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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Commission File No.:         0-22353

FLAGSTAR BANCORP, INC.

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

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 thirty days.   Yes    X      No         .

As of April 24, 2003, 29,698,640 shares of the registrant’s Common Stock, $0.01 par value, were issued and outstanding.

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PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements

The unaudited condensed consolidated financial statements of the Registrant are as follows:

	Consolidated Statements of Financial Condition — March 31, 2003 (unaudited) and December 31, 2002.

	Unaudited Consolidated Statements of Earnings — For the three months ended March 31, 2003 and 2002.

	Unaudited Consolidated Statements of Cash Flows — For the three months ended March 31, 2003 and 2002.

	Condensed Notes to Consolidated Financial Statements.

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

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

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

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Flagstar Bancorp, Inc.
Consolidated Statements of Financial Condition
(in thousands)

The accompanying notes are an integral part of these statements.

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Flagstar Bancorp, Inc.
Unaudited Consolidated Statements of Earnings
(in thousands, except per share data)

The accompanying notes are an integral part of these statements.

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Flagstar Bancorp, Inc.
Unaudited Consolidated Statements of Cash Flows
(in thousands)

The accompanying notes are an integral part of these statements.

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Flagstar Bancorp, Inc.
Notes to Consolidated Financial Statements

Note 1.      Nature of Business

Flagstar Bancorp, Inc. (“Flagstar” or the “Company”) is the holding company for Flagstar Bank, fsb (the “Bank”), a federally chartered stock savings bank founded in 1987. With $9.5 billion in assets at March 31, 2003, Flagstar is the largest savings institution and 2nd largest banking institution headquartered in Michigan.

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

The mortgage loans are securitized and sold in order to generate mortgage servicing rights. The Company also invests in a significant amount of its mortgage loan production in order to maximize the Company’s leverage ability and to receive the interest spread between earning assets and paying liabilities. The Company also acquires funds on a wholesale basis from a variety of sources and services a significant volume of loans for others.

The Bank is a member of the Federal Home Loan Bank System (“FHLB”) and is subject to regulation, examination and supervision by the Office of Thrift Supervision (“OTS”) and the Federal Deposit Insurance Corporation (“FDIC”). The Bank’s deposits are insured by the FDIC through the Savings Association Insurance Fund (“SAIF”).

Note 2.     Basis of Presentation

The accompanying consolidated unaudited financial statements of Flagstar Bancorp, Inc. (the “Company”), have been prepared in accordance with generally accepted accounting principles for interim information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All interim amounts are subject to year-end audit, the results of operations for the interim period herein are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

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Note 3.     Stock-Based Compensation

We have two stock incentive plans, the 1997 Stock Option Plan and the 2000 Stock Incentive Plan (collectively, the “Plans”), which provide for the granting of non-qualified stock options, incentive stock options, restricted stock awards, performance stock awards, stock bonuses and other awards to our employees (including officers and directors). Awards are granted at the average market price of our stock on the grant date, vest over varying periods generally beginning at least one year from the date of grant, and expire ten years from the date of grant.

As permitted by SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), we continue to measure and recognize compensation expense using the intrinsic value method specified in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). As required under the provisions of SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” the following table discloses the pro forma net income and pro forma basic and diluted earnings per share had the fair value method been applied to all stock awards for the three months ended March 31, 2003 and 2002:

In addition, during the three months ended March 31, 2003 and 2002, we recognized compensation expense of $357 thousand ($232 thousand, net of taxes) and $154 thousand ($100 thousand, net of taxes), respectively, related to restricted stock awards. These expenses were included in net earnings as reported.

Note 4.     Significant Events

1.		On May 3, 2002, the Company announced a 3 for 2 split of its common stock. The split was completed on May 31, 2002. All share information on the financial statements of the Company has been adjusted accordingly.
2.		On March 20, 2003, Flagstar Capital Corporation (“Capital”) announced that on June 30, 2003 it would redeem all of its 8.50% Series A Preferred stock.
3.		On April 23, 2003, the Company announced a 2 for 1 split of its common stock. The split is to be completed on May 15, 2003. All share information on the financial statements of the Company has been adjusted accordingly.

