Flagstar Capital (FLGSP) 10-Q 2003 Q1 Quarterly report

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, 2003

OR

o 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	38-3386801
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
5151 Corporate Drive, Troy Michigan	48098-2639
(Address of principal executive offices)	(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  X No      .

     As of May 9, 2003, 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

PART I. FINANCIAL INFORMATION
	Statements of Financial Condition
	Unaudited Statements of Earnings
	Unaudited Statements of Cash Flows
	Condensed Notes to Financial Statements-unaudited
Computation of Net Earnings Per Share
906 Certification of Chief Executive Officer
906 Certification of Chief Financial Officer

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

The condensed financial statements of the Registrant are as follows:

Statements of Financial Condition — March 31, 2003 (unaudited) and December 31, 2002

Unaudited Statements of Earnings — For the three months ended March 31, 2003 and March 31, 2002

Unaudited Statements of Cash Flows — For the three months ended March 31, 2003 and March 31, 2002

Condensed Notes to Financial Statements — unaudited

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Flagstar Capital Corporation
Statements of Financial Condition
(In thousands)

				March 31,		December 31,
				2003		2002
Assets				(unaudited)
Cash				$	27,042	$	10,658
	Mortgage loans				90,883		109,922
	Allowance for loan losses				250		250
	Net mortgage loans				90,633		109,672
Investment in mortgage securities					132,232		125,883
Other investments					17,768		24,117
Accrued interest receivable					424		485
Loan payments in process — due from parent					11,100		8,459
Other assets					496		624
		Total assets		$	279,695	$	279,898
Liabilities and stockholders’ equity
Liabilities
Due to parent				$	492	$	709
Other liabilities					126		112
			Total liabilities		618		821
Stockholders’ equity
Series A preferred stock — $25.00 liquidation value, 2,300,000 shares authorized and issued at March 31, 2003 and December 31, 2002					57,500		57,500
Common stock — $1.00 par value, 1,000,000 shares authorized and issued at March 31, 2003 and December 31, 2002					1,000		1,000
Additional paid in capital					220,577		220,577
Retained earnings					—		—
			Total stockholders’ equity		279,077		279,077
		Total liabilities and stockholders’ equity		$	279,695	$	279,898

The accompanying notes are an integral part of these statements.

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Flagstar Capital Corporation
Unaudited Statements of Earnings
(in thousands, except per share data)

		For the		For the
		quarter		quarter
		ended		ended
		March 31,		March 31,
		2003		2002
Income
	Interest on loans	$	1,441	$	1,819
	Interest on investments		1,548		1,524
	Total income		2,989		3,343
Expenses
	Advisory fee expense — paid to parent		62		63
	General and administrative expenses		29		28
	Total expenses		91		91
Net earnings		$	2,898	$	3,252
Preferred stock dividends		$	1,222	$	1,222
Net earnings available to common stockholders		$	1,676	$	2,030
Earnings per common share		$	1.68	$	2.03

The accompanying notes are an integral part of these statements.

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Flagstar Capital Corporation
Unaudited Statements of Cash Flows
(in thousands)

				For the three			For the three
				months ended			months ended
				March 31,			March 31,
				2003			2002
Operating Activities
	Net earnings			$	2,898		$	3,252
	Adjustments to reconcile net earnings to net cash provided by operating activities
	Decrease (increase) in accrued interest receivable				61			(33	)
	Decrease in other assets				127			258
	Increase (decrease) in other liabilities				14			(1,195	)
			Net cash provided by operating activities		3,100			2,282
Investing Activities
		Net change in investment in mortgage securities			(6,349	)		(22,302	)
		Net change in other investments			6,349			22,302
		Purchase of mortgage loans			(17,611	)		(17,977	)
		Principal repayments received on mortgage loans			34,009			24,211
			Net cash provided by investing activities		16,398			6,234
Financing Activities
		Dividends paid to common stockholder			(1,892	)		(4,177	)
		Dividends paid to preferred stockholders			(1,222	)		(1,222	)
			Net cash used in financing activities		(3,114	)		(5,399	)
Net increase in cash and cash equivalents					16,384			3,117
Beginning cash and cash equivalents					10,658			2,022
Ending cash and cash equivalents				$	27,042		$	5,139

The accompanying notes are an integral part of these statements.

