Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Mark One

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

For the year ended December 31, 2001

Commission File No.: 0-22353

FLAGSTAR BANCORP, INC.

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days.

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

The registrant’s voting stock is traded on the New York Stock Exchange. The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the last sale price ($21.70 per share) at which the stock was sold on March 20, 2002 was approximately $194.3 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 54.0% of the registrant’s Common Stock.

As of March 20, 2002, 19,280,111 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 Annual Report to Stockholders for the year ended December 31, 2001.

     2. Portions of the Proxy Statement for the 2002 Annual Meeting of Stockholders.

Table of Contents

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

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

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

2

Table of Contents

PART I

ITEM 1. BUSINESS

GENERAL

Flagstar Bancorp, Inc. (“Flagstar” or the “Company”) is the holding company for Flagstar Bank, FSB (the “Bank”), a federally chartered stock savings bank founded in 1987. With $6.6 billion in assets at December 31, 2001, Flagstar is the largest savings bank and the 3rd largest banking institution headquartered in Michigan. Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “FBC”.

Through our retail banking centers and e-commerce distribution channels, we attract deposits from the general public and local governmental units. We use these deposits, along with advances from the Federal Home Loan Bank and other funds garnered from the secondary market, to originate or acquire loans in our retail markets and on a nationwide basis. We are one of the largest home mortgage lenders in the United States. Additionally, but to a lesser extent, we provide warehousing lines of credit on a nationwide basis, and originate commercial real estate loans, consumer loans, and non-real estate commercial loans within our retail market area. We also service a significant volume of mortgage loans located throughout the United States.

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

CORPORATE STRATEGIES AND OBJECTIVES

Founded in 1987, we are a growth oriented, return on equity driven company. We began our corporate existence as a bank in 1987 with a $3.0 million balance sheet and one retail banking center. Our growth from that point on can be summed up in one word: rapid. The Bank was formed from a core operation that was in fact a mid-sized regional mortgage banking company. But since the formation of the Bank, we have concentrated on the growth of our retail banking operation by increasing its revenue stream and by expanding the deposit base by increasing the number of banking center locations. Although our core operations are categorized as two distinct operations, they are complimentary business lines. The mortgage banking operation feeds assets to our retail banking operation and our retail banking operation provides a cross selling opportunity for the local mortgage banking operation.

After ten years in business, our asset base reached $1.3 billion and we were operating from fifteen retail banking centers at December 31, 1996. In May of 1997, We initiated an initial public offering of our common stock. Prior to this public offering, our common stock was held by the five members of the Thomas J. Hammond family. The Hammond family is still in control of over 53% of our common stock.

Our primary business objective over our first 5 years as a public company was to generate stockholder value by providing high returns on stated equity and through the growth and enhancement of the franchise. To this end, over the past five years, we have averaged a 24% return on average equity and a return on average assets greater than 1%. During this same time, we have grown our asset base 39% per year, our retail deposits 42%

3

Table of Contents

per year, and our retail origination offices and retail banking centers by 20% per year. Our goal over the next five years is to double the size of our banking center and origination office network and to continue to increase our market share penetration in the markets we currently serve.

During 2002, we will continue to expand the banking center network and the amount of retail origination offices. Twenty-five new banking centers and twenty-four new retail origination offices are slated to be opened during the year. This large expansion will allow us to continue to grow our retail deposit base and our retail loan originations.

Also continuing into 2002, management will strive to stabilize the volatility of net income and to diversify its revenue stream. To achieve these objectives, management implemented strategies in 2001 to generate: (1) an increase in net interest income achieved by increasing the amount of loans held for investment; (2) an increase in spread income by diversifying the product mix of the deposit liability portfolio; and (3) an increase in the fee income received from loan servicing and retail banking.

RETAIL BANKING OPERATIONS

Through our Retail Banking Group (“RBG”), we offer a comprehensive line of consumer and business financial products and services to individuals and small and middle market businesses. We provide service to approximately 500 thousand households through our 70 banking centers (both free-standing and in-store) and 81 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. which allows unparalleled customer convenience.

