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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 June 30, 2002

FLAGSTAR BANCORP, INC.

     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 sixty days. Yes x    No o.

     As of August 12, 2002, 29,282,584 shares of the registrant’s Common Stock, $0.01 par value, were issued and outstanding.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

		Consolidated Statements of Financial Condition — June 30, 2002 (unaudited) and December 31, 2001.
		Unaudited Consolidated Statements of Earnings — For the three and six months ended June 30, 2002 and 2001.
		Unaudited Consolidated Statements of Cash Flows — For the six months ended June 30, 2002 and 2001.
		Condensed Notes to Consolidated Financial Statements.

When used in this Form 10-Q or future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases or other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “would be”, “will allow”, “intends to”, “will likely result”, “are expected to”, “will continue”, “is anticipated”, “estimate”, “project”, or similar expressions are intended to identify “forward looking statement” within the meaning of the Private Securities Litigation Reform Act of 1995.

The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities and competitive and regulatory factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected.

The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

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Flagstar Bancorp, Inc.
Consolidated Statements of Financial Condition
(in thousands)

The accompanying notes are an integral part of these statements.

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Flagstar Bancorp, Inc.
Unaudited Consolidated Statements of Earnings
(in thousands, except per share data)

The accompanying notes are an integral part of these statements.

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Flagstar Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands, except per share data)

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Flagstar Bancorp, Inc.
Unaudited Consolidated Statements of Cash Flows
(in thousands)

The accompanying notes are an integral part of these statements.

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Flagstar Bancorp, Inc.
Notes to Consolidated Financial Statements

Note 1. Nature of Business

Flagstar Bancorp, Inc. (“Flagstar” or the “Company”), is the holding company for Flagstar Bank, FSB (the “Bank”), a federally chartered stock savings bank founded in 1987. Flagstar’s primary business consists of attracting deposits from the general public, small businesses, and local government agencies. The Company strategically invests those funds in duration-matched residential, consumer, and commercial loans that are individually underwritten by the Company. The Company also originates or acquires conforming residential mortgage loans on an individual basis that are resold on a servicing retained basis to the secondary market in bulk. The Company also sells the retained servicing rights in bulk transactions in the secondary market. The Company also acquires funds on a wholesale basis from a variety of sources and services a significant volume of loans for others.

The Bank is a member of the Federal Home Loan Bank System (“FHLB”) and is subject to regulation, examination, and supervision by the Office of Thrift Supervision (“OTS”) and the Federal Deposit Insurance Corporation (“FDIC”). The Bank’s deposits are insured by the FDIC through the Savings Association Insurance Fund (“SAIF”).

Note 2. Basis of Presentation

The accompanying consolidated unaudited financial statements of Flagstar Bancorp, Inc. (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, 2002.

Note 3. Stock Split

1.

On May 3, 2002, the Company announced a 3 for 2 split of its common stock. The split was completed on May 31, 2002. All share information on the financial statements of the Company has been adjusted accordingly.

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Flagstar Bancorp, Inc. (“Flagstar” or the “Company”), is the holding company for Flagstar Bank, FSB (the “Bank”), a federally chartered stock savings bank founded in 1987. Flagstar’s primary business consists of attracting deposits from the general public, small businesses, and local government agencies. The Company strategically invests those funds in duration-matched residential, consumer, and commercial loans that are individually underwritten by the Company. The Company also originates or acquires conforming residential mortgage loans on an individual basis that are resold on a servicing retained basis to the secondary market in bulk. The Company also sells the retained servicing rights in bulk transactions in the secondary market. The Company also acquires funds on a wholesale basis from a variety of sources and services a significant volume of loans for others.

Although the Company operates and reports its net earnings as one entity, the Company’s operations have been segregated as two distinct operations for this document. The operations have been classified into a mortgage banking segment and retail banking segment.

RETAIL BANKING OPERATIONS

The Company provides a full range of banking services to consumers and small businesses in southern Michigan and Indiana. At June 30, 2002, the Retail Banking Group (“RBC”) operated a network of 76 banking centers. The Company has continued to focus on expanding its branch network in order to increase its access to retail deposit funding sources. The retail banking operation allows the Company to cross-market consumer banking services to the Company’s mortgage customers.

Earnings primarily consist of net interest income generated from loans held for investment which are funded primarily by deposits and long term borrowings. Earnings also consist of fees collected from depositors and fees earned on consumer and commercial loan originations. All single family mortgage data is included in the data pertaining to the mortgage banking operation. Management believes that because of its duration-matching program, the RBC’s earnings are more stable and less volatile than the earnings contributed from the mortgage banking operation.

This operation is considered the growth portion of the Company. Ten years ago, the Company had only one operating banking center located in the lobby of its headquarters building. During the six months ended June 30, 2002, the Company opened five new banking centers. During the 45 days since June 30, 2002, the Company opened four more banking centers.

Each quarter the RBC contributes a larger portion of the revenue and net earnings recorded by the Company. During the three months ended June 30, 2002, the RBC was responsible for approximately 61.6% of net earnings. That compares positively to the 29.8% during the comparable 2001 period and the 51.6% recorded in the first quarter of 2002. During the six months ended June 30, 2002, the RBC was responsible for approximately 56.7% of net earnings compared to 36.0% during the comparable 2001 period.

