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SECURITIES AND EXCHANGE COMMISSION

Mark One

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

For the year ended December 31, 2002

Commission File No.: 0-22353

FLAGSTAR BANCORP, INC.

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x     No o

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)

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 ($24.65 per share) at which the stock was sold on March 17, 2003 was approximately $359.6 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 50.8% of the registrant’s Common Stock.

As of March 17, 2003, 29,658,876 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, 2002.

          2. Portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders.

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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.

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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 retail banking group and our mortgage banking group. Each operation is linked to one another in many aspects of their respective businesses but are indeed separate. The Bank is a member of the Federal Home Loan Bank System (“FHLB”) and is subject to regulation, examination and supervision by the Office of Thrift Supervision (“OTS”) and the Federal Deposit Insurance Corporation (“FDIC”). Our deposits are insured by the FDIC, by the Savings Association Insurance Fund (“SAIF”).

Our Retail Banking Group (“RBG”) collects deposits from the general public and local government agencies at 86 banking centers located throughout southern Michigan and Indiana. We also collect certificates of deposits through secondary market offerings and solicit business through our internet branch located at www.flagstar.com. We also acquire advances from the Federal Home Loan Bank of Indianapolis. We invest these funds in a variety of consumer and commercial loan products offered to the general public. Our primary investment vehicle is single-family mortgage loans originated or acquired by our Mortgage Banking Group (“MBG”).

The MBG acquires single-family mortgage loans on a wholesale basis nationally. We also originate single-family loans on a retail basis from 92 offices in 21 states. We also originate retail mortgage loans from our 87 retail banking centers located in Michigan and Indiana. Our wholesale division operates from 14 regional offices across the country. In order to originate or acquire these loans, the MBG utilizes funds provided by the RBG. 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 and later sell the mortgage servicing rights in a separate secondary market transaction.

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

CORPORATE STRATEGIES AND OBJECTIVES

Historical Perspective

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Although our core operations are categorized as two distinct operations, they are complementary business lines. The mortgage banking operation feeds assets to our retail banking operation and our retail banking operation provides funding and cross-selling opportunities for our local mortgage banking operation.

After 16 years in business, our asset base has reached $8.2 billion and we are now operating from 87 retail banking centers. During 2002, our RBG contributed over 50% of pre-tax operating earnings despite a record origination year registered by the MBG. Over the past 16 years, we have grown our asset base 90% per year, our deposits 52% per year, and our retail origination offices and retail banking centers by 45% per year. Our goal over the next five years is to double the number of our banking centers and loan origination offices and to continue to increase our market share within the markets we serve.

Toward this goal, during 2003, we will expand the banking center network by 16 new banking centers and we project the amount of new retail origination offices will expand by 24. This large expansion will allow us to continue to grow our retail deposit base and our retail loan originations.

Capital Strategy

Since taking the Company public, our primary business objective has been to generate stockholder value by providing high returns on equity through the growth and enhancement of the value of our franchise. To this end, over the past six years, we have averaged a 26% return on average equity and a return on average assets greater than 1%.

We have not issued any other common equity since 1997, although we have successfully completed three debt capital offerings and one secondary offering of common stock for our primary stockholder. We have also initiated two stock splits completed in the form of stock dividends and have increased the cash dividend on our common stock seven times.

During the first quarter of 2003, we completed the placement of two additional $25.0 million private debt offerings. The proceeds from these offerings will be used to retire the preferred stock of Flagstar Capital, one of the two previously mentioned debt capital offerings. We do not foresee any need at this time to re-enter the capital markets for any other equity capital offerings.

Business Strategy

RETAIL BANKING OPERATIONS

Through our Retail Banking Group, 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 158 thousand households through our 87 banking centers (both free-standing and in-store) and 130 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

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RETAIL BANKING OPERATIONS (continued)

and Sunday hours in all our Wal-Mart locations. This accessibility allows our customer base a level of convenience that exceeds that offered by our competitors.

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 our other banking center openings, we will lead with price. Upon community acceptance of the location and the Flagstar brand, we will then promote to establish checking and savings accounts.