Our strategy is to expand our base of consumer and business 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 the other openings, we will lead with price. Upon community acceptance of the location and the Flagstar brand, we will then promote to establish the highly sought after core accounts.

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

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

A primary focus of the Company in 2001 was the opening of 19 new banking centers. The focus for 2002 will remain unchanged with 25 banking centers slated to open. The majority of these new openings will be in Wal-mart superstore locations.

At December 31, 2001, the Company had 26 in-store facilities in operation. Twenty-three of these facilities are located within Wal-mart superstores. In 2000, the Company entered into an agreement with Wal-mart in which Flagstar will provide banking services within new or refurbished Wal-mart superstore locations in

4

Table of Contents

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 cash-less e-banking center.

One of the RBG’s primary business objectives in 2002 is to expand our consumer lending activities, as they generally offer higher yields than our mortgage lending products. The size of our consumer loan portfolio has grown in recent years, partly due to the national roll-out of our second mortgage product line. The following consumer loan products are available through our retail banking centers:

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

At December 31, 2001, Flagstar’s consumer loan portfolio contained $232.5 million of second mortgage loans, $50.7 million of equity line loans, and $13.3 million of various other consumer loans such as personal lines of credit, and automobile loans. Consumer loans comprise 5.0% of the Company’s total loan portfolio at December 31, 2001. 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 2001, the Company originated a total of $244.3 million in consumer loans.

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

	–	business lines of credit,
	–	working capital loans,
	–	equipment loans, and
	–	loans secured by real estate.

Commercial business 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 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 satisfies the Company’s loan-to-value ratio requirements of no higher than 80%. 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

5

Table of Contents

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, 2001, the Company’s commercial real estate loan portfolio totaled $314.2 million, or 5.3% of the Company’s total loan portfolio. At December 31, 2001, the Company’s non-real estate commercial loan portfolio was $8.9 million, or 0.2% of its total loan portfolio. During 2001, the Company originated $195.6 commercial loans versus $94.2 million in 2000.

MORTGAGE BANKING OPERATION

We conduct our retail lending operations from 71 retail banking centers and 69 loan origination centers located in seventeen states. The Company’s largest concentration of offices is in southern Michigan, where 59 of its retail banking centers and 37 of its loan centers are located. The Company also maintains 15 wholesale lending offices that conduct business with correspondent mortgage lenders nationwide. During 2001, Flagstar continued to be among the country’s top twenty largest mortgage loan originators.

The origination or acquisition of residential mortgage loans constitutes the most significant lending activity of the Company. The Company originated or acquired $33.0 billion, $9.9 billion, and $14.6 billion of mortgage loans during the years ended December 31, 2001, 2000, and 1999, respectively. Each loan originated or acquired is for the purpose of acquiring or refinancing a one to four family residence and is secured by a first mortgage on the property. The Company offers traditional fixed-rate and adjustable-rate mortgage loans with terms ranging from one year to 30 years. The majority of the Company’s products conform to the respective underwriting guidelines established by the Federal Home Loan Mortgage Corporation (“FHLMC”), the Federal National Mortgage Association (“FNMA”), and the Government National Mortgage Association (“GNMA”). The Company also offers other residential mortgage loans that meet the Company’s underwriting guidelines, but have other terms and conditions customized to meet the needs of the borrower.

The Company, as a part of its overall mortgage banking strategy securitizes the majority of its mortgage loans through FHLMC, FNMA, or GNMA. The Company generally securitizes its longer-term, fixed-rate loans while it invests in the shorter duration and adjustable rate product it originates. Securitization is the process by which mortgage loans owned by the Company are exchanged for mortgage-backed securities that are guaranteed by FHLMC, FNMA, or GNMA and are collateralized by the same mortgage loans that were exchanged. These mortgage-backed securities are then sold to a secondary market investor. The servicing related to the sold loans is generally retained by the Company and later sold to other secondary market investors. The Company, for the most part, does not sell the servicing rights to loans originated within its retail market area. See Notes 3, 4, and 7 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, herein.

