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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No.: 000-23821
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FLAGSTAR CAPITAL CORPORATION
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(Exact name of registrant as specified in its charter)
MICHIGAN 38-3386801
--------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2600 TELEGRAPH ROAD, BLOOMFIELD HILLS, MICHIGAN 48302-0953
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 338-7700
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. Yes X No .
--- ---
As of May 10, 2000, 1,000,000 shares of the registrant's Common Stock,
$1.00 par value, were issued and outstanding and 2,300,000 shares of the
registrant's Series A Preferred Shares, $25.00 par value, were issued and
outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The unaudited condensed financial statements of the Registrant are as follows:
Statement of Financial Condition - March 31, 2000 and December 31, 1999
Statement of Earnings - For the three months ended March 31, 2000 and
March 31, 1999
Statement of Cash Flows - For the three months ended March 31, 2000 and
March 31, 1999
Condensed Notes to Financial Statements.
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FLAGSTAR CAPITAL CORPORATION
STATEMENT OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 2000 1999
---------- -----------
<S> <C> <C>
Cash and cash equivalents $ 12,030 $ 7,456
Mortgage loans 115,157 118,505
Less: allowance for loan losses (250) (250)
--------- ---------
Net mortgage loans 114,907 118,255
Accrued interest receivable 1,412 1,400
Other assets 1,197 2,611
--------- ---------
Total assets $ 129,546 $ 129,722
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Due to parent $ 439 $ 610
Other liabilities 30 35
--------- ---------
Total liabilities 469 645
STOCKHOLDERS' EQUITY
Series A Preferred Stock - $25.00 liquidation value,
2,300,000 shares authorized and issued at December 31,
1999 and March 31, 2000 57,500 57,500
Common stock - $1.00 par value, 1,000,000 shares
authorized and issued December 31, 1999 and
March 31, 2000 1,000 1,000
Additional paid in capital 70,577 70,577
Retained earnings -- --
--------- ---------
Total stockholders' equity 129,077 129,077
--------- ---------
Total liabilities and stockholders' equity $ 129,546 $ 129,722
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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FLAGSTAR CAPITAL CORPORATION
STATEMENT OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE QUARTER FOR THE QUARTER
ENDED MARCH 31, ENDED MARCH 31,
2000 1999
---------------- ---------------
<S> <C> <C>
INCOME
Interest on loans $ 1,764 $ 1,880
EXPENSES
Advisory fee expense - paid to parent 63 63
General and administrative expenses 41 39
------------ -----------
Total expenses 104 102
------------ -----------
NET EARNINGS $ 1,660 $ 1,778
============ ===========
PREFERRED STOCK DIVIDENDS $ 1,222 $ 1,222
============ ===========
NET EARNINGS AVAILABLE TO COMMON SHARES $ 438 $ 556
============ ===========
EARNINGS PER COMMON SHARE - BASIC $ 0.44 $ 0.56
============ ===========
EARNINGS PER COMMON SHARE - DILUTED $ 0.44 $ 0.56
============ ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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FLAGSTAR CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE QUARTER FOR THE QUARTER
ENDED MARCH 31, ENDED MARCH 31,
2000 1999
---------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 1,660 $ 1,778
Adjustments to reconcile net earnings to net cash provided by
operating
Activities
(Increase) decrease in accrued interest receivable (12) 86
Decrease in liabilities (5) --
-------- --------
Net cash provided by operating activities 1,643 1,864
INVESTING ACTIVITIES
Principal repayments received on mortgage loans 4,762 12,172
-------- --------
Net cash provided by investing activities 4,762 12,172
FINANCING ACTIVITIES
Dividends paid to common stockholders (609) (722)
Dividends paid to preferred stockholders (1,222) (1,222)
-------- --------
Net cash used in financing activities (1,831) (1,944)
-------- --------
Net increase in cash and cash equivalents 4,574 12,092
Beginning cash and cash equivalents 7,456 6,989
-------- --------
Ending cash and cash equivalents $ 12,030 $ 19,081
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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FLAGSTAR CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
Flagstar Capital Corporation (the "Company") is an operating subsidiary of
Flagstar Bank, FSB (the "Bank"), a federally chartered stock savings bank
founded in 1987. The primary business of the Company is to acquire, hold, and
manage residential mortgage loans that will generate net earnings that can be
distributed to stockholders.
