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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Mark One

OR

Commission File No.:    0-22353

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 ninety days. Yes x No o .

     As of November 11, 2002, 29,371,431 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 condensed consolidated financial statements of the Registrant are as follows:

		Consolidated Statements of Financial Condition — September 30, 2002 (unaudited) and December 31, 2001.
		Unaudited Consolidated Statements of Earnings — For the three and nine months ended September 30, 2002 and 2001.
		Unaudited Consolidated Statements of Changes in Stockholder’s Equity — For the year ended December 31, 2001 and the nine months ended September 30, 2002.
		Unaudited Consolidated Statements of Cash Flows — For the nine months ended September 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.

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.

The accompanying notes are an integral part of these financial 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. With $7.7 billion in assets at September 30, 2002, Flagstar is the largest savings institution and 3rd largest banking institution headquartered in Michigan.

Flagstar is a consumer-oriented financial services organization. The Company’s principal business is obtaining funds in the form of deposits and borrowings and investing those funds in various types of loans. The acquisition or origination of single family mortgage loans is the Company’s primary lending activity. The Company also originates for investment consumer loans, commercial real estate loans, and non-real estate commercial loans.

The mortgage loans are securitized and sold in order to generate mortgage servicing rights. The Company also invests in a significant amount of its mortgage loan production in order to maximize the Company’s leverage ability and to receive the interest spread between earning assets and paying liabilities. 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. Significant Events

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 have been adjusted accordingly.
2.		The Company recorded a one-time after-tax adjustment of $18.7 million, or $0.61 per share — diluted, as its cumulative effect to implement the Financial Accounting Standards Board’s (FASB) Statement 133 Implementation Issue No.C13 (Issue C13). The Company adopted FASB 133 in January 2001. Issue C13 clarifies and provides further guidance to reporting entities that have issued interest rate lock commitments on loans that will be originated and later resold. Issue C13 was cleared for adoption on March 13, 2002 and implementation was required for all reporting entities issuing financial statements for periods where the first day of the fiscal quarter began after April 10, 2002. Since the prior reporting of these rate lock commitments was different than what is expressed in Issue C13, then the change is reported as a change in accounting principle.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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Results of Operations

Net Earnings

During both the three and nine month period ended September 30, 2002, the Company reported record net earnings from recurring operations. The lower and falling interest rates experienced in 2002 have positively affected the Company’s mortgage banking operation. Along with the record revenues recorded by the mortgage banking operation, the expanding retail banking operation has benefited from the widening yield curve and the downward repricing of higher cost deposits.

Also during the period, the Company recorded a one-time after-tax adjustment of $18.7 million, or $0.61 per share — diluted, as its cumulative effect to implement the Financial Accounting Standards Board’s (FASB) Statement 133 Implementation Issue No.C13 (Issue C13). The Company adopted FASB 133 in January 2001. Issue C13 clarifies and provides further guidance to reporting entities that have issued interest rate lock commitments on loans that will be originated and later resold. Issue C13 was cleared for adoption on March 13, 2002 and implementation was required for all reporting entities issuing financial statements for periods where the first day of the fiscal quarter began after April 10, 2002. Since the prior reporting of these rate lock commitments was different than what is expressed in Issue C13, then the change is reported as a change in accounting principle.

Management does not believe that this one-time cumulative adjustment is part of ongoing earnings and as such has not portrayed it as recurring earnings in the current quarter.

     Three months
Net earnings from recurring operations for the three months ended September 30, 2002 were $26.6 million ($0.86 per share-diluted), a $2.0 million increase from the $24.6 million ($0.82 per share-diluted) reported in 2001. The increase resulted from a $17.0 million increase in net interest income, which was offset by a $0.6 million decrease in other income, a $0.8 million increase in the provision for federal income taxes, a $3.8 million increase in the provision for losses, and a $9.7 million increase in operating expenses.

     Nine months
Net earnings from recurring operations for the nine months ended September 30, 2002 were $78.6 million ($2.54 per share-diluted), a $24.6 million increase from the $54.0 million ($1.83 per share-diluted) reported in 2001. The increase resulted from a $63.3 million increase in net interest income and a $20.5 million increase in other income, which was offset by a $12.5 million increase in the provision for federal income taxes, a $3.5 million increase in the provision for losses, and a $42.9 million increase in net operating expenses.

Net Interest Income

     Three months
Net interest income continues to rise and in this quarter increased $17.0 million, or 58.4%, to $46.1 million for the three months ended September 30, 2002. This level of interest income compares positively to the $29.1 million recorded for the 2001 period. This large percentage increase in net interest income was created by a $5.0 million increase in interest income and a $12.0 decrease in interest expense.

For the first nine months of this year, the Company’s paying liabilities have matured and or repriced at a faster pace than the Company’s earning assets. In this three month period that the Company increased the average earning asset base by over $871.2 million, the Company registered a significant increase in net interest income because of this expanding interest margin. The liabilities used for the asset acquisitions and the liabilities that were used to replace the maturing liabilities were acquired at a substantially discounted rate compared to the liabilities used in the 2001 period.

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These pricing adjustments are best shown by the increased spread reported during the current period when compared to the third quarter of 2001. Earning assets as a whole repriced down 68 basis points while the liabilities repriced down 144 basis points on a like period comparison. These decreases were reflected in the increase in the Company’s net interest margin of 75 basis points to 2.75% for the three months ended September 30, 2002 from 2.00% for the comparable 2001 period.

On a sequential quarter basis, the Company reported an 11 basis point decrease in the interest rate spread and 30 basis point decrease in the interest margin. These changes were the result of the large amount of asset refinancings experienced during the third quarter of 2002. The Company reported a $405,000, or 0.9% decrease in net interest income during the third quarter versus the second quarter of 2002 despite a $472.0 million increase in earning assets. Earning assets repriced down 25 basis points while paying liabilities repriced down only 14 basis points.

     Nine months
Net interest income for the nine months ended September 30, 2002 had an increase of $63.3 million, or 80.6%, to $141.8 million. This level of interest income compares to $78.5 million recorded during the 2001 period. This increase was due to a $565.8 million increase in average interest-earning assets between the comparable periods, offset by the $432.7 million increase in interest-bearing liabilities necessary to fund the growth and an increased spread achieved during the nine month comparable periods. The spread increased 111 basis points and the interest margin increased 118 basis points from the comparable 2001 period. The majority of this increase was found in the deposit portfolio that grew $322.6 million and posted a decrease in cost of 241 basis points.

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AVERAGE YIELDS EARNED AND RATES PAID

Table 1 and Table 2 presents 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.

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