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

6

Table of Contents

To further protect the Company from loss, the Company generally requires 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. The Company requires a lower loan-to-value ratio for non-owner-occupied loans. In addition, all home mortgage loans originated by the Company are subject to requirements for title, fire, and hazard insurance. Real estate taxes are generally collected and held in escrow for disbursement by the Company. The Company is also protected against fire or casualty loss on home mortgage loans by a blanket mortgage impairment insurance policy which insures the Company when the mortgagor’s insurance is inadequate.

The Company utilizes three production channels to acquire mortgage loans. Each production channel produces similar loan product and each loan acquired is underwritten by the Company or a contracted representative.

     Wholesale

     Correspondent

     Retail

          MORTGAGE LENDING AND THE INTERNET

Flagstar has always been a strong advocate of the Internet and its use within the mortgage origination process. During 2001, our customers were able to register loans, lock the interest rates on loans, check their in-process inventory, production statistics, and underwriting status through the Internet. During 2001, approximately 60% of all mortgage loans closed utilized the Internet as a communication tool. Although complete electronic fulfillment was not a possibility in 2001, we are working to be able to complete an on-line application, approval, and closing in the near future.

During 2001, we have also been very much involved with testing an electronic streamlined appraisal, the title commitment process, and the title transfer process. In March 2002, Flagstar completed its first fully electronic, paperless loan closing. We will continue to utilize our research and development budget to streamline the mortgage origination process and bring service and convenience to our customers.

7

Table of Contents

          CONSTRUCTION LENDING

We also engage in construction lending involving loans to individuals for construction of one to four family residential housing primarily located in southern Michigan markets, with such loans converting to permanent financing upon completion of construction. At December 31, 2001, our portfolio of loans held for investment included $53.5 million of loans secured by properties under construction, or 1.7% of total loans held for investment. These loans may be construction/permanent loans structured to become permanent loans upon the completion of construction, or may be interim construction loans structured to be repaid in full upon completion of construction and the receipt of permanent financing. 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 2001, the Company originated a total of $70.0 million in construction loans.

          WAREHOUSE LENDING

These loans are granted for terms of one day to 30 days. Warehouse lines of credit are used by mortgage lenders to fund the closing of a mortgage loan which most often is acquired by the Company. The aggregate amount of warehouse lines of credit granted by the Company to other mortgage lenders was $619.1 million of which $298.5 million was outstanding at December 31, 2001 versus $256.1 million in lines granted of which $66.8 million was outstanding at December 31, 2000. Each borrowing consummated under the warehouse lending division is collateralized by a mortgage loan. These lines of credit are also personally guaranteed by a qualified principal officer of the borrower. Each mortgage lender which applies for a warehouse line of credit must be approved under the Company’s commercial loan standards. It is not a requirement of the warehouse lending division that the loan collateralizing the borrowing be sold to Flagstar or that the borrower be a correspondent of the Company.

8

Table of Contents

LOANS BY TYPE

The following table sets forth the Company’s total loans at December 31, 2001, categorized as having fixed interest rates or adjustable interest rates.

LOAN REPAYMENT SCHEDULE

The following table sets forth the scheduled principal payments of Flagstar’s loan portfolio at December 31, 2001, assuming that principal repayments are made in accordance with the contractual terms of the loans.

9

Table of Contents

ASSET QUALITY

Flagstar has implemented comprehensive internal asset review systems to provide for early detection of problem assets. The Company’s asset classifications and the adequacy of its allowances for losses are analyzed quarterly based on, among other things, historical loss experience, and current economic conditions. Although this system will not eliminate future losses due to unanticipated declines in the real estate market or economic downturns, it should provide for timely identification of the loans which could cause the Company a potential loss. Refer to the four schedules included hereafter (Tables 9 through 12), which set forth certain information about the Company’s non-performing assets. At December 31, 2001, the Company 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.