We offer various consumer and 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, online banking, money orders, bank checks, and traveler’s checks,
	•	a membership program featuring free checks, a variety of product discounts, shopping and travel services, and credit card protection service, and
	•	safety deposit box rentals.

One of our primary focuses in 2002 was the opening of 16 new banking centers. The focus for 2003 will remain unchanged with 16 banking centers slated to open. The majority of these new openings will be in free-standing banking centers located in metropolitan Detroit and Indianapolis.

At December 31, 2002, the Company had 33 in-store banking centers. Thirty of these facilities are located within Wal-Mart superstores. In 2000, the Company entered into an agreement with Wal-Mart that permits us to provide banking services within new or refurbished Wal-Mart superstore locations in Michigan and Indiana. The in-store banking centers welcome customers with an open, free-flowing retail environment. The customer can interact with roaming customer service representatives or become engaged by high-tech, self-help, touch screens in the cashless e-banking center.

One of the RBG’s primary business objectives is to expand its lending activities, as they generally offer higher yields than our mortgage lending products. The size of our loan portfolio has grown in recent years, partly due to the concentration placed on this objective by team leaders.

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. The loans are originated as a fixed, amortizing loan or a line of credit;
	•	loans for automobiles, marine and recreational vehicles;
	•	student loans;
	•	loans secured by deposit accounts; and
	•	secured and unsecured loans made under our personal line of credit or term loan programs.

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RETAIL BANKING OPERATIONS (continued)

At December 31, 2002, Flagstar’s consumer loan portfolio contained $214.5 million of second mortgage loans, $110.2 million of equity line loans, and $14.5 million of various other consumer loans such as personal lines of credit, and automobile loans. Consumer loans comprise 3.1% of the Company’s investment loan portfolio at December 31, 2002. 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 2002, the Company originated a total of $586.8 million in consumer loans versus the $244.3 million originated in 2001.

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 total sales. We provide the following loan products to our business customers:

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

Commercial 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 85%. The Company also generally requires a minimum debt-service ratio of 1.2 to 1. In addition, the Company considers the experience of the prospective borrower with similar properties, the creditworthiness and managerial ability of the borrower, the enforceability and collectibility of any relevant guarantees and the quality of the asset to be mortgaged. The Company officer processing the loan also generally performs various feasibility and income absorption studies in connection with the loan.

We also offer warehouse lines of credit to other mortgage lenders. These lines allow the lender to fund the closing of a mortgage loan that most often is acquired by the Company. Each extension or drawdown on the line is collateralized by a mortgage loan. These lines of credit are also 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 be a correspondent of the Company.

The aggregate amount of warehouse lines of credit granted to other mortgage lenders was $1.1 billion of which $558.8 million was outstanding at December 31, 2002 versus $619.1 million in lines granted of which $298.5 million was outstanding at December 31, 2001. At December 31, 2002, our commercial real estate loan portfolio totaled $445.3 million, or 11.1% of our investment loan portfolio. At December 31, 2002, our

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Business Strategy (continued)

RETAIL BANKING OPERATIONS (continued)

non-real estate commercial loan portfolio was $7.7 million, or 0.2% of our investment loan portfolio. During 2002, we originated $190.5 million commercial loans versus $195.6 million in 2001.

MORTGAGE BANKING OPERATION

We conduct our retail mortgage lending operations from our 87 retail banking centers and 92 loan origination centers located in 21 states. Our largest concentration of offices is in southern Michigan, where we have 74 retail banking centers and 54 loan origination centers. We also maintain 14 wholesale lending offices that conduct business with correspondent mortgage lenders nationwide. During 2002, we continued to be among 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 $43.2 billion, $33.0 billion, and $9.9 billion of mortgage loans during the years ended December 31, 2002, 2001, and 2000, respectively. Each loan originated or acquired is for the purpose of acquiring or refinancing a one to four family residence and is secured by a first mortgage on the property. We offer traditional fixed-rate and adjustable-rate mortgage loans with terms ranging from one year to 30 years. The majority of our products conform to the respective underwriting guidelines established by FNMA, FHLMC, and GNMA. We also offer other residential mortgage loans that meet agency underwriting guidelines, but have other terms and conditions customized to meet the needs of the borrower.

