FLAGSTAR BANCORP INC, S-1/A, 1997-04-24

FLAGSTAR BANCORP INC
S-1/A, 1997-04-24
SAVINGS INSTITUTION, FEDERALLY CHARTERED

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1997.
REGISTRATION STATEMENT NO. 333-21621
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

---------------

PRE-EFFECTIVE AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

---------------

FLAGSTAR BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

MICHIGAN 6035 38-3150651
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)

2600 TELEGRAPH ROAD
BLOOMFIELD HILLS, MICHIGAN 48302-0953
(810) 338-7700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

THOMAS J. HAMMOND
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
FLAGSTAR BANCORP, INC.
2600 TELEGRAPH ROAD
BLOOMFIELD HILLS, MICHIGAN 48302-0953
(810) 338-7700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

COPIES OF COMMUNICATION TO:

MATTHEW G. ASH, ESQ. LEE MEYERSON, ESQ.
EDWARD B. CROSLAND, JR., ESQ. SIMPSON THACHER & BARTLETT
PAUL D. BORJA, ESQ. 425 LEXINGTON AVENUE
DOUGLAS D. TIMMER, ESQ. NEW YORK, NY 10017-3955
REINHART, BOERNER, VAN DEUREN, NORRIS (212) 455-3675 (PHONE)
& RIESELBACH, P.C. (212) 455-2502 (FAX)
601 PENNSYLVANIA AVENUE, N.W., SUITE
750, NORTH
WASHINGTON, D.C. 20004-2601
(202) 393-3636 (PHONE)
(202) 393-0796 (FAX)

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

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<PAGE>

EXPLANATORY NOTE

This Registration Statement contains two separate prospectuses. The first
prospectus relates to a public offering of shares of Common Stock in the
United States and Canada (the "U.S. Offering"). The second prospectus relates
to a concurrent offering of shares of Common Stock outside the United States
and Canada (the "International Offering"). The prospectuses for the U.S.
Offering and the International Offering will be identical with the exception
of the outside front cover and outside back cover pages of the prospectus for
the International Offering. Such alternate pages appear in this Registration
Statement immediately following the complete prospectus for the U.S. Offering
and are labeled "Alternate Pages for International Offering Prospectus."
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

Subject to Completion, dated April 2, 1997

PROSPECTUS
8,050,000 SHARES

[LOGO OF FLAGSTAR BANCORP APPEARS HERE]
COMMON STOCK

Of the shares of common stock, par value $0.01 per share (the "Common
Stock"), of Flagstar Bancorp, Inc. (the "Company") offered hereby, 2,200,000
shares are being issued and sold by the Company and 5,850,000 shares are being
sold by members of the Hammond family (collectively, the "Selling
Stockholders"), who prior to this offering own 100% of the Company. The Selling
Stockholders include Thomas J. Hammond, the Chairman of the Board and Chief
Executive Officer of the Company, and Mark T. Hammond, the Vice Chairman and
President of the Company. Of the 8,050,000 shares being offered hereby,
shares are being offered initially in the United States and Canada by the U.S.
Underwriters (the "U.S. Offering") and shares are being offered initially
outside the United States and Canada by the International Managers (the
"International Offering" and, together with the U.S. Offering, the "Offering").
The initial public offering price and underwriting discounts and commissions
will be identical for both offerings. See "Underwriting." The Company was
formerly known as FSSB Holding Corporation and is the holding company and sole
stockholder of Flagstar Bank, FSB (the "Bank"), which was formerly known as
First Security Savings Bank, FSB. Following the consummation of the Offering,
the Selling Stockholders will own 5,400,000 shares of Common Stock representing
40.15% of the voting power of the Company, assuming no exercise of the U.S.
Underwriters' and International Managers' over-allotment options. See "Selling
Stockholders." The Company will not receive any of the proceeds from the sale
of the shares by the Selling Stockholders.

Prior to the Offering, there has been no public market for the Common Stock.
It is currently anticipated that the initial public offering price for the
Common Stock will be between $19 and $21 per share. See "Underwriting" for
information relating to the factors to be considered in determining the public
offering price. The Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "FLGS." See "Market for the Common Stock."

At the request of the Company, the U.S. Underwriters have reserved up to
800,000 shares of Common Stock for sale at the initial public offering price to
employees and customers of the Company and its affiliates. See "Underwriting."

THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 10.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION"), THE FEDERAL DEPOSIT INSURANCE
CORPORATION (THE "FDIC"), THE OFFICE OF THRIFT SUPERVISION (THE "OTS") OR
ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION, THE FDIC, THE OTS
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS
OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION, AND ARE NOT INSURED BY
THE FDIC OR ANY OTHER GOVERNMENTAL AGENCY.

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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2)(3) STOCKHOLDERS(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................. $ $ $ $
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Total(4).................. $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters and International Managers (together, the "Underwriters")
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) Before deducting offering expenses payable by the Company, estimated to be
$ .
(3) Pursuant to an agreement among each of the Selling Stockholders and the
Company, the Company has agreed to pay 50% of the Underwriting Discounts
and Commissions in connection with the sale of shares of the Common Stock
in the Offering as well as all other fees and expenses incurred in
connection therewith. See "Selling Stockholders--Selling Stockholder
Agreement."
(4) The Company and the Selling Stockholders have granted to the U.S.
Underwriters a 30-day option to purchase up to an additional and
shares of Common Stock, respectively, on the same terms and conditions as
set forth above to cover over-allotments, if any. The Company and the
Selling Stockholders have granted the International Managers a similar
option to purchase up to an additional and shares of Common Stock,
respectively, to cover over-allotments, if any. If all such shares of
Common Stock are purchased, the total Price to Public, Underwriting
Discounts and Commissions, Proceeds to Company and Proceeds to Selling
Stockholders will be $ , $ , $ and $ , respectively. See
"Underwriting."
------------
The shares of Common Stock offered by this Prospectus are offered by the U.S.
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the U.S.
Underwriters and to certain further conditions. It is expected that delivery of
certificates for the shares of Common Stock will be made at the offices of
Lehman Brothers Inc., New York, New York, on or about , 1997.
------------
LEHMAN BROTHERS
PAINEWEBBER INCORPORATED
RONEY & CO.

APRIL , 1997
<PAGE>

[LOGO OF FLAGSTAR BANCORP APPEARS HERE]

[MAP OF UNITED STATES WITH EXPANDED MAP OF MICHIGAN AND WITH LOCATIONS SHOWN
OF REGIONAL WHOLESALE/CORRESPONDENT LENDING OFFICES, RETAIL LOAN ORIGINATION
OFFICES, BANK BRANCHES AND WHOLESALE/CORRESPONDENT SATELLITE OFFICES]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING
THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON
STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK, AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."

2
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information, risk factors and financial
statements, including the related notes, appearing elsewhere in this
Prospectus. Unless otherwise indicated, all information in this Prospectus
assumes that the over-allotment options granted to the U.S. Underwriters and
the International Managers have not been exercised. Terms used but not defined
herein are defined elsewhere in this Prospectus.

THE COMPANY

Flagstar Bancorp, Inc., a Michigan-based thrift holding company, is one of
the largest originators of conforming single-family mortgage loans in the
United States. Formerly known as FSSB Holding Corporation, the Company is
engaged, through its principal subsidiary, the Bank, in the business of
providing a full range of retail banking services in southern Michigan and in
originating, purchasing and servicing residential mortgage loans on a
nationwide basis. For 1996, the Company ranked fourth in the United States
among thrifts in mortgage loan originations and sixteenth in total mortgage
loan production according to SMR Research Corp., and was the second largest
privately-owned mortgage originator in the United States.

Prior to this Offering, all of the Common Stock of the Company has been owned
by the Hammond family, which includes Thomas J. Hammond, the Chairman, Chief
Executive Officer and founder of the Company, and Mark T. Hammond, the Vice
Chairman and President of the Company. At December 31, 1996, the Company had
consolidated total assets of $1.3 billion, net loans of $1.1 billion, total
deposits of $624.5 million and total stockholders' equity of $78.5 million. For
the year ended December 31, 1996, the Company's net earnings were $17.0 million
and its return on average assets and return on average equity were 1.53% and
24.68%, respectively ($19.2 million, 1.73% and 27.87%, respectively, excluding
the special deposit insurance assessment imposed on September 30, 1996 on all
depository institutions insured by the Savings Association Insurance Fund (the
"SAIF")).

The Company currently operates in both the retail banking and mortgage
banking segments, with most of the Company's revenue (net interest income and
non-interest income) and earnings before income taxes attributable to the
mortgage banking segment. The Company believes that its retail banking business
provides it with a strategic advantage because it affords the Company access to
funding sources for its mortgage origination business which would not otherwise
be available. These additional funding sources include low cost retail
deposits, FHLB advances and escrowed funds. The Company benefits as compared to
mortgage originators with no retail banking operations because it has access to
a lower cost of funds and is therefore able to generate greater net interest
income. See "The Company" and "Business."

RETAIL BANKING. Through the Bank (which was formerly known as First Security
Savings Bank, FSB), the Company provides a full range of retail banking
services to consumers and small businesses in southern Michigan. The Bank
operates a network of 15 bank branches located in southern Michigan counties,
including Jackson County where it had the third largest market share with 21.8%
of total deposits as of June 1996. Beginning with the acquisition of Security
Savings Bank, F.S.B. ("Security Savings") and its seven bank branches in 1994,
the Company has focused on expanding its branch network in these markets in
order to increase its access to retail deposit funding sources. The Company
believes that this also provides a greater opportunity for cross-marketing of
consumer banking services to the Company's mortgage customers in Michigan and
for taking advantage of opportunities that the Company believes exist for
community banks in Michigan as a result of the substantial consolidation that
has occurred in the banking industry. See "Business."

MORTGAGE BANKING. The Company's mortgage banking operations, which have
historically generated substantially all of the Company's earnings, originate
residential mortgages through 41 retail loan origination offices located in
Michigan (30), California (9) and Ohio (2). In addition, the Company originates
retail

3
<PAGE>

mortgage loans on a wholesale basis through a network of approximately 1,800
independent mortgage brokers nationwide (who originate such loans using the
Company's underwriting systems and standards and close such loans using funds
advanced by the Company). This network is serviced by sixty account executives,
who are organized among 10 regional wholesale/correspondent lending offices and
nine wholesale/correspondent satellite offices. The Company also purchases
mortgage loans on a regular basis from independent mortgage lenders, commercial
banks, savings and loan associations and other financial institutions with whom
the Company has established a correspondent relationship. See "Business."

During the years ended December 31, 1996 and 1995, the Company's mortgage
loan production totaled $6.8 billion and $5.2 billion, respectively. Of these
amounts, approximately $6.1 billion was produced during the year ended December
31, 1996 through the Company's wholesale and correspondent loan production
network and $685.3 million was produced through the Company's retail network
($4.6 billion and $632.7 million, respectively, during 1995).

The Company sells a substantial portion of its loan production into the
secondary market, principally by securitizing pools of loans through programs
offered by government-sponsored enterprises such as the Federal National
Mortgage Association ("FNMA" or "Fannie Mae") and the Federal Home Loan
Mortgage Corporation ("FHLMC" or "Freddie Mac") and through sales to private
investors. In addition, the Company originates and sells loans conforming to
the underwriting criteria of the Federal Housing Authority ("FHA") and the
Department of Veterans Affairs ("VA"). Generally, the Company retains a portion
of the servicing rights to the loans that it sells, but also realizes
additional income by selling servicing rights on an individual and a bulk basis
to other mortgage servicers. At December 31, 1996 and 1995, the Company's loan
servicing portfolio totaled $4.8 billion and $6.8 billion, respectively (net of
loans subserviced for others), substantially all of which related to
conventional loans.

The Company makes extensive use of advanced technology and automated
processes in order to enhance the competitiveness and reduce the cost of its
mortgage origination operations. The Company was one of the first mortgage
lenders to utilize video conferencing for loan production. In 1996, the Company
began full-scale operational use of automated underwriting system technologies,
including Fannie Mae's Desktop UnderwriterTM and Freddie Mac's Loan
ProspectorTM (of which the Company is currently one of the largest users), and
has combined the two technologies into its LIVESM video conferencing and
underwriting system. The Company believes that the LIVESM system, which permits
a loan underwriter to interview and complete a loan application and approve a
loan for a prospective borrower in one session during a live video conference,
provides it with a significant competitive edge in writing mortgage loans. The
Company also expects that during 1997, substantially all of its mortgage loan
production will be underwritten using automated systems, which it believes will
further reduce overhead, enhance customer service and facilitate conformity of
the Company's loan production with FHLMC and FNMA underwriting guidelines.

BUSINESS STRATEGY. The Company's strategy consists of the following key
elements:

. continue to expand the Company's branch network into the demographically
desirable communities adjacent to the Company's current markets (such as
Grand Rapids and Kalamazoo, Michigan) in order to gain access to
additional low cost retail funding sources;

. cross-sell retail banking services to the Company's large Michigan base
of existing mortgage customers;

. benefit from economies of scale by increasing the size of its loan
servicing portfolio through the continued origination and purchase of
large volumes of mortgage loans on a diversified, nationwide basis;

. use the additional capital received by the Company from this Offering to
retain more of its mortgage loan production volume and mortgage servicing
rights, thereby increasing net interest income and servicing income;

. utilize advanced technology and automated processes throughout the
Company's business to improve customer service, reduce costs of loan
production and servicing and increase efficiencies; and

. outsource selected loan servicing and other functions when cost-
effective.

4
<PAGE>

RECENT OPERATING RESULTS. The Company's operations have grown significantly
over the past five years. Between year-end 1992 and year-end 1996, the
Company's annual mortgage loan production volume grew from $3.0 billion to $6.8
billion, its assets grew from $304.8 million to $1.3 billion and its loan
servicing portfolio (net of loans subserviced for others) grew from $3.1
billion to a peak of $6.8 billion at December 31, 1995 before decreasing to
$4.8 billion at December 31, 1996 as a result of significant sales of servicing
rights during 1996. Over this period, net earnings increased from $9.8 million
in 1992 to $17.0 million in 1996 ($19.2 million before the special deposit
insurance assessment imposed on September 30, 1996, on all SAIF-insured
institutions). Net earnings decreased in 1994 and 1995 compared to 1993 as a
result of several factors, including higher levels of compensation and expense
relating to expansion that the Company undertook in 1993 in response to the
record levels of refinancing activity and its acquisition of Security Savings
in 1994. This resulted in a corresponding decrease in earnings per share from
$1.65 in 1993 to $1.37 in 1995, before increasing to $1.51 in 1996. For the
three years ended December 31, 1996, 1995 and 1994, the Company reported a
return on average equity of 24.68%, 29.42% and 35.78%, respectively, and a
return on average assets of 1.53%, 1.63% and 3.19%, respectively.

Historically, the Company has incurred minimal losses from charge-offs in
connection with its residential mortgage loan production. Net charge-offs as a
percentage of average loans outstanding increased from 0.09% in 1992 to 0.13%
in 1996. Over this period, non-performing assets as a percentage of total
assets ranged from 0.94% in 1992 to a low of 0.42% in 1994 and increased to
1.25% at December 31, 1995 and to 3.16% at December 31, 1996 (down from 3.37%
at September 30, 1996). As a result of the increase in non-performing assets
during 1996, the Company increased its provision for losses from $238,000 in
1995 to $2.6 million in 1996. At December 31, 1996, the Company's allowance for
losses was equal to 0.31% of total loans and 11.43% of non-performing loans
compared to 0.23% and 19.67%, respectively, at December 31, 1995. The 1995 and
1996 increases in non-performing assets resulted primarily from increased
repurchases of delinquent residential mortgage loans from secondary market
investors. Although the Company generally does not sell loans with recourse, it
typically is required to repurchase loans, including delinquent and defaulted
loans, which were not underwritten strictly in compliance with the underwriting
standards of secondary market investors. As the volume of the Company's new
loan production has increased substantially over the past several years, the
aggregate amount of loan delinquencies and foreclosures has also increased,
thereby increasing the number of loans potentially subject to repurchase. In
addition, during 1996 two of the largest secondary market purchasers of loans
implemented automated underwriting review systems which enabled them to review
delinquent loans on a much faster basis, thereby accelerating the process of
returning to the Company loans originated in prior periods.

It has been the Company's experience that non-performing loans do not
necessarily result in an ultimate loss to the Company. Approximately 88% of the
Company's non-performing loans at December 31, 1996 were single-family
residential mortgage loans (94% at December 31, 1995), which generally
represent minimal risk of ultimate loss because of the nature of the underlying
collateral, private mortgage insurance for loans with over-80% loan-to-value
("LTV") ratios and insurance or guarantees on certain loans from the FHA and
VA. In addition, the Company may also have the right to sell the repurchased
loan back to the broker or correspondent which originated it, or to seek
indemnity from the applicable mortgage insurance company in the case of loans
which are underwritten on a contract basis for the Company by such insurers.

The Company anticipates that its level of loan repurchases and non-performing
assets may continue to be above historical levels during 1997 as a result of
the factors described above. The Company believes, however, that several
actions it has taken during 1996, including a tightening of credit standards
and the implementation of automated underwriting systems (which the Company
believes, in most cases, significantly reduce the ability of secondary market
investors to require repurchases of loans absent material misrepresentation),
should result in the level of loan repurchases declining over time. See
"Management's Discussion and Analysis of Changes in Financial Condition and
Results of Operations--Financial Condition--Allowance for Losses" and
"Business--Asset Quality."

5
<PAGE>

MANAGEMENT

The Company's senior management team consists of four individuals with
extensive experience in the financial services industry, particularly
residential mortgage loan origination. The Chairman, Chief Executive Officer
and founder, Thomas J. Hammond, has over 29 years of experience in various
aspects of residential lending and has been the Chief Executive Officer of the
Bank since its inception in 1987. Prior to organizing the Bank, Mr. Hammond
organized, owned and managed a series of financial services related companies,
including Hammond Mortgage Corporation, which was sold to Michigan National
Bank in 1981. The President, Mark T. Hammond, has worked in various positions
at the Bank for the past 10 years, including Senior Vice President of the Bank
in charge of secondary marketing and loan production and Executive Vice
President responsible for mortgage operations. Joan H. Anderson, who is
Executive Vice President in charge of mortgage loan servicing, collections and
real estate holdings, has 27 years of banking and mortgage-related experience
and has managed numerous aspects of the Bank's mortgage banking operations
since joining the Bank in 1987. Michael W. Carrie, who is Chief Financial
Officer of the Bank, has 12 years of experience in banking and mortgage
lending, both with the Bank and previously with a major regional federal
savings bank.

THE OFFERING

Common Stock offered by the
Company.................... 2,200,000 shares of Common Stock(1)

Common Stock offered by the
Selling Stockholders....... 5,850,000 shares of Common Stock(1)

Common Stock to be
outstanding immediately
after the Offering......... 13,450,000 shares of Common Stock(1)(2)

Use of Proceeds............. Substantially all of the net proceeds received by
the Company from the shares it is selling in the
Offering will be contributed to the Bank to be
used for general corporate purposes and to pro-
vide additional capital to the Bank to retain
more servicing rights and to grow and expand its
banking operations through the acquisition or es-
tablishment of new bank branches. The Company
will receive none of the proceeds from the sale
of shares of Common Stock by the Selling Stock-
holders. See "Use of Proceeds."

Nasdaq National Market
Symbol..................... FLGS
- --------
(1) Excludes up to an aggregate of 330,000 shares and 877,500 shares of Common
Stock that the Underwriters have the option to purchase from the Company
and the Selling Stockholders, respectively, to cover over-allotments, if
any. See "Underwriting."
(2) Excludes shares issuable upon exercise of options to be issued to employees
of the Company. See "Management--Certain Benefit Plans and Agreements--
Stock Option Plan."

6
<PAGE>

DIVIDEND POLICY

The Company intends, subject to its capital needs, regulatory restrictions
and other factors that its Board of Directors may deem relevant, to declare and
pay a regular quarterly dividend beginning in 1997. It is currently anticipated
that the annual amount of such dividend will be equal to approximately 2% of
the initial public offering price of the Common Stock in the Offering (which is
equal to a quarterly dividend of $0.10 per share assuming an initial public
offering price at the mid-point of the range set forth on the cover page of
this Prospectus ($20 per share)). The declaration of dividends by the Company
and the amount thereof, however, will be at the discretion of the Company's
Board of Directors. See "Risk Factors--Company's Dependence on Bank for Funding
of Dividend Payments" and "Dividend Policy."

RISK FACTORS

See "Risk Factors" for a discussion of certain material factors that should
be considered in connection with an investment in the Common Stock offered
hereby.

7
<PAGE>

SUMMARY SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following table presents summary selected consolidated financial and
other data as of and for each of the five years in the period ended December
31, 1996. The information set forth below should be read in conjunction with
the Consolidated Financial Statements and the Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Consolidated Statements of Financial Condition as of December 31, 1996 and
1995, and the Consolidated Statements of Earnings for the years ended December
31, 1996, 1995 and 1994 are included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest income......... $ 76,179 $ 71,304 $ 35,112 $ 29,760 $ 18,735
Interest expense........ 45,967 41,443 14,486 12,052 9,227
---------- ---------- -------- -------- --------
Net interest income..... 30,212 29,861 20,626 17,708 9,508
Provision for losses.... 2,604 238 290 644 380
---------- ---------- -------- -------- --------
Net interest income
after provision for
losses................. 27,608 29,623 20,336 17,064 9,128
Non-interest income:
Loan administration
income................ 11,859 14,248 13,261 7,786 2,340
Net gain on loan sales
and sales of mortgage
servicing rights...... 39,640 16,228 27,357 20,400 9,921
Other income........... 7,035 6,512 2,114 5,468 6,162
---------- ---------- -------- -------- --------
Total.................. 58,534 36,988 42,732 33,654 18,423
---------- ---------- -------- -------- --------
Non-interest expense:
Compensation and
benefits.............. 25,553 19,665 18,609 7,984 5,184
Other expense.......... 33,267(1) 22,051 19,010 13,308 7,298
---------- ---------- -------- -------- --------
Total.................. 58,820 41,716 37,619 21,292 12,482
---------- ---------- -------- -------- --------
Earnings before federal
income taxes........... 27,322 24,895 25,449 29,426 15,069
Provision for federal
income taxes........... 10,299 9,419 9,318 10,405 5,275
---------- ---------- -------- -------- --------
Net earnings............ $ 17,023(1) $ 15,476 $ 16,131 $ 19,021 $ 9,794
---------- ---------- -------- -------- --------
PER SHARE DATA:
Earnings per share...... $ 1.51 $ 1.37 $ 1.42 $ 1. 65 $ 0.85
Book value per share.... $ 6.97 $ 5.55 $ 4.37 $ 3.05 $ 1.45
Weighted average number
of shares outstanding.. 11,250 11,274 11,389 11,527 11,527
SUMMARY OF FINANCIAL
CONDITION:
Total assets............ $1,297,226 $1,045,094 $723,150 $467,629 $304,758
Loans receivable:
Mortgage loans
available for sale.... 840,767 620,455 205,480 389,073 218,266
Loans held for
investment............ 273,569 305,580 429,800 26,906 21,637
Less: Allowance for
losses................ (3,500) (2,102) (1,871) (901) (550)
---------- ---------- -------- -------- --------
Total loans, net....... 1,110,836 923,933 633,409 415,078 239,353
Mortgage servicing
rights................. 30,064 27,957 18,179 17,563 11,108
Deposits................ 624,485 526,974 307,624 190,761 181,171
FHLB advances........... 389,801 191,156 200,750 55,000 --
Stockholders' equity.... 78,468 62,445 49,419 35,114 16,767
PERFORMANCE RATIOS:
Return on average
assets................. 1.53%(1) 1.63% 3.19% 4.39% 3.72%
Return on average
equity................. 24.68%(1) 29.42% 35.78% 69.56% 84.78%
Interest rate spread.... 2.13% 2.36% 3.37% 3.39% 2.04%
Net interest margin..... 3.07% 3.46% 4.63% 4.55% 3.92%
Ratio of average
interest-earning assets
to average interest-
bearing liabilities.... 120% 123% 139% 137% 158%
Ratio of non-interest
expense to average
assets................. 5.28%(2) 4.39% 7.44% 4.92% 4.71%
Efficiency ratio (3).... 64.8% 60.4% 58.3% 41.5% 44.7%
Dividend payout ratio... 5.87% 12.92% 2.48% 4.21% 7.66%
</TABLE>

8
<PAGE>

<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
ASSET QUALITY DATA:
Net charge-offs to
average loans
outstanding............ 0.13% 0.00% 0.08% 0.08% 0.09%
Non-performing assets to
total assets........... 3.16% 1.25% 0.42% 0.60% 0.94%
Non-performing loans to
total loans............ 2.75% 1.15% 0.27% 0.37% 0.85%
Allowance for losses to
total loans............ 0.31% 0.23% 0.29% 0.22% 0.23%
Allowance for losses to
non-performing loans .. 11.43% 19.67% 107.59% 58.17% 26.84%
CAPITAL RATIOS:
Tangible capital........ 5.58% 5.19% 5.54% 7.41% 5.35%
Core capital............ 6.01% 5.84% 6.63% 7.41% 5.35%
Total risk-based
capital................ 10.91% 10.12% 12.08% 13.84% 13.40%
Average equity-to-
average assets......... 6.19% 5.54% 8.91% 6.32% 5.14%
MORTGAGE ORIGINATION AND
SERVICING DATA:
Mortgage loans
originated or
purchased.............. $6,791,665 $5,195,605 $3,720,173 $6,220,415 $2,984,076
Mortgage loans sold..... $6,581,897 $4,760,806 $3,551,319 $6,034,828 $2,888,564
Mortgage loans serviced
for others (4)......... $4,801,581 $6,788,530 $5,691,421 $6,198,311 $3,091,399
Capitalized value of
mortgage servicing
rights (5)............. 0.63% 0.41%(6) 0.32% 0.28% 0.36%
OTHER DATA:
Full time equivalent
employees.............. 1,310 1,142 869 971 584
Number of bank
branches............... 15 13 9 1 1
Number of regional
wholesale/correspondent
lending offices........ 10 9 6 5 4
</TABLE>
- --------

(1) Includes the special deposit insurance assessment imposed during 1996 by
the FDIC on all institutions whose deposits were insured by the SAIF on
March 31, 1995. See "Regulation and Supervision of the Bank--Federal
Deposit Insurance." The Bank's assessment was $2.2 million, net of taxes.
If such assessment had not been imposed, the Company's net earnings would
have been approximately $19.2 million for the year ended December 31, 1996
and its return on average assets and return on average equity for the
period would have been 1.73% and 27.87%, respectively.
(2) Excluding the special SAIF assessment of $3.4 million, before taxes,
incurred during 1996, mentioned in footnote 1 above, such ratio would have
been 4.98%.
(3) Computed as non-interest expense (excluding amortization of core deposit
premiums) divided by the sum of net interest income and non-interest
income. Excluding the special SAIF assessment of $3.4 million, before
taxes, incurred during 1996, mentioned in footnote 1 above, such ratio
would have been 61.0% for the year ended December 31, 1996.
(4) Amount excludes loans being subserviced for others, which is servicing of
loans subsequent to the sale of the related mortgage servicing rights but
prior to their delivery to the purchasers. Loans subserviced for others
totalled $3.6 billion and $0.5 billion at December 31, 1996 and 1995,
respectively. There was no subservicing in prior years.
(5) Reflects percentage of book value of mortgage servicing rights to loans
serviced for others (excluding subservicing).
(6) Increase from prior year arises in part from the Company's adoption in May
1995 of Statement of Financial Accounting Standards No. 122, "Accounting
for Mortgage Servicing Rights," which required the capitalization of
mortgage servicing rights arising from loans originated by the Bank as well
as the continued capitalization of mortgage servicing rights purchased from
third parties.

9
<PAGE>

RECENT DEVELOPMENTS

The following table presents selected financial data for the periods
indicated. The selected consolidated financial and other data as of and for the
three months ended March 31, 1997 and 1996 are unaudited and are derived from
the Company's internal consolidated financial statements which, in the opinion
of management, contain all adjustments (consisting only of normal recurring
adjustments) which are necessary for a fair presentation of the results for
such periods. The information set forth below should be read in conjunction
with the Consolidated Financial Statements and the Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1997 1996
------------ ---------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
SUMMARY OF OPERATIONS:
Interest income................................... $25,991 $19,518
Interest expense.................................. 15,246 11,722
---------- ----------
Net interest income............................... 10,745 7,796
Provision for losses.............................. 662 308
---------- ----------
Net interest income after provision for losses.... 10,083 7,488
Non-interest income
Loan administration income...................... 3,180 3,736
Net gain on loan sales and sales of mortgage
servicing rights............................... 9,192 3,505
Other income.................................... 214 1,143
---------- ----------
Total......................................... 12,586 8,384
Non-interest expense
Compensation and benefits....................... 7,235 5,165
Other expense................................... 8,330 7,315
---------- ----------
Total......................................... 15,565 12,480
---------- ----------
Earnings before federal tax provision............. 7,104 3,392
Provision for federal income taxes................ 2,583 1,142
---------- ----------
Net earnings...................................... $ 4,521 $ 2,250
========== ==========
PER SHARE DATA:
Earnings per share................................ $ 0.40 $ 0.20
Book value per share.............................. $ 7.38 $ 5.66
Weighted average number of shares outstanding..... 11,250 11,250
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
1997 1996
------------ ---------------
(IN THOUSANDS)
<S> <C> <C>
SUMMARY OF FINANCIAL CONDITION:
Total assets...................................... $1,519,099 $1,297,226
Loans receivable:
Mortgage loans available for sale............... 1,091,136 840,767
Loans held for investment....................... 240,843 273,569
Less: Allowances for losses..................... (3,995) (3,500)
---------- ----------
Total loans, net.............................. 1,327,984 1,110,836
Mortgage servicing rights......................... 30,331 30,064
Deposits.......................................... 767,293 624,485
FHLB advances..................................... 465,614 389,801
Total stockholders' equity........................ 82,989 78,468
</TABLE>

10
<PAGE>

<TABLE>
<CAPTION>
AT OR FOR
THE THREE
MONTHS
ENDED MARCH
31,
---------------
1997 1996
----- -----
<S> <C> <C>
PERFORMANCE RATIOS (1)
Return on average assets..................................... 1.28% 0.80%
Return on average equity..................................... 22.85% 14.55%
Interest rate spread......................................... 2.52% 2.04%
Net interest margin.......................................... 3.32% 3.02%
Ratio of average interest-earning assets to average interest-
bearing liabilities......................................... 116% 121%
Ratio of non-interest expense to average assets.............. 4.40% 4.43%
Efficiency ratio............................................. 65.3% 75.1%
Dividend payout ratio........................................ 0.00%(2) 44.44%
ASSETS QUALITY DATA:
Net charge-offs to average loans outstanding(1).............. 0.05% 0.00%
Non-performing assets to total assets........................ 3.13% 1.66%
Non-performing loans to total loans.......................... 2.83% 1.52%
Allowance for losses to total loans.......................... 0.30% 0.23%
Allowance for losses to non-performing loans................. 10.62% 15.31%
</TABLE>

The following tables set forth additional information regarding the Company and
the Bank as of or for the three month period ended March 31, 1997. At such
date, the Bank exceeded all minimum regulatory capital requirements. See
"Regulation--Regulation and Supervision of the Bank--Regulatory Capital and
Reserve Requirements."

