FORM 10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Mark One

For the year ended December 31, 2004

OR

Commission File No.: 001-16577

FLAGSTAR BANCORP, INC.

(Exact name of registrant as specified in its charter)

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 registrant’s 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 ($19.88 per share) at which the stock was sold on June 30, 2004, was approximately $607.7 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, 2005, 61,415,030 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:

          1. Portions of the Proxy Statement for the 2005 Annual Meeting of Stockholders.

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) a significant increase in competitive pressures among depository institutions in our primary market areas; (2) significant or sustained increases in the interest rate environment that could reduce our net interest margins; (3) sudden or sustained changes in significant factors of our loan portfolio,

such as an increase in prepayment speeds, decline in loan origination and sale volumes, or increases in charge-offs or loan loss provisions; (4) changes in general economic conditions, either national or in the states in which the Company does business, that are less favorable than expected; (5) political developments, wars or other hostilities that disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions that adversely affect the businesses in which the Company is engaged; (7) changes and trends in the securities markets; (8) a delayed or incomplete resolution of regulatory issues; (9) the impact of reputational damage created by the developments discussed above on such matters as business generation and retention, funding and liquidity; and (10) the outcome of any regulatory and legal investigations and proceedings that might arise.

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.

PART I

ITEM 1. BUSINESS

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 and in fact is reliant on the other for completion of their respective operation. 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 primarily collects deposits from the general public and local government agencies at 120 banking centers in southern Michigan and Indiana. We collect certificates of deposits utilizing investment-banking firms to distribute our deposit offerings to consumers through independent brokerage firms. We solicit business through our Internet branch found at www.flagstar.com. We also borrow funds from the Federal Home Loan Bank of Indianapolis and issue debt through secondary market sources. 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.

Our home lending group uses three channels to obtain single-family mortgage loans for resale to investors. We acquire single-family mortgage loans on a wholesale basis nationally. We originate single-family loans on a consumer direct basis from 112 home loan centers in 26 states and our national call center located in Troy, Michigan. We also originate mortgage loans from our 120 banking centers located in Michigan and Indiana. Our wholesale division is supported by 11 regional offices. In order to originate or acquire these mortgage loans, the home lending group utilizes funds provided by the banking group. 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 also service a large portfolio of mortgage loans for others, $21.4 billion at December 31, 2004. The home lending group collects and holds in escrow, payments for principal and interest, hazard and mortgage insurance, and various property taxes. The home lending group then distributes these funds to the appropriate third party on a contractual basis. We later sell the majority 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.

ITEM 1. BUSINESS (continued)

CORPORATE STRATEGIES AND OBJECTIVES

Historical Perspective

We began our corporate existence as a savings bank in 1987 with a $3.0 million balance sheet and one banking center. Before our registration as a savings bank, we operated as a mid-sized regional mortgage banking company. Our growth since 1987 has been extremely rapid. In 1994, we acquired Security Savings Bank 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, 2004 our total assets were $13.1 billion and we operated 120 banking centers. Over the past five years, we have grown our total assets an average of 25.1% per year, our deposits an average of 27.5% per year, and the number of our home lending and banking centers an average of 27.3% per year. Our goal over the next five years is to double the number of our banking and home lending centers and to continue to increase market share within the markets we serve. We will also strategically open home lending centers in metropolitan retail markets we do not currently serve.

Toward this goal, during 2005, we expect to expand our banking center network by up to 18 new banking centers and we project the number of home loan centers will expand by 25. This expansion will allow us to continue to grow our deposit base and our consumer direct loan originations. During 2005, we also anticipate growing our asset base approximately 26.0%.

Also during 2005, we will enter our third state for deposit banking. We have chosen a de novo strategy to open a total of 14 branches over the next two years in the Atlanta, Georgia market area.

Business Objective

Our business objective has always been to generate stockholder value by providing high returns on equity and assets, while aggressively growing the Company’s asset base and facility locations. Over the past five years, we have delivered a return on average equity greater than 31% and a return on average assets greater than 1%.

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

During 2004, we completed the placement of a $25.8 million private debt offering. The proceeds from this offering will be used to continue to leverage our consolidated assets.

ITEM 1. BUSINESS (continued)

Business Strategy

BANKING OPERATIONS

Through our banking group, 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 225,000 households through our 120 banking centers (both free-standing and in-store) and 176 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., Monday through Friday, with 8:30 a.m. to 4:00 p.m. hours on Saturday. Our in-store banking centers are also open Sunday from 8:30 a.m. to 4:00 p.m.

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. These are introductory rates offered on a short-term basis as part of each grand opening and are intended to provide the newly opened facility with a marketing tool that could facilitate immediate community acceptance.

Our banking group offers 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:

One of our primary accomplishments in 2004 was the opening of 22 new banking centers. Our focus on expansion will remain unchanged in 2005, with up to 18 banking centers expected to open. The majority of these new openings will be freestanding banking centers located in metropolitan Detroit, Atlanta, and Indianapolis.

Banking Center Overview. At December 31, 2004, we had 120 banking centers in operation, with 96 located in Michigan and 24 located in Indiana. Of these centers:

ITEM 1. BUSINESS (continued)

Growth of the Banking Center Network. We continue to increase the number of our banking centers as part of our overall strategic growth plan. Of our 120 banking centers:

In 2005, we expect to continue to focus on the expansion of our banking center network. For 2005 we expect to open up to an additional 18 banking centers. Of those, six are expected to open in Atlanta, Georgia with the balance expected to be located in metropolitan Detroit and Indianapolis. The majority of these new openings will be freestanding banking centers.

Deposit Strength of Banking Centers. In 2004, the average size of a banking center’s deposit portfolio was $33.6 million. Of the 120 banking centers in operation during 2004, 24 had deposits of less than $10.0 million. The deposit strength of the various banking centers varies, with low deposit portfolios usually found in our newer branches and our in-store branches.