NOTE 3. - BASIS OF PRESENTATION
The accompanying consolidated unaudited financial statements of the Company have
been prepared in accordance with generally accepted accounting principles for
interim information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X as promulgated by the Securities and Exchange
Commission. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. All interim amounts are subject to year-end audit, the results of
operations for the interim period herein are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The principal business of the Company is to acquire, hold, and manage
residential mortgage loans that will generate net earnings that can be
distributed to stockholders. The Company intends to acquire all its mortgage
loans from the Bank.
RESULTS OF OPERATION
The Company reported net earnings for the quarter ended March 31, 2000 of $1.7
million. Interest income from loans was $1.8 million, which was offset by
$41,000 in administrative expenses, and $63,000 in advisory fees. The reported
net earnings for the quarter ended March 31, 1999 were $1.8 million. Interest
income from loans was $1.9 million, which was offset by $39,000 in
administrative expenses, and $62,000 in advisory fees during the 1999 period.
The Company reported net earnings per common share of $ 0.44 for the quarter
ended March 31, 2000 and $0.56 for the quarter ended March 31, 1999.
During the quarters ended March 31, 2000 and 1999, the Company declared and paid
$1,222,000 in preferred stock dividends.
The Company declared and paid or accrued common stock distributions of $438,000
and $556,000 for the three months ended March 31, 2000 and 1999, respectively.
MORTGAGE LOANS
The Company's residential mortgage loans ("Mortgage Loans") consist of
adjustable rate mortgages ("ARMs"), and fixed rate mortgages ("FRM's").
Reinvestments made in Mortgage Loans will be initiated in a manner to maintain
the original composition of approximately 70% ARMs and 30% FRMs. All Mortgage
Loans are expected to be purchased from the Bank.
The following table gives a breakdown of the Mortgage Loans at March 31, 2000.
<TABLE>
<CAPTION>
Principal Average Interest
Product Type Loans Balance Balance Rate WAM WARM % of Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
3 year ARM 135 $ 35,907,000 $ 265,976 6.733% 360 336 31.3
5 year ARM 87 23,056,000 265,019 6.843 360 336 20.3
7 year ARM 85 20,860,000 245,410 6.896 360 337 18.4
15 year Fixed 141 12,435,000 88,191 6.500 180 156 11.0
30 year Fixed 170 21,577,000 126,923 6.934 360 335 19.0
---------------------------------------------------------------------------------------------
Total 618 $ 113,835,000 $ 184,199 6.798% 340 316 100.0%
=============================================================================================
</TABLE>
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ALLOWANCE FOR LOAN LOSSES
The Company had a recorded an $250,000 allowance for loan losses at December 31,
1999 and did not record any additional allowance at March 31, 2000. Management
has based the allowance on assessments of relevant factors including the types
and amount of delinquent loans, historical and anticipated loss experience on
such types of loans experienced by the Bank, and current and projected economic
conditions. Management is of the opinion that the allowance for loan losses is
adequate to meet potential losses in the portfolio. The Company had certain
representations and warranties from the Bank that were related to the
performance of the Mortgage Loans. The Company's delinquent loans were limited
to one mortgage loan for $256,689, or 0.21% of the portfolio, which was 30 days
delinquent at December 31, 1999 and did not have any delinquent loans at March
31, 2000.
The Bank, in its role as Advisor, has implemented internal asset review systems
to provide for early detection of problem assets. Although this system will not
eliminate future losses due to unanticipated declines in the real estate market
or economic downturns, it should provide for timely identification of any losses
created from Mortgage Loans.
<TABLE>
<CAPTION>
ACTIVITY WITHIN THE ALLOWANCE FOR LOAN LOSSES
-----------------------------------------------------------------
<S> <C>
Balance, January 1, 2000 $ 250,000
Provision for loan losses -
Charge-offs, net of recoveries -
---------
Balance, March 31, 2000 $ 250,000
=========
</TABLE>
LIQUIDITY
The objective of maintaining liquidity within the Company is to ensure the
availability of sufficient cash flows to meet all of the Company's financial
commitments. In managing liquidity, the Company takes into account various legal
limitations placed on a REIT as discussed below in Other Matters.
The Company's principal liquidity needs are to maintain the current portfolio
size through the acquisition of additional Mortgage Loans as Mortgage Loans
currently in the portfolio mature, or prepay, and to pay dividends on the Series
A Preferred Shares and common stock. The acquisition of additional Mortgage
Loans is intended to be funded with the proceeds obtained from the repayment of
principal balances by individual borrowers.
