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RULE 424(b)(1)
REGISTRATION STATEMENT NO. 333-75147
333-75147-01
PROSPECTUS
2,600,000 PREFERRED SECURITIES
[FLAGSTAR TRUST LOGO]
9.50% CUMULATIVE PREFERRED SECURITIES
(LIQUIDATION AMOUNT $25 PER PREFERRED SECURITY)
GUARANTEED BY
[FLAGSTAR BANCORP LOGO]
------------------------------------
The Offering:
<TABLE>
<CAPTION>
PER
PREFERRED
SECURITY TOTAL
--------- -----
<S> <C> <C>
Public Price............ $ 25.00 $65,000,000
Underwriting Discounts
and Commissions....... 0.7875 2,047,500
-------- -----------
Proceeds to Trust....... $24.2125 $62,952,500
======== ===========
</TABLE>
This offering is for 2,600,000 Preferred Securities of Flagstar Trust; however,
the Underwriters have a 30-day option to purchase up to an additional 15% of the
shares of Preferred Securities (390,000 additional Preferred Securities) from
Flagstar Trust.
Flagstar Trust is a Delaware business trust. The trust will:
- - sell Preferred Securities (representing undivided beneficial interests in the
trust) to the public,
- - sell Common Securities (representing undivided beneficial interests in the
trust) to Flagstar Bancorp,
- - use the proceeds from these sales to buy an equal principal amount of Junior
Subordinated Debentures due April 29, 2029 of Flagstar Bancorp,
- - distribute the cash payments it receives on the Junior Subordinated Debentures
it owns to the holders of the Preferred and Common Securities.
For each Preferred Security that you own, you will be entitled to receive
cumulative cash distributions at an annual rate of 9.50% payable after each
calendar quarter on the last business day of March, June, September and
December, beginning on June 30, 1999. We may defer payment of distributions at
any time for periods of up to 20 consecutive quarters. The Preferred Securities
are subordinated to all of our Senior and Subordinated Debt. The Preferred
Securities mature on April 29, 2029. Flagstar Trust may redeem the Preferred
Securities, at a redemption price of $25 per Preferred Security plus accrued and
unpaid distributions, at any time on or after April 29, 2004, or earlier under
certain circumstances.
Flagstar Bancorp will fully and unconditionally guarantee the Preferred
Securities based on its obligations under a guarantee, a trust declaration and
an indenture.
The Preferred Securities have been approved for quotation on The Nasdaq Stock
Market under the trading symbol "FLGSO".
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INVESTING IN THE PREFERRED SECURITIES INVOLVES RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
NONE OF THE SECURITIES OFFERED BY THIS PROSPECTUS ARE DEPOSITS OR ACCOUNTS. THEY
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSIONS HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------------------
[RONEY CAPITAL MARKETS LOGO]
MCDONALD INVESTMENTS INC.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
JWGENESIS SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS APRIL 26, 1999.
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[MAP OF PROPOSED MARKET AREA]
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ABOUT THIS PROSPECTUS
This Prospectus is part of a registration statement on Form S-3 that we and
Flagstar Trust have filed with the Securities and Exchange Commission (the
"SEC") relating to Flagstar Trust's Preferred Securities being offered by this
Prospectus. As permitted by SEC rules, this Prospectus does not contain all of
the information contained in the registration statement and accompanying
exhibits and schedules we file with the SEC. You may refer to the registration
statement, the exhibits and schedules for more information about us and Flagstar
Trust's Preferred Securities. The registration statement, exhibits and schedules
are also available at the SEC's public reference rooms or through its EDGAR
database on the internet.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy, upon payment of a fee set by
the SEC, any document that we file with the SEC at its public reference rooms in
Washington, D.C. (450 Fifth Street, N.W., 20549), New York, New York (Seven
World Trade Center, 13th Floor, Suite 1300, 10048) and Chicago, Illinois
(Citicorp Center, 500 West Madison Street, 14th Floor, Suite 1400, 60661). You
may also call the SEC at 1-800-432-0330 for more information on the public
reference rooms. Our filings are also available to the public on the internet,
through the SEC's EDGAR database. You may access the EDGAR database at the SEC's
web site at http://www.sec.gov.
You may also obtain a copy of these filings from us at no cost upon your
written or oral request to us. Please direct your requests to our Corporate
Secretary, Mary Kay McGuire, at Flagstar Bancorp, Inc., 2600 Telegraph Road,
Bloomfield Hills, Michigan, 48302-0953, or by telephoning us at (248) 338-7700.
To obtain timely delivery, you must request the information no later than five
business days prior to the date you decide to invest in Flagstar Trust's
Preferred Securities.
The SEC allows us to "incorporate by reference" into this Prospectus the
information we file with them. This means that we can disclose important
business, financial and other information in our SEC filings by referring you to
the documents containing this information. Any information referred to in this
way is considered part of this Prospectus, and any information filed with the
SEC by us after the date of this Prospectus will automatically be deemed to
update and supersede this information. We incorporate by reference the documents
listed below and any future filings made with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act")
until we file a post-effective amendment to the Form S-3 indicating the
termination of this offering:
- Annual Report on Form 10-K for the year ended December 31, 1998.
There are not separate financial statements of Flagstar Trust in this
Prospectus. We do not believe such financial statements would be helpful
because:
- Flagstar Trust is a subsidiary of Flagstar Bancorp, Inc., which files
consolidated financial information under the Exchange Act.
- Flagstar Trust does not have any independent operations other than
issuing the preferred and common securities and purchasing the Junior
Subordinated Debentures of Flagstar Bancorp, Inc.
- Flagstar Trust's only material assets will be the Junior Subordinated
Debentures of Flagstar Bancorp, Inc. when issued.
- The combined obligations of Flagstar Bancorp, Inc. under the Junior
Subordinated Debentures, the Guarantee, the Trust Agreement and the
Indenture (each as we define later) have the effect of providing a full
and unconditional guarantee of Flagstar Trust's
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obligations under its Preferred Securities. See "Description of Junior
Subordinated Securities," "Description of Preferred Securities,"
"Description of Guarantee" and "Relationship Among Preferred Securities,
the Junior Subordinated Debentures and the Guarantee."
SPECIAL NOTE OF CAUTION REGARDING
FORWARD-LOOKING STATEMENTS
Certain statements contained in (i) this Prospectus, (ii) any applicable
amendment to this Prospectus and (iii) the documents incorporated by reference
into this Prospectus, may constitute "forward-looking statements" within the
meaning of the federal securities laws. Forward-looking statements are based on
our management's beliefs, assumptions and expectations of our future economic
performance, taking into account the information currently available to them.
These statements are not statements of historical fact. Forward-looking
statements involve risks and uncertainties that may cause our actual results,
performance or financial condition to be materially different from the
expectations of future results, performance or financial condition we express or
imply in any forward-looking statements. Some of the important factors that
could cause our actual results, performance or financial condition to differ
materially from our expectations are:
- The effect that changes in interest rates have on our earnings and
assets.
- Our cost of funds.
- Our ability to resell mortgages.
- Our level of loan defaults and delinquencies.
- Concentrations of our loans in one geographic area or with a few mortgage
companies.
- The seasonal variations in the mortgage banking business.
- Our ability to manage our retail banking expansion.
- Our ability to retain key personnel.
- The degree and nature of our competition.
- Changes in government regulation of our business.
- The threat of litigation in the mortgage banking business.
- Environmental liability associated with foreclosures.
- The effect of the Year 2000 problem on us and on those entities with
which we deal.
When used in our documents or oral presentations, the words "believe,"
"may," "will," "should," "anticipate," "estimate," "expect," "objective,"
"projection," "forecast," "goal," or similar words or the negatives of these
words are intended to identify forward-looking statements. We qualify any such
forward-looking statements entirely by these cautionary factors.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this Prospectus.
The summary is not complete and does not contain all of the information that you
should consider before investing in the Preferred Securities. You should read
the entire Prospectus carefully.
We use the term "we" or "the Company" to refer to Flagstar Bancorp, Inc., a
business corporation organized under Michigan law. We use the term "Flagstar
Trust" to refer to Flagstar Trust, a Delaware business trust organized to
purchase our Junior Subordinated Debentures and issue the Preferred Securities.
We use the term "the Bank" to refer to Flagstar Bank, FSB, a federal savings
bank organized under federal laws of the United States. In some cases, a
reference to "we" or "the Company" will include the Bank and Flagstar Trust
since they are both our wholly-owned subsidiaries.
FLAGSTAR BANCORP, INC.
We are one of the largest home mortgage lenders in the United States. Our
business is the origination of single-family mortgage loans. Through the Bank,
we attract deposits from the general public and originate or acquire residential
mortgage loans. The Bank is the largest independent savings institution in
Michigan based on asset size. For the year ended December 31, 1998, we ranked
13th in the United States in residential mortgage loan originations.
We have experienced significant asset growth and achieved continuing
profitability:
- Total assets increased to $3.0 billion for the year ended December 31,
1998 from $1.9 billion for the same period in 1997 and $1.3 billion for
the same period in 1996.
- Net income increased to $41.1 million ($2.90 per share -- diluted) for
the year ended December 31, 1998 from $21.8 million ($1.68 per
share -- diluted) for the same period in 1997 and $17.0 million ($1.51
per share -- diluted) for the same period in 1996.
- For the year ended December 31, 1998 return on average assets equaled
1.45% and return on average equity equaled 28.77% compared to return on
average assets of 1.29% and return on average equity of 20.69% for the
same period in 1997.
Our primary lines of business are mortgage banking and retail banking.
- Our mortgage banking operations originate residential mortgages through
31 retail loan origination offices located in Michigan (27), Florida (3)
and Ohio (1), as well as a nationwide network of independent mortgage
brokers.
- We currently operate a network of 30 retail bank branches located in
Michigan, including two opened in 1999.
For the year ended December 31, 1998, we produced $18.8 billion in mortgage
loans as compared to $7.9 billion in 1997. In addition, our loan servicing
portfolio totaled $11.5 billion at December 31, 1998 as compared to $6.4 billion
at December 31, 1997. Substantially all of our servicing portfolio (net of loans
subserviced for others) is comprised of conventional loans.
OUR BUSINESS STRATEGY
Our strategy consists of the following key elements:
- continue to expand our bank branch network into demographically desirable
communities in Michigan in order to gain access to additional deposits;
- as market conditions permit, retain a portion of our mortgage loan
production volume or mortgage servicing rights or both (thereby
benefiting from economies of scale);
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- continue to utilize advanced technology and automated processes
throughout our business to improve customer service, reduce costs of loan
production and servicing and increase efficiencies; and
- cross-sell retail banking services to our large Michigan base of existing
mortgage customers.
FLAGSTAR TRUST
Flagstar Trust is a Delaware business trust. Flagstar Trust will exist
solely to:
- issue and sell its Common Securities to us;
- issue and sell its Preferred Securities to the public;
- use the proceeds from the sale of its Common Securities and Preferred
Securities to purchase the Junior Subordinated Debentures from us;
- distribute the cash payments it receives on the Junior Subordinated
Debentures it owns to the holders of the Preferred and Common Securities;
and
- engage in other activities that are necessary or incidental to these
purposes.
Flagstar Bancorp's and Flagstar Trust's principal executive offices are
located at 2600 Telegraph Road, Bloomfield Hills, Michigan, 48302-0968. The main
telephone number for both Flagstar Bancorp and Flagstar Trust is (248) 338-7700.
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RISK FACTORS
In addition to the other information in this Prospectus, you should
carefully consider the following factors before investing in the Preferred
Securities.
PREFERRED SECURITIES RISK FACTORS
THE HOLDERS OF OUR SENIOR AND SUBORDINATED DEBT WILL GET PAID BEFORE YOU
WILL GET PAID UNDER THE GUARANTEE.
Our obligations under the Junior Subordinated Debentures are unsecured and
rank junior in right of payment to all of our Senior and Subordinated Debt and
equal to any junior debt securities we may later have.
The Preferred Securities, the Junior Subordinated Debentures and the
Guarantee do not limit our ability to incur additional indebtedness, including
indebtedness that ranks senior to the Junior Subordinated Debentures and the
Guarantee. See "Description of Guarantee -- Status of Guarantee" and
"Description of the Junior Subordinated Debentures -- Subordination."
IF WE DO NOT MAKE PAYMENTS UNDER THE JUNIOR SUBORDINATED DEBENTURES,
FLAGSTAR TRUST WILL BE UNABLE TO PAY DISTRIBUTIONS AND LIQUIDATION AMOUNTS AND
THE PREFERRED SECURITIES GUARANTEE WILL NOT APPLY.
The ability of Flagstar Trust to pay Distributions and, upon redemption,
the Liquidation Amount of $25 per Preferred Security is solely dependent upon
our ability to make the related payments on the Junior Subordinated Debentures
when due. If we default on our obligation to pay principal of or interest on the
Junior Subordinated Debentures, Flagstar Trust will not have sufficient funds to
pay Distributions or the Liquidation Amount.
In that case, you will not be able to rely upon the Preferred Securities
Guarantee for payment of these amounts because the Preferred Securities
Guarantee only applies if we make a payment of principal or interest on the
Junior Subordinated Debentures. For more information on our obligations under
the Preferred Securities Guarantee and the Junior Subordinated Debentures, see
"Description of Guarantee -- Status of Guarantee" and "Description of the Junior
Subordinated Debentures -- Subordination."
OUR INTEREST PAYMENTS ON THE JUNIOR SUBORDINATED DEBENTURES ARE DEPENDENT
ON OUR RECEIPT OF DIVIDENDS FROM THE BANK.
A substantial majority of our assets consists of our investment in the
Bank. Thus, our ability to pay interest and principal on the Junior Subordinated
Debentures to Flagstar Trust depends primarily upon our receipt of cash
dividends from the Bank. Dividend payments from the Bank to us are subject to,
among other things:
- regulatory limitations, generally based on current and retained earnings
and capital maintenance requirements, imposed by various bank regulatory
agencies;
- profitability, financial condition and capital expenditures and other
cash flow requirements of the Bank; and
- prior claims of creditors of the Bank.
This means that the Junior Subordinated Debentures will be effectively
subordinated to all obligations of our subsidiaries. For example, our Bank
currently has a subsidiary that acts as a real estate investment trust ("REIT")
and sold preferred shares to the public. If the Bank is required to terminate
the REIT, the REIT's preferred shares will be exchanged for the Bank's preferred
shares. If this happens, the Bank's funds would be used first to satisfy its
obligations on its own preferred shares before paying any dividends to the
Company.
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If the Bank is unable to pay sufficient dividends to us, then we will
likely be unable to make payments on the Junior Subordinated Debentures, thereby
leaving insufficient funds for Flagstar Trust to make payments to you on the
Preferred Securities.
DISTRIBUTIONS ON THE PREFERRED SECURITIES MAY BE DEFERRED; YOU MAY HAVE TO
INCLUDE INTEREST IN YOUR TAXABLE INCOME BEFORE YOU RECEIVE CASH.
It is possible that you will not receive cash distributions on the
Preferred Securities for up to 20 consecutive quarters (in each case, an
"Extension Period"). We have the right, at one or more times, to defer interest
payments on the Junior Subordinated Debentures for up to 20 consecutive
quarters, but not beyond the maturity date of the Junior Subordinated Debentures
and must make payments of all deferred interest upon the earlier of the end of
the Extension Period or the maturity date. This right exists only if no Event of
Default under the Junior Subordinated Debentures has occurred and is continuing.
If we exercise this right, Flagstar Trust could defer Distributions on the
Preferred Securities during any Extension Period. However, you would still
accumulate Distributions at the annual rate of 9.50% of the Liquidation Amount
of $25 per Preferred Security, plus you will earn interest at the annual rate of
9.50%, compounded quarterly, on any unpaid Distributions. When we pay all the
accumulated amounts due to you during an Extension Period, the Extension Period
will terminate. However, we have the right to begin another Extension Period
under the same terms outlined above. There is no limit on the number of times we
can elect to begin an Extension Period. During an Extension Period, the
Preferred Securities may trade at a price that does not fully reflect the value
of accrued but unpaid Distributions. See "Description of the Preferred
Securities."
You will also not receive the cash distributions related to any accrued and
unpaid interest from Flagstar Trust if you sell the Preferred Securities before
the end of an Extension Period. However, you will be required to include accrued
interest income as original issue discount for United States federal income tax
purposes in respect of your pro rata share of the Junior Subordinated Debentures
held by Flagstar Trust. While we will take the position that original issue
discount will not arise before the first Extension Period, it is possible that
all interest on the Junior Subordinated Debentures would be required to be
accounted for as original issue discount. In these circumstances, the receipt of
interest would not separately be reported as taxable income. See "United States
Federal Income Tax Consequences" for more information regarding the tax
consequences of the Preferred Securities.
We have no current intention of exercising our right to defer interest
payments on the Junior Subordinated Debentures. However, if we exercise our
right in the future, the market price of the Preferred Securities is likely to
be adversely affected.
IF WE REDEEM THE JUNIOR SUBORDINATED DEBENTURES IT WILL CAUSE A REDEMPTION
OF THE PREFERRED SECURITIES AND YOU MAY NOT BE ABLE TO REINVEST THE PROCEEDS AT
THE SAME OR HIGHER RATE OF RETURN.
You are subject to prepayment risk of your Preferred Securities. If your
Preferred Securities are redeemed, you may not be able to reinvest the money you
receive in the redemption at a rate that is equal to or higher than the rate of
return you receive on the Preferred Securities. Although the Junior Subordinated
Debentures have a stated maturity date of April 29, 2029, they may be redeemed
by us prior to maturity which, in turn, would cause an early redemption of the
Preferred Securities, in the following circumstances:
- In whole or in part, beginning on April 29, 2004 at our option.
- In whole upon a change in the federal tax laws or a change in the
interpretation of the tax laws by the courts or the Internal Revenue
Service, which would result in a risk that (1) Flagstar Trust may be
subject to federal income tax, (2) the interest we pay on the Junior
Subordinated Debentures will not be deductible by us for federal income
tax
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purposes, or (3) Flagstar Trust is or will be subject to more than a
minimal amount of other taxes or governmental charges.
- In whole upon a change in the laws or regulations to the effect that
Flagstar Trust is or will be considered to be an investment company that
is required to be registered under the Investment Company Act of 1940.
- In whole upon a change in the laws or regulations if there is a risk that
we will not be able to treat all or a substantial portion of the
Preferred Securities as core capital for purposes of federal banking
guidelines.
Our exercise of these redemption rights is subject to our receipt of prior
approval of federal banking regulators, if required. For further information
concerning tax or regulatory events that may trigger redemption of the Junior
Subordinated Debentures and prepayment of the Preferred Securities, see
"Description of the Preferred Securities -- Redemption."
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF PREFERRED
SECURITIES MAY HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF YOUR INVESTMENT.
Your investment in the Preferred Securities may decrease in value if the
Junior Subordinated Debentures are distributed to you in exchange for your
Preferred Securities. We cannot predict the liquidity or market prices for the
Junior Subordinated Debentures that may be distributed. Accordingly, the Junior
Subordinated Debentures that you receive upon a distribution, or the Preferred
Securities you hold pending such a distribution, may trade at a discount to the
price that you paid to purchase the Preferred Securities.
Because you may receive Junior Subordinated Debentures, you must also make
an investment decision with regard to these securities. You should carefully
review all the information regarding the Junior Subordinated Debentures
contained in this Prospectus.
Under "United States Federal Income Tax Consequences" we discuss applicable
United States federal income tax consequences of a distribution of the Junior
Subordinated Debentures.
IN THE EVENT OF A DEFAULT UNDER THE PREFERRED SECURITIES, YOU MAY BE
REQUIRED TO RELY ON THE PROPERTY TRUSTEE OF FLAGSTAR TRUST TO ENFORCE YOUR
RIGHTS.