As a part of our overall mortgage banking strategy, we securitize the majority of our mortgage loans through FNMA, FHLMC, or GNMA. We generally securitize our longer-term, fixed-rate loans while we invest in the shorter duration and adjustable rate product we originate. Securitization is the process by which mortgage loans we own are exchanged for mortgage-backed securities that are guaranteed by FNMA, FHLMC, or GNMA. These mortgage-backed securities are then sold to a secondary market investor. The servicing related to the sold loans is generally retained and later sold to other secondary market investors. We, for the most part, do not sell the servicing rights to loans originated within our retail market area. For further information see Notes 3, 5, 6, 7, and 10 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, herein.

Our written underwriting guidelines for mortgage loans employ a system of internal controls designed to maintain the quality of the mortgage loan portfolio. All mortgage loans are reviewed by an underwriter at our national headquarters or at one of our wholesale lending centers. We also contract underwriters employed by mortgage insurance companies to underwrite loans. Additionally, certain correspondents have 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.

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

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MORTGAGE BANKING OPERATION (continued)

fire or casualty loss on home mortgage loans by a blanket mortgage impairment insurance policy that insures us when the mortgagor’s insurance is inadequate.

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

     Wholesale

     Correspondent

     Retail

During 2002, we opened 23 new offices under our “My Net Branch” concept. In this process the loan origination officer functions much like our broker channel. The loan officer operates his or her own office on a stand-alone basis. The office is responsible for all costs related to the individual office but in turn receives all fees collected in the origination process. We provide the office staff with accounting, legal, data processing, underwriting, and payroll services for a nominal fee in exchange for the delivery of the closed loan. The office staff is allowed to broker away a small portion of its originations when we do not provide the needed loan program to complete the transaction. During 2002, less than 4.8% of originations were not delivered into Flagstar loan products.

During 2002, we closed $4.1 billion utilizing this origination channel versus the $3.0 billion originated in 2001 and $1.0 billion originated in 2000.

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Business Strategy (continued)

MORTGAGE BANKING OPERATION (continued)

          MORTGAGE LENDING AND THE INTERNET

We have always been a strong advocate of the Internet and its use within the mortgage origination process. During 2002, 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 2002, approximately 80% of all mortgage loans closed utilized the Internet as a communication tool and delivery system. In March 2002, Flagstar completed its first fully electronic, paperless loan closing. During 2003, we will continue to utilize our research and development budget to streamline the mortgage origination process and bring service and convenience to our customers.

          CONSTRUCTION LENDING

We also engage in construction lending involving loans to individuals for construction of one-to-four family residential housing. These properties are primarily located in southern Michigan markets. These construction loans usually convert to permanent financing upon completion of construction. At December 31, 2002, our portfolio of loans held for investment included $54.7 million of loans secured by properties under construction, or 1.4% 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 2002, the Company originated a total of $73.8 million in construction loans versus the $70.0 million originated in 2001 and $78.0 million originated in 2000.

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MORTGAGE BANKING OPERATION (continued)

LOANS BY TYPE

The following table sets forth the Company’s investment loan portfolio at December 31, 2002, 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, 2002, assuming that principal repayments are made in accordance with the contractual terms of the loans.

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ASSET QUALITY

We have implemented comprehensive internal asset review systems to provide for early detection of problem assets. Our asset classifications and the adequacy of our allowances for losses are analyzed quarterly based on, among other things, historical loss experience and current economic conditions. Although this system will not eliminate future losses due to unanticipated declines in the real estate market or economic downturns, it should provide for timely identification of the loans that could cause a potential loss. Refer to the four schedules included hereafter (Pages 37 through 39), which set forth certain information about our non-performing assets. At December 31, 2002, we had no other loans outstanding where known information about possible credit problems of borrowers caused management concern regarding the ability of the same borrowers to comply with the loan repayment terms.

