FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Mark One

   
Mark One
x
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
  For the quarterquarterly period ended March 31,June 30, 2003

OR

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

Commission File No.:         0-22353

Commission File No.:   0-22353

FLAGSTAR BANCORP, INC.


(Exact name of registrant as specified in its charter)

   
Michigan 38-3150651

 
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization) (I.R.S. Employer
Identification No.)
 
5151 Corporate Drive, Troy, Michigan 48098

 
(Address of principal executive offices) (Zip Code)

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 thirtysixty days. Yes   X   x Noo.

As of April 24,August 8, 2003, 29,698,64060,119,996 shares of the registrant’s Common Stock, $0.01 par value, were issued and outstanding.

 


TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Consolidated Statements of Financial Condition
Unaudited Consolidated Statements of Earnings
Consolidated Statements of Stockholders’ Equity
Unaudited Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
Mortgage banking operation
Liquidity and Capital Resources
PART II — OTHER INFORMATION
SIGNATURES
EX-11 Computation of Net Earnings per Share
Sec 302 Certification of Chief Executive Officer
302 Certification of Chief Financial Officer
906 Certification of Chief Executive Officer
Sec 906 Certification of Chief Financial Officer


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,June 30, 2003 (unaudited) and December 31, 2002.

 Unaudited Consolidated Statements of Earnings — For the three and six months ended March 31,June 30, 2003 and 2002.

Consolidated Statements of Stockholders Equity — June 30, 2003 (unaudited) and December 31, 2002.

 Unaudited Consolidated Statements of Cash Flows — For the threesix months ended March 31,June 30, 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.

2


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


        
 At June 30, At December 31, 
            2003 2002 
 At March 31, At December 31,   
 
 
AssetsAssets 2003 2002  (unaudited) 
 
 
 
 (unaudited) 
Cash and cash equivalentsCash and cash equivalents $119,571 $126,969 Cash and cash equivalents $828,267 $126,969 
Mortgage-backed securitiesMortgage-backed securities 41,210 39,110 Mortgage-backed securities 37,895 39,110 
Investment portfolio 13,021 11,766 
Investment securitiesInvestment securities 10,781 11,766 
Mortgage loans available for saleMortgage loans available for sale 4,357,802 3,302,212 Mortgage loans available for sale 3,731,829 3,302,212 
Loans held for investment 4,274,196 3,998,682 Loans held for investment 4,848,327 3,998,682 
Less: allowance for losses  (50,000)  (50,000)Less: allowance for losses  (50,000)  (50,000)
 
 
   
 
 
Investment loan portfolio, net 4,224,196 3,948,682 
Loans held for investment, netLoans held for investment, net 4,798,327 3,948,682 
Federal Home Loan Bank stockFederal Home Loan Bank stock 150,000 150,000 Federal Home Loan Bank stock 152,800 150,000 
 
 
   
 
 
Total earning assetsTotal earning assets 8,786,229 7,451,770 Total earning assets 8,731,632 7,451,770 
Accrued interest receivableAccrued interest receivable 48,424 43,279 Accrued interest receivable 45,183 43,279 
Repossessed assetsRepossessed assets 46,512 45,094 Repossessed assets 46,447 45,094 
Premises and equipmentPremises and equipment 153,815 149,630 Premises and equipment 151,681 149,630 
Mortgage servicing rightsMortgage servicing rights 181,606 230,756 Mortgage servicing rights 210,869 230,756 
Other assetsOther assets 170,564 156,204 Other assets 158,903 156,204 
 
 
   
 
 
 Total assets $9,506,721 $8,203,702  Total assets $10,172,982 $8,203,702 
 
 
   
 
 
Liabilities and Stockholders’ Equity
Liabilities and Stockholders’ Equity
 
Liabilities and Stockholders’ Equity
 
Liabilities
Liabilities
 
Liabilities
 
Deposit accountsDeposit accounts $5,178,967 $4,373,889 Deposit accounts $5,269,463 $4,373,889 
Federal Home Loan Bank advancesFederal Home Loan Bank advances 2,364,597 2,222,000 Federal Home Loan Bank advances 2,436,122 2,222,000 
Long term debtLong term debt 149,750 99,750 Long term debt 149,750 99,750 
 
 
   
 
 
Total interest bearing liabilitiesTotal interest bearing liabilities 7,693,314 6,695,639 Total interest bearing liabilities 7,855,335 6,695,639 
Accrued interest payableAccrued interest payable 17,002 16,850 Accrued interest payable 18,988 16,850 
Undisbursed payments on loans serviced for others 794,037 595,206 
Undisbursed payments on Loans serviced for othersUndisbursed payments on Loans serviced for others 1,109,277 595,206 
Escrow accountsEscrow accounts 203,696 148,194 Escrow accounts 267,737 148,194 
Liability for checks issuedLiability for checks issued 145,497 124,293 Liability for checks issued 198,213 124,293 
Federal income taxes payableFederal income taxes payable 65,928 73,582 Federal income taxes payable 98,101 73,582 
Other liabilitiesOther liabilities 129,364 130,992 Other liabilities 90,144 130,992 
 
 
   
 
 
 Total liabilities 9,048,838 7,784,756  Total liabilities 9,637,795 7,784,756 
Stockholders’ Equity
Stockholders’ Equity
 
Stockholders’ Equity
 
Common stock — $.01 par value, 80,000,000 shares authorized; 59,332,322 and 59,189,254 shares issued and outstanding at March 31, 2003 and December 31, 2002, respectively 594 592 
Common stock — $.01 par value, 80,000,000 shares authorized; 59,498,968 and 59,189,254 shares issued and outstanding at June 30, 2003 and December 31, 2002, respectivelyCommon stock — $.01 par value, 80,000,000 shares authorized; 59,498,968 and 59,189,254 shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively 595 592 
Additional paid in capitalAdditional paid in capital 29,721 29,147 Additional paid in capital 27,389 29,147 
Retained earningsRetained earnings 427,568 389,207 Retained earnings 507,203 389,207 
 
 
   
 
 
 Total stockholders’ equity 457,883 418,946  Total stockholders’ equity 535,187 418,946 
 
 
   
 
 
 Total liabilities and stockholders’ equity $9,506,721 $8,203,702  Total liabilities and stockholders’ equity $10,172,982 $8,203,702 
 
 
   
 
 

The accompanying notes are an integral part of these statements.

3


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


                      
 For the quarter ended
March 31,
  For the three months For the six months ended 
 2003 2002  ended June 30, June 30, 
 
 
  2003 2002 2003 2002 
 (unaudited)  
 
 
 
 
Interest Income
Interest Income
 
Interest Income
 
LoansLoans $121,235 $112,426 Loans $122,949 $106,533 $244,184 $218,959 
OtherOther 3,557 2,395 Other 3,374 2,619 6,931 5,015 
 
 
   
 
 
 
 
Total 124,792 114,821 Total 126,323 109,152 251,115 223,974 
Interest Expense
Interest Expense
 
Interest Expense
 
DepositsDeposits 33,895 33,319 Deposits 34,510 29,839 68,405 63,158 
FHLB advancesFHLB advances 28,454 27,882 FHLB advances 29,088 28,581 57,542 56,464 
OtherOther 8,889 4,462 Other 11,641 4,202 20,530 8,664 
 
 
   
 
 
 
 
Total 71,238 65,663 Total 75,239 62,622 146,477 128,286 
 
 
   
 
 
 
 
Net interest incomeNet interest income 53,554 49,158 Net interest income 51,084 46,530 104,638 95,688 
Provision for lossesProvision for losses 9,541 8,174 Provision for losses 8,426 3,589 17,967 11,763 
 
 
   
 
 
 
 
Net interest income after provision for lossesNet interest income after provision for losses 44,013 40,984 Net interest income after provision for losses 42,658 42,941 86,671 83,925 
Non-Interest Income
Non-Interest Income
 
Non-Interest Income
       
Loan administrationLoan administration  (25,609) 780 Loan administration  (13,056) 5,508  (38,665) 6,288 
Net gain on loan salesNet gain on loan sales 90,901 50,824 Net gain on loan sales 155,910 25,117 246,811 75,941 
Net gain on sales of mortgage servicing rightsNet gain on sales of mortgage servicing rights 1,261 650 Net gain on sales of mortgage servicing rights 320 10,179 1,581 10,830 
Other fees and chargesOther fees and charges 10,678 6,457 Other fees and charges 11,387 5,840 22,065 12,297 
 
 
   
 
 
 
 
Total 77,231 58,711 Total 154,561 46,644 231,792 105,356 
Non-Interest Expense
Non-Interest Expense
 
Non-Interest Expense
     
Compensation and benefitsCompensation and benefits 24,915 33,487 Compensation and benefits 29,899 26,138 57,255 59,702 
Occupancy and equipmentOccupancy and equipment 16,109 12,352 Occupancy and equipment 17,299 13,032 33,408 25,384 
General and administrativeGeneral and administrative 16,547 14,429 General and administrative 18,291 9,602 32,397 23,955 
 
 
   
 
 
 
 
Total 57,571 60,268 Total 65,489 48,772 123,060 109,041 
 
 
   
 
 
 
 
Earnings before federal income taxesEarnings before federal income taxes 63,673 39,427 Earnings before federal income taxes 131,730 40,813 195,403 80,240 
Provision for federal income taxesProvision for federal income taxes 22,346 13,904 Provision for federal income taxes 46,150 14,395 68,496 28,299 
 
 
   
 
 
 
 
Net Earnings
Net Earnings
 $41,327 $25,523 
Net Earnings
 $85,580 $26,418 $126,907 $51,941 
 
 
   
 
 
 
 
Net earnings per share — basic
 $0.70 $0.45 
Net earnings per share — diluted
 $0.66 $0.42 
Earnings per share — basic
Earnings per share — basic
 $1.44 $0.45 $2.14 $0.90 
 
 
   
 
 
 
 
Earnings per share — diluted
Earnings per share — diluted
 $1.34 $0.43 $2.00 $0.84 
 
 
 
 
 

The accompanying notes are an integral part of these statements.

