Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Mark One

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

For the year ended December 31, 2003

Commission File No.: 0-22353

FLAGSTAR BANCORP, INC.

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

Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $0.01 per share

Securities registered pursuant to Section 12(g) of the Act: None

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 90 days. Yes x     No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K.  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes x     No o

The registrant’s voting stock is traded on the New York Stock Exchange. The estimated aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the last sale price ($25.85 per share) at which the stock was sold on March 1, 2004 was approximately $784.9 million. For purposes of this calculation, the term “affiliate” refers to all executive officers and directors of the registrant and all members of the original stockholder group that collectively own approximately 50.0% of the registrant’s outstanding Common Stock.

As of March 1, 2004, 60,730,466 shares of the registrant’s Common Stock, $0.01 par value, were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

          The following lists the documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated:

Table of Contents

TABLE OF CONTENTS

This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company including statements preceded by, followed by or that include the words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions, which are intended to identify “forward looking statement” within the meaning of the Private Securities Litigation Reform Act of 1995.

There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) competitive pressures among depository institutions increase significantly; (2) changes in the interest rate environment reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions; (4) general economic conditions, either national or in the states in which the Company does business, are less favorable than expected; (5) political

2

Table of Contents

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.

3

Table of Contents

GENERAL

Flagstar Bancorp (“Flagstar” or the “Company”) is a Michigan-based thrift holding company founded in 1993. Our stock is traded on the New York Stock Exchange under the symbol “FBC”. Our primary subsidiary is Flagstar Bank, fsb (the “Bank”) a federally-chartered stock savings bank.

We report our financial condition and net earnings on a consolidated basis but report segmented operating results for both our banking group and our home lending group. Each operation is linked to one another in many aspects of their respective businesses but are indeed separate. 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”). Our deposits are insured by the FDIC through the Savings Association Insurance Fund (“SAIF”).

Our banking group (“BG”) collects deposits from the general public and local government agencies at 99 banking centers located throughout southern Michigan and Indiana. We also collect certificates of deposits through secondary market offerings and solicit business through our internet branch located at www.flagstar.com. We also acquire advances from the Federal Home Loan Bank of Indianapolis. We invest these funds in a variety of consumer and commercial loan products offered to the general public.

Our primary investment vehicle is single-family mortgage loans originated or acquired by our home lending group (“HLG”).

The HLG acquires single-family mortgage loans on a wholesale basis nationally. We also originate single-family loans on a consumer direct basis from 128 home loan centers in 25 states. We also originate mortgage loans from our 99 banking centers located in Michigan and Indiana. Our wholesale division operates from 14 regional lending offices across the country. In order to originate or acquire these loans, the HLG utilizes funds provided by the BG. We sell the majority of the loans we produce in the secondary market on a whole loan basis or by securitizing the loans into a mortgage-backed security. Mortgage-backed securities are issued through the Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”), and the Government National Mortgage Association (“GNMA”). We sell primarily conforming originations on a servicing-retained basis. We service a large portfolio of mortgage loans for others, $30.4 billion at December 31, 2003. The HLG collects and holds in escrow payments for principal and interest, hazard and mortgage insurance, and various property taxes. The HLG then distributes these funds to the appropriate third party on a contractual basis. We later sell a significant portion of these mortgage servicing rights in separate secondary market transactions.

Our executive offices are located at 5151 Corporate Drive, Troy, Michigan 48098, and our telephone number is (248) 312-2000.

CORPORATE STRATEGIES AND OBJECTIVES

Historical Perspective

4

Table of Contents

of Jackson, Michigan. Since that acquisition, we have been focused on growing our banking operation. The revenue stream created by a banking operation was sought to counter the cyclical operating results of our home lending operation.

Although our core operations are categorized as two distinct operations, they are complementary business lines. The home lending operation originates assets for our banking operation and our banking operation provides funding for our home lending operation. The loans originated in our local market areas provide cross-selling opportunities for our banking products.

At December 31, 2003 our total assets are $10.6 billion and we operate 99 banking centers. During 2003, our BG contributed over 25% of pre-tax operating earnings. Over the past 5 years, we have grown our total assets an average of 29% per year, our deposits an average of 25% per year, and our home loan and banking centers an average of 31% per year. Our goal over the next five years is to double the number of our banking and home loan centers and to continue to increase our market share within the markets we serve.

Toward this goal, during 2004, we will expand the banking center network by 25 new banking centers and we project the number of new home loan centers will expand by 64. This large expansion will allow us to continue to grow our deposit base and our loan originations. We also anticipate growing our asset base approximately 35%.

Capital Strategy

Since our initial public offering in 1997, we have not issued any new common equity. We have successfully completed five debt capital offerings. We have also initiated three stock splits completed in the form of stock dividends and have increased the cash dividend on our common stock eight times.

During 2003, we completed the placement of two $25.0 million private debt offerings. The proceeds from these offerings were used to retire the preferred stock of our subsidiary, Flagstar Capital, a debt capital offering completed in 1998. In April 2004, the Company intends to redeem its 9.50% preferred securities that were issued by Flagstar Trust in 1999. We do not foresee any need at this time to re-enter the capital markets for any equity capital offerings.

Business Strategy

BANKING OPERATIONS

Through our BG, we offer a comprehensive line of consumer and commercial financial products and services to individuals and small and middle market businesses. We provide service to approximately 197,000 households through our 99 banking centers (both free-standing and in-store) and 145 automated teller machines located in Michigan and Indiana. We also offer our customers the convenience of 24-hour telephone and internet banking services. Our banking centers are open in most locations from 7:30 a.m. to 7:30 p.m.,

5

Table of Contents

BANKING OPERATIONS (continued)

Monday through Friday, with 8:30 a.m. to 4:00 p.m. hours on Saturday and Sunday hours in all our Wal-Mart locations.

Our strategy is to expand our base of consumer and commercial relationships by combining a high level of customer service with our broad-based product line. We will continue to open de novo banking centers in areas that meet our demographic model. As has been the approach on all of our other banking center openings, we will lead with price. Upon community acceptance of the location and the Flagstar brand, we will then promote to establish checking and savings accounts.

We offer various consumer and commercial deposit products, as well as a variety of value-added, fee-based banking services. Our deposit product offerings include various checking, savings, and time deposit accounts. Fee-based services include, but are not limited to:

	•	payment choices, including debit card, pay-by-phone, online banking, money orders, bank checks, and traveler’s checks,
	•	a membership program featuring free checks, a variety of product discounts, shopping and travel services, and credit card protection service, and
	•	safety deposit box rentals.