The average size of the deposit portfolio at branches opened during the following years is as follows:

In-Store Banking Centers. Each of our 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 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 freestanding banking centers.

Our 40 in-store facilities include 34 banking centers located within a Wal-Mart retail store. 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 retail 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.

Fifteen of the in-store banking centers are located in Indiana and 25 are located in Michigan. At this time, the Company expects to open one more in-store facility in the Grand Rapids, Michigan market area. This location is expected to open in early 2005.

Eight of the 24 banking centers in Indiana were opened under the Wal-Mart in-store program during the past four years. The in-store banking centers had an average deposit portfolio of $17.4 million compared with the non-in-store banking centers that had average deposits of $41.7 million. Banking centers opened under the in-store program opened in 2001, 2002, 2003 and 2004 had average balances of $19.9 million, $12.7 million, $11.5 million and $5.7 million, respectively.

ITEM 1. BUSINESS (continued)

Deposit levels also depend on the location of the banking center. The Indiana in-store banking centers had an average deposit portfolio of $19.4 million, while the Michigan in-store banking centers had an average deposit portfolio of $16.2 million. In Michigan, the Detroit metropolitan area in-store banking centers had an average deposit portfolio of $20.1 million

          Lending within the Banking Operation

One of the banking group’s primary business objectives is to expand its lending activities, as it generally offers higher returns than the lending activities of our home lending group. The size of our loan portfolio has grown significantly 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:

At December 31, 2004, Flagstar’s consumer loan portfolio contained $196.5 million of second mortgage loans, $601.6 million of equity line loans, and $26.0 million of various other consumer loans such as personal lines of credit, and automobile loans. Consumer loans, including second mortgage loans, comprise 7.8% of the Company’s investment loan portfolio at December 31, 2004. 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 2004, the Company originated a total of $693.5 million in consumer loans versus the $392.2 million originated in 2003.

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:

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

ITEM 1. BUSINESS (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.

At December 31, 2004, our commercial real estate loan portfolio totaled $751.7 million, or 7.1% of our investment loan portfolio. At December 31, 2004, our non-real estate commercial loan portfolio was $8.4 million, or 0.1% of our investment loan portfolio. During 2004, we originated $368.1 million commercial loans versus $239.5 million in 2003. At December 31, 2003, our commercial real estate portfolio totaled $548.4 million and our non-real estate commercial loan portfolio totaled $7.9 million.

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 is often 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 during 2004 was $1.5 billion of which $249.3 million was outstanding at December 31, 2004. At December 31, 2003 $2.0 billion in lines had been granted, of which $346.8 million was outstanding.

Among the warehouse lines of credit we extended were a series of warehouse loans totaling $22.4 million we made to two related borrowers in March 2004 that were subsequently determined to be fraudulently obtained. Upon discovery of the fraud, we seized cash and real property with an estimated value of $13.4 million. The cash and real property are subject of competing claims from another mortgage company that was also defrauded and from the United States Government through a forfeiture action. In addition to any loss mitigation efforts, we have filed a claim pursuant to our fidelity bond. Management believes that the fidelity bond should cover any loss incurred. There can be no assurance that our efforts to recover that remaining balance will be successful, or that we will not suffer any further loss from these loans. Management believes that any losses that might be sustained would not be material to the operations of the Company.

HOME LENDING OPERATIONS

Our home lending group conducts its operations from our 120 banking centers and 112 home loan centers located in 26 states. Our largest concentration of offices is in southern Michigan, where we have 96 banking centers and 55 home loan centers. We also maintain 11 wholesale support offices that assist correspondent mortgage lenders nationwide. During 2004, we were again 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 $34.0 billion, $56.4 billion, and $43.2 billion of mortgage loans during the years ended December 31, 2004, 2003, and 2002, respectively. These loans are either for the purchase of a home or the refinance of an existing mortgage debt. The Company has continued to expand its operations each year

ITEM 1. BUSINESS (continued)

and is evident when one views the level of purchased money mortgage originations made in each successive year.

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

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 thirty years. The majority of our products conform to the respective underwriting guidelines established by FNMA, FHLMC, and GNMA (“the Agencies”).

As a part of our overall mortgage banking strategy, we securitize the majority of our mortgage loans through the Agencies. 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 the Agencies. These mortgage-backed securities are then sold to a secondary market investor. The servicing related to the sold loans is generally retained and later may be sold to other secondary market investors. We, for the most part, do not sell the servicing rights to loans originated within our banking markets.

We routinely sell residential mortgage loans to the secondary market. As part of these sales, we make customary representations and warranties to the purchasers about various characteristics of each loan, such as the manner of origination, the nature and extent of underwriting standards applied and the types of documentation being provided. We are not required to reimburse purchasers for any missed loan payments or for any reduced income as a result of a loan being prepaid. If any loans do not comply with the representations and warranties made by us, we may repurchase the loans or else indemnify the purchaser for any related losses. In order to account for the repurchase and indemnification exposure that results from our representations and warranties, we maintain a secondary market reserve, which had a balance of $19.0 million and $10.3 million at December 31, 2004 and 2003, respectively.

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 is a mortgage company or a mortgage insurance company.

ITEM 1. BUSINESS (continued)

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.

          PRODUCTION CHANNELS

We utilize three production channels to originate or 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

In a wholesale purchase transaction, we supply the funding for the transaction at the closing table. This is also known as “table funding.” The mortgage broker completes all of the up-front paperwork and receives an origination fee from the mortgagor and a servicing release premium from us. These brokers are serviced by our wholesale account executives. We have relationships with over 9,000 individual brokerage companies located in all 50 states. During 2004, we closed $19.7 billion utilizing this origination channel, which equaled 57.9% of total originations versus $32.0 billion originated in 2003 and $24.9 billion originated in 2002. During 2004, 59.1% of loan originations in this category were for the refinance of an existing mortgage loan.