You may not be able to directly enforce rights against us if an event of
default occurs with respect to the Junior Subordinated Debentures. For a listing
of events that are events of default, see "Description of the Preferred
Securities -- Events of Default, Notice" and "Description of the Junior
Subordinated Debentures -- Debenture Events of Default."
If an event of default under the Junior Subordinated Debentures occurs and
is continuing, this event will also be an event of default under the Preferred
Securities. In that case, you generally would first have to rely on the Property
Trustee's enforcement of its rights as holder of the Junior Subordinated
Debentures against us. If the Property Trustee fails to exercise its rights
under the Junior Subordinated Debentures, you will then be able to exercise any
other remedies available under the Junior Subordinated Debentures.
However, if the default arises because we fail to pay interest or principal
(except during an Extension Period) on the Junior Subordinated Debentures, you
may proceed directly against us without first relying on the Property Trustee.
LIMITED COVENANTS RELATING TO THE PREFERRED SECURITIES AND THE JUNIOR
SUBORDINATED DEBENTURES WILL NOT NECESSARILY PROTECT YOU.
Our obligations as set forth in the governing documents (i.e., relating to
the Preferred Securities and the Junior Subordinated Debentures) are limited. As
a result, the governing documents will not necessarily protect you in the event
of an adverse change in our financial
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condition or results of operations. The governing documents do not limit our
ability or any of our subsidiaries to incur additional debt. You should not
consider the terms of the governing documents to be a significant factor in
evaluating whether we will be able to comply with our obligations under the
Junior Subordinated Debentures or the Guarantee.
WE WILL CONTROL FLAGSTAR TRUST BECAUSE YOU WILL HAVE LIMITED VOTING RIGHTS.
As a holder of Preferred Securities, you have limited voting rights. These
rights relate only to the modification of the Preferred Securities and removal
of the Property and Indenture Trustees of Flagstar Trust upon a limited number
of events. You will not have any voting rights regarding Flagstar Bancorp's
business or any matters regarding the Administrative Trustees. See "Description
of the Preferred Securities -- Voting Rights; Amendment of the Trust Agreement"
for more information on your limited voting rights.
TRADING CHARACTERISTICS OF THE PREFERRED SECURITIES MAY CREATE ADVERSE TAX
CONSEQUENCES FOR YOU.
The Preferred Securities may trade at a price that does not reflect the
value of accrued but unpaid interest on the underlying Junior Subordinated
Debentures. If you dispose of your Preferred Securities between record dates for
payments on the Preferred Securities, you may have adverse tax consequences.
Under these circumstances, you will be required to include accrued but unpaid
interest on the Junior Subordinated Debentures allocable to the Preferred
Securities through the date of disposition in your income as ordinary income.
If interest on the Junior Subordinated Debentures is included in income
under the original issue discount provisions, you would add this amount to your
adjusted tax basis in your share of the underlying Junior Subordinated
Debentures deemed disposed. If your selling price is less than your adjusted tax
basis, which will include all accrued but unpaid original issue discount
interest included in your income, you could recognize a capital loss which,
subject to exceptions, cannot be applied to offset ordinary income for federal
income tax purposes. See "United States Federal Income Tax
Consequences -- Potential Extension of Interest Payment Period and Original
Issue Discount" and "-- Sale of Preferred Securities" for more information on
possible adverse tax consequences to you.
THERE HAS NOT BEEN A PRIOR PUBLIC MARKET FOR THE PREFERRED SECURITIES, AND
AN ACTIVE TRADING MARKET FOR THE PREFERRED SECURITIES MAY NOT DEVELOP.
The Preferred Securities constitute a new issue of securities with no
established trading market. Although an application for listing of the Preferred
Securities on The Nasdaq Stock Market(R) has been filed, there can be no
assurance that our listing will be approved. Further, even if approved, a
listing does not guarantee that a trading market for the Preferred Securities
will develop. If a trading market does develop, there is no assurance of the
depth of that market or that holders of Preferred Securities will be able to
sell their Preferred Securities easily.
FLAGSTAR BANCORP RISK FACTORS
ANY CHANGES IN INTEREST RATES MAY ADVERSELY AFFECT OUR EARNINGS AND
FINANCIAL CONDITION.
Changes in interest rates affect our operating performance and financial
condition in diverse ways. Our profitability depends in substantial part on our
"net interest spread," which is the difference between the rates we receive on
loans and investments and the rates we pay for deposits and other sources of
funds. Our net interest spread 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 spreads for other financial institutions have widened and narrowed in
response to these and other factors, which are often collectively referred to as
"interest rate risk." We intend to try to minimize our exposure to interest rate
risk, but we will be unable to eliminate it.
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In our retail banking operations, we are subject to interest rate risk on
loans held in our portfolio arising from mismatches (i.e., the interest rate
sensitivity gap) between the dollar amount of repricing or maturing assets and
liabilities, which is measured in terms of the ratio of the interest rate
sensitivity gap to total assets. A higher level of assets repricing or maturing
than liabilities over a given time frame is considered asset-sensitive and is
reflected as a positive gap. In contrast, a higher level of liabilities
repricing or maturing than assets over a given time frame is considered
liability-sensitive and is reflected as a negative gap. An asset-sensitive
position (i.e., a positive gap) will generally enhance earnings in a rising
interest rate environment and will negatively impact earnings in a falling
interest rate environment. A liability-sensitive position (i.e., a negative gap)
will generally enhance earnings in a falling interest rate environment and
negatively impact earnings in a rising interest rate environment. Fluctuations
in interest rates are not predictable or controllable. Although we have
attempted to structure our asset and liability management strategies to mitigate
the impact on net interest income of changes in market interest rates, 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.
In our mortgage banking operations, we are exposed to interest rate risk
from the time the interest rate on a mortgage loan application is committed to
by us through the time we sell or commit to sell the mortgage loan. On a daily
basis, we analyze various economic and market factors and, based upon these
analyses, project the amount of mortgage loans we expect to sell for delivery at
a future date. The actual amount of loans we sell will be a percentage computed
as (i) 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") divided by (ii) actual closings. If interest rates change in an
unanticipated fashion, the actual percentage of pipeline loans that close may
differ from the projected percentage. The resulting 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, a sudden
increase in interest rates can cause a higher percentage of pipeline loans to
close than projected. To the degree that this is not anticipated, we may not
have made commitments to sell these additional pipeline loans and may incur
significant losses upon their sale as the market rate of interest will be higher
than the mortgage interest rate we committed to on such additional pipeline
loans. Our profitability may be adversely affected to the extent our hedging
strategy is not successful.
The market value of, and earnings from, our mortgage loan servicing
portfolio may be adversely affected by declines in interest rates. When mortgage
interest rates decline, mortgage loan prepayments usually 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. This would adversely affect our
operating results and financial condition.
THE LOSS OF OR INCREASED COST OF OUR OPERATING FUNDS MAY REDUCE OUR
EARNINGS.
The principal sources of funding for our operations have been bank deposits
and, to a lesser extent, borrowings from the Federal Home Loan Bank (the "FHLB")
and funds held in escrow for mortgage loan servicing purposes. Historically, our
cost of funds associated with deposits has generally been lower than our cost to
borrow from the FHLB. If we are unable to fund our asset growth through the
maintenance and growth of our deposit base, we may have to rely to a greater
extent on borrowings from the FHLB or other sources. If this causes our net cost
of funds to increase, our net interest margin would be adversely affected. At
December 31, 1998, we had a $1.3 billion line of credit with the FHLB, of which
$456.0 million had been drawn and was outstanding.
We cannot assume that we will be successful in retaining our access to
funds at the level or cost necessary to continue originations of single-family
mortgage loans at their current volume
11
<PAGE> 12
and level of profitability. We may have to curtail our origination of
single-family mortgage loans if we cannot maintain our low cost of funds. If we
have to reduce our single family mortgage loan originations, we may suffer a
material adverse effect on our operating results and financial condition.
OUR PROFITABILITY WILL BE SIGNIFICANTLY REDUCED IF WE ARE NOT ABLE TO
RESELL MORTGAGES.
Currently, we sell substantially all the mortgage loans we originate. Our
profitability depends in large part upon our ability to originate or purchase a
high volume of loans and to quickly sell them in the secondary 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 limit 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 such 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.
WE ARE AT RISK FOR LOSSES ON OUR LOANS THAT HAVE DEFAULTS OR DELINQUENCIES.
We are generally at risk for any loan defaults from the time we fund a loan
until the time we sell the loan. This time period is generally 10 to 40 days.
Once we sell the mortgage loans, the risk of loss from loan defaults and
foreclosure generally passes to the purchaser or insurer of the loans. In
connection with the sale, we typically make certain representations and
warranties to the purchasers and insurers of such loans. Such representations
and warranties generally relate to the origination and servicing of loans in
substantial conformance with the laws of the state of origination and applicable
investor guidelines and program eligibility standards. We rely upon our
underwriting department to ascertain compliance with individual investor
standards prior to sale of the loans in the secondary market, and we rely upon
our quality control department to test sold loans on a sample basis for
compliance. The purchasers of such loans will typically conduct a more detailed
review of such loans following acquisition to determine whether such loans were
originated in compliance with the purchaser's underwriting guidelines and
program eligibility standards. We become liable for the unpaid principal and
interest on any defaulted mortgage loan if there has been a breach of our
representations and warranties. In such instances, we may be required to
repurchase the loan.
We are also affected by loan delinquencies and defaults on mortgage loans
that we service. At December 31, 1998, approximately 1.83% of the loans we
serviced for others were 30 days or more delinquent (including foreclosures).
Under certain types of servicing contracts, the servicer must advance all or
part of the scheduled payments to the owner of the loan, even when loan payments
are delinquent. Also, to protect their liens on mortgaged properties, owners of
loans usually require the servicer to advance the cost of mortgage and hazard
insurance and tax payments on schedule even if sufficient escrow funds are not
available. The servicer will be reimbursed by the mortgage owner or from
liquidation proceeds for payments advanced that the
12
<PAGE> 13
servicer is unable to recover from the mortgagor, although the timing of such
reimbursement is typically uncertain. In the interim, the servicer must absorb
the cost of funds advanced. Further, the servicer must bear the costs of
attempting to collect on delinquent and defaulted loans. We do not collect
servicing income from the time a loan becomes delinquent until foreclosure, at
which time such amounts, if any, may be recovered.
IF THERE ARE ADVERSE CONDITIONS IN ONE GEOGRAPHIC AREA OR WITH A FEW
CUSTOMERS, THESE MAY HAVE A DISPROPORTIONATELY LARGE EFFECT ON OUR FINANCIAL
RESULTS.
Historically, our single-family mortgage loan portfolio has been
concentrated in certain geographic regions, particularly Michigan, based upon
the location of the property collateralizing the mortgage loan. Because
borrowers of single-family mortgage loans usually reside on the collateral
property, changes in economic and business conditions in the area in which the
property is located can affect the borrower and thus have an effect on the
performance of the loan. For instance, the mortgage loans we serviced (as
measured by unpaid principal balance), including loans held for investment, that
were collateralized by property located in Michigan comprised 22.4% of total
mortgage loans at December 31, 1998. As a result, unfavorable or worsened
economic conditions in Michigan could have a material adverse effect on our
financial condition and results of operations.
In addition to risks associated with a geographic concentration of our loan
portfolio, our results of operations can be affected by concentration of credit
to just a few borrowers. We currently provide warehouse lines of credit ranging
up to $21.5 million to certain mortgage companies. We have also originated
commercial real estate loans in amounts up to $6.5 million. Repayment of such
loans is primarily dependent upon the successful operation of the business
involved and therefore could be subject to a greater extent to adverse
conditions in the economy. If any single large loan customer defaults on their
loan from us, it could adversely affect our operating results.
A SIGNIFICANT PORTION OF OUR INCOME ARISES FROM THE MORTGAGE BANKING
BUSINESS, WHICH IS SEASONAL.
We earn a significant amount of income in the mortgage banking industry,
which is generally subject to seasonal variations. These variations reflect the
general national pattern of sales and resales of homes, although refinancings
tend to be less seasonal and more closely related to changes in interest rates.
Sales and resales of homes typically peak during the spring and summer seasons
and decline to lower levels from mid-November through February. In addition,
delinquency rates typically rise in the winter months, which results in higher
servicing costs. The magnitude of these variations, which is beyond our control,
could adversely affect our operating results.
THE EXPANSION OF OUR RETAIL BANKING BUSINESS WILL BE EXPENSIVE.
We intend to expand our retail banking operations through the acquisition
or establishment of additional bank branches. This expansion is expected to
occur in communities across southern and western Michigan. If we are unable to
generate a customer base within these communities because of consumer loyalty to
other financial institutions or for other reasons, we will have incurred
construction or building acquisition costs and liabilities under lease
agreements as well as related branch overhead expenses without an appropriate
return on our investment.
WE ARE DEPENDENT ON OUR KEY PERSONNEL.
Our growth and development to date have been largely dependent on certain
key employees, the loss of whom could have a material adverse effect. Our key
employees are Thomas J. Hammond, Chief Executive Officer; Mark T. Hammond,
President; Michael W. Carrie, Executive Vice President and Chief Financial
Officer; and Joan H. Anderson, Executive Vice President. Each of these persons
are officers of the Company and the Bank. Our key employees also include
13
<PAGE> 14
Kirstin A. Hammond, Executive Vice President; and Robert O. Rondeau, Jr.,
Executive Vice President, who are officers of the Bank. We do not carry "key
person" life insurance on the lives of any officers.
WE ARE IMPACTED BY COMPETITION FROM MANY OTHERS.
Both our retail banking business and mortgage banking business are
extremely competitive. In the retail banking segment, we will have to overcome
historical relationships to attract customers away from our competition. In the
mortgage banking segment, many of our competitors are, or are affiliates of,
enterprises that have greater resources than we do.
Through our various businesses, we compete with different institutions,
including:
- mortgage companies;
- other banks and thrift institutions;
- credit unions;
- full service and discount broker dealers;
- investment companies, mutual funds and money market funds; and
- insurance companies.
Some of our competitors are not regulated as extensively as we are and,
therefore, may have greater flexibility in competing for business. Some of these
competitors are subject to similar regulation but have the advantages of
established customer bases, higher lending limits, extensive branch networks,
numerous automated teller machines or other factors. We compete by offering
market rates on our products and prompt service to our customers.
WE OPERATE A BUSINESS THAT IS SUBJECT TO SIGNIFICANT GOVERNMENT REGULATION.
We are subject to extensive regulation by state and federal banking
authorities. These regulations govern our existence, our general operations and
our other functions such as mortgage origination, processing, underwriting,
selling and servicing. Many of these regulations are intended to protect
depositors, the public or the FDIC and not our shareholders. Regulatory
requirements will affect our lending practices, capital structure, investment
practices, dividend policy and growth. Any change in these regulatory
requirements could adversely affect us. In some instances, regulatory changes
are applied retroactively. Our mortgage banking operations are also affected by
the rules and regulations of quasi-governmental agencies that purchase,
guarantee or insure mortgage loans. Further, federal economic and monetary
policies, which are entirely out of our control, will affect various aspects of
our operations.
In addition, certain states require that interest be paid to mortgagors on
funds deposited by them in escrow to cover mortgage-related payments such as
property taxes and insurance premiums. Federal legislation has been introduced
in the past that would, if enacted, revise current escrow regulations and
establish a uniform escrow calculation methodology in all states. If such
federal legislation were enacted or if other states enact legislation relating
to payment of, or increases in the rate of, interest on escrow balances, or if
such legislation were retroactively applied to loans in our servicing portfolio,
our earnings would be adversely affected.
WE OPERATE A BUSINESS IN AN INDUSTRY THAT HAS BEEN SUBJECT TO SIGNIFICANT
LITIGATION.
In recent years, mortgage originators have been subject to class action
lawsuits that allege violations of federal and state laws and regulations,
including the propriety of collecting and paying various fees and charges and
the calculation of escrow amounts. Class action lawsuits may continue to be
filed in the future against mortgage originators generally. The results of our
operations could be adversely affected if we suffer an unfavorable court
judgment in any such lawsuit.
14
<PAGE> 15
WE MAY INCUR SIGNIFICANT COSTS IF WE FORECLOSE ON ENVIRONMENTALLY
CONTAMINATED REAL ESTATE.
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. These liabilities could exceed the fair value
of the real property. It is also possible that hazardous substances or wastes,
contaminants, pollutants or their sources (as defined by state and federal laws
and regulations) may be discovered on properties during our ownership or after
they are sold to a third party. If they are discovered on a property that we
have acquired through foreclosure or otherwise, we may be required to remove
those substances and clean up the property. We may have to pay for the entire
cost of any removal and clean-up without the contribution of any other third
parties. These costs may also exceed the fair value of the property. We may also
be liable to tenants and other users of neighboring properties. In addition, we
may find it difficult or impossible to sell the property prior to or following
any such clean-up.
THE YEAR 2000 PROBLEM MAY HAVE AN ADVERSE IMPACT ON US OR ON OTHERS UPON
WHOM WE DEPEND.
Much of today's information technology (i.e., computer systems) and
embedded technology (e.g., microcontrollers) identifies a particular year on the
basis of the last two digits of that year. For example, the year "1998" is
recognized by the digits "98." The inability of information technology and
embedded technology to properly recognize a year that begins with "20" instead
of "19," if not corrected, may result in the production of erroneous results or
the failure of systems which rely on information technology and embedded
technology. This failure of systems, production of erroneous results and the
resulting damages is commonly known as the "Year 2000 Problem" or the "Y2K
Problem."
We are dependent, to a substantial degree, upon the proper functioning of
our computer systems as well as those of our vendors, suppliers and customers.
Most of our products and services rely on information and data provided by
others. Most of this information and data is provided electronically and is
dependent on information systems and telecommunications. The inability of our
vendors and suppliers to provide accurate information in a timely manner, our
inability to accurately and timely process such information, the inability of
our customers to receive and use our products and services, and a general
disruption of telecommunications and utilities as a result of the Year 2000
Problem would most likely result in business interruption or shutdown, financial
loss, potential regulatory action, harm to our reputation and potential legal
liability.
Although we have conducted internal development and testing of our computer
systems to insure millennium compliance, we can give no assurance that our
internal systems will be completely free of errors. Furthermore, we can give no
assurance that all of our vendors will deliver Year 2000 compliant certificates
or that the vendors will in fact be Year 2000 compliant despite their
certification of compliance. If either our computer systems or those of our
vendors fail to function properly because of the Year 2000 problem, the results
of our operations may materially suffer.
15
<PAGE> 16
THE OFFERING
Preferred Securities
Issuer..................... Flagstar Trust
Securities Offered......... Flagstar Trust is offering 2,600,000 of its
Preferred Securities, which represent an indirect
interest in our Junior Subordinated Debentures that
it will purchase with the proceeds of this
offering.
Flagstar Trust will sell its Preferred Securities
to the public and its Common Securities to us.
Together, the Preferred Securities and the Common
Securities are referred to as Trust Securities.
Flagstar Trust will use the proceeds from the sale
of Trust Securities to buy our 9.50% Junior
Subordinated Debentures which will have the same
payment terms as the Preferred Securities.
Use of Proceeds of Sale of
the Preferred Securities... The proceeds of the sale of the Preferred
Securities will be invested by Flagstar Trust in
our Junior Subordinated Debentures. We will receive
the proceeds from the issuance of the Junior
Subordinated Debentures. We intend to:
- invest a significant portion of the net proceeds
in the Bank; and
- retain the remainder for our general corporate
purposes.
Quarterly Distributions Are
Payable to You on the
Preferred Securities....... The Distributions payable on each Preferred
Security will:
- be fixed and accumulate at a rate per year of
9.50%;
- accrue from the date of issuance of the Preferred
Securities; and
- be payable after each calendar quarter on the
last business day of March, June, September and
December of each year that the Preferred
Securities are outstanding, beginning on June 30,
1999.