One of our primary focuses in 2003 was the opening of 12 new banking centers. The focus for 2004 will remain unchanged with 25 banking centers expected to open. The majority of these new openings will be in free-standing banking centers located in metropolitan Detroit and Indianapolis.

At December 31, 2003, the Company operated 35 banking centers under its in-store program. Thirty-two of these banking centers are located in Wal-Mart superstores. In June 2000, the Company entered into an agreement with Wal-Mart, that permits us to provide banking services within new or refurbished Wal-Mart superstore locations in Michigan and Indiana. The in-store banking centers welcome customers with an open, free-flowing retail environment. The customer can interact with roaming customer service representatives or become engaged by high-tech, self-help, touch screens in the cashless e-banking center. Fourteen of the in-store banking centers are located in Indiana and 21 are located in Michigan. The Company expects to open two more Wal-Mart facilities in 2004.

Forty-seven of the Company’s banking centers were opened within the past three years. Seven of the banking centers in Indiana were opened under the Wal-Mart in-store program during the past three years. The Wal-Mart banking centers had an average deposit portfolio of $16.3 million compared with the remainder of the banking centers which had average deposits of $48.5 million. Of the 99 banking centers, 17 banking centers had deposits of less than $10.0 million. Banking centers opened in 2000, 2001, 2002, and 2003 had average balances of $43.8 million, $22.7 million, $17.7 million, and $9.8 million, respectively. Banking centers opened under the in-store program opened in 2000, 2001, 2002, and 2003 had average balances of $20.0 million, $16.6 million, $10.1 million, and $8.0 million, respectively.

Each of the in-store banking centers offer the same products and services to our customers as are available at our free-standing banking centers without any significant difference in operating costs. By relying upon

6

Table of Contents

BANKING OPERATIONS (continued)

in-store banking centers to expand our banking center network, we avoid the significant building costs of free-standing banking centers while obtaining marketing exposure in a high customer traffic area. The customers using our in-store banking centers are substantially the same as the customers using our free-standing banking centers.

One of the BG’s primary business objectives is to expand its lending activities, as they generally offer higher returns than our home lending group. The size of our loan portfolio has grown in recent years, partly due to the concentration placed on this objective by the Company.

The following consumer loan products are available through our banking centers:

	•	second mortgage loans, both for purposes unrelated to the property securing the loan and for renovation or remodeling. The loans are originated as a fixed, amortizing loan or a line of credit;
	•	loans for automobiles, marine and recreational vehicles;
	•	student loans;
	•	loans secured by deposit accounts; and
	•	secured and unsecured loans made under our personal line of credit or term loan programs.

At December 31, 2003, Flagstar’s consumer loan portfolio contained $141.0 million of second mortgage loans, $245.8 million of equity line loans, and $13.9 million of various other consumer loans such as personal lines of credit, and automobile loans. Consumer loans, including second mortgage loans, comprise 5.9% of the Company’s investment loan portfolio at December 31, 2003. Flagstar’s underwriting standards for a consumer loan include an analysis of the applicant’s payment history on other indebtedness and an assessment of the applicant’s ability to meet existing obligations as well as payments on the proposed loan. During 2003, the Company originated a total of $392.2 million in consumer loans versus the $586.8 million originated in 2002.

We also offer a full line of commercial loan products and banking services especially developed for our commercial customers through our banking centers and main office location. We concentrate on developing and maintaining strong client relationships with small and mid-sized companies. Our core commercial customers are companies with $5 million to $100 million in total sales. We offer the following commercial loan products:

	–	business lines of credit, including warehouse lines of credit to other mortgage lenders,
	–	working capital loans,
	–	equipment loans, and
	–	loans secured by real estate.

Commercial loans are made on a secured or unsecured basis. Collateral for secured commercial loans may be business assets, real estate, personal assets, or some combination thereof. Our decision to make a commercial loan is based on an evaluation of the borrower’s financial capacity, including such factors as income, other

7

Table of Contents

BANKING OPERATIONS (continued)

indebtedness, credit history, company performance, and collateral. All loans on income-producing properties are evaluated by a qualified, certified appraiser to ensure that the appraised value of the property to be mortgaged or the enterprise value of the borrower satisfies the Company’s loan-to-value ratio requirements of no higher than 90%. The Company also generally requires a minimum debt-service ratio of 1.2 to 1. In addition, the Company considers the experience of the prospective borrower with similar properties, the creditworthiness and managerial ability of the borrower, the enforceability and collectibility of any relevant guarantees and the quality of the asset to be mortgaged. The Company officer processing the loan also generally performs various feasibility and income absorption studies in connection with the loan.

We also offer warehouse lines of credit to other mortgage lenders. These lines allow the lender to fund the closing of a mortgage loan that most often is acquired by the Company. Each extension or drawdown on the line is collateralized by a mortgage loan. These lines of credit are personally guaranteed by a qualified principal officer of the borrower. It is not a requirement that the loan collateralizing the borrowing be sold to Flagstar or that the borrower have a correspondent relationship with the Company.

The aggregate amount of warehouse lines of credit granted to other mortgage lenders was $2.0 billion of which $346.8 million was outstanding at December 31, 2003. At December 31, 2002 $1.1 billion in lines had been granted, of which $558.8 million was outstanding. At December 31, 2003, our commercial real estate loan portfolio totaled $548.4 million, or 8.0% of our investment loan portfolio. At December 31, 2003, our non-real estate commercial loan portfolio was $7.9 million, or 0.1% of our investment loan portfolio. During 2003, we originated $239.5 million commercial loans versus $190.5 million in 2002.

HOME LENDING OPERATIONS

Our HLG conducts its operations from our 99 banking centers and 128 home loan centers located in 25 states. Our largest concentration of offices is in southern Michigan, where we have 82 banking centers and 81 home loan centers. We also maintain 14 wholesale offices that conduct business with correspondent mortgage lenders nationwide. During 2003, we were one of the country’s top 20 largest mortgage loan originators.

The origination or acquisition of residential mortgage loans constitutes our most significant lending activity. We originated or acquired $56.4 billion, $43.2 billion, and $33.0 billion of mortgage loans during the years ended December 31, 2003, 2002, and 2001, respectively. Each loan originated or acquired is for the purpose of acquiring or refinancing a one to four family residence and is secured by a first mortgage on the property. We offer traditional fixed-rate and adjustable-rate mortgage loans with terms ranging from one year to 30 years. The majority of our products conform to the respective underwriting guidelines established by FNMA, FHLMC, and GNMA. We also offer other residential mortgage loans that meet agency underwriting guidelines, but have other terms and conditions customized to meet the needs of the borrower.