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Flagstar Capital Corporation
Condensed Notes to Financial Statements-unaudited

Note 1 — Nature of Business

Flagstar Capital Corporation (the “Company”) is a subsidiary of Flagstar Intermediate Holding Company (“IHC”), a wholly owned 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.

On March 20, 2003, the Company notified the public in a press release that they would redeem all of the Series A Preferred Shares on June 30, 2003.

Note 2. — 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, 2003.

Note 3. Significant Events

The Company removed its preferred stock listing from the Nasdaq Stock Market on July 12, 2001. On July 13, 2001, the Company moved those same shares to the New York Stock Exchange. The securities, which formerly traded under the symbol “FLGSP”, now trade under the symbol “FBC-P”.

In September, 2001, Flagstar Bank, FSB contributed it’s common stock investment in the Company to Flagstar Intermediate Holding Company, a newly formed, wholly-owned subsidiary. The purpose of the transaction is to allow the Bank greater flexibility in the manner in which the common stock of the Company is held. The change will also increase the mortgage investments the Company is allowed to invest in while still complying with various federal tax requirements. At the same time, IHC contributed $150 million of equity to the Company. The Company then invested the proceeds in a 15% interest in mortgage securities 100% owned by Flagstar LLC.

On March 20, 2003, the Company notified the public in a press release that they would redeem all of the Series A Preferred Shares on June 30, 2003.

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.

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Results of Operation

The Company recorded a 10.9% decrease in net earnings for the quarter ended March 31, 2003 compared to the quarter ended March 31, 2002. This decrease was the result of a smaller average investment in Mortgage Loans and mortgage securities during the 2003 quarter. The Company’s parent, IHC, contributed $150 million of equity during September 2001 and the Company invested in additional Mortgage Loans and mortgage securities.

The Company reported net earnings for the quarter ended March 31, 2003 of $2.9 million. Interest income from loans and investments was $3.0 million, which was offset by $29,000 in administrative expenses and $62,000 in advisory fees. The reported net earnings for the quarter ended March 31, 2002 were $3.3 million. Interest income from loans was $3.3 million, which was offset by $28,000 in administrative expenses and $63,000 in advisory fees during the 2002 period.

The Company reported net earnings per common share of $1.68 for the quarter ended March 31, 2003 and $2.03 for the quarter ended March 31, 2002.

During the quarters ended March 31, 2003 and 2002, the Company declared and paid $1,222,000 in preferred stock dividends.

The Company declared and paid or accrued common stock distributions of $1,676,000 and $2,030,000 for the quarters ended March 31, 2003 and 2002, 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, 2003.

					Principal		Average		Interest
Product Type			Loans		Balance		Balance		Rate			WAM		WARM		% of Total
	3 year ARM			109	$	24,196,000	$	221,981		5.845	%		360		338		26.7
	5 year ARM			219		45,611,000		208,269		6.094			360		342		50.4
	7 year ARM			34		11,108,000		326,700		6.783			360		329		12.3
	15 year Fixed			68		4,771,000		70,163		6.499			180		126		5.3
	30 year Fixed			43		4,778,000		111,125		6.866			360		300		5.3
		Total		473	$	90,464,000	$	191,256		6.174	%		351		326		100.0	%

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Allowance for Loan Losses

The Company’s allowance for loan losses was $250,000 at March 31, 2003. Management has based the allowance on assessments of relevant factors including the types and amount of delinquent loans, historical loss experience on such types of loans experienced by the Bank, and current economic conditions. Management is of the opinion that the allowance for loan losses is adequate to meet potential losses in the portfolio. The Company’s non-performing assets consisted of three mortgage loans totaling $790,000, or 0.87%, of the portfolio, at March 31, 2003. The Company, in accordance with applicable disclosure requirements, defines an asset as non-performing if it meets any of the following criteria: 1) a loan more than 90 days past due; 2) real estate acquired in a settlement of a loan; or 3) a restructured loan whose terms have been modified due to the borrower’s inability to pay as contractually specified including loans the Company has classified as impaired. Loans are generally placed into non-accrual status when they become 90 days delinquent.