Flagstar Bancorp and
Flagstar Trust May Defer
Distributions to You on the
Preferred Securities....... Flagstar Trust may defer Distributions on the
Preferred Securities if we defer paying interest to
Flagstar Trust on the Junior Subordinated
Debentures. We generally have the right to defer
interest payments on the Junior Subordinated
Debentures for up to 20 consecutive quarters.
During any deferral period, you will accumulate
Distributions at the annual rate of 9.50%, plus you
will earn additional interest at the annual rate of
9.50%, compounded quarterly, on any unpaid
Distributions.
You Will Still be Taxed
Even If Distributions on
the Preferred Securities
are Deferred............... If Distributions on the Preferred Securities are
deferred, you must still include the related income
in your taxable gross income for United States
federal income tax purposes for as long
16
<PAGE> 17
as the Junior Subordinated Debentures remain
outstanding. As a result, you may incur a tax
liability on the income before you have received
cash to pay the tax. For further information on
deferrals and their tax consequences, see "Risk
Factors -- Distributions on the Preferred
Securities may be deferred; you may have to include
interest in your taxable income before you receive
cash," "Description of the Junior Subordinated
Debentures -- Option to Extend Interest Payment
Period" and "United States Federal Income Tax
Consequences -- Potential Extension of Interest
Payment Period and Original Issue Discount."
You Will Be Required to
Sell Your Preferred
Securities To Flagstar
Trust When the Junior
Subordinated Debentures
Mature or if They Are
Prepaid.................... The Junior Subordinated Debentures will mature on
April 29, 2029. You will be required to sell your
Preferred Securities to Flagstar Trust upon the
stated maturity date of the Junior Subordinated
Debentures or earlier if they are prepaid. If we
prepay the Junior Subordinated Debentures, Flagstar
Trust will simultaneously redeem your Preferred
Securities on the date of payment of the Junior
Subordinated Debentures.
If the Junior Subordinated
Debentures Are Prepaid,
Your Preferred Securities
Will Be Redeemed........... If we receive prior approval of federal banking
regulators, if required, we may prepay the Junior
Subordinated Debentures prior to maturity:
- on or after April 29, 2004; or
- at any time if certain specified events occur
that may have a significant adverse effect on our
benefits of having the Preferred Securities
outstanding.
Upon any prepayment of the Junior Subordinated
Debentures, your Preferred Securities will be
redeemed at the liquidation amount of $25 per
Preferred Security plus any accrued and unpaid
Distributions to the date of redemption. For
further information on redemptions, see
"Description of the Preferred
Securities -- Redemption" and "Description of the
Junior Subordinated Debentures Redemption."
At our Option, We May
Require You to Exchange
Your Preferred Securities
For Our Junior Subordinated
Debentures................. We have the right at any time to dissolve or
liquidate Flagstar Trust and distribute the Junior
Subordinated Debentures to you in exchange for your
Preferred Securities. If that happens, you will
receive Junior Subordinated Debentures in exchange
for the same principal amount of your holdings of
Preferred Securities. However, we must pay the
creditors of Flagstar Trust and, if required,
receive prior approval of federal banking
regulators
17
<PAGE> 18
before we dissolve or liquidate Flagstar Trust. If
the Junior Subordinated Debentures are distributed,
we will use our best efforts to list them on The
Nasdaq Stock Market(R) in place of the Preferred
Securities. For further information concerning
distribution of the Junior Subordinated Debentures,
see "Description of the Preferred
Securities -- Distribution of Junior Subordinated
Debentures."
We Fully and
Unconditionally Guarantee
Your Preferred Securities
On a Subordinated Basis.... We fully and unconditionally guarantee the payment
of all distributions Flagstar Trust is obliged to
make, but only to the extent Flagstar Trust has
sufficient funds to satisfy those payments.
If we do not make a payment on the Junior
Subordinated Debentures, Flagstar Trust will not
have sufficient funds to make payments on the
Preferred Securities. The Guarantee does not
require us to make any payments on our Junior
Subordinated Debentures nor does it require us to
make up any shortfall in Flagstar Trust's funds
needed to make a payment on the Preferred
Securities to you. The Guarantee only requires us
to make payments to the extent Flagstar Trust holds
any funds.
For further information concerning our Guarantee of
the Preferred Securities, see "Description of
Guarantee."
Your Preferred Securities
Rank Lower in Payment
Compared to Our Other
Obligations................ Our obligations under the Preferred Securities
Guarantee, the Junior Subordinated Debentures and
other governing documents are unsecured and have a
payment priority below all of our current and
future Senior and Subordinated Debt. In addition,
because we are a holding company that relies on our
subsidiaries for virtually all of our income, all
existing and future liabilities of our subsidiaries
will effectively rank higher than all of our
obligations relating to the Preferred Securities
and the Junior Subordinated Debentures. For
example, our Bank currently has a subsidiary that
acts as a real estate investment trust and sold
preferred shares to the public. If the Bank is
required to terminate the REIT, the REIT's
preferred shares will be exchanged for the Bank's
preferred shares. If this happens, the Bank's funds
would be used to first satisfy its obligations on
its own preferred shares before paying any
dividends to the Company.
There is no limit on the amount of other preferred
securities or other junior subordinated debentures
that we may issue in the future or on the amount of
future liabilities of the Bank. Future issuances of
securities similar to the Preferred Securities and
the Junior Subordinated Debentures will rank
equally with our obligations under the Junior
Subordinated Debentures and our Preferred
Securities Guarantee described in this Prospectus.
18
<PAGE> 19
You Will Have Limited
Voting Rights.............. As a holder of Preferred Securities, you will have
limited voting rights. These rights relate only to
the dissolution or termination of Flagstar Trust
and removal of the Property Trustee and the
Indenture Trustee of Flagstar Trust under certain
conditions. See "Description of the Preferred
Securities -- Voting Rights; Amendment of the Trust
Agreement."
The Preferred Securities
Will Be In Book Entry Form
Only....................... You will not receive a certificate for your
Preferred Securities. Instead, the Preferred
Securities will be represented by a global security
that will be deposited with and registered in the
name of The Depository Trust Company or its
nominee.
The Nasdaq Stock
Market(R).................. The Preferred Securities have been approved for
quotation on The Nasdaq Stock Market(R) under the
trading symbol "FLGSO." Prior to this offering,
there has been no public market of the Preferred
Securities. The Underwriters have advised Flagstar
Trust that they presently intend to make a market
in the Preferred Securities prior to the
commencement of trading on The Nasdaq Stock
Market(R). The Underwriters are not obligated to
make a market in the Preferred Securities, however,
and may cease market making activities at any time.
We can not give any assurance as to the liquidity
of any trading market for the Preferred Securities.
19
<PAGE> 20
USE OF PROCEEDS
All of the proceeds from the sale of Preferred Securities by Flagstar Trust
will be invested in the Junior Subordinated Debentures. The net proceeds to
Flagstar Bancorp from the sale of the Junior Subordinated Debentures, after
deducting underwriting commissions and estimated offering expenses, are expected
to be approximately $62,452,000 or $71,895,000 if the underwriters'
over-allotment option is exercised in full. We intend to invest a significant
portion of the net proceeds in the Bank, with the remainder to be retained by us
and used for general corporate purposes.
CAPITALIZATION
The following table sets forth (a) our historical capitalization at
December 31, 1998 and (b) our adjusted capitalization at December 31, 1998 after
giving effect to the offering (assuming no exercise of the over-allotment
option) and the use of net proceeds as described in "Use of Proceeds" above.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
----------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Long-term debt(1)........................................... $300,000 $300,000
Company obligated mandatorily redeemable securities of
subsidiary trust holding solely Junior Subordinated
Debentures................................................ -- 65,000
Stockholders' Equity:
Preferred Stock (10,000,000 shares authorized; no shares
issued or outstanding)................................. -- --
Common Stock (40,000,000 shares authorized; 13,670,000
shares issued and outstanding);........................ 137 137
Additional paid in capital................................ 29,988 29,988
Retained earnings......................................... 133,727 133,727
-------- --------
Total stockholders' equity............................. 163,852 163,852
-------- --------
Total capitalization................................. $463,852 $528,852
======== ========
Ratio of equity to assets................................... 5.38% 5.27%
Regulatory capital ratios of the Bank:
Tangible capital.......................................... 6.44% 8.32%
Core capital.............................................. 6.54% 8.42%
Total risk based capital.................................. 12.93% 16.01%
</TABLE>
- -------------------------
(1) Reflects FHLB advances maturing more than one year from December 31, 1998.
20
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents our selected consolidated financial data as of
and for each of the years in the period ended December 31, 1998, 1997, 1996,
1995 and 1994. The information has been derived from our consolidated financial
statements, including our audited consolidated financial statements incorporated
in this Prospectus by reference to our 1998 Form 10-K, and should be read in
conjunction with the notes to those financial statements. See "WHERE YOU CAN
FIND MORE INFORMATION."
Historical results are not necessarily indicative of results to be expected
for any future period.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996(1) 1995 1994
---- ---- ------- ---- ----
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF CONSOLIDATED STATEMENTS OF EARNINGS:
Interest income................................ $ 191,261 $ 122,752 $ 76,179 $ 71,304 $ 35,112
Interest expense............................... 137,187 80,033 45,967 41,443 14,486
----------- ---------- ---------- ---------- ----------
Net interest income............................ 54,074 42,719 30,212 29,861 20,626
Provisions for losses.......................... 18,631 5,015 2,604 238 290
----------- ---------- ---------- ---------- ----------
Net interest income after provisions for
losses....................................... 35,443 37,704 27,608 29,623 20,336
Other income................................... 118,413 59,836 58,534 36,988 42,732
Operating and administrative expenses.......... 86,843 62,503 58,820 41,716 37,619
----------- ---------- ---------- ---------- ----------
Earnings before federal income tax provision... 67,013 35,037 27,322 24,895 25,449
Provision for federal income taxes............. 25,950 13,265 10,299 9,419 9,318
----------- ---------- ---------- ---------- ----------
Net earnings................................... $ 41,063 $ 21,772 $ 17,023 $ 15,476 $ 16,131
=========== ========== ========== ========== ==========
Basic earnings per share....................... $ 3.00 $ 1.70 $ 1.51 $ 1.37 $ 1.42
Diluted earnings per share..................... $ 2.90 $ 1.68 $ 1.51 $ 1.37 $ 1.42
Dividends per common share..................... $ 0.28 $ 0.06 $ 0.09 $ 0.18 $ 0.04
Dividend payout ratio.......................... 9.32% 3.77% 5.87% 12.92% 2.48%
SUMMARY OF CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION:
Total assets................................... $ 3,046,445 $1,901,084 $1,297,226 $1,045,094 $ 723,150
Loans receivable............................... 2,558,716 1,655,259 1,110,836 923,933 633,409
Mortgage servicing rights...................... 150,258 83,845 30,064 27,957 18,179
Deposits....................................... 1,923,370 1,109,933 624,485 526,974 307,624
FHLB advances.................................. 456,019 482,378 389,801 191,156 200,750
Stockholders' equity........................... 163,852 126,617 78,468 62,445 49,419
OTHER FINANCIAL AND STATISTICAL DATA:
Ratio of earnings to fixed charges............. 1.49x 1.44x 1.59x 1.60x 2.76x
Tangible capital ratio......................... 6.44% 5.40% 5.58% 5.19% 5.54%
Core capital ratio............................. 6.54% 5.62% 6.01% 5.84% 6.63%
Total risk-based capital ratio................. 12.93% 11.74% 10.91% 10.12% 12.08%
Equity-to-assets ratio (at the end of the
period)...................................... 5.38% 6.66% 6.05% 5.98% 6.83%
Equity-to-assets ratio (average for the
period)...................................... 5.03% 6.22% 6.19% 5.54% 8.91%
Book value per share........................... $ 11.98 $ 9.26 $ 6.97 $ 5.55 $ 4.37
Shares outstanding............................. 13,670 13,670 11,250 11,250 11,309
Average shares outstanding..................... 13,670 12,837 11,250 11,274 11,389
Mortgage loans originated or purchased......... $18,852,885 $7,873,099 $6,791,665 $5,195,605 $3,720,173
Mortgage loans sold............................ $17,803,958 $7,222,394 $6,581,897 $4,760,806 $3,551,319
Mortgage loans serviced for others............. $11,472,211 $6,412,797 $4,801,581 $6,788,530 $5,691,421
Capitalized value of mortgage servicing
rights....................................... 1.31% 1.31% 0.63% 0.41% 0.32%
Interest rate spread........................... 1.85% 2.10% 2.13% 2.36% 3.37%
Net interest margin............................ 2.14% 2.74% 3.07% 3.46% 4.63%
Return on average assets....................... 1.45% 1.29% 1.53% 1.63% 3.19%
Return on average equity....................... 28.77% 20.69% 24.68% 29.42% 35.78%
Efficiency ratio............................... 49.6% 59.7% 64.8% 60.4% 58.3%
Net charge offs to average loans............... 0.17% 0.20% 0.13% 0.00% 0.08%
Ratio of allowances to total loans............. 0.78% 0.33% 0.31% 0.23% 0.29%
Ratio of non performing assets to total
assets....................................... 1.97% 3.29% 3.16% 1.25% 0.42%
Ratio of allowance to non performing loans..... 53.78% 12.41% 11.43% 19.67% 107.59%
Number of Bank branches........................ 28(2) 19 15 13 9
Number of retail loan origination centers...... 31 35 41 31 29
Number of correspondent offices................ 15 16 10 9 6
</TABLE>
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(1) Included in the 1996 operation and administrative expenses is a one-time
assessment to recapitalize the SAIF, which totaled $3.4 million pre-tax
($2.2 million or $.20 per share on an after-tax basis). Without this
assessment, return on average assets would have been 1.73%, return on
average equity would have been 27.87%, and the efficiency ratio would have
been 61.0%.
(2) In 1999, we opened two branches.
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BUSINESS
GENERAL. We are one of the largest home mortgage lenders in the United
States. Our business is the origination of single-family mortgage loans. Through
our Bank, we attract deposits from the general public and originate or acquire
residential mortgage loans. The Bank is the largest independent savings
institution in Michigan based on asset size. We also acquire funds on a
wholesale basis from a variety of sources, service a significant volume of
mortgage loans for others, and to a lesser extent, make consumer loans,
commercial real estate loans and non-real estate commercial loans. For the year
ended December 31, 1998, we ranked 13th in the United States in residential
mortgage loan originations.
We have experienced significant asset growth and achieved continuing
profitability: our total assets increased to $3.0 billion for the year ended
December 31, 1998 from $1.9 billion for the same period in 1997 and $1.3 billion
for the same period in 1996; our net income increased to $41.1 million ($2.90
per share -- diluted), for the year ended December 31, 1998 from $21.8 million
($1.68 per share -- diluted) for the same period in 1997 and $17.0 million
($1.51 per share -- diluted) for the same period in 1996; and for the year ended
December 31, 1998 return on average assets equaled 1.45% and return on average
equity was 28.77% compared to return on average assets of 1.29% and return on
average equity of 20.69% for the same period in 1997.
MORTGAGE AND RETAIL BANKING. Our primary lines of business are mortgage
banking and retail banking. A majority of our revenue (net interest income and
non-interest income) and earnings before income taxes is attributable to the
mortgage banking segment. We believe that our retail banking business provides
us with access to attractive and relatively stable funding sources for our
mortgage origination business. We believe we have a strategic advantage compared
to other mortgage originators with no retail banking operations due to our
stable, lower cost of funds.
Mortgage Banking. Our mortgage banking operations originate residential
mortgages through 31 retail loan origination offices located in Michigan (27),
Florida (3) and Ohio (1). In addition, we originate mortgage loans on a
wholesale basis through a nationwide network of independent mortgage brokers. We
also purchase mortgage loans on a regular basis from independent mortgage
lenders, commercial banks, savings and loan associations and other financial
institutions with whom we are familiar. These independent mortgage brokers and
mortgage lenders originate such loans using our underwriting standards. We
service this network through over 60 account executives, who are organized among
10 regional wholesale/correspondent lending offices and five
wholesale/correspondent satellite offices.
Retail Banking. We provide a full range of retail banking services to
consumers and small businesses in southern and western Michigan. We currently
operate a network of 30 bank branches (including nine opened in 1998 and two in
1999) located in southern and western Michigan counties. Since 1994, we have
focused on expanding our branch network in these markets in order to increase
our access to retail deposit funding sources. We believe that this also provides
a greater opportunity for cross-marketing of consumer banking services to our
large base of mortgage customers in Michigan. We believe we can benefit from the
customer displacement in our markets caused by the substantial consolidation of
the banking industry in Michigan.
LOAN PRODUCTION. For the year ended December 31, 1998, we produced $18.8
billion in mortgage loans. These included $17.4 billion in mortgage loans
produced through the wholesale and correspondent network and $1.4 billion
originated through the retail network. We produced mortgage loans of $7.9
billion during 1997 which included $7.1 billion produced through the wholesale
and correspondent network and $745.2 million originated through the retail
network. For the year ended December 31, 1996, the wholesale and correspondent
network produced $6.1 billion and the retail network originated $685.3 million
for a total production of $6.8 billion.
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<PAGE> 23
LOAN SALES AND SERVICING. We sell a substantial portion of our loan
production into the secondary market. These sales are principally completed by
securitizing pools of loans through programs offered by government-sponsored
enterprises such as Fannie Mae, Freddie Mac, and Ginnie Mae and through sales to
private investors. We generally retain the servicing rights to many of the loans
that we sell. We also realize additional income by selling servicing rights on
an individual and a bulk basis to other mortgage servicers. Our loan servicing
portfolio totaled $11.5 billion at December 31, 1998, $6.4 billion at December
31, 1997 and $4.8 billion at December 31, 1996 (net of loans subserviced for
others).
TECHNOLOGY. We make extensive use of advanced technology and automated
processes which we believe enhance our competitiveness and reduce the cost of
our mortgage origination operations. We were one of the first major mortgage
lenders to utilize video conferencing for loan production. In 1996, we began
full-scale operational use of automated underwriting system technologies,
including Fannie Mae's Desktop Underwriter(TM) and Freddie Mac's Loan
Prospector(TM). In fact, we are currently one of the largest users of the Loan
Prospector(TM) system. We underwrite substantially all of our mortgage loans
using these automated systems. We believe that our use of these systems reduces
overhead, enhances customer service and better ensures that our mortgage loans
conform to secondary market guidelines.
BUSINESS STRATEGY. Our strategy consists of the following key elements:
- continue to expand our bank branch network into demographically desirable
communities in Michigan in order to gain access to additional retail
funding sources;
- as market conditions permit, retain a portion of our mortgage loan
production volume or mortgage servicing rights or both (thereby
benefiting from economies of scale);
- continue to utilize advanced technology and automated processes
throughout our business to improve customer service, reduce costs of loan
production and servicing and increase efficiencies; and
- cross-sell retail banking services to our large Michigan base of existing
mortgage customers.
ACCOUNTING TREATMENT
For financial reporting purposes, we will treat Flagstar Trust as our
subsidiary. Accordingly, we will include the accounts of Flagstar Trust in our
consolidated financial statements. We will include the Preferred Securities in
debt in our consolidated statements of financial condition, and will include
appropriate disclosures about the Preferred Securities, the Guarantee and the
Junior Subordinated Debentures in the notes to our consolidated financial
statements. For financial reporting purposes, we will record Distributions on
the Preferred Securities as interest expense in our consolidated statements of
earnings.