BANK REGULATORY CAPITAL RATIOS:

<TABLE>
<S> <C>
Tangible capital...................................................... 5.09%
Core capital.......................................................... 5.43%
Total risk-based capital.............................................. 10.06%
</TABLE>

MORTGAGE ORIGINATION AND SERVICING DATA:
(DOLLARS IN THOUSANDS)

<TABLE>
<S> <C>
Mortgage loans originated or purchased........................... $1,496,298
Mortgage loans sold.............................................. $1,244,741
Mortgage loans serviced for others (3)........................... $4,162,204
Capitalized value of mortgage servicing rights (4)............... 0.73%
</TABLE>
- --------

(1) Ratios are annualized where appropriate.

(2) No dividends were paid during the three months ended March 31, 1997.

(3) Amount excludes subservicing of $4.3 billion.

(4) Reflects percentage of book value of mortgage servicing rights to loans
serviced for others (excluding subservicing).

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1996. The Company's consolidated net earnings for the three months ended
March 31, 1997 were $4.5 million, an increase of $2.2 million, or 95.7%, from
net earnings of $2.3 million for the three months ended March 31, 1996. This
increase in net earnings was due to increases in net interest income and non-
interest income, offset by an increase in non-interest expense and the
provision for losses. The Company's net interest income increased $2.9 million,
or 37.2%, to $10.7 million for the three months ended March 31, 1997, from $7.8
million for the three months

11
<PAGE>

ended March 31, 1996, reflecting continuing substantial growth in average
assets combined with a significant increase in the net interest margin (from
3.02% to 3.32%). Non-interest income increased $4.2 million, or 50.0%, to
$12.6 million for the three months ended March 31, 1997, from $8.4 million for
the three months ended March 31, 1996. The majority of this increase in non-
interest income resulted from increased net gains on loan sales and sales of
mortgage servicing rights, offset by decreases in loan administration and
other income. Non-interest expense increased $3.1 million, or 24.8%, to $15.6
million for the three months ended March 31, 1997, from $12.5 million for the
three months ended March 31, 1996. This increase was the result of an increase
in compensation and benefits of $2.1 million and an increase in other expenses
of $1.0 million.

The Company's provision for losses also increased by $354,000, or 114.9%, to
$662,000 for the three months ended March 31, 1997 from $308,000 for the three
months ended March 31, 1996. The increase in the provision increased the
Company's allowance for losses, to $4.0 million at March 31, 1997 (or 10.62%
of non-performing loans) compared to $3.5 million at December 31, 1996 (or
11.43% of non-performing loans). The increased provision reflects the higher
level of non-performing loans compared to the first quarter of 1996. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operation--Financial Condition--Allowance for Losses." The Company had net
charge-offs to average loans outstanding of 0.05% (annualized) in the first
quarter of 1997 compared to 0.00% (annualized) during the first quarter of
1996 and 0.13% for all of 1996.

12
<PAGE>

RISK FACTORS

In addition to the other information in this Prospectus, the following
factors should be carefully considered before investing in the Common Stock
offered hereby.

The discussion in this Prospectus contains certain forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Prospectus, including the risk factors discussed
below, should be read as being applicable to all related forward-looking
statements wherever they appear in this Prospectus. The Company's actual
results could differ materially from those discussed here. Factors that could
cause or contribute to such differences include those discussed below, as well
as those discussed elsewhere herein or in the documents incorporated by
reference herein.

EARNINGS AND ASSET VALUE DECLINES FROM INTEREST RATE FLUCTUATIONS

Changes in interest rates can have a variety of effects on the Company's
business. In particular, changes in interest rates may impact the volume of
mortgage loan originations, the interest spread on mortgage loans held for
sale, the amount of gain or loss on the sale of mortgage loans and mortgage
servicing rights and the market value of the Company's mortgage servicing
portfolio.

During periods of declining interest rates, such as occurred during 1993,
the Company typically experiences an increase in mortgage loan originations,
particularly those due to the refinancing of existing mortgages. An increase
in, or stabilization of, interest rates for an extended period of time would
adversely affect refinancing demand which could have an adverse effect on the
Company's loan origination volume.

The Company's net interest income or loss is the difference between the
interest income it earns on the loans it originates or purchases as well as on
other interest-earning assets and the interest expense it pays on its
interest-bearing liabilities to fund such interest-earning assets. The Company
principally funds its interest-earning assets from deposits and borrowings
from the FHLB. The profitability of the Company's mortgage loan originations
is in part a function of the spread between long-term interest rates (the
rates on the loans the Company holds, whether for investment or for sale in
the secondary market) and short-term interest rates (the rates at which the
Company funds such mortgage loans). Since 1994, the Company's interest rate
spread has declined from 3.37% for the year ended December 31, 1994 to 2.13%
for the year ended December 31, 1996 in large part because of the decrease in
the prevailing spread between long-term and short-term interest rates. There
can be no assurance that future changes in interest rates will not further
decrease this spread, which may adversely affect the Company's level of net
interest income.

In its retail banking operations, the Company is subject to interest rate
risk on loans held in its portfolio arising from mismatches (i.e., the
interest sensitivity gap) between the dollar amount of repricing or maturing
assets and liabilities, which is measured in terms of the ratio of the
interest rate sensitivity gap to total assets. More assets repricing or
maturing than liabilities over a given time frame is considered asset-
sensitive and is reflected as a positive gap, and more liabilities repricing
or maturing than assets over a given time frame is considered liability-
sensitive and is reflected as a negative gap. An asset-sensitive position
(i.e., a positive gap) will generally enhance earnings in a rising interest
rate environment and will negatively impact earnings in a falling interest
rate environment. A liability-sensitive position (i.e., a negative gap) will
generally enhance earnings in a falling interest rate environment and
negatively impact earnings in a rising interest rate environment. Fluctuations
in interest rates are not predictable or controllable. Although the Company
has attempted to structure its asset and liability management strategies to
mitigate the impact on net interest income of changes in market interest
rates, there can be no assurance that a sudden or significant change in
prevailing interest rates will not have a material adverse effect on the
Company's operating results. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition--Asset/Liability Management--
Interest Rate Sensitivity Analysis."

13
<PAGE>

In its mortgage banking operations, the Company is exposed to 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
significant 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 strategy utilized by
the Company is not successful, the Company's profitability may be adversely
affected. See "Business--Secondary Marketing."

The market value of, and earnings from, the Company's mortgage loan
servicing portfolio may be adversely affected by declines in interest rates.
If mortgage interest rates decline and mortgage loan prepayments therefore
increase due to refinancing activity, the income stream from the Company's
current mortgage loan servicing portfolio may decline. In that case, the
Company may be required to amortize the portfolio more quickly or reduce the
carrying value of its mortgage loan servicing portfolio, which would adversely
affect the Company's operating results and financial condition. See
"Business--Loan Servicing."

POTENTIAL LOSS OF ACCESS TO AND INCREASED COST OF FUNDING SOURCES

The Company's principal sources of funding for its operations have been
deposits placed with the Company and, to a lesser extent, borrowings from the
Federal Home Loan Bank of Indianapolis (the "FHLB") and funds held in escrow
for mortgage loan servicing purposes. Historically, the Company's cost of
funds associated with deposits has generally been lower than its cost to
borrow from the FHLB. To the extent the Company is unable to fund its asset
growth through the maintenance and growth of its deposit base, it may have to
rely to a greater extent on borrowings from the FHLB or other sources. If the
cost of non-deposit funds is higher than the cost of deposits placed with the
Company, the Company's net interest income and profitability would be
adversely affected. At December 31, 1996, the Company had a $425.0 million
line of credit with the FHLB, of which $389.8 million had been drawn and was
outstanding.

There can be no assurance that the Company will be successful in retaining
access to funds at the level or cost necessary to continue originations of
single-family mortgage loans at their current volume and level of
profitability. To the extent that the Company is not successful in maintaining
the availability of its current funding sources, by retaining existing
deposits and attracting new deposits and by maintaining its line of credit
with the FHLB, it may have to curtail its origination of single-family
mortgage loans. A reduction in the Company's origination of single-family
mortgage loans could have a material effect on the Company's gain on mortgage
loan sales and sales of mortgage servicing rights. See "Management's
Discussion and Analysis of Changes in Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business--Funding Sources."

POSSIBLE LOSS OF ACCESS TO SECONDARY MORTGAGE MARKET

The ability of the Company to continue the mortgage banking segment of its
operations, which generated a significant portion of the Company's pre-tax
earnings for the year ended December 31, 1996, and has historically generated
substantially all of the Company's earnings, is dependent upon the Company's
continued access to an active secondary market in which to sell its single-
family mortgage loans.

14
<PAGE>

The Company currently sells substantially all of the mortgage loans that it
originates through its mortgage banking operations. The Company's ability to
readily sell mortgage loans is dependent upon the availability of an active
secondary market for single-family mortgage loans, which in turn depends in
part upon the continuation of programs currently offered by Fannie Mae,
Freddie Mac and other institutional and non-institutional investors. These
entities account for a substantial portion of the secondary market in
residential mortgage loans. Some of the largest participants in the secondary
market, including Freddie Mac and Fannie Mae, are government-sponsored
enterprises whose activities are governed by federal law. Any future changes
in those laws could limit the activity of such government sponsored
enterprises or change the terms on which they acquire loans, which in turn
could adversely affect the Company's operations. The Company expects that it
will continue to remain eligible to participate in such programs but any
significant impairment of such eligibility could materially and adversely
affect its operations. Further, the criteria for loans to be accepted under
such programs may be changed from time to time by the sponsoring entity. The
profitability of participating in specific programs may vary depending on a
number of factors, including the administrative costs to the Company of
originating and purchasing qualifying loans.

There can be no assurance that the Company will continue to have ready
access to an active secondary market for the sale of its single-family
mortgage loans or that it can continue to originate the types of loans for
which such a market exists. Any significant change in the secondary market
level of activity or underwriting criteria of Fannie Mae, Freddie Mac or other
institutional or non-institutional investors could have a material adverse
effect on the Company's results of operations.

POTENTIAL LOSS FROM LOAN DELINQUENCIES AND DEFAULTS ON LOANS

From the time that the Company funds the mortgage loans it originates to the
time it sells such loans, generally 10 to 40 days, the Company is at risk for
any loan defaults. Once the Company sells the mortgage loans it originates,
the risk of loss from loan defaults and foreclosure generally passes to the
purchaser or insurer of the loans. In connection with the sale, the Company
typically makes certain representations and warranties to the purchasers and
insurers of such loans. Such representations and warranties generally relate
to the origination and servicing of loans in substantial conformance with the
laws of the state of origination and applicable investor guidelines and
program eligibility standards. The Company relies upon its underwriting
department to ascertain compliance with individual investor standards prior to
sale of the loans in the secondary market, and it relies upon its quality
control department to test sold loans on a sample basis for compliance. See
"Business--Underwriting" and "--Quality Control." The purchasers of such loans
will typically conduct a more detailed review of such loans following
acquisition to determine whether such loans were originated in compliance with
the purchaser's underwriting guidelines and program eligibility standards.

If a loan defaults and there has been a breach of the Company's
representations and warranties, the Company becomes liable for the unpaid
principal and interest on the defaulted mortgage loan and may be required to
repurchase the loan. During 1996, the Company sold approximately $6.6 billion
in single family mortgage loans in the secondary market, of which
approximately $10.4 million (0.16% of loans sold) were repurchased during
1996. Total repurchases of single family mortgage loans by the Company during
1996 of $54.8 million also included $32.7 million related to loans sold in
1995 (0.69% of such loans) and $11.7 million related to loans sold prior to
1995. Of the $54.8 million of mortgage loans repurchased during 1996, $15.0
million were non-performing at the time of repurchase, $10.1 million were non-
performing at December 31, 1996 and $3.7 million had been foreclosed and were
held as other repossessed assets at such date. These amounts represented
significant increases over 1995, when the Company repurchased an aggregate of
$4.5 million of single family residential mortgage loans. This increase in
loan repurchases resulted primarily from the Company's increased volume of
loan production in 1996 and also the accelerated review by certain secondary
market investors of delinquent and other loans, which in turn accelerated the
process of returning to the Company loans originated in prior periods which
did not comply with the underwriting standards of such investors. See
"Business--Asset Quality." Primarily as a result of these increases in
repurchases of non-performing loans from secondary market investors, the
Company's level of non-performing assets increased from 1.25% of total assets

15
<PAGE>

at December 31, 1995 to 3.16% at December 31, 1996. Although the Company
increased its provision for losses from $238,000 in 1995 to $2.6 million in
1996, its ratio of allowance for losses to non-performing loans declined from
107.6% at December 31, 1994 to 19.7% at December 31, 1995 and to 11.4% at
December 31, 1996.

For the reasons discussed under "Management's Discussion and Analysis of
Changes in Financial Condition and Results of Operations," the Company expects
that the level of its loan repurchases may continue to be above historical
levels during 1997. The Company has historically incurred minimal losses from
charge-offs in connection with its residential mortgage loan production and
does not expect that these increases in loan repurchases and non-performing
assets will result in materially increased levels of losses in the future (see
"Management's Discussion and Analysis of Changes in Financial Condition and
Results of Operations--Financial Condition--Allowance for Losses"); however,
there can be no assurance that this will continue to be the case.

The Company is also affected by loan delinquencies and defaults on mortgage
loans that it services. At December 31, 1996, approximately 4.16% of the loans
being serviced by the Company were delinquent (including foreclosures). Under
certain types of servicing contracts, the servicer must advance all or part of
the scheduled payments to the owner of the loan, even when loan payments are
delinquent. Also, to protect their liens on mortgaged properties, owners of
loans usually require the servicer to advance mortgage and hazard insurance
and tax payments on schedule even if sufficient escrow funds are not
available. The servicer will be reimbursed by the mortgage owner or from
liquidation proceeds for payments advanced that the servicer is unable to
recover from the mortgagor, although the timing of such reimbursement is
typically uncertain. In the interim, the servicer must absorb the cost of
funds advanced. Further, the servicer must bear the costs of attempting to
collect on delinquent and defaulted loans. The Company also foregoes servicing
income from the time a loan becomes delinquent until foreclosure, at which
time such amounts, if any, may be recovered.

GEOGRAPHIC CONCENTRATIONS IN LOAN AND SERVICING PORTFOLIO

Historically, the Company's single-family mortgage loan portfolio has been
concentrated in certain geographic regions, particularly Michigan, based upon
the location of the property collateralizing the mortgage loan. Because
borrowers of single-family mortgage loans usually reside on the collateral
property, changes in economic and business conditions in the area in which the
property is located can affect the borrower and thus have an effect on the
performance of the loan. As of December 31, 1996, approximately 38% of the
Company's single-family mortgage loans held for investment and of the mortgage
loans serviced by the Company (as measured by unpaid principal balance) were
collateralized by property located in Michigan. As a result, unfavorable or
worsened economic conditions in Michigan could have a material adverse effect
on the Company's financial condition and results of operations. Although the
Company continues to diversify its loan portfolio geographically to minimize
this risk, there can be no assurance that the Company will be successful in
this effort. See "Business--Lending."

In addition to risks associated with a geographic concentration of its loan
portfolio, the Company's results of operations can be affected by the
Company's concentration of credit to particular borrowers. The Company
currently provides warehouse lines of credit ranging up to $8.0 million to
certain mortgage companies. At December 31, 1996, the Company had issued a
total of $97.1 million in such lines of credit, under which $42.9 million in
borrowings were outstanding. Repayment of such loans is primarily dependent
upon the successful operation of the business involved and therefore could be
subject to a greater extent to adverse conditions in the economy. The Company
seeks to minimize these risks by granting warehouse lines of credit generally
to borrowers with which the Company has had substantial favorable business
experience, by monitoring each credit drawdown for prompt repayment and by
requiring collateral with a value in excess of the amount of the outstanding
borrowings. At December 31, 1996, none of these loans were non-performing or
classified. See "Business--Mortgage Banking Operations--Commercial Lending."

16
<PAGE>

SEASONAL NATURE OF MORTGAGE BANKING BUSINESS

The mortgage banking industry is generally subject to seasonal trends. These
trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during
the spring and summer seasons and decline to lower levels from mid-November
through February. In addition, delinquency rates typically rise in the winter
months, which results in higher servicing costs. See Note 18 of Notes to the
Consolidated Financial Statements.

EXPANSION OF RETAIL BANKING BRANCHES

The Company intends to grow and expand its retail banking operations through
the acquisition or establishment of additional bank branches. This expansion
is expected to be in communities across lower Michigan. If the Company is
unable to generate a customer base within these communities because of
consumer loyalty to other financial institutions or for other reasons, the
Company will have incurred construction or building acquisition costs and
liabilities under lease agreements as well as related branch overhead expenses
without an appropriate return on its investment. See "Business--Properties"
regarding the Company's branch expansion plans.

DEPENDENCE ON KEY PERSONNEL

The growth and development of the Company to date have been largely
dependent on certain key employees, the loss of whom could have a material
adverse effect. The key employees of the Company are Thomas J. Hammond, Chief
Executive Officer; Mark T. Hammond, President; Michael W. Carrie, Executive
Vice President and Chief Financial Officer; and Joan H. Anderson, Executive
Vice President. In connection with the Offering, the Company will enter into
employment agreements with such employees. The Company does not carry "key
person" life insurance on the lives of its officers. See "Management."

HIGHLY COMPETITIVE NATURE OF RETAIL AND MORTGAGE BANKING BUSINESS

The Company competes in the retail banking business primarily with
commercial banks and thrift institutions, all of which have a substantial
presence in the same markets as the Company. Competitors for deposits include
thrift institutions, commercial banks, credit unions, full service and
discount broker dealers, and other investment alternatives, such as mutual
funds, money market funds, and savings bonds or other government securities.
The Company and its peers compete primarily on price at which products are
offered and on customer service, with the Company generally offering deposit
rates above prevailing market rates. See "Management's Discussion and Analysis
of Changes in Financial Condition and Results of Operations--Financial
Condition." In addition, the Company offers extended hours in its bank
branches to attract a retail base of deposits.

The Company competes in the mortgage banking business for mortgage
originations with thrift institutions, commercial banks, insurance companies,
and mortgage companies, many of which operate nationwide mortgage origination
networks similar to that of the Company. Primary competitive factors include
service quality, relationships with builders, mortgage brokers, real estate
brokers and investors, technology, product offerings and rates and fees. Many
of the Company's competitors are, or are affiliated with, organizations with
substantially larger asset and capital bases (including regional and multi-
national banks and bank holding companies). The Company has positioned itself
with a product mix that attracts business from mortgage companies, credit
unions and thrifts which may not have sufficient loan origination volume to
obtain preferential pricing directly in the secondary market.

COMPANY'S DEPENDENCE ON BANK FOR FUNDING OF DIVIDEND PAYMENTS

As a holding company without significant assets other than the capital stock
of the Bank, the Company's ability to pay dividends on the Common Stock and to
meet its other obligations is dependent upon the receipt of dividends from the
Bank on such capital stock. The declaration of dividends by the Bank on all
classes of its

17
<PAGE>

capital stock is subject to the discretion of the Board of Directors of the
Bank and to applicable regulatory limitations. At December 31, 1996, the Bank
estimates that it would have at least $6.8 million available for the payment
of dividends to the Company under current OTS regulations without prior OTS
approval. See "Dividend Policy."

COMPANY'S EXPOSURE TO REGULATORY AND LEGISLATIVE CHANGES AND CIVIL LAWSUITS

The Bank, as a federally chartered savings bank, is subject to extensive
regulation, supervision and examination by the OTS and the FDIC. Such
regulation and supervision establishes a comprehensive framework of activities
in which a savings institution may engage and is intended primarily for the
protection of depositors and the SAIF, which is administered by the FDIC. In
addition, the Company, as a registered savings and loan holding company, is
subject to the regulation and supervision of the OTS. The regulatory structure
also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities. Any change in such regulation,
whether by the OTS, the FDIC, the Board of Governors of the Federal Reserve
Board (the "Federal Reserve Board") or the U.S. Congress, could have a
significant impact on the Bank and its operations. See "Regulation."

The Company's lending activities, including its mortgage banking operations,
are subject to the rules and regulations of the FHA, VA, Fannie Mae, Freddie
Mac, the Government National Mortgage Association ("GNMA") and other
regulatory agencies with respect to originating, processing, underwriting,
selling, and servicing mortgage loans. In addition, there are other federal
and state statutes and regulations affecting such activities. These rules and
regulations, among other things, impose licensing obligations on the Bank,
prohibit discrimination and establish underwriting guidelines which include
provisions for inspections and appraisals, require credit reports on
prospective borrowers and fix maximum loan amounts. Moreover, lenders such as
the Company are required annually to submit audited financial statements to
Fannie Mae, Freddie Mac, and GNMA and to comply with each regulatory entity's
own financial requirements. The Company's business is also subject to
examination by Fannie Mae, Freddie Mac and GNMA to assure compliance with
applicable regulations, policies and procedures.

Mortgage loan origination activities are subject to the provisions of
various federal and state statutes including, among others, the Equal Credit
Opportunity Act, the Federal Truth in Lending Act, the Real Estate Settlement
Procedures Act, the Fair Housing Act, and the regulations promulgated
thereunder, which, among other provisions, prohibit discrimination, prohibit
unfair and deceptive trade practices, and require the disclosure of certain
basic information to mortgagors concerning credit terms and settlement costs,
and otherwise regulate terms and conditions of credit and the procedures by
which credit is offered and administered. Many of the aforementioned
regulatory requirements are designed to protect the interests of consumers,
while others protect the owners or insurers of mortgage loans. Failure to
comply with these requirements can lead to loss of approved status,
termination of servicing contracts without compensation to the servicer,
demands for indemnification or loan repurchases, class action lawsuits and
administrative enforcement actions.

In addition, certain states require that interest be paid to mortgagors on
funds deposited by them in escrow to cover mortgage-related payments such as
property taxes and insurance premiums. Federal legislation has in the past
been introduced that would, if enacted, revise current escrow regulations and
establish a uniform escrow calculation methodology in all states. If such
federal legislation were enacted or if other states enact legislation relating
to payment of, or increases in the rate of, interest on escrow balances, or if
such legislation were retroactively applied to loans in the Company's
servicing portfolio, the Company's earnings would be adversely affected.

In recent years, mortgage originators have been subject to class action
lawsuits which allege violations of federal and state laws and regulations,
including the propriety of collecting and paying various fees and charges and
the calculation of escrow amounts. Class action lawsuits may continue to be
filed in the future against mortgage originators generally. There can be no
assurance that the Company or the Bank will not be the subject of such
lawsuits in the future. In the event of an unfavorable court judgment in such
lawsuits, if any, the Company's results of operations could be adversely
affected. See "Business--Legal Proceedings."

18
<PAGE>

There are various other state and local laws and regulations affecting the
Company's operations. The Company is licensed in those states that require
licensing to originate, purchase and/or service mortgage loans.

REGULATORY LIMITATION ON STOCK OWNERSHIP

With certain limited exceptions, federal regulations prohibit a person or
company or a group of persons deemed to be "acting in concert" from, directly
or indirectly, acquiring more than 10% of any class of voting stock or
obtaining the ability to control in any manner the election of a majority of
the directors or otherwise direct the management or policies of a savings
institution, such as the Bank, without prior notice or application to and the
approval of the OTS. See "Regulation--Regulation and Supervision of the
Company."

CONCENTRATION OF STOCK OWNERSHIP IN SELLING STOCKHOLDERS

Immediately following the Offering, the Selling Stockholders will own 40.15%
of the outstanding shares of Common Stock, or approximately 32.8% if the
Underwriters exercise the over-allotment options in full. Such ownership
percentage is based upon the anticipated sale of 5,850,000 shares of Common
Stock by the Selling Stockholders in the Offering (6,727,500 shares assuming
full exercise of the over-allotment options). The Selling Stockholders will
not purchase any shares in the Offering. Accordingly, following completion of
the Offering, the Selling Stockholders will continue to hold, in the
aggregate, a significant ownership interest in the Company and therefore will
be able to control or substantially influence the election of the Board of
Directors and thus be able to direct the Company's affairs, including
decisions regarding acquisitions and other business opportunities, the
declaration of dividends and the issuance of additional shares of Common Stock
and other securities, notwithstanding their ownership of less than a majority
of the outstanding shares of Common Stock.

DILUTION OF NEW STOCKHOLDERS THROUGH OFFERING

Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution, and present stockholders will receive a substantial
increase in the book value of their shares of Common Stock. See "Dilution."

NO PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY

Prior to the Offering, there has been no public market for the Common Stock.
There can be no assurance that an active trading market will develop or that
purchasers of the Common Stock will be able to resell their Common Stock at
prices equal to or greater than the initial public offering price, which was
determined through negotiations between the Company and the representatives of
the Underwriters and may not reflect the market price of the Common Stock
after the Offering. The development of a public market having the desirable
characteristics of depth, liquidity and orderliness depends upon the presence
in the marketplace of a sufficient number of willing buyers and sellers at any
given time, over which none of the Company, the Bank or any market maker has
any control. Accordingly, there can be no assurance that an established and
liquid market for the Common Stock will develop or be maintained. The market
price of the Common Stock could be subject to significant fluctuations in
response to the Company's operating results and other factors. In addition,
the stock market in recent years has experienced extreme price and volume
fluctuations that often have been unrelated or disproportionate to the
operating performance of individual companies. Such fluctuations, and general
economic and market conditions, may adversely affect the market price of the
Common Stock. See "Market for the Common Stock" and "Underwriting."

POTENTIAL ADVERSE EFFECT ON STOCK PRICE OF FUTURE SALES BY SELLING
STOCKHOLDERS

If the Underwriters do not exercise their over-allotment options, then the
Company will have 13,450,000 shares of Common Stock outstanding immediately
following consummation of the Offering, of which 5,400,000 shares,
representing approximately 40.15% of the outstanding shares of Common Stock,
will be owned by the Selling Stockholders, and will have reserved an
additional 1,345,000 shares of Common Stock for issuance

19
<PAGE>

pursuant to employee stock option plans. Of the then-outstanding shares, the
8,050,000 shares of Common Stock offered hereby will be freely tradable by
non-affiliates of the Company without restriction or registration under the
Securities Act of 1933, as amended (the "Securities Act"). All of the
remaining 5,400,000 shares of capital stock held by the Selling Stockholders
are "restricted securities" as that term is defined in Rule 144 promulgated
under the Securities Act. None of such securities will be eligible for sale
under Rule 144 before April, 1998 and then will be available for sale subject
to the volume and other restrictions generally applicable to unregistered
securities; in addition, the holders thereof have registration rights which
entitle them to require, under certain circumstances, that the Company
register their shares for sale to the public at an earlier date. The Company
and the Selling Stockholders have agreed not to sell any shares of such stock
or any rights to acquire such stock for a period of at least 180 days
following the date of this Prospectus without the consent of Lehman Brothers
Inc. on behalf of the Representatives and Lead Managers. See "Selling
Stockholders" and "Underwriting." Following this Offering, sales of
substantial amounts of the Common Stock in the public market, whether under
Rule 144 or otherwise, or the potential for such sales, could adversely affect
the prevailing market prices for the Company's Common Stock and impair the
Company's ability to raise capital through the sale of additional equity
securities.

RESTRICTIONS ON FUTURE ACQUISITION OF COMPANY

The Articles of Incorporation and Bylaws of the Company and applicable
provisions of the Michigan Business Corporation Act ("MBCA"), contain several
provisions that may make more difficult the acquisition of control of the
Company without the approval of the Board of Directors. Certain provisions of
the Articles of Incorporation, among other things, (i) authorize the issuance
of additional shares of Common Stock and serial preferred stock; (ii) classify
the Board of Directors into three classes, each of which will serve for
staggered three year periods; (iii) provide that a director of the Company may
be removed by the stockholders only for cause; (iv) provide that only the
Board of Directors or Chairman of the Board of the Company may call special
meetings of the stockholders; (v) provide that the stockholders may take
action only at a meeting of the stockholders; (vi) provide that the
stockholders must comply with certain advance notice procedures in order to
nominate candidates for director to the Board of Directors or to place
stockholders' proposals on the agenda for communication at stockholders
meetings; and (vii) provide that the stockholders may amend or repeal any of
the foregoing provisions of the Articles of Incorporation or Bylaws only by a
vote of 80% of the stock entitled to vote generally in the election of
directors. In addition, the Company is subject to various anti-takeover
provisions under the MBCA. See "Restrictions on Acquisition of the Company and
the Bank."

20
<PAGE>

THE COMPANY

Flagstar Bancorp, Inc., a Michigan-based thrift holding company, is one of
the largest originators of conforming single-family mortgage loans in the
United States. Formerly known as FSSB Holding Corporation, the Company is
engaged, through its principal subsidiary, the Bank, in the business of
providing a full range of retail banking services in southern Michigan and in
originating, purchasing and servicing residential mortgage loans on a
nationwide basis. For 1996, the Company ranked fourth in the United States
among thrifts in mortgage loan originations and sixteenth in total mortgage
loan production, according to SMR Research Corp., and was the second largest
privately-owned mortgage originator in the United States.

Prior to the Offering, all of the Common Stock of the Company has been owned
by the Hammond family, which includes Thomas J. Hammond, the Chairman, Chief
Executive Officer and founder of the Company, and Mark T. Hammond, the Vice
Chairman and President of the Company. At December 31, 1996, the Company had
consolidated total assets of $1.3 billion, net loans of $1.1 billion, total
deposits of $624.5 million and total stockholders' equity of $78.5 million.