     Correspondent

In a correspondent purchase transaction, we acquire the loan after the mortgage company has funded the transaction. The mortgage company completes the entire origination process and we pay a “servicing release” premium plus a market price for the loan. A “servicing release” premium reflects the value of the right we also obtain to service the loan. Our correspondent relationships are also serviced by our wholesale account executives. We have relationships with over 1,700 individual mortgage origination companies located in all 50 states. During 2004, we closed $10.4 billion utilizing this origination channel, which equaled 30.6% of total originations versus the $18.3 billion originated in 2003 and $14.2 billion originated in 2002. During 2004, 63.9% of loan originations in this category were for the refinance of an existing mortgage loan.

     Consumer Direct

In a consumer direct transaction, we originate the loan through one of our loan officers located in one of our banking centers or home loan centers. We complete the entire origination process and fund the transaction. This origination channel is the fastest growing portion of our home lending operation.

Our consumer direct lending is conducted from our 120 banking centers and 112 home loan centers located in 26 states. Our largest concentration of offices is in southern Michigan, where we have 96 banking centers and 55 home loan centers. During 2004, we opened 26 new offices within our consumer direct division. We treat every loan office as a separate cost center and continually evaluate its profitability. In this process, 28 loan offices were closed during 2004 because of a shortfall in profitability. These offices function much

ITEM 1. BUSINESS (continued)

like our wholesale channel. Originated loans are processed similar to a third party transaction using market pricing and direct costs. To evaluate profitability, the office is allocated all costs related to the individual office but in turn is allocated all fees collected in the origination process. We centralized accounting, legal, data processing, underwriting, and payroll services on an allocated cost basis. The office must deliver its originated loans to us, except that the office staff is allowed to broker away a small portion of its originations when we do not provide the loan program needed to complete the transaction. During 2004, less than 2.5% of consumer direct originations resulted in non-Flagstar loan products. The loan office manager is paid on a per loan basis as is every loan officer but is also allowed to share in a profitability bonus based on the overall operation of the individual office.

During 2004, we closed $3.9 billion utilizing this origination channel, which equaled 11.5% of total originations versus the $6.1 billion originated in 2003 and $4.1 billion originated in 2002. During 2004, 52.4% of loan originations in this category were for the refinance of an existing mortgage loan.

HOME LENDING AND THE INTERNET

We have always been a strong advocate of the Internet and its use within the mortgage origination process. During 2004, our wholesale customers and correspondents were able to register loans, lock the interest rates on loans, and check their in-process inventory, production statistics, and underwriting status through the Internet. During 2004, approximately 90% of all mortgage loans closed utilized the Internet in the completion of the mortgage origination or acquisition process. Our loan officers and brokers utilized the Internet as a communication tool and our correspondents utilized the Internet as a delivery system. During 2005, we will continue to utilize our research and development to streamline the mortgage origination process and bring service and convenience to our correspondent partners and 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 located throughout the United States with a large concentration in our southern Michigan market area. These construction loans usually convert to permanent financing upon completion of construction. At December 31, 2004, our portfolio of loans held for investment included $67.6 million of loans secured by properties under construction, or 0.6% 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 2004, the Company originated a total of $112.3 million in construction loans versus the $99.8 million originated in 2003 and $73.8 million originated in 2002.

Asset Quality

It is the intent of management to maintain an asset portfolio that contains high quality short-duration loans. The Company has consistently focused on following a conservative posture with respect to credit risk which

ITEM 1. BUSINESS (continued)

is reflected in our asset quality. At December 31, 2004, approximately 93.0% of the Company’s earning assets consisted of loans collateralized by single-family mortgage loans. Mortgage loans are acquired or originated by the home lending group and underwritten on a loan-by-loan basis.

The credit quality of the Company’s commercial loan, non-single family mortgage-related consumer loan, and commercial real estate loan portfolio, which in the aggregate comprises only 6.5% of earning assets at December 31, 2004, remains good. During the past three years, the Company has emphasized commercial real estate lending in its retail market area and second mortgage lending as an add-on to the Company’s national mortgage lending platform. Management plans to continue to increase the size of these loan portfolios. Management expects to achieve this growth with adherence to sound underwriting and credit standards.

Each loan is underwritten by a Flagstar underwriter or an underwriter contracted by the Company. Any loan not underwritten by a Flagstar employee is warranted by the individual underwriter’s employer whether it is a mortgage company or a mortgage insurance company.

Our underwriting guidelines employ a system of internal controls designed to maintain the quality of the loan portfolio.

We also verify the reasonableness of the appraised value of each loan by utilizing an automated valuation model (AVM). 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 to determine the loan-to-value ratio. 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 have implemented comprehensive internal asset review procedures to provide for early detection of problem assets. Our asset classification committee reviews the adequacy of our allowances for losses quarterly and bases their assessment 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 schedules included hereafter (Pages 14 through 20), which set forth certain information about our non-performing assets. At December 31, 2004, 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.

ITEM 1. BUSINESS (continued)

Non-Performing Assets

DELINQUENT LOANS

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 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 seek 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 only when it is actually collected. At December 31, 2004, we had $104.1 million in loans that were determined to be delinquent and $56.9 million which were determined to be non-performing and for which interest accruals had ceased. Of this $56.9 million, $53.6 million, or 94.2%, pertained to single-family mortgage loans. The following table displays delinquent loans as of December 31, (in thousands):

ITEM 1. BUSINESS (continued)

Non-Accrual Loans at December 31, 2004

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses represents management’s estimate of losses inherent in the Company’s loan portfolios as of the date of the financial statement. The estimation of the allowance is based on a variety of factors, including past loan loss experience, the estimated value of underlying collateral, and general economic conditions. The Company’s methodology for assessing the adequacy of the allowance includes a formula based allowance, a specific allowance (which includes the allowance for loans deemed to be impaired in accordance with Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan) and the allocated allowance. The formula allowance is a calculation based on historical losses in the specific loan category. The specific allowance represents the portion of the allowance that is allocated to specific loans because of known deficiencies in the individual loans. The allocated portion of the allowance for loan losses is a judgment made by management based on inherent losses in segments of the loan portfolio that do not have a significant amount history.