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

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

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Results of Operations

Net Earnings

During three month period ended March 31, 2003, the Company recorded record net earnings from recurring operations due to the interest rate environment prevalent in 2003. The lower and falling interest rates experienced in 2003 have positively affected the Company’s mortgage banking operation. Along with the record revenues recorded by the mortgage banking operation, the expanding retail banking operation has benefited from the widening yield curve and the downward repricing of higher cost deposits.

Net earnings from recurring operations for the three months ended March 31, 2003 were $41.3 million ($0.66 per share-diluted), a $15.8 million increase from the $25.5 million ($0.42 per share-diluted) reported in 2002. The increase resulted from a $4.4 million increase in net interest income, a $18.5 million increase in other income, and a $2.7 million decrease in operating expenses which was offset by a $8.4 million increase in the provision for federal income taxes and a $1.4 million increase in the provision for losses.

Segment reporting

	Retail banking operation

The Company provides a full range of banking services to consumers and small businesses in southern Michigan and Indiana. At March 31, 2003, the Bank operated a network of 91 banking centers. The Company has continued to focus on expanding its branch network in order to increase its access to retail deposit funding sources.

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, revenues increased 65.7%, while pre-tax earnings increased 105.8%. Additionally, identifiable assets associated with the operation increased 42.4% in 2002. This increase is tied to the expansion of the banking center network. Further expansion of the deposit branch network is planned. During 2002, the Company opened 16 banking centers. During 2003, the Company has plans to open an additional 16 banking centers. During the first quarter 4 banking centers were opened.

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 sources providing sufficient funding in the interim.

At March 31, 2003, the Company operated 34 banking centers under its in-store program. Thirty-one of these banking centers are located in Wal-Mart superstores. While 13 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 June 2000. The Company expects to open three more Wal-Mart facilities, two more in 2003.

Fifty-three 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 $10.5 million compared with the Company average of $31.2 million. Of the 91 branches, 28 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 34.1% of revenues and 39.2% of pre-tax earnings during the three months ended March 31, 2003. During 2002, the retail banking operation produced 50.0% of pre-tax earnings.

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	Mortgage banking operation

Flagstar’s mortgage banking activities involve the origination of mortgage loans or the purchase of mortgage loans from the originating lender. Company personnel originate loans and conduct business from 101 loan origination centers in 21 states. Flagstar purchases mortgage loans on a wholesale basis through a network of correspondents consisting of other banks, thrifts, mortgage companies, and mortgage brokers. This mortgage banking network conducts mortgage lending operations nationwide. The mortgage loans, the majority of which are subsequently sold in the secondary mortgage market, conform to the underwriting standards of Freddie Mac or Fannie Mae, or both.

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 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 2003 and 2002, 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.

The following tables present certain financial information concerning the results of operations of Flagstar’s retail banking and mortgage banking operation.

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Net Interest Income

Net interest income continues to rise and in this quarter increased $4.4 million, or 8.9%, to $53.6 million for the three months ended March 31, 2003. This level of interest income compares positively to the $49.2 million recorded for the 2002 period. This increase in net interest income was created by a $10.0 million increase in interest revenue offset by a $5.6 increase in interest expense.

For the first three months of this year, the Company’s paying liabilities have matured and or repriced at a faster pace than the Company’s earning assets. In this same period that the Company increased the average earning asset base by over $773.9 million, the Company only registered a small increase in interest income. The Company also raised $771.9 million in liabilities to fund these new assets. The liabilities used for these acquisitions and the liabilities that were used to replace maturing liabilities were acquired at a substantially discounted rate compared to the liabilities used in the 2002 period.

These pricing adjustments are best shown by the decreased spread reported during the current period when compared to the first quarter of 2002. Earning assets as a whole repriced down 130 basis points while the liabilities repriced down 75 basis points on a like period comparison. These decreases were reflected in the decrease in the Company’s net interest margin of 56 basis points to 2.69% for the three months ended March 31, 2003 from 3.25% for the comparable 2002 period.

On a sequential quarter basis, the Company reported a 28 basis point increase in the interest rate spread and 27 basis point increase in the interest margin. The Company reported a $9.1 million, or 20.6% increase in net interest income during the current period versus the fourth quarter of 2002.