Repurchased Loans. Although all of the loans we sell to the secondary market are done so on a non-recourse basis, we repurchased $25.5 million, $44.0 million, $19.1 million, and $30.9 million in mortgage loans from secondary market investors during 2002, 2001, 2000, and 1999, respectively. Generally, for loans sold to the secondary market, we are responsible for certain representations and warranties regarding the adherence to underwriting and loan program guidelines. At December 31, 2002, we had sold $110.0 billion in loans to the secondary market over the previous 60 months. This volume of loan sales is $33.2 billion, or 43.2%, larger than the $76.8 billion sold in the 60 months preceding December 31, 2001. A repurchase is required because of a loan’s delinquent status or its non-compliance with the underwriting or loan program guidelines that it was initially sold under. A large portion of the mortgage loan charge-offs we recorded ($3.8 million, $3.2 million, and $1.6 million in 2002, 2001, and 2000, respectively) were attributed to loans originated within the prior 60 month period, repurchased from secondary market investors, foreclosed on, and disposed of at a loss.

Delinquent Loans. Residential property loans are considered to be delinquent when any payment of principal or interest is past due. While it is the goal of management to work out a satisfactory repayment schedule with a delinquent borrower, we will undertake foreclosure proceedings if the delinquency is not satisfactorily resolved. Our procedures regarding delinquent loans are designed to assist borrowers in meeting their contractual obligations. We customarily mail notices of past due payments to the borrower approximately 15, 30 and 45 days after the due date, and late charges are assessed in accordance with certain parameters. Our collection department makes telephone or personal contact with borrowers after a 30-day delinquency. In certain cases, we recommend that the borrower seeks credit counseling assistance and may grant forbearance if it is determined that the borrower is likely to correct a loan delinquency within a reasonable period of time. We cease the accrual of interest on loans that are more than 90 days delinquent. Such interest is recognized as income when collected. At December 31, 2002, we had $147.5 million in loans that were determined to be delinquent and $81.6 million which were determined to be non-performing and for which interest accruals had ceased. Of this $81.6 million, $72.4 million, or 88.8%, pertained to single-family mortgage loans.

Repossessed Assets. Real property that we acquire as a result of foreclosure proceedings is classified as “real estate owned” until it is sold or otherwise disposed of. Our Foreclosure Committee decides whether to rehabilitate the property or sell it “as is,” and whether to list the property with a broker, sell the property directly to a third party, or sell it at auction. Generally, we are able to dispose of a substantial portion of this type of real estate and other repossessed assets during each year, but we invariably acquire additional real estate and other assets through repossession in the ordinary course of business. At December 31, 2002, we had $45.1 million of repossessed assets.

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SOURCES OF FUNDS

We have retail deposits of $2.7 billion, municipal deposits of $0.8 billion, and wholesale deposits totaling $0.9 billion at December 31, 2002. These deposits represent the principal funding source for our lending and investing activities. We also derive funds from operations, loan principal payments, loan sales, advances from the FHLB, money held in escrow, and the capital markets.

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

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

BORROWINGS. The FHLB provides credit for savings institutions and other member financial institutions. As a member of the FHLB, we are required to own stock in the FHLB. We are currently authorized through a board resolution to apply for advances from the FHLB using our mortgage loans as collateral. The FHLB generally permits advances up to 50% of a company’s “adjusted assets”, which are defined as assets reduced by outstanding advances. At December 31, 2002, our advances from the FHLB totaled $2.2 billion, or 37.2% of adjusted assets. Of the $2.2 billion outstanding at year-end, $2.0 million, or 0.1% of our total FHLB advances, consisted of daily borrowings which may be “put” back or paid off at our option without penalty. Refer to Note 12 of the Notes to Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary Data, herein for further discussion of our FHLB advances.

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 $2.7 billion during 2002, consistent with the $2.6 billion received in 2001. This large amount of principal repayments was attributable to the continued low interest rate environment for the past two years.