As the process for determining the adequacy of the allowance requires subjective and complex judgment by management about the effect of matters that are inherently uncertain, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for loan losses.

The allowance considers losses that are inherent in the different segments of the loan portfolio, but have not yet been realized. Losses are recognized when (a) available information indicates that it is probable that a loss has occurred and (b) the amount of the loss can be reasonably estimated. Generally, the Company believes that borrowers are impacted by events that result in loan default and eventual loss well in advance of a lender’s knowledge of those events. Examples of such loss-causing events for home loans and consumer loans are borrower job loss, divorce and medical crisis. An example for commercial real estate loans would be the loss of a major tenant.

ITEM 1. BUSINESS (continued)

The formula based portion of the allowance is calculated by applying loss factors against all loans in what are considered homogeneous portfolios (such as single-family home loans and home equity lines of credit). Additionally, management has sub-divided the homogeneous portfolios into categories that have exhibited a greater loss exposure (such as sub-prime loans or loans that are not salable on the secondary market because of collateral or documentation issues). Loss factors are based on an analysis of the historical loss experience of each loan category, as well as specific risk factors impacting the loan portfolios.

For non-homogeneous loans such as commercial real estate, loss factors are assigned based on risk ratings that are ascribed to the individual loans. All loans that are determined to be substandard because of a high-risk rating are treated as an impaired loan and given an individual evaluation based on collectability. This analysis determines the amount of impairment based on a discounted cash flow analysis, using the loan’s effective interest rate, except when it is determined that the only source of repayment for the loan is the operation or liquidation of the underlying collateral. In such cases, the current fair value of the collateral, reduced by estimated disposal costs, is used in place of the discounted cash flows. In estimating the fair value of collateral, we utilize outside fee-based appraisers to evaluate various factors, such as occupancy and rental rates in our real estate markets and the level of obsolescence that may exist on assets that would be acquired from a defaulted commercial loan.

Loans that are determined to be impaired, delinquent, or substandard are excluded from the formula allowance analysis so as not to double-count the loss exposure.

In estimating the amount of credit losses inherent in the Company’s loan portfolio, various assumptions are made. For example, when assessing the condition of the overall economic environment, assumptions are made regarding current economic trends and their impact on the loan portfolio. In the event the national economy were to sustain a prolonged downturn, the loss factors applied to our portfolios may need to be revised, which may significantly impact the measurement of the allowance for loan losses. For impaired loans that are collateral-dependent, the estimated fair value of the collateral may deviate significantly from the proceeds received when the collateral is sold.

The allocated component reflects our judgmental assessment of the impact that various factors have on the overall measurement of credit losses. These factors include, but are not limited to, the general economic and business conditions affecting our portfolio, credit quality and collateral value trends, loan concentrations, recent trends in our loss experience, new product initiatives and other variables that have little to no historical data, and the results of regulatory examinations and findings from the Company’s internal credit review function.

Also refer to Note 4 to the Consolidated Financial Statements — “Summary of Significant Accounting Policies” for further discussion of the Allowance for Loan Losses.

ITEM 1. BUSINESS (continued)

ALLOWANCE FOR LOAN LOSSES

December 31, 2004

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

ITEM 1. BUSINESS (continued)

ACTIVITY WITHIN THE ALLOWANCE FOR LOAN LOSSES

REPOSSESSED ASSETS

Real property that we acquire as a result of the foreclosure process 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 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, 2004, we had $37.8 million of repossessed assets. Historically, we have taken an average loss of 18.8% on all delinquent loans that we have been forced to complete foreclosure proceedings and later sell to a third party.

The following schedule provides the activity for repossessed assets in the year stated:

NET REPOSSESSED ASSET ACTIVITY

ITEM 1. BUSINESS (continued)

REPURCHASED ASSETS

We routinely sell residential mortgage loans to the secondary market. As part of these sales, we make customary representations and warranties to the purchasers about various characteristics of each loan, such as the manner of origination, the nature and extent of underwriting standards applied and the types of documentation being provided. We are not required to reimburse purchasers for any missed loan payments or for any reduced income as a result of a loan being prepaid. If any loans do not comply with the representations and warranties, we may repurchase the loans or else indemnify the purchaser for any related losses. In order to account for the repurchase and indemnification exposure that results from our representations and warranties, we maintain a secondary market reserve, which had a balance of $19.0 million and $10.3 million at December 31, 2004 and 2003, respectively.

Based upon our experience, deficiencies in representations and warranties that require repurchase of a loan are usually raised within the first 60 months following the sale of a loan. We expect that repurchases will comprise approximately 12 basis points (0.12%) of the loan sales completed during the 60-month period prior to December 31, 2004. At December 31, 2004, we had sold $160.2 billion in loans to the secondary market over the previous 60 months. This volume of loan sales is $16.1 billion, or 11.2%, larger than the $144.1 billion we sold in the 60 months preceding December 31, 2003. At December 31, 2002, we had sold $110.0 billion in loans over the preceding 60 months. By comparison, we repurchased $90.7 million, $46.3 million and $34.3 million in mortgage loans from secondary market investors during 2004, 2003 and 2002, respectively, which includes $68.7 million, $42.4 million, and $25.8 million of non-performing repurchases during 2004, 2003 and 2002, respectively.

The loans noted above that were repurchased during 2004, 2003 and 2002 subsequently resulted in charge-offs of $15.3 million, $13.0 million, and $8.7 million, respectively, as a result of post-repurchase foreclosures. These loans were generally non-performing at the time of repurchase. Our experience shows that we generally record a loss of 25.0% on all non-performing loans repurchased.