4


Flagstar Bancorp, Inc.
Unaudited Consolidated Statements of Cash FlowsStockholders’ Equity
(in thousands)thousands, except per share data)


             
      For the quarter ended 
      March 31, 
      2003  2002 
      
  
 
Operating Activities
        
 Net earnings $41,327  $25,523 
 Adjustments to reconcile net earnings to net cash used in operating activities        
  Provision for losses  9,541   8,174 
  Depreciation and amortization  55,372   18,360 
  Net gain on the sale of assets  (882)  (545)
  Net gain on loan sales  (90,901)  (50,824)
  Net gain on sales of mortgage servicing rights  (1,261)  (650)
  Proceeds from sales of loans available for sale  13,972,870   9,068,003 
  Originations and repurchases of loans available for sale, net of principal repayments  (15,717,137)  (9,277,682)
  Increase in accrued interest receivable  (5,145)  (2,339)
  (Increase) decrease in other assets  (14,362)  16,964 
  Increase (decrease) in accrued interest payable  152   (2,850)
  Increase in the liability for checks issued  21,204   35,822 
  Increase (decrease) in current federal income taxes payable  14,129   (64,073)
  (Benefit) provision of deferred federal income taxes payable  (21,783)  25,977 
  (Decrease) increase in other liabilities  (1,627)  1,992 
  
  
 
    Net cash used in operating activities  (1,738,503)  (198,148)
Investing Activities
        
  Purchase of other investments  (1,255)  (820)
   Investment in mortgage backed securities  (2,099)   
  Origination of loans held for investment, net of principal repayments  483,808   461,508 
  Proceeds from the disposition of repossessed assets  10,179   7,548 
  Acquisitions of premises and equipment  (11,746)  (9,935)
  Proceeds from the disposition of premises and equipment  10   13 
  Increase in mortgage servicing rights  (117,510)  (107,074)
  Proceeds from the sale of mortgage servicing rights  120,102   108,952 
  
  
 
    Net cash provided by investing activities  481,489   460,192 
Financing Activities
        
  Net increase (decrease) in deposit accounts  805,077   (227,248)
  Issuance of junior subordinated debt  50,000    
  Net increase in Federal Home Loan Bank advances  142,597   4,495 
  Net disbursement of payments of loans serviced for others  198,831   (57,400)
  Net receipt of escrow payments  55,502   36,391 
  Proceeds from the exercise of common stock options  576   1,564 
  Dividends paid to stockholders  (2,967)  (1,343)
  
  
 
    Net cash provided by (used in) financing activities  1,249,616   (243,541)
  
  
 
Net (decrease) increase in cash and cash equivalents  (7,398)  18,503 
Beginning cash and cash equivalents  126,969   110,447 
  
  
 
Ending cash and cash equivalents $119,571  $128,950 
  
  
 
Supplemental disclosure of cash flow information:
        
  Loans receivable transferred to repossessed assets $20,257  $17,746 
  
  
 
  Total interest payments made on deposits and other borrowings $71,085  $62,812 
  
  
 
  Federal income taxes paid $29,970  $52,000 
  
  
 
  Loans held for sale transferred to loans held for investment $779,578  $322,111 
  
  
 
                 
      Additional      Total 
  Common  Paid in  Retained  Stockholders' 
  Stock  Capital  Earnings  Equity 
  
  
  
  
 
Balance at December 31, 2001 $574  $21,666  $269,248  $291,488 
Net earnings        129,343   129,343 
Stock options exercised  18   4,872      4,890 
Tax benefit from stock options exercised     2,609      2,609 
Dividends paid ($0.16 per share)        (9,384)  (9,384)
  
  
  
  
 
Balance at December 31, 2002  592   29,147   389,207   418,946 
Net earnings        126,907   126,907 
Return of investment from subsidiary     (3,127)     (3,127)
Stock options exercised  3   1,369      1,372 
Dividends paid ($0.15 per share)        (8,911)  (8,911)
  
  
  
  
 
Balance at June 30, 2003 $595  $27,389  $507,203  $535,187 
  
  
  
  
 

The accompanying notes are an integral part of these statements.

5


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

            
     For the six months ended 
     June 30, 
     2003  2002 
     
  
 
Operating Activities
        
 Net earnings $126,907  $51,941 
 Adjustments to reconcile net earnings to net cash used in operating activities      
 Provision for losses  17,967   11,763 
  Depreciation and amortization  100,950   34,466 
  Net gain on the sale of assets  (1,145)  (1,320)
  Net gain on loan sales  (246,811)  (75,941)
  Net gain on sales of mortgage servicing rights  (1,581)  (10,830)
  Proceeds from sales of loans available for sale  32,282,455   16,003,536 
  Originations and repurchases of loans available for sale, net of principal repayments  (33,244,839)  (16,804,934)
  Increase in accrued interest receivable  (1,904)  (2,892)
  (Increase) decrease in other assets  (2,703)  55,662 
  Increase (decrease) in accrued interest payable  2,138   (3,764)
  Increase (decrease) in the liability for checks issued  73,920   (24,610)
  Increase (decrease) in current federal income taxes payable  46,302   (49,774)
  (Benefit) provision of deferred federal income taxes payable  (21,783)  25,977 
  Decrease in other liabilities  (40,847)  (4,613)
   
  
 
   Net cash used in operating activities  (910,974)  (795,333)
Investing Activities
        
  Net change in other investments  985   (1,142)
  Purchase of mortgage backed securities, net of principal repayments  1,216    
  Origination of loans held for investment, net of principal repayments  (109,684)  677,016 
  Purchase of Federal Home Loan Bank stock  (2,800)  (2,950)
  Proceeds from the disposition of repossessed assets  22,141   17,982 
  Acquisitions of premises and equipment  (17,387)  (14,308)
  Net proceeds in the disposition of premises and equipment  (701)  (159)
  Increase in mortgage servicing rights  (271,188)  (184,019)
  Proceeds from the sale of mortgage servicing rights  207,046   149,329 
   
  
 
   Net cash (used in) provided by investing activities  (170,372)  641,749 
Financing Activities
        
  Net increase (decrease) in deposit accounts  895,574   (14,488)
  Issuance of junior subordinated debt  50,000    
  Net increase in Federal Home Loan Bank advances  214,122   235,495 
  Net receipt (disbursement) of payments of loans serviced for others  514,071   (100,921)
  Net receipt of escrow payments  119,543   49,392 
  Proceeds from the exercise of common stock options  1,372   3,319 
  Net return on investment in subsidiaries  (3,127)   
  Dividends paid to stockholders  (8,911)  (2,898)
   
  
 
   Net cash provided by financing activities  1,782,644   169,899 
   
  
 
Net increase in cash and cash equivalents  701,298   16,315 
Beginning cash and cash equivalents  126,969   110,447 
   
  
 
Ending cash and cash equivalents $828,267  $126,762 
   
  
 
Supplemental disclosure of cash flow information:
        
  Loans receivable transferred to repossessed assets $21,651  $30,860 
   
  
 
  Total interest payments made on deposits and other borrowings $144,339  $124,522 
   
  
 
  Federal income taxes paid $44,000  $52,000 
   
  
 
  Loans held for sale transferred to loans held for investment $779,578  $868,857 
   
  
 

The accompanying notes are an integral part of these financial statements.

6


Flagstar Bancorp, Inc.
Notes to Consolidated Financial Statements


Note 1.1 — Nature of Business

Flagstar Bancorp, Inc. (“Flagstar” or the “Company”), is the holding company for Flagstar Bank, fsbFSB (the “Bank”), a federally chartered stock savings bank founded in 1987. With $9.5 billion in assets at March 31, 2003, Flagstar isFlagstar’s primary business consists of attracting deposits from the largest savings institutiongeneral public, small businesses, and 2nd largest banking institution headquartered in Michigan.

Flagstar is a consumer-oriented financial services organization.local government agencies. The Company’s principal business is obtaining funds in the form of deposits and borrowings and investingCompany strategically invests those funds in various types of loans. The acquisition or origination of single family mortgageduration-matched residential, consumer, and commercial loans isthat are individually underwritten by the Company’s primary lending activity.Company. The Company also originates for investment consumer loans, commercial real estate loans, and non-real estate commercial loans.

Theor acquires conforming residential mortgage loans on an individual basis that are securitized and soldresold on a servicing retained basis to the secondary market in order to generate mortgage servicing rights.bulk. The Company also investssells the retained servicing rights in a significant amount of its mortgage loan productionbulk transactions in order to maximize the Company’s leverage ability and to receive the interest spread between earning assets and paying liabilities.secondary market. 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.

67


Note 3. Critical Accounting Policies

The Company has established various accounting policies that govern the application of generally accepted accounting principles in the preparation of the financial statements. Application of these accounting policies involves judgments and assumptions by management that has a material impact on the carrying value of certain assets and liabilities. The judgments and assumptions are based on historical experience and other factors that are believed to be reasonable under the circumstances.

The Company believes that the following topics involve critical areas of the Company’s operations and the accounting policies associated with these areas requires the most significant judgments, assumptions and estimates.

Allowance for Loan Losses.The allowance for loan losses represents management’s estimate of credit losses inherent in the Company’s investment loan portfolio at the report date. The estimate is a composite of a variety of factors including past experience, collateral value, and the general economy. The allowance includes a specific portion, a formula driven portion, and a general nonspecific portion. The collection and ultimate recovery of the book value of the collateral, in most cases, is beyond the Company’s control.

Mortgage Servicing Rights.Determining the fair value of mortgage servicing rights involves a calculation of the present value of a set of market driven and MSR specific cash flows. The Company is forced to make assumptions about future market conditions including interest rates in order to complete the analysis. The model calculates a fair value based upon variables, but does not, and can not take into account the actual price the specific MSR could be sold at in a fair exchange. The Company does have the portfolio valued by an outside valuation expert not less than annually, but interim valuations could fail to reflect any valuation changes created by a dynamic interest rate environment.

Derivative Accounting.In its mortgage banking operation, the Company enters into commitments to originate loans at certain prices and rates. The Company also sells forward mortgage-backed securities into the secondary market. In accordance with FASB 133, the Company carries these commitments at market value. The process of recording these commitments at fair value has the effect of recording the eventual gain or loss on the sale of these loans before it actually happens. This estimation process may be prone to error and therefore could misstate the Company’s true position.

8


Note 3.4. Stock-Based Compensation

We haveThe Company has 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 continuethe Company continues 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 and six months ended March 31,June 30, 2003 and 2002:

          
         For the three months For the six months 
 For the quarter  ended June 30, ended June 30, 
 Ended March 31,  2003 2002 2003 2002 
 2003 2002  
 
 
 
 
 
 
  ( in thousands, except share data ) 
Net Earnings $41,327 $25,523  $85,580 $26,418 $126,907 $51,941 
Stock-based compensation expense  (1,190)  (622)  (1,190)  (622)  (2,380)  (1,244)
Tax effect 417 218  417 218 833 436 
 
 
  
 
 
 
 
Pro forma net earnings $40,544 $25,119  $84,807 $26,014 $125,360 $51,133 
 
 
  
 
 
 
 
Average common shares outstanding 59,250 57,634  59,416 58,374 59,333 58,006 
Net earnings per share — basic $0.70 $0.45  $1.44 $0.45 $2.14 $0.90 
Pro forma earnings per share — basic $0.68 $0.45  $1.42 $0.45 $2.11 $0.88 
Average common share equivalents outstanding 62,618 61,186  64,107 62,414 63,637 61,792 
Net earnings per share — diluted $0.66 $0.42  $1.34 $0.43 $2.00 $0.84 
Pro forma earnings per share — diluted $0.65 $0.41  $1.32 $0.42 $1.97 $0.83 

In addition, during the three and six months ended March 31,June 30, 2003, and 2002, wethe Company recognized compensation expense of $357 thousand ($232 thousand, net of taxes) and $714 thousand ($464 thousand, net of taxes), respectively, related to restricted stock awards. During the three and six months ended June 30, 2002, the Company recognized compensation expense of $154 thousand ($100 thousand, net of taxes) and $309 thousand ($201 thousand, net of taxes), respectively, related to restricted stock awards. These expenses were included in net earnings as reported.