As a part of our overall mortgage banking strategy, we securitize the majority of our mortgage loans through FNMA, FHLMC, or GNMA. We generally securitize our longer-term, fixed-rate loans while we invest in the shorter duration and adjustable rate product we originate. Securitization is the process by which mortgage loans we own are exchanged for mortgage-backed securities that are guaranteed by FNMA, FHLMC, or GNMA. These mortgage-backed securities are then sold to a secondary market investor. The

8

Table of Contents

Business Strategy (continued)

HOME LENDING OPERATIONS (continued)

servicing related to the sold loans is generally retained and later sold to other secondary market investors. We, for the most part, do not sell the servicing rights to loans originated within our retail market area. For further information see Notes 3, 4, 6, 7, and 12 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, herein.

Our written underwriting guidelines for mortgage loans employ a system of internal controls designed to maintain the quality of the mortgage loan portfolio. All mortgage loans are reviewed by an underwriter at our national headquarters or at one of our wholesale lending centers. We also contract underwriters employed by mortgage insurance companies to underwrite loans. Additionally, certain correspondents have delegated underwriting authority. Any loan not underwritten by a Flagstar employed underwriter is warranted by the individual underwriter’s employer whether it be a mortgage company or a mortgage insurance company.

To further protect us from loss, we generally require that any loan with a loan-to-value ratio in excess of 80% must carry mortgage insurance. A loan-to-value ratio is the percentage that the original principal amount of a loan bears to the appraised value of the mortgaged property. In the case of a purchase money mortgage, the lower of the appraised value of the property or the purchase price of the property securing the loan is used. We require a lower loan-to-value ratio, and thus a higher down payment, for non-owner-occupied loans. In addition, all home mortgage loans originated are subject to requirements for title, fire, and hazard insurance. Real estate taxes are generally collected and held in escrow for disbursement. We are also protected against fire or casualty loss on home mortgage loans by a blanket mortgage impairment insurance policy that insures us when the mortgagor’s insurance is inadequate.

We utilize three production channels to acquire mortgage loans. Each production channel produces a similar loan product and each loan acquired is underwritten by us or a contracted representative using the same underwriting standards.

     Wholesale

     Correspondent

9

Table of Contents

HOME LENDING OPERATIONS (continued)

versus the $14.2 billion originated in 2002 and $11.8 billion originated in 2001. During 2003, 83.9% of loan originations in this category were for the refinance of an existing mortgage loan.

     Consumer Direct

During 2003, we opened 36 new offices under our “My Net Branch” concept. In this process, the loan officer functions much like our wholesale channel. The loan officer operates his or her own office on a stand-alone basis. The office is responsible for all costs related to the individual office but in turn receives all fees collected in the origination process. We provide the office staff with accounting, legal, data processing, underwriting, and payroll services for a nominal fee in exchange for the delivery of the closed loan. The office staff is allowed to broker away a small portion of its originations when we do not provide the needed loan program to complete the transaction. During 2003, less than 5.3% of retail originations were not delivered into Flagstar loan products.

During 2003, we closed $6.1 billion utilizing this origination channel versus the $4.1 billion originated in 2002 and $3.0 billion originated in 2001. During 2003, 75.2% of loan originations in this category were for the refinance of an existing mortgage loan.

LOANS BY TYPE

The following table sets forth the Company’s investment loan portfolio at December 31, 2003, categorized as having fixed interest rates or adjustable interest rates.

10

Table of Contents

LOAN REPAYMENT SCHEDULE

The following table sets forth the scheduled principal payments of Flagstar’s loan portfolio at December 31, 2003, assuming that principal repayments are made in accordance with the contractual terms of the loans.

          HOME LENDING AND THE INTERNET

We have always been a strong advocate of the Internet and its use within the mortgage origination process. During 2003, our customers were able to register loans, lock the interest rates on loans, check their in-process inventory, production statistics, and underwriting status through the Internet. During 2003, approximately 90% of all mortgage loans closed utilized the Internet as a communication tool and delivery system. During 2004, we will continue to utilize our research and development budget to streamline the mortgage origination process and bring service and convenience to our customers.

          CONSTRUCTION LENDING

We also engage in construction lending involving loans to individuals for construction of one-to-four family residential housing. These properties are primarily located in southern Michigan markets. These construction loans usually convert to permanent financing upon completion of construction. At December 31, 2003, our portfolio of loans held for investment included $58.3 million of loans secured by properties under construction, or 0.9% of total loans held for investment. All construction loans are secured by a first lien on the property under construction. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. Construction/permanent loans may have adjustable or fixed interest rates and are underwritten in accordance with the same terms and requirements as permanent mortgages, except during a construction period of up to nine months, the borrower is required to make interest-only monthly payments. Monthly payments of principal and interest commence one month from the date the loan is converted to permanent financing. Borrowers must satisfy all credit requirements that would apply to permanent mortgage loan financing prior to receiving construction financing for the subject property. During 2003, the Company originated a total of $99.8 million in construction loans versus the $73.8 million originated in 2002 and $70.0 million originated in 2001.

11

Table of Contents

ASSET QUALITY

We have implemented comprehensive internal asset review systems to provide for early detection of problem assets. Our asset classifications and the adequacy of our allowances for losses are analyzed quarterly based on, among other things, historical loss experience and current economic conditions. 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 the loans that could cause a potential loss. Refer to the four schedules included hereafter (Pages 36 through 38), which set forth certain information about our non-performing assets. At December 31, 2003, we had no other loans outstanding where known information about possible credit problems of borrowers caused management concern regarding the ability of the same borrowers to comply with the loan repayment terms.

Repurchased Assets. Although all of the loans we sell to the secondary market are done so on a non-recourse basis, we repurchased $46.3 million, $34.3 million, and $47.0 million in mortgage loans from secondary market investors during 2003, 2002, and 2001, respectively. Generally, for loans sold to the secondary market, we are responsible for certain representations and warranties regarding the adherence to underwriting and loan program guidelines. At December 31, 2003, we had sold $144.1 billion in loans to the secondary market over the previous 60 months. This volume of loan sales is $34.1 billion, or 31.0%, larger than the $110.0 billion sold in the 60 months preceding December 31, 2002. A repurchase is required because of a loan’s delinquent status or its non-compliance with the underwriting or loan program guidelines that it was initially sold under. Losses attributable to these repurchased loans were $12.0 million, $6.8 million, and $4.0 million in 2003, 2002, and 2001, respectively. All of these loans were sold within the prior sixty-month period, repurchased from secondary market investors, foreclosed on, and disposed of at a loss.

The following schedule provides the amount of non-performing loans repurchased attributable to the year of origination:

Repurchased Assets

At December 31, 2003 and 2002, the Company had $12.0 million and $10.4 million, respectively, of repurchased assets awaiting foreclosure.