We believe that continued appreciation in home values could significantly mitigate our exposure to loss. However, our experience also indicates that our exposure increases during periods of higher rates and less refinance volume, as is presently the case. Further, loans made to borrowers with credit scores below 660, also referred to in the mortgage industry as “subprime loans,” have shown a repurchase exposure twice as high as loans underwritten for borrowers with higher credit scores.

At December 31, 2004 and 2003, the Company had $17.1 million and $12.0 million, respectively, of net repurchased assets awaiting foreclosure.

ITEM 1. BUSINESS (continued)

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

REPURCHASED ASSETS

SECONDARY MARKET RESERVE

To account for the different type of risk exposure posed by loan repurchases as compared to loans that we acquire or purchase for our own investment loan portfolio, we have established a separate reserve for losses from repurchased loans. In the fourth quarter of 2003, we reclassified $10.3 million from our allowance for loan losses to a newly established secondary market reserve. Our secondary market reserve was $19.0 million at December 31, 2004 and $10.3 million at December 31, 2003. We charge any increase in the secondary market reserve as an offset to net loan sale gains.

Our experience has shown that these repurchased assets may present risks that differ from those loans that we retain in our own investment loan portfolio. For instance, repurchased loans, while initially underwritten by us, may have developed adverse characteristics while in the possession of the initial purchaser that are more difficult to resolve than if we had retained control of the loan since its inception. Also, these loans are often non-performing when repurchased by us or may not be salable on the secondary market because of collateral or documentation issues, and therefore have a greater loss exposure than loans in our investment loan portfolio.

Our secondary market reserve is recorded at a level based upon management’s analysis of the potential for repurchase of loans sold during the prior 60-month period. Our experience indicates that deficiencies in representations and warranties that require repurchase of a loan are usually raised within the first 60 months following the sale of the loan. There is no assurance that we will not, in any particular period, sustain losses from repurchased loans that exceed the reserve, or that subsequent evaluation, in light of the factors then-prevailing, will not require increases to the reserve.

For the 60-month periods ending December 31, 2004 and 2003, the amount of loans we sold into the secondary market was $160.2 billion and $144.1 billion, respectively.

ITEM 1. BUSINESS (continued)

LIQUIDITY

Sources of Funds

We had deposits of $7.4 billion at December 31, 2004. 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 ten 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.

A significant amount of our deposit liabilities are higher-priced jumbo accounts. These account holders are more sensitive to the interest rate paid on their account than most depositors. There is no guarantee that in a changing rate environment, the Company will be able to retain all of these depositors’ accounts.

We call on local municipal agencies as another source for deposit funding. While a valuable source of liquidity, municipal deposits are usually extremely rate sensitive and therefore prone to withdrawal if higher interest rates are offered elsewhere. Unlike other financial institutions, we have discouraged our individual branch managers from calling on the local municipal government units but instead centralized this calling program in our Troy headquarters for accounting and pricing purposes. Because of the interest rate sensitivity of these depositors, there is no guarantee that in a changing rate environment, we will be able to retain all of funds in these accounts.

Our national accounts division garners funds through nationwide advertising of deposit rates and the use of investment banking firms. Typically, we do not accept funds from brokers, but instead solicit certificates of deposit through regional investment firms. These deposit accounts are typically for larger amounts and for terms longer than we have been able to garner in our retail market. They are also usually priced below our consumer direct rates because of the absence of any potential for a long-term customer relationship. Whereas, our retail rates are most often designed to attract new depositors to our banking centers. Without any face-to-face relationship, these certificates are usually more interest rate sensitive and harder to retain.

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

ITEM 1. BUSINESS (continued)

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, 2004, our advances from the FHLB totaled $4.1 billion, or 45.2% 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 $5.0 billion during 2004, an increase of $0.4 billion, or 8.7%, when compared with the $4.6 billion received in 2003. This large amount of principal repayments was attributable to the increased loan portfolio offset somewhat from 2003 by the increase in the interest rate environment.

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 $28.9 billion, or 85.0% of originations in 2004, compared to $51.9 billion, or 92.1% of originations, in 2003. The reduction in sales during 2004 was attributable to the decrease in originations and the increased amount of loans retained by the Company for its own portfolio.

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 increased from $653.7 million at December 31, 2003, to $672.6 million at December 31, 2004. Although funds held in escrow increased, the amount of total residential mortgage loans we serviced decreased from $42.0 billion at December 31, 2003 to $40.7 billion at December 31, 2004. This increase 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, 2004, we have completed three public offerings and four private debt offerings. These offerings provided funds that increased the regulatory capital of the Bank.

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., Flagstar Commercial Corporation, Flagstar Credit Corporation, Flagstar Trust, Flagstar Title Insurance Agency, Inc., Flagstar Statutory Trust II, Flagstar Statutory Trust III, Flagstar Statutory Trust IV, Flagstar Statutory Trust V, and Flagstar Investment Group, Inc.

Douglas Insurance Agency, Inc.

Douglas Insurance Agency, Inc. (“Douglas”) acts as an agent for life insurance and health and casualty insurance companies. Douglas recorded net earnings (loss) of $(18,000), in 2004, and was inactive during 2003 and 2002, respectively. Douglas’ primary purpose is to act as the agent that provides group life and health insurance to Flagstar Bancorp employees Douglas also acts as a broker with regard to certain insurance product offerings to employees and customers.

Flagstar Commercial Corporation

Flagstar Commercial Corporation was inactive during 2004, 2003 and 2002.