The principal executive offices of the Company and the Bank are located at
2600 Telegraph Road, Bloomfield Hills, Michigan, 48302 and their telephone
number is (810) 338-7700.

USE OF PROCEEDS

The net proceeds to the Company from the Offering (after deduction of the
underwriting discounts and commissions and estimated offering expenses) are
estimated to be approximately $36.9 million, assuming an initial public
offering price at the mid-point of the range set forth on the cover of this
Prospectus ($20 per share) and assuming that the Underwriters' over-allotment
options are not exercised. The Company will not receive any of the proceeds
from the sale of Common Stock by the Selling Stockholders. Substantially all
of the net proceeds received by the Company from the shares of Common Stock it
is selling in the Offering will be contributed to the capital of the Bank to
be used for general corporate purposes and to provide additional capital to
the Bank to support growth in its businesses, including expansions in mortgage
originations and in its loan servicing portfolio and expansions in its banking
operations through the acquisition or establishment of new bank branches. See
"Business--Properties" regarding the Company's branch expansion plans and
"Business--General."

DIVIDEND POLICY

The Company intends to declare and pay dividends on its Common Stock
beginning in 1997. The declaration and payment of dividends by the Company are
subject to the discretion of the Board of Directors and will depend upon
levels of indebtedness, future earnings, capital requirements, the operating
and financial condition of the Company and its subsidiaries, and general
business conditions, as well as other factors that the Board of Directors
considers relevant. As a holding company, the Company's principal source of
funds for the payment of dividends will be dividends received from the Bank,
which are subject to certain regulatory restrictions. See "Regulation."

MARKET FOR THE COMMON STOCK

The Company's outstanding shares of Common Stock are currently held solely
by the Selling Stockholders and, prior to the Offering, there has been no
market for its capital stock. The Common Stock has been approved for quotation
on the Nasdaq National Market under the symbol "FLGS." The Company will seek
to encourage and will assist at least two market makers to establish and
maintain a market in the Common Stock in order to fulfill the requirements for
having the Common Stock quoted on the Nasdaq National Market. However, there
can be no assurance that an active and liquid trading market for the Common
Stock will develop or, if developed, will be sustained following the Offering.

21
<PAGE>

CAPITALIZATION

The following table sets forth (a) the historical capitalization of the
Company at December 31, 1996 and (b) the adjusted capitalization of the
Company at December 31, 1996 after giving effect to the Offering. The net
proceeds to the Company from the Offering (after deduction of the underwriting
discounts and commissions and estimated offering expenses) are estimated to be
approximately $36.9 million, assuming an initial public offering price at the
mid-point of the range set forth on the cover of this Prospectus ($20 per
share) and assuming that the Underwriters' over-allotment options are not
exercised. The Company will not receive any of the proceeds from the sale of
Common Stock by the Selling Stockholders. See "Selling Stockholders."

<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
----------------------
HISTORICAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt (1).................................... $ 2,500 $ 2,500
------- --------
Stockholders' Equity:
Common Stock (40,000,000 shares authorized;
11,250,000 shares issued and outstanding;
13,450,000 shares issued and outstanding as
adjusted).......................................... 112 134(2)
Preferred Stock (10,000,000 shares authorized;
no shares issued or outstanding)................... -- --
Additional paid in capital.......................... 2,816 39,661(3)
Retained earnings................................... 75,540 75,540
------- --------
Total stockholders' equity........................ 78,468 115,335
------- --------
Total capitalization............................ $80,968 $117,835
======= ========
Ratio of equity to assets............................. 6.05% 8.65%
Regulatory capital ratios of the Bank:
Tangible Capital.................................... 5.58% 8.21%
Core Capital........................................ 6.01% 8.61%
Total Risk Based Capital............................ 10.91% 15.49%(4)
Book value per common share........................... $ 6.97 $ 8.58
</TABLE>
- --------
(1) Reflects FHLB advances maturing more than one year from December 31, 1996.
(2) The Company has reserved 1,345,000 shares of its Common Stock for issuance
and to be available for grants under certain compensation plans. See
"Management."
(3) Offering expenses to be paid by the Company are expected to be
approximately $7.1 million.
(4) Reflects a risk-weighting of 50% for net proceeds received by the Company
from the Offering because of an assumed investment in single-family
mortgage loans.

22
<PAGE>

DILUTION

The net tangible book value of the Company's Common Stock as of December 31,
1996 was approximately $72.7 million or $6.46 per share. Net tangible book
value per share represents the amount of total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding.

Dilution per share to new investors purchasing Common Stock in the Offering
represents the difference between the amount per share paid and the net
tangible book value per share of Common Stock immediately after the Offering.
Shares used in the computation of per share amounts below include 11,250,000
shares outstanding immediately prior to the Offering and 2,200,000 shares to
be issued by the Company in the Offering. After giving effect to the sale of
2,200,000 shares of Common Stock offered by the Company hereby and assuming no
exercise of the over-allotment options by the Underwriters and an initial
public offering price at the mid-point of the range set forth on the cover of
this Prospectus ($20 per share) (after deducting the underwriting discount and
estimated Offering expenses), the pro forma net tangible book value of the
Company as of December 31, 1996 would have been $109.5 million or $8.14 per
share, representing an immediate increase in net tangible book value of $1.68
per share to existing stockholders and an immediate dilution of $11.86 per
share to new investors purchasing shares at the estimated public offering
price. The following table illustrates this per share dilution.

<TABLE>
<S> <C> <C>
Estimated public offering price per share (1)................. $20.00
Net tangible book value per share before the Offering (2)... $6.46
Increase in net tangible book value per share attributable
to new investors........................................... 1.68
-----
Pro forma net tangible book value per share after the
Offering..................................................... 8.14
------
Dilution per share to new investors........................... $11.86
======
</TABLE>
- --------
(1) Before deducting estimated underwriting discounts and commissions and
estimated expenses of the Offering payable by the Company.
(2) Includes mortgage servicing rights and excludes core deposit intangibles.
See Notes 3 and 15 of Notes to Consolidated Financial Statements.

The following table sets forth on a pro forma basis at December 31, 1996 the
number of shares of Common Stock purchased from the Company (assuming no
exercise of the Underwriters' over-allotment options), the total consideration
paid to the Company and the average price per share paid by the existing
stockholders in 1987 and new investors purchasing shares of Common Stock in
the Offering, assuming a public offering price of $20 per share.

<TABLE>
<CAPTION>
SHARES OWNED AFTER
THE PUBLIC OFFERING TOTAL CONSIDERATION
------------------------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ---------------------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 5,400,000 40.15% $ 1,404,000 0.86% $ 0.26
New investors.......... 8,050,000 59.85% $161,000,000 99.14% $20.00
----------- ------- ------------ ------
Total................ 13,450,000 100.00% $162,404,000 100.00%
=========== ======= ============ ======
</TABLE>

23
<PAGE>

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following selected consolidated financial and other data as of and for
each of the five years in the period ended December 31, 1996 are derived from
the Company's audited consolidated financial statements. The information set
forth below should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Consolidated Statements of
Financial Condition as of December 31, 1996 and 1995, and the Consolidated
Statements of Earnings for the years ended December 31, 1996, 1995 and 1994
are included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest income............ $ 76,179 $ 71,304 $ 35,112 $ 29,760 $ 18,735
Interest expense........... 45,967 41,443 14,486 12,052 9,227
---------- ---------- -------- -------- --------
Net interest income........ 30,212 29,861 20,626 17,708 9,508
Provision for losses....... 2,604 238 290 644 380
---------- ---------- -------- -------- --------
Net interest income after
provision for losses...... 27,608 29,623 20,336 17,064 9,128
Non-interest income:
Loan administration
income................... 11,859 14,248 13,261 7,786 2,340
Net gain on loan sales and
sales of mortgage
servicing rights......... 39,640 16,228 27,357 20,400 9,921
Other income.............. 7,035 6,512 2,114 5,468 6,162
---------- ---------- -------- -------- --------
Total................... 58,534 36,988 42,732 33,654 18,423
---------- ---------- -------- -------- --------
Non-interest expense:
Compensation and
benefits................. 25,553 19,665 18,609 7,984 5,184
Other expense............. 33,267(1) 22,051 19,010 13,308 7,298
---------- ---------- -------- -------- --------
Total................... 58,820 41,716 37,619 21,292 12,482
---------- ---------- -------- -------- --------
Earnings before federal
income taxes.............. 27,322 24,895 25,449 29,426 15,069
Provision for federal
income taxes.............. 10,299 9,419 9,318 10,405 5,275
---------- ---------- -------- -------- --------
Net earnings............... $ 17,023(1) $ 15,476 $ 16,131 $ 19,021 $ 9,794
---------- ---------- -------- -------- --------
PER SHARE DATA:
Earnings per share......... $ 1.51 $ 1.37 $ 1.42 $ 1. 65 $ 0.85
Book value per share....... $ 6.97 $ 5.55 $ 4.37 $ 3.05 $ 1.45
Weighted average number of
shares outstanding........ 11,250 11,274 11,389 11,527 11,527
SUMMARY OF FINANCIAL
CONDITION:
Total assets............... $1,297,266 $1,045,094 $723,150 $467,629 $304,758
Loans receivable:
Mortgage loans available
for sale................. 840,767 620,455 205,480 389,073 218,266
Loans held for
investment............... 273,569 305,580 429,800 26,906 21,637
Less: Allowance for losses (3,500) (2,102) (1,871) (901) (550)
---------- ---------- -------- -------- --------
Total loans, net........ 1,110,836 923,933 633,409 415,078 239,353
Mortgage servicing rights.. 30,064 27,957 18,179 17,563 11,108
Deposits................... 624,485 526,974 307,624 190,761 181,171
FHLB advances.............. 389,801 191,156 200,750 55,000 --
Stockholders' equity....... 78,468 62,445 49,419 35,114 16,767
PERFORMANCE RATIOS:
Return on average assets... 1.53%(1) 1.63% 3.19% 4.39% 3.72%
Return on average equity... 24.68%(1) 29.42% 35.78% 69.56% 84.78%
Interest rate spread....... 2.13% 2.36% 3.37% 3.39% 2.04%
Net interest margin........ 3.07% 3.46% 4.63% 4.55% 3.92%
Ratio of average interest-
earning assets to average
interest-bearing liabili-
ties...................... 120% 123% 139% 137% 158%
Ratio of non-interest ex-
pense to average assets... 5.28%(2) 4.39% 7.44% 4.92% 4.71%
Efficiency ratio (3)....... 64.8% 60.4% 58.3% 41.5% 44.7%
Dividend payout ratio...... 5.87% 12.92% 2.48% 4.21% 7.66%
</TABLE>
(continued)

24
<PAGE>

<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
ASSET QUALITY DATA:
Net charge-offs to aver-
age loans outstanding.. 0.13% 0.00% 0.08% 0.08% 0.09%
Non-performing assets to
total assets........... 3.16% 1.25% 0.42% 0.60% 0.94%
Non-performing loans to
total loans............ 2.75% 1.15% 0.27% 0.37% 0.85%
Allowance for losses to
total loans............ 0.31% 0.23% 0.29% 0.22% 0.23%
Allowance for losses to
non-performing loans... 11.43% 19.67% 107.59% 58.17% 26.84%
CAPITAL RATIOS:
Tangible capital........ 5.58% 5.19% 5.54% 7.41% 5.35%
Core capital............ 6.01% 5.84% 6.63% 7.41% 5.35%
Total risk-based capi-
tal.................... 10.91% 10.12% 12.08% 13.84% 13.40%
Average equity-to-aver-
age assets............. 6.19% 5.54% 8.91% 6.32% 5.14%
MORTGAGE ORIGINATION AND
SERVICING DATA:
Mortgage loans origi-
nated or purchased..... $6,791,665 $5,195,605 $3,720,173 $6,220,415 $2,984,076
Mortgage loans sold..... $6,581,897 $4,760,806 $3,551,319 $6,034,828 $2,888,564
Mortgage loans serviced
for others (4)......... $4,801,581 $6,788,530 $5,691,421 $6,198,311 $3,091,399
Capitalized value of
mortgage servicing
rights (5)............. 0.63% 0.41%(6) 0.32% 0.28% 0.36%
OTHER DATA:
Full time equivalent em-
ployees................ 1,310 1,142 869 971 584
Number of bank branch-
es..................... 15 13 9 1 1
Number of regional
wholesale/correspondent
lending offices........ 10 9 6 5 4
</TABLE>

- --------
(1) Includes the special deposit insurance assessment imposed during 1996 by
the FDIC on all institutions whose deposits were insured by the SAIF on
March 31, 1995. See "Regulation and Supervision of the Bank--Federal
Deposit Insurance." The Bank's assessment was $2.2 million, net of taxes.
If such assessment had not been imposed, the Company's net earnings would
have been approximately $19.2 million for the year ended December 31, 1996
and its return on average assets and return on average equity for the
period would have been 1.73% and 27.87%, respectively.
(2) Excluding the special SAIF assessment of $3.4 million, before taxes,
incurred during 1996, mentioned in footnote 1 above, such ratio would have
been 4.98%.
(3) Computed as non-interest expense (excluding amortization of core deposit
premiums) divided by the sum of net interest income and non-interest
income. Excluding the special SAIF assessment of $3.4 million, before
taxes, incurred during 1996, mentioned in footnote 1 above, such ratio
would have been 61.0% for the year ended December 31, 1996.
(4) Amount excludes loans being subserviced for others, which is servicing of
loans subsequent to the sale of the related mortgage servicing rights but
prior to their delivery to the purchaser. Loans subserviced for others
totalled $3.6 billion and $0.5 billion at December 31, 1996 and 1995,
respectively. There was no subservicing in prior years.
(5) Reflects percentage of book value of mortgage servicing rights to loans
serviced for others (excluding subservicing).
(6) Increase from prior year arises in part from the Company's adoption in May
1995 of Statement of Financial Accounting Standards No. 122, "Accounting
for Mortgage Servicing Rights," which required the capitalization of
mortgage servicing rights arising from loans originated by the Bank as
well as the continued capitalization of mortgage servicing rights
purchased from third parties.

25
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF CHANGES
IN FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company serves as the holding company of the Bank and its other
subsidiaries. The Company's operations involve both mortgage banking and
retail banking. The mortgage banking segment involves the origination and
purchase of single-family residential mortgage loans on a nationwide basis,
the sale of such loans, usually on a pooled and securitized basis, in the
secondary market, and the servicing of mortgage loans for investors as well as
the Company's own loan portfolio. The retail banking segment involves
attracting deposits from the general public and originating single-family
residential mortgage loans and consumer, commercial, commercial real estate
and residential construction loans, primarily through the Company's branch
network. A significant portion of the deposits attracted by the Company
through its branch network and from wholesale sources are used to support the
mortgage banking operations.

The tables below set forth certain information for the Company's business
segments for the periods shown. Prior to June 30, 1994, the Company did not
have significant retail banking operations.

REVENUES

<TABLE>
<CAPTION>
RETAIL MORTGAGE
BANKING SEGMENT BANKING SEGMENT COMBINED
--------------- --------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Year ended:
December 31, 1996.................... $13,791 $74,955 $88,746
December 31, 1995.................... 12,390 54,459 66,849
December 31, 1994.................... 1,432 61,926 63,358

EARNINGS (LOSS) BEFORE INCOME TAXES

<CAPTION>
RETAIL MORTGAGE
BANKING SEGMENT BANKING SEGMENT COMBINED
--------------- --------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Year ended:
December 31, 1996.................... $ 3,305 (1) $24,017 $27,322
December 31, 1995.................... 3,549 21,346 24,895
December 31, 1994.................... (2,127)(2) 27,576 25,449
</TABLE>
- --------
(1) The earnings before income taxes of the retail banking segment for the
year ended December 31, 1996 were adversely affected by the one-time SAIF
assessment of $3.4 million before taxes.
(2) The retail banking segment began with the acquisition of Security Savings
on July 1, 1994. See "Business--Lending--Retail Banking Operations."

The Company's earnings are primarily dependent upon three revenue sources:
its net interest income, which is the difference between interest earned on
interest-earning assets (including loans held for sale in the Company's
mortgage banking operations as well as loans held for investment) and interest
paid on interest-bearing liabilities; fee income from servicing mortgages held
by investors; and gains realized on sales of mortgage loans and mortgage
servicing rights. These revenues are in turn significantly affected by factors
such as changes in prevailing interest rates and in the yield curve (that is,
the difference between prevailing short-term and long-term interest rates), as
well as changes in the volume of mortgage originations nationwide and
prepayments of outstanding mortgages.

Since 1993, there has been a gradual flattening of the yield curve which has
had the effect of reducing the Company's net interest spread. In order to
offset this change, the Company has pursued a strategy of expanding its retail
banking branch network in order to gain greater access to lower-cost retail
deposits and reduce its

26
<PAGE>

reliance on wholesale funding sources and other borrowings. The Company does
not use warehouse loans from commercial lending sources.

In addition, changes in prevailing interest rates have had a significant
effect on the Company's loan production volume. The Company's mortgage loan
production volume more than doubled between 1992 and 1993 (from $3.0 billion
to $6.2 billion) principally as a result of the record level of refinancing
activity that occurred in 1993 following the sudden decline in interest rates.
Excluding 1993 due to the surge in refinancing activity which occurred in that
year, the Company's mortgage loan origination volume has grown steadily and
significantly each year, from $3.0 billion in 1992 to $6.8 billion in 1996.
This in turn has contributed to the yearly growth in net interest income and
(except for 1996, when the Company sold a significant volume of mortgage
servicing rights) loan administration income, as well as the substantial gains
on loan sales and sales of mortgage servicing rights, that the Company has
been able to recognize during this period.

RESULTS OF OPERATIONS

OVERVIEW OF OPERATING RESULTS. 1996 COMPARED TO 1995. Net earnings for 1996
were $17.0 million ($1.51 per share), a 9.7% increase from the $15.5 million
($1.37 per share) reported in 1995. Excluding the effect of the one-time SAIF
assessment of $2.2 million (after-tax) in 1996, net earnings would have been
$19.2 million ($1.71 per share), a 23.9% increase over 1995. The increase
resulted from increases in net gains on loan sales and sales of mortgage
servicing rights (up $23.4 million, or 144.4%), and a $0.3 million, or 1.0%,
increase in net interest income. The increase in net interest income resulted
primarily from a 14.0% increase in average interest-earning assets reflecting
continued strong growth in the Company's loan production volume, offset in
part by a decrease in the net interest spread caused by a continued flattening
of the yield curve. These increases in net interest income and non-interest
income were offset by increases in the provision for losses, higher
compensation and benefits expenses, reflecting staff increases and merit
raises, and an increase in general and administrative expenses resulting from
increased loan production levels and expansion of the Company's branch
network.

1995 COMPARED TO 1994. Net earnings decreased by 3.7% to $15.5 million
($1.37 per share) in 1995 from $16.1 million ($1.42 per share) in 1994 as a
result of an $11.2 million reduction in the level of gains on loan sales and
sales of mortgage servicing rights ($16.2 million in 1995 compared to $27.4
million in 1994) and an increase in other non-interest expenses of $3.1
million (from $19.0 million in 1994 to $22.1 million in 1995), which more than
offset a substantial increase in net interest income (from $20.6 million to
$29.9 million) and a significant increase in loan administration income. The
reduction in part resulted from a $300.0 million decrease in the unpaid
principal balance of the mortgage loans underlying the mortgage servicing
rights sold as well as the sale of currently originated higher coupon mortgage
servicing rights sold during 1995. Mortgage loans serviced increased
significantly from $5.7 billion at December 31, 1994 to $6.8 billion at
December 31, 1995, reflecting a net retention of $1.1 billion, or 19.3%, as
compared to a net reduction of $500 million, or 8.1%, for 1994.

NET INTEREST INCOME. 1996 COMPARED TO 1995. Net interest income increased
$0.3 million, or 1.0%, to $30.2 million for the year ended December 31, 1996,
from $29.9 million for the year ended December 31, 1995. This increase was due
primarily to a $121.3 million increase in average interest-earning assets
between the comparable periods, offset in part by the related increase in
interest-bearing liabilities necessary to fund such growth. At the same time,
the Company's interest rate spread declined from 2.36% for the year ended
December 31, 1995 to 2.13% for 1996, which resulted in a decrease in the
Company's net yield on interest-earning assets to 3.07% for the year ended
December 31, 1996 from 3.46% for 1995. This decrease was caused by a slight
compression in the yield curve for interest-earning assets priced off of 10-
year and 15-year U. S. Treasury securities as compared to funding sources
priced off of the one-year U.S. Treasury security.

1995 COMPARED TO 1994. Net interest income for the year ended December 31,
1995 increased $9.3 million, or 45.1%, to $29.9 million as compared to $20.6
million for the year ended December 31, 1994. This increase was caused
primarily by substantial increases in interest-earning assets. Average
interest-earning assets were $864.0 million and $445.6 million for the years
ended December 31, 1995 and 1994, respectively. At the same time, the
Company's interest rate spread declined from 3.37% for the year ended December
31, 1994 to

27
<PAGE>

2.36% for 1995 and the net interest margin declined from 4.63% to 3.46% during
such periods. These decreases resulted primarily from the substantial growth
in the Company's average assets between 1994 and 1995. In order to fund such
growth, the Company significantly increased its use of brokered deposits,
which typically have a higher interest rate than retail deposits, and FHLB
advances, which are subject to daily repricing. The average cost of such
funding sources increased from 4.79% and 4.44%, respectively, in 1994 to 6.21%
and 6.35%, respectively, in 1995. During the same periods, the average yield
on the Company's loans increased by only 32 basis points, from 8.00% in 1994
to 8.32% in 1995. In addition, as a result of this asset growth, the ratio of
average interest-earning assets to average interest-bearing liabilities
decreased to 123% for the year ended December 31, 1995, as compared to 139%
for the year ended December 31, 1994, and the ratio of non-interest bearing
funding sources to interest-earning assets declined. The Company's interest
rate spread and net interest margin were also adversely affected by a
significant compression in the yield curve between short-term funding
liabilities and longer-term assets.

AVERAGE BALANCES, INTEREST RATES AND YIELDS. Net interest income is affected
by (i) the difference ("interest rate spread") between rates of interest
earned on interest-earning assets and rates of interest paid on interest-
bearing liabilities and (ii) the relative amounts of interest-bearing
liabilities and interest-earning assets. When the total of interest-earning
assets approximate or exceed interest-bearing liabilities, any positive
interest rate spread will generate net interest income. Financial institutions
have traditionally used interest rate spreads as a measure of net interest
income. Another indication of an institution's net interest income is its "net
yield on interest-earning assets" which is net interest income divided by
average interest-earning assets.

The following table sets forth certain information relating to the Company's
consolidated average interest-earning assets and interest-bearing liabilities
and reflects the average yield on assets and average cost of liabilities for
the periods indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of assets or liabilities, respectively,
for the periods presented. During the periods indicated, non-accruing loans,
if any, are included in the net loan category. Average balances are derived
from month-end average balances. Management does not believe that the use of
month-end average balances instead of average daily balances has caused any
material difference in the information presented.

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
---------- -------- ---------- -------- -------- ---------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net.. $ 964,257 $74,588 7.74% $835,600 $69,543 8.32% $419,147 $33,533 8.00%
FHLB stock............. 18,776 1,471 7.83% 16,304 1,285 7.88% 9,534 553 5.80%
Other.................. 2,230 120 5.38% 12,098 476 3.93% 16,871 1,026 6.08%
---------- ------- -------- ------- -------- -------
Total.................. 985,263 76,179 7.73% 864,002 71,304 8.25% 445,552 35,112 7.88%
-------
Non-interest-earning
assets................ 129,005 85,686 60,254
---------- -------- --------
Total assets......... $1,114,268 $949,688 $505,806
========== ======== ========
Interest-bearing
liabilities:
Demand deposits........ $ 86,650 2,499 2.88% $ 63,844 1,824 2.86% $ 27,892 773 2.77%
Savings deposits....... 18,933 428 2.26% 10,119 228 2.25% 5,385 127 2.36%
Certificates of
deposit............... 446,808 27,504 6.16% 371,756 23,071 6.21% 169,986 8,137 4.79%
FHLB advances.......... 247,204 14,291 5.78% 237,535 15,072 6.35% 83,912 3,726 4.44%
Other.................. 21,227 1,245 5.87% 19,703 1,248 6.33% 34,267 1,723 5.03%
---------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities............ 820,822 45,967 5.60% 702,957 41,443 5.89% 321,442 14,486 4.51%
Non-interest-bearing
liabilities............ 224,484 194,128 139,278
---------- -------- --------
Total liabilities.... 1,045,306 897,085 460,720
Equity................. 68,962 52,603 45,086
---------- -------- --------
Total Liabilities and
Equity................ $1,114,268 $949,688 $505,806
========== ======== ========
Net interest-earning
assets................. $ 164,441 $161,045 $124,110
========== ======= ======== ======= ======== =======
Net interest income..... $30,212 $29,861 $20,626
======= ======= =======
Interest rate spread.... 2.13% 2.36% 3.37%
Net interest margin..... 3.07% 3.46% 4.63%
Ratio of average
interest-earning assets
to interest-bearing
liabilities............ 120% 123% 139%
</TABLE>

28
<PAGE>

RATE/VOLUME ANALYSIS. The following table analyzes net interest income in
terms of changes in the volume of interest-earning assets and interest-bearing
liabilities and changes in yields and rates. The table reflects the extent to
which changes in the interest income and interest expense are attributable to
changes in volume (changes in volume multiplied by prior year rate) and
changes in rate (changes in rate multiplied by prior year volume). Changes
attributable to the combined impact of volume and rate have been allocated
proportionately to changes due to volume and changes due to rate.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 VS. 1995 1995 VS. 1994
----------------------- -------------------------
RATE VOLUME NET RATE VOLUME NET
------- ------ ------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable, net.... $(4,907) $9,952 $5,045 $ 1,351 $34,659 $36,010
FHLB stock............... (8) 194 186 136 437 573
Other.................... 175 (531) (356) (362) (29) (391)
------- ------ ------ ------- ------- -------
Total.................. (4,740) 9,615 4,875 1,125 35,067 36,192
------- ------ ------ ------- ------- -------
INTEREST EXPENSE:
Demand deposits.......... 17 658 675 24 1,027 1,051
Savings deposits......... 1 199 200 (6) 107 101
Certificates of deposit.. (187) 4,620 4,433 2,412 12,522 14,934
FHLB advances............ (1,654) 873 (781) 1,636 9,710 11,346
Other.................... (92) 89 (3) 277 (752) (475)
------- ------ ------ ------- ------- -------
Total.................. (1,915) 6,439 4,524 4,343 22,614 26,957
------- ------ ------ ------- ------- -------
Net change in net
interest income......... $(2,825) $3,176 $ 351 $(3,218) $12,453 $ 9,235
======= ====== ====== ======= ======= =======
</TABLE>

PROVISION FOR LOSSES. 1996 COMPARED TO 1995. The provision for losses
increased to $2.6 million for 1996 from $238,000 for 1995. The Company's
determination of its provision for losses reflects its consideration of the
potential loss that may arise from loans in its portfolio or which it services
for others. See "Business--Asset Quality." The increase in the provision
reflected the increase in the level of non-performing loans to $30.6 million
at December 31, 1996, from $10.7 million at December 31, 1995, an increase of
approximately $19.9 million, or 186%, and the increase in the level of net
charge-offs to 0.13% of average loans in 1996 from 0.00% in 1995. Single
family residential mortgage loans comprised approximately $27.0 million, or
88%, of non-performing loans at December 31, 1996 compared to 94% at December
31, 1995. See "--Financial Condition--Allowance for Losses" and "Business--
Asset Quality".

1995 COMPARED TO 1994. The provision for losses decreased to $238,000 in
1995 from $290,000 in 1994. This decrease was not significant based on the
minimal amount of net charge-offs during 1995.

NON-INTEREST INCOME. 1996 COMPARED TO 1995. Non-interest income increased
$21.5 million, or 58.1%, to $58.5 million for 1996, from $37.0 million for
1995. The majority of this increase resulted from increased net gains on loan
sales and sales of mortgage servicing rights.

Decisions to sell mortgage servicing rights are influenced in part by
federal regulations and OTS supervision of the Bank. Such regulations, in
part, limit the amount of mortgage servicing rights that the Bank may consider
for purposes of satisfying its minimum regulatory capital requirements. See
"Regulation--Regulation and Supervision of the Bank." Thus, sales of mortgage
servicing rights may be undertaken for regulatory purposes. In addition, sales
may also be undertaken to take advantage of market prices that exceed the
Bank's internal valuation of such rights.

1995 COMPARED TO 1994. For the year ended December 31, 1995, non-interest
income decreased $5.7 million, or 13.4%, to $37.0 million from $42.7 million
for the year ended December 31, 1994. The majority of

29
<PAGE>

the decrease was attributable to a decrease in the net gains on mortgage loan
sales and sales of mortgage servicing rights, together with a slight decrease
in the volume of mortgage servicing rights sold.

LOAN ADMINISTRATION. 1996 COMPARED TO 1995. Loan administration income
decreased $2.4 million or 16.8%, to $11.9 million for 1996, from $14.3 million
for 1995. This decrease resulted primarily from a decrease in mortgage loans
serviced. At December 31, 1996, the unpaid principal balance of loans serviced
for others decreased $2.0 billion, or 29.4%, to $4.8 billion, from $6.8
billion at December 31, 1995. At December 31, 1996 and 1995, the weighted
average servicing fee on loans serviced for others was 0.289% (i.e., 28.9
basis points) and 0.287%, respectively.

1995 COMPARED TO 1994. For the year ended December 31, 1995, loan
administration income increased $1.0 million, or 7.5%, to $14.3 million from
$13.3 million for the year ended December 31, 1994. This increase was
attributable to an increase in loans being serviced at December 31, 1995, of
$1.1 billion, or 19.3%, from $5.7 billion at December 31, 1994. The weighted
average servicing fee on loans serviced for others (excluding subserviced
loans) was 0.287% at December 31, 1995 and 1994.

Loans serviced for others excludes short-term subservicing, which is the
servicing of loans subsequent to the sale of the related mortgage servicing
rights but prior to their delivery to the purchaser. At December 31, 1996 and
1995, the amount of servicing for others excluded subservicing of $3.6 billion
and $536.3 million, respectively.