Delinquent Loans. Residential property loans are considered to be delinquent when any payment of principal or interest is past due. While it is the goal of management to work out a satisfactory repayment schedule with

12

Table of Contents

a delinquent borrower, we will undertake foreclosure proceedings if the delinquency is not satisfactorily resolved. Our procedures regarding delinquent loans are designed to assist borrowers in meeting their contractual obligations. We customarily mail notices of past due payments to the borrower approximately 15, 30 and 45 days after the due date, and late charges are assessed in accordance with certain parameters. Our collection department makes telephone or personal contact with borrowers after a 30-day delinquency. In certain cases, we recommend that the borrower seeks credit counseling assistance and may grant forbearance if it is determined that the borrower is likely to correct a loan delinquency within a reasonable period of time. We cease the accrual of interest on loans that are more than 90 days delinquent. Such interest is recognized as income when collected. At December 31, 2003, we had $105.5 million in loans that were determined to be delinquent and $58.3 million which were determined to be non-performing and for which interest accruals had ceased. Of this $58.3 million, $55.2 million, or 94.7%, pertained to single-family mortgage loans. The following table displays delinquent loans as of December 31, (in thousands):

Repossessed Assets. Real property that we acquire as a result of foreclosure proceedings is classified as “real estate owned” until it is sold. Our Foreclosure Committee decides whether to rehabilitate the property or sell it “as is,” and whether to list the property with a broker, sell the property directly to a third party, or sell it at auction. Generally, we are able to dispose of a substantial portion of this type of real estate and other repossessed assets during each year, but we invariably acquire additional real estate and other assets through repossession in the ordinary course of business. At December 31, 2003, we had $36.8 million of repossessed assets.

Allowance for Loan Losses. The Company maintains an allowance against future losses inherent in the current investment loan portfolio. That loss allowance stands at $36.0 million at December 31, 2003. The allowance for loan losses at December 31, 2003 was recorded at a level based upon management’s assessment of relevant factors, including the types and amounts of non-performing loans, the amount of historical charge offs and anticipated loss experience on such types of loans, and the current and near-term projected economic conditions. There is no assurance that the Company will not, in any particular period, sustain loan losses that exceed the allowance, or that subsequent evaluation of the loan portfolio, in light of the factors then-prevailing, including economic conditions, the credit quality of the assets comprising the portfolio, will not require increases in the allowance for loan losses.

Secondary Marketing Reserve. The Company maintains a reserve against future losses created by the repurchase of mortgage loans previously sold to the secondary market. That loss reserve totals $10.2 million at December 31, 2003. The reserve is recorded at a level based upon management’s analysis of the potential for repurchase of loans sold during the prior sixty-month period. There is no assurance that the Company will not, in any particular period, sustain loan losses that exceed the reserve, or that subsequent evaluation, in light of the factors then-prevailing, will not require increases to the reserve.

13

Table of Contents

SOURCES OF FUNDS

We have deposits of $5.7 billion at December 31, 2003. These deposits represent the principal funding source for our lending and investing activities. We also derive funds from operations, loan principal payments, loan sales, advances from the FHLB, money held in escrow, and the capital markets.

DEPOSIT ACTIVITIES. We have developed a variety of deposit products ranging in maturity from demand-type accounts to certificates with maturities of up to 10 years, and savings accounts and money market accounts. We primarily rely upon our network of banking centers, their strategic location, the quality and efficiency of our customer service, and our pricing policies to attract deposits.

The following table sets forth information relating to the Company’s total deposit flows for each of the years indicated:

BORROWINGS. The FHLB provides credit for savings institutions and other member financial institutions. We are currently authorized through a board resolution to apply for advances from the FHLB using our mortgage loans as collateral. The FHLB generally permits advances up to 50% of a company’s “adjusted assets”, which are defined as assets reduced by outstanding advances. At December 31, 2003, our advances from the FHLB totaled $3.2 billion, or 44.3% of adjusted assets.

LOAN PRINCIPAL PAYMENTS. In our capacity as an investor in loans, we derive funds from the repayment of principal on the loans we hold in portfolio. Payments totaled $4.6 billion during 2003, an increase of $1.9 billion, or 70.4%, when compared with the $2.7 billion received in 2002. This large amount of principal repayments was attributable to the continued low interest rate environment for the past two years.

LOAN SALES. As part of our home lending operation, we originate loans and then sell those loans to other investors. Sales of mortgage loans totaled $51.9 billion, or 92.1% of originations in 2003, compared to $40.5 billion, or 93.8% of originations, in 2002. The sales recorded during 2003 were higher than in 2002 because of the higher origination volume in 2003.

MONEY HELD IN ESCROW. As a servicer of mortgage loans, we hold funds in escrow for investors, various insurance entities, or for the government taxing authorities. Amounts held in escrow decreased from $743.4 million at December 31, 2002, to $653.7 million at December 31, 2003. Although funds held in escrow decreased, the amount of total residential mortgage loans we serviced increased from $35.4 billion at December 31, 2002, to $42.0 billion at December 31, 2003. This decrease is the result of timing differences of when funds are transferred to the various investors, insurance entities, and the government taxing authorities.

CAPITAL MARKETS. Through December 31, 2003, we have completed three public offerings and three private debt offerings. These offerings provided funds that increased the regulatory capital of the Bank.

14

Table of Contents

SUBSIDIARY ACTIVITIES

We conduct business through a number of wholly-owned subsidiaries in addition to the Bank. Our additional subsidiaries include Douglas Insurance Agency, Inc. (“DIA”), Flagstar Commercial Corporation (“FCC”), Flagstar Credit Corporation (“Credit”), Flagstar Trust (“Trust”), Flagstar Title Insurance Agency, Inc. (“Title”), Flagstar Statutory Trust II (“Trust II”), Flagstar Statutory Trust III (“Trust III”), Flagstar Statutory Trust IV (“Trust IV”) and Flagstar Investment Group, Inc. (“Investment”). DIA acts as an agent for life insurance and property and casualty insurance companies. Credit participates in mortgage reinsurance agreements with various private mortgage insurance companies. FCC and Investment are inactive. Trust II is a Connecticut statutory trust that issued $25 million of trust preferred securities in a privately placed transaction completed in December 2002. Trust III and Trust IV are Delaware statutory trusts that each issued $25 million of trust preferred securities in privately placed transactions in February 2003 and March 2003, respectively. Title is a real estate title insurance agency that operates primarily in the state of Michigan.

Trust is a Delaware trust whose common stock is owned solely by the Company and in 1999 sold 2.99 million shares of trust preferred securities to the general public in an initial public offering. On January 21, 2004, we notified the public in a press release that we would redeem all of the preferred securities on April 30, 2004.