Note 4.5. 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 bewas completed on May 15, 2003. All share information on the financial statements of the Company has been adjusted accordingly.
3.On June 30, 2003, Flagstar Capital Corporation (“Capital”) redeemed all of its 8.50% Series A Preferred stock.

79


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

                 
  For the three months ended  For the six months ended 
  June 30, 2003  June 30, 2002  June 30, 2003  June 30, 2002 
  
  
  
  
 
Return on average assets  3.48%  1.53%  2.71%  1.54%
Return on average equity  69.55%  32.00%  54.67%  32.75%
Efficiency ratio  31.9%  52.4%  36.6%  54.2%
Equity/assets ratio (average for the period)  5.00%  4.79%  4.96%  4.70%
Mortgage loans originated or purchased $17,488,383  $7,488,490  $32,550,482  $16,750,674 
Mortgage loans sold $17,287,723  $6,818,644  $30,540,969  $15,762,964 
Interest rate spread  2.02%  2.77%  2.23%  2.92%
Net interest margin  2.26%  3.05%  2.47%  3.13%
Average common shares outstanding (2)  59,416   58,374   59,333   58,006 
Average diluted shares outstanding (2)  64,107   62,414   63,637   61,792 
Charge-offs to average investment loans  0.73%  0.34%  0.84%  0.52%
                 
  June 30, 2003  March 31,  December 31,  June 30, 2002 
     2003  2002    
  
  
  
  
 
Equity-to-assets ratio  5.26%  4.82%  5.10%  5.06%
Core capital ratio (1)  6.58%  6.79%  6.73%  6.73%
Total risk-based capital ratio (1)  12.17%  12.33%  11.01%  12.54%
Book value per share (2) $8.99  $7.72  $7.08  $5.88 
Number of common shares outstanding (2)  59,499   59,332   59,190   58,478 
Mortgage loans serviced for others $28,953,871  $22,336,428  $21,586,797  $19,390,204 
Value of mortgage servicing rights  0.73%  0.81%  1.07%  0.99%
Allowance to non performing loans  71.7%  61.5%  61.3%  56.6%
Allowance to held for investment loans  1.03%  1.17%  1.25%  1.38%
Non performing assets to total assets  1.14%  1.34%  1.54%  1.86%
Number of bank branches  95   91   87   76 
Number of loan origination centers  108   101   92   83 
Number of correspondent offices  15   14   14   15 
Number of employees  4,110   3,777   3,588   3,059 


(1)Based on adjusted total assets for purposes of tangible capital and core capital, and risk-weighted assets for purposes of the risk-based capital and the total risk-based capital. These ratios are applicable to Flagstar Bank only.
(2)All share data has been adjusted to reflect the 2 for 1 stock dividend declared on April 23, 2003 and completed on May 15, 2003.

10


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

Selected Financial Ratios (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 thousands, except per share data )

          
  For the quarter ended 
  March 31,
2003
  March 31,
2002
 
  
  
 
Return on average assets  1.86%  1.55%
Return on average equity  37.82%  33.58%
Efficiency ratio  44.02%  55.87%
Equity/assets ratio (average for the period)  4.92%  4.60%
Mortgage loans originated or purchased $15,062,099  $9,262,184 
Mortgage loans sold $13,253,246  $8,944,320 
Interest rate spread  2.55%  3.10%
Net interest margin  2.69%  3.25%
Average common shares outstanding (2)  59,250   57,634 
Average fully diluted shares outstanding (2)  62,618   61,186 
Charge-offs to average investment loans  1.16%  0.65%

             
  March 31,
2003
  December 31,
2002
  March 31,
2002
 
  
  
  
 
Equity-to-assets ratio  4.82%  5.11%  4.95%
Tangible capital ratio (1)  6.79%  6.73%  6.70%
Core capital ratio (1)  6.79%  6.73%  6.70%
Risk-based capital ratio (1)  11.44%  11.01%  11.47%
Total risk-based capital ratio (1)  12.33%  12.01%  12.45%
Book value per share (2) $7.72  $7.08  $5.48 
Number of common shares outstanding (2)  59,332   59,190   57,936 
Mortgage loans serviced for others $22,336,428  $21,586,797  $15,249,763 
Value of mortgage servicing rights  0.81%  1.07%  1.02%
Allowance for losses to non performing loans  61.5%  61.3%  50.8%
Allowance for losses to total investment loans  1.17%  1.25%  1.49%
Non performing assets to total assets  1.34%  1.54%  2.08%
Number of bank branches  91   87   74 
Number of loan origination centers  101   92   73 
Number of correspondent offices  14   14   15 
Number of employees  3,777   3,588   3,071 
1987. Flagstar’s primary business consists of attracting deposits from the general public, small businesses, and local government agencies. The Company strategically invests those funds in duration-matched residential, consumer, and commercial loans that are individually underwritten by the Company. The Company also originates or acquires conforming residential mortgage loans on an individual basis that are resold on a servicing retained basis to the secondary market in bulk. The Company also sells the retained servicing rights in bulk transactions in the secondary market. The Company also acquires funds on a wholesale basis from a variety of sources and services a significant volume of loans for others.


(1) Based on adjusted total assets for purposes of tangible capital and core capital, and risk-weighted assets for purposes of the risk-based capital and the total risk-based capital. These ratios are applicable to Flagstar Bank only.
(2) All share data has been adjusted to reflect a 3 for 2 stock dividend declared on May 3, 2002 and issued on May 31, 2002 and a 2 for 1 stock dividend declared on April 23, 2003 and to be issued on May 15, 2003.
Although the Company operates and reports its net earnings as one entity, the Company’s operations have been segregated as two distinct operations for this document. The operations have been classified into a mortgage banking segment and retail banking segment.

8CAUTIONARY NOTE ABOUT FORWARD-LOOKING 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.

11


Results of Operations

Net Earnings

During the three and six month periodperiods ended March 31,June 30, 2003, the Company recorded record net earnings from recurring operations due to the interest rate environment prevalent in 2003.during the periods. The lower and falling interest rates experienced in the first half of 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 fromcontinued to provide added earnings for the widening yield curve and the downward repricing of higher cost deposits.Company.

Three months

Net earnings from recurring operations for the three months ended March 31,June 30, 2003 were $41.3$85.6 million ($0.661.34 per share-diluted), a $15.8$59.2 million increase from the $25.5$26.4 million ($0.420.43 per share-diluted) reported in 2002. The increase resulted from a $4.4$108.0 million increase in non interest income and a $4.6 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$16.7 million increase in operating expenses, a $31.8 million increase in the provision for federal income taxes, and a $1.4$4.8 million increase in the provision for losses.

Six months

Net earnings for the six months ended June 30, 2003 were $126.9 million ($2.00 per share-diluted), a $75.0 million increase from the $51.9 million ($0.84 per share-diluted) reported in 2002. The increase resulted from a $126.4 million increase in non interest income and a $9.0 million increase in net interest income which was offset by a $14.0 million increase in operating expenses, a $40.2 million increase in the provision for federal income taxes, and a $6.2 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,June 30, 2003, the Bank operated a network of 9195 banking centers.

Earnings from the Retail Banking Operation (“RBO”) primarily consist of net interest income generated from loans held for investment funded by deposits and long-term borrowings. Earnings also consist of fees collected from depositors and fees earned on consumer and commercial loan originations. All single-family mortgage origination data is included in the earnings related to the mortgage banking operation. Management believes that because of its duration-matching program, the RBO’s earnings are more stable and less volatile than the earnings contributed from the mortgage banking operation.

This operation is considered the growth portion of the Company. Ten years ago, the Company had only one banking center located in the lobby of its headquarters building. During the six months ended June 30, 2003, the Company opened eight new banking centers. Since June 30, 2003, the Company opened two more banking centers.

Each quarter the RBO contributes a larger amount of revenue and net earnings to the totals recorded by the Company. During the three months ended June 30, 2003, the RBO was responsible for approximately $16.8 million, or 19.6% of net earnings. That compares positively to the $16.4 million reported for the comparable 2002 period and the $16.2 million reported in the first quarter of 2003. During the six months ended June 30, 2003, the RBO was responsible for approximately $33.0 million of net earnings compared to the $29.6 million reported in the comparable 2002 period.

In each period the portion of the total earnings of the Company that the RBO earnings constitutes varies widely. In the three months ended June 30, 2003, RBO earnings constituted 19.6% of total earnings versus 26.0%, 39.3%, 61.8%, and 56.9% reported for the six months ended June 30, 2003, and the three and six months ended June 30, 2002, respectively. The Company has continued to focus on expanding its branch networkvolatility in order to increase its access to retail deposit funding sources.the percentage of total income is a product of the fluctuation in the earnings provided by the MBO as discussed below.

12


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-taxthe three months ended June 30, 2003, attributable earnings increased 105.8%. Additionally, identifiable assets associated withan annualized 10.4% versus the operation increased 42.4%same period in 2002. This increase is2002 and an annualized 13.5% versus the three months ended March 31, 2003. These increases are 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 the remainder of 2003, the Company has plans to open an additional 16four banking centers. During the first quarter 4 banking centers were opened.

WeUpon opening these new facilities, we do not expect that we will have an immediate increase in retail deposits by opening these new locations.deposits. 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,June 30, 2003, the Company operated 3435 banking centers under its in-store program. Thirty-oneThirty-two of these banking centers are located in Wal-Mart superstores. While 1314 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 threetwo more Wal-Mart facilities, twoone more in 2003.

Fifty-threeFifty-nine of the Company’s retail banking centers were opened within the past three years. The 12Fourteen of the banking centers in Indiana were all opened under the Wal-Mart in-store program induring the past three years. The Wal-Mart banking centers had an average deposit portfolio of only $10.5$13.0 million compared with the Company average of $31.2$33.1 million. Of the 9195 branches, 2826 branches had deposits of less than $10.0 million. Banking centers opened in 2000, 2001, 2002, and 2003 had average balances of $38.3 million, $26.6 million, $11.5 million, and $3.7 million, respectively. Banking centers opened under the in-store program opened in 2000, 2001, 2002, and 2003 had average balances of $16.3 million, $13.1 million, $6.9 million, and $3.0 million, respectively.