Flagstar Credit Corporation

Flagstar Credit Corporation (“Credit”) is a Michigan corporation whose common stock is owned solely by the Company. Credit participates in private mortgage insurance operations with certain private mortgage

ITEM 1. BUSINESS (continued)

insurers. Credit has contractual arrangements that include the collection of up 25% of the mortgage insurance premiums paid by the insured in exchange for providing certain performance guarantees on certain pools of loans underwritten and originated by the Company. Credit is contractually bound to provide a second tier of loss protection when the incurred foreclosure losses on the pool of loans exceeds 5% of the original balance. The loans are insured for any loss greater than 10% by a third party insurance carrier. Credit recorded net earnings of $3.1 million, $5.7 million, and $0.5 million in 2004, 2003, and 2002, respectively.

Flagstar Title Insurance Agency, Inc.

Flagstar Title Insurance Agency, Inc. (“Title”) is a Michigan corporation whose common stock is owned solely by the Company. Title offers title insurance closing services to the metropolitan Detroit real estate community. Title recorded net earnings (loss) of $(78,900), $138,600, and $239,700 in 2004, 2003, and 2002, respectively. Title discontinued its operations in 2004.

Flagstar Investment Group, Inc.

Flagstar Investment Group, Inc. (“Investment”) is a Michigan corporation whose common stock is owned solely by the Company. Investment formerly employed a sales staff that sold investment products on a consumer direct basis. Investment was inactive during 2004, 2003, and 2002.

Non-Consolidated Trust Subsidiaries

          Flagstar Trust

          Flagstar Trust II

          Flagstar Trust III

          Flagstar Trust IV

          Flagstar Trust V

ITEM 1. BUSINESS (continued)

Flagstar Bank

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

          FSSB Mortgage Corporation

          Flagstar Intermediate Holding Company

          Flagstar LLC

          Mid-Michigan Service Company

          SSB Funding Corporation

          Flagstar Capital Corporation

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

ITEM 1. BUSINESS (continued)

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 public company accounting oversight board which enforces auditing, quality control and independence standards, and is funded by fees from all publicly traded companies, the law restricts provision of both auditing and consulting services by an accounting firm. To ensure auditor independence, certain permitted non-audit services being provided to an audit client requires preapproval by a company’s audit committee members. 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. 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. The Company is subject to these rules because its common stock is

ITEM 1. BUSINESS (continued)

listed on the NYSE under the symbol “FBC.” These rules include ensuring that a majority of a board of directors is 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.

USA Patriot Act. The USA PATRIOT Act, signed in 2002, established a wide variety of new and enhanced ways of combating international terrorism, including amending the Bank Secrecy Act to provide 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, 2004, 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, 2004, we had 3,376 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 401(k) savings and investment plan. We consider our employee relations to be excellent.

ITEM 1. BUSINESS (continued)

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. Mr. Hammond is the father of Mark T. Hammond, and the father- in-law of Kirstin A. Hammond and Robert O Rondeau, Jr.

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 A. Hammond has served as an Executive Director of the Company 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 10-K.

We operate from 120 banking centers and 112 home lending centers in 26 states. We also maintain 11 wholesale lending offices. We own the buildings and land for 43 of our offices, own the building but lease the land for one of our offices, and lease the remaining 199 offices. The buildings with leases have lease expiration dates ranging from 2005 to 2019. At December 31, 2004, the total net book value of all of our offices and land was approximately $135.6 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, 2004, the net book value of our computer related equipment (including both hardware and software) was approximately $29.1 million.

From time to time, we are parties to various legal proceedings incident to our business. At December 31, 2004, there were no legal proceedings that we anticipate would have a material adverse effect on the Company. See Note 19 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.

PART II

COMMON STOCK

Our common stock trades on the New York Stock Exchange under the trading symbol FBC. At March 1, 2005, there were 61,415,030 shares of our common stock outstanding held by approximately 2,646 holders.

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, 2004, that have been approved by stockholders.

Information regarding security ownership of certain beneficial owners and management appearing under “Stock Options” in the 2005 Proxy Statement is incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA

Restatement of previously issued financial statements

As a result of the Company’s review of internal controls relating to our accrued interest, we identified that our accounting methodology was inadequate and resulted in the overstatement of interest accrued on our $10.2 billion portfolio of mortgage loans, with a corresponding overstatement of interest income. The cumulative impact, as of December 31, 2004, is a $16.9 million overstatement of accrued interest, which resulted in a $5.9 million overstatement of deferred income tax liability and an $11.0 million overstatement of retained earnings for the periods ended December 31, 2001. This impact is reflected below as a decrease in beginning-of-year stockholders’ equity for 2000, a reduction in interest income for 2000 of $2.3 million and for 2001 of $5.1 million, and corresponding changes to total assets and stockholders’ equity for 2000 through 2003.

This restatement is discussed in Note 3, Restatement of Previously Issued Financial Statements, included in Part II, Item 8, Financial Statements and Supplementary Data of this Form 10-K.

SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA

ITEM 6. SELECTED FINANCIAL DATA (continued)

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

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 collects deposits from the general public and local government agencies at 120 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 (“FHLBI”). 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.

The home lending group acquires single-family mortgage loans on a wholesale basis nationally. We also originate single-family loans on a retail basis from 112 offices in 26 states. We also have mortgage loan personnel in 25 banking centers located in Michigan. Our wholesale division operates from 11 regional offices across the country. In order to originate or acquire these loans, the home lending group utilizes funds provided by the banking group. 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 group. The revenue stream created by a banking operation was sought to counter the cyclical operating results of our home lending operation.

As of December 31, 2004, our assets totaled $13.1 billion. During 2004, our banking group contributed 60.9% of net earnings and provided an approximate return on allocated equity of 36.5%. The home lending group returned approximately 11.8% return on allocated equity during 2004. The overall return by the Company equaled a 20.7% return on average equity and a 1.2% return on average assets. During 2004, the Company increased its asset base 23.6%, its deposit portfolio by 29.9%, its banking center locations by 22.5%, its total equity position by 14.2% and decreased its home loan centers by 12.5%. 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.