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<PAGE> 24
DESCRIPTION OF THE PREFERRED SECURITIES
DEFINITIONS OF MATERIAL AGREEMENTS
For purposes of this Prospectus:
- the "Indenture" means the Subordinated Indenture dated as of April 29,
1999, as amended and supplemented from time to time, between Flagstar
Bancorp and FMB Bank, as trustee (the "Indenture Trustee"), under which
the Junior Subordinated Debentures will be issued,
- the "Trust Agreement" means the Amended and Restated Trust Agreement,
under which the Preferred Securities and the Common Securities will be
issued, dated as of April 29, 1999, as amended and supplemented from time
to time, among Flagstar Bancorp, as Depositor, First Omni Bank, National
Association, as Delaware trustee (the "Delaware Trustee"), FMB Bank, as
property trustee (the "Property Trustee"), and the Administrative
Trustees named therein,
- the "Guarantee" means the Guarantee Agreement relating to the Guarantee
of Flagstar Bancorp, between Flagstar Bancorp and FMB Bank, as trustee
(the "Guarantee Trustee") on behalf of the holders, and
- the "Expense Agreement" means the Expense Agreement between Flagstar
Bancorp and Flagstar Trust.
The Preferred Securities and the Common Securities will be issued pursuant
to the terms of the Trust Agreement, which is qualified as an indenture under
the Trust Indenture Act of 1939 (the "Trust Indenture Act"). This summary is not
complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Trust Agreement, including the definitions portion of
the Trust Agreement, and the Trust Indenture Act. However, we believe that all
material terms of the Preferred Securities in the Trust Agreement are set forth
in this section of the Prospectus. The form of the Trust Agreement has been
filed as an exhibit to the Registration Statement. This Prospectus is a part of
the Registration Statement.
GENERAL
The Administrative Trustees on behalf of Flagstar Trust will issue the
Preferred Securities and the Common Securities (collectively, the "Trust
Securities"). We will own 100% of the Common Securities and you may purchase the
Preferred Securities. The Preferred Securities will represent undivided
preferred beneficial interests in the assets of Flagstar Trust and each holder
will be entitled to a preference in respect of certain distributions by Flagstar
Trust and amounts payable on redemption or liquidation of Flagstar Trust.
Otherwise, the Preferred Securities will generally rank the same as the Common
Securities.
The Preferred Securities, as well as the Junior Subordinated Debentures,
are scheduled to mature on April 29, 2029.
The Property Trustee will hold the Junior Subordinated Debentures which we
have issued in trust for the benefit of the holders of Trust Securities. Our
Guarantee (the "Guarantee") will be subordinated to most of our other
obligations and liabilities. Our Guarantee will not provide for the payment of
Distributions (as defined below) or amounts payable on redemption of the
Preferred Securities if Flagstar Trust does not have funds available to make
such payments. See "Description of Guarantee."
If we do not make required payments on the Junior Subordinated Debentures
held by Flagstar Trust, taking into account our right to defer such payments for
up to 20 quarters, Flagstar Trust will be unable to pay any Distributions to
you. In such event, you may make a claim directly against us to enforce payment
of the amounts due to you. See "Description of the
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<PAGE> 25
Junior Subordinated Debentures -- Enforcement of Certain Rights by Holders of
Preferred Securities."
DISTRIBUTIONS
Distributions on the Preferred Securities will be fixed at an annual rate
of 9.50% of the Liquidation Amount of $25 per Preferred Security. Unpaid
Distributions that are past due will accumulate additional interest at an annual
rate of 9.50% of the unpaid Distributions, compounded quarterly. The term
"Distribution" includes any additional amounts payable in respect of
Distributions unless otherwise stated.
Distributions on the Preferred Securities:
- will be cumulative,
- will accumulate from April 29, 1999, the date of initial issuance of the
Preferred Securities, and
- will be payable quarterly in arrears on the last Business Day of March,
June, September and December, commencing June 30, 1999.
The amount of Distributions payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months. In the event that any date on
which a Distribution is payable is not a Business Day, the payment of that
Distribution will generally be made on the next Business Day (and without any
additional interest). "Business Day" means any day other than a Saturday or a
Sunday, or a day on which banking institutions in the State of Michigan are
authorized or required by law or executive order to remain closed or a day on
which the Corporate Trust Office of the Property Trustee or the Indenture
Trustee is closed for business.
We may defer the payment to Flagstar Trust of interest on the Junior
Subordinated Debentures at any time for one or more Extension Periods. However,
we may not defer any payments if we are in default under the Indenture. No
Extension Period may extend beyond the maturity date of the Junior Subordinated
Debentures. If we elect to defer the payment of interest, then quarterly
Distributions on the Preferred Securities will be deferred by Flagstar Trust
during the Extension Period. The Distributions will continue to accumulate, with
additional interest, generally at an annual rate of 9.50%, compounded quarterly,
during the Extension Period.
During any Extension Period:
- we may not declare or pay any dividends on, make any distribution, or
redeem, purchase, acquire or make a liquidation payment on any of
Flagstar Bancorp's capital stock; and
- we may not make any payment of interest, principal or premium on or
repay, repurchase or redeem any debt securities issued by us that rank
equal or junior to the Junior Subordinated Debentures (of which there are
none at the time of this printing), or make any guarantee payments on the
foregoing.
The Extension Period restrictions do not apply to:
- repurchases, redemptions or other acquisitions of shares of our capital
stock in connection with any employment contract, benefit plan or other
similar arrangement with or for the benefit of any one or more employees,
officers, directors or consultants, or a dividend reinvestment or
shareholder stock purchase plan;
- any declaration of a dividend in connection with any shareholders' rights
plan, or the issuance of rights, stock or other property under any
shareholders' rights plan, or the redemption or repurchase of rights
pursuant to the plan;
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- any dividend in the form of stock, warrants, options or other rights
where the dividend or the stock issuable upon exercise of the warrants,
options or other rights is the same stock as that on which the dividend
is being paid or ranks equal or junior to that stock; or
- payments by us under the Guarantee.
When we pay all the accumulated amounts due to you during an Extension
Period, the Extension Period will terminate. However, we have the right to begin
another Extension Period under the same terms outlined above. There is no limit
on the number of times we can elect to begin an Extension Period. In no way may
any single Extension Period extend beyond 20 consecutive calendar quarters.
We have no current intention of exercising our right to defer payments of
interest by extending the interest payment period on the Junior Subordinated
Debentures.
REDEMPTION
When we repay or redeem some or all of the Junior Subordinated Debentures,
whether at maturity or upon earlier redemption, the Property Trustee will apply
the proceeds from the repayment or redemption to redeem the same proportionate
amount of Preferred Securities and Common Securities. The Redemption Price per
Security will equal the $25 Liquidation Amount, plus accumulated and unpaid
Distributions to the date of redemption. We will make this redemption not less
than 30 nor more than 60 days after the notice of a date of redemption (the
"Redemption Date"), at the Redemption Price (as defined below). See "Description
of the Junior Subordinated Debentures -- Redemption."
If less than all the Junior Subordinated Debentures are to be repaid or
redeemed, then the aggregate liquidation amount of Preferred and Common
Securities to be redeemed will be allocated approximately 3% to the Common
Securities and 97% to the Preferred Securities, except in the case of an event
of default under the Indenture. See "-- Subordination of Common Securities."
We will have the right, after receipt of prior approval by federal banking
regulators, if approval is then required, to redeem the Junior Subordinated
Debentures:
- on or after April 29, 2004, in whole at any time or in part from time to
time; or
- prior to April 29, 2004 in whole, but not in part, at any time within 90
days following the occurrence and continuation of a Tax Event, an
Investment Company Event or a Capital Treatment Event, each as we defined
below. See "Description of the Junior Subordinated Debentures -- Optional
Redemption."
SELECTED DEFINITIONS
"Additional Sums" means the additional payments we are required by the
Indenture to make under the Junior Subordinated Debentures to cover certain
charges imposed upon Flagstar Trust so that the funds available to Flagstar
Trust for payment of Distributions will not be reduced. An example of the
Additional Sums could be any additional taxes, duties and other governmental
charges that Flagstar Trust has incurred.
"Capital Treatment Event" means that we have received an opinion of
nationally recognized independent counsel experienced in such matters that, as a
result of
(1) any amendment to, clarification of or change, including any announced
prospective change, in applicable laws or regulations or official
interpretations thereof or policies with respect thereto; or
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<PAGE> 27
(2) any official administrative pronouncement or judicial decision
interpreting or applying such laws or regulations, which amendment,
clarification, change, pronouncement or decision is announced or is
effective after the date of this Prospectus,
there is more than an insubstantial risk that the Preferred Securities will not
then constitute capital of Flagstar Bancorp for purposes of the capital adequacy
guidelines or policies of federal banking regulators. There are currently no
capital adequacy guidelines applicable to savings and loan holding companies
such as Flagstar Bancorp.
"Investment Company Event" means that the Administrative Trustees have
received an opinion of nationally recognized independent counsel experienced in
such matters that, as a result of the occurrence of a change, including any
announced prospective change, in law or regulation or a written change,
including any announced prospective change, in interpretation or application of
law or regulation by any legislative body, court, governmental agency or
regulatory authority on or after the date of this Prospectus, there is more than
an insubstantial risk that Flagstar Trust is or will be considered an
"investment company" that is required to be registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act").
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount (as defined below) equal to that
portion of the principal amount of Junior Subordinated Debentures to be
contemporaneously redeemed in accordance with the Indenture, allocated to the
Common Securities and to the Preferred Securities based upon the relative
Liquidation Amounts of such classes and the proceeds of which will be used to
pay the Redemption Price of such Trust Securities, and (ii) with respect to a
distribution of Junior Subordinated Debentures to holders of Trust Securities in
connection with a dissolution or liquidation of Flagstar Trust, Junior
Subordinated Debentures having a principal amount equal to the Liquidation
Amount of Trust Securities of each holder to whom such Junior Subordinated
Debentures are distributed.
"Liquidation Amount" means the stated amount of $25 per Trust Security. The
Liquidation Amount is the amount that you are entitled to receive if Flagstar
Trust is terminated at or prior to the maturity date and its assets are
distributed to the holders of its securities. You are entitled to receive this
amount from the assets of Flagstar Trust for distribution, after it has paid
liabilities owed to its creditors, if Flagstar Trust has sufficient funds to pay
this amount.
"Redemption Price" means, with respect to any Trust Security, the
Liquidation Amount of such Trust Security, plus accumulated and unpaid
Distributions to the Redemption Date, allocated on a pro rata basis (based on
Liquidation Amounts) among the holders of Trust Securities.
"Tax Event" means that the regular trustees, or, if Flagstar Trust has been
terminated at the time, an appropriate representative of the holders of the
Junior Subordinated Debentures, have received an opinion of nationally
recognized independent tax counsel experienced in such matters to the effect
that, as a result of:
- any amendment to, clarification of, or change, including any announced
prospective change, in the laws, or any regulations under the laws, of
the United States or any political subdivision or taxing authority
affecting taxation;
- any judicial decision, official administrative pronouncement, ruling,
regulatory procedure, notice or announcement, including any notice or
announcement of intent to adopt such procedures or regulations (an
"Administrative Action"); or any amendment to, clarification of, or
change in the official position or the interpretation of such
Administrative Action or judicial decision that differs from the prior
generally accepted position,
in each case, by any legislative body, court, governmental authority or
regulatory body, irrespective of the manner in which the amendment,
clarification, change or Administrative Action is made known, which amendment,
clarification, change or Administrative Action is effective or
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which pronouncement or decision is announced, in each case, on or after the date
of this Prospectus, there is more than an insubstantial risk that:
(1) Flagstar Trust is, or will be within 90 days of the date of the opinion
of counsel, subject to United States federal income tax with respect to
income accrued or received on the Junior Subordinated Debentures,
(2) Flagstar Trust is, or will be within 90 days of the date of the opinion
of counsel, subject to more than a de minimis amount of taxes, duties
or other governmental charges, except for withholding taxes, or
(3) interest paid in cash by us to Flagstar Trust on the Junior
Subordinated Debentures is not, or within 90 days of the date of the
opinion of counsel will not be, deductible, in whole or in part, by us
for United States federal income tax purposes.
Notwithstanding the foregoing, a Tax Event does not include any change in
tax law that requires us to defer taking a deduction for any original issue
discount that accrues with respect to the Junior Subordinated Debentures until
the interest payment related to the OID is paid by us in cash if the change in
tax law does not create more than an insubstantial risk that we will be
prevented from taking a deduction for OID accruing on the Junior Subordinated
Debentures at a date that is no later than the date the interest payment related
to the OID is actually paid by us in cash.
If any event described in clause (1) or (2) of the definition of "Tax
Event" above has occurred and is continuing and Flagstar Trust is the holder of
all of the Junior Subordinated Debentures, Flagstar Bancorp will pay Additional
Sums, if any, on the Junior Subordinated Debentures.
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES
We may at any time elect to dissolve Flagstar Trust and, after we have paid
all of the liabilities of creditors of Flagstar Trust as provided by applicable
law, cause the Junior Subordinated Debentures to be distributed to you. However,
we may only dissolve Flagstar Trust if we have received prior federal banking
regulators' approval, if then required. If we dissolve Flagstar Trust and
distribute the Junior Subordinated Debentures to you:
- the Preferred Securities will no longer be outstanding;
- the Depositary or its nominee, as the record holder of the Preferred
Securities, will, upon the distribution of the Junior Subordinated
Debentures, receive a registered global certificate or certificates
representing the Junior Subordinated Debentures; and
- any certificates representing Preferred Securities not held by the
Depositary or its nominee will be deemed to represent the Junior
Subordinated Debentures having a principal amount equal to the
Liquidation Amount of the Preferred Securities.
The Preferred Securities certificates will continue to bear interest until
the certificates are presented to the Administrative Trustees or their agent for
replacement by certificates representing an equal amount of Junior Subordinated
Debentures, at which time only unpaid interest will be paid, if Flagstar Trust
has sufficient funds available.
REDEMPTION PROCEDURES
Flagstar Trust may not redeem fewer than all of the outstanding Preferred
Securities unless it has paid all accumulated and unpaid Distributions on all
Preferred Securities for all quarterly distribution periods terminating on or
prior to the date of redemption. Flagstar Trust will only redeem the Preferred
Securities if we have redeemed the Junior Subordinated Debentures. Flagstar
Trust may redeem Preferred Securities only in an amount equal to the funds it
has on
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<PAGE> 29
hand and legally available to pay the Redemption Price. See "-- Subordination of
Common Securities" and "Description of Guarantee."
Unless there is a payment default, additional interest will stop accruing
on those Preferred Securities called for redemption on the date they are called
for redemption.
The Property Trustee will give you notice of the redemption at least 30 but
not more than 60 days before the date fixed for redemption. If Flagstar Trust
gives a notice of redemption, then, by 12:00 noon, New York City time, on the
date of redemption, if the funds are available for payment, the Property Trustee
will, for Preferred Securities held in book-entry form:
- deposit irrevocably with The Depository Trust Company ("DTC") funds
sufficient to pay the Redemption Price; and
- give DTC irrevocable instructions and authority to pay the Redemption
Price to the holders of the Preferred Securities.
With respect to Preferred Securities not held in book-entry form, if funds
are available for payment, the Property Trustee will:
- irrevocably deposit with the paying agent for the Preferred Securities
funds sufficient to pay the Redemption Price; and
- give such paying agent irrevocable instructions and authority to pay the
Redemption Price to the holders of Preferred Securities upon surrender of
their certificates evidencing the Preferred Securities.
Notwithstanding the foregoing, distributions payable on or prior to the
date of redemption for any Preferred Securities called for redemption will be
payable to the holders on the relevant record dates.
Once notice of redemption is given and funds are deposited as required,
then all rights of the holders of Preferred Securities called for redemption
will cease, except the right to receive the Redemption Price, but without
interest after the date of redemption. At that time, those Preferred Securities
will cease to be outstanding.
Payment of the Redemption Price on the Preferred Securities and any
distribution of Junior Subordinated Debentures to holders of Preferred
Securities will be made to the applicable record holders on the relevant record
date, which date will be one Business Day prior to the relevant redemption date
or liquidation date, as applicable; provided, however, that in the event that
any Preferred Securities are not in book-entry form, the relevant record date
for such Preferred Securities will be a date at least 15 days prior to the
redemption date or liquidation date, as applicable. In the case of a
liquidation, the record date will be no more than 45 days before the liquidation
date.
If any date fixed for redemption is not a Business Day, then payment of the
Redemption Price will be made on the next day that is a Business Day, without
any interest or other payment for the delay. If the next Business Day falls in
the next calendar year, the payment will instead be made on the immediately
preceding Business Day.
If payment of the Redemption Price for the Preferred Securities called for
redemption is improperly withheld or refused and not paid, either by Flagstar
Trust or by Flagstar Bancorp under the Guarantee, then Distributions on those
Preferred Securities will continue to accumulate at the then applicable rate,
from the date of redemption to the date of actual payment. In this case, the
actual payment date will be the date fixed for redemption for purposes of
calculating the Redemption Price.
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Flagstar Bancorp or its affiliates may at any time and from time to time
purchase outstanding Preferred Securities, by tender, in the open market or by
private agreement, and may resell Preferred Securities.
If Flagstar Trust is going to redeem less than all the Preferred Securities
and Common Securities, then the aggregate liquidation amount of Preferred and
Common Securities to be redeemed will be allocated approximately 3% to the
Common Securities and 97% to the Preferred Securities, except if an Event of
Default has occurred. In such case, holders of Preferred Securities will be paid
first. See "-- Subordination of the Common Securities" immediately below for a
more complete discussion. The Property Trustee will select the particular
Preferred Securities to be redeemed on this pro rata basis not more than 60 days
before the date of redemption by any method the Property Trustee deems fair and
appropriate, or if the Preferred Securities are then held in book-entry form, in
accordance with DTC's customary procedures.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, the Preferred
Securities and Common Securities will be made on a proportionate basis, based on
the aggregate Liquidation Amounts of the Preferred Securities and Common
Securities. However, if a Debenture Event of Default has occurred and is
continuing, then no payment of any Distribution will be made on any of the
Common Securities, unless all unpaid amounts due on the Preferred Securities
shall have been paid in full or provided for, as appropriate.
In the case of any Event of Default under the Trust Agreement resulting
from a Debenture Event of Default, we as the holder of the Common Securities
will be deemed to have waived any right to act upon the Event of Default under
the Trust Agreement until the effects of all Events of Default under the Trust
Agreement regarding the Preferred Securities have been cured, waived or
otherwise eliminated. Until that time, the Property Trustee shall act solely on
behalf of the holders of the Preferred Securities.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
We will have the right at any time to dissolve Flagstar Trust, and after
paying all the expenses and liabilities of Flagstar Trust, distribute the Junior
Subordinated Debentures to you. However, we may only dissolve Flagstar Trust if
we have received prior approval of federal banking regulators, if then required.
See "-- Distribution of Junior Subordinated Debentures" above.
In addition, the Trust Agreement states that Flagstar Trust will dissolve:
- on the expiration of the term of Flagstar Trust, which currently expires
on April 29, 2029;
- upon the bankruptcy of Flagstar Bancorp;
- upon the filing of a certificate of dissolution or its equivalent of
Flagstar Bancorp;
- upon our delivery of a written direction to the Property Trustee to
dissolve Flagstar Trust, which we may do in our discretion; or
- upon entry of a court order for the dissolution of Flagstar Bancorp or
Flagstar Trust.
In the event of a dissolution, after Flagstar Trust pays all amounts owed
to its creditors, the holders of the Preferred Securities and Common Securities
issued by Flagstar Trust will be entitled to receive:
- cash, if the dissolution arises from redemption of the Junior
Subordinated Debentures, equal to the aggregate Liquidation Amount of
each Preferred Security and Common
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Security specified in this Prospectus, plus accumulated and unpaid
Distributions to the date of payment; or
- Junior Subordinated Debentures, if the dissolution does not arise from
redemption of the Junior Subordinated Debentures, in an aggregate
principal amount equal to the aggregate Liquidation Amount of the
Preferred Securities and Common Securities are distributed to the holders
of the Preferred Securities and Common Securities.