LOAN SALES. As part of our mortgage banking operation, we originate loans and then sell those loans to other investors. Sales of mortgage loans totaled $40.5 billion, or 93.8% of originations in 2002, compared to $30.9 billion, or 93.6% of originations, in 2001. The sales recorded during 2002 were higher than in 2001 because of the higher origination volume in 2002.

MONEY HELD IN ESCROW. As a servicer of mortgage loans for others and for that matter as the servicer of our own loans, we hold funds in escrow for investors, various insurance entities, or for the government taxing authorities. Amounts held in escrow increased from $105.7 million at December 31, 2001, to $148.2 million at December 31, 2002. This increase was caused by an increase in the amount of total

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residential mortgage loans we serviced from $25.8 billion at December 31, 2001, to $35.4 billion at December 31, 2002.

CAPITAL MARKETS. Through December 31, 2002, we have completed three public offerings and one private debt offering. 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. (“DIA”), Flagstar Commercial Corporation (“FCC”), Flagstar Credit Corporation (“Credit”), Flagstar Trust (“Trust”), Flagstar Title Insurance Agency, Inc. (“Title”), Flagstar Statutory Trust II (“Trust II”), 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 an initial public offering. Trust II is a Connecticut statutory trust that issued $25 million of debt securities in a privately placed transaction completed in December 2002. Title is a real estate title insurance agency that operates primarily in the state of Michigan.

The Bank, our primary subsidiary, is a federally chartered, stock savings bank headquartered in Troy, Michigan. The Bank owns four subsidiaries: FSSB Mortgage Corporation (“Mortgage”), Flagstar Intermediate Holding Company (“Holding”), Mid-Michigan Service Corporation (“Mid-Michigan”), and SSB Funding Corporation (“Funding”). Mortgage, Mid-Michigan, and Funding are currently inactive subsidiaries. Holding is the parent of Flagstar 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. On March 20, 2003, we notified the public in a press release that we would redeem all of the preferred stock on June 30, 2003.

LEGISLATIVE, LEGAL AND REGULATORY DEVELOPMENTS

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

FDIC. The FDIC and members of the United States Congress have recently proposed new legislation that would reform the bank deposit insurance system. This reform could merge BIF and SAIF insurance funds, increase the deposit insurance coverage limits and index future coverage limitations, among other changes. Most significantly, reform proposals could allow the FDIC to raise or lower (within certain limits) the

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currently mandated designated reserve ratio requiring the FDIC to maintain a 1.25% reserve ratio ($1.25 against $100 of insured deposits), and require certain changes in the calculation methodology. Although it is too early to predict the ultimate impact of such proposals, they could, if adopted, result in the imposition of higher deposit insurance premium costs on the Company.

Sarbanes Oxley Act. On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 (the S-O Act) implementing legislative reforms intended to address corporate and accounting fraud. In addition to the establishment of a new accounting oversight board which will enforce auditing, quality control and independence standards, and will be funded by fees from all publicly traded companies, the law restricts provision of both auditing and consulting services by accounting firms. To ensure auditor independence, certain permitted non-audit services being provided to an audit client will require preapproval by a company’s audit committee members. In addition, the audit partners must be rotated. Chief executive officers and chief financial officers, or their equivalent, are required to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement. In addition, under the S-O Act, counsel will be required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself. Longer prison terms and increased penalties will be applied to corporate executives who violate federal securities laws, the period during which certain types of suits can be brought against a company or its officers has been extended, and bonuses issued to top executives prior to restatement of a company’s financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan “blackout” periods, and loans to company executives are restricted.

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

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

NYSE. Also during 2002, the New York Stock Exchange (the “NYSE”) proposed numerous corporate governance rules intended to address a heightened public perception of shortcomings in corporate accountability among public companies generally. These rules, if adopted, would affect the Company because its common stock is listed on the NYSE under the symbol “FBC.” The proposed changes include ensuring that

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a majority of a board of directors are independent of management, establishing and publishing a code of conduct for directors and officers and requiring stockholder approval of all new stock option plans and all modifications. These rules are still tentative in nature because they are subject to SEC review and approval, which is expected to occur later this year and would then be followed by an anticipated six-month transition period.