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AVERAGE YIELDS EARNED AND RATES PAID

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

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RATE/VOLUME ANALYSIS

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

Provision for Losses

The provision for losses was increased to $9.5 million for the three months ended March 31, 2003 from $8.2 million during the same period in 2002. The provision for losses in the 2003 period included only charge-offs recorded during the respective period. In the 2002 period, the Company increased the allowance for loan losses by $3.0 million. Net charge-offs were an annualized 1.16% and 0.65% of average investment loans outstanding during the three months ended March 31, 2003 and March 31, 2002, respectively.

The current allowance was not increased during the three months ended March 31, 2003. It is management’s belief that the current reserves are adequate to offset the inherent risk associated with the Company’s investment loan portfolio. The investment loan portfolio increased $275.5 million, or 7.0%, during the three month period ended March 31, 2003. The allowance, which totals $50.0 million, is 1.17% of the investment loan portfolio and 61.5% of non-performing loans.

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Non-Interest Income

During the three months ended March 31, 2003, non-interest income increased $18.5 million to $77.2 million from $58.7 million. This increase was primarily attributable to an increase in net gain on loan sales and other fees and charges, offset by an increase in the amount of MSR amortization.

	Loan Administration

Net loan administration fee income decreased to a negative $25.6 million during the three months ended March 31, 2003, from $0.8 million in the 2002 period. This $26.4 million decrease was the result of the $35.4 million increase in the amortization of the mortgage servicing rights (“MSR”). This amortization increase was recorded to adjust for the increased prepayment on the underlying mortgage loans serviced for others. Loan amortization or prepayment was $2.1 billion during the three months ended March 31, 2003 versus $294.1 million during the three months ended March 31, 2002. Fee income before the amortization of servicing rights actually increased $9.0 million for the three months ended March 31, 2003, to $22.2 million compared to the $13.2 million recorded in the 2002 period. This increase in the gross fee income was the result of a larger portfolio of serviced loans during the 2003 period.

At March 31, 2003, the unpaid principal balance of loans serviced for others is $22.3 billion versus $21.6 billion serviced at December 31, 2002, and $15.2 billion serviced at March 31, 2002. The weighted average servicing fee on loans serviced for others at March 31, 2003 was 0.343% (i.e., 34.3 basis points). The weighted average age of the loans serviced for others portfolio at March 31, 2003 was 7 months old.

	Net Gain on Loan Sales

For the three months ended March 31, 2003, net gain on loan sales increased $40.1 million, to $90.9 million, from $50.8 million in the 2002 period. The 2003 period reflects the sale of $13.3 billion in loans versus $8.9 billion sold in the 2002 period. The lower interest rate environment in the 2003 period resulted in a higher mortgage loan origination volume ($15.1 billion in the 2003 period vs. $9.3 billion in the 2002 period) and a smaller or narrower gain on sale spread (63 basis points in the 2003 period versus 57 basis points in the 2002 period) recorded when the loans were sold.

	Net Gain on the Sale of Mortgage Servicing Rights

For the three months ended March 31, 2003, the net gain on the sale of mortgage servicing rights increased from $650,000 during the 2002 period to $1.3 million. The gain on sale of mortgage servicing rights increased because the Company sold $10.4 billion of MSR during the 2003 period versus $7.6 billion during the 2002 period. The Company sold a $4.9 billion bulk servicing package in the 2003 period versus a $5.2 billion package in the 2002 period. During 2003, the Company sold $5.1 billion of newly originated servicing rights on a flow basis and $428.8 million of loans on a servicing released basis. During 2002, the Company sold $2.2 billion of newly originated servicing rights on a flow basis and $234.5 million of loans on a servicing released basis.

	Other Fees and Charges

During the three months ended March 31, 2003, the Company recorded $10.7 million in other fees and charges. In the comparable 2002 period, the Company recorded $6.5 million. The collection and recording of these fees are dependent on the amount of deposit accounts, the number of certain types of loans closed, the amount of earnings recorded in certain subsidiaries, and the collection of any miscellaneous fees.