For the quarters ended March 31, 2000 and 1999, the Company received repayments
of principal from mortgage loans totaling approximately $4.8 million and $12.2
million, respectively.
The Company does not anticipate any material capital expenditures other than for
the acquisition of additional residential mortgage loans.
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OTHER MATTERS
As of March 31, 2000, the Company believed that it was in compliance with the
REIT tax rules and that it will continue to qualify as a REIT under the
provision of the Internal Revenue Code (the "Code"). The Company calculates
that:
* its Qualified REIT Assets, as defined in the Code, are approximately
100% of its total assets, as compared to the federal tax requirements
that at least 75% of its total assets must be Qualified REIT Assets.
* 100% of its revenues qualify for the 75% source of income test and 100%
of its revenues qualify for the 95% source of income test under the
REIT rules.
* none of the revenue was subject to the 30% income limitation under the
REIT rules.
The Company also met all REIT requirements regarding the ownership of its common
and preferred stocks and anticipates meeting the 2000 annual distribution and
administrative requirements.
ITEM 3. MARKET RISK
The Company considers that its primary business objective is to ensure the
availability of sufficient cash flows to meet the obligations mandated by the
Series A Preferred Shares. In managing its investments, the Company accepts a
certain credit risk posture and assumes some interest rate risk.
Interest rate risk generally refers to the potential volatility in net interest
income resulting from changes in interest rates. The Company's risk occurs when
it must replace amortized principal balances with new Mortgage Loans. These new
Mortgage Loans are chosen in a manner to maintain an interest rate risk posture
similar to the initial portfolio of Mortgage Loans. The Company must monitor the
ratio of fixed costs (the Series A Preferred Shares' dividends, advisory fees,
and servicing costs) to the interest income potential of the Mortgage Loans.
When, in management's opinion, the coverage ratio is at risk of being depleted,
the Company must look to its parent company, the Bank, for support or utilize
the investment powers of the Company.
The Company will record higher levels of interest income in a rising interest
rate environment and will experience declining interest income during periods of
falling interest rates. This happens because the Company's assets reprice while
the Series A Preferred Shares have a fixed cost of 8.5%.
At March 31, 2000 the Company had a liquidity coverage ratio (Projected interest
income divided by REIT dividends plus Advisory Fees plus Servicing Fees) of 1.51
versus 1.54 at December 31, 1999 and 1.67 at inception.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT 11
Exhibit 27 (SEC Use only)
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLAGSTAR CAPITAL CORPORATION
Date: May 10, 2000 /S/ Thomas J. Hammond
---------------------
Thomas J. Hammond
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
/S/ Michael W. Carrie
---------------------
Michael W. Carrie
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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Exhibit Index
Exhibit No. Description
- ----------- -----------
11 Computation of Net Earning per Share
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11
Flagstar Capital Corporation
Computation of Net Earnings per Share
Earnings per common share are computed by subtracting from the applicable
earnings the dividend requirements on preferred stock to arrive at earnings
available to common stock and dividing this amount by the weighted average
number of common stock outstanding during the period.
<TABLE>
<CAPTION>
For the quarter ended March 31,
2000 1999
---------- ----------
(In thousands, except share data)
<S> <C> <C>
Net earnings $ 1,660 $ 1,778
Less: preferred stock dividends 1,222 1,222
---------- ----------
Net earnings available to common
stockholders $ 438 556
========== ==========
Average common shares outstanding 1,000,000 1,000,000
Net earnings per share - basic $ 0.44 $ 0.56
</TABLE>
In order to calculate net earnings per share of common stock, the Company must
first subtract the dividend requirements of the Series A Preferred Shares to
arrive at net earnings available to the common stockholders. Net earnings per
share is calculated by dividing net earnings available to common stockholders by
the average number of common shares outstanding during the period.
12
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001051818
<NAME> FLAGSTAR CAPITAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 12,030
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 115,157
<ALLOWANCE> 250
<TOTAL-ASSETS> 129,546
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 469
<LONG-TERM> 0
0
57,500
<COMMON> 1,000
<OTHER-SE> 70,577
<TOTAL-LIABILITIES-AND-EQUITY> 129,546
<INTEREST-LOAN> 1,764
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,764
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 0
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 104
<INCOME-PRETAX> 1,660
<INCOME-PRE-EXTRAORDINARY> 1,660
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,660
<EPS-BASIC> 0.44
<EPS-DILUTED> 0.44
<YIELD-ACTUAL> 6.798
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 250
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 250
<ALLOWANCE-DOMESTIC> 250
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