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Retail Banking Operations

MORTGAGE BANKING OPERATIONS

Flagstar’s mortgage banking activities involve the origination of mortgage loans or the purchase of mortgage loans from the originating lender. Company personnel originate loans and conduct business from 83 loan origination centers located in 18 states. Flagstar purchases mortgage loans on a wholesale basis through its network of correspondents consisting of other banks, thrifts, mortgage companies, and mortgage brokers. This mortgage banking network conducts mortgage lending operations nationwide. The mortgage loans, the majority of which are subsequently sold in the secondary mortgage market, generally conform to the underwriting standards of Freddie Mac or Fannie Mae, or both.

Earnings recorded in the Mortgage Banking Operation (“MBO”) consist of net interest income received on loans held for sale, loan servicing fees received, certain loan origination fees, revenue from the sale of loans and mortgage servicing rights, offset by the cost required to perform those tasks. The earnings and revenues recorded by the MBO are substantially dependent on the general economy and the interest rate environment. Historically, originations are at their peak when interest rates are low and the general outlook for the economy is positive.

During the three months ended June 30, 2002, the MBO was responsible for approximately 38.4% of net earnings. Net earnings for the MBO are down 18.0% on a sequential quarter basis and down 17.5% on a comparable quarter basis. Loan production in the current quarter is down 19.1% on a sequential quarter basis and down 8.6% on a comparable quarter basis.

During the six months ended June 30, 2002, the MBO was responsible for approximately 43.3% of net earnings. Earnings for the MBO are up 19.6% on a comparable period basis. Loan production for the six months ended June 30, 2002 is up 22.9% on a comparable period basis.

Management believes that the earnings of the MBO will continue to fluctuate with its ability to originate and sell mortgage loans and mortgage servicing rights. The severity of the swings and the effect those swings will have on the net earnings of the Company will be mitigated by the increased earnings provided by the RBC.

Mortgage Banking Operations

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Selected Financial Ratios ( in thousands, except per share data )

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Results of Operations

Net Earnings

During both the three and six month period ended June 30, 2002, the Company recorded record net earnings from operations due to the interest rate environment prevalent in 2002. The lower interest rate environment experienced in 2002 has positively affected the Company’s mortgage banking operation through increased loan production. Along with the record revenues recorded by the mortgage banking operation, the retail banking operation has been able to reduce the cost on deposits substantially.

Three months

Net earnings for the second quarter were $26.4 million, or $0.85 per share on a diluted basis. These earnings constitute an increase of $8.9 million, or 50.9%, from net earnings of $17.5 million, or $0.60 per share on a diluted basis, reported for the comparable 2001 period (as adjusted for our 3-for-2 stock split in May 2002) and are our record for second quarter earnings. As a result, we had an annualized return on average equity of 32.00% and an annualized return on average assets of 1.53%. These results were driven by an increase in the net interest margin to 3.05%, second quarter residential mortgage loan production of $7.4 billion and an operating efficiency ratio of 52.4%.

Six months

For the six months ended June 30, 2002, we earned $51.9 million, or $1.68 per share on a diluted basis, which is our record for the first six months of a year. These earnings constitute an increase of $22.5 million, or 76.5%, from net earnings of $29.4 million, or $1.01 per share on a diluted basis, reported for the comparable 2001 period (as adjusted for our 3-for-2 stock splits in May 2002). As a result, we had an annualized return on average equity of 32.75% and an annualized return on average assets of 1.54%. These results were driven by an increase in the net interest margin to 3.13%, a six-month loan production of $16.7 billion and an operating efficiency ratio of 54.2%.

Net Interest Income

Three months

Net interest income continued to rise and in this quarter increased $22.4 million, or 92.9%, to $46.5 million compared to the $24.1 million recorded for the 2001 period. Although there was only a small increase of $0.6 million in interest income, there was a $21.9 million decrease in interest expense. In this period of lower interest rates, management was able to dramatically reduce the rates paid on the Company’s deposit portfolio. This repricing is shown in the 250 basis point decrease in the deposit cost. This decrease allowed the Company to report a 125 basis point increase in the interest rate spread during the period and a 136 basis point increase in the interest margin when compared to the 2001 period.

On a sequential quarter basis, the reported spread and margin decreased 33 basis points and 20 basis points, respectively. This decrease was the result of a dramatic 52 basis point decrease in the yield on our earning asset portfolio offset by a 19 basis point decrease in the rate paid on liabilities.

Management believes that there will be further compression in the interest margin in coming quarters. The largest interest margin reported by the Company occurred in the first quarter of 2002. Although management will acquire the most cost effective source of funds available, there is no guarantees that management will be able to maintain these spreads and margins.

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AVERAGE YIELDS EARNED AND RATES PAID

The following tables present interest income from average earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates. Interest income from earning assets includes the amortization of net premiums and the amortization of net deferred loan origination costs. Nonaccruing loans were included in the average loan amounts outstanding.