Toward this goal, during 2005, we expect to expand the banking center network by adding up to 18 new banking centers and we project the amount of new home loan centers will be 25. This large expansion will allow us to continue to grow our deposit base and our loan originations. Also during 2005, we will enter our

third state for deposit banking. We have chosen a de novo strategy to open a total of 14 branches over the next two years in the Atlanta, Georgia market area.

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 2003 and 2002 was not duplicated in 2004 because of our reliance on home lending during those periods. Our earnings in 2004 returned to a more normalized 20.7% return on average equity. To produce returns on average equity in excess of 35%, a significant portion of our profitability was caused by our increased loan sale activity. These loan sales were the result of the lower interest rate environment in the United States during those periods. Any sudden or prolonged increase in interest rates will reduce our income from loan sales. Primarily because of interest rate movements, for instance, our net loan sale revenue fluctuated, from $357.3 million in 2003 to $59.7 million in 2004. In turn, our return on equity was negatively affected, decreasing from 48.6% in 2003 to 20.7% in 2004.

Additionally, our asset growth has been fueled from our expansion into new deposit and loan markets. While this has allowed us to develop and maintain an efficient operating platform, 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 50.4% in 2004, a large decline from the 37.7% reported for 2003. If our earning asset base and productivity does not grow along with the increases in costs created by our planned expansion, we will experience a decrease in net earnings.

RESULTS OF OPERATIONS

During 2004, we continued our record pace of growth but did not enjoy the increased profitability we have experienced over the past three years. Flagstar’s net earnings totaled $143.8 million ($2.24 per share — diluted) for the year ended December 31, 2004, compared to $254.4 million ($3.99 per share — diluted) in 2003, and $129.3 million ($2.09 per share — diluted) in 2002.

During the year, we experienced double-digit increases in our assets, deposits, banking centers, and our total equity position as well as record levels of net interest income and loan administration income. This growth and record levels of certain types of revenue was not sufficient to offset the 43.5% decline in 2004 net earnings from the earnings reported in 2003. This large decline in earnings was primarily attributable to our reduced amount of net gain on loan sales, which in turn reflects the decrease in mortgage loan originations during the period. During 2004, mortgage loans originations decreased $22.4 billion, or 39.7%, to $34.0 billion.

The primary reason for the variations in results was the amount of mortgage loan originations and subsequent loan sales completed in the above periods. Gains on the sale of mortgage loans accounted for 12.5%, 54.1% and 45.8% of revenues during 2004, 2003, and 2002, respectively. The origination volumes in 2002 and 2003 constituted corporate records. Refinance activity during the periods accounted for 61%, 87%, and 81% of total originations during the years ended 2004, 2003, and 2002, respectively. These refinancings were a product of the low interest rate environment experienced during 2002 and 2003, which was not expected to continue into 2004 and did not. In 2005, interest rates are expected to continue to increase from 2004 levels and, as a result net earnings in 2005 are expected to decrease as much as another 17% from 2004 levels. The expected reduction is based on the assumption that interest rates will continue to rise throughout 2005.

In the fourth quarter of 2004, the continued tight competition experienced in the home lending operation resulted in gain on loan sale margins being at an historic low. The depressed sale margins hit 13 basis points versus the 37 basis points recorded for the same period in 2003. In conjunction with these decreased margins and the expected decreased profitability in 2005, we instituted a number of cost-cutting and staffing adjustments. The home lending group also increased certain fees charged to correspondents for support operations. We do not expect to adjust our staff any further.

In 2004, we recorded a record amount of net interest income. This achievement was the product of the 26.0% increase in the earning asset portfolio. In 2005, we expect to expand our earning asset portfolio an additional 30%. Although we expect this growth to 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 our asset and liability strategy. Continued growth in the investment loan portfolio will allow management to grow the net interest income. 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 growth will come from an expansion of each of our main funding sources; however, 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. At December 31, 2004, the Company’s loans serviced for others portfolio totaled $21.4 billion, despite originating $28.9 billion of mortgage loans sold for which servicing rights were retained in 2004. The difference in these comparative totals is found in the amount of servicing rights sold to the secondary market. During 2004, the Company sold $29.6 billion of loans with associated servicing rights and recorded $91.7 million of net revenue compared to the $67.3 million of net revenue recorded on $30.7 billion of servicing sales during 2003 and $14.5 million of net revenue recorded on $28.5 billion on servicing sales in 2002, respectively.

Additionally, in 2004, the loans serviced for others portfolio generated $30.1 million of loan administration revenue, versus a loss of $18.6 million in 2003, and a loss of $4.3 million in 2002. During the fourth quarter of 2004, the portfolio accounted for $6.5 million in net revenues. At December 31, 2004, the mortgage servicing rights (“MSR”) portfolio had a fair value $69.1 million greater than its current book value. As interest rates rise, the fair value of this portfolio should increase. Over the past five years, the Company has sold 87% of the MSRs it has originated. During 2004, the Company sold 106% of the portfolio it originated. A sale of any of this portfolio will decrease the recurring earnings attainable in the future, but should create a net gain from the sale.

SEGMENT REPORTING

Our operations are broken down into two business segments: banking and home lending. Each business operates under the same banking charter, but is reported on a segmented basis for financial reporting purposes. 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 interest 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 home lending group also services mortgage loans for others and sells MSR into the secondary market. Funding for the home lending group is provided by deposits and borrowings garnered by the banking group.

BANKING OPERATIONS

We provide a full range of banking services to consumers and small businesses in southern Michigan and Indiana, operating a network of 120 banking centers at December 31, 2004. Throughout 2004, we have focused on expanding our banking center network in these markets in order to increase our access to depositors. At June 30, 2004, we maintained a 5% market share in 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 2004 and 2003, revenues increased 14.4% and 33.1%, respectively, while pre-tax earnings increased 34.5% in 2004 and 18.0% in 2003, respectively. Additionally, identifiable assets increased 43.4% in 2004 and 79.2% in 2003, respectively.