The Company had a $250,000 allowance for loan losses at December 31, 2002. The Company’s non-performing loans were limited to three mortgage loans totaling $790,000, or 0.8%, of the portfolio, at December 31, 2002. The Company has certain representations and warranties from the Bank, which are related to the performance of the Mortgage Loans.

The Bank, in its role as Advisor, has implemented comprehensive 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 problem loans.

Activity within the Allowance for Loan Losses
Balance, December 31, 2002		$	250,000
	Provision for loan losses		—
	Charge-offs, net of recoveries		—
Balance, March 31, 2003		$	250,000

Investment in Mortgage Securities

During September 2001, the Company invested in mortgage securities owned by Flagstar, LLC, a second-tier subsidiary of the Bank. The Company currently has a 15% interest in these mortgage securities, which is equal to $132.2 million. The mortgage securities currently have a yield of 5.626% and interest payments are made monthly to the Company. The mortgage securities are managed and serviced by the Bank.

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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.

On March 20, 2003, the Company notified the public in a press release that they would redeem all of the Series A Preferred Shares on June 30, 2003.

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 September 2001, the Company received an additional capital investment from its parent company, IHC, of $150 million. This additional capital was used to purchase REIT qualifying mortgage securities from Flagstar LLC, a second-tier subsidiary of the Bank.

During the quarter ended March 31, 2003, the Company purchased from the Bank $17.5 million in principal balance of residential mortgage loans at a purchase price of $17.6 million, their fair value. During the quarter ended March 31, 2002, the Company purchased from the Bank $18.0 million in principal balance of residential mortgage loans at a purchase price of $18.2 million, their fair value.

For the quarters ended March 31, 2003 and 2002, the Company received repayments of principal from mortgage loans totaling approximately $34.0 million and $24.2 million, respectively.

At March 31, 2003 the Company had a liquidity coverage ratio (Projected interest income divided by REIT dividends plus Advisory Fees plus Servicing Fees) of 2.54 versus 2.85 at December 31, 2002 and 3.37 at March 31, 2002.

The Company does not anticipate any material capital expenditures other than for the acquisition of additional residential mortgage loans.

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REIT Qualification

As of March 31, 2003, 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 90% 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 2003 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 and mortgage securities. When, in management’s opinion, the coverage ratio is at risk of being depleted, the Company must look to its parent company, IHC, 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%.

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ITEM 4. CONTROLS AND PROCEDURES

A review and evaluation was performed by the Company’s management, including the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing of this quarterly report pursuant to Rule 13a-14 of the Securities Act of 1934. Based on that review and evaluation, the CEO and CFO have concluded that the Company’s current disclosure controls and procedures, as designed and implemented, were effective. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls subsequent to the date of their evaluation. There were no significant material weaknesses identified in the course of such review and evaluation and, therefore, no corrective measures were taken by the Company.

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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	Computation of Net Earnings per Share
Exhibit 99.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)	Reports on Form 8-K
	The Company filed a Form 8-K on March 20, 2003 in connection with the Company’s filing of a press release announcing the redemption of the Series A Preferred Shares on June 30, 2003.

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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 9, 2003	/S/ Mark T. Hammond
		Mark T. Hammond
		Vice-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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SECTION 302 CERTIFICATION

I, Mark T. Hammond certify that:

1)	I have reviewed this quarterly report on Form 10-Q of Flagstar Capital Corp;
2)	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3)	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4)	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6) The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 9, 2003	/s/ Mark T. Hammond
	Signature
	Chairman of the Board and CEO
	Title

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SECTION 302 CERTIFICATION

I, Michael W. Carrie certify that:

1)	I have reviewed this quarterly report on Form 10-Q of Flagstar Capital Corp;
2)	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3)	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4)	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6) The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 9, 2003	/s/ Michael W. Carrie
	Signature
	Chief Financial Officer and EVP
	Title

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10-Q EXHIBIT INDEX

EXHIBIT NO.	DESCRIPTION
EX-11	Computation of Net Earnings per share
EX-99.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-99.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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