If Flagstar Trust cannot pay the full amount due on its Preferred
Securities and Common Securities because insufficient assets are available for
payment, then the amounts payable by Flagstar Trust on its Preferred Securities
and Common Securities shall be paid pro rata. However, if a Debenture Event of
Default has occurred, the total amounts due on such Preferred Securities will be
paid before any distribution on such Common Securities.
Under current United States federal income tax law and interpretations and
assuming, as expected, Flagstar Trust is treated as a grantor trust, a
distribution of the Junior Subordinated Debentures should not be a taxable event
to you. Should there be a change in law, a change in legal interpretation, a Tax
Event or other circumstances, however, the distribution could be a taxable event
to you. See "United States Federal Income Tax Consequences."
If we elect to liquidate Flagstar Trust and cause the Junior Subordinated
Debentures to be distributed to you in liquidation of Flagstar Trust, we will
continue to have the right to shorten the maturity of the Junior Subordinated
Debentures, subject to certain conditions. See "Description of the Junior
Subordinated Debentures -- Option to Accelerate Maturity."
EVENTS OF DEFAULT; NOTICE
The following events constitute an Event of Default (an "Event of Default")
with respect to the Preferred Securities and Common Securities:
(i) the occurrence of a Debenture Event of Default under the Indenture
(see "Description of Junior Subordinated Debentures -- Debenture Events of
Default"); or
(ii) default by Flagstar Trust in the payment of any Distribution when
it becomes due and payable (other than during an Extension Period), and
continuation of such default for a period of 30 days; or
(iii) default by Flagstar Trust in the payment of any Redemption Price
of any Trust Security when it becomes due and payable; or
(iv) material default in the performance, or breach, of any covenant
or warranty of the Property Trustee in the Trust Agreement (other than a
default or breach in the performance of a covenant or warranty which is
addressed in clause (ii) or (iii) above), and continuation of such default
or breach, for a period of 60 days after there has been given, to the
Property Trustee by the holders of at least 25% in aggregate Liquidation
Amount of the outstanding Preferred Securities, a written notice specifying
such default or breach and requiring it to be remedied and stating that
such notice is a "Notice of Default" under the Trust Agreement; or
(v) if the Property Trustee becomes bankrupt or insolvent and we do
not appoint a successor to the Property Trustee within 60 days of the event
of bankruptcy or insolvency.
The Property Trustee must give notice of any uncured or unwaived Event of
Default to you, to us and to the Administrative Trustees. This notice must be
given within five Business Days after the Property Trustee actually knows of the
Event of Default. Flagstar Bancorp and the Administrative Trustees are required
to file annual certificates with the Property Trustee declaring whether we and
they are in compliance with all the conditions and covenants applicable to us
and them under the Trust Agreement.
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If a Debenture Event of Default has occurred and is continuing, the
Preferred Securities will have a preference over the Common Securities upon
dissolution of Flagstar Trust as described above. See "-- Liquidation
Distribution upon Dissolution." Upon a Debenture Event of Default, unless the
principal of all the Junior Subordinated Debentures has already become due and
payable, either the Property Trustee or the holders of not less than 25% in
aggregate principal amount of the Junior Subordinated Debentures then
outstanding may declare all of the Junior Subordinated Debentures to be due and
payable immediately by giving us written notice of that fact (and to the
Property Trustee, if notice is given by holders of the Junior Subordinated
Debentures). If the Property Trustee or the holders of the Junior Subordinated
Debentures fail to declare the principal of all of the Junior Subordinated
Debentures due and payable upon a Debenture Event of Default, the holders of at
least 25% in Liquidation Amount of the Preferred Securities then outstanding
will have the right to declare the Junior Subordinated Debentures immediately
due and payable. In either event, payment of principal and interest on the
Junior Subordinated Debentures will remain subordinated to the extent provided
in the Indenture. In addition, holders of the Preferred Securities have the
right in certain circumstances to bring a Direct Action (as defined below). See
"Description of the Junior Subordinated Debentures -- Enforcement of Certain
Rights by Holders of Preferred Securities."
REMOVAL OF TRUSTEES
As the holder of the Common Securities, we may at any time remove any
trustee, unless a Debenture Event of Default has occurred and is continuing. If
a Debenture Event of Default has occurred and is continuing, the Property
Trustee and the Delaware Trustee may be removed at such time by the holders of a
majority in Liquidation Amount of the outstanding Preferred Securities. In no
event will the holders of the Preferred Securities have the right to vote to
appoint, remove or replace the Administrative Trustees. Flagstar Bancorp as the
holder of the Common Securities has the sole power to remove the Administrative
Trustee. The resignation or removal of any Trustee and the appointment of a
successor Trustee is effective only on the acceptance of appointment by the
successor trustee in accordance with the provisions of the Trust Agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an Event of Default has occurred and is continuing, we have the
right to appoint co-trustees or a separate Property Trustee. We may appoint
these additional trustees in order to meet the requirements of the Trust
Indenture Act or the state laws of any jurisdiction where property of Flagstar
Trust may be located. Our appointment of any additional trustees will be subject
to provisions of the Trust Agreement. In case a Debenture Event of Default has
occurred and is continuing, the Property Trustee alone will have power to make
such appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Any Person (as defined in the Trust Agreement) into which the Property
Trustee, the Delaware Trustee or any Administrative Trustee that is not a
natural person may be merged or converted or with which it may be consolidated,
or any Person resulting from any merger, conversion or consolidation to which
such Trustee will be a party, or any person succeeding to all or substantially
all the corporate trust business of such Trustee, shall be the successor of such
Trustee under the Trust Agreement, provided such corporation shall be otherwise
qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF FLAGSTAR TRUST
Flagstar Trust may, at our request, with the consent of the Administrative
Trustees and without your consent, consolidate, amalgamate, merge with or into
or be replaced by or convey,
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transfer or lease its properties and assets substantially as an entirety to
another trust organized under the laws of any state provided that:
- such successor entity either (a) expressly assumes all of the obligations
of Flagstar Trust with respect to the Preferred Securities or (b)
substitutes for the Preferred Securities other securities having
substantially the same terms as the Preferred Securities (the "Successor
Securities") so long as the Successor Securities rank the same as the
Preferred Securities for distributions and payments upon liquidation,
redemption and otherwise;
- Flagstar Bancorp expressly appoints a trustee of such successor entity
possessing the same powers and duties as the Property Trustee as the
holder of the Junior Subordinated Debentures;
- any such transaction does not adversely affect the rights, preferences
and privileges of the holders of the Preferred Securities (including any
Successor Securities) in any material respect;
- such successor entity has a purpose substantially identical to that of
Flagstar Trust;
- the Successor Securities will be listed or traded on any national
securities exchange or other organization on which the Preferred
Securities may then be listed;
- prior to such a transaction, Flagstar Bancorp has received an opinion
from independent counsel to Flagstar Trust experienced in such matters to
the effect that (a) such transaction does not adversely affect the
rights, preferences and privileges of the holders of the Preferred
Securities (including any Successor Securities) in any material respect,
and (b) following any such transaction, neither Flagstar Trust nor such
successor entity will be required to register as an investment company
under the Investment Company Act; and
- Flagstar Bancorp or any permitted successor or designee owns all of the
common securities of such successor entity and guarantees the obligations
of such successor entity under the Successor Securities at least to the
extent provided by the Guarantee and enters into an agreement
substantially similar to the Expense Agreement.
In addition, unless all of the holders of the Preferred Securities and
Common Securities agree, Flagstar Trust may not consolidate, amalgamate, merge
with or into, or be replaced by any other entity or permit any other entity to
consolidate, amalgamate, merge with or into, or replace it, if that transaction
would cause Flagstar Trust or the successor entity to be classified as other
than a grantor trust for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT
Except as provided below and under "Description of Guarantee -- Amendments
and Assignment" and as otherwise required by law and the Trust Agreement, the
holders of the Preferred Securities will have no voting rights.
The Trust Agreement may be amended from time to time by Flagstar Bancorp,
the Property Trustee and the Administrative Trustees, without the consent of the
holders of Trust Securities, (i) to cure any ambiguity, correct or supplement
any provisions in the Trust Agreement that may be inconsistent with any other
provision, or to make any other provisions with respect to matters or questions
arising under the Trust Agreement which shall not be inconsistent with the other
provisions of the Trust Agreement, or (ii) to modify, eliminate or add to any
provisions of the Trust Agreement to such extent as will be necessary to ensure
that Flagstar Trust will be classified for United States federal income tax
purposes as a grantor trust at all times that any Trust Securities are
outstanding or to ensure that Flagstar Trust will not be required to register as
an "investment company" under the Investment Company Act.
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We and the Trustees may amend the Trust Agreement (i) with the consent of
holders representing not less than a majority of the aggregate Liquidation
Amount of the outstanding Trust Securities, and (ii) upon receipt by both the
Property and Administrative Trustees of an opinion of counsel to the effect that
the amendment or the exercise of any power granted to trustees in accordance
with the amendment will not affect Flagstar Trust's status as a grantor trust
for United States federal income tax purposes or Flagstar Trust's exemption from
status as an "investment company" under the Investment Company Act.
However, the Trust Agreement may not be amended without the consent of each
holder of Trust Securities to (i) change the amount or timing of any
Distribution on Trust Securities or otherwise adversely affect the amount of any
Distribution required to be made in respect of Trust Securities as of a
specified date or (ii) restrict the right of a holder of Trust Securities to
institute suit for the enforcement of any such payment on or after such date.
So long as any Junior Subordinated Debentures are held by the Property
Trustee, the Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Indenture Trustee, or
executing any trust or power conferred on the Property Trustee with respect to
the Junior Subordinated Debentures, (ii) waive any past default that is waivable
under the Indenture, (iii) exercise any right to rescind or annul a declaration
that the principal of all the Junior Subordinated Debentures shall be due and
payable or (iv) consent to any amendment, modification or termination of the
Indenture or the Junior Subordinated Debentures, where such consent shall be
required, without, in each case, obtaining the prior approval of the holders of
a majority in aggregate Liquidation Amount of all outstanding Preferred
Securities or in some cases, the prior consent of each holder of the Preferred
Securities.
The Trustees may not revoke any action previously authorized or approved by
a vote of the holders of the Preferred Securities except by subsequent vote of
the holders of the Preferred Securities.
The Property Trustee will notify each holder of the Preferred Securities of
any notice of default with respect to the Junior Subordinated Debentures.
In addition to obtaining these approvals, the Trustees must also obtain an
opinion of counsel experienced in such matters to the effect that Flagstar Trust
will not be classified as an association taxable as a corporation for United
States federal income tax purposes on account of such action.
Any required approval of holders of the Preferred Securities may be given
at a meeting of holders of Preferred Securities convened for such purpose or
pursuant to written consent. The Property Trustee will cause a notice of any
meeting at which holders of the Preferred Securities are entitled to vote, or of
any matter upon which action by written consent of such holders is to be taken,
to be given to each holder of record of the Preferred Securities in the manner
set forth in the Trust Agreement.
If we or any of our affiliates, or the Trustees or any of their affiliates
own any Preferred Securities, those Preferred Securities will not be treated as
outstanding for purposes of the votes or consents described above.
BOOK-ENTRY ONLY ISSUANCE -- THE DEPOSITORY TRUST COMPANY
DTC will act as securities depositary for the Preferred Securities.
Flagstar Trust will issue one or more fully registered global Preferred
Securities certificates in the name of Cede & Co. (DTC's nominee). These
certificates will represent the total aggregate number of Preferred Securities.
Flagstar Trust will deposit these certificates with DTC or a custodian appointed
by DTC. Flagstar Trust will not issue certificates to you for the Preferred
Securities that you purchase, unless DTC's services are discontinued.
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DTC has provided Flagstar Trust and Flagstar Bancorp with the following
information: DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered under the provisions of Section 17A of the Securities Exchange Act of
1934. DTC holds securities that its participants deposit with DTC. DTC also
facilitates the settlement among participants of securities transactions, such
as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and other organizations ("Direct Participants").
DTC is owned by a number of its Direct Participants and by the New York
Stock Exchange, Inc., the American Stock Exchange, Inc., and the National
Association of Securities Dealers, Inc. Access to the DTC system is also
available to others, such as securities brokers and dealers, banks and trust
companies, that clear transactions through or maintain a direct or indirect
custodial relationship with a Direct Participant ("Indirect Participants"). The
rules applicable to DTC and its participants are on file with the SEC.
When you purchase Preferred Securities within the DTC system, the purchase
must be made by or through a Direct Participant. The Direct Participant will
receive a credit for the Preferred Securities on DTC's records. You, as the
actual owner of the Preferred Securities, are the "beneficial owner." Your
beneficial ownership interest will be recorded on the Direct and Indirect
Participants' records, but DTC will have no knowledge of your individual
ownership. DTC's records reflect only the identity of the Direct Participants to
whose accounts Preferred Securities are credited.
You will not receive written confirmation from DTC of your purchases. The
Direct or Indirect Participant through whom you purchased the Preferred
Securities should send you written confirmations providing details of your
transactions, as well as periodic statements of your holdings. The participants
are responsible for keeping accurate account of the holdings of their customers
like you.
Transfers of ownership interests in the Preferred Securities will be
accomplished by entries made on the books of participants acting on behalf of
beneficial owners.
The laws of some states may require that specified purchasers of securities
take physical delivery of the securities in definitive form. These laws may
impair the ability to transfer beneficial interests in the global certificate
representing the Preferred Securities.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants and by Direct
Participants and Indirect Participants to beneficial owners will be governed by
arrangements among them, and any statutory or regulatory requirements that may
be in effect from time to time.
Redemption notices will be sent to Cede & Co. If less than all of the
Preferred Securities are being redeemed, DTC will reduce each Direct
Participant's holdings of Preferred Securities in accordance with its
procedures.
In those cases where a vote by the holders of the Preferred Securities is
required, neither DTC nor Cede & Co. will itself consent or vote. Under its
usual procedures, DTC would mail an omnibus proxy to Flagstar Trust as soon as
possible after the record date. The omnibus proxy assigns Cede & Co.'s
consenting or voting rights to those Direct Participants to whose accounts the
Preferred Securities are credited on the record date, which are identified in a
listing attached to the omnibus proxy.
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Flagstar Trust will make distribution payments on the Preferred Securities
directly to DTC. DTC's practice is to credit Direct Participants' accounts on
the relevant payment date in accordance with their respective holdings shown on
DTC's records, unless DTC has reason to believe that it will not receive payment
on such payment date.
Payments by participants (whether Direct Participants or Indirect
Participants) to beneficial owners will be governed by standing instructions and
customary practices, as is the case with securities held for the account of
customers in bearer form or registered in "street name." These payments will be
the responsibility of the participant and not of DTC, Flagstar Trust or Flagstar
Bancorp.
Except as provided below in "Description of the Junior Subordinated
Debentures --
Discontinuance of the Depositary's Services," a beneficial owner in a global
Preferred Securities certificate will not be entitled to receive physical
delivery of Preferred Securities. Accordingly, each beneficial owner must rely
on the procedures of DTC to exercise any rights under the Preferred Securities.
DTC may discontinue providing its services as securities depositary with
respect to the Preferred Securities at any time by giving reasonable notice to
Flagstar Trust. In the event that a successor securities depositary is not
obtained, Flagstar Trust will print and deliver Preferred Securities
certificates. Additionally, the Administrative Trustees, with our consent, may
decide to discontinue the book-entry only system of transfers with respect to
the Preferred Securities. In that event, Flagstar Trust will print and deliver
certificates for the Preferred Securities to its holders.
We have obtained the information in this section concerning DTC and DTC's
book-entry system from sources that we and Flagstar Trust believe to be
reliable, but neither we nor they take responsibility for the accuracy of the
information.
CERTIFICATED SECURITIES
If the Preferred Securities do not remain in book-entry only form as
described above, the following provisions would apply:
- The Property Trustee will act as paying agent and may designate an
additional or substitute paying agent at any time.
- Registration of transfers of Preferred Securities will be effected
without charge by or on behalf of Flagstar Trust, but the registration
will require payment, with the giving of such indemnity as Flagstar Trust
or Flagstar Bancorp may require, for any tax or other governmental
charges that may be imposed.
- Flagstar Trust will not be required to register or cause to be registered
the transfer of Preferred Securities after they have been called for
redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only those duties as
are specifically set forth in the Trust Agreement and, after such Event of
Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs.
Subject to this provision, the Property Trustee is under no obligation to
exercise any of the powers vested in it by the Trust Agreement at the request of
any holder of Preferred Securities unless the Property Trustee is offered
reasonable indemnity against the costs, expenses and liabilities that it might
incur. If no Event of Default has occurred and is continuing and the Property
Trustee is required to decide between alternative causes of action, construe
ambiguous provisions in the Trust Agreement or is unsure of the application of
any provision of the Trust
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Agreement, and the matter is not one on which holders of the Preferred
Securities are entitled under the Trust Agreement to vote, then the Property
Trustee shall take such action as is directed by us. If we do not direct any
action, then the Property Trustee shall take such action as it deems advisable
and in the best interests of the holders of Trust Securities and will have no
liability except for its own bad faith, negligence or willful misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to operate Flagstar
Trust in such a way so that Flagstar Trust will not be:
- required to register as an "investment company" under the Investment
Company Act; or
- characterized as other than a grantor trust for United States federal
income tax purposes.
We are authorized and directed to conduct our affairs so that the Junior
Subordinated Debentures will be treated as indebtedness for United States
federal income tax purposes on our books and accounts.
We and the Administrative Trustees are authorized to take any action, not
inconsistent with applicable law, the certificate of trust of Flagstar Trust or
our articles of incorporation, that either we or the Administrative Trustees
determine in either of our discretion to be necessary or desirable to achieve
that end, as long as the action does not adversely affect the interests of the
holders of the Preferred Securities.
Flagstar Trust may not borrow money, issue debt or mortgage or pledge any
of its assets.
DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures will be issued under the Subordinated
Indenture, dated as of April 29, 1999 (the "Indenture"), between us and FMB
Bank, as the Indenture Trustee. The following summary of the terms and
provisions of the Junior Subordinated Debentures and the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the Indenture. You should also read the Indenture for the complete
terms of the Junior Subordinated Debentures. The Indenture has been filed as an
exhibit to the Registration Statement. This Prospectus forms a part of the
Registration Statement. The Indenture is also qualified in its entirety by
reference to the Trust Indenture Act. The Indenture is qualified under the Trust
Indenture Act. We believe that this section of the Prospectus describes the
material terms of the Junior Subordinated Debentures and the Related Indenture.
Flagstar Trust will invest the proceeds of the issuance of the Preferred
Securities and Common Securities in the Junior Subordinated Debentures that are
issued by us. Our Junior Subordinated Debentures are subordinated, unsecured
debt under the Indenture.
GENERAL
We will issue the Junior Subordinated Debentures as unsecured debt under
the Indenture. The Junior Subordinated Debentures will be limited in aggregate
principal amount to the sum of the Liquidation Amount of the Preferred
Securities and the amount of capital that we contributed to Flagstar Trust in
exchange for the Common Securities.
The Junior Subordinated Debentures contain no sinking fund provisions. The
entire principal amount of the Junior Subordinated Debentures will become due
and payable, together with any accrued and unpaid interest, including compound
interest and additional sums, if any, on April 29, 2029.
If Junior Subordinated Debentures are distributed to holders of Preferred
Securities in liquidation of those holders' interests in Flagstar Trust, the
Junior Subordinated Debentures will
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initially be issued as a global security. As described in "Description of the
Junior Subordinated Debentures -- Discontinuance of the Depositary's Services",
under limited circumstances, Junior Subordinated Debentures may be issued in
certificated form in exchange for a global security. See "-- Book-Entry and
Settlement; Depositary" below.