The Bank, our primary subsidiary, is a federally chartered, stock savings bank headquartered in Troy, Michigan. The Bank owns four subsidiaries: FSSB Mortgage Corporation (“Mortgage”), Flagstar Intermediate Holding Company (“Holding”), Mid-Michigan Service Corporation (“Mid-Michigan”), and SSB Funding Corporation (“Funding”). Mortgage, Mid-Michigan, and Funding are currently inactive subsidiaries. Holding is the parent of Flagstar LLC (“LLC”).

Flagstar Capital was a subsidiary of Holding and had issued publicly-owned preferred stock (NYSE: FBC-P) and was a real estate investment trust whose common stock was owned solely by Holding. On June 30, 2003, we redeemed all of the preferred stock and Flagstar Capital was dissolved shortly thereafter.

LEGISLATIVE, LEGAL AND REGULATORY DEVELOPMENTS

The thrift industry is generally subject to extensive regulatory oversight. The Company, as a publicly held savings and loan holding company, and the Bank, as a federally chartered stock savings bank with deposits insured by the FDIC, are subject to a number of laws and regulations. Many of these laws and regulations have undergone significant change in recent years. These laws and regulations impose restrictions on activities, minimum capital requirements, lending and deposit restrictions and numerous other requirements. Future changes to these laws and regulations, and other new financial services laws and regulations, are likely and cannot be predicted with certainty. Future legislative or regulatory change, or changes in enforcement practices or court rulings, may have a dramatic and potentially adverse impact on the Company, the Bank, and the other subsidiaries.

Sarbanes-Oxley Act. On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 (the “S-O Act”) implementing legislative reforms intended to address corporate and accounting fraud. In addition to the establishment of a new accounting oversight board which will enforce auditing, quality control and independence standards, and will be funded by fees from all publicly traded companies, the law restricts provision of both auditing and consulting services by accounting firms. To ensure auditor independence,

15

Table of Contents

certain permitted non-audit services being provided to an audit client will require preapproval by a company’s audit committee members. In addition, the audit partners must be rotated. Chief executive officers and chief financial officers, or their equivalent, are required to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement. In addition, under the S-O Act, counsel will be required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself. Longer prison terms and increased penalties will be applied to corporate executives who violate federal securities laws, the period during which certain types of suits can be brought against a company or its officers has been extended, and bonuses issued to top executives prior to restatement of a company’s financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan “blackout” periods, and loans to company executives are restricted.

The S-O Act also increases the oversight of, and codifies certain requirements relating to audit committees of public companies and how they interact with a company’s “registered public accounting firm.” Audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer. In addition, companies must disclose whether at least one member of the committee is an “audit committee financial expert” and if not, why not. Under the S-O Act, a “registered public accounting firm” is prohibited from performing statutorily mandated audit services for a company if such company’s chief executive officer, chief financial officer, comptroller, chief accounting officer, or any person serving in equivalent positions has been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date. The S-O Act also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the audit of a company’s financial statements for the purpose of rendering the financial statement’s materially misleading.

The board is determined to continue a corporate governance structure that meets or exceeds the requirements of the Sarbanes-Oxley Act.

NYSE. Also during 2003, the New York Stock Exchange (the “NYSE”) adopted numerous corporate governance rules intended to address a heightened public perception of shortcomings in corporate accountability among public companies generally. These rules, affect the Company because its common stock is listed on the NYSE under the symbol “FBC.” These rules include ensuring that a majority of a board of directors are independent of management, establishing and publishing a code of conduct for directors and officers and requiring stockholder approval of all new stock option plans and all modifications. The Company will need to be in compliance with these new rules as of the date of its 2004 annual meeting of shareholders.

USA Patriot Act. The President of the United States signed the USA PATRIOT Act into law on October 26, 2002. The USA PATRIOT Act establishes a wide variety of new and enhanced ways of combating international terrorism. The provisions that affect national banks (and other financial institutions) most directly are contained in Title III of the act. In general, Title III amends current law — primarily the Bank Secrecy Act — to provide the Secretary of Treasury (“Treasury”) and other departments and agencies

16

Table of Contents

of the federal government with enhanced authority to identify, deter, and punish international money laundering and other crimes.

Among other things, the USA PATRIOT Act prohibits financial institutions from doing business with foreign “shell” banks and requires increased due diligence for private banking transactions and correspondent accounts for foreign banks. In addition, financial institutions will have to follow new minimum verification of identity standards for all new accounts and will be permitted to share information with law enforcement authorities under circumstances that were not previously permitted. These and other provisions of the USA PATRIOT Act became effective at varying times and the Treasury and various federal banking agencies are responsible for issuing regulations to implement the new law.”

COMPETITION

Based on total assets at December 31, 2003, we are the largest savings institution headquartered in Michigan. We face substantial competition in attracting deposits at our banking centers. Our most direct competition for deposits has historically come from other savings institutions, commercial banks and credit unions. Money market funds and full-service securities brokerage firms also provide competition in this area. The primary factors in competing for deposits are the rates offered, the quality of service, the hours of service, and the location of banking centers.

Our competition for lending products comes principally from other savings institutions, commercial banks, mortgage companies, and other lenders. The primary factors in competing are the rates and fees charged, the efficiency and speed of the service provided, and the quality of the services provided.

PERSONNEL

At December 31, 2003, we had 3,512 full-time equivalent employees. The employees are not represented by a collective bargaining unit. We provide our employees with a comprehensive program of benefits, some of which are on a contributory basis, including comprehensive medical and dental plans, life insurance, disability insurance, a deferred compensation plan, and a 401K savings and investment plan. We consider our employee relations to be excellent.

17

Table of Contents

EXECUTIVE OFFICERS

Thomas J. Hammond has served as Chairman of the Board of the Company since its formation in 1993 and the Bank since its formation in 1987. On January 1, 2002, Mr. Hammond stepped down from his position as Chief Executive Officer. Mr. Hammond is the founder of the Bank.

Mark T. Hammond has served as President of the Company since 1997 and of the Bank since 1995. He has been employed by the Bank since 1987. On January 1, 2002, Mr. Hammond assumed the position of Chief Executive Officer. Mr. Hammond is the son of Thomas J. Hammond, the Chairman of the Board.

Michael W. Carrie has served as an Executive Director of the Company and the Bank since 2003, an Executive Vice President of the Company and the Bank since 1995, Chief Financial Officer of the Company and the Bank since 1993, and Treasurer of the Company since 1993 and the Bank since 2002.