USA Patriot Act. The President of the United States signed the USA PATRIOT Act into law on October 26, 2001. The USA PATRIOT Act establishes a wide variety of new and enhanced ways of combating international terrorism. The provisions that affect national banks (and other financial institutions) most directly are contained in Title III of the act. In general, Title III amends current law — primarily the Bank Secrecy Act — to provide the Secretary of Treasury (“Treasury”) and other departments and agencies of the federal government with enhanced authority to identify, deter, and punish international money laundering and other crimes.

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

COMPETITION

Based on total assets at December 31, 2002, we are the largest savings institution headquartered in Michigan. We face substantial competition in attracting deposits at our retail 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 branch offices.

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, 2002, we had 3,588 full-time equivalent employees. The employees are not represented by a collective bargaining unit. We provide our employees with a comprehensive program of benefits, some of which are on a contributory basis, including comprehensive medical and dental plans, life insurance, disability insurance, a deferred compensation plan, and a 401K savings and investment plan. We consider our employee relations to be excellent.

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EXECUTIVE OFFICERS

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

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

Michael W. Carrie has served as an Executive 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.

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 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 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 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.

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We operate from 87 retail banking centers and 92 retail loan origination offices in 21 states. We also maintain 14 wholesale loan offices. We own the buildings and land for 27 of our offices, own the building but lease the land for one of our offices, and lease the remaining 165 offices. The buildings with leases have lease expiration dates ranging from 2003 to 2017. At December 31, 2002, the total net book value of all of our offices and land was approximately $96.3 million.

Our 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 facility. The majority of the staff that supports the retail banking operation is housed at our owned facility in Jackson, Michigan.

We utilize a highly sophisticated server-based data processing system. At December 31, 2002, the net book value of our computer related equipment (including both hardware and software) was approximately $38.7 million.

From time to time, we are parties to various legal proceedings incident to our business. At December 31, 2002, there were no legal proceedings that we anticipate would have a material adverse effect on the Company. See Note 16 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.

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COMMON STOCK

Our common stock began trading on the New York Stock Exchange in July 2001. The trading symbol is FBC. Prior to July 2001, the common stock traded on the Nasdaq Stock Market under the symbol: FLGS. At March 17, 2003, there were 29,658,876 shares of our common stock outstanding.

QUARTERLY STOCK PRICE/ DIVIDEND INFORMATION

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

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth certain information with respect to securities to be issued under the Company’s equity compensation plans as of December 31, 2002 that have been approved by stockholders.

Information regarding security ownership of certain beneficial owners and management appearing under “Stock Options” in the 2003 Proxy Statement is incorporated herein by reference.

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SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA

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

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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 retail banking group and our mortgage banking group. Each operation is linked to one another in many aspects of their respective businesses but are indeed separate.

Our Retail Banking Group (“RBG”) collects deposits from the general public and local government agencies at 86 banking centers located throughout southern Michigan and Indiana. We also collect certificates of deposit through secondary market offerings and solicit business through our internet branch located at www.flagstar.com. We also acquire advances from the Federal Home Loan Bank of Indianapolis. We invest these funds in a variety of consumer and commercial loan products offered to the general public. Our primary investment vehicle is single-family mortgage loans originated or acquired by our Mortgage Banking Group (“MBG”).

The MBG acquires single-family mortgage loans on a wholesale basis nationally. We also originate single-family loans on a retail basis from 92 offices in 21 states. We also have mortgage loan personnel in 19 retail banking centers located in Michigan. Our wholesale division operates from 14 regional offices across the country. In order to originate or acquire these loans, the MBG utilizes funds provided by the RBG. 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 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. Our growth since 1987 has been extremely rapid. In late 1993, we signed a letter of intent to acquire Security Savings Bank of Jackson, Michigan. Since that acquisition, we have been focused on growing our retail banking operation. The revenue stream created by a retail banking operation was sought to counter the cyclical operating results of our mortgage operation.