If Junior Subordinated Debentures are issued in certificated form, we will
issue them in denominations of $25, and integral multiples of $25, and they may
be transferred or exchanged at the offices described below.
We will make payments on Junior Subordinated Debentures issued as a global
security to DTC, a successor depositary or, if no depositary is used, to a
paying agent for the Junior Subordinated Debentures. If we issue Junior
Subordinated Debentures in certificated form, principal and interest will be
payable, the transfer of the Junior Subordinated Debentures will be registrable,
and Junior Subordinated Debentures will be exchangeable for Junior Subordinated
Debentures of other denominations of a like aggregate principal amount, at the
Corporate Trust Office of the Indenture Trustee in Baltimore, Maryland. At our
option, however, we may pay interest by check mailed to the address of the
persons entitled to the interest.
INTEREST
The Junior Subordinated Debentures will bear interest at an annual rate of
9.50% from the original date of issuance until the principal becomes due and
payable. Interest is payable quarterly in arrears on the last Business Day of
March, June, September and December of each year, beginning June 30, 1999.
Interest payments not paid when due will accrue interest, compounded quarterly,
at the annual rate of 9.50%.
The amount of interest payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months, and, for any period shorter than a
quarter, on the basis of the actual number of days elapsed per 30-day month.
The interest payment provisions for the Junior Subordinated Debentures
correspond to the distribution provisions for the Preferred Securities. See
"Description of the Preferred Securities -- Distributions".
OPTION TO EXTEND INTEREST PAYMENT PERIOD
As long as we are not in default on the payment of interest on the Junior
Subordinated Debentures, we have the right, at any time and from time to time,
to defer payments of interest by extending the interest payment period for a
period not exceeding 20 consecutive quarters (an "Extension Period"), but not
beyond the maturity date of the Junior Subordinated Debentures. At the end of
any Extension Period, we will pay all interest then accrued and unpaid, together
with interest on that amount, compounded quarterly, at the annual rate of 9.50%.
After termination of any Extension Period and the payment of all amounts then
due, we may begin a new Extension Period.
During an Extension Period, interest will continue to accrue and holders of
Junior Subordinated Debentures will be required to accrue interest income for
United States federal income tax purposes. See "United States Federal Income Tax
Consequences."
During any Extension Period:
- we may not declare or pay any dividends on, make any distribution, or
redeem, purchase, acquire or make a liquidation payment on any of our
capital stock; and
- we may not make any payment of interest, principal or premium on or
repay, repurchase or redeem any debt securities issued by us that rank
equal or junior to the Junior Subordinated Debentures, or make any
guarantee payments on the foregoing.
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The Extension Period restrictions do not apply to:
- repurchases, redemptions or other acquisitions of shares of our capital
stock in connection with any employment contract, benefit plan or other
similar arrangement with or for the benefit of any one or more employees,
officers, directors or consultants, or a dividend reinvestment or
shareholder stock purchase plan;
- any declaration of a dividend in connection with any shareholders' rights
plan, or the issuance of rights, stock or other property under any
shareholders' rights plan, or the redemption or repurchase of rights
pursuant to the plan;
- any dividend in the form of stock, warrants, options or other rights
where the dividend or the stock issuable upon exercise of the warrants,
options or other rights is the same stock as that on which the dividend
is being paid or ranks equal or junior to that stock; or
- payments by us under the Guarantee.
The restrictions described above will also apply if we default on our
obligations under the Junior Subordinated Debentures or the Guarantee.
Before termination of any Extension Period, we may further extend the
interest payment period. However, the Extension Period, including all previous
and further extensions, may not exceed 20 consecutive quarters or extend beyond
the maturity date of the Junior Subordinated Debentures. After termination of
any Extension Period and the payment of all amounts then due, we may begin a new
Extension Period, for up to an additional 20 consecutive calendar quarters, as
described above.
If the Property Trustee is the sole holder of the Junior Subordinated
Debentures, we will give the Administrative Trustees, the Indenture Trustee and
the Property Trustee notice of our selection of an Extension Period one business
day before the earlier of:
- the next date Distributions on the Preferred Securities are payable; or
- the date the Administrative Trustees are required to give notice to the
holders of record of the Preferred Securities.
The Indenture Trustee will give notice of our selection of an Extension
Period to the holders of the Preferred Securities. We may elect to begin an
Extension Period an unlimited number of times.
If the Property Trustee is not the sole holder of the Junior Subordinated
Debentures, we will give the holders of the Junior Subordinated Debentures
notice of our selection of an Extension Period ten business days before the
earlier of:
- the next interest payment date; or
- the date upon which we are required to give notice to the New York Stock
Exchange, or other applicable self-regulatory organization, or to holders
of the Junior Subordinated Debentures of the record or payment date of
the related interest payment.
We have no present intention of exercising our right to defer payments of
interest by extending the interest payment period on the Junior Subordinated
Debentures.
ADDITIONAL SUMS
If Flagstar Trust is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, we will pay as additional
amounts on the Junior Subordinated Debentures the amounts (i.e., the "Additional
Sums") required to be paid so that the Distributions paid by Flagstar Trust
shall not be reduced as a result of such charges.
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REDEMPTION
We have the right, after receipt of prior approval of the federal banking
regulators, if approval is then required, to redeem the Junior Subordinated
Debentures:
(i) on or after April 29, 2004, in whole at any time or in part from
time to time; or
(ii) at any time in whole (but not in part), upon the occurrence of a
Tax Event, an Investment Company Event or a Capital Treatment Event.
In either case, the Redemption Price will equal 100% of the principal
amount to be redeemed, plus any accrued and unpaid interest, to the date of
redemption.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Junior Subordinated
Debentures to be redeemed at such holder's registered address. Interest will
cease to accrue on any Junior Subordinated Debentures that we call for
redemption, unless we default in payment of the Redemption Price.
The Junior Subordinated Debentures will not be subject to any sinking fund.
OPTION TO ACCELERATE MATURITY DATE
The Junior Subordinated Debentures will mature on April 29, 2029. We may,
at our option, shorten the maturity to any date not earlier than April 29, 2004.
We may only shorten the maturity date if we receive prior approval from the
federal banking regulators, if then required. We may only elect to shorten the
maturity once.
If we elect to shorten the maturity, we will give notice to each registered
holder of the Junior Subordinated Debentures, the Property Trustee and the
Indenture Trustee within 90 days of the effective date of the shortened
maturity. The Property Trustee must give notice to the holders of Trust
Securities of the new maturity date of the Junior Subordinated Debentures. You
may be subject to adverse United States federal income tax consequences if we
shorten the maturity. See "United States Federal Income Tax Consequences --
Exercise of Right to Shorten Maturity."
DISTRIBUTION UPON LIQUIDATION
As described under "Description of the Preferred Securities -- Liquidation
Distribution upon Dissolution," under certain circumstances involving the
dissolution of Flagstar Trust, the Junior Subordinated Debentures may be
distributed to the holders of the Preferred Securities and Common Securities in
liquidation of Flagstar Trust after the expenses of Flagstar Trust have been
paid in full. If distributed to holders of the Preferred Securities in
liquidation, the Junior Subordinated Debentures will initially be issued in the
form of one or more global securities and the Depositary, or any successor
depositary for the Preferred Securities, will act as depositary for the Junior
Subordinated Debentures. We anticipate that the depositary arrangements for the
Junior Subordinated Debentures will be substantially identical to those in
effect for the Preferred Securities. See "Book-Entry Issuance".
If the Junior Subordinated Debentures are distributed to the holders of
Preferred Securities upon the liquidation of Flagstar Trust, there can be no
assurance as to the market price of the Junior Subordinated Debentures.
SUBORDINATION
The Indenture provides that the Junior Subordinated Debentures rank junior
in right of payment to all of our "Senior and Subordinated Debt," defined below.
We may not make payment
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of principal, including redemption payments, or interest on the Junior
Subordinated Debentures if
- any of our Senior and Subordinated Debt is not paid when due and any
applicable grace period after the default has ended and the default has
not been cured or waived; or
- the maturity of any of our Senior and Subordinated Debt has been
accelerated because of a default, and the acceleration has not been
rescinded.
Upon any distribution of our assets to creditors upon our dissolution,
winding-up, liquidation or reorganization, whether voluntary or involuntary, or
in bankruptcy, insolvency, receivership or other proceedings, all principal,
premium, if any, and interest due or to become due on all of our Senior and
Subordinated Debt must be paid in full before the holders of Junior Subordinated
Debentures are entitled to receive or retain any payment. In that event, any
payment or distribution on the Junior Subordinated Debentures that would
otherwise be payable in respect of the Junior Subordinated Debentures, but for
the subordination provision, will be paid or delivered directly to the holders
of our Senior and Subordinated Debt in accordance with the priorities then
existing among the holders of our Senior and Subordinated Debt until all of our
Senior and Subordinated Debt has been paid in full.
If the Indenture Trustee or any holder of Junior Subordinated Debentures
receives any payment or distribution on account of the Junior Subordinated
Debentures before all of our Senior and Subordinated Debt is paid in full, then
that payment or distribution will be paid to the holders of our Senior and
Subordinated Debt at the time outstanding.
The rights of the holders of the Junior Subordinated Debentures will be
subrogated to the rights of the holders of our Senior and Subordinated Debt to
the extent of any payment we made to the holders of our Senior and Subordinated
Debt that otherwise would have been made to the holders of the Junior
Subordinated Debentures but for the subordination provisions.
SELECTED DEFINITIONS
"Debt" means with respect to any person, whether recourse is to all or a
portion of the assets of such person and whether or not contingent:
- every obligation of such person for money borrowed or money owed;
- every reimbursement obligation of such person with respect to letters of
credit, bankers' acceptances or similar facilities;
- every obligation of such person issued or assumed as the deferred
purchase price of property or services (but excluding trade accounts
payable or accrued liabilities arising in the ordinary course of
business);
- every capital lease obligation of such person; and
- every obligation of the type referred to in the foregoing clauses of
another person and all dividends of another person the payment of which,
in either case, such person has guaranteed or is responsible or liable,
directly or indirectly, as obligor or otherwise.
"Senior and Subordinated Debt" means the principal of (and premium, if any)
and interest, if any (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to Flagstar Bancorp
whether or not such claim for post-petition interest is allowed in such
proceeding), on Debt, whether incurred on, prior to or after the date of the
Indenture, unless, in the instrument creating or evidencing the Debt, it is
provided that such obligations are not superior in right of payment to the
Junior Subordinated Debentures or to
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other Debt which ranks equal with, or subordinated to, the Junior Subordinated
Debentures. However, that Senior and Subordinated Debt will not include:
- any Debt of the Company which when incurred (and without respect to any
election under section 1111(b) of the United States Bankruptcy Code of
1978, as amended), was without recourse to the Company;
- any Debt of the Company to any of its subsidiaries;
- any Debt to any employee of the Company;
- any Debt which by its terms is subordinated to trade accounts payable or
accrued liabilities arising in the ordinary course of business but only
to the extent that payments made to the holders of such Debt by the
holders of the Junior Subordinated Debentures as a result of the
subordination provisions of the Indenture would be greater than they
otherwise would have been as a result of any obligation of such holders
to pay amounts over to the obligees on such trade accounts payable or
accrued liabilities arising in the ordinary course of business as a
result of subordination provisions to which such Debt is subject;
- the Guarantee; and
- any other debt securities issued pursuant to the Indenture.
The Indenture does not limit the amount of additional Senior and
Subordinated Debt that we may incur. We expect that from time to time we may
incur additional indebtedness constituting Senior and Subordinated Debt.
BOOK-ENTRY AND SETTLEMENT; DEPOSITARY
If we distribute the Junior Subordinated Debentures to holders of Preferred
Securities in connection with the involuntary or voluntary dissolution,
winding-up or liquidation of Flagstar Trust, they will be issued in the form of
one or more global certificates registered in the name of a depositary or its
nominee. Except under the limited circumstances described immediately below
under "-- Discontinuance of the Depositary's Services," Junior Subordinated
Debentures represented by a global security will not be exchangeable for, and
will not otherwise be issuable as, certificated securities.
If Junior Subordinated Debentures are distributed to holders of Preferred
Securities upon termination of Flagstar Trust, DTC will act as securities
depositary for the Junior Subordinated Debentures. For a description of DTC and
the specific terms of the depositary arrangements, see "Description of the
Preferred Securities -- Book-Entry Only Issuance -- The Depository Trust
Company."
As of the date of this Prospectus, that description of DTC's book-entry
system and DTC's practices as they relate to purchases of, transfers of, notices
concerning and payments on the Preferred Securities apply in all material
respects to any debt obligations represented by one or more global securities
held by DTC.
We may appoint a successor to DTC or any successor depositary if the
current depositary is unable or unwilling to continue as a depositary for the
global securities.
DISCONTINUANCE OF THE DEPOSITARY'S SERVICES
A global security will be exchangeable for Junior Subordinated Debentures
registered in the names of persons other than the depositary or its nominee only
if:
- the depositary notifies us that it is unwilling or unable to continue as
a depositary for the global security and no successor depositary has been
appointed;
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- the depositary ceases to be a clearing agency registered under the
Exchange Act at a time the depositary is required to be so registered to
act as depositary, and no successor depositary has been appointed;
- we, in our sole discretion, determine that the global security shall be
exchangeable for definitive certificates; or
- there shall have occurred a Debenture Event of Default.
Any global security that is exchangeable as described above will be
exchangeable for Junior Subordinated Debentures registered in the names the
depositary directs. We expect that the instructions will be based upon
directions received by the depositary from its participants with respect to
ownership of beneficial interests in the global security.
PAYMENT AND PAYING AGENTS
Payment of principal and interest on the Junior Subordinated Debentures
will be made at the office of the Indenture Trustee. In addition, at our option,
we may pay interest by check mailed to the address of the holder of the
Preferred Security as it appears in the securities register or by transfer to an
account of the holder of the Preferred Security pursuant to proper transfer
instructions that we have received prior to the regular record date. However, we
may not exercise these options if the Junior Subordinated Debentures are
represented by a Global Subordinated Debenture. Payment of any interest on
Junior Subordinated Debentures will be made to the person in whose name such
Junior Subordinated Debenture is registered at the close of business on the
regular record date for such interest. We may at any time designate additional
Paying Agents or rescind the designation of any Paying Agent; however, we will
at all times be required to maintain a Paying Agent in each place of payment for
the Junior Subordinated Debentures.
Any moneys deposited with the Indenture Trustee or any Paying Agent, or
held by us in trust, for the payment of the principal of or interest on the
Junior Subordinated Debentures and remaining unclaimed for two years after such
principal or interest has become due and payable shall, at our request, be
repaid to us. Thereafter the holder of our Junior Subordinated Debenture shall
look only to us for payment as one of our general unsecured creditors.
MODIFICATION OF INDENTURE
The Indenture provides that we and the Indenture Trustee may enter into
supplemental indentures without the consent of the holders of Preferred
Securities to: (i) secure any securities, (ii) evidence the assumption by a
successor corporation of our obligations, (iii) add covenants for the protection
of the holders of Junior Subordinated Debentures, (iv) cure any ambiguity or
correct any inconsistency in the Indenture, (v) qualify or maintain the
qualification of the Indenture under Trust Indenture Act and (vi) evidence and
provide for the acceptance of appointment by a successor trustee.
The Indenture also provides that we and the Indenture Trustee may, with the
consent of at least a majority of the holders in aggregate principal amount of
the Junior Subordinated Debentures then outstanding and affected, add any
provisions to or change the provisions of the Indenture or the rights of the
holders of the Junior Subordinated Debentures. We and the Indenture Trustee may
not, however, without the consent of each holder of the Junior Subordinated
Debentures:
- extend the final maturity of the Junior Subordinated Debentures;
- reduce the principal amount or premium, if any;
- reduce the rate or extend the time of payment of interest;
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- reduce any amount payable on redemption; or
- reduce the percentage of holders of the Junior Subordinated Debentures
whose consent is required for any modification of the Indenture.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures that has occurred and
is continuing constitutes a "Debenture Event of Default" with respect to the
Junior Subordinated Debentures:
- failure for 30 days to pay any interest on the Junior Subordinated
Debentures, when due (not including the deferral of any due date in the
case of an Extension Period); or
- failure to pay any principal on the Junior Subordinated Debentures when
due whether at maturity, upon redemption by declaration or otherwise; or
- our failure to observe or perform in any material respect certain other
covenants contained in the Indenture for 90 days after written notice to
us from the Indenture Trustee or to us and the Indenture Trustee by the
holders of at least 25% in aggregate outstanding principal amount of the
Junior Subordinated Debentures; or
- certain events in bankruptcy, insolvency or reorganization of Flagstar
Bancorp, including the voluntary commencement of bankruptcy proceedings,
entry of an order for relief against us in a bankruptcy proceeding,
appointment of a custodian over substantially all of our property, a
general assignment for the benefit of creditors, or a court order for our
liquidation; or
- if Flagstar Trust shall have voluntarily or involuntarily dissolved,
wound up its business or otherwise terminated its existence (except in
connection with (i) the distribution of Junior Subordinated Debentures to
the holders in liquidation of their interests in Flagstar Trust; (ii) the
redemption of all of the outstanding Trust Securities; or (iii) certain
mergers, consolidations or amalgamations, each as permitted by the Trust
Agreement).
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures have the right to direct any proceeding for any
remedy available to the Indenture Trustee. The Indenture Trustee or the holders
of not less than 25% in aggregate outstanding principal amount of the Junior
Subordinated Debentures may declare the principal due and payable immediately
upon a Debenture Event of Default.
However, the holders of a majority in aggregate outstanding principal
amount of the Junior Subordinated Debentures may annul such declaration and
waive the default if the default (other than the non-payment of the principal of
the Junior Subordinated Debentures which has become due solely by such
acceleration) has been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Indenture Trustee. If the holders of the Junior
Subordinated Debentures fail to annul such declaration and waive such default,
the holders of a majority in aggregate Liquidation Amount of the Preferred
Securities would have such right.
In case a Debenture Event of Default occurs, the Property Trustee may
declare the principal of and the interest on the Junior Subordinated Debentures,
and any other amounts payable under the Indenture, to be due and payable and to
enforce its other rights as a creditor with respect to the Junior Subordinated
Debentures.
We will be required to file annually with the Indenture Trustee a
certificate, signed by one of our officers, stating whether or not such officer
knows of any default by us in the performance, observance or fulfillment of any
condition or covenant of the Indenture.
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ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF PREFERRED SECURITIES
If a Debenture Event of Default for failure to pay interest or principal on
the Junior Subordinate Debentures has occurred and is continuing, you may
institute a legal proceeding directly against us for enforcement of payment to
you of the principal of or interest on the Junior Subordinated Debentures in an
amount equal to the aggregate Liquidation Amount of the Preferred Securities you
hold ("Direct Action"). Our failure to pay principal or interest during an
Extension Period is not a Debenture Event of Default. If the right to bring a
Direct Action is removed, Flagstar Trust may become subject to the reporting
obligations under the Exchange Act. We have the right under the Indenture to
set-off any payment made to a holder of Preferred Securities by us in connection
with a Direct Action.
Unless an Event of Default under the Trust Agreement has occurred, you will
not be able to exercise directly any remedies except for those listed above. See
"Description of the Preferred Securities -- Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Company shall not consolidate with, convert
into or merge into any other Person or convey, transfer or lease its properties
and assets substantially as an entirety to any Person, and no Person shall
consolidate with, convert into or merge into the Company or convey, transfer or
lease its properties and assets substantially as an entirety to the Company.