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

DespiteIt is the Company’s growing retail banking operation and the large number of banking centers that are not mature,intent to continue to grow the retail banking operation was responsible for 34.1%operation.

The following table presents certain financial information concerning the results of revenues and 39.2% of pre-tax earnings during the three months ended March 31, 2003. During 2002, theFlagstar’s retail banking operation produced 50.0% of pre-tax earnings.operation.

                 
  At or for the quarter ended  At or for the six months ended 
  June 30,  June 30, 
  2003  2002  2003  2002 
  
  
  
  
 
      ( In thousands )     
Revenues $53,440  $43,281  $98,025  $77,655 
Earnings before taxes  25,861   25,155   50,781   45,492 
Net earnings  16,810   16,350   33,007   29,570 
Identifiable assets  5,334,839   3,878,380   5,334,839   3,878,380 

913


Mortgage banking operation

Flagstar’s mortgage banking activities involve the origination of mortgage loans orand the purchase of mortgage loans from the originating lender. Company personnel originate loans and conduct business from 101its 95 banking centers and its 108 loan origination centers in 21 states.centers. 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, primarily conform to the underwriting standards of Freddie Mac or Fannie Mae, or both.

Earnings recorded in the Mortgage Banking Operation (“MBO”) is generated by the revenue received from the sale of loans and mortgage servicing rights, the net interest income received on loans held for sale, loan servicing fees received, and certain loan origination fees, offset by the costs required to perform those tasks. The earnings and revenues recorded by the MBO are substantially dependent on the general economy and the interest rate environment, which is outside the Company’s control. Historically, originations are at their peak when interest rates are low and the general outlook for the economy is positive.

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 2003the three and 2002, revenues increased 14.3% and 163.6%, respectively, whilesix months ended 2003, pre-tax earnings decreased 1.8%increased 576.5% and increased 1,359.5%,316.2% versus the comparable periods in 2002, 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 fullyis dependent on production volumevolumes and the interest rate environment.

During the three months ended June 30, 2003, the MBO was responsible for approximately 80.4% of net earnings. Net earnings for the MBO are up 173.7% on a sequential quarter basis. Loan production in the current quarter is up 13.1% on a sequential quarter basis and up 133.3% on a comparable quarter basis.

During the six months ended June 30, 2003, the MBO was responsible for approximately 74.0% of net earnings. Earnings for the MBO are up 319.8% on a comparable period basis. Loan production for the six months ended June 30, 2003 is up 94.0% on a comparable period basis.

Management believes that the earnings of the MBO will continue to fluctuate with its ability to originate and sell mortgage loans and mortgage servicing rights. The severity of the swings and the effect those swings will have on the net earnings of the Company will be mitigated by the increased earnings provided by the RBO.

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

                
 Retail Banking Operation Mortgage Banking Operation 
                 
 At or for the three months ended At or for the three months ended  At or for the quarter ended At or for the six months ended 
 March 31, March 31,  June 30, June 30, 
 2003 2002 2003 2002  2003 2002 2003 2002 
 
 
 
 
  
 
 
 
 
 ( In thousands )  ( In thousands ) 
Revenues $44,585 $34,375 $86,200 $73,494  $152,205 $49,893 $238,405 $123,387 
Earnings before taxes 24,970 20,338 38,703 19,089  105,869 15,658 144,622 34,747 
Net earnings 68,815 10,178 93,850 22,586 
Identifiable assets 5,560,443 3,106,109 4,958,280 3,984,515  4,838,145 3,360,031 4,838,145 3,360,031 

1014


Net Interest Income

Three months

Net interest income continuescontinued to rise and in this quarter increased $4.4$4.6 million, or 8.9%9.9%, to $53.6$51.1 million for the three months ended March 31, 2003. This level of interest income compares positivelycompared to the $49.2$46.5 million recorded for the 2002 period. This increase in net interest incomeAlthough there was created by a $10.015.7%, or $17.1 million, increase in interest revenue offset byincome, there was a $5.6$12.6 million, or 20.1%, 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 thatof lower interest rates, the Company increasedasset sensitivity of the average earningbalance sheet was evident. This repricing is shown in the 148 basis point decrease in the asset base by over $773.9 million,yield while liability costs only decreased 73 basis points. This decrease caused the Company only registered a small increase75 basis point decrease in the interest income. The Company also raised $771.9 million in liabilities to fund these new assets. The liabilities used for these acquisitionsrate spread during the period and the liabilities that were used to replace maturing liabilities were acquired at a substantially discounted rate compared to the liabilities used79 basis point decrease in the 2002 period.

These pricing adjustments are best shown by the decreased spread reported during the current periodinterest margin 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 spread and margin decreased 53 basis points and 43 basis points, respectively. This decrease was the result of a 2870 basis point increasedecrease in the yield on the earning asset portfolio, offset by a 17 basis point decrease in the rate paid on liabilities. The interest margin decreased less than the interest spread because of the Company’s reliance on non-interest bearing liabilities during the quarter.

Management believes that there will be further compression in the interest rate spread and 27 basis point increasemargin in the third quarter of 2003. The loans receivable that were reported as yielding 5.87% during the quarter ended June 30, 2003, will to a certain extent refinance and be replaced with current market mortgage loans. These replacement loans will have yields less than 5.87%.

Management expects to increase the size of the earning asset portfolio in the coming quarters. This growth will be accomplished using duration matched assets and liabilities. Although management will utilize the most cost effective source of funds available, there is no guarantee that management will be able to maintain these spreads and margins.

Six months

In comparing the net interest margin.income reported for the six months ended June 30, 2003 to the net interest income reported for the six months ended June 30, 2002, the variance is similar to that seen in the three-month analysis. The Company reported a $9.1recorded an increase of $8.9 million or 20.6% increase in net interest income. This increase includes a $27.1 million increase in interest income duringand an $18.2 million increase in interest expense.

In comparison, despite a 71 basis point reduction in the current period versusrates paid on the fourth quarter of 2002.Company’s liabilities, there was a 140 basis point reduction in the yield on earning assets that eliminated the savings in interest costs.

1115


AVERAGE YIELDS EARNED AND RATES PAID

The following table presentstables present 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.

                                        
 Quarter ended March 31,  Quarter ended June 30, 
 
  
 
 2003 2002  2003 2002 
 
 
  
 
 
 Average Yield/ Average Yield/  Average Yield/ Average Yield/ 
 Balance Interest Rate Balance Interest Rate  Balance Interest Rate Balance Interest Rate 
 
  
 
 
 
 
 
 
Interest-earning assets:
Interest-earning assets:
 ( in thousands ) 
Interest-earning assets:
 ( in thousands ) 
Loans receivable, netLoans receivable, net $7,640,659 $121,235  6.43% $5,877,257 $112,426  7.76%Loans receivable, net $8,377,789 $122,949  5.87% $5,928,422 $106,533  7.19%
FHLB stockFHLB stock 150,000 2,219 6.00 128,400 1,900 6.00 FHLB stock 152,800 2,098 5.49 129,875 2,030 6.25 
OtherOther 270,312 1,338 2.01 135,211 495 1.48 Other 520,029 1,276 0.98 121,975 589 1.93 
 
 
 
 
   
 
 
 
 
Total interest-earning assetsTotal interest-earning assets 8,060,971 $124,792  6.28% 6,140,868 $114,821  7.58%Total interest-earning assets 9,050,618 $126,323 5.58 6,180,272 $109,152 7.06 
Other assetsOther assets 813,099 464,353 Other assets 790,224 720,606 
 
 
   
  
 
Total assetsTotal assets $8,874,070 $6,605,221 Total assets $9,840,842 $6,900,878 
 
 
   
 
 
Interest-bearing liabilities:
Interest-bearing liabilities:
 
Interest-bearing liabilities:
 
Deposits
Deposits
 $4,973,298 $33,895  2.76% $3,748,504 $33,319  3.60%Deposits $5,244,464 $34,510  2.64% $3,586,141 $29,839  3.34%
FHLB advancesFHLB advances 2,206,651 28,455 5.23 1,979,673 27,882 5.71 FHLB advances 2,401,081 29,088 4.86 2,127,593 28,581 5.39 
OtherOther 571,424 8,888 6.31 219,250 4,462 8.25 Other 843,096 11,641 5.54 211,718 4,202 7.96 
 
 
 
 
   
 
 
 
 
Total interest-bearing liabilitiesTotal interest-bearing liabilities 7,751,373 $71,238  3.73% 5,947,427 $65,663  4.48%Total interest-bearing liabilities 8,488,641 $75,239  3.56% 5,925,452 $62,622  4.29%
Other liabilitiesOther liabilities 685,659 353,740 Other liabilities 859,992 645,200 
Stockholders equity 437,038 304,054 Stockholders equity 492,209 330,226 
 
 
   
 
 
Total liabilities and stockholders equityTotal liabilities and stockholders equity $8,874,070 $6,605,221 Total liabilities and stockholders equity $9,840,842 $6,900,878 
 
 
   
 
 
Net interest-earning assetsNet interest-earning assets $309,598 $193,441 Net interest-earning assets $561,977 $255,048 
 
 
   
 
 
  
  
    
  
 
Net interest incomeNet interest income $53,554 $49,158 Net interest income $51,084 $46,530 
 
 
   
 
 
   
   
 
Interest rate spreadInterest rate spread  2.55%  3.10%Interest rate spread  2.02%  2.77%
 
 
   
 
 
Net interest marginNet interest margin  2.69%  3.25%Net interest margin  2.26%  3.05%
 
 
   
 
 
Ratio of average interest-
Earning assets to
Interest-bearing liabilities
  104%  103%
Ratio of average interest- earning assets to interest-bearing liabilitiesRatio of average interest- earning assets to interest-bearing liabilities  107%  104%
 
 
   
 
 

1216


AVERAGE YIELDS EARNED AND RATES PAID

                          
   Six months ended June 30, 
   
 
   2003  2002 
   
  
 
   Average      Yield/  Average      Yield/ 
   Balance  Interest  Rate  Balance  Interest  Rate 
   
  
  
  
  
  
 
Interest-earning assets:
 ( in thousands )  
Loans receivable, net $8,009,224  $244,184   6.10% $5,905,237  $218,959   7.42%
FHLB stock  151,400   4,317   5.75   129,243   3,930   6.00 
Other  395,171   2,614   1.32   128,707   1,085   1.68 
  
  
      
  
     
Total interest-earning assets  8,555,795  $251,115   5.87%  6,163,187  $223,974   7.27%
Other assets  803,269           592,366         
  
        
       
Total assets $9,359,064          $6,755,553         
  
          
         
Interest-bearing liabilities:
                        
Deposits $5,109,935  $68,405   2.70% $3,667,070  $63,158   3.47%
FHLB advances  2,303,802   57,542   5.04   2,057,917   56,464   5.53 
Other  707,260   20,530   5.85   215,484   8,664   8.11 
  
  
      
  
     
Total interest-bearing liabilities  8,120,997  $146,477   3.64%  5,940,471  $128,286   4.35%
Other liabilities  773,790           497,871         
 Stockholders equity  464,277           317,211         
  
          
         
Total liabilities and Stockholders equity $9,359,064          $6,755,553         
  
          
         
Net interest-earning assets $434,798          $222,716         
  
          
         
    
        
     
Net interest income     $104,638          $95,688     
      
          
     
Interest rate spread          2.23%          2.92%
          
          
 
Net interest margin          2.47%          3.13%
          
          
 
Ratio of average interest- earning assets to interest-bearing liabilities          105%          104%
          
          
 

17


RATE/VOLUME ANALYSIS

The following tabletables present the dollar amount of changes in interest income and interest expense for the components of earning assets and interest-bearing liabilities whichthat are presented above. The table distinguishestables distinguish 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 initialending volume constant).

