments in Debt and
Equity Securities. SFAS 115 requires investments to be
classified within one of three categories, trading, held to
maturity or available for sale based on the type of security and
managements intent with regards to selling the security.
Certain mortgage-backed securities are classified as held to
maturity because management has the positive intent and ability
to hold these securities to maturity. Securities held to
maturity are carried at amortized cost. Unrealized losses that
are deemed to be
other-than-temporary
are reported in the consolidated statement of earnings.
Securities available for sale are carried at fair value with
unrealized gains and unrealized losses deemed to be temporary
being reported in other comprehensive income, net of tax. Any
gains or losses realized upon the sale of a security or
unrealized losses that are deemed to be
other-than-temporary
are reported in the consolidated statement of earnings. The
securities available for sale represent certain mortgage-backed
securities and the non-investment grade residual interests in
the Companys private securitizations.
64
Flagstar
Bancorp, Inc.
Notes to the Consolidated Financial
Statements - continued
Other investments, which include certain investments in mutual
funds that by their nature cannot be held to maturity, are
carried at fair value. Increases or decreases in fair value are
recorded in earnings.
Interest on securities, including the amortization of premiums
and the accretion of discounts using the effective interest
method over the period of maturity, is included in interest
income. Realized gains and losses on the sale of securities and
other-than-temporary
impairment charges on securities are determined using the
specific-identification method.
Loans
Loans are designated as held for investment or available for
sale or securitization during the origination process. Loans
held for investment are carried at amortized cost. The Company
has both the intent and the ability to hold all loans held for
investment for the foreseeable future. Loans available for sale
are carried at the lower of aggregate cost or estimated market
value. Loans are stated net of deferred loan origination fees or
costs. Interest income on loans is recognized on the accrual
basis based on the principal balance outstanding. Loan
origination fees and certain direct origination costs associated
with loans are deferred and amortized over the expected life of
the loans as an adjustment to the yield using the interest
method. Net unrealized losses on loans available for sale are
recognized in a valuation allowance that is charged to earnings.
Gains or losses recognized upon the sale of loans are determined
using the specific identification method.
Delinquent
Loans
Loans are placed on non-accrual status when any portion of
principal or interest is 90 days delinquent, or earlier
when concerns exist as to the ultimate collection of principal
or interest. When a loan is placed on non-accrual status, the
accrued and unpaid interest is reversed and interest income is
recorded as collected. Loans return to accrual status when
principal and interest become current and are anticipated to be
fully collectible.
Loan
Sales and Securitizations
Our recognition of gain or loss on the sale or securitization of
loans is accounted for in accordance with SFAS 140.
SFAS 140 requires that a transfer of financial assets in
which we surrender control over the assets be accounted for as a
sale to the extent that consideration other than beneficial
interests in the transferred assets is received in exchange. The
carrying value of the assets sold is allocated between the
assets sold and the retained interests based on their relative
fair values.
SFAS 140 requires, for certain transactions, a true
sale analysis of the treatment of the transfer under state
law if the company was a debtor under the bankruptcy code. The
true sale analysis includes several legal factors
including the nature and level of recourse to the transferor and
the nature of retained servicing rights. The true
sale analysis is not absolute and unconditional but rather
contains provisions that make the transferor bankruptcy
remote. Once the legal isolation of financial assets has
been met and is satisfied under