After 16 years in business, our asset base has reached $8.2 billion and we are now operating from 87 retail banking centers. During 2002, our RBG contributed over 50% of pre-tax operating earnings despite a historic origination year registered by the MBG. Over the past 16 years, we have grown our asset base 90% per year, our deposits 52% per year, and our retail origination offices and retail banking centers by 45% per year. Our goal over the next five years is to double the number of our banking centers and loan origination offices and to continue to increase our market share within the markets we serve.

Toward this goal, during 2003, we will expand the banking center network by 16 new banking centers and we project the amount of new retail origination offices will expand by 24. This large expansion will allow us to continue to grow our retail deposit base and our retail loan originations.

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

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 2001 and 2002 was due to a significant increase in our loan sale activity. This, in turn, resulted from the unusually low mortgage rate environment in the United States over a prolonged period. Any sudden or prolonged increase in these rates could significantly reduce our income from these sales. Primarily because of interest rate movements, for instance, our loan sale income fluctuated, from $38.7 million in 1999 to $21.9 million in 2000, $199.4 million in 2001, and $194.2 million in 2002. In turn, our return on equity was affected, declining from 21.37% in 1999 to 15.47% in 2000, improving to 34.98% in 2001 and increasing again to 37.14% in 2002.

Further, our operating and administrative expenses increased significantly in 2001 and 2002 to support our anticipated or actual increase in loan sale activity. While this has allowed us to develop and maintain an efficient wholesale loan operation intended to handle a large volume of loans, our ability to increase operational efficiency will become limited over time. Our efficiency ratio (the percentage of each dollar of revenue that is paid in expenses) was 53.9% in 1999, worsened to 63.6% in 2000 and then improved to 50.2% in 2001. It has since worsened again, to 52.6% for the year ended December 31, 2002. If the volume of loans declines and we do not correspondingly reduce our operating and administrative expenses in a prompt manner, we could suffer a significant reduction in net income.

RESULTS OF OPERATIONS

During 2002, Flagstar enjoyed its most profitable year in its corporate existence. During the year corporate records were set for every category of growth, earnings, and loan production. The Company, for the second year in a row, was singled out as the most profitable publicly traded financial institution, from a return on average equity perspective.

Flagstar’s net income totaled $129.3 million ($4.18 per share — diluted) for the year ended December 31, 2002, compared to $82.9 million ($2.78 per share — diluted) in 2001, and $28.9 million ($1.05 per share — diluted) in 2000. The 2002 earnings constitute a 56.0% increase in profitability versus 2001. The 2001 earnings constitute a 186.9% increase in profitability from 2000.

The Company’s operations are broken down into two distinct business lines: mortgage banking and retail banking. Each business operates under the same banking charter, but is reported on a segmented basis for this report. Each of the business lines is complementary to each other. The retail banking operation includes the gathering of deposits and investing those deposits in duration-matched assets primarily originated by the mortgage banking operation in order to earn spread income. On the other hand, the mortgage banking operation 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. Funding for the mortgage banking operation is provided by deposits and borrowings from the retail banking operation.

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

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 operated a network of 87 retail banking centers at December 31, 2002. Throughout 2002, the Company has focused on expanding its branch network in these markets in order to increase its access to retail depositors. The retail banking operation also provides 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 and banking centers. Each new banking center has been opened on a de novo basis. The result has been that each year revenues and expenses related to this operation have increased. During 2002 and 2001, revenues increased 65.7% and 38.2%, respectively, while pre-tax earnings increased 105.8% in 2002 and 5.8% in 2001, respectively. Additionally, identifiable assets increased 42.4% in 2002 and decreased 15.4% in 2001, respectively. The primary reason for the increases in revenue is the corresponding increases in the amount of earning assets funded by retail deposits. This increase is tied to the expansion of the banking center network. Further expansion of the deposit branch network is planned. During 2001 and 2002, the Company opened 19 and 16 retail banking centers, respectively. During 2003, the Company has plans to open an additional 16 banking centers.

However, we do not expect that we will have an immediate increase in retail deposits by opening these new locations. Nonetheless, we believe that the growth in deposits will occur over time, with FHLB advances and other wholesale funding providing sufficient funding in the interim.