NET GAIN ON LOAN SALES AND SALES OF MORTGAGE SERVICING RIGHTS. 1996 COMPARED
TO 1995. For 1996, net gain on loan sales and sales of mortgage servicing
rights increased $23.4 million, or 144.4%, to $39.6 million, from $16.2
million for 1995. This increase primarily resulted from the increased amount
of mortgage servicing rights sold. Specifically, this change resulted from a
$21.7 million increase in the gain on sale of mortgage servicing rights and a
$1.7 million increase on the gain on sale of loans. These higher levels of
gains are attributable to increases in the amount of mortgage servicing rights
and loans sold. For 1995 versus 1996, the principal balance of the loans
underlying the mortgage servicing rights sold increased from $2.3 billion to
$6.5 billion. Over the same time period, the amount of loans sold grew from
$4.8 billion to $6.6 billion. The $21.7 million increase in the gain on sale
of mortgage servicing rights reflects $22.6 million attributable to the $4.2
billion increase in the volume of mortgage servicing rights sold, less
$900,000 attributable to an increase in the cost of the mortgages servicing
rights sold.

1995 COMPARED TO 1994. For the year ended December 31, 1995, net gain on
loan sales and sales of mortgage servicing rights decreased $11.2 million, or
40.9%, to $16.2 million, from $27.4 million for 1994. This decrease was a
function of a $15.1 million decrease in the gain on sale of mortgage servicing
rights and a $3.9 million increase in the gain on sale of mortgage loans. The
gain on sale of mortgage servicing rights decreased approximately $3.0 million
due to a $300 million decrease in the principal balance of the loans
underlying the mortgage servicing rights sold, from $2.6 billion to $2.3
billion, and approximately $12.1 million due to decreases in the selling
prices of such rights and an increase in the cost of the servicing rights
sold. The decreases in the selling prices were due to the sale of currently
originated lower coupon mortgage servicing rights during 1995. The increase in
the cost of the servicing rights was principally due to the adoption in mid-
1995 of SFAS No. 122, which required mortgage servicing rights to be
capitalized whether they are originated or purchased by the Company. The
increase in the gain on the mortgage loans sold was principally the result of
the increase in the volume of loans sold for the year ended 1995 of $1.2
billion, from $3.6 billion in 1994 to $4.8 billion in 1995.

Mortgage servicing rights originated or acquired by the Company are
capitalized pursuant to Statement of Financial Accounting Standards ("SFAS")
No. 122, "Accounting for Mortgage Servicing Rights," which the Company adopted
in May 1995. The value of mortgage servicing rights capitalized are
periodically evaluated in relation to the estimated discounted net future
servicing revenues. See Note 3 of Notes to Consolidated Financial Statements.
At December 31, 1996 and 1995, the estimated fair value of the mortgage
servicing rights in excess of their stated book value was approximately $23.9
million and $42.4 million, respectively. See Note 7 of Notes to Consolidated
Financial Statements.

30
<PAGE>

OTHER FEES AND CHARGES. 1996 COMPARED TO 1995. For 1996, other fees and
charges, which includes certain loan fees and charges, deposit-related fees
and escrow waiver fees, increased $0.5 million, or 7.7%, to $7.0 million from
$6.5 million for 1995. This increase was a result of an overall increase in
mortgage loan originations in 1996 as compared to 1995.

1995 COMPARED TO 1994. Other fees and charges increased $4.4 million, or
209.5%, to $6.5 million for 1995 from $2.1 million for 1994. This increase was
attributable to an increase in underwriting fees in 1995 as compared to 1994
and an overall increase in mortgage loan originations in 1995.

NON-INTEREST EXPENSE. The following table sets forth components of the
Company's non-interest expense, prior to 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 and amortized rather than immediately expensed.
Certain other expenses associated with loan production, however, are not
required to be capitalized. These expense amounts are reflected on the
Company's statement of earnings net of the portion that must be capitalized
under SFAS No. 91. However, management believes that the analysis of non-
interest expense on a "gross" basis (i.e., prior to the deferral of
capitalized loan origination costs) more clearly reflects the changes in total
overhead costs associated with increased loan production. See Note 3 of Notes
to Consolidated Financial Statements for further information.

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Compensation and benefits................. $ 40,524 $ 30,809 $ 25,424
Commissions............................... 12,367 11,102 9,340
Occupancy and equipment................... 12,125 8,873 7,339
Advertising............................... 943 597 1,110
Core deposit premium amortization......... 1,290 1,330 651
Federal deposit insurance premiums........ 4,435 1,122 803
Other..................................... 20,474 15,536 11,978
---------- ---------- ----------
Subtotal.............................. 92,158 69,369 56,645
Less: deferral of capitalized loan
origination costs........................ (33,338) (27,653) (19,026)
---------- ---------- ----------
Total................................. $ 58,820 $ 41,716 $ 37,619
========== ========== ==========
</TABLE>

1996 COMPARED TO 1995. Non-interest expense for 1996 increased $17.1
million, or 41.0%, to $58.8 million, from $41.7 million for 1995. The largest
contributing factors to this increase were higher compensation and benefits
and general and administrative expenses.

Compensation and benefits, excluding the capitalization of direct loan
origination costs, increased by $9.7 million, or 31.5%, to $40.5 million for
1996 from $30.8 million for 1995. The increase in compensation and benefits
was attributable to an increase in the number of full-time equivalent
employees and increased salaries of senior management and staff . The number
of full-time equivalent employees of the Company increased to 1,310 persons at
December 31, 1996 from 1,142 persons at December 31, 1995.

Higher general and administrative expenses also contributed to the increased
non-interest expense for 1996 as compared to 1995. The increase in general and
administrative expenses reflected an increase in overall activity because of
increased mortgage loan production recorded during 1996 of $6.8 billion
compared to $5.2 billion for 1995. This increase in general and administrative
expenses was also a result of an increase in the number of the Company's bank
branches from 13 at December 31, 1995 to 15 at December 31, 1996.

In addition, general and administrative expense for 1996 reflects the one-
time special assessment imposed by the FDIC pursuant to federal legislation
adopted on such date. See "Regulation--Regulation and Supervision

31
<PAGE>

of the Bank--Federal Deposit Insurance." Such assessment affected all thrifts,
including the Bank, whose deposits were insured by the SAIF administered by
the FDIC and was imposed to capitalize the SAIF to the same extent as the Bank
Insurance Fund and thereby eliminate the disparity in related premiums charged
by the two funds. Based upon notice received from the FDIC, the Bank's special
assessment totaled $3.4 million, or $2.2 million, net of tax. In 1997,
subsequent to such assessment, the Bank's annual premium expense for FDIC
deposit insurance is expected to be approximately 6.5 basis points (charged
against the Bank's insurable deposit base) as compared to 23 basis points
prior to the assessment.

1995 COMPARED TO 1994. Non-interest expense for the year ended December 31,
1995 increased $4.1 million, or 10.9%, to $41.7 million from $37.6 million for
the year ended 1994. This increase was primarily a result of increased
compensation and benefits and increased general and administrative expenses.
Compensation and benefits totaled $30.8 million, and $25.4 million for the
years ended December 31, 1995 and 1994, respectively. This increase was
primarily a result of an increase in the number of full-time equivalent
employees from 869 persons to 1,142 persons at December 31, 1994 and 1995,
respectively. Increased general and administrative expenses for 1995 were
attributable to an increase in the number of bank branches from 9 at
December 31, 1994 to 13 at December 31, 1995. The increase in general and
administrative expenses corresponded to an increase in mortgage loan
originations of $1.5 billion, or 40.5%, from $3.7 billion for 1994 to $5.2
billion for 1995.

FEDERAL INCOME TAXES. 1996 COMPARED TO 1995. Federal income tax expense for
1996 increased to $10.3 million from $9.4 million for 1995. The Company's
effective rate for 1996 was 37.7% versus 37.8% for 1995. See Note 10 of Notes
of Consolidated Financial Statements.

1995 COMPARED TO 1994. Federal income tax expense totaled $9.4 million and
$9.3 million for the years ended December 31, 1995 and 1994, respectively. The
effective rate was 37.8% and 36.6% for 1995 and 1994, respectively. The
increase in effective rate was due to a higher amount of non-deductible
expenses. See Note 10 of Notes to Consolidated Financial Statements.

FINANCIAL CONDITION

ASSETS. The Company's assets totaled $1.30 billion at December 31, 1996, an
increase of approximately $250.0 million, or 23.8%, as compared to $1.05
billion at December 31, 1995. This increase was primarily due to increases in
mortgage loans held for sale, premises and equipment, mortgage servicing
rights, and other assets, offset in part by decreases in loans held for
investment.

LOANS RECEIVABLE. Mortgage loans available for sale and mortgage loans held
for investment increased, in the aggregate, $163.0 million from $798.7 million
at December 31, 1995 to $961.7 million at December 31, 1996. Mortgage loans
available for sale increased $220.3 million, or 35.5%, to $840.8 million at
December 31, 1996, from $620.5 million at December 31, 1995. Mortgage loans
held for investment decreased $57.3 million, or 32.2%, from $178.2 million at
December 31, 1995 to $120.9 million at December 31, 1996. See "Business--
Lending." Loans held for investment decreased $32.0 million, or 10.5%, to
$273.6 million at December 31, 1996, from $305.6 million at December 31, 1995.
Loans held for investment include both loans originated for the Company's own
portfolio through the retail banking operation and loans with characteristics
that do not conform to underwriting standards for sale as conforming loans in
the secondary market. See "Business--Lending."

ALLOWANCE FOR LOSSES. The allowance for losses totaled $3.5 million at
December 31, 1996, an increase of $1.4 million, or 66.7%, from $2.1 million at
December 31, 1995. The allowance for losses as a percentage of non-performing
loans was 11.43% and 19.67% at December 31, 1996 and 1995, respectively. The
Company's non-performing loans totaled $30.6 million and $10.7 million at
December 31, 1996 and 1995, respectively, and, as a percentage of total loans,
were 2.75% and 1.15% at December 31, 1996 and 1995, respectively. The increase
in the allowance for losses was based upon management's assessment of relevant
factors, including the types

32
<PAGE>

and amounts of non-performing loans, historical and anticipated loss
experience on such types of loans, and current and projected economic
conditions. Management also considered the likelihood that the Company would
be required to repurchase additional loans from secondary market investors
over the next year at levels above the Company's historical experience, as
discussed below.

The increase in non-performing loans at December 31, 1996 resulted primarily
from the repurchase of $54.8 million in mortgage loans from secondary market
investors during 1996 (compared to $4.5 million during 1995). Such loans
included approximately $10.3 million of loans sold during 1996, $32.7 million
of loans sold in 1995 and $11.8 million of loans sold prior to 1995.
Approximately $10.1 million of the loans repurchased in 1996 were non-
performing at December 31, 1996 and $3.7 million had been foreclosed and were
held as other repossessed assets. Loan repurchases are an ongoing part of the
Company's operations since all loans sold in the secondary market are
generally subject to detailed underwriting reviews by the ultimate purchaser.
Although the Company generally does not sell loans with recourse, it typically
is required to repurchase loans, including defaulted and delinquent loans,
which were not underwritten in strict compliance with the underwriting
standards of secondary market investors. As the volume of the Company's new
loan production has increased substantially over the past several years, the
aggregate amount of loan delinquencies and foreclosures has also increased,
thereby increasing the number of loans potentially subject to repurchase. In
addition, during 1996 two of the largest secondary market purchasers of loans
implemented automated underwriting review systems which enabled them to review
delinquent and other loans on a much faster basis, thereby accelerating the
process of returning to the Company loans originated in prior periods.

The Company believes that its risk of loss arising from its non-performing
loans, including loans acquired through repurchase from individual investors
after initial sale in the secondary market, has not materially increased as a
result of either the increase in repurchased loans or the overall increase in
non-performing loans. In most cases the repurchased loans were required to be
repurchased for reasons (such as failure to meet all of the secondary market
investor's criteria for mortgagor eligibility or failure to meet the
investor's program eligibility requirements) that do not significantly affect
the ultimate collectibility of such loans or significantly increase the
Company's exposure to losses. A substantial majority of the repurchased loans
are eligible for resale in the secondary market to other investors, and the
Company does not believe that the remaining repurchased loans which are
currently non-performing or which have been foreclosed present any risks of
ultimate loss that are significantly different than the Company has
historically experienced. Of the Company's $30.6 million of non-performing
loans at December 31, 1996, $27.0 million, or 88%, were single family
residential mortgage loans, which generally represent minimal risk of ultimate
loss because of the nature of the collateral securing the loans, private
mortgage insurance for loans with over-80% LTV ratios and insurance or
guarantees on certain loans from the FHA or VA. At December 31, 1996,
approximately $8.0 million of such loans were the subject of bankruptcy
proceedings by the mortgagor; however, it has been the Company's experience
that such proceedings usually result in full repayment to the Company and
present minimal risk of loss because the imposition of judicial scrutiny and
related enforcement powers supersede the less comprehensive collection methods
normally available to the Company.

For further information regarding the Company's asset quality, see
"Business--Asset Quality".

FHLB STOCK. Holdings of FHLB stock increased from $17.8 million at December
31, 1995 to $19.7 million at December 31, 1996 as the Company's total mortgage
loan portfolio increased. 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, home purchase contracts
and similar obligations at the beginning of each year, or 1/20th of its FHLB
advances, whichever is greater. See "Regulation--Regulation and Supervision of
the Bank--Federal Home Loan Bank System."

PREMISES AND EQUIPMENT. Premises and equipment, net of accumulated
depreciation, totaled $20.9 million at December 31, 1996, an increase of $2.9
million, or 16.1%, from $18.0 million at December 31, 1995. This increase
reflects the Company's investment in technology, along with the expansion of
the retail deposit

33
<PAGE>

branch offices, and the increased national presence in the mortgage
acquisition area. See "Business--Technology," "--Lending" and "--Retail Loan
Production."

MORTGAGE SERVICING RIGHTS. Mortgage servicing rights totaled $30.1 million
at December 31, 1996, an increase of $2.1 million, or 7.5%, from $28.0 million
at December 31, 1995. For the year ended December 31, 1996, $5.6 billion of
loans underlying mortgage servicing rights were originated and purchased, and
$7.6 billion were reduced through sales, prepayments, and amortization
(including a $3 billion sale of mortgage servicing rights in December 1996)
resulting in a net decrease at year-end of $2 billion. However, because of
sales during 1996 of servicing acquired during earlier periods, the mortgage
servicing portfolio at December 31, 1996 contained a greater percentage of
capitalized servicing rights which are reflected as assets on the Company's
statement of financial condition (reflecting largely servicing rights
originated after the Company's mid-1995 adoption of SFAS No. 122, "Accounting
for Mortgage Servicing Rights") than it did at December 31, 1995. See
"Business--Lending."

OTHER ASSETS. Other assets increased $32.9 million, or 158.2%, to $53.7
million at December 31, 1996, from $20.8 million at December 31, 1995. The
majority of this increase was attributable to receivables recorded in
conjunction with a $700 million sale of mortgage servicing rights during
September 1996 and a $3.0 billion sale of mortgage servicing rights in
December 1996. Upon a sale of mortgage servicing rights, the Company receives
a down payment from the purchaser equivalent to approximately 20% of the total
purchase price and records a receivable account for the balance of the
purchase price due. In connection with the sale of mortgage servicing rights
during 1996, the Company had receivables of $35.7 million at December 31,
1996. The balance due is paid upon transfer by the Company of the related
mortgage loan servicing documents, usually within 180 days after the initial
closing. See "Business--Loan Servicing."

LIABILITIES. The Company's total liabilities increased $237.3 million, or
24.1%, to $1.22 billion at December 31, 1996, from $982.7 million at December
31, 1995. This increase was primarily attributable to an increase in the
Company's deposit portfolio as well as changes in the amount of escrows held
on mortgage loans, and the amount of FHLB advances, offset in part by a
decrease in the amount of undisbursed payments on loans serviced for others
and the amount of liability for checks issued.

DEPOSITS. Deposit accounts increased $97.5 million, or 18.5%, to $624.5
million at December 31, 1996, from $527.0 million at December 31, 1995. This
increase reflects the Company's deposit growth strategy through its branch
network and its pricing strategy. The number of bank branches has increased
from 13 at December 31, 1995 to 15 at December 31, 1996. The Company's
aggressive pricing strategy attracts one-year certificates of deposit and
brokered funds. The Company relies upon both its retail customer base and
nationwide advertising of its deposit rates to attract deposits through the
pricing of deposits at up to 0.25% over the prevailing market rate. At
December 31, 1996, the Company's certificates of deposit totaled $500.6
million, with an average balance of $26,235 and a weighted average cost of
5.95%. Of such amount, approximately $212.6 million were brokered deposits
with a weighted average cost of 5.88%. See "Business--Funding Sources."

FHLB ADVANCES. FHLB advances increased $198.6 million, or 103.9%, to $389.8
million at December 31, 1996, from $191.2 million at December 31, 1995. The
Company relies upon such advances as a source of funding for the origination
or purchase of loans for sale in the secondary market. See "Capitalization."
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 retail deposit base and its escrow
accounts. The increase in the outstanding balance of FHLB advances from
December 31, 1995 to December 31, 1996 was attributable to an increase in the
amount of loans held for sale. See "--Liquidity and Capital Resources."

UNDISBURSED PAYMENTS. Undisbursed payments on loans serviced for others
increased $1.4 million, or 2.3%, to $61.4 million at December 31, 1996, from
$60.0 million at December 31, 1995. The month-end average amount of these
funds was $67.3 million and $49.6 million during 1996 and 1995, respectively.
These amounts represent payments received from borrowers for interest,
principal and related loan charges, which have not been

34
<PAGE>

remitted. These balances fluctuate with the size of the servicing portfolio
and increase during a time of high payoff or refinance volume.

ESCROW ACCOUNTS. The amount of funds in escrow accounts decreased $27.9
million, or 31.4%, to $61.0 million at December 31, 1996, from $88.9 million
at December 31, 1995. The average of the month end balances in these accounts
was $82.3 million and $86.5 million during 1996 and 1995, respectively. These
accounts are maintained on behalf of mortgage customers and include funds
earmarked for real estate taxes, homeowner's insurance, and other insurance
product liabilities. These balances fluctuate with the size of the servicing
for others portfolio and also depend upon the scheduled payment dates for the
related expenses.

LIABILITY FOR CHECKS ISSUED. The liability for checks issued decreased $46.0
million, or 53.6%, to $39.8 million at December 31, 1996, from $85.8 million
at December 31, 1995. This liability reflects the outstanding amount of checks
the Company has written in conjunction with acquiring mortgage loans. This
account grows or contracts in conjunction with the amount of loans that are in
the Company's mortgage pipeline.

FEDERAL INCOME TAXES PAYABLE. Federal income taxes payable increased $7.8
million, or 53.1%, to $22.5 million at December 31, 1996, from $14.7 million
at December 31, 1995. This increase was primarily attributable to the timing
of payments and an increase in the current tax liability. See Note 10 of Notes
to the Consolidated Financial Statements.

OTHER LIABILITIES. Other liabilities increased $4.0 million, or 31.0%, to
$16.9 million at December 31, 1996, from $12.9 million at December 31, 1995.
This liability primarily reflects amounts received in conjunction with
acquiring mortgage loans, but not yet applied. This account grows or contracts
in conjunction with the amount of loans that are in the Company's mortgage
pipeline.

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY. Liquidity refers to the ability or the financial flexibility to
manage future cash flows 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 other than that of the Bank. The Company's primary source
of liquidity is dividends paid by the Bank. Management of the Company believes
that dividends that may be paid by the Bank to the Company following the
Offering will provide sufficient funds for its operations and liquidity needs;
however, no assurance can be given that the Company will not have a need for
additional funds in the future. Further, the Bank is subject to certain
regulatory limitations with respect to the payment of dividends to the
Company. See "Dividend Policy" and "Regulation--Regulation and Supervision of
the Bank--Dividend Restrictions."

The Bank is required by OTS regulations to maintain minimum levels of liquid
assets. This requirement, which may be changed at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required minimum ratio
is currently 5%. While the Bank's liquidity ratio varies from time to time,
the Bank has generally maintained liquid assets substantially in excess of the
minimum requirements. The Bank's average daily liquidity ratios were 21.5%,
11.4% and 42.4% for the months ended December 31, 1996, December 31, 1995 and
December 31, 1994, respectively.

A significant source of cash flow for the Company is the sale of mortgage
loans held for sale. Additionally, the Company receives funds from net
interest income, mortgage loan servicing fees, loan principal repayments,
advances from the FHLB, deposits from customers and cash generated from
operations. Mortgage loans sold during 1996 totaled $6.6 billion, an increase
of $1.8 billion, or 37.5%, from $4.8 billion sold during 1995. This increase
in mortgage loan sales was directly attributable to the 30.7% increase in
mortgage loan originations. Mortgage loans sold during 1995 totaled $4.8
billion, compared to $3.5 billion during 1994. The fluctuation in this
activity was directly related to the amount of mortgage loan originations. The
Company sold 96.9%, 91.6% and 95.5% of its mortgage loan originations during
1996, 1995 and 1994, respectively.

35
<PAGE>

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 unless a more cost-effective source of
funds becomes available. FHLB advances are used because of their flexibility.
These funds are typically borrowed for 90-day terms with no prepayment
penalty, of which $389.8 million was outstanding at December 31, 1996. 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 $425.0
million. This line is collateralized by non-delinquent mortgage loans. To the
extent the amount of retail deposits or customer escrow accounts can be
increased, the Company expects that they will eventually replace FHLB advances
as a funding source.

At December 31, 1996, the Company had outstanding rate-lock commitments to
lend $585.0 million for mortgage loans, along with outstanding commitments to
make other types of loans totaling $15.0 million. Because such commitments may
expire without being drawn upon, they do not necessarily represent future cash
commitments. Also, as of December 31, 1996, the Company had outstanding
commitments to sell $665.0 million of mortgage loans. These commitments will
be funded within 90 days. Total commercial and consumer unused collateralized
lines of credit totaled $94.8 million at December 31, 1996. Such commitments
include $97.1 million in warehouse lines of credit to various mortgage
companies, of which $42.9 million was drawn upon as of December 31, 1996.

CAPITAL RESOURCES. At December 31, 1996, the Bank exceeded all applicable
regulatory minimum capital requirements. For a detailed discussion of the
regulatory capital requirements to which the Bank is subject, and for a
tabular presentation of compliance with such requirements, see "Regulation--
Regulation and Supervision of the Bank--Capital Requirements" and Note 13 of
Notes to Financial Statements.

ASSET/LIABILITY MANAGEMENT

The Company has sought to manage its exposure to changes in interest rates
by matching more closely the effective maturities or repricing characteristics
of the Company's interest-earning assets and interest-bearing liabilities. The
matching of the Company's assets and liabilities may be analyzed by examining
the extent to which its assets and liabilities are interest rate sensitive and
by monitoring the expected effects of interest rate changes on its net
interest income.

An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If the Company's
assets mature or reprice more quickly or to a greater extent than its
liabilities, the Company's net portfolio value and net interest income would
tend to increase during periods of rising interest rates but decrease during
periods of falling interest rates. If the Company's assets mature or reprice
more slowly or to a lesser extent than its liabilities, its net portfolio
value and net interest income would tend to decrease during periods of rising
interest rates but increase during periods of falling interest rates. Because
the Company sells a significant portion of its loan production in the
secondary market, its interest rate risk is somewhat mitigated. The Company
has pursued certain strategies designed to decrease the vulnerability of its
earnings to material and prolonged changes in interest rates in connection
with its banking operations.

As part of its overall interest rate risk policy, the Company has focused on
the development of a long-term deposit base to support its asset growth as
well as its ability to sell residential mortgage loans in the secondary market
while retaining both the mortgage servicing rights and the generally non-
interest bearing escrow accounts. In addition to its deposit base and funds
from the escrow accounts, the Company also uses FHLB advances as a means to
match efficiently maturities of funding sources with the expected selling time
of the related loans. Management believes that this approach to loan
originations allows the Company to respond to customer demand while minimizing
interest rate and credit risk without significantly increasing operating
expenses.

INTEREST RATE SENSITIVITY ANALYSIS. The matching of assets and liabilities
may be analyzed by examining the extent to which such assets and liabilities
are "interest rate sensitive" and by monitoring an institution's interest rate
sensitivity "gap." An asset or liability is said to be interest rate sensitive
within a specific period if it will mature or reprice within that period. The
interest rate sensitivity "gap" is the difference between the

36
<PAGE>

amount of interest-earning assets maturing or repricing within a specific time
period and the amount of interest-bearing liabilities maturing or repricing
within that time period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities, and is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, a negative gap would be expected to
adversely affect net interest income while a positive gap would be expected to
result in an increase in net interest income, while conversely during a period
of declining interest rates, a negative gap would be expected to result in an
increase in net interest income and a positive gap would be expected to
adversely affect net interest income. At December 31, 1996, the Company's
cumulative one-year interest rate gap position was a negative $184.8 million,
or 16.33% of total interest-earning assets. This is a one-day position which
is continually changing and is not necessarily indicative of the Company's
position at any other time. The Company's current one-year gap is within the
guidelines established by management and approved by the Board of Directors.
Management considers numerous factors when establishing these guidelines,
including current interest rate margins, capital levels, and any guidelines
provided by the OTS.

Different types of assets and liabilities with the same or similar
maturities may react differently to changes in overall market rates or
conditions, and thus changes in interest rates may affect net interest income
positively or negatively even if an institution were perfectly matched in each
maturity category. Additionally, the gap analysis does not consider the many
factors accompanying interest rate moves. While the interest rate sensitivity
gap is a useful measurement and contributes toward effective asset and
liability management, it is difficult to predict the effect of changing
interest rates solely on that measure, without accounting for alterations in
the maturity or repricing characteristics of the balance sheet that occur
during changes in market interest rates. During periods of rising interest
rates, the Company's assets tend to have prepayments that are slower than
originally expected, thus increasing the negative gap position. Conversely,
during a period of falling interest rates, the Company's assets would tend to
prepay faster than originally expected thus decreasing the negative gap. In
addition, some of the Company's assets, such as adjustable rate mortgages,
have caps on the amount by which their interest rates can change in any single
period, and therefore may not reprice as quickly as liabilities in the same
maturity category.

37
<PAGE>

The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996 which are
expected to mature or reprice in each of the time periods shown.

<TABLE>
<CAPTION>
OVER ONE OVER FIVE
ONE YEAR THROUGH THROUGH TEN OVER TEN
OR LESS FIVE YEARS YEARS YEARS TOTAL
--------- ---------- ----------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS (1):
Mortgage loans held for
investment............. $ 53,454 $ 12,486 $ 8,721 $ 25,635 $ 100,296
Mortgage loans held for
sale................... 282,092 63,603 40,557 454,515 840,767
Other mortgage loans.... 17,128 -- -- -- 17,128
Construction loans...... 59,270 -- -- -- 59,270
Commercial real estate
loans.................. 7,487 6,078 -- -- 13,565
Commercial loans........ 38,533 7,669 -- -- 46,202
Consumer loans.......... 8,292 14,480 10,836 -- 33,608
FHLB stock.............. 19,725 -- -- -- 19,725
Other investments....... 387 500 -- -- 887
--------- --------- --------- --------- ----------
Total............... $ 486,368 $ 104,816 $ 60,114 $ 480,150 $1,131,448
--------- --------- --------- --------- ----------
LIABILITIES (2):
Passbook savings........ $ 8,582 $ 36,472 $ 12,157 $ -- $ 57,211
Savings certificates.... 412,477 88,136 -- -- 500,613
Demand deposits......... 66,661 -- -- -- 66,661
--------- --------- --------- --------- ----------
Total deposits.......... 487,720 124,608 12,157 -- 624,485
Other borrowings........ 387,301 2,500 -- -- 389,801
--------- --------- --------- --------- ----------
Total............... $ 875,021 $ 127,108 $ 12,157 $ -- $1,014,286
--------- --------- --------- --------- ----------
OFF-BALANCE SHEET:
Commitments to sell
loans.................. $ 605,434 $ (56,649) $ (59,408) $(489,377) $ --
Commitments to originate
loans.................. (401,588) 39,604 40,253 321,731 --
--------- --------- --------- --------- ----------
Total............... $ 203,846 $ (17,045) $ (19,155) $(167,646) $ --
--------- --------- --------- --------- ----------
Interest sensitivity
gap.................... $(184,807) $ (39,337) $ 28,802 $ 312,504 $ 117,162
========= ========= ========= ========= ==========
Cumulative gap.......... $(184,807) $(224,144) $(195,342) $ 117,162
========= ========= ========= =========
Cumulative gap as a
percentage of total
interest-earning
assets................. (16.33)% (19.81)% (17.26)% 10.36%
========= ========= ========= =========
</TABLE>
- --------
(1) Fixed-rate loans are distributed based on their contractual maturity
adjusted for projected or anticipated prepayments, and variable rate loans
are distributed based on the interest rate reset date and contractual
maturity adjusted for prepayments. Loan run-off and repricing assumes a
constant prepayment rate based on coupon rate and maturity. Based on
available published statistics, the average annual prepayment rate with
respect to conventional fixed-rate single family mortgages has been
17.70%.
(2) Assumes a decay rate for passbook savings accounts of 15%. Demand deposits
are presented in the earliest repricing period since amounts in these
accounts are subject to withdrawal on demand. Savings certificates are
distributed assuming no withdrawal prior to maturity.

EFFECT OF NEW ACCOUNTING STANDARDS

In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation," which defines a fair
value based method of accounting for an employee stock option or similar
equity instrument and encourages adoption of that method for all employee
stock compensation plans. However, SFAS No. 123 also allows an entity to
continue to measure compensation cost for those plans using the intrinsic
value based method currently being followed and make pro forma disclosures of
net earnings and earnings per share under the fair value based method of
accounting. This statement is effective for financial statements with fiscal
years beginning after December 15, 1995, with earlier application encouraged.
See

38
<PAGE>

"Management--Stock Option Plan" and "--Incentive Compensation Plan."
Implementation of SFAS No. 123 is not expected to have a significant effect on
the Company. See Note 20 of Notes to Consolidated Financial Statements.

In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
125 requires that, after a transfer of financial assets, an entity recognize
the financial and servicing assets it controls and the liabilities it has
incurred, derecognize financial assets when control has been surrendered, and
derecognize liabilities when extinguished. SFAS No. 125 is intended to provide
consistent standards by which a company may distinguish transfers of financial
assets that are sales from transfers that are secured borrowings. SFAS No. 125
is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Implementation of SFAS No. 125 is not expected to have a significant effect on
the Company.