However, this does not apply if (i) in case the Company consolidates with,
converts into or merges into another Person or conveys or transfers its
properties and assets substantially as an entirety to any Person, the successor
Person is organized under the laws of the United States or any state or the
District of Columbia, and such Person expressly assumes the Company's
obligations on the Junior Subordinated Debentures issued under the Indenture;
(ii) immediately after giving effect thereto, no Debenture Event of Default, and
no event which, after notice or lapse of time or both, would become a Debenture
Event of Default, shall have occurred and be continuing; and (iii) certain other
conditions as prescribed in the Indenture are met.
If these conditions are met, the holders of the Preferred Securities have
no grounds to object to a highly leveraged or other transaction involving the
Company even if it may adversely affect holders of the Junior Subordinated
Debentures.
SATISFACTION AND DISCHARGE
The Indenture provides that when, among other things, all Junior
Subordinated Debentures not previously delivered to the Indenture Trustee for
cancellation (i) have become due and payable or (ii) will become due and payable
at their maturity date within one year, and we deposit with the Indenture
Trustee, in trust, funds for the purpose and in an amount sufficient to pay and
discharge the entire indebtedness on the outstanding Junior Subordinated
Debentures, for the principal and interest to the date of the deposit or to the
stated maturity, as the case may be, then the Indenture will cease to be of
further effect. However, we will continue to be obliged to pay all other sums
due pursuant to the Indenture and to provide the officers' certificates and
opinions of counsel required by the Indenture. Under these conditions, we will
be deemed to have satisfied and discharged the Indenture.
GOVERNING LAW
The Indenture and the Junior Subordinated Debentures will be governed by
and construed in accordance with the laws of the State of Delaware.
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INFORMATION CONCERNING THE INDENTURE TRUSTEE
The Indenture Trustee will be unaffiliated with us. For matters relating to
compliance with Trust Indenture Act, the Indenture Trustee will have all of the
duties and responsibilities of an Indenture Trustee under the Trust Indenture
Act. The Indenture Trustee, other than during the occurrence and continuance of
a Debenture Event of Default, undertakes to perform only such duties as are
specifically set forth in the Indenture and, upon a Debenture Event of Default,
must use the same degree of care and skill as a prudent person would use in the
conduct of his or her own affairs. Subject to this provision, the Indenture
Trustee is under no obligation to exercise any of the powers given it by the
Indenture at the request of any holder of Preferred Securities unless it is
offered reasonable security or indemnity against the costs, expenses and
liabilities that it might incur. However, the holders of the Preferred
Securities will not be required to offer such an indemnity where the holders, by
exercising their voting rights, direct the Indenture Trustee to take any action
following a Debenture Event of Default.
COVENANTS OF THE COMPANY
We have made certain covenants in the Indenture. One specific covenant we
have agreed to is that we will pay to Flagstar Trust the Additional Sums so long
as Flagstar Trust holds the Junior Subordinated Debentures.
In addition, we have also agreed to the following terms:
- we will maintain directly or indirectly 100% ownership of the Common
Securities. However, the Indenture does allow us to transfer ownership of
the Common Securities to certain successors;
- we will not voluntarily dissolve Flagstar Trust unless we have received
prior approval from federal banking regulators, if required. However, we
may voluntarily dissolve Flagstar Trust if we distribute the Junior
Subordinated Debentures to holders of the Preferred Securities or if
Flagstar Trust is a party to certain mergers, consolidations or
amalgamations permitted by the Trust Agreement; and
- we will use our reasonable best efforts to cause Flagstar Trust to be
classified as a grantor trust and thus not be taxed as a corporation for
United States federal income tax purposes.
BOOK-ENTRY ISSUANCE
The Depositary will act as securities depositary for all of the Preferred
Securities and, if there is a dissolution of Flagstar Trust, the Junior
Subordinated Debentures. The Preferred Securities and the Junior Subordinated
Debentures will be issued only as fully-registered securities registered in the
name of Cede & Co. (the Depositary's nominee). One or more fully-registered
global certificates will be issued for the Preferred Securities and the Junior
Subordinated Debentures and will be deposited with the Depositary.
The Depositary may discontinue providing its services as securities
depositary with respect to any of the Preferred Securities or the Junior
Subordinated Debentures at any time by giving reasonable notice to the relevant
Trustee and the Company. In the event that a successor securities depositary is
not obtained, definitive Preferred Securities or Subordinated Debenture
certificates representing such Preferred Securities or Junior Subordinated
Debentures are required to be printed and delivered. At our option, we may
decide to discontinue use of the system of book-entry transfers through the
Depositary (or a successor depositary). After a Debenture Event of Default, the
holders of a majority in Liquidation Amount of Preferred Securities or aggregate
principal amount of Junior Subordinated Debentures may determine to discontinue
the system of book-entry transfers through the Depositary. In any such event,
definitive
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certificates for such Preferred Securities or Junior Subordinated Debentures
will be printed and delivered.
The Depositary's management is aware that some computer applications,
systems, and the like for processing data ("Systems") that are dependent upon
calendar dates, including dates before, on, and after January 1, 2000, may
encounter "Year 2000 problems." The Depositary has informed its participants and
other members of the financial community (the "Industry") that it has developed
and is implementing a program so that its Systems, as the same relate to the
timely payment of distributions (including principal and income payments) to
security holders, book-entry deliveries and settlement of trades with the
Depositary, continue to function appropriately. This program includes a
technical assessment and a remediation plan, each of which is complete.
Additionally, the Depositary's plan includes a testing phase, which is expected
to be completed within appropriate time frames.
However, the Depositary's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as third-party vendors from whom the Depositary licenses
software and hardware, and third-party vendors on whom the Depositary relies for
information or the provision of services, including telecommunication and
electrical utility service providers, among others. The Depositary has informed
the Industry that it is contacting (and will continue to contact) third-party
vendors from whom the Depositary acquires services to: (i) impress upon them the
importance of such services being Year 2000 compliant and (ii) determine the
extent of their efforts for Year 2000 remediation (and, as appropriate, testing)
of their services. In addition, the Depositary is in the process of developing
such contingency plans as it deems appropriate.
According to the Depositary, the foregoing information with respect to the
Depositary has been provided to the Industry for informational purposes only and
is not intended to serve as a representation, warranty or contract modification
of any kind.
DESCRIPTION OF GUARANTEE
We will execute and deliver the Preferred Securities Guarantee Agreement
(the "Guarantee") concurrently with the issuance of the Preferred Securities for
the benefit of the holders of the Preferred Securities. FMB Bank will act as
trustee under the Guarantee (the "Guarantee Trustee") for the purposes of
compliance with the Trust Indenture Act, and the Guarantee will be qualified
under the Trust Indenture Act. The following summary of certain provisions of
the Guarantee does not purport to be complete and is subject to, and qualified
in its entirety by reference to, all of the provisions of the Guarantee,
including the definitions of certain terms, and Trust Indenture Act. The form of
the Guarantee has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. You should also read the Guarantee. The
Guarantee Trustee will hold the Guarantee for the benefit of the holders of the
Preferred Securities.
GENERAL
Pursuant to the Guarantee, we will agree to pay in full on a subordinated
basis, to the extent set forth in the Guarantee, the Guarantee Payments, as
defined below, to the holders of the Preferred Securities, as and when due,
regardless of any defense, right of set-off or counterclaim that Flagstar Trust
may have or assert other than the defense of payment.
The following payments on the Preferred Securities, if not fully paid by
Flagstar Trust (the "Guarantee Payments"), are covered by the Guarantee, without
duplication:
- any accumulated and unpaid Distributions required to be paid on the
Preferred Securities, if Flagstar Trust has funds available to make the
payment;
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- the Redemption Price, if Flagstar Trust has funds available to make the
payment, with respect to any Preferred Securities called for redemption;
and
- upon a voluntary or involuntary dissolution, winding up or liquidation of
Flagstar Trust other than in connection with the distribution of the
Junior Subordinated Debentures to holders of the Preferred Securities,
the lesser of
(1) the aggregate of the $25 Liquidation Amount and all accumulated and
unpaid Distributions on the Preferred Securities to the date of
payment if Flagstar Trust has funds available to make the payment;
or
(2) the amount of assets Flagstar Trust has remaining available for
distribution to holders of Preferred Securities.
Our obligations to make a Guarantee Payment may be satisfied by direct
payment of the required amounts by us to the holders of the Preferred Securities
or by causing Flagstar Trust to pay the amounts to the holders.
The Guarantee will be full and unconditional from the time of issuance.
However, the Guarantee will not apply to any payment of Distributions due if
Flagstar Trust lacks funds legally available for payment as a result of a
failure by us to make payments of interest or principal on the Junior
Subordinated Debentures.
We are a holding company and we have the right to participate in any
distribution of assets of any of our subsidiaries if any of our subsidiaries are
liquidated or reorganized. However, our right to participate is subject to the
prior claim of the subsidiary's creditors. Accordingly, our obligations under
the Guarantee will be effectively subordinated to all existing and future
liabilities of our subsidiaries, and holders of Preferred Securities should look
only to our assets for payments.
The Guarantee does not limit our incurrence or issuance of other secured or
unsecured debt. We may issue or incur Senior and Subordinated Debt in the
future. We expect that we will issue or incur Senior and Subordinated Debt in
the future.
We have, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures, the Indenture and the Expense Agreement, taken
together, guaranteed on a subordinated basis all of Flagstar Trust's obligations
under the Preferred Securities. No single document standing alone or operating
in conjunction with fewer than all of the other documents constitutes the
guarantee. It is only the combined operation of these documents that has the
effect of providing our guarantee on a subordinated basis of all of Flagstar
Trust's obligations under the Preferred Securities. See "Relationship Among the
Preferred Securities, the Junior Subordinated Debentures and the Guarantee."
THE EXPENSE AGREEMENT
We will enter into an agreement with Flagstar Trust as to the expenses and
liabilities of Flagstar Trust (the "Expense Agreement"). We will fully and
unconditionally guarantee to each person or entity to whom Flagstar Trust
becomes indebted or liable, the full payment of any costs, expenses or
liabilities of Flagstar Trust, other than obligations of Flagstar Trust to the
holders of the Preferred Securities or other similar interests in Flagstar
Trust.
STATUS OF THE GUARANTEE
The Guarantee is unsecured and ranks subordinate and junior in right of
payment to all Senior and Subordinated Debt in the same manner as the Junior
Subordinated Debentures. As such, it is (1) subordinate and junior in right of
payment to all of our other liabilities, (2) equal to the most senior preferred
stock now or hereafter issued by us, and with any guarantee now or
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hereafter issued by us in respect of any preferred stock of our affiliates, and
(3) senior to our Common Stock.
The Guarantee will constitute a guarantee of payment and not of collection.
The guaranteed party may institute a legal proceeding directly against us to
enforce its rights under the Guarantee without first instituting a legal
proceeding against any other person or entity. The Guarantee will be held for
the benefit of the holders of the Preferred Securities. The Guarantee will not
be discharged except by payment of the Guarantee Payments in full to the extent
not paid by Flagstar Trust or upon distribution of the Junior Subordinated
Debentures to the holders of the Preferred Securities.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Preferred Securities (in which case no vote will be
required), the Guarantee may not be amended without the prior approval of the
holders of not less than a majority of the aggregate Liquidation Amount of the
outstanding Preferred Securities. A description of the way to obtain any
approval is described under "Description of the Preferred Securities -- Voting
Rights; Amendment of the Trust Agreement." All Guarantees and agreements
contained in the Guarantee will bind our successors, assigns, receivers,
trustees and representatives and are for the benefit of the holders of the
Preferred Securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur when we fail to perform
any of our payment or other obligations under the Guarantee. The holders of at
least a majority in aggregate Liquidation Amount of the Preferred Securities
have the right to direct any proceeding for any remedy available to the
Guarantee Trustee relating to the Guarantee or to direct the exercise of any
trust or power conferred upon the Guarantee Trustee under the Guarantee.
If the Guarantee Trustee fails to enforce the Guarantee, you may, after
your written request to the Guarantee Trustee to enforce the Guarantee, sue us
directly to enforce the Guarantee Trustee's rights under the Guarantee without
first instituting a legal proceeding against Flagstar Trust, the Guarantee
Trustee, or any other person or entity.
Notwithstanding the foregoing, if we have failed to make a Guarantee
Payment, you may directly institute a proceeding against us to enforce the
Guarantee.
We are required to file annually with the Guarantee Trustee a certificate
as to our compliance with all the conditions and covenants under the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of
a default by us in performance of the Guarantee, undertakes to perform only such
duties as are specifically set forth in the Guarantee and, after default with
respect to the Guarantee, must exercise the same degree of care and skill as a
prudent person would exercise or use in the conduct of his or her own affairs.
Subject to this provision, the Guarantee Trustee is under no obligation to
exercise any of the powers vested in it by the Guarantee at the request of any
holder of the Preferred Securities unless it is offered reasonable indemnity
against the costs, expenses and liabilities that it might incur.
TERMINATION OF THE GUARANTEE
The Guarantee will remain in effect as long as the Preferred Securities are
outstanding.
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GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of Delaware.
RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE JUNIOR
SUBORDINATED DEBENTURES AND THE GUARANTEE
GUARANTEE
Payments of Distributions and other amounts due on the Preferred Securities
are guaranteed by us to the extent described under "Description of Guarantee."
Taken together, our obligations under the Junior Subordinated Debentures, the
Indenture, the Trust Agreement, the Expense Agreement and the Guarantee provide,
in the aggregate, a guarantee on a subordinated basis for payments of
Distributions and other amounts due on the Preferred Securities (but only to the
extent Flagstar Trust has funds available for the payment of such
Distributions). No single document standing alone or operating in conjunction
with fewer than all of the other documents constitutes such guarantee. It is
only the combined operation of our obligations under those documents that has
the effect of providing a guarantee on a subordinated basis of Flagstar Trust's
obligations under the Preferred Securities.
To the extent that we do not make required payments on the Junior
Subordinated Debentures, Flagstar Trust will not pay Distributions or other
amounts due on the Preferred Securities. Neither the guarantee described above
nor the Guarantee covers payment of Distributions when Flagstar Trust does not
have sufficient funds to pay such Distributions. In those circumstances, your
remedy is to institute a legal proceeding directly against us to enforce the
payment of the Distributions to you. Our obligations under the guarantee and the
Guarantee are subordinate and junior in right of payment to all Senior and
Subordinated Debt.
SUFFICIENCY OF PAYMENTS
As long as we make payments required by the Junior Subordinated Debentures
held by Flagstar Trust, there will be sufficient funds to cover Distributions
and other payments due on the Preferred Securities, primarily because:
- the aggregate principal amount of the Junior Subordinated Debentures will
exceed the aggregate Liquidation Amount of the Preferred Securities by
the amount of the Common Securities;
- the interest rate and interest and other payment dates on the Junior
Subordinated Debentures will match the distribution rate and distribution
and other payment dates for the Preferred Securities;
- we will directly pay for all costs, expenses and liabilities of Flagstar
Trust except Flagstar Trust's obligations to holders of Preferred
Securities; and
- the Trust Agreement further provides that Flagstar Trust will not engage
in any activity that is not consistent with the limited purposes of
Flagstar Trust.
Notwithstanding anything to the contrary in the Indenture, we have the
right to set-off any payment we are required to make with and to the extent we
have made, or are concurrently making a payment under the Guarantee.
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<PAGE> 51
ENFORCEMENT RIGHTS OF HOLDERS OF THE PREFERRED SECURITIES UNDER THE GUARANTEE
A holder of the Preferred Securities may institute a legal proceeding
directly against us to enforce its rights under the Guarantee without first
instituting a legal proceeding against the Guarantee Trustee, Flagstar Trust or
any other person or entity.
A default or event of default under any Senior and Subordinated Debt would
not constitute a Debenture Event of Default. However, in the event of payment
defaults under, or acceleration of, Senior and Subordinated Debt, the
subordination provisions of the Indenture provide that no payments may be made
in respect of the Junior Subordinated Debentures until the Senior and
Subordinated Debt have been paid in full or any payment default has been cured
or waived. Our failure to make the required payments on Junior Subordinated
Debentures will constitute a Debenture Event of Default.
LIMITED PURPOSE OF FLAGSTAR TRUST
The Preferred Securities evidence a beneficial interest in Flagstar Trust,
and it exists for the sole purpose of issuing Trust Securities and investing
those proceeds in the Junior Subordinated Debentures. A principal difference
between the rights of a holder of the Preferred Securities and a holder of a
Junior Subordinated Debenture is that a holder of a Junior Subordinated
Debenture is entitled to receive the principal amount of and interest accrued on
Junior Subordinated Debentures from us, while a holder of the Preferred
Securities is entitled to receive Distributions from Flagstar Trust (or from us
under the Guarantee) if and to the extent Flagstar Trust has funds available for
the payment of such Distributions.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary dissolution, winding-up or liquidation of
Flagstar Trust involving the liquidation of the Junior Subordinated Debentures,
the holders of Preferred Securities will be entitled to receive, out of assets
held by Flagstar Trust, the liquidation distribution in cash. See "Description
of the Preferred Securities -- Liquidation Distribution upon Dissolution." Upon
our voluntary or involuntary liquidation or bankruptcy, the Property Trustee, as
holder of the Junior Subordinated Debentures, would be one of our subordinated
creditors, subordinated in right of payment to all Senior and Subordinated Debt
as set forth in the Indenture. However, the Property Trustee, and indirectly the
holders of the Preferred Securities are entitled to receive payment in full of
principal and interest, before any of our stockholders receive payments or
distributions. Since we are the guarantor under the Guarantee and have agreed to
pay for all costs, expenses and liabilities of Flagstar Trust (other than
Flagstar Trust's obligations to the holders of its Preferred Securities), the
positions of a holder of the Preferred Securities and a holder of Junior
Subordinated Debentures relative to other creditors and to our stockholders in
the event of our liquidation or bankruptcy are expected to be substantially the
same.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
GENERAL
This discussion summarizes the opinion of Kutak Rock, special tax counsel
to Flagstar Bancorp and Flagstar Trust ("Tax Counsel"), of the United States
federal income tax consequences of the purchase, ownership, and disposition of
the Preferred Securities that Tax Counsel anticipates to be material to
investors. Unless otherwise stated, this summary only deals with Preferred
Securities held as capital assets (generally, assets held for investment) by
holders who purchase the Preferred Securities upon original issuance. Your tax
treatment may vary depending on your particular situation.
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<PAGE> 52
This summary does not address:
- all of the tax consequences that may be relevant to holders who may be
subject to special tax treatment such as, for example, financial
institutions, insurance companies, broker-dealers, tax-exempt
organizations or investors who have acquired Preferred Securities as part
of a straddle, hedge or similar transaction or, except as described
below, non-U.S. Holders, as we define that term below;
- the tax consequences to holders that have a functional currency other
than the United States dollar;
- the tax consequences to shareholders, partners or beneficiaries of a
holder of Preferred Securities;
- any aspects of state, local or foreign tax laws; or
- the United States federal alternative minimum tax consequences of the
purchase, ownership and sale of Preferred Securities.
Tax Counsel's opinion is based on the United States federal income tax law
in effect as of the date of this Prospectus. These laws may change, and any
change could have a retroactive effect. These laws are also subject to various
interpretations, and the IRS or the courts could later disagree with the
explanation of conclusions contained in this summary. The IRS has not formally
ruled (and we do not intend to seek a ruling) on the tax consequences of
purchasing, holding, and selling the Preferred Securities. Accordingly, the IRS
could challenge the opinions expressed in this Prospectus concerning such
consequences, and a court could agree with the IRS. We urge you to consult your
tax advisor as to the particular tax consequences to you of purchasing, owning,
and disposing of the Preferred Securities, including the application and effect
of United States federal, state, local, foreign and other tax laws.