The primary reason for the increase in revenue is the corresponding increase 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 2004, 2003, and 2002, we opened 22, 12, and 16 banking centers, respectively. During 2005, we plan to open up to an additional 18 banking centers including centers in the Atlanta, Georgia metropolitan area.

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 deposits and those deposit accounts garnered through the secondary market providing sufficient operational funding in the interim.

Despite the Company’s growing banking operation and the large number of banking centers that are not mature (15 of the newly opened branches had less than $10.0 million in deposit balances at December 31, 2004), the banking operation was responsible for approximately 60.9% of pre-tax earnings in 2004, versus 25.7% in 2003, and 49.7% in 2002, respectively. The banking operation’s identifiable assets averaged 83% of our total assets during 2004 versus 59% of total assets during 2003 and 2002. During 2004, the estimated return on average attributable assets and average allocated equity was 0.85% and 36.48%, 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 our control.

The home lending operation was responsible for 50.4% of revenues and 39.1% of pre-tax earnings in 2004. During 2003, the home lending operation produced 74.3% of the pre-tax earnings of the Company and was responsible for 68.4% of revenues. The home lending operation’s identifiable assets averaged 17% of the Company’s total assets during 2004 and 41% 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 loans and MSR’s into the secondary market. During 2004 and 2003, we serviced a portfolio of mortgage loans that averaged $26.4 billion and serviced average loans of $15.6 billion in 2002. The portfolio generated gross revenue of $106.2 million, $104.4 million, and $58.3 million in 2004, 2003, and 2002, respectively. This revenue stream was offset by the amortization of $76.1 million, $123.0 million, and $62.6 million in previously capitalized value of MSR’s in 2004, 2003, and 2002, respectively. During a period of falling or low interest rates, the rate of amortization of the capitalized value of the portfolio increases because of payoffs and refinances. During a period of higher or rising interest rates, payoffs and refinancing slow reducing the rate of amortization.

The earnings volatility inherent in the home lending operation is reflected in the revenues and pre-tax earnings of the operation. The results show that during 2004 and 2003, revenues decreased 46.4% and increased 71.2%, respectively, while pre-tax earnings for the same periods decreased 70.1% and increased 237.5%, respectively. During 2004, the approximate return on average attributable assets and average attributable equity was 1.87% and 11.80%, respectively as compared to 4.14% and 73.01%, respectively, in 2003 and 1.44% and 19.66%, respectively, in 2002. In periods of low or falling interest rates, our loan originations and subsequent sale revenue generally increase but so does the amount of amortization on the capitalized servicing asset (MSR). In a rising or higher interest rate environment, loan originations and sales will slow and the amount of amortization of the MSR asset will also slow. Generally, the increase in the amount of servicing revenue, net of amortization, will probably not offset the decline in 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.

The following tables present certain financial information concerning the results of operations of our banking and home lending operations. See Note 26 of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary Data, herein.

Banking Operations

Home Lending Operations

Net Interest Income

During each of the last three years, there has been an increased level of revenue attributable to net interest income. Our level of net interest income 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, 2004, approximately $1.5 billion of our earning assets were long-term mortgage loans it had originated and was preparing to sell. These mortgage loans are sold upon their conversion to a mortgage-backed security, usually within 90 days. These loans were 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 2004, 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, whereas the approximate spread averaged less than 3.00% during 2004.

During 2003, this spread on mortgage banking asset versus funding liabilities average over 4.00%. This arbitrage was the single largest asset that affected our interest margin.

     2004

During 2004, we recognized $223.3 million in net interest income, which represents an increase of 14.7% compared to the $194.6 million reported in 2003. Net interest income represented 46.4% of our total revenue in 2004 as compared to 29.5% in 2003 reflecting both an increase in such income and a decrease in revenue from our home lending operations. The increase in 2004 was mainly driven by the $2.2 billion, or 24.4%, increase in average earning assets.

During 2004, our interest rate margin decreased to 1.99%, from 2.16%. Our yield earned on earning assets decreased from 5.59% during 2003 to 5.03% in 2004, a 0.56% decrease that was greater than the related decrease in the cost of interest-bearing liabilities. The cost of interest-bearing liabilities decreased 0.42% from 3.58% in 2003 to 3.16% during 2004.

     2003

During 2003, we recognized $194.6 million in net interest income, which represents an increase of 9.4% compared to the $177.9 million reported in 2002. Net interest income represented 29.5% of our total revenue in 2003 as compared to 42.3% in 2002. The increase in 2003 was mainly driven by the $2.6 billion, or 40.6%, increase in average earning assets.

During 2003, our interest rate margin decreased to 2.16%, from 2.80%. Our yield earned on earning assets decreased from 6.95% during 2002 to 5.59% in 2003, a 1.36% 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

The 2002 total of $177.9 million in net interest income represented an increase of 77.7% when compared to the $100.1 million reported in 2001 and totaled 42.3% of 2002 revenue. The 2002 increase was primarily attributable to a $614.4 million increase in average earning assets.

During 2002, our interest rate margin increased to 2.80% from 1.83%. Our yield earned on earning assets decreased from 7.41% during 2001 to 6.95% in 2002, but was offset by a decrease in the cost of interest-bearing liabilities from 5.67% in 2001 to 4.19%.

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 $15.8 million, $6.4 million, and $3.3 million of amortization of net premiums and

net deferred loan origination costs in 2004, 2003, and 2002, respectively. Non-accruing loans were included in the average loans outstanding.

RATE/ VOLUME ANALYSIS

The following table presents the dollar amount of changes in interest income and interest expense for the components of earning assets and interest-bearing liabilities that are presented in the preceding table. The table below distinguishes between the changes related to average outstanding balances (changes in volume while holding the initial rate constant) and the changes related to average interest rates (changes in average rates while holding the initial balance constant).