In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
(i) replaces the presentation of primary earnings per share ("EPS") with a
presentation of basic EPS; (ii) requires dual presentation of basic and
diluted EPS on the face of the consolidated statements of income regardless of
whether basic and diluted EPS are the same; and (iii) requires a
reconciliation of the numerator and denominator used in computing basic and
diluted EPS. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to Accounting Principles Board Opinion
No. 15. SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. Earlier application
is not permitted. SFAS No. 128 requires restatement of all prior-period EPS
data presented.

IMPACT OF INFLATION AND CHANGING PRICES

The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations.
Unlike most industrial companies, nearly all the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.

39
<PAGE>

BUSINESS

GENERAL

Flagstar Bancorp, Inc., a Michigan-based thrift holding company, is one of
the largest originators of conforming single-family mortgage loans in the
United States. Formerly known as FSSB Holding Corporation, the Company is
engaged, through its principal subsidiary, the Bank, in the business of
providing a full range of retail banking services in southern Michigan and in
originating, purchasing and servicing residential mortgage loans on a
nationwide basis. For 1996, the Company ranked fourth in the United States
among thrifts in mortgage loan originations and sixteenth in total mortgage
loan production, according to SMR Research Corp., and was the second largest
privately-owned mortgage originator in the United States.

Prior to this Offering, all of the Common Stock of the Company has been
owned by the Hammond family, which includes Thomas J. Hammond, the Chairman,
Chief Executive Officer and founder of the Company, and Mark T. Hammond, the
Vice Chairman and President of the Company. At December 31, 1996, the Company
had consolidated total assets of $1.3 billion, net loans of $1.1 billion,
total deposits of $624.5 million and total stockholders' equity of $78.5
million. For the year ended December 31, 1996, the Company's net earnings were
$17.0 million and its return on average assets and return on average equity
were 1.53% and 24.68%, respectively ($19.2 million, 1.73% and 27.87%,
respectively, excluding the special deposit insurance assessment imposed on
September 30, 1996 on all depositary institutions insured by the SAIF).

The Company's operations involve both retail banking and mortgage banking.
The Company believes that its operations in the retail banking business
provide it with a strategic advantage in the mortgage origination business
because it affords the Company access to funding sources which would not
otherwise be available. These additional funding sources include low cost
retail deposits, FHLB advances and escrowed funds. The Company benefits as
compared to mortgage originators with no retail banking operations because it
has access to a lower cost of funds and is therefore able to generate greater
net interest income. See "The Company."

The Company did not have any significant retail banking operations prior to
1994. See "--Retail Banking Operations." For further information, see Note 17
of Notes to Consolidated Financial Statements.

BUSINESS STRATEGY

The Company's strategy consists of the following key elements:

. continue to expand the Company's branch network into demographically
desirable communities adjacent to the Company's current markets (such as
Grand Rapids and Kalamazoo, Michigan) in order to gain access to
additional low cost retail funding sources;

. cross-sell retail banking services to the Company's large Michigan base
of present mortgage customers;

. benefit from economies of scale by increasing the size of the loan
servicing portfolio through the continued origination and purchase of
large volumes of mortgage loans on a diversified, nationwide basis;

. use the additional capital received by the Company from this Offering to
retain more mortgage loan production volume and mortgage servicing
rights, thereby increasing net interest income and servicing income;

. utilize advanced technology and automated processes throughout the
Company's business to improve customer service, reduce costs of loan
production and servicing and increase efficiencies; and

.outsource selected loan servicing and other functions when cost-effective.

TECHNOLOGY

40
<PAGE>

first mortgage lenders to utilize video conferencing for loan production. In
1996, the Company began full-scale operational use of automated underwriting
system technologies, including Fannie Mae's Desktop UnderwriterTM and Freddie
Mac's Loan ProspectorTM (of which the Company is currently one of the largest
users), and has combined the two technologies into its LIVESM video
conferencing and underwriting system. The Company believes that this system,
which permits a loan underwriter to interview and complete a loan application
and approve a loan for a prospective borrower in one session during a live
video conference, will give it a significant competitive edge in writing
mortgage loans. The Company also expects that during 1997, substantially all
of its mortgage loan production will be underwritten using automated systems,
which it believes will further reduce overhead, increase customer service and
facilitate conformity with underwriting guidelines.

LENDING

The Company originates or acquires loans through its retail banking
operations or through the wholesale, correspondent and retail loan production
outlets of its mortgage banking operations. Loans are either held for
investment in the Company's portfolio or held available for sale in the
secondary market. Wholesale mortgage loan production involves the origination
of loans by a nationwide network of independent mortgage brokers with funding
provided directly by the Company (i.e., table funding) and the transfer of
such loans to the Company upon closing. Correspondent mortgage loan production
occurs through the purchase of loans by the Company from independent mortgage
lenders, commercial banks, savings and loan associations and other financial
intermediaries that originate loans in their own name using their own source
of funds. Retail mortgage loan production for mortgage banking operations
occurs through the Company's retail loan origination offices. For 1996, the
Company's combined wholesale and correspondent loan production totaled $6.1
billion and its retail loan production totaled $685.3 million.

In addition to mortgage loan production, the Company engages to a limited
extent in the origination of commercial, commercial real estate, construction
and consumer loans, primarily through its bank branches and retail loan
origination offices.

The following table sets forth selected data relating to the composition of
the Company's loan portfolio by type of loan at the dates indicated. This
table includes mortgage loans available for sale and mortgage loans held for
investment. At December 31, 1996, the Company had no concentrations of loans
exceeding 10% of total loans that are not otherwise disclosed below.

<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ---------------- ---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family........... $ 934,226 84.62% $784,980 85.68% $554,087 87.92% $384,819 93.36% $217,360 90.95%
Construction............ 59,270 5.37% 48,933 5.34% 25,499 4.05% 19,864 4.82% 20,181 8.44%
Consumer loans.......... 33,608 3.04% 39,331 4.29% 19,271 3.06% 11 0.00% 18 0.01%
Commercial real estate.. 13,565 1.23% 30,504 3.33% 23,383 3.71% 864 0.21% 1,199 0.50%
Commercial.............. 46,202 4.18% 8,566 0.93% 7,546 1.20% 6,167 1.50% 239 0.10%
Other mortgage.......... 17,128 0.43% 3,877 0.43% 453 0.06% 478 0.11% -- -- %
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total................ 1,103,999 100.00% 916,191 100.00% 630,239 100.00% 412,203 100.00% 238,997 100.00%
====== ====== ====== ====== ======
Add (deduct):
Deferred loan fees...... 3,179 1,621 970 1,243 680
Premiums (discounts).... 7,158 8,223 4,071 2,533 226
Allowance for losses.... (3,500) (2,102) (1,871) (901) (550)
---------- -------- -------- -------- --------
Total................ $1,110,836 $923,933 $633,409 $415,078 $239,353
========== ======== ======== ======== ========
</TABLE>

In its wholesale and correspondent lending, the Company competes nationwide
by offering a wide variety of mortgage products designed to respond to
consumer needs and tailored to address market competition. The

41
<PAGE>

Company primarily originates conforming, fixed rate 30-year mortgage loans,
which collectively represented 62.2% of its total loan production for 1996 and
65.8% for 1995. In addition, the Company offers other products, such as
adjustable-rate, 5-year and 7-year balloons and jumbo mortgages as well as
loans under various FHA and VA programs. Mortgage loans originated are
primarily for the purchase of single-family residences, although such loans
are also originated for refinancing of existing mortgages.

Approximately 78% of the mortgage loans originated during 1993 were
refinancings of outstanding mortgage loans. In 1994 and 1995, approximately
44% and 36% of loans originated, respectively, were refinancings. For the year
ended December 31, 1996, approximately 46% of loans were refinancings. The
Company's loan production has, since 1992, increased each successive year,
after excluding the unusual level of refinancing in 1993 that occurred in
response to a low level of interest rates available to consumers over an
extended period of time. To achieve these increases, the Company has expanded
its wholesale loan production division from 18 employees in 1993 to 97
employees at December 31, 1996.

In addition to single-family mortgage loans, the Company relies upon its
wholesale and correspondent loan production networks for the origination or
purchase of single-family residential construction and consumer loans. Its
retail loan production arises through its bank branches, which originate
commercial, consumer, commercial real estate and construction loans, and its
retail loan origination offices, which originate construction and home equity
loans.

Set forth below is a table summarizing the Company's loan production of
single-family mortgage loans, which comprise the bulk of its loan production,
and other loans for the periods noted.

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Single-family
Retail....................................... $ 685,288 $ 632,696 $ 705,723
Wholesale.................................... 5,435,701 4,562,909 3,014,450
Correspondent................................ 670,676 -- --
---------- ---------- ----------
Total single-family........................ 6,791,665 5,195,605 3,720,173
Construction................................... 79,022 101,532 68,383
Consumer....................................... 43,354 52,199 13,389
Commercial real estate......................... 5,648 6,725 10,319
Commercial..................................... 1,412 1,681 2,580
---------- ---------- ----------
Total originations......................... $6,921,101 $5,357,742 $3,814,844
========== ========== ==========
</TABLE>

The following table sets forth the origination of single-family mortgage
loans for the periods presented by the nature of loan:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Government (GNMA).............................. $ 425,137 $ 285,293 $ 222,794
Conventional (FNMA and FHLMC).................. 6,238,174 4,831,108 3,426,620
Jumbo/Non-Conforming........................... 128,354 79,204 70,759
---------- ---------- ----------
Total originations during the period....... $6,791,665 $5,195,605 $3,720,173
========== ========== ==========
</TABLE>

The following table sets forth certain information at December 31, 1996
regarding the dollar amount of loans held for investment based on their
contractual terms to maturity, including scheduled repayments of

42
<PAGE>

principal. The table does not include any estimate of prepayments which
significantly shorten the average life of all mortgage loans and may cause the
Company's repayment experience to differ from that shown below.

<TABLE>
<CAPTION>
DUE AFTER 1 THROUGH 5
DUE BY YEARS AFTER DUE AFTER 5 YEARS
DECEMBER 31, 1997 DECEMBER 31, 1997 AFTER DECEMBER 31, 1997 TOTAL
----------------- --------------------- ----------------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans held for
investment............. $ 3,331 $16,655 $ 83,810 $103,796
Construction............ 59,270 -- -- 59,270
Consumer................ 3,115 15,578 14,915 33,608
Commercial real estate.. 2,680 10,885 -- 13,565
Commercial.............. 44,032 2,170 -- 46,202
Other mortgage.......... 2,076 10,381 4,671 17,128
-------- ------- -------- --------
Total............... $114,504 $55,669 $103,396 $273,569
======== ======= ======== ========
</TABLE>

The following table sets forth, at December 31, 1996, the dollar amount of
all loans held for investment which are due one year or more after December
31, 1997 which have predetermined interest rates and have floating or
adjustable interest rates.

<TABLE>
<CAPTION>
PREDETERMINED FLOATING OR
RATE ADJUSTABLE RATES TOTAL
------------- ---------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans held for investment..... $ 59,724 $44,072 $103,796
Construction........................... 59,270 -- 59,270
Consumer............................... 28,107 5,501 33,608
Commercial real estate................. 7,694 5,871 13,565
Commercial............................. 11,765 34,437 46,202
Other mortgage......................... 17,128 -- 17,128
-------- ------- --------
Total.............................. $183,688 $89,881 $273,569
======== ======= ========
</TABLE>

RETAIL BANKING OPERATIONS. The Company's retail banking operations
constitute a growing part of its overall operations. The principal aspects of
retail banking include deposit-gathering and consumer, residential, and
commercial lending. The Company began to emphasize its retail banking
operations upon its acquisition in 1994 of Security Savings, a federal savings
bank located in Jackson, Michigan. Security Savings was a long standing
community institution which received its charter in 1936. At the time of
acquisition, Security Savings had approximately $226 million in assets and
seven bank branches in southern Michigan with deposits of $197.2 million.

Security Savings was merged into the Bank on February 1, 1996. As of
December 31, 1996, the Company's retail banking operations had expanded to
include 15 bank branches in southern Michigan with deposits of $360.9 million.

The Company generally has authority to originate and purchase loans
collateralized by real estate located throughout the United States. Consistent
with its emphasis on being a community-oriented financial institution, the
Company concentrates the lending activities of its retail banking operations
in the southern Michigan market areas of its bank branches.

The Company's loan originations for its retail banking operations are
derived from a number of sources, including referrals by realtors, depositors
and borrowers and advertising, as well as walk-in customers. The Company's
solicitation programs consist of advertisements in local media, in addition to
occasional participation in various community organizations and events. The
Company's loan personnel in its retail banking operations are salaried, and
the Company does not compensate these loan personnel on a commission basis for
loans originated. Loan applications are accepted at all of the Company's
branch offices.

43
<PAGE>

Under applicable law, with certain limited exceptions, outstanding loans and
extensions of credit by a savings institution to a person at one time shall
not exceed 15% of the institution's unimpaired capital and surplus. Loans and
extensions of credit fully secured by readily marketable collateral may
compose an additional 10% of unimpaired capital and surplus. Applicable law
additionally authorizes savings institutions to make loans to one borrower,
for any purpose, in an amount not to exceed $500,000 or in an amount not to
exceed the lesser of $30,000,000 or 30% of unimpaired capital and surplus to
develop residential housing, provided: (i) the purchase price of each single-
family dwelling in the development does not exceed $500,000; (ii) the savings
institution is and continues to be in compliance with its fully phased-in
regulatory capital requirements; (iii) the loans comply with applicable LTV
requirements; (iv) the aggregate amount of loans made under this authority
does not exceed 150% of unimpaired capital and surplus; and (v) the Director
of OTS, by order, permits the savings institution to avail itself of this
higher limit. Under these limits, the Company's loans to one borrower were
limited to $12.2 million at December 31, 1996. At that date, the Company had
no lending relationships in excess of the loans-to-one-borrower limit.

Interest rates charged by the Company on loans are affected principally by
competitive factors, the demand for such loans and the supply of funds
available for lending purposes. These factors are, in turn, affected by
general economic conditions, monetary policies of the federal government,
including the Federal Reserve Board, legislative tax policies and government
budgetary matters.

SINGLE-FAMILY MORTGAGE LENDING. The Company's retail banking operations have
historically focused on the origination of single-family residential real
estate loans in its market area. At December 31, 1996, single-family mortgage
loans held for investment totaled approximately $120.9 million, or 44.2% of
the Company's loans held for investment.

The Company acquired a majority of its fixed rate single-family mortgage
loans held for investment through its 1994 acquisition of Security Savings. In
each case, such loans are secured by first mortgages on single-family, owner-
occupied residential real property located in the Company's market area. At
December 31, 1996, $59.7 million, or 57.5%, of the Company's portfolio of
mortgage loans held for investment consisted of fixed-rate mortgage loans.

The Company also originates residential mortgage loans with adjustable rates
("ARMs"). As of December 31, 1996, 42.5% of single-family mortgage loans in
the Company's portfolio of mortgage loans held for investment carried
adjustable rates. Such loans are primarily for terms of 30 years, although the
Company does occasionally originate ARMs for other terms, in each case
amortized on a monthly basis with principal and interest due each month. The
interest rates on a majority of mortgages are adjusted once a year, with a
maximum adjustment of 2% per adjustment period and a maximum aggregate
adjustment of 6% over the life of the loan. Rate adjustments on the Company's
adjustable-rate loans are indexed to a rate which adjusts annually based upon
changes in the weekly average yield on U.S. Treasury securities adjusted to a
constant comparable maturity of one year, as made available by the Federal
Reserve Board, and the adjusted interest rate is equal to such Treasury rate
plus a spread (currently approximately 3%). The adjustable-rate mortgage loans
offered by the Company provide for initial rates of interest below the rates
that would prevail when the index used for repricing is applied.

The retention of adjustable-rate loans in the Company's portfolio helps
reduce the Company's exposure to increases in prevailing market interest
rates. However, there are unquantifiable credit risks resulting from potential
increases in costs to borrowers in the event of upward repricing of
adjustable-rate loans. It is possible that during periods of rising interest
rates, the risk of default on adjustable-rate loans may increase due to
increases in interest costs to borrowers. Further, although adjustable-rate
loans allow the Company to increase the sensitivity of its interest-earning
assets to changes in interest rates, the extent of this interest sensitivity
is limited by the initial fixed-rate period before the first adjustment and
the lifetime interest rate adjustment limitations. Accordingly, there can be
no assurance that yields on the Company's adjustable-rate loans will fully
adjust to compensate for increases in the Company's cost of funds.

44
<PAGE>

COMMERCIAL AND COMMERCIAL REAL ESTATE LENDING. The Company originates
commercial loans on a selected basis and in limited amounts for retention in
its portfolio. At December 31, 1996, the Company had $3.3 million in
commercial loans associated with its retail banking operations, which
comprised 1.2% of its loans held for investment and which are primarily
inventory and other business loans to small businesses in the Company's
southern Michigan market area.

Also as part of the Company's retail banking operations the Company makes
commercial real estate loans in its southern Michigan market area. At December
31, 1996, there were $13.6 million in commercial real estate loans
outstanding, which comprised 5.0% of total loans held for investment and 1.2%
of total loans.

Commercial real estate loans are generally underwritten in amounts of up to
75% of the appraised value of the underlying property. Appraisals on
properties securing commercial real estate loans originated by the Company are
performed by an independent fee appraiser designated by the Company before the
loan is made. All appraisals for commercial real estate loans are reviewed by
the Company's management.

Underwriting procedures include an analysis of the property, borrower,
market and levels of risks. Underwriting procedures require verification of
the borrower's credit history, financial statements, references and income
projections for the property. All commercial real estate loans in excess of
$500,000 must be approved by the Company's Executive Loan Committee. The
Company's commercial real estate loans are secured by the property and, in
many circumstances, require the borrower to be personally liable for all or a
portion of the loan. The Company's lending policy requires that commercial
real estate properties securing loans be inspected at least annually. In
addition, the Company reviews updated financial information regarding the
borrower on a regular basis.

Commercial and commercial real estate loans generally present a higher level
of risk than do loans secured by one- to four-family residences. This greater
risk is due to several factors, including the concentration of large amounts
of principal in a limited number of loans and borrowers, the effects of
general economic conditions on commercial properties, and the difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by commercial real estate is typically dependent upon the
successful operation of the related real estate project or business. If the
cash flow from the project or business is reduced the borrower's ability to
repay the loan may be impaired.

CONSUMER LOANS. Consumer loans originated by the Company are predominantly
loans secured by personal property, passbook loans and home equity loans. At
December 31, 1996, the Company's consumer loans totaled $33.6 million, or
12.3%, of the Company's loans held for investment of which $16.8 million were
home equity loans.

Consumer loans tend to be originated at higher interest rates than mortgage
loans and for shorter terms and, in the case of home equity loans, the Company
tends to have a junior secured position. However, consumer loans generally
involve more risk than single-family mortgage loans. Repossessed collateral
for a defaulted loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of damage, loss or depreciation, and the
remaining deficiency often does not warrant further substantial collection
efforts against the borrower. In addition, loan collections are dependent on
the borrower's continuing financial stability and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Further, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which may be
recovered. In underwriting consumer loans, the Company considers the
borrower's credit history, an analysis of the borrower's income and ability to
repay the loan, and the value of the collateral.

MORTGAGE BANKING OPERATIONS. The Company actively participates in the
mortgage banking market, ranking sixteenth in the United States in total
mortgage loan production for 1996. Mortgage banking generally involves the
origination or purchase of single-family mortgage loans for sale in the
secondary mortgage market. The secondary mortgage market and its evolution
have been significantly influenced by two government-

45
<PAGE>

sponsored enterprises, Fannie Mae and Freddie Mac, and one government agency,
GNMA. Through these entities, the United States government provides support
and liquidity to the market for residential mortgage debt.

Mortgage originators sell their loans directly to Fannie Mae and Freddie Mac
either as whole loans or, more typically, as pools of loans used to
collateralize mortgage-backed securities ("MBS") issued or guaranteed by these
entities. Similarly, the originators can issue MBS collateralized by pools of
loans that are guaranteed by GNMA. In order to arrange these sales or obtain
these guarantees, the originator must underwrite its loans to conform with
standards established by Fannie Mae and Freddie Mac or by the FHA or VA in the
case of GNMA. All loans other than FHA and VA loans are considered
conventional loans. Loans with principal balances exceeding agency guidelines,
currently those in excess of $214,600, are sold to private investors.

Mortgage bankers operate in a highly competitive market. The underwriting
guidelines and servicing requirements set by the participants in the secondary
markets are standardized. As a result, mortgage banking products (i.e.,
mortgage loans and the servicing of these loans) have become difficult to
differentiate. Therefore, mortgage bankers compete primarily on the basis of
price or service, making effective cost management essential. Mortgage bankers
generally seek to develop cost efficiencies in one of two ways: economies of
scale or specialization. Large, full-service national or regional mortgage
bankers such as the Company have sought economies of scale through an emphasis
on wholesale originations and the introduction of automated processing
systems.

The Company pursues its loan production strategy as part of its mortgage
banking operations through the Company's wholesale, correspondent and retail
loan production outlets and, to a limited extent, through direct solicitation
of commercial banks, savings associations and credit unions.

WHOLESALE LOAN PRODUCTION. Under its wholesale operations, the Company funds
mortgage loans originated by a network of approximately 1,800 independent
mortgage brokers nationwide. Approximately 1,200 of these brokers originate
mortgage loans for the Company on a monthly basis and the remainder originate
mortgage loans for the Company on a quarterly basis. This network is
maintained by the Company's approximately sixty account executives, who are
compensated through a salary and commission package, and are organized among
10 regional wholesale correspondent lending offices and nine
wholesale/correspondent satellite offices. Many of the larger brokers are
provided with loan data entry software by the Company for the entry of loan
applicant data in a format familiar to the Company's underwriters and for
transmission to the Company's automated underwriting systems for review. All
loans originated through brokers are underwritten according to the Company's
standards.

The Company's underwriters or contract representatives review the loan data
provided by the loan applicant, including the review of appropriate loan
documentation, and request additional information as necessary from the
broker. To speed the information gathering phase of underwriting and thus the
loan approval process, the Company is utilizing an interview process referred
to as LIVESM underwriting, which involves an interview of the potential
borrower directly by a Company underwriter using its proprietary combination
of computer video technology and automated underwriting technology. Currently,
the Company believes that approximately 20% of the applications generated by
its wholesale loan production network use the LIVESM technology. Loans
originated by such brokers are typically funded directly by the Company
through table funding arrangements. In most cases, the loan is closed in the
broker's name and thereafter transferred to the Company together with related
mortgage servicing rights for which the Company generally pays a servicing
release premium which is included in the loan price paid to the broker by the
Company. Broker participants in this program are prequalified on the basis of
creditworthiness, mortgage lending experience and reputation. Each broker is
subject to annual and ongoing reviews by the Company.

CORRESPONDENT LOAN PRODUCTION. In addition, the Company acquires mortgage
loans from mortgage lenders, commercial banks, savings and loan associations
and other financial intermediaries. The Company's selection of correspondents
is subject to a separate approval process with higher net worth requirements
than wholesale brokers and correspondents must use their own source of funds
to close loans. The prices of such loan

46
<PAGE>

acquisitions are separately negotiated. Warehouse lines of credit, obtained
from either the Company or other parties, may be used by the mortgage lenders
to finance their respective mortgage loan originations. At December 31, 1996,
the aggregate amount of warehouse lines of credit granted by the Company to
its correspondents was $97.1 million, of which $42.9 million was outstanding.
Independent lenders who obtain warehouse lines of credit from the Company are
not required by the terms of such lines to sell their loan production to the
Company. All loans acquired from correspondents are expected to satisfy the
Company's underwriting standards and may be subject to repurchase by the
correspondent in the event of default of the loan due to fraud or
misrepresentation in the origination process and for certain other reasons,
including the failure to satisfy underwriting requirements imposed by the
Company.

RETAIL LOAN PRODUCTION. The Company's retail loan production involves the
origination of loans through its branch network, which includes its bank
branches and its retail loan origination offices. The Company has 41 retail
loan origination offices located in southern Michigan, Ohio and California.
These retail loan origination offices originate primarily single-family
mortgage loans and, to a lesser extent, construction and home equity loans.
Such retail loan origination offices generally provide the Company with a
source of loan production at a lower cost per loan than loans acquired through
brokers or correspondents because the cost of operating such branches is more
than offset by cost savings through the Company's ability to avoid payment of
the servicing release premium for the related mortgage servicing rights.
Managers of retail loan origination offices and loan officers are compensated
solely on a commission basis as measured by loan production.

To encourage efficient loan production, the Company allows managers of
retail loan origination offices to elect to operate their respective offices
as "100% offices," subject to approval by the Company. Such offices are
treated for incentive compensation purposes as free-standing operations where
each office is responsible for its own operating expenses. Each office is
required to satisfy minimum loan production levels. The manager receives
compensation based on the office's profitability. As of December 31, 1996, 14
retail loan origination offices were operated as 100% offices.

COMMERCIAL LENDING. Warehouse lines are granted under the Company's
correspondent lending program and are a major component of the Company's
commercial lending strategy. Warehouse lines of credit are used by
correspondents to fund production of loans which for the most part are
acquired by the Company. At December 31, 1996 the aggregate amount of
warehouse lines of credit granted by the Company to its correspondents was
$97.1 million of which $42.9 million was outstanding. The Company's selection
of correspondents is subject to a separate approval process with higher net
worth requirements than wholesale brokers. All loans acquired from
correspondents are expected to satisfy the Company's underwriting standards
and may be subject to repurchases by the correspondent in the event of default
of the loan due to fraud or misrepresentation in the origination process and
for certain other reasons, including the failure to satisfy underwriting
requirements imposed by the Company.

CONSTRUCTION LENDING. The Company also engages in construction lending
involving loans to individuals for construction of one- to- four-family
residential housing primarily located within the Company's southern Michigan
market area, with such loans converting to permanent financing upon completion
of construction. At December 31, 1996, the Company's portfolio of loans held
for investment included $59.3 million of loans secured by properties under
construction, or 21.7% of loans held for investment. These loans may be
construction/permanent loans structured to become permanent loans upon the
completion of construction, or may be interim construction loans structured to
be repaid in full upon completion of construction and receipt of permanent
financing. All construction loans are secured by a first lien on the property
under construction. Loan proceeds are disbursed in increments as construction
progresses and as inspections warrant. Construction/permanent loans may have
adjustable or fixed interest rates and are underwritten in accordance with the
same terms and requirements as the Company's permanent mortgages, except the
loans generally provide for disbursement in stages during a construction
period of up to nine months, during which period the borrower is required to
make interest-only monthly payments. Monthly payments of principal and
interest commence one month from the date the loan is converted to permanent
financing. Borrowers must satisfy all credit requirements that would apply to
the Company's permanent mortgage loan financing prior to receiving
construction financing for the subject property.

47
<PAGE>

Construction financing generally is considered to involve a higher degree of
risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan is largely dependent upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction.
During the construction phase, a number of factors could result in delays and
cost overruns. If the estimate of construction costs proves to be inaccurate,
the Company may be required to advance funds beyond the amount originally
committed to permit completion of the construction. If the estimate of value
proves to be inaccurate, the Company may be confronted, at or prior to the
maturity of the loan, with a project having value which is insufficient to
assure full repayment. The ability of the borrower to sell or complete the
finished structure will depend on, among other things, demand, pricing,
availability of comparable properties and economic conditions. The Company has
sought to minimize this risk by concentrating construction lending to
qualified borrowers in the Company's southern Michigan market area, by
requiring the involvement of qualified builders, and by limiting the aggregate
amount of outstanding construction loans.

SECONDARY MARKETING

The Company sells a significant portion of the mortgage loans that it
originates or purchases through its mortgage operations while retaining the
servicing rights to such loans. During the years ended December 31, 1996 and
1995, the Company originated $6.8 billion and $5.2 billion in total mortgage
loans, respectively, and sold $6.6 billion and $4.8 billion of mortgage loans,
respectively, in the secondary market. Mortgage loans are aggregated into
pools and sold, or are sold as individual mortgage loans, to investors
principally at prices established at the time of sale or under forward sales
commitments. Conforming conventional mortgage loans are generally pooled and
exchanged under the purchase and guarantee programs sponsored by Fannie Mae
and Freddie Mac and GNMA for Fannie Mae MBS, Freddie Mac MBS or GNMA MBS,
respectively. A limited number of mortgage loans are sold to other
institutional and non-institutional investors. For the year ended December 31,
1996, a significant portion of such loans were exchanged for Fannie Mae and
Freddie Mac securities. The remainder were sold to other institutional and
non-institutional investors.

The Company exchanges and sells mortgage loans on a non-recourse basis. In
connection with the Company's loan exchanges and sales, the Company makes
representations and warranties customary in the industry relating to, among
other things, compliance with laws, regulations and program standards, and to
accuracy of information. In the event of a breach of those Company
representations and warranties, the Company typically corrects such flaws. If
the flaws cannot be corrected, the Company may be required to repurchase such
loans. See "--Allowance for Losses." In cases where loans are acquired from a
broker or correspondent and there have been material misrepresentations made
to the Company, the Company has the right to resell the flawed loan back to
the broker or correspondent. Otherwise, the Company is indemnified against
loss on such loans by the broker. In addition, the Company relies upon
contract underwriters for a portion of its loan production, and these
underwriters must indemnify the Company against loss for loans which are
eventually determined to have been flawed upon origination.

48
<PAGE>

The following table sets forth the activity in the Company's mortgage loans
available for sale and its loans held for investment in its portfolio.

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
AVAILABLE FOR SALE:
Beginning balance...................... $ 620,455 $ 205,480 $ 389,073
Originations(1)........................ 6,850,277 5,251,510 3,752,650
Repurchases............................ 54,788 4,477 2,683
Sales(1)............................... (6,599,568) (4,780,198) (3,670,002)
Amortization........................... (74,683) (244,144) (161,225)
Transfers to repossessed assets or
mortgage-backed securities............ (10,502) (1,781) (1,438)
Transfers (to) from held for
investment............................ -- 185,111 (106,261)
----------- ----------- -----------
Ending balance......................... $ 840,767 $ 620,455 $ 205,480
=========== =========== ===========
HELD FOR INVESTMENT:
Beginning balance...................... $ 305,580 $ 429,800 $ 26,906
Originations(1)........................ 129,436 162,137 236,700
Amortization........................... (161,372) (101,246) (79,002)
Transfers to repossessed assets........ (75) -- (1,367)
Acquired through acquisition........... -- -- 140,302
Transfers (to) from available for
sale.................................. -- (185,111) 106,261
----------- ----------- -----------
Ending balance......................... $ 273,569 $ 305,580 $ 429,800
=========== =========== ===========
</TABLE>
- --------
(1) Originations and sales are presented at cost, including deferred loan
origination fees and costs, premiums and discounts.