                       
 Quarter ended March 31,  Three months ended June 30, 
 
  
 
 2003 versus 2002  2003 versus 2002 
 Increase (Decrease) due to:  Increase (Decrease) due to: 
 Rate Volume Total  Rate Volume Total 
 
 
 
  
 
 
 
Interest Income: (in thousands)  (in thousands)
Loans receivable, net $(25,405) $34,214 $8,809  $(27,647) $44,063 $16,416 
FHLB stock  319 319   (290) 358 68 
Other 358 485 843   (1,235) 1,922 687 
 
 
 
  
 
 
 
Total $(25,047) $35,018 $9,971  $(29,172) $46,343 $17,171 
Interest Expense:
  
Deposits $(10,394) $10,970 $576  $(9,178) $13,849 $4,671 
FHLB advances  (2,650) 3,223 573   (3,181) 3,688 507 
Other  (2,774) 7,200 4,426   (5,101) 12,540 7,439 
 
 
 
  
 
 
 
Total $(15,818) $21,393 $5,575  $(17,460) $30,077 $12,617 
 
 
 
  
 
 
 
Net change in net interest income $(9,229) $13,625 $4,396  $(11,712) $16,266 $4,554 
 
 
 
  
 
 
 
                 
  Six months ended June 30, 
  
    
  2003 versus 2002 
  Increase (Decrease) due to: 
  Rate  Volume  Total     
  
  
  
     
Interest Income:
 (in thousands) 
Loans receivable, net $(52,861) $78,086  $25,225 
FHLB stock  (189)  674   387 
Other  (711)  2,241   1,530 
  
  
  
 
Total $(53,859) $81,001  $27,142 
Interest Expense:
            
Deposits $(19,673) $24,920  $5,247 
FHLB advances  (5,644)  6,722   1,079 
Other  (7,992)  19,858   11,866 
  
  
  
 
Total $(33,309) $51,501  $18,191 
  
  
  
 
Net change in net interest income $(20,452) $29,402  $8,951 
  
  
  
 

18


Provision for Losses

TheThree months

During the three months ended June 30, 2003, the Company’s provision for losses was increased to $9.5$8.4 million. This is a 133.3% increase over the $3.6 million forrecorded in the comparable 2002 period and a 12.5% decrease from the $9.6 million recorded in the prior quarter.

During the three months ended March 31,June 30, 2003, from $8.2$1.0 million of the provision was used to write-off accrued interest on severely delinquent loans and $3.0 million was utilized to charge off a group of second mortgages. The second mortgages written off were 90 days delinquent but were making sporadic payments.

Net charge-offs during the same period in 2002. The provision for losses in thethree months ended June 30, 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. Netwere an annualized 0.73% of average investment loans outstanding. Comparatively, net charge-offs were an annualized 1.16%0.34% during the three months ended June 30, 2002 and 0.65% of average investment loans outstandingan annualized 1.16% during the three months ended March 31, 2003, respectively.

In each period, management believes that the allowance was at a level that would offset the inherent risks associated with the Company’s loan portfolio. The loan portfolio increased 26.8% from June 30, 2002 to June 30, 2003, excluding warehouse loans. The Company’s increase in its general reserves between these two dates constituted an increase of $4.0 million, or 8.7%. Non-performing loans decreased 14.3%, 14.5%, and 14.2% since March 31, 2003, December 31, 2002, and June 30, 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 now totals $50.0 million, is 1.17%1.03% of theloans held for investment loan portfolio and 61.5%71.7% of non-performing loans.

13Six months

During the six months ended June 30, 2003, the Company’s provision for losses was $18.0 million. This is a 52.5% increase from the $11.8 million recorded in the comparable 2002 period.

The provision for losses in the 2002 period included a $4.0 million increase in the allowance for losses, whereas in the 2003 period no increase in the allowance was recorded. Net charge-offs were an annualized 0.84% in the 2003 period versus 0.52% in the 2002 period.

19


Non-Interest Income

Three months

During the three months ended March 31,June 30, 2003, non-interest income increased $18.5was reported as $154.6 million to $77.2versus $46.6 million from $58.7 million. Thisreported in the comparable 2002 period. The significant increase reported for the 2003 quarter was primarily attributable to ancaused by the large increase in netthe gain on loan sales and other fees and charges, offset byreported during the period.

Six months

During the six months ended June 30, 2003, non-interest income was also dramatically higher than last year because of the increased amount of loan sale gains. The Company reported an increase in the amount of MSR amortization.$126.4 million to $231.8 million from $105.4 million.

Loan Administration

Three months

Net loan administration fee income decreased to a negative $25.6$13.1 million during the three months ended March 31,June 30, 2003, from $0.8$5.5 million in the 2002 period. This $26.4$18.6 million decrease between the comparable periods was the result of the $35.4$28.5 million increase in the amortization of the mortgage servicing rights (“MSR”). offset by the $9.9 million increase in the amount of gross servicing fees received. This amortization increase was recorded to adjust forresulted from the increasedlarge increase in the amount of prepayment activity 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. ThisThe increase in the gross fee incomerevenue was the result of a larger portfolio of serviced loans during the 2003 period.

Six months

Net loan administration fee income for the six months ended June 30, 2003 decreased to a negative $38.7 million from $6.3 million recorded in the 2002 period. This $45.0 million decrease similarly was the result of the increase in the amortization of mortgage servicing rights offset by increased servicing revenue. MSR amortization equaled $85.6 million during the 2003 period versus $21.7 million during the comparable 2002 period. Gross fee income, before the amortization of serving rights, was $46.9 million for the six months ended June 30, 2003 and $28.0 million for the comparable 2002 period. This increase in gross fee income was the result of the larger portfolio of serviced loans during the 2003 period.

At March 31,June 30, 2003, the unpaid principal balance of loans serviced for others iswas $29.0 billion versus $22.3 billion versusserviced at March 31, 2003 and $21.6 billion serviced at December 31, 2002. At June 30, 2002, andthe unpaid principal balance of loans serviced for others was $19.4 billion versus $15.2 billion serviced at March 31, 2002.2002 and $14.2 billion serviced at December 31, 2001. The weighted average servicing fee on loans serviced for others at March 31,June 30, 2003 was 0.343%0.346% (i.e., 34.334.6 basis points). The weighted average age of the loans serviced for others portfolio at March 31,June 30, 2003 was 7 months old.months.

20


Net Gain on Loan Sales

As previously stated, one of the Company’s operating strategies involves the origination of mortgage loans on a national basis, the sale of those loans on a servicing retained basis, and then the strategic sale of the created servicing rights.

Typically, as the supply of available loans in the marketplace increases, the Company is able to acquire these loans at a lower price. Inversely, as interest rates rise or are stable but at higher levels, the amount of available loans are less and the competing companies must originate at decreased margins to applicable secondary market resale prices in order to maintain production levels.

Management has historically maintained a profitable spread between the price at which it acquires loans versus the price level at which the loans can be sold in the secondary market. There can be no assurances that the Company will be able to maintain this profitability level in the future.

Three months

For the three months ended March 31,June 30, 2003, net gain on loan sales increased $40.1$130.8 million, to $90.9$155.9 million, from $50.8$25.1 million in the 2002 period. The 2003 period reflects the sale of $13.3$17.3 billion in loans versus $8.9$6.8 billion sold in the 2002 period. TheA lower interest rate environment in the 2003 period resulted in a higherlarger mortgage loan origination volume ($15.117.5 billion in the 2003 period vs. $9.3$7.5 billion in the 2002 period) and a smallerlarger or narrowerwider gain on sale spread (63(90 basis points in the 2003 period versus 5737 basis points in the 2002 period) recorded when the loans were sold.

Six months

For the six months ended June 30, 2003, net gain on loan sales were $246.8 million versus $75.9 million in the comparable 2002 period. The 2003 period includes the sale of $30.5 billion in loans versus $15.8 billion sold in the 2002 period. For the six month period ended June 30, 2003, the lower interest rate environment also resulted in a larger or wider gain on sale spread recorded (81 basis points in the 2003 period versus 48 basis points in the 2002 period) when the loans were sold.

21


Net Gain on the Sale of Mortgage Servicing Rights

As previously stated, one of the Company’s operating strategies involves the origination of mortgage loans on a national basis, the sale of those loans on a servicing retained basis, and then the strategic sale of the created servicing rights.

Typically, the Company enters into a flow sale agreement to sell a portion of its newly originated MSR. The Company will then sell the remaining portion of its MSR on a strategic basis in a bulk sale transaction as conditions warrant. The Company continually monitors the marketplace for sale opportunities versus the value the Company can create by retaining a larger portfolio of MSR. The Company is limited in the amount of MSR it can hold for regulatory purposes and is also limited on an operational basis to the amount of loans the Company can service.

Management has historically maintained a profitable spread between the price at which it acquires MSR and the price level at which the MSR can be sold in the secondary market. Management also has not been forced to record a valuation adjustment to the MSR for impairment because of its policy of selling substantially all of the MSR it originates. Impairment in a MSR portfolio is typically created by a sudden and unexpected change in the interest rate environment. Since the interest rate environment is beyond the control of management, there can be no assurances made that the Company will be able to avoid an impairment charge in the future.

Three months

For the three months ended March 31,June 30, 2003, the net gain on the sale of mortgage servicing rights increased from $650,000was $320,000 versus $10.2 million during the 2002 period to $1.3 million.period. The gain on sale of mortgage servicing rights increaseddecreased because the Company sold $10.4a $1.8 billion of MSR during the 2003 period versus $7.6 billion during the 2002 period. The Company sold a $4.9 billionseasoned bulk servicing package in the 20032002 period versusand a $5.2 billionsmaller bulk package in the 2002 period. During 2003, the Company sold $5.1 billioncomprised of newly originated servicing in the 2003 period. Also, during the 2002 period a number of sales from prior quarters completed their final settlement procedure.