Delinquent Loans. Residential property loans are considered by the Company to be delinquent when any payment of principal and/or interest is past due. While it is the goal of management to work out a satisfactory repayment schedule with a delinquent borrower, the Company will undertake foreclosure proceedings if the delinquency is not satisfactorily resolved. The Company’s procedures regarding delinquent loans are designed to assist borrowers in meeting their contractual obligations. The Company customarily mails 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 Company parameters. The Company’s collection department makes telephone and/or personal contact with borrowers after a 30-day delinquency. In certain cases, the Company recommends that the borrower seeks credit counseling assistance and may grant forbearance if the Company determines that the borrower is likely to correct loan delinquencies within a reasonable period of time. The Company ceases the accrual of interest on loans which are more than 90 days delinquent. Such interest is recognized as income when collected. At December 31, 2001, the Company had $157.1 million in loans that were determined to be delinquent and $87.7 million which were determined to be non-performing and for which interest accruals had ceased. Of this $87.7 million, $76.5 million, or 87.2%, pertained to single family mortgage loans.

Repossessed Assets. Real property which the Company acquires as a result of foreclosure proceedings is classified as “real estate owned” until it is sold or otherwise disposed of. The Company’s Foreclosure Committee decides whether to rehabilitate the property or sell it “as is,” and whether to list the property with a broker, sell the property directly to a third party, or sell it at auction. Generally, the Company is able to dispose of a substantial portion of this type of real estate and other repossessed assets during each year, but the Company invariably acquires additional real estate and other assets through repossession in the ordinary course of its business. At December 31, 2001, the Company had $38.9 million of repossessed assets.

10

Table of Contents

SOURCES OF FUNDS

The Company had retail deposits of $2.4 billion and wholesale deposits totaling $1.2 billion at December 31, 2001. These deposits represent the principal funding source for Flagstar’s lending and investing activities. The Company also derives funds from operations, loan principal payments, loan sales, advances from the FHLB, customer escrow accounts, and the capital markets.

DEPOSIT ACTIVITIES. Flagstar has developed a variety of deposit products ranging in maturity from demand-type accounts to certificates with maturities of up to ten years, including savings accounts and checking accounts. Flagstar primarily relies upon its network of branches, their strategic location, the quality and efficiency of its customer service, and its pricing policies to attract deposits.

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

BORROWINGS. The FHLB provides credit for savings institutions and other member financial institutions. As a member of the FHLB, Flagstar is required to own stock in the FHLB. Flagstar is authorized to apply for advances from the FHLB using its mortgage loans as collateral. The FHLB generally permits advances up to 50% of the Company’s “adjusted assets”, which are defined as assets reduced by outstanding advances. At December 31, 2001, advances to the Company by the FHLB totaled $2.0 billion, or 43.5% of adjusted assets. Of the $2.0 billion outstanding at year-end, $50.5 million, or 2.6% of the Company’s total FHLB advances, consisted of daily borrowings which may be “put” back or paid off at the Company’s option without penalty. Refer to Note 10 of the Notes to Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary Data, herein for further discussion of the Company’s FHLB advances.

LOAN PRINCIPAL PAYMENTS. In its capacity as an investor in loans, the Company will derive funds from the repayment of principal on the loans it holds in its portfolio. Payments totaled $2.6 billion during 2001, representing an increase of $1.7 billion, or 184.3%, compared to 2000. This large increase was attributable to the continued low interest rate environment and the increased asset base.

LOAN SALES. As part of the Company’s mortgage banking operation, the Company originates loans and then sells these loans to other investors. Sales of mortgage loans totaled $30.9 billion in 2001, compared to $8.0 billion sold in 2000. The sales recorded during 2001 were higher than in 2000 because of the higher origination volume in 2001.

CUSTOMER ESCROW ACCOUNTS. As a servicer of mortgage loans for others and for that matter as the servicer of its own loans, the Company holds funds in escrow for the other investors, various insurance entities, or for the government taxing authorities. Escrow accounts on mortgage loans increased from $54.9 million at December 31, 2000 to $105.7 million at December 31, 2001. This increase was caused by an increase in the

11

Table of Contents

amount of total residential mortgage loans serviced by the Company from $14.3 billion at December 31, 2000 to $25.8 billion at December 31, 2001.