The Company assesses the interest rate risk associated with outstanding
commitments that it has extended to fund loans and hedges the interest rate
risk of these commitments based upon a number of factors, including the
remaining term of the commitment, the interest rate at which the commitment
was provided, current interest rates and interest rate volatility. These
factors are monitored on a daily basis, and the Company adjusts its hedging on
a daily basis as needed. The Company hedges its "available for sale" mortgage
loan portfolio and its interest rate risk inherent in its unfunded mortgage
commitments primarily through the use of forward sale commitments. Under such
commitments, the Company enters into commitments with terms of not more than
90 days to sell these loans to Freddie Mac, Fannie Mae and GNMA. In addition,
the Company occasionally establishes futures positions in U.S. Treasury bonds
under which the Company contracts to sell notional principal contracts. At
December 31, 1996, the Company did not have any open futures positions. See
"Management's Discussion and Analysis of Changes in Financial Condition and
Results of Operations--Results of Operations--Net Gain on Loan Sales and Sales
of Mortgage Servicing Rights."

ASSET QUALITY

The Company is exposed to certain credit risks related to the value of the
collateral that secures loans held in its portfolio and the ability of
borrowers to repay their loans during the term thereof. The Company has an
asset classification committee, which is comprised of senior officers of the
Company, that closely monitors the loan and real estate owned portfolios for
potential problems on a continuing basis and reports to the Board of Directors
of the Company at regularly scheduled meetings. This committee reviews the
classification of loans and reviews the allowance for losses. The Company also
has a quality control department, the function of which is to provide the
Board of Directors of the Company with an independent ongoing review and
evaluation of the quality of the process by which lending assets are
generated.

49
<PAGE>

Non-performing assets consist of non-accrual loans and real estate owned.
Loans are usually placed on non-accrual status when the loan is past due 90
days or more, or the ability of a borrower to repay principal and interest is
in doubt. Real estate acquired by the Company as a result of foreclosure is
classified as real estate owned until such time as it is sold. The Company
generally tries to sell the property at a price no less than its net book
value, but will consider discounts where appropriate to expedite the return of
the funds to an earning status. When such property is acquired, it is recorded
at its fair value less estimated costs of sale. Any required write-down of the
loan to its appraised fair market value upon foreclosure is charged against
the allowance for losses.

The Company establishes an allowance for losses based upon a quarterly or
more frequent evaluation by management of various factors including the
estimated market value of the underlying collateral, the growth and
composition of the loan portfolio, current delinquency trends and prevailing
and prospective economic conditions, including property values, employment and
occupancy rates, interest rates and other conditions that may affect
borrowers' abilities to comply with repayment terms. If actual losses exceed
the amount of the allowance for losses, earnings could be adversely affected.
As the Company's provision for losses is based on management's assessment of
the general risk inherent in the loan portfolio based on all relevant factors
and conditions, the allowance for losses represents general, rather than
specific, reserves.

The following table sets forth information with respect to the Company's
non-performing assets at the dates indicated. No loans were either accruing
loans which were contractually past due 90 days or more or recorded as
restructured loans within the meaning of SFAS No. 15 at the dates indicated.
The increase in the mortgage loan category in 1995 and 1996 is attributable
primarily to the Company's required repurchase of non-performing loans from
secondary market investors. See "Management's Discussion and Analysis of
Changes in Financial Condition and Results of Operation--Financial Condition--
Allowance for Losses."

<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------
1996 1995 1994 1993 1992
------- ------- ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual
basis:
Mortgage............................... $27,017 $10,096 $1,477 $1,314 $1,179
Construction........................... 2,801 -- 140 140 650
Commercial............................. 476 464 57 88 210
Consumer............................... 327 126 65 7 10
------- ------- ------ ------ ------
Total non-performing loans............. 30,621 10,686 1,739 1,549 2,049
Real estate owned........................ 10,363 2,359 1,271 1,249 802
------- ------- ------ ------ ------
Total non-performing assets............ $40,984 $13,045 $3,010 $2,798 $2,851
======= ======= ====== ====== ======
</TABLE>

If non-accrual loans at December 31, 1996 had been current according to
their original terms and had been outstanding throughout 1996, or since
origination if originated during the year, interest income on these loans for
1996 would have been $2.7 million. Interest actually recognized on these loans
during 1996 was not significant.

At December 31, 1996, the Company did not have any loans which are not
currently classified as non-accrual, 90 days past due or restructured and
where known information about possible credit problems of borrowers caused
management to have serious concerns as to the ability of the borrowers to
comply with existing loan repayment terms. At December 31, 1996, the Company
had $3.9 million of impaired loans pursuant to SFAS No. 114, as amended by
SFAS No. 118.

50
<PAGE>

1992 to 0.00% in 1995, and rose in 1996 to 0.13%. Over this period non-
performing assets as a percentage of total assets ranged from 0.94% in 1992 to
a low of 0.42% in 1994 and increased to 3.16% at December 31, 1996. The 1995
and 1996 increases resulted primarily from increased repurchases of delinquent
residential mortgage loans from secondary market investors. Although the
Company generally does not sell loans with recourse, it typically is required
to repurchase loans, including delinquent and defaulted loans, which were not
underwritten strictly in compliance with the underwriting standards of
secondary market investors. As the volume of the Company's new loan production
has increased over the past several years, the aggregate amount of loan
delinquencies and foreclosures has also increased, thereby increasing the
number of loans potentially subject to repurchase. In addition, during 1996
two of the largest secondary market purchasers of loans implemented automated
underwriting review systems which enabled them to review delinquent loans on a
much faster basis, thereby accelerating the process of returning to the
Company loans originated in prior periods.

The Company relies upon its underwriting department to ascertain compliance
with individual investor standards prior to sale of the loans in the secondary
market, and it relies upon its quality control department to test sold loans
on a sample basis for compliance. See "--Underwriting" and "--Quality
Control." During 1996, the Company sold approximately $6.6 billion in single
family mortgage loans in the secondary market, of which approximately $10.4
million (0.16% of loans sold) were repurchased during 1996. Total repurchases
of single family mortgage loans by the Company during 1996 of $54.8 million
also included $32.7 million related to loans sold in 1995 (0.69% of such
loans) and $11.7 million related to loans sold prior to 1995. The Company
views loan repurchases as an inherent risk of originating loans for sale in
the secondary market notwithstanding the ongoing reviews by its quality
control department. A majority of loans repurchased during 1996 were and
continue to be performing. Losses arising from repurchases depend upon whether
repurchased loans are or become non-performing and, if so, whether the Company
is able to recover all of the loan principal and interest otherwise due.

It has been the Company's experience that non-performing loans do not
necessarily result in an ultimate loss to the Company. Approximately 88% of
the Company's non-performing loans at December 31, 1996 were residential
mortgage loans (approximately 94% at December 31, 1995), which generally
represent minimal risk of ultimate loss because of the nature of the
underlying collateral, private mortgage insurance for loans with over-80% LTV
ratios and insurance or guarantees on certain loans from the FHA and VA. In
addition, the Company may also have the right to sell the repurchased loan
back to the broker or correspondent which originated it, or to seek indemnity
from the applicable mortgage insurance company in the case of loans which are
underwritten on a contract basis for the Company by such insurers.

The Company anticipates that its level of loan repurchases and non-
performing assets may continue to be above historical levels during 1997 as a
result of the factors described above. The Company believes, however, that
several actions it has taken during 1996, including a tightening of credit
standards and the implementation of automated underwriting systems (which the
Company believes, in most cases, significantly reduce the ability of secondary
market investors to require repurchase of loans absent material
misrepresentation), should result in the level of loan repurchases declining
over time.

The Company experienced an increase in its non-performing construction loans
from December 31, 1995 to December 31, 1996 from zero to $2.8 million. This
increase was related to a significant increase in the single family
residential construction loans originated in the period subsequent to December
31, 1994. During the years ended December 31, 1994 and 1995 the origination of
such loans increased from $68.4 million to $101.5 million, respectively.
Approximately two-thirds of the non-performing construction loans resulted
from one particular construction lending program. The Company has discontinued
its participation in this program and substantially all loans originated under
the program, other than those which are currently classified as non-
performing, have been paid off.

The Company's repossessed assets were $10.4 million at December 31, 1996,
compared with $2.4 million and $1.3 million at December 31, 1995 and 1994,
respectively, representing an increase of 84.6% from December 31, 1994 to
December 31, 1995, and 333.3% from December 31, 1995 to December 31, 1996. The

51
<PAGE>

increases resulted primarily from the Company's foreclosure on non-performing
loans as part of the collection process and reflects the increased levels of
non-performing loans during such periods.

The Company's allowance for losses increased to $3.5 million at December 31,
1996 from $2.1 million at December 31, 1995. The Company's ratio of allowance
for losses to non-accrual loans, however, declined to 11.43% at December 31,
1996 from 19.67% at December 31, 1995. Approximately 88.2% of the non-accrual
loans at December 31, 1996 were single-family mortgages. Historically, the
Company's experience with loan losses on single family loans held in portfolio
or repurchased from investors has been low. Management believes that the
allowance for losses is adequate to cover the losses currently inherent in the
loan portfolio. Future changes in economic conditions or interest rates,
however, could require additional reserves.

The Company's allowance for losses increased to $2.1 million at December 31,
1995 from $1.9 million at December 31, 1994. The Company's ratio of allowance
for losses to non-accrual loans, however, declined to 19.67% at December 31,
1995 from 107.59% at December 31, 1994.

The following table sets forth an analysis of the Company's consolidated
allowance for losses and ratio of net charge-offs for the periods indicated.

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994 1993 1992
------- ------ ------ ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period......... $ 2,102 $1,871 $ 901 $ 550 $ 345
Charge offs, net of recoveries(1)...... (1,206) (7) (321) (293) (175)
Provision.............................. 2,604 238 290 644 380
Provision acquired in acquisition...... -- -- 1,001 -- --
------- ------ ------ ----- -----
Balance at end of period............... $ 3,500 $2,102 $1,871 $ 901 $ 550
======= ====== ====== ===== =====
Ratio of net charge offs to average
loans outstanding during the period... 0.13% 0.00% 0.08% 0.08% 0.09%
======= ====== ====== ===== =====
</TABLE>
- --------
(1) Reflects primarily charge-offs related to single-family mortgage loans.

The following table sets forth an analysis of the Company's net charge-offs,
by loan category, for the year ended December 31, 1996.

<TABLE>
<CAPTION>
LOAN CATEGORY (AMOUNT)
------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Charge-offs:
Mortgage
Available for Sale (1) $(637)
Held for investment (694)
Consumer (50)
------- --- ---
Total charge-offs (1,381)
Recoveries
Commercial 175
------- --- ---
Charge-offs, net of recoveries $(1,206)
======= ===
</TABLE>
- --------
(1) Includes $494,000 of charge-offs related to loans which were repurchased
during 1996.

52
<PAGE>

The following table sets forth the breakdown of the allowance for losses by
loan category at the dates indicated. Management believes that the allowance
can be allocated by category only on an approximate basis, and therefore
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses
in any category. The unallocated portion of the allowance represents an amount
that is not specifically allocable to one of the loan portfolios.

<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ------------------ ------------------ ------------------ ------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS LOANS LOANS LOANS LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage
Available for sale.... $1,000 75.45% $ 248 67.00% $ 289 32.34% $356 93.53% $135 90.98%
Held for investment... 200 10.85% 78 19.25% 531 55.74% -- -- % -- -- %
Construction........... 400 5.32% 367 5.28% 191 4.01% 149 4.78% 96 8.41%
Consumer............... 300 3.02% 393 4.25% 193 3.03% -- -- % 2 0.01%
Commercial............. 200 4.15% 43 0.93% 38 1.19% 31 1.48% 1 0.10%
Commercial real
estate................ 100 1.21% 305 3.29% 234 3.69% 9 0.21% 181 0.50%
Unallocated............ 1,300 -- % 668 -- % 395 -- % 356 -- % 135 -- %
------ ------ ------ ------ ------ ------ ---- ------ ---- ------
Total allowance for
losses............... $3,500 100.00% $2,102 100.00% $1,871 100.00% $901 100.00% $550 100.00%
====== ====== ====== ====== ====== ====== ==== ====== ==== ======
</TABLE>

UNDERWRITING

The Company's mortgage loans are underwritten either in accordance with
applicable Fannie Mae, Freddie Mac or FHA/VA guidelines or with requirements
set by other investors.

All mortgage loans originated or acquired by the Company, whether through
its retail loan origination offices or through its wholesale or correspondent
networks, must satisfy the Company's underwriting standards. The Company
permits a few originating correspondent lenders operating under the Company's
delegated underwriting program to perform initial underwriting reviews. The
Company employs an automated underwriting process on most loans that is based
upon data provided through the Company's initial loan data entry software and
is available from Fannie Mae through its Desktop Underwriter(TM) software and
from Freddie Mac through its Loan Prospector(TM) software. This process
incorporates credit scoring and an appraisal evaluation system, which in turn
employs rules-based and statistical technologies to evaluate the borrower,
property and the sale of the loan in the secondary market. This process is
intended to reduce processing and underwriting time, to improve overall loan
approval productivity, to improve credit quality and to reduce potential
investor repurchase requests. Approximately one-third of loans underwritten by
the Company are initially underwritten on a contractual basis by mortgage
insurance companies, in their capacity as contract underwriters. The contract
underwriter may be required to repurchase loans that are determined not to be
in compliance with such underwriting criteria.

Loans underwritten directly by the Company are subject to a complete review
of all information prior to loan approval. This process involves the transfer
of loan data to the Company by wholesalers or correspondents using loan data
entry software provided by the Company plus certain other physical
documentation or through the physical transfer of loan files to the Company.
Further, the Company has introduced the use of video-based computer
technology, known as LIVESM, to expedite the loan approval process by allowing
its underwriters to conduct face-to-face interviews with loan applicants using
personal computers with cameras mounted on them. This equipment is installed
and can be used on an as-needed or pre-scheduled basis in the offices of
certain mortgage brokers. See "--Technology."

53
<PAGE>

To a limited extent, the Company delegates underwriting authority to select
correspondent lenders who meet financial strength, delinquency, underwriting
and quality control standards. The lenders may be required to agree to
repurchase loans that later become delinquent or to indemnify the Company from
loss.

QUALITY CONTROL

The Company maintains a quality control department that, among other things,
reviews compliance and quality assurance issues relating to loan production
and underwriting. For its production compliance process, the Company randomly
selects a statistical sample of generally at least 5% of all loans closed each
month. This review includes a credit scoring and re-underwriting of such
loans; ordering second appraisals on 10% of the sample; reverifying funds,
employment and final applications; and reordering credit reports on the entire
sample. In addition, a full underwriting review is conducted on loans that go
into default during the first twelve months from the date of origination.
Document and file reviews are also undertaken to ensure regulatory compliance.

The Company also monitors the performance of delegated underwriters through
quality assurance reports prepared by its quality control department, FHA/VA
reports and audits, reviews and audits by regulatory agencies, investor
reports and mortgage insurance company audits. Deficiencies in loans are
generally corrected; otherwise, the Company may exercise its option to require
that the loan be repurchased by the originating broker or correspondent, or
the Company may insist that the broker who originated the loan indemnify the
Company against any losses.

MORTGAGE LOAN SERVICING

The Company derives a significant portion of its revenues from the servicing
of mortgage loans for others. For the years ended December 31, 1996 and 1995,
the Company realized net servicing fee revenue from its mortgage loan
servicing operations of $11.9 million and $14.3 million, respectively, which
represented 20.3% and 38.6% of the Company's non-interest income for the
respective periods. Servicing arises in connection with mortgage loans
originated or purchased and then sold in the secondary market with mortgage
servicing rights retained.

Mortgage loan servicing includes collecting payments of principal and
interest from borrowers, remitting aggregate mortgage loan payments to
investors, accounting for principal and interest payments, holding escrow
funds for payment of mortgage related expenses such as taxes and insurance,
making advances to cover delinquent payments, inspecting the mortgaged
premises as required, contacting delinquent mortgagors, supervising
foreclosures and property dispositions in the event of unremedied defaults,
and other miscellaneous duties related to loan administration. The Company
collects servicing fees from monthly mortgage payments generally ranging from
0.25% (i.e., 25 basis points) to 0.75% (i.e., 75 basis points) of the
declining principal balances of the loans per annum. At December 31, 1996 and
December 31, 1995, the weighted average servicing fee on the servicing for
others portfolio was 0.289% and 0.287%, respectively.

The Company services mortgage loans nationwide. The geographic distribution
of the Company's servicing portfolio reflects the national scope of the
Company's originations and loan acquisitions. The Company actively monitors
the geographic distribution of its servicing portfolio to maintain a mix that
it deems appropriate to balance its risks and makes adjustments as it deems
necessary. At December 31, 1996, the Company's servicing portfolio consisted
of $6.5 million of FHA/VA servicing and $4.7 billion of conventional servicing
(excluding sub servicing). Such amounts were in addition to loans serviced by
the Company which were recorded on its books as loans receivable (i.e.,
available for sale and held for investment).

The value of the Company's mortgage servicing rights ("MSRs"), is subject to
prepayment risk in the event that declining interest rates provide borrowers
with refinancing opportunities. At December 31, 1996 and December 31, 1995,
the amounts of the MSRs recorded on the Company's books were $30.1 million and
$28.0 million, respectively, and their estimated fair values were $54.0
million and $70.4 million, respectively. For further information, see Note 7
of Notes to Consolidated Financial Statements. During the year ended December

54
<PAGE>

31, 1996, the Company sold MSRs for gains amounting to $35.1 million. Also,
the Company occasionally enters into forward sale commitments of its MSRs.
During the year ended December 31, 1996, the Company sold $1.4 billion in MSRs
to a single purchaser, pursuant to a $2.0 billion commitment entered into on
October 31, 1995. In June 1996, the Company entered into a separate agreement
with another purchaser for the sale of $2.0 billion to $3.0 billion in MSRs.
Such agreement has a term through June 1997 and provides that the MSRs will be
sold at the end of each quarter in which the underlying loans are originated
(i.e., sold on a "flow basis"). In December 1996, the Company sold an
additional $2.3 billion in mortgage servicing rights that was not related to
any flow arrangement.

Gains on the sale of MSRs are affected by changes in interest rates as well
as the amount of MSRs capitalized at the time of the loan origination or
acquisition of MSRs. Purchasers of MSRs analyze a variety of factors,
including prepayment sensitivity, to assess the purchase price they are
willing to pay. Lower market interest rates prompt an increase in prepayments
as consumers refinance their mortgages at lower rates of interest. As
prepayments increase, the life of the servicing portfolio is reduced,
decreasing the servicing fee revenue that will be earned over the life of that
portfolio and the price third party purchasers are willing to pay. The fair
value of servicing is also influenced by the supply and demand of servicing
available for purchase at any point in time. Conversely, as interest rates
rise, prepayments generally decrease, resulting in an increase in the value of
the servicing portfolio as well as the gains on sales of MSRs.

The following table sets forth information regarding the mortgage loan
servicing portfolio.

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period........................... $6,788,530 $5,691,421
Add: Servicing acquisitions
Originated............................................. 563,355 87,370
Purchased.............................................. 5,070,190 4,133,015
---------- ----------
Total additions...................................... 5,633,545 4,220,385
---------- ----------
Less: Prepayments/amortizations.......................... 1,146,564 851,188
Sales(1)............................................... 6,473,930 2,272,088
---------- ----------
Total reductions..................................... 7,620,494 3,123,276
---------- ----------
Balance at end of period................................. $4,801,581 $6,788,530
========== ==========
Composition at end of period:
GNMA................................................... $ 6,458 $ 7,217
Fannie Mae/Freddie Mac................................. 4,658,056 6,638,435
Other Private.......................................... 137,067 142,878
---------- ----------
Subtotal............................................. 4,801,581 6,788,530
Subservicing on sold servicing rights(2)................. 3,619,373 536,324
---------- ----------
Total servicing for others........................... $8,420,954 $7,324,854
========== ==========
Loans receivable, net(3)............................. $1,110,836 $ 923,933
========== ==========
</TABLE>
- --------
(1) The actual release or transfer of servicing does not necessarily take
place during the same period as the related sale of MSRs.
(2) Reflects mortgage servicing rights sold by the Company but as to which the
purchaser has not yet taken delivery. The Company's costs of subservicing
are generally equivalent to the fees charged by the Company for this
service.
(3) Represents loans which the Company also services, including loans
available for sale.

55
<PAGE>

The Company originates and purchases MSRs nationwide. The geographic
distribution of the Company's MSR portfolio reflects the national scope of the
Company's mortgage loan originations and acquisitions. The ten largest states
accounted for 79.57% of the total number of mortgage loans serviced and 79.17%
of the dollar value of the mortgage loans serviced, at December 31, 1996,
while the largest volume by state was Michigan with 42.76% and 38.11% of the
mortgage loans serviced by number and value, respectively.

The Company's mortgage servicing portfolio includes servicing for adjustable
rate, balloon payment and fixed rate fully amortizing loans. At December 31,
1996, 13.5% of the mortgage servicing rights related to adjustable rate loans,
which had a weighted average coupon rate of 8.078%; 21.5% related to fixed
rate balloon payment loans, which had a weighted average coupon rate of
7.120%; and the remaining 65.0% related to fixed rate fully amortizing loans,
which had a weighted average coupon rate of 8.381%. At that date, the
Company's mortgage servicing portfolio had an aggregate weighted average
coupon rate of 8.069%. The following table sets forth, as of December 31,
1996, the percentage of fixed-rate, single-family mortgage loans being
serviced for others by the Company, by interest rate category.

<TABLE>
<CAPTION>
COUPON RANGE PERCENTAGE OF PORTFOLIO
------------ -----------------------
<S> <C>
Less than 7.00%................................. 4.88%
7.00--8.00%.................................... 18.16%
8.01--9.00%.................................... 61.55%
9.01--10.00%................................... 13.77%
10.01--11.00%................................... 1.39%
11.01--12.00%................................... 0.18%
12.01% & above.................................. 0.07%
------
100.00%
======
</TABLE>

The following table sets forth information regarding the mortgage loan
servicing portfolio, broken down by state.

<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-----------------------------------------------------------
NUMBER OF PERCENTAGE OF TOTAL PERCENTAGE OF
MORTGAGE LOANS NUMBER OF MORTGAGE TOTAL DOLLAR
SERVICED LOANS SERVICED AMOUNT AMOUNT
-------------- ------------------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Michigan........... 24,842 42.76% $1,829,500 38.11%
California......... 2,346 4.04% 334,500 6.97%
Ohio............... 4,210 7.25% 296,000 6.17%
Illinois........... 2,887 4.97% 286,700 5.97%
Florida............ 3,210 5.53% 232,600 4.84%
Texas.............. 2,872 4.94% 224,700 4.68%
Colorado........... 1,946 3.35% 201,300 4.19%
Maryland........... 1,449 2.49% 156,400 3.26%
Georgia............ 1,547 2.66% 126,200 2.63%
Washington......... 921 1.58% 112,900 2.35%
Virginia........... 872 1.50% 97,600 2.03%
New York........... 658 1.13% 68,200 1.42%
Oregon............. 582 1.00% 63,500 1.32%
Minnesota.......... 849 1.46% 63,500 1.32%
Indiana............ 815 1.40% 62,700 1.31%
Missouri........... 794 1.37% 53,900 1.12%
New Jersey......... 501 0.86% 53,100 1.11%
Utah............... 498 0.86% 50,000 1.04%
Wisconsin.......... 494 0.85% 39,300 0.82%
Tennessee.......... 567 0.98% 38,700 0.81%
Other.............. 5,239 9.02% 409,700 8.53%
------ ------ ---------- ------
Total............ 58,099 100.00% $4,801,000 100.00%
====== ====== ========== ======
</TABLE>

56
<PAGE>

At December 31, 1996, the Company was servicing 58,099 loans with an
aggregate unpaid principal balance of $4.8 billion (excluding subservicing).
Of such loans, 3.28% were delinquent and an additional 0.88% were in
foreclosure. The following table presents certain information regarding the
percentage of delinquent single family mortgage loans as of the dates
indicated.

<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
30--59 Days Past Due....................................... 2.52% 1.77% 0.81%
60--89 Days Past Due....................................... 0.51% 0.24% 0.09%
90+ days Past Due.......................................... 0.25% 0.14% 0.02%
Loans in foreclosure....................................... 0.88% 0.40% 0.23%
----- ----- -----
Total.................................................. 4.16% 2.55% 1.15%
===== ===== =====
</TABLE>

The Company is materially affected by loan delinquencies and defaults on
loans that it services for others. Under a portion of its servicing contracts,
the Company must advance all or part of the scheduled payments to the owner of
the loan, even when loan payments are delinquent. At December 31, 1996, the
Company's delinquency rates on loans serviced for Freddie Mac and Fannie Mae
were 3.46% and 4.88%, respectively. Also, to protect their liens on mortgage
properties, owners of loans usually require a servicer to advance scheduled
mortgage and hazard insurance and tax payments even if sufficient escrow funds
are not available. The Company is generally reimbursed by the mortgage owner
or from liquidation proceeds for payments advanced that the servicer is unable
to recover from the mortgagor, although the timing of such reimbursement is
typically uncertain. In the interim, the Company absorbs the cost of funds
advanced during the time the advance is outstanding. Further, the Company
bears the costs of collection activities on delinquent and defaulted loans.

FUNDING SOURCES

The Company funds its operations through its retail deposit base, brokered
deposits, the funds available in escrow accounts held in connection with its
mortgage loan servicing operations, and FHLB advances. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources." Following the Offering, the Company intends
to continue to rely upon these sources of funds, in addition to the net
proceeds received by it from the Offering, to finance its operations.

Deposits are a significant source of the Company's funds for lending,
investment activities and general operational purposes. In addition to
deposits, the Company derives funds from loan principal and interest
repayments, sales of loans, mortgage loan servicing income and sales of
mortgage servicing rights.

The Company attracts deposits principally from its primary market area in
southern Michigan by offering a variety of deposit instruments, including
checking accounts, money market accounts, regular savings accounts and
certificates of deposit. Deposit terms vary according to the minimum balance
required and the interest rate. Maturities, terms, service fees and withdrawal
fees are established on a periodic basis. Management of the Company generally
reviews its deposit mix and pricing on a daily basis. In determining the
characteristics of its deposit accounts, the Company considers the rates
offered by competing institutions in the Company's market areas, the
acquisition of brokered funds, liquidity requirements, growth goals and
federal regulations.

The Company competes for deposits with other institutions in its market area
and nationwide (through print advertisements and a commercial wire service) by
offering deposit instruments that are competitively priced and by providing
customer service through convenient and attractive offices, knowledgeable and
efficient staff and hours of service that meet customers' needs. Most of the
Company's depositors are Michigan residents.

57
<PAGE>

Among deposits which the Company attracts and retains are brokered deposits,
which are pools of deposits purchased from a broker acting as an agent for
depositors seeking the highest certificate of deposit rates offered by insured
financial institutions. At December 31, 1996, the Company had $500.6 million
in certificates of deposit, of which $212.6 million, or 42.5%, were brokered
deposits. Because brokered deposits are inherently interest-rate sensitive,
the Company is subject to the risk of a significant outflow of funds in the
event of a sudden increase in interest rates. Further, the Company's net
earnings may be adversely affected by attempts by the Company to match
interest rates to stem any such outflow of funds. The Company believes that
this risk is appropriately mitigated by the availability of its $425.0 million
FHLB line of credit at December 31, 1996 (increased to $650 million as of
February 1997), as to which its maximum outstanding month-end balance for the
year ended December 31, 1996 was $389.8 million. A FHLB line of credit is
adjusted quarterly and is generally computed as 50% of an institution's total
assets, less outstanding FHLB advances. Based upon the Company's current cost
of its funds, the Company does not believe that reliance on the FHLB as a
short-term replacement funding source would have a significant adverse effect
on its financial condition. For the year ended December 31, 1996, the average
cost of funds for the Company's deposits, including brokered deposits, and its
FHLB advances were 5.51% and 5.78%, respectively. Further, the Company
believes its reliance on brokered funds will diminish as the Company develops
its retail deposit base through its existing and future branch network.

The following table sets forth by account types the aggregate amount and
weighted average rate of the Company's deposits.

<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Transaction Accounts:
Non-interest-bearing
deposits.............. $ 36,688 --% $ 10,927 --% $ 12,818 --%
Interest-bearing depos-
its................... 29,973 3.56% 29,239 3.05% 49,226 2.96%
-------- -------- --------
Subtotal............. 66,661 1.60% 40,166 2.22% 62,044 2.35%
Savings accounts......... 57,211 4.30% 38,094 2.25% 9,744 2.25%
Certificates of deposit.. 500,613 5.95% 448,714 6.27% 235,836 5.47%
-------- -------- --------
Total deposits....... $624,485 5.34% $526,974 5.73% $307,624 4.74%
======== ==== ======== ==== ======== ====
</TABLE>

The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of December 31, 1996.

<TABLE>
<CAPTION>
MATURITY PERIOD CERTIFICATES OF DEPOSIT
--------------- -----------------------
(IN THOUSANDS)
<S> <C>
Three months or less............................... $142,516
Over three through six months...................... 128,583
Over six through 12 months......................... 141,378
Over 12 months..................................... 88,136
--------
Total............................................ $500,613
========
</TABLE>

The Company considers all its certificates of deposit to be highly interest-
rate sensitive regardless of amount.

Deposits have historically been the primary source of funds for the
Company's lending and general operating activities. However, the Company also
utilizes the FHLB to provide both short-term and long-term borrowings and also
relies to a limited extent on short-term reverse repurchases of pools of
single-family mortgage loans for advance funding of securitized loans.