Kirstin Hammond has served as an Executive Director of the Company and the Bank since 2003, an Executive Vice President of the Bank since 1999 and of the Company since 2002 and has been employed by the Bank since 1991. Mrs. Hammond is the wife of Mark T. Hammond, the President and Chief Executive Officer, and the daughter-in-law of Thomas J. Hammond, the Chairman of the Board.

Robert O. Rondeau, Jr. has served as an Executive Director of the Company and the Bank since 2003, an Executive Vice President of the Bank since 1999 and of the Company since 2002 and as an employee of the Bank since 1996. Mr. Rondeau is the son-in-law of Thomas J. Hammond, the Chairman of the Board.

Additional information

We will make available our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act free of charge through our internet website at http://www.flagstar.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

Copies of our (i) Corporate Governance Guidelines, (ii) charters for the Audit Committee, Compensation Committee, and Nominating/ Corporate Governance Committee and (iii) Code of Business Conduct and Ethics are available at www.flagstar.com. Copies will also be provided to any stockholder upon written request to Flagstar Bancorp, Inc., Investor Relations, 5151 Corporate Drive, Troy, MI 48098. None of the information posted on our website is incorporated by reference into this Form 10K. The Company will have this information available by the date of its 2004 annual meeting of shareholders.

18

Table of Contents

We operate from 99 banking centers and 128 home lending centers in 25 states. We also maintain 14 wholesale lending offices. We own the buildings and land for 32 of our offices, own the building but lease the land for one of our offices, and lease the remaining 208 offices. The buildings with leases have lease expiration dates ranging from 2004 to 2017. At December 31, 2003, the total net book value of all of our offices and land was approximately $104.7 million.

Our national headquarters facility and executive offices are located in Troy, Michigan. Substantially all of the operational support departments related to the home lending operation are housed in this facility. The majority of the staff that supports the banking operation is housed at our owned facility in Jackson, Michigan.

We utilize a highly sophisticated server-based data processing system. At December 31, 2003, the net book value of our computer related equipment (including both hardware and software) was approximately $65.5 million.

From time to time, we are parties to various legal proceedings incident to our business. At December 31, 2003, there were no legal proceedings that we anticipate would have a material adverse effect on the Company. See Note 18 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.

No items were submitted during the fourth quarter of the year covered by this report for inclusion to be voted on by security holders through a solicitation of proxies or otherwise.

19

Table of Contents

COMMON STOCK

Our common stock began trading on the New York Stock Exchange in July 2001. The trading symbol is FBC. Prior to July 2001, the common stock traded on the Nasdaq Stock Market under the symbol: FLGS. At March 1, 2004, there were 60,730,466 shares of our common stock outstanding.

QUARTERLY STOCK PRICE/ DIVIDEND INFORMATION

The following table summarizes the Company’s common stock price and dividend activity for:

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth certain information with respect to securities to be issued under the Company’s equity compensation plans as of December 31, 2003 that have been approved by stockholders.

Information regarding security ownership of certain beneficial owners and management appearing under “Stock Options” in the 2004 Proxy Statement is incorporated herein by reference.

20

Table of Contents

SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA

Note —	All per share data has been restated for the 2 for 1 stock split on May 15, 2003 and for the 3 for 2 stock splits completed on May 31, 2002 and July 13, 2001.

21

Table of Contents

PROFILE AND INTRODUCTION

Flagstar Bancorp (“Flagstar” or the “Company”) is a Michigan-based thrift holding company founded in 1993. Our stock is traded on the New York Stock Exchange under the symbol “FBC”. Our primary subsidiary is Flagstar Bank, fsb (the “Bank”) a federally chartered stock savings bank.

We report our financial condition and net earnings on a consolidated basis but report segmented operating results for both our banking group and our home lending group. Each operation is linked to one another in many aspects of their respective businesses but is indeed separate.

Our banking group (“BG”) collects deposits from the general public and local government agencies at 99 banking centers located throughout southern Michigan and Indiana. We also collect certificates of deposit through secondary market offerings and solicit business through our Internet branch located at www.flagstar.com. We also acquire advances from the Federal Home Loan Bank of Indianapolis. We invest these funds in a variety of consumer and commercial loan products offered to the general public.

Our primary investment vehicle is single-family mortgage loans originated or acquired by our Home Lending Group (“HLG”).

The HLG acquires single-family mortgage loans on a wholesale basis nationally. We also originate single-family loans on a retail basis from 128 offices in 25 states. We also have mortgage loan personnel in 22 banking centers located in Michigan. Our wholesale division operates from 14 regional offices across the country. In order to originate or acquire these loans, the HLG utilizes funds provided by the BG. We sell the majority of the loans we produce in the secondary market on a whole loan basis or by securitizing the loans into mortgage-backed securities. Mortgage-backed securities are issued through FNMA, FHLMC, and GNMA. We sell primarily conforming originations on a servicing-retained basis and generally sell the mortgage servicing rights in a separate secondary market transaction.

We began our corporate existence as a bank in 1987 with a $3.0 million balance sheet and one banking center. Our roots come from our core operation that was once a mid-sized regional mortgage banking company. In mid-1994, we acquired Security Savings Bank, an eight branch savings bank headquartered in Jackson, Michigan. Since that acquisition, we have been focused on growing our banking operation. The revenue stream created by a banking operation was sought to counter the cyclical operating results of our home lending operation.

Today, our assets total $10.6 billion. During 2003, our BG contributed 25% of net earnings and provided an approximate return on allocated equity of 21.22%. This achievement was overshadowed by the 75% contribution by the mortgage group. The HLG returned 73.01% return on allocated equity. The overall return by the Company equaled a 47.6% return on average equity and a 2.52% return on average assets. During 2003, the Company increased its asset base 29%, its deposit portfolio by 30%, its banking center locations by 13%, its home loan centers 39%, and its total equity position by 56%. Our goal over the next five years is to double the number of our banking centers and home lending centers and to continue to increase our market share within the markets we serve.

22

Table of Contents

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

PROFILE AND INTRODUCTION (continued)

Toward this goal, during 2004, we expect to expand the banking center network by adding 25 new banking centers and we project the amount of new home loan centers will expand by 64. This large expansion will allow us to continue to grow our deposit base and our loan originations.

Our ability to sustain this rate of growth on a long-term basis is dependent upon a number of factors, some of which are beyond our control. For instance, our record growth in earnings in 2002 and 2003 was due to a significant increase in our loan sale activity. These loan sales were the result of the unusually low mortgage rate environment in the United States during the period. Any sudden or prolonged increase in these rates will reduce our income from these sales. Primarily because of interest rate movements, for instance, our loan sale income fluctuated, from $17.2 million in 2000 to $191.7 million in 2001, $192.6 million in 2002, and $357.3 million in 2003. In turn, our return on equity was affected, improving from 15.47% in 2000 to 34.98% in 2001, increasing again to 37.14% in 2002 and increasing again to 47.58% in 2003.