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Non-Interest Expense

The following table sets forth the components of the Company’s non-interest expense, along with the allocation of expenses related to loan originations that are deferred pursuant to SFAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” As required by SFAS No. 91, mortgage loan fees and certain direct origination costs (principally compensation and benefits) are capitalized as an adjustment to the basis of the loans originated during a period. Certain other expenses associated with loan production, however, are not required or allowed to be capitalized. These expense amounts are reflected on the Company’s statement of earnings. Management believes that the analysis of non-interest expense on a “gross” basis ( i.e., prior to the deferral of capitalized loan origination costs ) more clearly reflects the changes in non-interest expense when comparing periods.

The following are the major changes affecting the quarterly income statement:

•		The retail banking operation conducted business from 17 more facilities at March 31, 2003 than at March 31, 2002.
•		The Company conducted business from 28 more retail loan origination offices at March 31, 2003 than at March 31, 2002.
•		The mortgage banking operation originated $15.1 billion in residential mortgage loans during the 2003 quarter versus $9.3 billion in the comparable 2002 quarter.
•		The Company employed 2,865 salaried employees at March 31, 2003 versus 2,441 salaried employees at March 31, 2002.
•		The Company employed 119 full-time national account executives at March 31, 2003 versus 100 at March 31, 2002.
•		The Company employed 793 full-time retail loan originators at March 31, 2003 versus 530 at March 31, 2002.

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Non-Interest Expense (continued)

Non-interest expense, excluding the capitalization of direct loan origination costs, increased $35.2 million to $117.2 million during the three months ended March 31, 2003, from $82.0 million for the comparable 2002 period. This large increase in costs is for the most part explained above, but further explanation follows.

The largest changes occurred in compensation and benefits, commissions, occupancy and equipment, and general and administrative expenses reported.

The increased compensation and benefits expense of $6.2 million is the direct result of the increased personnel count which was required to support the additional banking centers and retail loan centers and to accommodate the growth in loan originations during the period.

The increased commission expense of $20.1 million is the direct result of the increased mortgage loan originations during the period. During the 2003 period commissions were 27.8 basis points of loan originations versus 23.6 basis points during the 2002 period.

The majority of the $3.7 million increase in occupancy and equipment costs are directly attributable to the extensive facility expansion and the equipment required to accommodate the increased staff.

The increase in general and administrative expense is reflective of the increased mortgage loan originations and the increased number of banking centers in operation during the period.

During the three months ended March 31, 2003, the Company capitalized direct loan origination costs of $59.7 million, an increase of $37.9 million from $21.8 million for the comparable 2002 period. The 2003 deferral equates to a capitalization of $566 per loan versus $356 per loan in the 2002 period.

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Financial Condition

Assets

The Company’s assets totaled $9.5 billion at March 31, 2003, an increase of $1.3 billion, or 15.9%, as compared to $8.2 billion at December 31, 2002. This increase was primarily due to an increase in earning assets at March 31, 2003, but encompassed increases in the majority of asset categories.

	Cash and cash equivalents

Cash and cash equivalents decreased from $127.0 million at December 31, 2002 to $119.6 million at March 31, 2003.

	Mortgage-backed securities

Mortgage-backed securities increased from $39.1 million at December 31, 2002 to $41.2 million at March 31, 2003. The slight increase was attributed to the completion of the original delivery scheduled for December 2002. There were no additions to the portfolio in February or March. This portfolio includes loans originated by the Company and securitized for credit enhancement reasons.

	Investment portfolio

The Company’s investment portfolio increased from $11.8 million at December 31, 2002 to $13.0 million at March 31, 2003. The investment portfolio is limited to a small portfolio of contractually required collateral, regulatory required collateral, and reinvestments made by non-bank subsidiaries.

	Loans available for sale

Mortgage loans available for sale increased $1.1 billion, or 33.3%, to $4.4 billion at March 31, 2003, from $3.3 billion at December 31, 2002. This increase is primarily attributable to the record amount of loan production originated during the first quarter. At March 31, 2003, the majority of these loans were originated within the two weeks prior to the end of the quarter.

	Investment loan portfolio, net

The investment loan portfolio, net at March 31, 2003 increased $0.3 million from December 31, 2002. The increase included a $299.7 million increase in mortgage loans, a $27.7 million increase in consumer loans, a $7.0 million increase in commercial real estate loans, and a $1.7 million increase in commercial loans, offset by a $23.1 million decrease in second mortgage loans and a $33.8 million decrease in warehouse loans.