For purposes of this discussion, a "U.S. Holder" means:
- a citizen or resident of the United States (or someone treated as a
citizen or resident of the United States for federal income tax
purposes);
- a corporation, partnership, or other entity created or organized (or
treated as created or organized for United States federal income tax
purposes) in the United States or under the laws of the United States or
of any political subdivision of the United States;
- an estate, the income of which is includible in gross income for United
States federal income tax purposes regardless of its source; or
- a trust, the administration of which is subject to the primary
supervision of a United States court and that has one or more United
States persons who have the authority to control all substantial
decisions of the trust.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
Based on the opinion of Tax Counsel, the Junior Subordinated Debentures
should be treated for United States federal income tax purposes as indebtedness
of Flagstar Bancorp. By accepting the Preferred Securities, you agree to treat
the Junior Subordinated Debentures as indebtedness for United States federal
income tax purposes and to treat the Preferred Securities as evidence of an
indirect beneficial ownership interest in the Junior Subordinated Debentures. No
assurance can be given, however, that such treatment will not be challenged by
the IRS or, if challenged, that such a challenge will not be successful.
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<PAGE> 53
CLASSIFICATION OF FLAGSTAR TRUST
Tax Counsel is of the opinion that Flagstar Trust should be classified for
United States federal income tax purposes as a grantor trust and not as an
association taxable as a corporation.
Accordingly, for United States federal income tax purposes, you should
generally be treated as the owner of an undivided interest in the Junior
Subordinated Debentures. As further discussed below, you may be required to
include in ordinary income your allocable share of interest paid or accrued on
the Junior Subordinated Debentures.
POTENTIAL EXTENSION OF INTEREST PAYMENT PERIOD AND ORIGINAL ISSUE DISCOUNT
We have the right to defer payments of interest on the Junior Subordinated
Debentures, which could cause the Junior Subordinated Debentures treated as
having been issued with OID. In general, a debt instrument will be deemed to
have been issued with OID for United States federal income tax purposes if there
is more than a remote contingency that periodic stated interest payments due on
the instrument will not be timely paid. Because the exercise by us of our option
to defer the payment of stated interest on the Junior Subordinated Debentures
would also prevent us from declaring dividends on any class of equity, we
believe that the likelihood that we would exercise the option is remote.
As a result, we intend to take the position, based on the advice of Tax
Counsel, that the Junior Subordinated Debentures will not be deemed to be issued
with OID. Accordingly, based on this position, stated interest payments on the
Junior Subordinated Debentures will be includible in your ordinary income at the
time that those payments are paid or accrued in accordance with your regular
method of accounting and in the amount of each payment. Because these Treasury
Regulations have not yet been addressed in any revenue rulings or other
published interpretations issued by the IRS, it is possible that the IRS could
take a position contrary to the position taken by us.
EXERCISE OF DEFERRAL OPTION
If we exercise our option to defer the payment of stated interest on the
Junior Subordinated Debentures, they would be treated, solely for purpose of the
OID rules, as being "re-issued" at that time with OID. Under these rules, you
would be required to include OID in ordinary income, on a current basis, over
the period that the instrument is held, even though we would not be making any
actual cash payments during the extended interest payment period.
The amount of interest income treated as OID and therefore includible in
the taxable income of a holder of the Junior Subordinated Debentures would be
determined on the basis of a constant yield method over the remaining term of
the instrument, not on the basis of the stated interest amount. The actual
receipt of future payments of stated interest on the Junior Subordinated
Debentures would no longer be separately reported as taxable income because it
would have been replaced, solely for tax purposes, by the amount of OID. The
amount of OID that would accrue, in total, during the extended interest payment
period would be approximately equal to the amount of the cash payment due at the
end of the period. Any OID included in income would increase your adjusted tax
basis in the Preferred Securities or the Junior Subordinated Debentures,
depending on which you held at that time, and interest payments actually
received would reduce your adjusted tax basis.
If the likelihood of the Company deciding to defer any payments of interest
were not treated as remote, the Junior Subordinated Debentures would be
considered as issued initially with OID in an amount equal to the sum of all the
interest payable over the term of the Junior Subordinated Debentures. Again,
this would mean that you would have to include interest income in gross income
for United States federal income tax purposes as it accrued daily on an economic
accrual basis instead of on the dates you actually received the cash payments.
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<PAGE> 54
The IRS has not issued any rulings or interpretations which define the
meaning of the term "remote" as used in the applicable income tax regulations.
The IRS could take a position that differs from what we state in this
Prospectus.
CORPORATE U.S. HOLDERS
Because the income from the Preferred Securities will not be considered to
be dividends for federal income tax purposes, corporate U.S. Holders of the
Preferred Securities will not be entitled to a dividends-received deduction for
any income received from the Preferred Securities.
RECEIPT OF JUNIOR SUBORDINATED DEBENTURES OR CASH UPON TERMINATION OF FLAGSTAR
TRUST
If we exercise our right to terminate Flagstar Trust and cause the Junior
Subordinated Debentures to be distributed to you on a basis proportionate to
your ownership in the Preferred Securities, the distribution would be treated as
a nontaxable event to you. In that event, you would have an adjusted tax basis
in the Junior Subordinated Debentures that you receive equal to the adjusted tax
basis in the Preferred Securities that you surrender, and the holding period of
the Junior Subordinated Debentures would include the period during which you
held the Preferred Securities. If, however, Flagstar Trust is characterized for
United States federal income tax purposes as an association taxable as a
corporation at the time of the termination, the distribution of the Junior
Subordinated Debentures would be a taxable event to the holders of Preferred
Securities.
If we redeem the Junior Subordinated Debentures for cash and Flagstar Trust
distributes the proceeds of the redemption to holders in redemption of their
Preferred Securities, the redemption would be treated as a sale of the Preferred
Securities in which you would recognize gain or loss as described immediately
below.
EXERCISE OF RIGHT TO SHORTEN MATURITY
We have the right to shorten the maturity of the Junior Subordinated
Debentures. If we exercise our right to shorten the maturity of the Junior
Subordinated Debentures, this could result in a taxable event to you. Federal
income tax regulations provide that a significant modification of a debt
instrument is a taxable event. A significant modification includes shortening
the maturity of a debt instrument, provided that the instrument's rate of return
changes by more than the greater of 25 basis points or five percent of the
annual rate of return. At the present time, the extent to which the Junior
Subordinated Debenture's rate of return would change (if we exercised our right
to shorten the maturity) is unclear.
SALE OF PREFERRED SECURITIES
Upon the sale of Preferred Securities (including a redemption for cash),
you will recognize gain or loss in an amount equal to the difference between the
amount realized (which for this purpose, will exclude amounts attributable to
accrued interest or OID not previously included in income, which amount will be
subject to tax as ordinary interest income) and your adjusted tax basis in the
Preferred Securities.
If we do not defer interest payments on the Junior Subordinated Debentures,
your adjusted tax basis in the Preferred Securities generally will equal the
initial purchase price that you paid for the Preferred Securities. If, however,
we elect to defer interest payments on the Junior Subordinated Debentures, your
adjusted tax basis in the Preferred Securities will equal: (1) the initial
purchase price that you paid for the Preferred Securities; (2) increased by the
amount of any accrual and unpaid distributions you were required to treat as
OID; and (3) reduced by the amount of cash or other property received by you
with respect to such OID.
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<PAGE> 55
The gain or loss will be capital gain or loss and will be long-term capital
gain or loss if you have held the Preferred Securities for more than one year.
Capital losses generally cannot be applied to offset ordinary income for United
States federal income tax purposes.
The Preferred Securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest, or OID, if the Junior
Subordinated Debentures are treated as having been issued, or reissued, with
OID, relating to the underlying Junior Subordinated Debentures. If you dispose
of your Preferred Securities you will be required to include in your ordinary
income:
- any portion of the amount realized that is attributable to accrued but
unpaid interest to the extent not previously included in income; or
- any amount of OID that has accrued on your proportionate share of the
underlying Junior Subordinated Debentures during the taxable year of sale
through the date of disposition.
However, you can also increase your adjusted tax basis in the Preferred
Securities to the extent that you include these amounts in ordinary income.
WITHHOLDING OF U.S. TAXES ON NON-U.S. HOLDERS
This summary assumes that the non-U.S. Holder
- is an individual;
- is not and will not become engaged in a United States trade or business;
and
- will not be present in the United States for 183 days or more during any
particular taxable year.
Payments made to a holder of Preferred Securities who is a non-U.S. Holder
generally will not be subject to withholding of United States federal income
tax, if:
- the beneficial owner of the Preferred Securities does not actually or
constructively own 10% or more of the total combined voting power of all
classes of stock entitled to vote; and
- either:
(1) the beneficial owner of the Preferred Securities certifies to
Flagstar Trust or its agent, under penalties of perjury, that it
is not a United States person and provides his name and address;
or
(2) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary
course of its trade or business (a "Financial Institution"), and
holds the capital securities in that capacity, certifies to
Flagstar Trust or its agent, under penalties of perjury, that such
statement has been received from the beneficial owner by it or by
a Financial Institution between it and the beneficial owner and
furnishes Flagstar Trust or its agent with a copy of the
statement.
In addition, a non-U.S. Holder of Preferred Securities will not be subject
to withholding of United States federal income tax on any gain realized upon the
sale or other disposition of a capital security.
BACKUP WITHHOLDING
You may be subject to a "backup withholding" tax of 31% on distributions
made on the Preferred Securities and on the entire price received on the sale of
the Preferred Securities if you:
- fail to provide your Social Security or taxpayer identification number to
your broker;
- provide your broker with an incorrect Social Security or tax
identification number;
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<PAGE> 56
- fail to provide your broker with a certified statement that your Social
Security or tax identification number is correct and that you are not
subject to backup withholding; or
- improperly report interest and dividends on your tax return.
Backup withholding, however, does not apply to payments made to certain exempt
recipients such as corporations or tax-exempt organizations. Any withheld
amounts will be allowed as a credit against your United States federal income
tax, provided the required information is provided to the IRS.
ERISA CONSIDERATIONS
Retirement plans are generally subject to the rules of the Employee
Retirement Income Security Act of 1974 ("ERISA"), and they are also subject to
requirements in the Code. Retirement plans may purchase Preferred Securities in
accordance with their governing documents. When they do, the fiduciaries for
these retirement plans (usually trustees and custodians) are required to comply
with fiduciary duties under ERISA and other requirements under the Code.
Retirement plans can be employer-sponsored plans like pension plans and profit
sharing plans, individual retirement accounts (IRAs), and other types of plans
which defer the receipt of income.
If a retirement plan is sponsored and/or contributed to by a party that is
affiliated in certain ways with us, we and/or our affiliate could be a "party in
interest" or a "disqualified person" for purposes of ERISA and the Code. The
rules regarding these relationships are very complex. They can arise if we are a
fiduciary to a retirement plan, such as a trustee or custodian. They can arise
if we or one of our affiliates provides any services to or for the retirement
plan. Our affiliates are Flagstar Bank, Douglas Insurance Agency, Inc., FSSB
Real Estate Development Corporation, First Security Investment Group, Inc., FSSB
Mortgage Corporation, Flagstar Capital Corporation, Flagstar Credit Corporation,
Mid-Michigan Service Corporation and SSB Funding Corporation.
There are many other circumstances which can cause the relationship to
exist. When one of these relationships exists, the purchase of Preferred
Securities by the retirement plan is likely to result in a transaction that is
not permitted by ERISA and/or the Internal Revenue Code. These transactions are
referred to as "prohibited transactions" or "disqualifying transactions." These
could lead to excise tax penalties and even tax disqualification of a retirement
plan. However, there may be ways to exempt prohibited transactions from the
excise tax penalties and tax disqualification. This may require application to a
governmental agency.
If we or one of our affiliates is a party in interest or disqualified
person as to a retirement plan, that retirement plan should not acquire
Preferred Securities without first establishing an exemption. Entities like
partnerships and limited liability companies which have a relationship with us
and/or one of our affiliates and that may be holding assets of retirement plans
also have to address these prohibited transaction issues. All of these rules are
very complicated. If you have a relationship of any kind with us and/or one of
our affiliates, you should consult with your benefits counsel before acquiring
Preferred Securities.
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UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof, each of the underwriters (the "Underwriters")
named below has severally agreed to purchase, and Flagstar Trust has agreed to
sell to such Underwriter, the number of Preferred Securities set forth opposite
the name of such Underwriter.
<TABLE>
<CAPTION>
NUMBER OF
PREFERRED
NAME OF UNDERWRITER SECURITIES
------------------- ----------
<S> <C>
Roney Capital Markets,
a division of Banc One Capital Markets, Inc. ............. 581,100
McDonald Investments Inc. .................................. 581,100
Stifel, Nicolaus & Company, Incorporated.................... 581,100
JWGenesis Clearing Corp.(1) ................................ 193,700
Advest, Inc. ............................................... 39,000
Robert W. Baird & Co. Incorporated.......................... 39,000
Dain Rauscher Wessels....................................... 39,000
EVEREN Securities, Inc. .................................... 39,000
Fahnestock & Co. Inc........................................ 39,000
Fifth Third Securities, Inc. ............................... 39,000
First Union Capital Markets Corp. .......................... 39,000
J.J.B. Hilliard, W.L. Lyons, Inc. .......................... 39,000
Howe Barnes Investments, Inc. .............................. 39,000
Janney Montgomery Scott Inc. ............................... 39,000
Kirkpatrick, Pettis, Smith, Polian Inc. .................... 39,000
Morgan Keegan & Company, Inc. .............................. 39,000
Raymond James & Associates, Inc. ........................... 39,000
Ryan, Beck & Co., Inc. ..................................... 39,000
Sandler O'Neill & Partners L.P. ............................ 39,000
Stephens Inc. .............................................. 39,000
U.S. Bancorp Piper Jaffray Inc. ............................ 39,000
---------
2,600,000
=========
</TABLE>
- -------------------------
(1) JWGenesis Clearing Corp. and JWGenesis Securities, Inc. are each a
wholly-owned subsidiary of JWGenesis Financial Corp.
The Underwriters are offering the Preferred Securities subject to their
acceptance of the securities from Flagstar Trust and subject to prior sale. The
Underwriting Agreement provides that the obligations of the Underwriters to pay
for and accept delivery of the Preferred Securities are conditioned on the
delivery of legal opinions by their counsel. The Underwriters are obligated to
purchase all the Preferred Securities if any are purchased.
The Underwriters propose to offer part of the Preferred Securities directly
to the public at the public offering price set forth on the cover page of this
Prospectus and part of the Preferred Securities to certain dealers at a price
which represents a concession not in excess of $0.50 per Preferred Security
under the public offering price. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $0.10 per Preferred Security to
certain other dealers. After the initial offering of Preferred Securities to the
public, the public offering price and such concessions may be changed by the
Underwriters.
Flagstar Trust has granted to the Underwriters an option, exercisable at
any time during the 30-day period from the date of this Prospectus, to purchase
up to an aggregate of an additional 15% of the shares of Preferred Securities
(390,000 additional Preferred Securities) at the public offering price set forth
on the cover page less underwriting discounts and commissions. The
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<PAGE> 58
Underwriters may exercise such option to purchase additional Preferred
Securities solely for the purpose of covering over-allotments, if any, incurred
in connection with the sale of the Preferred Securities offered by this
Prospectus. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase a number of additional
Preferred Securities proportionate to such Underwriter's initial amount
reflected in the preceding table.
Flagstar Bancorp, Flagstar Trust and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The following table sets forth the estimated expenses in connection with
the sale and distribution of the securities being registered hereby, other than
underwriting discounts and commissions. All such expenses are to be paid by
Flagstar Bancorp, Inc.:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 21,000
NASD filing fee............................................. 7,975
Blue Sky filing fees and expenses........................... 5,000
Accounting fees and expenses................................ 50,000
Legal fees and expenses..................................... 250,000
Printing, postage and mailing............................... 100,000
Stock transfer agent fees and certificates.................. 5,000
Other....................................................... 61,025
--------
Total.................................................. $500,000
========
</TABLE>
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids for and purchase of the Common Stock so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Preferred Securities in the open market in
order to cover syndicate short positions. Penalty bids permit the Underwriters
to reclaim a selling concession from a syndicate member when the Preferred
Securities originally sold by such syndicate member is purchased in a
stabilizing transaction or syndicate covering transaction to cover syndicate
short positions. Such stabilizing transactions, syndicate covering transactions
and penalty bids may cause the price of the Preferred Securities to be higher
than it would otherwise be in the absence of such transactions. These
transactions may be effected on The Nasdaq Stock Market(R) or otherwise and, if
commenced, may be discontinued at any time.
TRANSFER AGENT
Registrar and Transfer Company, Cranford, New Jersey, will act as registrar
and transfer agent for the Preferred Securities.
LEGAL MATTERS
The validity of the Preferred Securities we are offering, and certain
matters relating to United States federal income tax consequences of this
offering, will be passed upon for us and for Flagstar Trust by Kutak Rock,
Washington, D.C. Albert J. Gladner, Esq., Senior Vice President and General
Counsel of the Bank, will pass upon certain legal matters relating to Michigan
law for us and Flagstar Trust. Morris, James, Hitchens & Williams, Wilmington,
Delaware will pass upon certain matters relating to Delaware law for Flagstar
Trust. Certain legal matters will be passed upon for the Underwriters by
Honigman Miller Schwartz and Cohn, Detroit, Michigan.
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EXPERTS
The consolidated financial statements incorporated in this Prospectus by
reference to our Annual Report on Form 10-K for the year ended December 31, 1998
have been so incorporated in reliance on the report of Grant Thornton LLP,
independent certified public accountants, given on the authority of said firm as
experts in auditing and accounting.
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<PAGE> 60
================================================================================
- - WE HAVE NOT AUTHORIZED ANYONE TO GIVE YOU ANY INFORMATION THAT DIFFERS FROM
THE INFORMATION IN THIS PROSPECTUS. IF YOU RECEIVE ANY DIFFERENT INFORMATION,
YOU SHOULD NOT RELY ON IT.
- - THE DELIVERY OF THIS PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT FLAGSTAR BANCORP, INC. IS OPERATING UNDER THE SAME CONDITIONS
THAT IT WAS OPERATING UNDER WHEN THIS PROSPECTUS WAS WRITTEN. DO NOT ASSUME
THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AT ANY TIME PAST
THE DATE INDICATED.
- - THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF
AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES.
- - THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF
AN OFFER TO BUY, THE SECURITIES TO WHICH IT RELATES IN ANY CIRCUMSTANCES IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
About this Prospectus..................... 3
Where You Can Find More Information....... 3
Special Note of Caution Regarding
Forward-Looking Statements.............. 4
Prospectus Summary........................ 5
Risk Factors.............................. 7
The Offering.............................. 16
Use of Proceeds........................... 20
Capitalization............................ 20
Selected Consolidated Financial Data...... 21
Business.................................. 22
Accounting Treatment...................... 23
Description of the Preferred Securities... 24
Description of the Junior Subordinated
Debentures.............................. 37
Book-Entry Issuance....................... 46
Description of Guarantee.................. 47
Relationship Among the Preferred
Securities, the Junior Subordinated
Debentures and the Guarantee............ 50
United States Federal Income Tax
Consequences............................ 51
ERISA Considerations...................... 56
Underwriting.............................. 57
Transfer Agent............................ 58
Legal Matters............................. 58
Experts................................... 59
</TABLE>
================================================================================
================================================================================
2,600,000 PREFERRED SECURITIES
[FLAGSTAR TRUST LOGO]
9.50% CUMULATIVE PREFERRED SECURITIES
(LIQUIDATION AMOUNT $25
PER PREFERRED SECURITY)
GUARANTEED BY
[FLAGSTAR BANCORP LOGO]
----------
PROSPECTUS
----------
[RONEY CAPITAL MARKETS LOGO]
MCDONALD
INVESTMENTS INC.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
JWGENESIS SECURITIES, INC.
April 26, 1999
================================================================================