CAPITAL MARKETS. Since 1997, the Company and its subsidiaries have completed three public offerings. These offerings provided funds that increased the regulatory capital of the Bank.

SUBSIDIARY ACTIVITIES

The Company conducts business through a number of wholly-owned subsidiaries in addition to the Bank. The additional subsidiaries of the Company include Douglas Insurance Agency, Inc. (“DIA”), Flagstar Commercial Corporation (“FCC”), Flagstar Credit Corporation (“Credit”), Flagstar Trust (“Trust”), Flagstar Title Insurance Agency, Inc. (“Title”), and Flagstar Investment Group, Inc. (“Investment”). DIA acts as an agent for life insurance and property and casualty insurance companies. Credit participates in mortgage reinsurance agreements with various private mortgage insurance companies. FCC and Investment are inactive. Trust is a Delaware trust whose common stock is owned solely by the Company and in 1999 sold 2.99 million shares of preferred securities to the general public in a initial public offering. Title is a real estate title insurance agency which operates in the state of Michigan.

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

Capital has issued publicly-owned preferred stock (NYSE: FBC-P) and is a real estate investment trust whose common stock is owned solely by Holding. Capital and LLC purchase mortgage loans from the Bank and hold them for investment purposes.

REGULATION

Regulation of the Bank

The Bank is chartered as a federal savings bank under the Home Owners’ Loan Act, as amended (the “HOLA”), which is implemented by regulations adopted and administered by the OTS. As a federal savings bank, the Bank is subject to regulation, supervision and regular examination by the OTS. The OTS also has extensive enforcement authority over all savings institutions and their holding companies, including the Bank. Federal banking laws and regulations control, among other things, the Bank’s required reserves, investments, loans, mergers and consolidations, payment of dividends and other aspects of the Bank’s operations. The deposits of the Bank are insured by the SAIF administered by the FDIC to the maximum extent provided by law (up to $100,000 for each depositor). In addition, the FDIC has certain regulatory and examination authority over OTS-regulated savings institutions and may recommend enforcement actions against savings institutions to the OTS. The supervision and regulation of the Bank is intended primarily for the protection of the deposit insurance fund and depositors rather than for the Company, the holder of the Bank’s common stock. See Note 15 of the Notes to the Consolidated Financial Statements, which is incorporated herein.

12

Table of Contents

Regulation of the Company

The Company is a savings and loan holding company under the HOLA and, as such, is subject to OTS regulation, supervision and examination. In addition, the OTS has enforcement authority over the Company and its non-savings institution subsidiaries and may restrict or prohibit activities that are determined to represent a serious risk to the safety, soundness or stability of the Bank or any other subsidiary savings institution.

COMPETITION

Based on total assets at December 31, 2001, the Company is the largest savings institution headquartered in Michigan. The Company faces substantial competition in attracting deposits at its retail banking centers. Its 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 branch offices.

The Company’s 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, 2001, the Company had 3,047 full-time equivalent employees. The employees are not represented by a collective bargaining unit. The Company provides its 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, and a 401K savings and investment plan. Flagstar’s management considers its employee relations to be excellent.

13

Table of Contents

EXECUTIVE OFFICERS

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

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

Michael W. Carrie has served as 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.

Joan H. Anderson has been an Executive Vice President of the Bank since 1988 and of the Company since 1993. She has been employed by the Bank since 1987.

Kirstin Hammond has served as an Executive Vice President of the Bank since 1998 and of the Company since 2001 and has been employed by the Bank since 1991. Mrs. Hammond is the wife of Mark T. Hammond, the President, and the daughter-in-law of Thomas J. Hammond, the Chief Executive Officer.

Robert O. Rondeau, Jr. has served as an Executive Vice President of the Bank since 1998 and of the Company since 2001 and as an employee of the Bank since 1996. Mr. Rondeau is the son-in-law of Thomas J. Hammond, the Chief Executive Officer.