Six months

For the six months ended June 30, 2003, the net gain on the sale of mortgage servicing rights decreased $9.2 million to $1.6 million, from $10.8 million for the same period in 2002. The gain on a flow basis and $428.8 millionsale of loans on amortgage servicing released basis.rights decreased due to the sale of $7.0 billion of seasoned servicing rights in 2002 versus the sale of $5.8 billion during 2003. During 2002, the Company sold $2.2a total of $9.8 billion in servicing versus the $15.8 billion of newly originatedmortgage servicing rights on a flow basisoriginated. In 2003, the Company sold $17.2 billion and $234.5 millionoriginated $30.5 billion in mortgage servicing rights.

Activity of loans on a servicing released basis.Mortgage Loans Serviced for Others ( in thousands):

                  
   Three months ended  Six months ended 
   June 30, 2003  June 30, 2002  June 30, 2003  June 30, 2002 
   
  
  
  
 
Beginning balance $22,336,428  $15,249,763  $21,586,797  $14,222,802 
Loans sold  17,287,723   6,818,644   30,540,969   15,762,964 
  
  
  
  
 
 Subtotal  39,624,151   22,068,407   52,127,766   29,985,766 
Servicing released sales  609,419   235,387   1,038,194   469,922 
Servicing sold (flow basis)  6,173,123   142,651   11,285,243   2,353,363 
Servicing sold (bulk basis)  980,683   1,813,247   5,836,608   6,991,308 
  
  
  
  
 
 Subtotal  7,763,225   2,191,285   17,179,362   9,814,593 
Amortization  2,907,055   486,918   5,013,850   780,969 
  
  
  
  
 
Ending balance $28,953,871  $19,390,204  $28,953,871  $19,390,204 
  
  
  
  
 

22


Other Fees and Charges

Three months

During the three months ended March 31,June 30, 2003, the Company recorded $10.7$11.4 million in other fees and charges. In the comparable 2002 period, the Company recorded $6.5$5.8 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.

14Six months


During the six months ended June 30, 2003, the Company recorded $22.1 million in other fees and charges. In the comparable 2002 period, the Company recorded $12.3 million. The collection and recording of these fees are dependent on the amount of deposit accounts, the number of certain types of loans closed and the collection of any miscellaneous fees.

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 )costs) more clearly reflects the changes in non-interest expense when comparing periods.

                      
 Three months ended March 31,  Quarter ended June 30, Six months ended June 30, 
 2003 2002  2003 2002 2003 2002 
 
 
  
 
 
 
 
 ( in thousands ) ( in thousands )
Compensation and benefits $39,661 $33,487  $49,435 $30,344 $94,096 $63,831 
Commissions 41,945 21,844  40,827 18,635 77,772 40,480 
Occupancy and equipment 16,109 12,352  17,299 13,032 33,408 25,384 
Advertising 3,245 1,862  3,446 1,435 6,691 3,297 
Federal insurance premium 569 162  605 178 1,174 340 
General and administrative 15,717 12,329  21,239 11,989 36,956 24,318 
 
 
  
 
 
 
 
Total 117,246 82,036  132,851 75,613 250,097 157,650 
Less: capitalized direct costs of loan closings  (59,675)  (21,768)
Less: capitalized loan costs  (67,362)  (26,841)  (127,037)  (48,609)
 
 
  
 
 
 
 
Total, net $57,571 $60,268  $65,489 $48,772 $123,060 $109,041 
 
 
  
 
 
 
 
Efficiency ratio  44.02%  55.87%  31.9%  52.4%  36.6%  54.2%

23


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

§ The retail banking operation conducted business from 1719 more facilities at March 31,June 30, 2003 than at March 31,June 30, 2002.
 
§ The Company conducted business from 2825 more retail loan origination offices at March 31,June 30, 2003 than at March 31,June 30, 2002.
 
§ The mortgage banking operation originated $15.1$17.5 billion in residential mortgage loans during the 2003 quarter versus $9.3$7.5 billion in the comparable 2002 quarter.
 
§ The Company employed 2,8653,106 salaried employees at March 31,June 30, 2003 versus 2,4412,393 salaried employees at March 31,June 30, 2002.
 
§ The Company employed 119121 full-time national account executives at March 31,June 30, 2003 versus 100101 at March 31,June 30, 2002.
 
§ The Company employed 793883 full-time retail loan originators at March 31,June 30, 2003 versus 530565 at March 31,June 30, 2002.

15


Non-Interest Expense (continued)

Non-interest expense, excluding the capitalization of direct loan origination costs, increased $35.2$57.3 million, or 75.8%, to $117.2$132.9 million during the three months ended March 31,June 30, 2003, from $82.0$75.6 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$19.1 million, or 63.0%, is the direct result of the 29.8% increase in salaried personnel which were hired to support the additional banking centers and retail loan centers during the period.

The increased commission expense of $22.2 million, or 119.4%, is the direct result of the 133.3% increase in mortgage loan originations during the period. During the 2003 period commissions were 23 basis points of loan originations versus 25 basis points during the 2002 period.

The majority of the $4.3 million, or 33.1% increase in occupancy and equipment costs are directly attributable to the 25.3% increase in facilities operated by the Company and the equipment required to accommodate the 29.8% increase in staff.

The 76.7% increase in general and administrative expense is reflective of the 133.3% increase in mortgage loan originations and the increased number of banking and origination centers in operation during the period.

During the three months ended June 30, 2003, the Company capitalized direct loan origination costs of $67.4 million, an increase of $40.6 million, or 151.5%, from $26.8 million for the comparable 2002 period. The 2003 deferral equates to a capitalization of $635 per loan versus $544 per loan in the 2002 period.

24


Six months

During the six months ended June 30, 2003, non-interest expense, excluding the capitalization of direct loan origination costs, increased by $92.4 million, or 58.6%, to $250.1 million, from $157.7 million for the comparable 2002 period. The increased costs are primarily attributable to the same items as mentioned above in the “three month” section. The largest increases occurred in the amounts of compensation and benefits, commissions, general and administrative expenses, and occupancy and equipment costs reported.

The increased compensation and benefits expense of $30.3 million, or 47.5%, 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$37.3 million, or 92.1%, is the direct result of the increased94.0% increase in mortgage loan originations during the period. During both the 2002 and 2003 periodperiods, commissions were 27.824 basis points of loan originations versus 23.6 basis points during the 2002 period.originations.

The majority of the $3.7$8.0 million, or 31.5% increase in occupancy and equipment costs are directly attributable to the extensive facility expansion27.7% increase in operating facilities and the equipment required to accommodate the increased staff.

The $12.7 million, or 52.3% increase in general and administrative expense is reflective of the increased94.0% increase in mortgage loan originations and the increased number of banking centers in operation during the period.

During the threesix months ended March 31,June 30, 2003, the Company capitalized direct loan origination costs of $59.7$127.0 million, an increase of $37.9$78.4 million, or 161.3%, from $21.8$48.6 million for the comparable 2002 period. The 2003 deferral equates to a capitalization of $566$644 per loan versus $356$440 per loan in the 2002 period.

1625


Financial Condition

Assets

The Company’s assets totaled $9.5$10.2 billion at March 31,June 30, 2003, an increase of $1.3$2.0 billion, or 15.9%24.4%, as compared to $8.2 billion at December 31, 2002. This increase was primarily due to ana $1.2 billion increase in earning assets and a $0.7 billion increase in cash and cash equivalents at March 31, 2003, but encompassed increases in the majority of asset categories.June 30, 2003.

Cash and cash equivalents

Cash and cash equivalents decreasedincreased from $127.0 million at December 31, 2002 to $119.6$828.3 million at March 31,June 30, 2003. This increase in cash is primarily associated with the increases in payments and payoffs received from the mortgage servicing portfolio at June 30, 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 scheduledMortgage loans available 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 portfoliosale

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$3.7 billion at March 31,June 30, 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,June 30, 2003, the majority of these loans were originated within the two weeks prior to the end of the quarter.

Investment loan portfolio,Loans held for investment, net

TheLoans held for investment loan portfolio, netincreased from $4.0 billion at March 31, 2003 increased $0.3 million from December 31, 2002. The2002 to $4.8 billion at June 30, 2003. This increase includedis primarily attributable to a $299.7$525.2 million increase in mortgage loans,single-family mortgages. Additionally there was a $27.7$283.1 million increase in consumerwarehouse loans. There was also a decrease of $44.0 million in second mortgage loans, offset by a $7.0$30.4 million increase in commercial real estate loans, and a $1.7$0.6 million increase in commercial loans, offset by a $23.1 million decrease in second mortgage loans and a $33.8$64.0 million decreaseincrease in warehouseconsumer loans.

Loans held for investment:

                              
Loans held for investment: March 31, 2003 December 31, 2002 March 31, 2002 
 June 30, 2003 March 31, 2003 December 31, 2002 June 30, 2002 
 
 
 
  
 
 
 
 
Single family mortgageSingle family mortgage $2,892,742 $2,593,005 $2,141,996 Single family mortgage $3,118,223 $2,892,742 $2,593,005 $2,398,536 
Second mortgageSecond mortgage 191,253 214,485 233,050 Second mortgage 170,511 191,253 214,485 245,355 
ConstructionConstruction 51,032 54,650 48,367 Construction 44,877 51,032 54,650 51,981 
Commercial real estateCommercial real estate 452,295 445,270 350,342 Commercial real estate 475,705 452,295 445,270 366,068 
CommercialCommercial 8,343 9,377 7,706 10,644 
WarehouseWarehouse 525,080 558,781 168,561 Warehouse 841,877 525,080 558,781 172,014 
Commercial 9,377 7,706 10,833 
ConsumerConsumer 152,417 124,785 70,207 Consumer 188,791 152,417 124,785 86,882 
 
 
 
   
 
 
 
 
Total $4,274,196 $3,998,682 $3,013,356 Total $4,848,327 $4,274,196 $3,998,682 $3,331,480 
 
 
 
   
 
 
 
 

1726


Allowance for losses

The allowance for losses totaled $50.0 million at March 31,June 30, 2003 and December 31, 2002.

Actual net charge-offs during the three months ended June 30, 2003 were $8.4 million, an annualized 0.73% of average investment loans. Comparatively, actual net charge-offs were $3.6 million, or 0.34% during the three months ended June 30, 2002 and $9.5 million, or 1.16% of average investment loans during the three months ended March 31, 2003, respectively.

The allowance, which now totals $50.0 million, is 1.03% of loans held for losses as a percentageinvestment and 71.7% of non-performing loans.

The Company’s non-performing loans was 61.5%totaled $69.7 million and 61.3%$81.6 million at March 31,June 30, 2003 and December 31, 2002, respectively.