At December 31, 2002, the Company operated 33 banking centers under its in-store program. Thirty of these banking centers are located in Wal-Mart superstores. While 12 of the in-store branches were located in Indiana, 21 were located in Michigan communities. The first of the Wal-Mart banking centers was placed in operation in September 2000. The Company expects to open four more Wal-Mart facilities, three in 2003.

Fifty-two of the Company’s retail banking centers were opened within the past three years. The 12 banking centers in Indiana were all opened under the Wal-Mart in-store program in the past three years. The Wal-Mart banking centers had an average deposit portfolio of only $10.6 million compared with the Company average of $30.5 million. Of the 87 branches, 29 branches had deposits of less than $10.0 million.

Each of the in-store banking centers offer the same products and services to our customers as are available at our free-standing banking centers without any significant difference in operating costs. By relying upon in-store banking centers to expand our retail branch network, we avoid the significant building costs of free-standing banking centers while obtaining marketing exposure in a high customer traffic area. The customers using our in-store banking centers are substantially the same as the customers using our free-standing banking centers.

Despite the Company’s growing retail banking operation and the large number of banking centers that are not mature, the retail banking operation was responsible for 37.2% of revenues and 50.0% of pre-tax earnings in 2002. During 2001, the retail banking operation produced 32.3% of the pre-tax earnings of the Company. The retail banking operation’s identifiable assets averaged 55% of the Company’s total assets during 2002 and 2001.

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

MORTGAGE BANKING OPERATIONS

The mortgage banking operation is a much more volatile source of earnings. This operation, for the most part, is reliant on the prevailing interest rate environment, which is outside the Company’s control. The Company has continued to expand its operations which is evident when one views the level of purchased money mortgage originations made in each successive year. During 2002, 2001, 2000, 1999, 1998, 1997, and 1996, the Company originated $8.1 billion, $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 $43.2 billion, $33.0 billion, $9.9 billion, $14.6 billion, $18.8 billion, $7.9 billion, and $6.8 billion in 2002, 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 FNMA, FHLMC, 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 2002 and 2001, revenues increased 14.3% and 163.6%, respectively, while pre-tax earnings decreased 1.8% and increased 1,359.5%, 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.

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

The following tables present certain financial information concerning the results of operations of Flagstar’s retail banking and mortgage banking operations. See Note 20 of the Notes to the Consolidated Financial Statements, in Item 8. Financial Statements and Supplementary Data, herein.

Retail Banking Operations

Mortgage Banking Operations

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

NET INTEREST INCOME

During each of the last three years, there has been an increased level of revenue attributable to net interest income. The level of net interest income reported by the Company is impacted primarily by the volume of average earning assets, the rate paid to acquire the required funding for those earning assets, and the general level of interest rates. During 2002, the Company recognized $186.2 million in net interest income, which represents an increase of 63.7% compared to the $113.7 million reported in 2001 which represented 44.1% of the Company’s total revenue. This increase is primarily attributable to a $636.5 million, or 10.9%, increase in average earning assets.

The 2001 total of $113.7 million in net interest income represented an increase of 24.3% when compared to the $91.5 million reported in 2000 and totaled 34.8% of 2001 revenue. The 2001 increase was primarily attributable to a $1.1 billion increase in average earning assets.

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

During 2001, the interest rate margin increased to 1.94%, from 1.91%. 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 decrease in the cost of interest-bearing liabilities from 6.21% in 2000 to 5.67% during 2001.

Approximately, $3.3 billion of the Company’s earning assets are long-term mortgage loans it has originated and is currently preparing to sell. These mortgage loans are sold upon their conversion to a mortgage-backed security, usually within 90 days. These loans are being funded with short-term liabilities. Typically, there is a spread between the long-term rates associated with the mortgage loans and the short-term rates associated with the funding source. During 2002, the spread widened in the first half of the year but tightened as the year progressed. The spread between these mortgages and these short-term funds stood at approximately 4.00% at year-end. This arbitrage was the single largest asset that affected the Company’s interest margin.

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

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

AVERAGE YIELDS EARNED AND RATES PAID