14

Table of Contents

The Company operates from 71 retail banking centers and 69 retail loan origination offices in seventeen states. The Company also maintains 15 wholesale loan offices. Flagstar owns the buildings and land for 18 of its offices, owns the building but leases the land for one of its offices, and leases the remaining 121 offices. The buildings with leases have lease expiration dates ranging from 2002 to 2011. At December 31, 2001, the total net book value of all of the Company’s offices was approximately $62.7 million.

The Company’s national headquarters facility and executive offices are located in Troy, Michigan. Substantially all of the operational support departments related to the mortgage lending operation are housed in this new facility. The Company houses its retail banking operation from its owned facility in Jackson, Michigan.

The Company utilizes a highly sophisticated server-based data processing system. At December 31, 2001, the net book value of the Company’s computer related equipment (including both hardware and software) was approximately $42.8 million.

From time to time, the Company and its subsidiaries are parties to various legal proceedings incident to their business. At December 31, 2001, there were no legal proceedings which management anticipates would have a material adverse effect on the Company. See Note 14 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.

15

Table of Contents

PART II.

ITEM 5. MARKET FOR THE COMPANY’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

COMMON STOCK

The Company’s common stock is traded on the New York Stock Exchange. The trading symbol is FBC. At March 20, 2002, there were 19,280,111 shares of the Company’s common stock outstanding.

QUARTERLY STOCK PRICE/ DIVIDEND INFORMATION

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

16

Table of Contents

FINANCIAL STATEMENTS

The management of the Company and the Bank are responsible for the preparation, integrity, and fair presentation of its published financial statements and all other information presented in this Form 10-K. The financial statements have been prepared in accordance with generally accepted accounting principles and, as such, include amounts based on informed judgements and estimates made by management.

INTERNAL CONTROL

Management is responsible for establishing and maintaining an effective internal control structure over financial reporting presented in conformity with both generally accepted accounting principles (“GAAP”) and the regulatory reporting completed for the Office of Thrift Supervision through the compilation of the quarterly Thrift Financial Report (“TFR”). The structure contains monitoring mechanisms, and actions are taken to correct any deficiencies which are identified.

There are inherent limitations in the effectiveness of any structure of internal controls, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control structure can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of an internal control structure may vary over time.

Management assessed the Company’s internal control structure over financial reporting presented in conformity with both GAAP and in the creation of the TFR at of December 31, 2001. This assessment was based on criteria for effective internal control over financial reporting described in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that the Company maintained an effective internal control structure over the financial reporting presented for both GAAP and the TFR, as of December 31, 2001.

The Audit Committee of the Company’s Board of Directors consists entirely of outside directors who are independent of the Company’s management. It includes members with financial management expertise, has access to its own outside counsel or other advisors it deems necessary to fulfill its responsibilities, and does not include any large customers of the Company. The Audit Committee is responsible for recommending to the Board of Directors the selection of independent auditors. It meets periodically with management, the independent auditors and the internal auditors to ensure that they are carrying out their responsibilities. The Audit Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting and auditing procedures of the Company in addition to reviewing the Company’s financial reports. The independent auditors and the internal auditors have full and free access to the Audit Committee, with or without the presence of management, to discuss the adequacy of the internal control structure for financial reporting and any other matters which they believe should be brought to the attention of the Audit Committee.

COMPLIANCE WITH LAWS AND REGULATIONS

Management is also responsible for ensuring compliance with the federal laws and regulations concerning loans to insiders and the federal and state laws and regulations concerning dividend restrictions, which are the laws and regulations relating to safety and soundness which have been designated by the Federal Deposit Insurance Corporation.

Management assessed its compliance with the designated safety and soundness laws and regulations and has maintained records of its determinations and assessments as required by the Federal Deposit Insurance Corporation. Based on this assessment, management believes that the Company has complied, in all material respects, with the designated safety and soundness laws and regulations for the year ended December 31, 2001.

