Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


Mark One
		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2000

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File No.: 000-23821

FLAGSTAR CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)


Michigan (State or other jurisdiction of incorporation or organization)		38-3386801 (I.R.S. Employer Identification No.)


5151 Corporate Drive, Troy Michigan (Address of principal executive offices)		48098-2639 (Zip Code)

Registrant’s telephone number, including area code: (248) 312-2000

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 No .

As of November 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.

TABLE OF CONTENTS


FORM 10-Q
PART I. FINANCIAL INFORMATION
Statement of Financial Condition
Statement of Earnings
Statements of Cash Flows
Notes to Consolidated Financial Statements
PART II — OTHER INFORMATION
SIGNATURES
Exhibit Index
Computation of Net Earnings Per Share
Financial Data Schedule

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

The unaudited condensed financial statements of the Registrant are as follows:


	Statement of Financial Condition — September 30, 2000 and December 31, 1999

	Statement of Earnings — For the three and nine months ended September 30, 2000 and September 30, 1999

	Statement of Cash Flows — For the three and nine months ended September 30, 2000 and September 30, 1999

	Condensed Notes to Financial Statements.

Flagstar Capital Corporation

Statement of Financial Condition
(in thousands)


				September 30,			December 31,
Assets				2000			1999
Cash and cash equivalents				$	9,849		$	7,456




	Mortgage loans				117,608			118,505




	Less: allowance for loan losses				(250	)		(250	)

Net mortgage loans					117,358			118,255




Accrued interest receivable					1,492			1,400




Other assets					1,106			2,611





		Total assets		$	129,805		$	129,722

Liabilities and Stockholders’ Equity




Liabilities




Due to parent				$	692		$	610




Other liabilities					36			35

			Total liabilities		728			645




Stockholders’ Equity




Series A Preferred Stock — $25.00 liquidation value, 2,300,000 shares authorized and issued at December 31, 1999 and September 30, 2000					57,500			57,500




Common stock — $1.00 par value, 1,000,000 shares authorized and issued at December 31, 1999 and September 30, 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		$	129,805		$	129,722

The accompanying notes are an integral part of these statements.

Flagstar Capital Corporation

Statement of Earnings
(in thousands, except per share data)


		For the		For the		For the		For the
		quarter		quarter		nine months		nine months
		ended		ended		ended		ended
		September 30,		September 30,		September 30,		September 30,
		2000		1999		2000		1999

Income




	Interest on loans	$	2,007	$	1,974	$	5,628	$	5,585




Expenses




	Advisory fee expense — paid to parent		63		63		188		187




	General and administrative expenses		30		31		109		114

	Total expenses		93		94		297		301





Net earnings		$	1,914	$	1,880	$	5,331	$	5,284

Preferred stock dividends		$	1,222	$	1,222	$	3,666	$	3,666

Net earnings available to common shares		$	692	$	658	$	1,665	$	1,618

Earnings per common share		$	0.69	$	0.66	$	1.66	$	1.62

The accompanying notes are an integral part of these statements.

Flagstar Capital Corporation

Statements of Cash Flows
(in thousands)


				For the nine	For the nine
				months ended	months ended
				September 30,	September 30,
				2000	1999

Operating Activities




	Net earnings			$5,331	$	5,284




	Adjustments to reconcile net earnings to net cash provided by Operating activities (Increase) in accrued interest receivable			(92)		(26	)




	Decrease in liabilities			2		7

			Net cash provided by operating activities	5,241		5,265




Investing Activities




		Purchase of mortgage loans		(12,215)		(25,009	)




		Principal repayments received on mortgage loans		14,616		30,699

			Net cash provided by investing activities	2,401		5,690




Financing Activities




		Dividends paid to common stockholders		(1,583)		(1,682	)




		Dividends paid to preferred stockholders		(3,666)		(3,666	)

			Net cash used in financing activities	(5,249)		(5,348	)

Net increase in cash and cash equivalents				2,393		5,607




Beginning cash and cash equivalents				7,456		6,989

Ending cash and cash equivalents				9,849	$	12,596

The accompanying notes are an integral part of these statements.