Further, our operating and administrative expenses increased in 2002 and 2003 to support the increase in loan sale activity. While this has allowed us to develop and maintain an efficient wholesale loan operation intended to handle a large volume of loans, our ability to increase operational efficiency will become limited over time. Our efficiency ratio (the percentage of each dollar of revenue that is paid in expenses) was 66.4% in 2000, improving to 51.6% in 2001 and then worsening to 52.8% in 2002. It has since improved to 37.7% for the year ended December 31, 2003. If the volume of loans declines and we do not correspondingly reduce our operating and administrative expenses in a prompt manner, we will suffer a reduction in net income.

RESULTS OF OPERATIONS

During 2003, Flagstar enjoyed its most profitable year ever. During the year corporate records were set for every category of growth, earnings, and loan production. The Company, for the third year in a row was the most profitable publicly traded financial institution with a market capitalization over $1.0 billion, from a return on average equity perspective. The Company’s return on average equity was 47.6%, 37.1% and 35.0% for the years ended December 31, 2003, 2002 and 2001, respectively.

Flagstar’s net earnings totaled $254.4 million ($3.99 per share — diluted) for the year ended December 31, 2003, compared to $129.3 million ($2.09 per share — diluted) in 2002, and $82.9 million ($1.39 per share — diluted) in 2001. The 2003 earnings constituted a 96.8% increase in profitability versus 2002.

The primary reason for these exceptional results were the amount of mortgage loan originations and subsequent loan sales completed during both periods. Gains on the sale of mortgage loans accounted for 54.1% and 45.8% of revenues during 2003 and 2002, respectively. Both origination volumes constituted corporate records. The origination levels were a product of the interest rate environment experienced during both periods. The lower interest rate environment prevalent during 2002 and 2003 is not expected to continue. In 2004, earnings are expected to decrease as much as 40%, according to the earnings guidance previously announced by the Company. The expected reduction is based on the assumption that interest rates will rise during 2004.

In the fourth quarter of 2003, loan originations dropped 51.3% from $16.0 billion in the third quarter to $7.8 billion. In conjunction with this slowdown the Company undertook a right-sizing of its HLG back room

23

Table of Contents

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

support operations. This restructuring of the operation staff resulted in the removal of over 700 temporary, contract, seasonal, and full-time staff members. The Company does not intend to adjust its staff any further.

In 2003, the Company also recorded a record amount of net interest income. This achievement was the product of the 30.7% increase in the earning asset portfolio. In 2004, the Company expects to expand its earning asset portfolio an additional 30%. Although this growth will come from the origination of intermediate adjustable-rate mortgages and other consumer and commercial loan products, there is no guarantee that a sufficient amount of loan product will be available at yields and durations that will satisfy the Company’s asset and liability strategy. This growth in the investment loan portfolio will allow management to continue to grow the net interest income of the Company. This projected growth is expected to generate approximately $22.0 million of net revenue, an increase of approximately $0.22 per share-diluted. Management believes the funding for this expansion will come from an expansion of each of the Company’s main funding sources. There is no guarantee that management will be able to garner the needed duration specific liabilities.

At December 31, 2003, the Company’s loans serviced for others portfolio was at an all-time high of $30.4 billion. This portfolio is expected to produce positive results during 2004. In 2003, the loans serviced for others portfolio generated a net loss of $18.6 million. During the fourth quarter, the portfolio accounted for $12.5 million in net revenues. During 2004, this MSR portfolio is projected to generate over $50.5 million of net revenue, a turn-around of approximately $0.70 per share-diluted. At December 31, 2003, the MSR portfolio had a fair value $150.5 million greater than its current book value. As interest rates rise, the fair value of this portfolio increases. Over the past five years, the Company has sold 75% of the MSRs it has originated. A sale of any of this portfolio will decrease the recurring earnings attainable in the future, but will create a net gain from the sale.

SEGMENT REPORTING

The Company’s operations are broken down into two business segments: home lending and banking. Each business operates under the same banking charter, but is reported on a segmented basis for this report. Each of the business lines is complementary to each other. The banking operation includes the gathering of deposits and investing those deposits in duration-matched assets primarily originated by the home lending operation. The banking group holds these loans in the investment portfolio in order to earn spread income. On the other hand, the home lending operation involves the origination, packaging, and sale of mortgage loans in order to receive transaction income. The lending operation also services mortgage loans for others and sells MSRs into the secondary market. Funding for the lending operation is provided by deposits and borrowings garnered by the banking group.

BANKING OPERATIONS

The Company provides a full range of banking services to consumers and small businesses in southern Michigan and Indiana. The Company operated a network of 99 banking centers at December 31, 2003. Throughout 2003, the Company has focused on expanding its banking center network in these markets in order to increase its access to depositors. At June 30, 2003, the Company maintained a 4% market share in

24

Table of Contents

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

the state of Michigan and a 2% deposit share in the state of Indiana. The banking operation also provides banking services to the Company’s home loan customers in both Michigan and Indiana.

In each successive period the banking operation has expanded its deposit portfolio and banking centers. Each new banking center has been opened on a de novo basis since 1994. The result has been that each year revenues and expenses related to this operation have increased. During 2003 and 2002, revenues increased 33.1% and 65.1%, respectively, while pre-tax earnings increased 18.0% in 2003 and 104.3% in 2002, respectively. Additionally, identifiable assets increased 79.2% in 2003 and increased 44.8% in 2002, respectively.

The primary reason for the increases in revenue is the corresponding increases in the amount of earning assets funded by retail deposits. This increase is tied to the expansion of the banking center network. Further expansion of the deposit banking center network is planned. During 2002 and 2003, the Company opened 16 and 12 banking centers, respectively. During 2004, the Company has plans to open an additional 25 banking centers.

We do not expect that we will have an immediate increase in retail deposits by opening new facilities. Nonetheless, we believe that the growth in deposits will occur over time, with FHLB advances, municipal and wholesale funds providing sufficient operational funding in the interim.

At December 31, 2003, the Company operated 36 banking centers in metropolitan Detroit. These banking centers had average deposits of $41.4 million. These facilities have an average maturation of 31 months. Eight of these facilities are part of our in-store program. During 2004, the Company plans to open 14 facilities in this market. There are no in-store banking centers planned in this market.

At December 31, 2003, the Company operated 8 banking centers in metropolitan Indianapolis. These banking centers had average deposits of $17.2 million. These facilities have an average maturation of 30 months. Six of these facilities are part of our in-store program. During 2004, the Company plans to open 3 new facilities in this market. There are no in-store banking centers planned in this market.