The Company’s non-performing loans totaled $81.3 million and $81.6 million at March 31, 2003 and December 31, 2002, respectively. Thelevel of the allowance for losses as a percentage of investment loansat June 30, 2003 was 1.17% and 1.25% at March 31, 2003 and December 31, 2002, respectively. The allowance for losses is considered adequate based upon management’s assessment of relevant factors, including the types and amounts of non-performing loans, the continued increase in the amount of historical charge-offs and currentanticipated loss experience on such types of loans, and the current economic environment.conditions. However, no assurance can be given that the Company will not, in any particular period, sustain loan losses that exceed the allowance, or that subsequent evaluation of the loan portfolio, in light of the factors then-prevailing, including economic conditions, the credit quality of the assets comprising the portfolio and the ongoing examination process, will not require significant increases in the allowance for loan losses.

FHLB stock

Holdings of FHLB stock remained atincreased from $150.0 million at December 31, 2002 and March 31,to $152.8 million at June 30, 2003. These increases were made to comply with member rules as set down by the FHLB. As a member of the FHLB, the Bank is required to hold shares of FHLB stock in an amount at least equal to 1% of the aggregate unpaid principal balance of its home mortgage loans, or 5% of its outstanding FHLB advances, whichever is greater.

Accrued interest receivable

Accrued interest receivable increased from $43.3 million at December 31, 2002 to $48.4$45.2 million at March 31,June 30, 2003 as the Company’s total loan portfolio increased. The Company typically collects loan interest in the following month after it is earned.

Repossessed assets

Repossessed assets increased from $45.1 million at December 31, 2002 to $46.5$46.4 million at March 31,June 30, 2003. This increase was caused by a greater amount of loans in a foreclosed status whichthat are yet to be sold.

27


Mortgage servicing rights

Mortgage servicing rights (“MSR”) totaled $181.6$210.9 million at March 31,June 30, 2003, a decrease of $49.2$19.9 million, or 8.6%, from $230.8 million reported at December 31, 2002. During the threesix months ended March 31,June 30, 2003, the Company capitalized $117.5$271.2 million, amortized $47.8$85.6 million, and sold $118.8$205.5 million in mortgage servicing rights. The principal balance of the loans serviced for others stands at $22.3$29.0 billion at March 31,June 30, 2003 versus $21.6 billion at December 31, 2002. The capitalized value of the mortgage servicing rights was 0.81%0.73% and 1.07% at March 31,June 30, 2003 and December 31, 2002, respectively.

Activity of Mortgage Loans Serviced for Others( in thousands):

          
   Three months ended  Three months ended 
   March 31, 2003  March 31, 2002 
   
  
 
Beginning balance $21,586,797  $14,222,802 
Loans sold  13,253,246   8,944,320 
  
  
 
 Subtotal  34,840,043   23,167,122 
Loans sold servicing released  428,775   234,535 
Servicing sold (flow basis)  5,112,120   2,210,712 
Servicing sold (bulk basis)  4,855,925   5,178,061 
  
  
 
 Subtotal  10,396,820   7,623,308 
Amortization  2,106,795   294,051 
  
  
 
Ending balance $22,336,428  $15,249,763 
  
  
 
At June 30, 2003, the fair value of the MSR was approximately $254.8 million based on an internal valuation model which utilized a discounted cash flow equal to 9%, a cost to service of $55.00, and a weighted prepayment assumption equal to 300% PSA. The portfolio contained 210,045 loans, had a weighted rate of 6.126%, a weighted remaining term of 288 months, and had been seasoned seven months.

18


Other assets

Other assets increased $14.4$2.7 million or 9.2%, to $170.6$158.9 million at March 31,June 30, 2003, from $156.2 million at December 31, 2002. The majority of this increase was attributable to the recording of receivables recorded in conjunction with the sale of residential mortgage loan servicing rights completed during the three months ended March 31, 2003.rights. Upon the sale of the mortgage servicing rights a receivable is recorded for a portion of the sale proceeds. The majority of the balance due is paid within 180 days after the sale date.

28


Liabilities

The Company’s total liabilities increased $1.2$1.8 billion or 15.4%, to $9.0$9.6 billion at March 31,June 30, 2003, from $7.8 billion at December 31, 2002. The majority of thisThis increase was foundprimarily centered in the Company’s interest bearing liabilities.liabilities and undispersed payments on loans serviced for others, but included an increase in every liability category.

Deposit accounts

The Company’s deposit liabilities increased $0.8 billion during the three months ended March 31, 2003.

Retail depositDeposit accounts increased $0.1$0.9 billion or 3.7%, to $2.8 billion$5.3 million at March 31,June 30, 2003, from $2.7$4.4 billion at December 31, 2002. This increase reflects the

Demand deposit growth strategy being implemented in the Company’s banking center network. The number of banking centers increasedaccounts decreased $43.3 million to $358.2 million at June 30, 2003, from 87$401.5 million at December 31, 20022002.

Savings deposit accounts decreased $21.2 million to 91$331.0 million at MarchJune 30, 2003, from $352.2 million at December 31, 2002.

Money market deposits increased $0.5 billion to $1.1 billion at June 30, 2003, from $0.6 billion at December 31, 2002.

The municipal deposit channel now totals $941.6 million. The account totals increased $133.9 million during the six months ended June 30, 2003. At March 31, 2003,These deposits have been garnered from local government units within the Company’s retail certificates ofbanking market area.

Wholesale deposit totaled $1.4accounts increased $0.3 billion or 50.0% of total retail deposits. These certificates carry an average balance of $21,811 and a weighted average cost of 3.65%.

National accounts include certificates of deposit relationships garnered through the Company’s national marketing of its rates and terms. The balances in this category of deposits totaledto $1.2 billion an increase of $0.3 billion or 33.3%,at June 30, 2003, from $0.9 billion at December 31, 2002. This increase reflects the Company’s strategy to increaseextend the duration of its deposit funding. The Company has continued emphasized the use of theselower costing retail deposits and advances from the FHLB, but the longer durations available from wholesale deposits were needed for interest rate risk management.

During the six months ended June 30, 2003, management continued to monitor and reprice the deposit relationships to garner deposit liabilities with a longer duration. This portfolio had a weighted cost of 3.36% and a weighted remaining term of 33 months. These deposits totaled 23.5% of total deposits.

Public Unit deposits include both savings and certificates of deposit relationships garnered from local municipal or government agencies. The balancesdownward in this category of deposits totaled $1.1 billion, an increase of $0.2 billion or 22.2%, from $0.9 billion at December 31, 2002. This increase reflects the Company’s strategyorder to increase the use of these deposit relationshipsspreads and margins earned by the Company. As can be seen below, management was able to funddecrease the Company’s warehouse of for sale loans. These deposits have a duration which matches the warehouse loans very well. This portfolio had a weighted cost of 1.81%the retail portfolio by 16 basis points and a weighted remaining term of 2.3 months. These deposits totaled 21.6% ofthe total deposits.portfolio by 28 basis points.

29


                          
   March 31, 2003  December 31, 2002 
   Balance  Rate  %  Balance  Rate  % 
   
  
  
  
  
  
 
Retail demand deposits $360,770   1.17%  6.97% $401,517   1.29%  9.18%
Retail savings deposits  342,966   1.72   6.62   352,155   1.72   8.05 
Retail money market deposits  761,659   2.52   14.71   575,411   2.71   13.15 
Retail certificates of deposits  1,377,960   3.65   26.60   1,324,486   3.81   30.28 
National accounts  1,214,930   3.36   23.46   912,655   3.91   20.87 
Public unit  1,120,682   1.81   21.64   807,665   2.00   18.47 
  
  
  
  
  
  
 
 Total deposits $5,178,967   2.72%  100.00% $4,373,889   2.95%  100.00%
  
  
  
  
  
  
 
                                       
    June 30, 2003  December 31, 2002 
    Balance  Rate  %          Balance  Rate  %     
    
  
  
          
  
  
     
Demand deposits $358,184   1.19%  6.8%         $401,517   1.29%  9.2%
Savings deposits  330,951   1.71   6.3           352,155   1.72   8.1 
Money market deposits  1,075,665   2.51   20.4           575,411   2.71   13.1 
Certificates of deposits  1,380,451   3.59   26.2           1,324,486   3.81   30.3 
  
  
  
          
  
  
 
  Total retail deposits  3,145,251   2.75   59.7           2,653,569   2.91   60.7 
Municipal deposits  941,558   1.58   17.9           807,665   2.00   18.5 
Wholesale deposits  1,182,654   3.33   22.4           912,655   3.91   20.9 
  
  
  
          
  
  
 
 Total deposits $5,269,463   2.67%  100.0%         $4,373,889   2.95%  100.0%
  
  
  
          
  
  
 

FHLB advances

FHLB advances increased $0.2 billion or 9.1%, to $2.4 billion at March 31,June 30, 2003, from $2.2 billion at December 31, 2002. The Company has historically reliedrelies upon these advances as a funding source for the origination or purchase of loans, which are later sold into the secondary market. The outstanding balance of FHLB advances fluctuates from time to time depending upon the Company’s current inventory of loans held for sale and the availability of lower cost funding from its deposit base and its escrow accounts. The Company has moved toward renewing allalso utilizes a portion of its maturingthese advances into mediumto fund longer term assets that can not be match-funded within the retail deposit portfolio.

Long term debt which better lines up as funding for the Company’s held for investment portfolio.

19


Long term debt

On April 30, 1999, the Company issued $74.8 million of 9.50% preferred securities to the general public in an initial public offering. The securities were issued by the Company’s subsidiary, Flagstar Trust, a Delaware trust.

On December 19, 2002, the Company issued $25.0 million of preferred securities through a privately issued pooled transaction. These securities have an effective cost for the first five years of 6.88%. The securities were issued by the Company’s subsidiary, Flagstar Statutory Trust II, a Connecticut trust.

On February 19, 2003, the Company issued $25.0 million of preferred securities through a privately issued pooled transaction. These securities have an effective cost for the first five years of 6.55%. The securities were issued by the Company’s subsidiary, Flagstar Statutory Trust III, a Delaware trust.

On March 19, 2003, the Company issued $25.0 million of preferred securities through a privately issued pooled transaction. These securities have an effective cost for the first five years of 6.75%. The securities were issued by the Company’s subsidiary, Flagstar Statutory Trust IV, a Delaware trust.

The preferred securities mature in 30 years from issuance, are callable after five years, pay interest quarterly, and the interest expense is deductible for federal income tax purposes. The net proceeds from these offerings were contributed to Flagstar Bank as additional paid in capital and are included as regulatory capital.

Undisbursed payments on loans serviced for others

Undisbursed payments on loans serviced for others increased $198.8$0.5 million or 33.4%, to $794.0 million$1.1 billion at March 31,June 30, 2003, from $595.2 million$0.6 billion at December 31, 2002. These amounts represent payments received from borrowers for interest, principal and related loan charges, which have not been remitted to the respective investors. These balances fluctuate with the size of the servicing portfolio and increase during a time of high payoff or refinance volume. The large increase at March 31, 2003balance is reflective of the refinance environment currently being experienced by the Company. During the three months ended March 31, 2003, the Company received $2.1 billion in prepayments and amortizations on serviced loans.environment.