March 29, 2002

17

Table of Contents

ITEM 6. SELECTED FINANCIAL DATA

SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA

Note — All per share data has been restated for the 3 for 2 stock split completed on July 12, 2001

18

Table of Contents

PROFILE AND INTRODUCTION

In 1993, Flagstar Bancorp, Inc. (“Flagstar” or the “Company”), was formed in order to become the holding company for Flagstar Bank, FSB, a federally chartered stock savings bank founded in 1987. All of the Flagstar common shares were owned by the Thomas J. Hammond family. Flagstar completed an initial public offering (“IPO”) of common stock in May 1997. Since 1994, the Company has worked to increase its retail banking franchise. Initiated by the acquisition of Security Savings Bank, F.S.B., the Company has increased its bank branch locations each year. This growth has been achieved by aggressively developing the Company’s core businesses. This consistent focus on retail deposit gathering, retail and wholesale mortgage lending, and mortgage loan servicing has allowed the Company to increase its net interest income and recurring fee income. The Company’s continued focus on information processing technology has allowed Flagstar to maintain a double digit annual growth rate while keeping control over its operating expenses. As a result, Flagstar has continued to be a highly profitable company over the years, maintaining high returns for its stockholders. During 2001, Flagstar’s return on average equity hit a corporate high of 34.98%, the highest reported by any publicly-traded savings institution. With $6.6 billion in assets at December 31, 2001, Flagstar is the largest savings institution headquartered in Michigan. Flagstar was one of the nations largest mortgage originators with $33.0 billion in mortgage originations during 2001.

RESULTS OF OPERATIONS

Flagstar’s net income totaled $82.9 million ($4.17 per share – diluted) for the year ended December 31, 2001, compared to $28.9 million ($1.57 per share – diluted) in 2000, and $38.4 million ($1.83 per share – diluted) in 1999. The 2001 earnings constitute a 186.9% increase in profitability versus 2000. The 2000 earnings constitute a 24.7% decrease in profitability from 1999.

The drastic swings in annual earnings is a byproduct of the dual operations of the Company. The Company’s operations are broken down into two distinct business lines: mortgage banking and retail banking. The retail banking operation includes the gathering of deposits and investing those deposits in duration matched assets in order to earn spread revenue. On the other hand, mortgage banking involves the origination, packaging, and sale of mortgage loans in order to receive transaction income in the form of a gain on the sale of the loan.

SEGMENT REPORTING

RETAIL BANKING OPERATIONS

The Company provides a full range of banking services to consumers and small businesses in southern Michigan and Indiana. The Company operates a network of 71 retail banking centers. Throughout 2001, the Company has focused on expanding its branch network in these markets in order to increase its access to retail depositors. This also provides cross-marketing opportunities of consumer banking services to the Company’s mortgage customers in Michigan and Indiana.

In each successive period the retail banking operation has expanded its deposit portfolio along with its associated fixed assets that relate to the new banking centers being opened on a de novo basis. The result has been that each year revenues of this operation have increased. During 2001 and 2000, revenues increased 38.2% and 20.4%, respectively, while pre-tax earnings increased 5.8% in 2001 but decreased 1.2% in 2000. Additionally, identifiable assets decreased 16.6% in 2001 and increased 133.8% in 2000. The primary reason

19

Table of Contents

for the increases in revenue is the corresponding increases in the amount of earning assets funded by retail deposits. This increase is tied to the expansion of the banking center network. Further expansion of the deposit branch network is planned. The small decrease in pre-tax earnings during 2000 is attributable to the rapid branch expansion that is taking place. During 2000 and 2001, the Company opened seventeen and nineteen retail banking centers, a 48.6% and 36.5% increase, respectively.

During 2001, the retail banking operation was responsible for 29.1% of revenues and 32.3% of pre-tax earnings. During 2000, the retail banking operation produced 86.1% of the pre-tax earnings of the Company. The retail banking operation also controlled less than 50% of the average assets of the Company during 2001 and 2000.