The 16 banking centers in Indiana were all opened within the past four years.

At December 31, 2003, the Company operated 35 banking centers under its in-store program. Thirty-two of these banking centers are located in Wal-Mart superstores. While 14 of the in-store banking centers were located in Indiana, 21 were located in Michigan communities. The Company expects to open two more Wal-Mart facilities in 2004. The in-store banking centers had an average deposit portfolio of only $16.3 million compared with the remainder of the banking centers which had average deposits of $48.5 million. The largest in-store branch had a deposit portfolio of $47.4 million. The eight in-store banking centers in the Detroit metropolitan area had average deposits of $18.8 million while, the six in-store banking centers in the metropolitan Indianapolis marketplace had average deposits of $19.9 million. Of the 35 banking centers, 11 banking centers had deposits of less than $10.0 million. The average age of the in-store banking centers was 34 months at December 31, 2003.

Each of the in-store banking centers offer the same products and services to our customers as are available at our free-standing banking centers without any significant difference in operating costs. By relying upon

25

Table of Contents

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

BANKING OPERATIONS (continued)

in-store banking centers to expand our retail banking center network, we avoid the significant building costs of free-standing banking centers while obtaining marketing exposure in a high customer traffic area. The customers using our in-store banking centers are substantially the same as the customers using our free-standing banking centers.

Forty-seven of the Company’s banking centers were opened within the past three years.

Despite the Company’s growing banking operation and the large number of banking centers that are not mature, the banking operation was responsible for 31.6% of revenues and 25.7% of pre-tax earnings in 2003. During the fourth quarter, the banking operation was responsible for 44.3% of revenues and 53.8% of pre-tax earnings. During 2002, the banking operation was responsible for 37.2% of revenues and 49.7% of pre-tax earnings. The banking operation’s identifiable assets averaged 70% of the Company’s total assets during 2003 and 2002. During 2003, the return on average attributable assets and average attributable equity was 0.85% and 21.22%, respectively.

HOME LENDING OPERATIONS

The home lending operation provides a much more volatile source of earnings. This operation, for the most part, is reliant on the prevailing interest rate environment, which is outside the Company’s control. The Company has continued to expand its operations which is evident when one views the level of purchased money mortgage originations made in each successive year.

The following table shows in each successive year the amount (in thousands) and percentage of both refinance and purchase money mortgages originated during each respective year:

Flagstar’s home lending activity consists primarily of the origination or purchase of mortgage loans from the originating lender. Flagstar conducts the wholesale portion of its home lending operation through a network of correspondent lenders consisting of banks, thrifts, mortgage companies, and mortgage brokers. This mortgage banking network conducts home lending operations nationwide. The Company also originates a significant amount of mortgage loans on a retail basis. These mortgage loans, the majority of which are subsequently sold in the secondary mortgage market, conform to the underwriting standards of FNMA, FHLMC, or GNMA.

26

Table of Contents

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The home lending operation was responsible for 68.4% of revenues and 74.3% of pre-tax earnings in 2003. During 2002, the home lending operation produced 50.3% of the pre-tax earnings of the Company. The home lending operation’s identifiable assets averaged 30% of the Company’s total assets during 2003 and 2002.

The home lending operation also involves the servicing of mortgage loans for others and the sale of MSRs into the secondary market. During 2003, the Company serviced a portfolio of mortgage loans that averaged $26.4 billion. The portfolio generated revenue of $104.4 million. This revenue stream was offset by the amortization of $123.0 million in previously capitalized value. During a period of falling or low interest rates, the Company must increase the amortization of the capitalized value of the portfolio because of payoffs and refinances.

The earnings volatility inherent in the home lending operation is apparent in the revenues and pre-tax earnings of the operation shown below. The results show that during 2003 and 2002, revenues increased 70.5% and 18.2%, respectively, while pre-tax earnings increased 233.4% and decreased 1.2%, respectively. During 2003, return on average attributable assets and average attributable equity was 4.14% and 73.01%, respectively. In periods of low or falling interest rates the Company will increase the amount of loan originations and subsequent sale revenue but will also increase the amount of amortization on the capitalized servicing asset. In a rising or higher interest rate, loan originations and sales will slow and the amount of amortization of the MSR asset will also slow. The net increase in the amount of net servicing revenue will not offset the amount of lost revenue from loans sales.

The future revenue, earnings, and profitability of this operation are fully dependent on production volumes, servicing portfolio balances, and the interest rate environment.

27

Table of Contents

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

HOME LENDING OPERATIONS (continued)

The following tables present certain financial information concerning the results of operations of Flagstar’s banking and home lending operations. See Note 24 of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary Data, herein.

Banking Operations

Home Lending Operations

28

Table of Contents

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

NET INTEREST INCOME

During each of the last three years, there has been an increased level of revenue attributable to net interest income. The level of net interest income reported by the Company is impacted primarily by the volume of average earning assets, the rate paid to acquire the required funding for those earning assets, and the general level of interest rates.

At December 31, 2003, approximately $2.8 billion of the Company’s earning assets are long-term mortgage loans it has originated and is currently preparing to sell. These mortgage loans are sold upon their conversion to a mortgage-backed security, usually within 90 days. These loans are being funded with short-term liabilities. Typically, there is a spread between the long-term rates associated with the mortgage loans and the short-term rates associated with the funding source. During 2003, the spread widened in the first half of the year but tightened as the year progressed. The spread between these mortgages and these short-term funds stood at approximately 4.00% at year-end. This arbitrage was the single largest asset that affected the Company’s interest margin.

     2003

During 2003, the interest rate margin decreased to 2.21%, from 2.87%. The yield earned on the Company’s earning assets decreased from 6.93% during 2002 to 5.58% in 2003, a 1.35% decrease that was greater than the related decrease in the cost of interest-bearing liabilities. The cost of interest-bearing liabilities decreased from 4.19% in 2002 to 3.58% during 2003.

     2002

During 2002, the interest rate margin increased to 2.87%, from 1.94%. The yield earned on the Company’s earning assets decreased from 7.49% during 2001 to 6.93% in 2002, but was offset by a decrease in the cost of interest-bearing liabilities from 5.67% in 2001 to 4.19%.

     2001

During 2001, the interest rate margin was 1.94%. The yield earned on the Company’s earning assets decreased from 7.97% during 2000 to 7.49% in 2001, and was offset by a decrease in the cost of interest-bearing liabilities from 6.21% in 2001 to 5.67%.

29

Table of Contents

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

AVERAGE YIELDS EARNED AND RATES PAID

The following table 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. Non-accruing loans were included in the average loan amounts outstanding.