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. The Company has elected to be treated as a Real Estate Investment Trust (“REIT”) for federal tax purposes and must satisfy various requirements as discussed herein.

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.

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 September 30, 2000 of $1.9 million. Interest income from loans was $2.0 million, which was offset by $30,000 in administrative expenses and $63,000 in advisory fees. The reported net earnings for the quarter ended September 30, 1999 were $1.9 million. Interest income from loans was $2.0 million, which was offset by $31,000 in administrative expenses and $63,000 in advisory fees during the 1999 period.

The Company reported net earnings of $5.3 million for the nine months ended September 30, 2000. Interest income from loans was $5.6 million, which was offset by $109,000 in administrative expenses and $188,000 in advisory fees. For the nine months ended September 30, 1999, the Company also reported $5.3 in net earnings. Interest income from loans was $5.6 million, which was offset by $114,000 in administrative expenses and $187,000 in advisory fees.

The Company reported net earnings per common share of $ 0.69 for the quarter ended September 30, 2000 and $0.66 for the quarter ended September 30, 1999. For the nine months ended September 30, 2000 and 1999, the Company reported net earnings per common share of $1.66 and $1.62, respectively.

Results of Operation con’t

During the quarters ended September 30, 2000 and 1999, the Company declared and paid $1,222,000 in preferred stock dividends. For the nine months ended September 30, 2000 and 1999, the Company declared and paid $3,666,000 in preferred stock dividends.

The Company declared and paid or accrued common stock distributions of $692,000 and $658,000 for the quarters ended September 30, 2000 and 1999, respectively. For the nine months ended September 30, 2000 and 1999, the Company declared and paid or accrued common stock distributions of $1,665,000 and $1,618,000, 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 September 30, 2000.


					Principal		Average		Interest
Product Type			Loans		Balance		Balance		Rate			WAM		WARM		% of Total

	3 year ARM			128	$	32,848,000	$	256,629		7.339	%		360		332		28.2




	5 year ARM			99		24,506,000		247,535		6.865			360		332		21.0




	7 year ARM			99		23,250,000		234,842		6.924			360		333		19.9




15 year Fixed				134		11,374,000		84,881		6.501			180		150		9.8




30 year Fixed				188		24,529,000		130,475		6.977			360		333		21.1

		Total		648	$	116,507,000	$	179,795		6.998	%		342		315		100.0	%

Allowance for Loan Losses

The Company had a $250,000 allowance for loan losses at December 31, 1999 and did not record any additional allowance for the nine months ended September 30, 2000. The allowance for losses as a percentage non-performing loans was 46.5% at September 30, 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. At September 30, 2000 the Company had three non-performing loans which totaled $537,474 or 0.46% of the total loan portfolio and one loan for $243,707, or 0.21% of the portfolio, which was 30 days delinquent.

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.


Activity within the Allowance for Loan Losses

Balance, January 1, 2000		$	250,000




	Provision for loan losses		—




	Charge-offs, net of recoveries		—

Balance, September 30, 2000		$	250,000

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.

During May 2000, the Company purchased from the Bank $12.2 million in principal balance of residential mortgage loans at a purchase price of $12.3 million, their estimated fair value.

For the quarters ended September 30, 2000 and 1999, the Company received repayments of principal from mortgage loans totaling approximately $8.0 million and $7.6 million, respectively. For the nine months ended September 30, 2000 and 1999, the Company received principal repayments from mortgage loans totaling approximately $14.6 million and $30.7 million, respectively.

The Company does not anticipate any material capital expenditures other than for the acquisition of additional Mortgage Loans.

OTHER MATTERS

As of September 30, 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 September 30, 2000 the Company had a liquidity coverage ratio (Projected interest income divided by REIT dividends plus Advisory Fees plus Servicing Fees) of 1.55 versus 1.54 at December 31, 1999 and 1.67 at inception (February 28, 1998).

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

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.

Exhibit Index


Exhibit No.										Description




11 27										Computation of Net Earnings per Share Financial Data Schedule

FLAGSTAR CAPITAL CORPORATION

Date: November 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
(Principal Accounting Officer)

FLAGSTAR CAPITAL CORP 10-Q