30


Escrow accounts

Customer escrow accounts increased $55.5$119.5 million or 37.5%, to $203.7$267.7 million at March 31,June 30, 2003, from $148.2 million at December 31, 2002. These amounts represent payments received from borrowers for taxes and insurance payments, which have not been remitted to the tax authorities or insurance providers. These balances fluctuate with the size of the servicing portfolio and during the year before and after the remittance of scheduled payments. A large amount of escrow payments are made in July and December to local school and municipal agencies.

Liability for checks issued

Liability for checks issued increased $21.2$73.9 million or 17.1%, to $145.5$198.2 million at March 31,June 30, 2003, from $124.3 million at December 31, 2002. These amounts represent checks issued to acquire mortgage loans that have not cleared for payment. These balances fluctuate with the size of the mortgage pipeline. The increase at June 2003 is indicative of the increase in loan production volumes recorded by the Company during the month of June.

Federal income taxes payable

Federal income taxes payable decreased $7.7increased $24.5 million or 10.5%, to $65.9$98.1 million at March 31,June 30, 2003, from $73.6 million at December 31, 2002. This decreaseincrease is attributable to the estimated payment made during the quarter offset by the increase in the deferred tax liability created through operations during the six months ended June 30, 2003 offset by timing differences in the recognitionpayment of revenue from a financial statement basis versus a federal income tax basis.taxes.

Other liabilities

Other liabilities decreased $1.6$40.9 million or 1.2%, to $129.4$90.1 million at March 31,June 30, 2003, from $131.0 million at December 31, 2002. This majority of this decrease was caused by changes inis the timingredemption of the paymentSeries A preferred stock of liabilities associated withFlagstar Capital that was recorded as a minority interest or other liability of the employee payroll and the Company’s mortgage production.Company.

2031


Liquidity and Capital Resources

Liquidity

Liquidity refers to the ability or the financial flexibility to manage future cash flows in order to meet the needs of depositors and borrowers and fund operations on a timely and cost-effective basis. The Company has no other significant business than that of its wholly owned subsidiary, Flagstar Bank, FSB.

A significant source of cash flow for the Company is the sale of mortgage loans held for sale. Additionally, the Company receives funds from loan principal repayments, advances from the FHLB, deposits from customers and cash generated from operations.

Mortgage loans sold during the three months ended March 31,June 30, 2003 totaled $13.3$17.3 billion, an increase of $4.4$10.5 billion from the $8.9$6.8 billion sold during the same period in 2002. This increase in mortgage loan sales was attributable to the $5.8 billion increase in mortgage loan originations during the quarter. The Company sold 88.1%98.9% and 96.6%91.1% of its mortgage loan originations during the three month periodsperiod ended March 31,June 30, 2003 and 2002, respectively.

The Company typically uses FHLB advances to fund its daily operational liquidity needs and to assist in funding loan originations. The Company will continue to use this source of funds until a more cost-effective source of funds becomes available. FHLB advances are used because of their flexibility. The Company had $2.4 billion outstanding at March 31,June 30, 2003. Such advances are repaid with the proceeds from the sale of mortgage loans held for sale. The Company currently has an authorized line of credit equal to $3.5 billion. This line is collateralized by non-delinquent mortgage loans. To the extent that the amount of retail deposits or customer escrow accounts can be increased, the Company expects to replace FHLB advances.

At March 31,June 30, 2003, the Company had outstanding rate-lock commitments to lend $7.1$11.1 billion in mortgage loans, along with outstanding commitments to make other types of loans totaling $25.3$120.3 million. Because such commitments may expire without being drawn upon, they do not necessarily represent future cash commitments. Also, at March 31,June 30, 2003, the Company had outstanding commitments to sell $7.1$9.1 billion of mortgage loans. These commitments will be funded within 90 days. Total commercial and consumer unused lines of credit totaled $1.1 billion$247.7 million at March 31,June 30, 2003. Such commitments do not include $902.1$910.6 million of unused warehouse lines of credit to various mortgage companies. The Company had advanced $525.1$841.9 million for warehouse lending customers at March 31,June 30, 2003.

Capital Resources.

At March 31,June 30, 2003, the Bank exceeded all applicable bank regulatory minimum capital requirements. The Company is not subject to any such requirements.

2132


Item 3. Market Risk

In its mortgage banking operations, the Company is exposed to market risk in the form of interest rate risk from the time the interest rate on a mortgage loan application is committed to by the Company through the time the Company sells or commits to sell the mortgage loan. On a daily basis, the Company analyzes various economic and market factors and, based upon these analyses, projects the amount of mortgage loans it expects to sell for delivery at a future date. The actual amount of loans sold will be a percentage of the number of mortgage loans on which the Company has issued binding commitments (and thereby locked in the interest rate) but has not yet closed (“pipeline loans”) to actual closings. If interest rates change in an unanticipated fashion, the actual percentage of pipeline loans that close may differ from the projected percentage. The resultant mismatching of commitments to fund mortgage loans and commitments to sell mortgage loans may have an adverse effect on the results of operations in any such period. For instance, a sudden increase in interest rates can cause a higher percentage of pipeline loans to close than projected. To the degree that this is not anticipated, the Company will not have made commitments to sell these additional pipeline loans and may incur losses upon their sale as the market rate of interest will be higher than the mortgage interest rate committed to by the Company on such additional pipeline loans. To the extent that the hedging strategies utilized by the Company are not successful, the Company’s profitability may be adversely affected.

Management believes there has been no material change in either interest rate risk or market risk since December 31, 2002.

Item 4. Controls and Procedures

(a) Disclosure Controls and Procedures.A review and evaluation was performed by the Company’s management, includingprincipal executive and financial officers regarding the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing of this quarterly reportJune 30, 2003, pursuant to Rule 13a-1413a-15(b) of the Securities Act of 1934. Based on that review and evaluation, the CEOprincipal executive and CFOfinancial officers have concluded that the Company’s current disclosure controls and procedures, as designed and implemented, wereare effective. There have

(b) Changes in Internal Controls.During the quarter ended June 30, 2003, there has not been no significant changesany change in the Company’s internal controlscontrol over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Act of 1934 that has materially affected, or in other factors that could significantlyis reasonably likely to materially affect, the Company’s internal controls subsequent to the date of their evaluation. There were no significant material weaknesses identified in the course of such review and evaluation and, therefore, no corrective measures were taken by the Company.control over financial reporting.

2233


PART II — OTHER INFORMATION

Item 1.Legal Proceedings
None.
Item 2.Changes in Securities
None.
Item 3.Defaults upon Senior Securities
None.
Item 4.

Item 1. Legal Proceedings

     None.

Item 2. Changes in Securities

     None.

Item 3. Defaults upon Senior Securities

     None.

Item 4. Submission of Matters to a Vote of Security Holders

 (a) Not applicableThe 2003 Annual Meeting of Shareholders of the Company was held on May 10, 2003.
 
(1)   The following directors were re-elected for a term of two years:

         
  For  Withheld 
  
  
 
Michael W. Carrie  24,116,347   998,799 
Richard S. Elsea  22,075,115   3,040,031 
James D. Coleman  24,831,956   283,190 
Robert O. Rondeau, Jr.  24,749,335   365,811 
Kirstin A. Hammond  24,773,014   342,132 

 (b) Not applicable

Item 5.Other Information
None.
Item 6.

Item 5. Other Information

     None.

Item 6. Exhibits and Reports on Form 8-K

 (a) Exhibits

   
Exhibit 11. Computation of Net Earnings per Share
   
Exhibit 99.131.1 Certification pursuant to 18 U.S.C.of Chief Executive Officer under Section 1350, as adopted pursuant to Section 906302 of the Sarbanes-Oxley Act of 2002.
   
Exhibit 99.231.2 Certification pursuant to 18 U.S.C.of Chief Financial Officer under Section 1350, as adopted pursuant to Section 906302 of the Sarbanes-Oxley Act of 2002.
   
Exhibit 32.1Certification of Chief Executive Officer relating to Form 10-Q for the period ended June 30, 2003.
  
Exhibit 32.2Certification of Chief Financial Officer relating to Form 10-Q for the period ended June 30, 2003.

 (b) Reports on Form 8-K

 None(i)   The Company filed a Form 8-K on April 24, 2003 to furnish its earnings release for the quarter ended March 31, 2003
(ii)  The Company filed a Form 8-K on April 25, 2003 to furnish its press release regarding its declaration of a 2-for-1 stock split.

2334


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

     
 
   FLAGSTAR BANCORP, INC.
Date:    May 9, 2003/S/ Mark T. Hammond
Mark T. Hammond
President and
Chief Executive Officer
(Duly Authorized Officer)
/S/ Michael W. Carrie
Michael W. Carrie
Executive Director and
Chief Financial Officer
(Principal Accounting Officer)

24


SECTION 302 CERTIFICATION

I, Mark T. Hammond certify that:

1)I have reviewed this quarterly report on Form 10-Q of Flagstar Bancorp, Inc.;
2)Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3)Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4)The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

    a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
    b)evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
    c)presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5)The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

    a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
    b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6)The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

     
Date: May 9,August 12, 2003 /s/S/ Mark T. Hammond

Signature
    President and Chief Executive Officer

Title

26


SECTION 302 CERTIFICATION

I, Michael W. Carrie certify that:

1)I have reviewed this quarterly report on Form 10-Q of Flagstar Bancorp, Inc.;
2)Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3)Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4)The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

    a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
    b)evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
    c)presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5)The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

    a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
    b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6)The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:May 9, 2003/s/ Michael W. Carrie

Signature
    Executive Director, Treasurer and Chief

Financial Officer

TitleMark T. Hammond

27


EXHIBIT INDEX

    President and
  EXHIBIT DESCRIPTIONChief Executive Officer
(Duly Authorized Officer)
     
  /S/ Michael W. Carrie

Michael W. Carrie
Executive Director
Chief Financial Officer
(Principal Accounting Officer)

35


Exhibit Index

(a)Exhibits

Exhibit 11. Computation of Net Earnings per Share
   
Exhibit 99.131.1 Certification pursuant to 18 U.S.C.of Chief Executive Officer under Section 1350, as adopted pursuant to Section 906302 of the Sarbanes-Oxley Act of 2002.
   
Exhibit 99.231.2 Certification pursuant to 18 U.S.C.of Chief Financial Officer under Section 1350, as adopted pursuant to Section 906302 of the Sarbanes-Oxley Act of 2002.
   
Exhibit 32.1Certification of Chief Executive Officer relating to Form 10-Q for the period ended June 30, 2003.
  
Exhibit 32.2Certification of Chief Financial Officer relating to Form 10-Q for the period ended June 30, 2003.