58
<PAGE>

The Company's principal source of borrowings has been FHLB advances. The
Company is authorized to use advances from the FHLB to supplement its supply
of funds and to satisfy deposit withdrawal requirements. The Federal Home Loan
Bank System functions as a twelve-bank central reserve bank providing credit
for savings institutions and certain other member financial institutions. As a
member of the Federal Home Loan Bank System, the Company is required to own
stock in the FHLB and is authorized to apply for advances, which are made
pursuant to several different programs with their own interest rates and range
of maturities. Advances from the FHLB are secured by the Company's stock in
the FHLB and a portion of the Company's mortgage loan portfolio.

The following table sets forth certain information regarding the borrowings
of the Company as of or for the period indicated.

<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB Advances
Balance outstanding at period-end.. $ 389,801 $ 191,156 $200,750
Maximum outstanding at any month-
end............................... $ 389,801 $ 315,000 $200,750
Monthly average balance............ $ 247,204 $ 237,535 $ 83,912
Average interest rate.............. 5.78% 6.35% 4.44%
</TABLE>

See Note 9 of Notes to Consolidated Financial Statements for additional
information.

EMPLOYEES

As of December 31, 1996, the Company and its subsidiaries had 1,310 full-
time equivalent employees, none of whom were represented by a collective
bargaining agreement. Management of the Company and the Bank considers their
relationship with such employees to be satisfactory.

PROPERTIES

The Company's principal executive offices are located at 2600 Telegraph
Road, Bloomfield Hills, Michigan 48302 in leased facilities. At December 31,
1996, the Company maintained 15 bank branches, 41 retail loan origination
offices, 10 regional wholesale/correspondent lending offices, nine
wholesale/correspondent satellite offices, a mortgage loan servicing center,
and three corporate operations offices. Other than six of the bank branches
and one of the retail loan origination offices, the Company or the Bank leased
their operating premises. In January 1997, the Company acquired one of the
leased premises which was serving at the time as its retail banking
headquarters and as a bank branch. See Note 6 of Notes to Consolidated
Financial Statements. From December 1996 through March 1997, the Company
entered into eleven agreements to lease or acquire property to be used for
future bank branch locations in Michigan in connection with the Company's
overall plan for expansion of its retail banking operations. See "Business--
Business Strategy."

SUBSIDIARY ACTIVITIES

The Company conducts business through a number of wholly-owned subsidiaries
in addition to the Bank. The additional subsidiaries of the Company include
Douglas Insurance Agency, Inc. ("DIA"), FSSB Real Estate Development
Corporation ("REDC"), Mortgage Video Network, Inc. ("Video") and First
Security Investment Group, Inc. ("Investment"). Of the additional
subsidiaries, DIA, REDC and Investment are presently active. DIA acts as an
agent for life insurance and property and casualty insurance companies. REDC
owns a single parcel of undeveloped commercial real estate in northern Oakland
County, Michigan which it currently has a contract to sell. REDC does not
conduct any other business.

The Bank, the Company's primary subsidiary, is a federally chartered, stock
savings bank headquartered in Bloomfield Hills, Michigan. The Bank owns five
subsidiaries: FSSB Mortgage Corporation ("Mortgage"), Boston Credit
Corporation ("BCC"), Mortgage Affiliated Services, Inc. ("MAS"), Mid-Michigan
Service

59
<PAGE>

Corporation ("Mid-Michigan") and SSB Funding Corporation ("Funding").
Mortgage, BCC and Funding are currently inactive subsidiaries. MAS provides
appraisal and document preparation services, primarily in conjunction with the
Bank's loan closings. Mid-Michigan is engaged in the business of leasing and
sub-leasing commercial real estate. Mid-Michigan leases the premises of the
Bank's regional headquarters located in Jackson, Michigan from a third party
and subleases the premises to the Bank.

LEGAL PROCEEDINGS

From time to time, the Company and its subsidiaries are parties to various
legal proceedings incident to its business. At December 31, 1996, there were
no legal proceedings which management anticipates would have a material
adverse effect on the Company. See Note 12 of Notes to Consolidated Financial
Statements.

60
<PAGE>

REGULATION

GENERAL

The Bank is chartered as a federal savings bank under the Home Owners' Loan
Act, as amended (the "HOLA"), which is implemented by regulations adopted and
administered by the OTS. As a federal savings bank, the Bank is subject to
regulation, supervision and regular examination by the OTS. Federal banking
laws and regulations control, among other things, the Bank's required
reserves, investments, loans, mergers and consolidations, payment of dividends
and other aspects of the Bank's operations. The deposits of the Bank are
insured by the SAIF administered by the FDIC to the maximum extent provided by
law ($100,000 for each depositor). In addition, the FDIC has certain
regulatory and examination authority over OTS-regulated savings institutions
and may recommend enforcement actions against savings institutions to the OTS.
The supervision and regulation of the Bank is intended primarily for the
protection of the deposit insurance fund and the Bank's depositors rather than
for holders of the Company's stock or for the Company as the holder of the
stock of the Bank.

As a savings and loan holding company, the Company is registered with and is
subject to OTS regulation and supervision under the HOLA. The Company also is
required to file certain reports with, and otherwise comply with the rules and
regulations of, the Commission under the federal securities laws.

The following discussion is intended to be a summary of certain statutes,
rules and regulations affecting the Bank and the Company. A number of other
statutes and regulations have an impact on their operations. The following
summary of applicable statutes and regulations does not purport to be complete
and is qualified in its entirety by reference to such statutes and
regulations.

REGULATION AND SUPERVISION OF THE BANK

PROPOSED LEGISLATION. Legislation introduced in the United States Congress
in 1997 would, if enacted, require all federal savings institutions (such as
the Bank) to convert to a national bank or a state commercial bank, savings
bank or savings association charter and would require all savings and loan
holding companies (such as the Company) to become bank holding companies or
"financial services" holding companies. The proposed legislation includes
limited grandfather provisions for business activities of federal savings
institutions that do not conform to applicable banking regulations. Holding
companies that were formerly savings and loan holding companies would not be
subject to any additional activity restrictions so long as their subsidiaries
continued to comply with certain lending restrictions currently applicable to
federal thrifts and were not acquired by another company.

In addition, the Deposit Insurance Funds Act of 1996, enacted on September
30, 1996, requires the Secretary of the Treasury to submit a report to the
Congress by March 31, 1997, providing a detailed analysis of the issues
related to and recommendations for a common charter for savings institutions
and banks. It is anticipated that further legislation affecting the federal
thrift charter will be introduced simultaneously with or shortly after
submission of the Treasury report.

Based upon an analysis of the current provisions of the legislation proposed
to date, the management of the Company does not believe that the enactment of
such legislation would have a material adverse effect on its financial
condition or results of operations.

BUSINESS ACTIVITIES. The Bank derives its lending and investment powers from
the HOLA and the regulations of the OTS thereunder. Under these laws and
regulations, the Bank may invest in mortgage loans secured by residential and
commercial real estate, commercial and consumer loans, certain types of
commercial paper and debt securities, and certain other assets. The Bank may
also establish service corporations that may engage in activities not
otherwise permissible for the Bank, including certain real estate equity
investments and securities and insurance brokerage. These investment powers
are subject to various limitations.

61
<PAGE>

REGULATORY CAPITAL AND RESERVE REQUIREMENTS. The OTS has adopted capital
adequacy regulations that require savings institutions such as the Bank to
meet three minimum capital standards: a "core" capital requirement of 3% of
adjusted total assets, a "tangible" capital requirement of 1.5% of adjusted
total assets, and a "risk-based" capital requirement of 8% of total risk-based
capital to total risk-weighted assets. In addition, the OTS has adopted
regulations imposing certain restrictions on savings institutions that have a
total risk-based capital ratio of less than 8%, a ratio of Tier 1 capital to
risk-weighted assets of less than 4% or a ratio of Tier 1 capital to total
assets of less than 4% (or 3% if the institution is rated Composite 1 under
the CAMEL examination rating system). See "--Prompt Corrective Regulatory
Action."

Certain MSRs need not be deducted in computing core and tangible capital.
Generally, the lower of 90% of the fair market value of readily marketable
MSRs, or the current unamortized book value as determined under GAAP may be
included in core and tangible capital up to a maximum of 50% of core capital
computed before the deduction of any disallowed qualifying intangible assets.
At December 31, 1996, the Bank's core capital included $35.9 million of core
deposit intangibles and MSRs, which comprised 46.1% of its core capital.

The risk-based capital requirement is measured against risk-weighted assets,
which equal the sum of each asset and the credit-equivalent amount of each
off-balance sheet item after being multiplied by an assigned risk weight,
which range from 0% to 100% as assigned by the OTS capital regulations based
on the risks the OTS believes are inherent in the type of asset. Comparable
risk weights are assigned to off-balance sheet assets.

The OTS risk-based capital regulation also includes an IRR component that
requires savings institutions with greater than normal IRR, when determining
compliance with the risk-based capital requirements, to maintain additional
total capital. The OTS has, however, indefinitely deferred enforcement of its
IRR requirements.

The table below sets forth the Bank's compliance with its regulatory capital
requirements at December 31, 1996.

<TABLE>
<CAPTION>
THE BANK'S CAPITAL CAPITAL REQUIREMENTS EXCESS CAPITAL
-------------------- ---------------------- ---------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- --------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital........ $ 72,094 5.58% $ 19,365 1.50% $52,729 4.08%
Core capital............ 77,899 6.01% 38,904 3.00% 38,995 3.01%
Total risk-based
capital................ 81,086 10.91% 59,458 8.00% 21,628 2.91%
</TABLE>

Pursuant to regulations of the Federal Reserve Board, all FDIC-insured
depository institutions must maintain average daily reserves against their
transaction accounts. No reserves are required to be maintained on the first
$4.3 million of transaction accounts, and reserves equal to 3% must be
maintained on the next $52.0 million of transaction accounts, plus reserves
equal to 10% on the remainder. These percentages are subject to adjustment by
the Federal Reserve Board. Because required reserves must be maintained in the
form of vault cash or in a non-interest-bearing account at a Federal Reserve
Bank, the effect of the reserve requirement is to reduce the amount of the
institution's interest-earning assets. As of December 31, 1996, the Bank met
its reserve requirements.

FEDERAL DEPOSIT INSURANCE. The Bank is required to pay assessments based on
a percentage of its insured deposits to the FDIC for insurance of its deposits
by the SAIF.

Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), the FDIC established a risk-based assessment system for
determining the deposit insurance assessments to be paid by insured depository
institutions. The assessment rate depends on the capital category and
supervisory category to which an institution is assigned. For the first nine
months of 1996, the assessment rate for SAIF-insured institutions ranged from
0.23% of deposits for well-capitalized institutions in the highest supervisory
subgroup, to 0.31% of deposits for undercapitalized institutions in the lowest
supervisory subgroup. The Bank was a "well-capitalized" institution as of
December 31, 1996.

62
<PAGE>

In late 1995, the FDIC amended the risk-based assessment schedule for
depository institutions with deposits insured by the Bank Insurance Fund
("BIF"), resulting in a significant reduction in FDIC assessments for BIF-
insured but not SAIF-insured institutions. In response to this assessment
disparity, the Deposit Insurance Funds Act of 1996 (the "1996 Act"), enacted
on September 30, 1996, amended the Federal Deposit Insurance Act (the "FDI
Act") in several ways to recapitalize the SAIF and reduce the disparity
between the assessment rates for the BIF and the SAIF. The 1996 Act authorized
the FDIC to impose a special assessment on all institutions with SAIF-
assessable deposits in the amount necessary to recapitalize the SAIF to the
required reserve ratio of 1.25%. SAIF-insured institutions on November 27,
1996 paid a special assessment equal to 65.7 basis points per $100 of each
institution's SAIF-assessable deposits as of March 31, 1995. The 1996 Act
provides the amount of the special assessment that will be deductible for
federal income tax purposes for the taxable year in which the special
assessment is paid. Based on the foregoing, the Bank recorded an expense for
the special assessment in 1996 of $3.4 million, or $2.2 million net of tax. In
view of the recapitalization of the SAIF, in December 1996 the FDIC reduced
the assessment rate for SAIF-assessable deposits for periods beginning on
October 1, 1996. As a result, the insurance assessment rates for SAIF-insured
institutions, like the Bank, were set at 18 to 27 basis points for the last
quarter of 1996 and zero to 27 basis points for the first half of 1997. In
addition, SAIF-insured institutions will be required, until December 31, 1999,
to pay assessments to the FDIC at the annual rate of 6.6 basis points to help
fund interest payments on certain bonds issued by the Financing Corporation
("FICO"), an agency of the federal government established to recapitalize the
predecessor to the SAIF. During this period, BIF member banks will be assessed
for payment of the FICO obligations at the annual rate of 1.3 basis points.
After December 31, 1999, BIF and SAIF members will be assessed at the same
rate for FICO obligations.

The 1996 Act also provides that the FDIC cannot assess regular insurance
assessments for the SAIF or the BIF unless required to maintain or to achieve
the designated reserve ratio of 1.25%, except for such assessments on those
institutions that are not classified as "well-capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational
or compliance weaknesses. The Bank is classified as "well-capitalized" and has
not been found by the OTS to have such supervisory weaknesses. Accordingly,
assuming that the designated reserve ratio is maintained by the SAIF after the
collection of the special SAIF assessment, the Bank, as long as it maintains
its capital and supervisory status, will pay substantially lower FDIC
assessments compared to those paid by the Bank in recent years.

QUALIFIED THRIFT LENDER TEST. The HOLA and OTS regulations require all
savings institutions to meet a Qualified Thrift Lender ("QTL") test. Under the
HOLA's QTL test, a savings institution is required to maintain at least 65% of
its "portfolio assets" in certain "Qualified Thrift Investments" in at least
nine months of the most recent 12-month period. Under OTS implementing
regulations, portfolio assets are defined as total assets less intangibles,
property used by a savings institution in its business and liquidity
investments in an amount not exceeding 20% of assets. Qualified Thrift
Investments consist of (i) loans, equity positions or securities related to
domestic, residential real estate or manufactured housing and (ii) 50% of the
dollar amount of residential mortgage loans subject to sale under certain
conditions. In addition, subject to a 20% of portfolio assets limit, savings
institutions are able to treat as Qualified Thrift Investments 200% of their
investments in loans to finance "starter homes" and loans for construction,
development or improvement of housing and community service facilities or for
financing small business in "credit needy" areas.

A savings institution that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. An
initial failure to qualify as a QTL results in a number of sanctions,
including the imposition of certain operating restrictions and a restriction
on obtaining additional advances from its Federal Home Loan Bank. If a savings
institution does not requalify under the QTL test within the three-year period
after it fails the QTL test, it would be required to terminate any activity
not permissible for a national bank and repay as promptly as possible any
outstanding advances from its Federal Home Loan Bank. In addition, the holding
company of such an institution, such as the Company, would similarly be
required to register as a bank holding company with the Federal Reserve Board.
See "--Regulation and Supervision of the Company." At December 31, 1996, the
Bank qualified as a QTL.

63
<PAGE>

Legislation enacted into law on September 30, 1996 made certain amendments
to the HOLA that significantly liberalize the QTL test. First, the new law
permits loans to small businesses, student loans and credit card loans to be
counted as Qualified Thrift Investments without percentage limits. The current
10% limit on all other loans to households is eliminated by the new law, and
such loans may now be counted toward the QTL test within the 20% of portfolio
assets limit. Second, the statute amends the QTL test to provide that a
savings institution may be considered a QTL either (i) by satisfying the
HOLA's QTL requirements or (ii) by qualifying as a "domestic building and loan
association" as defined under the Internal Revenue Code of 1986, as amended
(the "Code"). In order for a savings institution to be defined as a domestic
building and loan association under the Code, at least 60% of its total assets
must consist of: (a) cash; (b) obligations of the United States, a state or a
political subdivision thereof or obligations of a corporation that is an
instrumentality of any of the foregoing, except for certain obligations the
interest on which is excludable from gross income; (c) obligations of a state-
chartered deposit insurance corporation; (d) loans secured by deposits in the
institution; (e) loans secured by, or for the improvement of, residential real
property or real property used for church purposes; (f) loans secured by, or
for the improvement of, urban real property qualifying under specified federal
government programs; (g) loans secured by an interest in educational, health
or welfare institutions or facilities; (h) property acquired through the
liquidation of defaulted loans described in clauses (e), (f) or (g); (i)
educational loans; (j) property used by the institution in the conduct of its
business and (k) most interests in real estate mortgage investment conduits.

STANDARDS FOR SAFETY AND SOUNDNESS. The FDI Act, as amended by FDICIA and
the Riegle Community Development and Regulatory Improvement Act of 1994,
requires the OTS, together with the other federal bank regulatory agencies, to
prescribe standards, by regulation or guideline, relating to internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate risk exposure, asset growth, asset quality,
earnings, stock valuation, and compensation, fees and benefits and such other
operational and managerial standards as the agencies deem appropriate. The OTS
and the federal bank regulatory agencies adopted, effective August 9, 1995, a
set of guidelines prescribing safety and soundness standards pursuant to the
statute. The safety and soundness guidelines establish general standards
relating to internal controls and information systems, internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth,
and compensation, fees and benefits. In general, the guidelines require, among
other things, appropriate systems and practices to identify and manage the
risks and exposures specified in the guidelines. The guidelines prohibit
excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal stockholder.

In addition, on July 10, 1995, the OTS and the federal bank regulatory
agencies proposed guidelines for asset quality and earnings standards. Under
the proposed standards, a savings institution would be required to maintain
systems, commensurate with its size and the nature and scope of its
operations, to identify problem assets and prevent deterioration in those
assets as well as to evaluate and monitor earnings and ensure that earnings
are sufficient to maintain adequate capital and reserves. Management believes
that the asset quality and earnings standards, in the form proposed by banking
agencies, would not have a material effect on the operations of the Bank.

PROMPT CORRECTIVE REGULATORY ACTION. Under FDICIA, the federal banking
regulators are required to take prompt corrective action in respect of
depository institutions that do not meet certain minimum capital requirements,
including a leverage limit and a risk-based capital requirement. All
institutions, regardless of their capital levels, are restricted from making
any capital distribution or paying any management fees that would cause the
institution to become undercapitalized. As required by FDICIA, banking
regulators, including the OTS, have issued regulations that classify insured
depository institutions by capital levels and provide that the applicable
agency will take various prompt corrective actions to resolve the problems of
any institution that fails to satisfy the capital standards.

LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulations currently impose
limitations upon capital distributions by savings institutions, such as cash
dividends, payments to repurchase or otherwise acquire its

64
<PAGE>

shares, payments to stockholders of another institution in a cash-out merger
and other distributions charged against capital. A savings institution must
give notice to the OTS at least 30 days before payment of a proposed capital
distribution, and capital distributions in excess of specified earnings or by
certain institutions are subject to approval by the OTS. A savings institution
that has capital in excess of all regulatory capital requirements before and
after a proposed capital distribution and that is not otherwise restricted in
making capital distributions, may, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year equal to the
greater of (a) 100% of its net earnings to date during the calendar year plus
the amount that would reduce by one-half its "surplus capital ratio" (the
excess capital over its fully phased-in capital requirements) at the beginning
of the calendar year, or (b) 75% of its net earnings for the previous four
quarters. Any additional capital distributions would require prior OTS
approval. The OTS has proposed regulations that would simplify the existing
procedures governing capital distributions by savings institutions.

In addition to the foregoing, earnings of the Bank appropriated to bad debt
reserves and deducted for federal income tax purposes are not available for
payment of dividends or other distributions to the Company without payment of
taxes at the then current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions.

REAL ESTATE LENDING STANDARDS. Under joint regulations of the federal
banking agencies, including the OTS, savings institutions must adopt and
maintain written policies that establish appropriate limits and standards for
extensions of credit that are secured by liens or interests in real estate or
are made for the purpose of financing permanent improvements to real estate.
These policies must establish loan portfolio diversification standards,
prudent underwriting standards, including loan-to-value limits, that are clear
and measurable, loan administration procedures and documentation, approval and
reporting requirements. An institution's real estate lending policy must
reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies (the "Interagency Guidelines") that have been adopted by the federal
bank regulators. The Interagency Guidelines, among other things, call upon
depository institutions to establish internal loan-to-value limits for real
estate loans that are not in excess of the loan-to-value limits specified in
the Interagency Guidelines for the various types of real estate loans. The
Interagency Guidelines state that it may be appropriate in individual cases to
originate or purchase loans with loan-to-value ratios in excess of the
supervisory loan-to-value limits.

FEDERAL CONSUMER CREDIT AND NON-DISCRIMINATION REGULATION. The Company's
mortgage lending activities are subject to the provisions of various federal
and state statutes, including, among others, the Truth in Lending Act, the
Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act, the
Fair Housing Act and the regulations promulgated thereunder. These statutes
and regulations, among other things, prohibit discrimination on the basis of
race, gender or other designated characteristics, prohibit unfair and
deceptive trade practices, require the disclosure of certain basic information
to mortgage borrowers concerning credit terms and settlement costs, and
otherwise regulate terms and conditions of credit and the procedures by which
credit is offered and administered. Each of the foregoing statutes provides
for various administrative, civil and, in limited circumstances, criminal
enforcement procedures, and violations thereof may also lead to class actions
seeking actual and/or punitive damages.

The Bank attempts in good faith to comply with the provisions of these
statutes and their implementing regulations, however, the provisions are
complex and even inadvertent non-compliance could result in liability to the
Bank. The Bank currently has a staff of 40 persons in the consumer compliance
area, including many with extensive experience and/or training, and has
devoted significant resources to attempt to assure that the lending activities
continue to demonstrate material compliance with all applicable statutes,
regulations and rules. During the past several years numerous individual
claims, purported class actions and federal enforcement proceedings have been
commenced against a number of financial institutions alleging that one or more
of these provisions have been violated. While the Bank has incurred no
material detriment as a result of these actions, there can be no assurance
that one or more aspects of its lending program will not be found to have been
in violation of these statutes.

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<PAGE>

TRANSACTIONS WITH AFFILIATES. The Bank is subject to restrictions imposed by
federal law on extensions of credit to, and certain other transactions with,
the Company and other affiliates, and on investments in the stock or other
securities thereof. Such restrictions prevent the Company and such other
affiliates from borrowing from the Bank unless the loans are secured by
specified collateral, and require such transactions to have terms comparable
to terms of arms-length transactions with third persons. Further, such secured
loans and other transactions and investments by the Bank are generally limited
in amount as to the Company and as to any other affiliate to 10% of the Bank's
capital and surplus and as to the Company and all other affiliates to an
aggregate of 20% of the Bank's capital and surplus. These regulations and
restrictions may limit the Company's ability to obtain funds from the Bank for
its cash needs, including funds for acquisitions and for payment of dividends,
interest and operating expenses. The Bank's ability to extend credit to its
directors, executive officers, and 10% stockholders, as well as to entities
controlled by such persons, is governed by the requirements of Sections 22(g)
and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve
Board thereunder.

LIQUIDITY REQUIREMENTS. The Bank is required by OTS regulation to maintain
an average daily balance of liquid assets (cash, certain time deposits,
bankers' acceptances, highly rated corporate debt and commercial paper,
securities of certain mutual funds, and specified United States government,
state or federal agency obligations) equal to the monthly average of not less
than a specified percentage (currently 5%) of its net withdrawable savings
deposits plus short-term borrowings. The average daily liquidity ratio of the
Bank for the month ended December 31, 1996 was 21.5%. The Bank is also
required to maintain average daily balances of short-term liquid assets at a
specified percentage (currently 1%) of the total of its net withdrawable
savings accounts and borrowings payable in one year or less. The Bank was in
compliance with the 1% requirement at December 31, 1996. Monetary penalties
may be imposed for failure to meet liquidity requirements.

BRANCHING. Subject to certain limitations, the HOLA and the OTS regulations
currently permit federally chartered savings institutions such as the Bank to
establish branches in any state of the United States. The authority to
establish such branches is available (a) in states that expressly authorize
branches of savings institutions located in another state or (b) to a federal
savings institution that qualifies as a "domestic building and loan
association" under the Code. See "--Qualified Thrift Lender Test." The
authority for a federal savings institution to establish an interstate branch
network would facilitate a geographic diversification of the institution's
activities. This authority under the HOLA and the OTS regulations preempts any
state law purporting to regulate branching by federal savings institutions.
However, recently proposed federal legislation could, if enacted, restrict the
Bank's ability to open branches in states other than Michigan.

FEDERAL HOME LOAN BANK SYSTEM. The Federal Home Loan Bank System consists of
12 district Federal Home Loan Banks subject to supervision and regulation by
the Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks
provide a central credit facility primarily for member institutions. As a
member of the FHLB, the Bank is required to acquire and hold shares of capital
stock in the FHLB in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Bank was in compliance
with this requirement, with an investment in FHLB stock at December 31, 1996
of $19.7 million. Long-term FHLB advances may only be made for the purpose of
providing funds for residential housing finance. At December 31, 1996, the
Bank had total advances of $389.8 million outstanding from the FHLB.

REGULATION AND SUPERVISION OF THE COMPANY

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

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<PAGE>

Under the HOLA, a savings and loan holding company may not (i) acquire, with
certain exceptions, more than 5% of a non-subsidiary savings institution or a
non-subsidiary savings and loan holding company; or (ii) acquire or retain
control of a depository institution that is not insured by the FDIC.

As a unitary savings and loan holding company, the Company generally is not
subject to any restriction as to the types of business activities in which it
may engage, provided that the Bank continues to satisfy the QTL test. See "--
Regulation and Supervision of the Bank--Qualified Thrift Lender Test." Upon
any non-supervisory acquisition by the Company of another savings institution
that is held as a separate subsidiary, the Company would become a multiple
savings and loan holding company and would be subject to limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under the Bank Holding Company Act, subject to the prior approval of
the OTS, and to other activities authorized by OTS regulation.

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<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The Board of Directors of the Company currently consists of the same
individuals who serve as directors of the Bank. The Board of Directors of the
Company is divided into three classes. Directors of the Company each serve for
three year terms or until their successors are elected and qualified, with
one-third of the directors being elected at each annual meeting of
shareholders. The term of each director of the Company expires at the same
time as such person's term as a director of the Bank. Messrs. Bortels, Ellman,
Nichols and Bazzy and Ms. McGuire have submitted their resignations as members
of the Board of Directors of the Company effective upon consummation of the
Offering. They will remain directors of the Bank. Messrs. Elsea, Isbister,
Kersten, Kojaian and Carrie have been elected to replace such resigning
directors, effective upon consummation of the Offering. See "--Newly Elected
Directors."

The executive officers of the Company also serve as executive officers of
the Bank. Since the formation of the Company, none of the Company's executive
officers or directors have received compensation from the Company in their
capacity as such.

The following table sets forth the name, age and position with the Company
of each person who is an executive officer or director of the Company or a
newly elected director and also sets forth the expiration of each director's
term.

<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE(1) POSITION WITH THE COMPANY TO EXPIRE
- ---- ------ ------------------------- -------------
<S> <C> <C> <C>
Thomas J. Hammond....... 53 Chairman and Chief Executive Officer 1999
Mark T. Hammond......... 31 Vice Chairman and President 1998
Joan H. Anderson........ 46 Director and Executive Vice
President 1999
Mary Kay McGuire........ 40 Director, Senior Vice President and 2000
Secretary
Ronald I. Nichols, 62 Director
Sr. ................... 2000
James D. Coleman........ 49 Director 2000
Charles Bazzy........... 67 Director 1998
William B. Bortels...... 62 Director 1998
Harry S. Ellman......... 49 Director 1999
NEWLY ELECTED DIRECTORS:
Richard S. Elsea........ 67 Director 2000
James D. Isbister....... 59 Director 1998
John Kersten............ 55 Director 1998
C. Michael Kojaian...... 35 Director 1999
Michael W. Carrie....... 42 Director, Executive Vice President 2000
and Chief Financial Officer
</TABLE>
- --------
(1) As of December 31, 1996

The following sets forth the business experience and other information for
each of the current directors of the Company.

THOMAS J. HAMMOND has served as Chairman of the Board of Directors and Chief
Executive Officer of the Company since its formation in 1993 and served as
President from 1993 to January 1997. He has served as Chairman of the Board of
Directors and Chief Executive Officer of the Bank since the Bank's formation
in 1987 and served as President of the Bank from 1987 to September 1995. Mr.
Hammond has over 29 years of experience in the mortgage lending industry.
After earning a BSBA and an MBA in finance, Mr. Hammond

68
<PAGE>

began his career as a Staff Financial Analyst for Ford Motor Company in 1966.
Prior to founding the Bank in 1987, Mr. Hammond formed and managed a series of
companies in the financial services industry, including Hammond Mortgage
Corporation, Seller's & Homeowner's Uniform Receipt of Equity, Inc. and First
Security Mortgage Corporation (formerly known as Oak Hills Mortgage
Corporation) dating back to 1969. Mr. Hammond founded Hammond Mortgage
Corporation, a residential mortgage brokerage firm, in 1969. This company did
business nationwide and operated branches in eight different states and was
one of the country's largest FHA mortgage lenders prior to being sold to
Michigan National Bank in 1981. It eventually became known as Independence One
and is now part of Norwest Mortgage, Inc. Mr. Hammond is the father of Mark T.
Hammond, the Vice Chairman and President of the Company and the Bank.

MARK T. HAMMOND has been Vice-Chairman of the Board of Directors and
President of the Company since January 1997. Previously, Mr. Hammond served as
the Company's Vice President from its formation in 1993 through April 1994 and
then as its Executive Vice President from April 1994 through January 1997. He
has also served as President of the Bank since September 1995. He has served
as a member of the Bank's Board of Directors since 1991 and as its Vice
Chairman since 1993. He has also served as Executive Vice President of the
Bank from 1991 to September 1995 in charge of mortgage operations, wholesale
lending and construction lending. From 1989 to 1991, he served as the Bank's
Senior Vice President in charge of secondary marketing and mortgage
production. Mr. Hammond was a loan officer in 1987 for the Bank, worked part-
time in the financial services industry from 1982 to 1986 and is a graduate of
Wharton Business School. Mr. Hammond was responsible for the national
expansion of the Bank's loan production offices and has played a lead role in
the development and implementation of new technology for the Bank. Mr. Hammond
recently served on one of Fannie Mae's regional advisory councils. Mr. Hammond
is the son of Thomas J. Hammond, the Chairman and Chief Executive Officer of
the Company and the Bank.