MORTGAGE BANKING OPERATIONS

The mortgage banking operation is a much more volatile source of earnings. This operation is reliant on the prevailing interest rate environment, which of course, is outside the Company’s control. The Company has continued to expand its operations and is evident when one views the level of purchased money mortgage originations made in each successive year. During 2001, 2000, 1999, 1998, 1997, and 1996, the Company originated $7.1 billion, $6.1 billion, $6.2 billion, $5.4 billion, $4.1 billion, and $3.7 billion, respectively. Despite the expansion in purchased business, the Company’s origination volumes were extremely volatile and totaled $33.0 billion, $9.9 billion, $14.6 billion, $18.8 billion, $7.9 billion, and $6.8 billion in 2001, 2000, 1999, 1998, 1997, and 1996, respectively. This volatility in originations is created by the changes in the general interest rate environment and the amount of mortgages generated to refinance an existing mortgage loan.

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

The earnings volatility inherent in the mortgage banking operation is visually apparent in the revenues and pre-tax earnings of the operation shown below. The results show that during 2001 and 2000, revenues increased 163.0% and decreased 1.9%, respectively, while pre-tax earnings increased 1,359.5% and decreased 69.2%, respectively. The primary cause for these large swings is the mortgage loan production completed during the periods. The future revenue, earnings, and profitability of this operation are fully dependent on production volume and the interest rate environment.

20

Table of Contents

The following tables present certain financial information concerning the results of operations of Flagstar’s retail banking and mortgage banking operation. See Note 18 of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary Data, herein.

Retail Banking Operations

Mortgage Banking Operations

21

Table of Contents

NET INTEREST INCOME

During each of the last three years, there has been an increased level of earnings attributable to net interest income. The level of net interest income reported by the Company is impacted primarily by the volume of average earning assets, the rate paid to acquire the required funding for those earning assets, and the general level of interest rates. During 2001, the Company recognized $113.7 million in net interest income, which represents an increase of 24.3% compared to the $91.5 million reported in 2000 and represented 34.8% of the Company’s total revenue in 2001. This increase is primarily attributable to a $1.1 billion, or 22.9%, increase in average earning assets.

The 2000 total of $91.5 million in net interest income represented an increase of 41.0% when compared to the $64.9 million reported in 1999 and totaled 58.4% of 2000 revenue. The 2000 increase was primarily attributable to a $1.6 billion increase in average earning assets.

During 2000, the interest rate spread dropped .09% to 1.76%, from 1.85%. The yield earned on the Company’s earning assets increased from 7.41% during 1999 to 7.97% in 2000 but was offset by an increase in the cost of interest-bearing liabilities from 5.56% in 1999 to 6.21% during 2000.

During 2001, the interest rate spread increased .06% to 1.82%, from 1.76%. The yield earned on the Company’s earning assets decreased from 7.97% during 2000 to 7.49% in 2001 but was offset by a similar decrease in the cost of interest-bearing liabilities from 6.21% in 2000 to 5.67% during 2001.

As the Company’s spread went up and down, so too has the Company’s net interest margin. The margin decreased from 2.02% in 1999 to 1.91% during 2000, and then up to 1.94% in 2001. Each of these changes was the result of the decrease in the ratio of earning assets to interest-bearing liabilities and the change in the net interest spread. As the Company has increased its earning asset base, each additional asset is added with a corresponding paying liability. This method of increasing the asset base has created marginal assets with an interest margin equal to the prevailing interest spread which has been less than the reported margins.

A large portion of the Company’s assets are long-term mortgage loans it has originated and is currently preparing to sell. These mortgage loans are sold upon their conversion to a mortgage-backed security, usually within 90 days. These loans are being funded with short-term liabilities. Typically, there is a spread between the long-term rates associated with the mortgage loans and the short-term rates associated with the funding source. During 2001, this spread continued to widen as the year went by. The spread between these mortgages and these short-term funds reached over 4.00% near the end of the year. These arbitrages affected the overall spread during the fourth quarter and for the year.

22

Table of Contents

Table 1 presents interest income from average earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates. Interest income from earning assets includes the amortization of net premiums and the amortization of net deferred loan origination costs. Non-accruing loans were included in the average loan amounts outstanding.

TABLE 1

AVERAGE YIELDS EARNED AND RATES PAID