JOAN H. ANDERSON has been Executive Vice President of the Company since
1994. She has been a Director of the Company since January 1997 and a Director
of the Bank since 1987. She also serves as the Bank's Executive Vice President
in charge of mortgage loan servicing, collections and real estate holdings, a
position she has occupied since 1988. Ms. Anderson served as a Senior Vice
President of the Bank from 1987 to 1988. Prior to that time, she held various
positions with mortgage lending companies owned by Thomas J. Hammond and has
worked in the financial services industry since 1970.

MARY KAY MCGUIRE has been Secretary of the Company since its formation in
1993 and has been a Senior Vice President of the Company since 1994. She has
been a Director of the Company since January 1997 and a Director of the Bank
since September 1987. She has also served as the Bank's Secretary since its
formation in 1987, and Senior Vice President of the Bank in charge of human
resources, purchasing and facilities management since 1988 and advertising
since 1996. She also served as a Vice President of the Bank from 1987 to 1988.
Prior to that time, Ms. McGuire served with Mr. Thomas Hammond since 1977 and
has worked in the financial services industry since 1974.

RONALD I. NICHOLS, SR. has served as a Director of the Company since its
formation in 1993 and as a Director of the Bank since 1988. He has been
President of Nichols Sales Associates, Inc. located in Bloomfield Hills,
Michigan since 1969.

DR. JAMES D. COLEMAN has been a Director of the Company since its formation
in 1993 and a Director of the Bank since its formation in 1987. He has served
as Director of Emergency Services of Emergicare Physicians since 1979, which
provides emergency room staffing for Oakwood Hospital on a contract basis. He
also serves as Vice-Chief of the Foundation Board of Directors of Oakwood
Hospital located in Dearborn, Michigan.

CHARLES BAZZY has served as a Director of the Company since its formation in
1993 and as a Director of the Bank since 1988. He has been a manufacturer's
sales representative for and principal of Charles Bazzy & Associates located
in Bloomfield Hills, Michigan. Prior to 1988, he was a planning and
development manager for Ford Motor Company and was with Ford Motor Company for
33 years.

69
<PAGE>

WILLIAM B. BORTELS has been a Director of the Company since January 1997 and
a Director of the Bank since 1991. He has been a self-employed single-family
home builder in Brighton, Michigan since 1964.

HARRY S. ELLMAN has served as a Director of the Company since January 1997
and a Director of the Bank since 1990. He has been a title insurance agent and
attorney with Fidelity Title Co. located in Bingham Farms, Michigan since
1987. He is also a member of the State Bar of Michigan, the Building Industry
Association of Southeast Michigan and is a past chairman of the Income
Producing Committee of the Mortgage Bankers' Association.

NEWLY ELECTED DIRECTORS

Upon consummation of the Offering, the resignations of Messrs. Bortels,
Ellman, Nichols and Bazzy and Ms. McGuire will be effective and the election
of Messrs. Elsea, Isbister, Kersten, Kojaian and Carrie to replace them as
members of the Board of Directors of the Company will also be effective. The
following sets forth the business experience and other information for each of
the newly elected directors of the Company.

RICHARD S. ELSEA has been affiliated with Real Estate One, Inc., a
residential brokerage company based in Detroit, Michigan since 1954. Mr. Elsea
currently owns and is President of Real Estate One, which is one of Michigan's
largest real estate brokerage companies. Mr. Elsea has over 40 years
experience in the family real estate brokerage business and has held various
positions on local and Michigan boards of Realtors as well as with other real
estate related organizations. Mr. Elsea also serves on the board of The Realty
Alliance, a national real estate organization consisting of many of the
nation's largest real estate companies.

JAMES D. ISBISTER has been Vice Chairman of Shire Laboratories since March
1997. Prior to assuming his current position, Mr. Isbister was Chief Executive
Officer and Chairman of Pharmavene, Inc. since 1990 and 1995, respectively.
Mr. Isbister has been Senior Vice President of the National Blue Cross and
Blue Shield Association and Deputy Director of the National Institute of
Mental Health. Mr. Isbister was appointed by President Carter to the position
of Associate Director for Management of the U.S. International Communication
Agency and was appointed by President Ford as the First Director of the U.S.
Alcohol, Drug Abuse and Mental Health Administration. Mr. Isbister is the
father-in-law of Mark T. Hammond.

JOHN KERSTEN has owned and been President of Century 21 Town and Country
Real Estate since 1980. Century 21 Town and Country Real Estate, which is
based in Sterling Heights, Michigan, is one of Michigan's largest real estate
brokerage companies. Mr. Kersten has also served as President of several
local and Michigan real estate associations, the Michigan Multiple Listing
Service and is the current President of the Detroit Metro Brokers Council.

C. MICHAEL KOJAIAN has served as the Executive Vice President from 1989 to
1996 and as President and as a Director since January 1, 1997 of the Kojaian
Companies, a midwestern based real estate development and asset management
organization which owns and operates several million square feet of office,
industrial and retail properties. Mr. Kojaian has also been a Director of
Grubb & Ellis, a publicly traded full-service commercial real estate firm,
since December 1996. Grubb & Ellis completed over 13,000 real estate
transactions and managed over 84 million square feet of commercial office
space throughout the nation during 1996. Mr. Kojaian has also been a director
of DOTT Industries, a specialized manufacturer of automotive components with
domestic and international operations since 1991.

MICHAEL W. CARRIE has served as the Company's Executive Vice President and
Chief Financial Officer since January 1997. He served as Treasurer of the
Company from 1993 to 1997. He has also served as Chief Financial Officer of
the Bank since 1993, and as its Executive Vice President in charge of
financial planning, financial accounting, cash management, investor reporting,
regulatory accounting, loan funding and information services since 1995. From
1993 to 1995 he served as Senior Vice President of the Bank. From 1985 until
1993, he served as Vice President and Manager of Financial Analysis of a major
regional federal savings bank. From July 1994 to February 1996, Mr. Carrie
also served as a director of Security Savings after its acquisition by the
Company.

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<PAGE>

KEY EMPLOYEES OF THE BANK

The Bank has 14 Senior Vice Presidents or First Vice Presidents, many of
which have been with the Bank since its formation in 1987. The Senior Vice
Presidents in charge of treasury management, administration, risk management
and underwriting previously worked for Hammond Mortgage Company, Thomas
Hammond's prior company, during the 1970's. Only one senior officer has
resigned from the Bank in the last ten years.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors of the Company generally meets on a monthly basis, as
needed. The Board of Directors of the Bank holds regular monthly meetings and
special meetings as needed. During the year ended December 31, 1996, the
Company's and the Bank's Boards each met 12 times. No director attended fewer
than 75% in the aggregate of the total number of such Board meetings held
while such director was a member during the year ended December 31, 1996 and
the total number of meetings held by committees on which such director served
during such year.

The Company's full Board of Directors acts as a nominating committee for the
annual selection of its nominees for election as directors of the Company.
While the Board of Directors will consider nominees recommended by
stockholders, it has not actively solicited recommendations from the Company's
stockholders for nominees nor, subject to the procedural requirements set
forth in the Company's Restated Articles and Bylaws, established any
procedures for this purpose. The Company's Board of Directors met once in its
capacity as the nominating committee during 1996.

The Bank's full Board of Directors acts as a compensation committee for both
the Company and the Bank and met 12 times in this capacity during 1996 to
examine the performance and approve the compensation of the officers.

The Bank's Audit Committee consists of directors Coleman (Chairman), Bazzy
and Bortels and performs the functions of the Company's and the Bank's
respective audit committees. The Audit Committee is responsible for reviewing
the Company's and the Bank's auditing programs, overseeing the quarterly
regulatory reporting process, overseeing internal compliance audits as
necessary, receiving and reviewing the results of each external audit,
reviewing management's response to auditors' recommendations, and reviewing
management's reports on cases of financial misconduct by employees, officers
or directors. The Audit Committee met four times in 1996.

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<PAGE>

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE. The following table sets forth the cash and
noncash compensation for each of the last three years awarded to or earned by
certain executive officers of the Company for services rendered in all
capacities to the Company and its subsidiaries.

<TABLE>
<CAPTION>
OTHER ANNUAL
COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) COMPENSATION
- --------------------------- ---- ---------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Thomas J. Hammond........ 1996 $1,000,000(2) $793,580 -- $49,300(5)
Chairman of the Board 1995 529,600 737,102 -- 56,340(6)
and Chief Executive 1994 529,600 616,301 -- 43,580(7)
Officer
Mark T. Hammond(3)....... 1996 $ 405,002 $ 12,600 -- $23,418(5)
Vice Chairman of the
Board and President 1995 298,369 12,779 -- 32,491(6)
1994 276,694 17,450 -- 23,683(7)
Michael W. Carrie(4)..... 1996 $ 204,314 $ 8,568 -- $11,700(5)
Executive Vice President
and Chief Financial 1995 160,640 8,042 -- 18,900(6)
Officer 1994 147,577 5,143 -- 8,477(7)
Joan H. Anderson......... 1996 $ 149,450 $ 10,080 -- $27,300(5)
Executive Vice President
and Director 1995 137,169 10,989 -- 23,978(6)
1994 120,738 27,450 -- 20,988(7)
</TABLE>
- --------
(1) Executive officers of the Company receive certain perquisites and other
personal benefits. In each case, the amount of such benefits received by
each executive officer in each of the years 1996, 1995 and 1994 did not
exceed $50,000 or 10% of such executive officer's salary and bonus.
(2) In conjunction with the adoption of the 1997 Incentive Compensation Plan,
Thomas J. Hammond's salary will be at an annual rate of $600,000 following
the Offering. See "Certain Benefit Plans and Agreements--Incentive
Compensation Plan."
(3) Mark T. Hammond was elected President of the Company and the Bank in
September 1995.
(4) Michael W. Carrie joined the Company and the Bank in January 1993 as Chief
Financial Officer. He assumed his current position as Executive Vice
President in November 1995.
(5) Includes payments to Thomas J. Hammond, Mark T. Hammond, Michael W. Carrie
and Joan H. Anderson of $13,200, $14,400, $0 and $14,400, respectively,
for Board fees, $4,500, $3,219, $4,500 and $4,500, respectively, in 401(k)
contributions, and $31,600, $5,799, $7,200 and $8,400, respectively, in
term life insurance premium equivalent payments.
(6) Includes payments to Thomas J. Hammond, Mark T. Hammond, Michael W. Carrie
and Joan H. Anderson of $25,200, $25,200, $9,600 and $15,600,
respectively, for Board fees, $4,500, $3,500, $4,500 and $2,378,
respectively, in 401(k) contributions and $26,640, $3,791, $4,800 and
$6,000, respectively, in term life insurance premium equivalent payments
for such persons.
(7) Includes payments to Thomas J. Hammond, Mark T. Hammond, Michael W. Carrie
and Joan H. Anderson of $17,400, $17,400, $4,000 and $13,400,
respectively, for Board fees, $4,500, $4,500, $2,077 and $3,988,
respectively, in 401(k) contributions, and $21,680, $1,783, $2,400 and
$3,600, respectively, in term life insurance premium equivalent payments.

DIRECTOR COMPENSATION

Directors of the Company presently do not receive compensation in their
capacities as such. Following the Offering, directors of the Company who are
not also directors of the Bank are expected to be compensated to the same
extent as Bank directors. In addition, they will be eligible to participate in
the Stock Option Plan. See "--Certain Benefit Plans and Agreements--Stock
Option Plan." Directors of the Bank receive fees of $1,200 for each meeting
attended. During 1996, directors' fees for each director of the Bank totaled
$14,400 plus a $1,200 bonus. The directors do not receive any additional
compensation for serving on committees.

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<PAGE>

CERTAIN BENEFIT PLANS AND AGREEMENTS

In connection with the Offering and subject to its successful completion,
the Boards of Directors of the Company and the Bank have approved various
incentive or other plans and several employment agreements.

BASIS FOR AWARDS OF BENEFITS AND COMPENSATION. The Company's and the Bank's
Boards of Directors have evaluated and approved the terms of the employment
agreements and other benefits described below. In their review of the benefits
and compensation of the executive officers and the terms of the employment
agreements and severance agreements, the Boards of Directors considered a
number of factors, including the experience, tenure and ability of the
executive officers, their performance during their tenure and the various
legal and regulatory requirements regarding the levels of compensation which
may be paid to employees of savings associations. Where appropriate, these
plans have been approved by the Company's stockholders.

STOCK OPTION PLAN. The 1997 Employees and Directors Stock Option Plan (the
"Option Plan") will be effective upon the successful completion of the
Offering. The purpose of the Option Plan is to provide an additional incentive
to directors and employees by facilitating their purchase of Common Stock. The
Option Plan has a term of 10 years from the date of its approval by the
Company's stockholders, after which no awards may be made. Pursuant to the
Option Plan, a number of shares equal to 10% of the shares of Common Stock
that are to be outstanding immediately following the Offering (without giving
effect to the exercise of the over-allotment options), would be reserved for
future issuance by the Company, in the form of newly issued or treasury shares
or shares held in a grantor trust, upon exercise of stock options ("Options").
Options are collectively referred to herein as "Awards." If Awards should
expire, become unexercisable or be forfeited for any reason without having
been exercised or having become vested in full, the shares of Common Stock
subject to such Awards would, unless the Option Plan shall have been
terminated, be available for the grant of additional Awards under the Option
Plan.

The Option Plan will be administered by a committee of at least two non-
employee directors of the Company who are designated by the Board of Directors
(the "Option Committee"). The Option Committee will select the employees to
whom Awards are to be granted, the number of shares to be subject to such
Awards, and the terms and conditions of such Awards (provided that any
discretion exercised by the Option Committee must be consistent with the terms
of the Option Plan).

It is intended that Options granted under the Option Plan will constitute
both incentive stock options ("ISOs") and non-incentive stock options ("non-
ISOs"). ISOs are options that comply with certain restrictions pursuant to
Section 422 of the Code and thereby provide favorable tax treatment to
recipients, although they do not result in tax deductions to the Company
unless participants fail to comply with Section 422 of the Code. Non-ISOs are
stock options that fail to qualify as ISOs, either at the time of grant or
upon exercise.

The exercise price for ISOs may not be less than 100% of the fair market
value of the shares on the date of the grant. Non-ISOs may be granted with any
exercise price of 50% or more of the fair market value of the shares on the
date of grant, although a recipient will recognize taxable income upon the
receipt of a non-ISO with an exercise price that is substantially less than
its fair market value. The Plan permits the Option Committee to impose
transfer restrictions, such as a right of first refusal, on the Common Stock
that optionees may purchase.

No Option will be exercisable earlier than one year following the Offering
or later than ten years from the date it is granted (five years in the case of
non-employee directors) unless a shorter period is provided by the Option
Committee; provided, however, that in the case of any employee who owns more
than 10% of the outstanding Common Stock at the time an ISO is granted, the
option price for the ISO shall not be less than 110% of the fair market value
of the shares on the date of the grant and the ISO shall not be exercisable
after the expiration of five years from the date it is granted unless a
shorter period is provided.

An otherwise unexpired Option shall, unless otherwise determined by the
Option Committee, cease to be exercisable upon (i) an employee's termination
of employment for "just cause" (as defined in the Option Plan), (ii) the date
three months after an employee terminates service for a reason other than
death or disability, (iii) the date one year after an employee terminates
service due to disability, or (iv) the date two years after termination

73
<PAGE>

of such service due to the employee's death. Options granted to non-employee
directors will automatically expire one year after termination of service on
the Board of Directors (two years in the event of death). Effective upon
consummation of the Offering, Thomas Hammond, Mark Hammond, Joan Anderson and
Michael Carrie will be granted options under the Option Plan to acquire,
respectively, 400,000 shares, 250,000 shares, 45,000 shares, and 65,000 shares
of Common Stock.

The Company will receive no monetary consideration for the granting of
Awards under the Option Plan and will receive no monetary consideration other
than the Option exercise price for each share issued to optionees upon the
exercise of Options. The Option exercise price may be paid in cash or Common
Stock. The exercise of Options will be subject to such terms and conditions
established by the Option Committee as are set forth in a written agreement
between the Option Committee and the optionee (to be entered into at the time
an Award is granted). No Award is assignable or transferable except by will or
the laws of descent and distribution, although, limited transfers, principally
to immediate family members, would be permitted if a pending change in the law
is approved.

EMPLOYEE STOCK ACQUISITION PLAN. The Flagstar Bancorp, Inc. 1997 Employee
Stock Acquisition Plan ("Purchase Plan") will be effective upon the successful
completion of the Offering. The purpose of the Purchase Plan is to encourage
broad-based ownership by employees of the Company and, as a result, to provide
an incentive for employees at all levels to contribute to the profitability
and success of the Company. The Purchase Plan will enable the Company to offer
a convenient means for the employees who might not otherwise own Common Stock
to purchase and hold the Common Stock, and through the partial refund feature
of the Purchase Plan, to provide a meaningful inducement to participate.

The Purchase Plan will be administered by the Board of Directors. All
employees of the Company, its subsidiaries or affiliates who work 20 hours per
week or more with at least 12 months of continuous employment and all
directors will be eligible to participate.

Under the Purchase Plan, eligible participants would be free to purchase
from any third party and on the open market shares of the Common Stock and,
upon providing evidence of the purchase to the Company, the employees would
receive a payment from the Company equal to 15% of the full price of the
shares. No employee would receive such reimbursement for total purchases in
any one year in excess of 7% of the employee's gross income from the Company
in the prior calendar year. Costs related to the sale of such shares will be
borne by the individuals. Participants in the Purchase Plan will be asked to
sign a statement acknowledging that they are aware of the condition of the
Purchase Plan that the shares so purchased may not be sold for a period of one
year.

Participants will be entitled, with respect to Common Stock acquired under
the Purchase Plan, to the same rights and distributions as are other holders
of the Common Stock. The Purchase Plan has not been designed to comply with
the requirements of Section 423 of the Code with respect to "employee stock
purchase plans." As a result, participants in the Purchase Plan will likely be
taxed for federal income tax purposes in the year the refund is received by
them. Costs incurred by the Company pursuant to the Purchase Plan are expected
to be deductible as an expense by the Company.

INCENTIVE COMPENSATION PLAN. The Flagstar Bancorp, Inc. 1997 Incentive
Compensation Plan (the "Incentive Compensation Plan") is to be effective upon
the successful completion of the Offering. The Incentive Compensation Plan
will be unfunded and benefits will be payable only in the form of cash from
the Company's general assets. The purposes of the Incentive Compensation Plan
will be to attract and retain the best available personnel for positions of
substantial responsibility with the Company and to provide additional
incentives to employees of the Company in the event the Company achieves
certain financial performance goals indicative of its profitability and
stability.

The Incentive Compensation Plan will be administered by a committee (the
"Incentive Compensation Committee") consisting of the Company's Compensation
Committee. The Incentive Compensation Committee will decide, from year to
year, which employees of the Company will be eligible to participate in the
Incentive Compensation Plan and the size of the bonus pool. The plan year of
the Incentive Compensation Plan will

74
<PAGE>

correspond to the Company's fiscal year. Directors who are not employees may
not participate in the Incentive Compensation Plan.

Each employee who is eligible to receive a bonus at the end of a plan year
will receive a bonus equal to a specified percentage of his or her base salary
adjusted by a mathematical formula which reflects aspects of the Company's
results for that year. However, the Incentive Compensation Committee may, in
its discretion, by resolution adopted before the first day of any plan year,
change said percentage. The aggregate amount of bonuses payable for any plan
year will be proportionately reduced to the extent that the payment would
cause the Bank to cease to be a "well-capitalized" institution. For 1997, the
Incentive Compensation Plan provides for bonuses to be tied to return on
equity, return on assets, deposit growth, CAMELS rating and the volume of loan
originations.

DEFERRED COMPENSATION PLAN. The 1997 Deferred Compensation Plan (the
"Plan"), to be effective upon the completion of the Offering, is intended to
permit employees and directors to defer the current receipt of income until
such time as funds or assets are distributed in the future. Employees may
elect to defer up to 25 percent of annual compensation and directors may defer
their entire compensation. Funds deferred remain the property of the Bank or
the Company and subject to the claims of the creditors of the Bank or the
Company in the event of default. However, the funds will be placed in a trust
with an independent trustee and the individual participants may direct that
their deferred amounts be invested in stock of the Company purchased on the
open market. Upon withdrawal, the participant will have the option of
receiving the stock or the proceeds of its sale at the then market price. All
withdrawals from the Plan trust would then be taxable as ordinary income.

EMPLOYMENT AGREEMENTS. The Company and the Bank intend to enter into
separate employment agreements pursuant to which Thomas J. Hammond would serve
as Chairman and Chief Executive Officer of the Company and the Bank and Mark
T. Hammond would serve as President of the Company and the Bank. In such
capacities, Messrs. Hammond and Hammond are responsible for overseeing all
operations of the Company and the Bank, and for implementing the policies
adopted by the Boards of Directors. In addition, the Company and the Bank
intend to enter into separate employment agreements with Mr. Carrie in his
capacity as Executive Vice President and Chief Financial Officer and Ms.
Anderson in her capacity as Executive Vice President of the Company. All such
employment agreements are referred to herein collectively as "Employment
Agreements" and all persons who will enter into such Employment Agreements are
referred to herein as "Employees."

The Boards of Directors of the Company and the Bank each believe that the
Employment Agreements assure fair treatment of the Employees in relation to
their career with the Company and the Bank by providing them with a limited
form of financial security while committing such persons to future employment
with the Company and the Bank for the term of their respective agreements. In
the event that any Employee prevails over the Company or the Bank in a legal
dispute as to an Employment Agreement, he or she will be reimbursed for his or
her legal and other expenses.

The Employment Agreements will become effective upon successful completion
of the Offering. The terms of the agreements will be three years. Each
agreement will provide for an annual base salary equal to the Employee's
existing base salary rate in effect on the date of the completion of the
Offering, except that Thomas Hammond's base compensation shall be at an annual
rate of $600,000. On each anniversary date from the date of commencement of
the Employment Agreements, the term of the Employee's employment under the
Employment Agreements will be extended for an additional one-year period
beyond the then effective expiration date, upon a determination by the Board
of Directors that the performance of the Employee has met the required
performance standards and that such Employment Agreements should be extended.
The Employment Agreements provide the Employee with a salary review by the
Board of Directors not less often than annually, as well as with inclusion in
any discretionary bonus plans, retirement and medical plans, customary fringe
benefits, vacation and sick leave.

The Employment Agreements will terminate upon the Employee's death or
disability, and are terminable by the Company or the Bank for "just cause" as
defined in the Employment Agreements. In the event of

75
<PAGE>

termination for just cause, no severance benefits are available. If the
Company or the Bank terminates the Employee without just cause, the Employee
will be entitled to a continuation of his or her salary and benefits from the
date of termination through the remaining term of such Employee's Employment
Agreement, plus an additional 12-month period, and, at the Employee's
election, either cash in an amount equal to the cost with certain limitations
to the Employee of obtaining health, life, disability, and other benefits
which the Employee would have been eligible to participate in through the
Employment Agreement's expiration date or continued participation in such
benefits plans through the agreement's expiration date, provided the Employee
continued to qualify for participation therein. If the Employment Agreements
are terminated due to the Employee's "disability" (as defined in the
Employment Agreements), the Employee will be entitled to a continuation of his
or her salary and benefits for up to 180 days following such termination. In
the event of the Employee's death during the term of the Employment Agreement,
his or her estate will be entitled to receive his or her salary through the
last day of the calendar month in which the Employee's death occurred. The
Employee is able to terminate voluntarily his or her Employment Agreement by
providing 90 days' written notice to the Boards of Directors of the Bank and
the Company, in which case the Employee is entitled to receive only his
compensation, vested rights and benefits up to the date of termination.

The Employment Agreements contain provisions stating that in the event of
the Employee's involuntary termination of employment in connection with, or
within one year after, any change in control of the Bank or the Company, other
than for "just cause," the Employee will be paid within 10 days of such
termination an amount equal to the difference between (i) 2.99 times his or
her "base amount," as defined in Section 280G(b)(3) of the Code, and (ii) the
sum of any other parachute payments, as defined under Section 280G(b)(2) of
the Code, that the Employee receives on account of the change in control.
"Control" generally refers to the acquisition, by any person or entity, of the
ownership or power to vote more than 25% of the Bank's or the Company's voting
stock, the control of the election of a majority of the Bank's or the
Company's directors, or the exercise of a controlling influence over the
management or policies of the Bank or the Company. In addition, under the
Employment Agreements, a change in control occurs when, during any consecutive
two-year period, directors of the Company or the Bank at the beginning of such
period cease to constitute at least a majority of the Board of Directors of
the Company or the Bank. The amount determined using the foregoing formula
would also be paid (i) in the event of an Employee's voluntary termination of
employment within 30 days following a change in control, or (ii) in the event
of the Employee's voluntary termination of employment within one year
following a change in control, upon the occurrence, or within 90 days
thereafter, of certain specified events following the change in control, which
have not been consented to in writing by the Employee, including (i) the
requirement that the Employee perform his or her principal executive functions
more than 30 miles from his or her primary office, (ii) a reduction in the
Employee's base compensation as then in effect, (iii) a reduction in the
Employee's compensation and benefits, including material vacation, fringe
benefits, stock option and retirement plans, (iv) the assignment to the
Employee of duties and responsibilities which are other than those normally
associated with his or her position with the Bank and the Company, (v) a
material reduction in the Employee's authority and responsibility, and (vi) in
the case of an employee who is also a director, the failure to re-elect the
Employee to the Company's or the Bank's Board of Directors. The Employment
Agreements with the Bank provide that within five business days of a change in
control, the Bank shall fund, or cause to be funded, a trust in the amount of
2.99 times the Employee's "base amount," that will be used to pay the Employee
amounts owed to him upon termination, other than for just cause, within one
year of the change in control. The aggregate payments that would be made to
Messrs. Thomas J. Hammond, Mark T. Hammond and Carrie and Ms. Anderson,
assuming termination of employment under the foregoing circumstances at
January 1, 1997, would be approximately $3.0 million, $851,000, $476,000 and
$438,000, respectively. These provisions may have an anti-takeover effect by
making it more expensive for a potential acquirer to obtain control of the
Company. For more information regarding anti-takeover matters, see
"Description of Capital Stock."

WHOLE LIFE INSURANCE POLICY. The Bank also pays the premiums of variable
whole life insurance policies which are available to all officers of the
Company and the Bank. The beneficiary of each such policy is the estate of the
officer, except that the Bank is the beneficiary to the extent of all premiums
paid by the Bank for such policy.

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<PAGE>

THRIFT PLAN. The Bank maintains a defined contribution plan for its
employees which is designed to qualify under Sections 401(a) and 401(k) of the
Code (the "Thrift Plan"). The Thrift Plan permits each participant to make
before-tax contributions, through regular salary reduction, in amounts ranging
up to 6% of the participant's annual salary, not to exceed $9,500 in total
annual contributions. The Bank makes matching contributions up to 3% of each
eligible participant's monthly salary. Participants are at all times 100%
vested in their entire account balances under the Thrift Plan attributed to
their contributions, and vest 100% after seven years as to the Bank's
contribution. The Thrift Plan is intended to comply with all the rights and
protection afforded employees pursuant to the Employee Retirement Income
Security Act of 1974, as amended.

TRANSACTIONS WITH MANAGEMENT

The Company, through the Bank, offers loans to its directors, officers and
employees. These loans currently are made in the ordinary course of business
with the same collateral, interest rates and underwriting criteria as those of
comparable transactions prevailing at the time and do not involve more than
the normal risk of collectibility or present other unfavorable features. Under
federal law, the Bank's loans to directors and executive officers are required
to be made on substantially the same terms, including interest rates, as those
prevailing for comparable transactions and must not involve more than the
normal risk of repayment or present other unfavorable features. At December
31, 1996, all of the Bank's loans to directors and executive officers
satisfied these requirements.

The Company has, since 1991, leased space for its headquarters in a building
owned by a limited partnership, of which one-third is owned by C. Michael
Kojaian, who has been elected to the Company's Board of Directors effective
upon consummation of the Offering. Mr. Kojaian is also the President, a
director and one-third owner of the Kojaian Companies which is the general
partner of the owner and manager of the building. During 1996, the Company
paid approximately $1.8 million to the limited partnership as lessor and
expects to pay approximately $1.8 million to the lessor during 1997.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

As of the date hereof, outstanding capital stock of the Company consists of
11,250,000 shares of the Common Stock, which entitles the holder thereof to
one vote per share on each matter on which the stockholders of the Company are
entitled to vote.

The following table sets forth information, as of the date of this
Prospectus, regarding persons who own more than 5% of the Common Stock.

<TABLE>
<CAPTION>
SHARES OF COMMON STOCK COMMON STOCK PERCENTAGE
NAME OF BENEFICIAL OWNER OWNED BEFORE OFFERING OWNED BEFORE OFFERING
- ------------------------ ---------------------- -----------------------
<S> <C> <C>
Thomas J. Hammond............... 7,257,066(1) 64.51%
Janet G. Hammond................ 7,257,066(1) 64.51%
Mark T. Hammond................. 1,330,978(2) 11.83%
Catherine H. Rondeau............ 1,330,978(2) 11.83%
Carrie C. Langdon............... 1,330,978(2) 11.83%
</TABLE>
- --------
(1) Mr. Hammond and Mrs. Hammond, who are husband and wife, each disclaim
beneficial ownership of all the shares of Common Stock held by the other.
In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is deemed to be the beneficial owner, for purposes of this table,
of any shares of the Common Stock if he or she has or shares voting or
investment power with respect to such security, or has a right to acquire
beneficial ownership at any time within 60 days from the date of such
determination. As used herein, "voting power" is the power to vote or
direct the voting of shares and "investment power" is the power to dispose
or direct the disposition of shares.
(2) Mark T. Hammond, Catherine H. Rondeau and Carrie C. Langdon are the
children of Thomas and Janet Hammond.

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<PAGE>

SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth information, as of the most recent
practicable date, regarding each class of equity securities of the Company or
the Bank beneficially owned by their directors and certain of the executive
officers and by all of the directors and executive officers of the Company and
the Bank as a group.

<TABLE>
<CAPTION>
SHARES OF COMMON STOCK OWNED PERCENTAGE OF TOTAL COMMON
NAME OF BENEFICIAL OWNER BEFORE THE OFFERING STOCK OWNED BEFORE THE OFFERING
- ------------------------ ---------------------------- -------------------------------
<S> <C> <C>
Thomas J. Hammond....... 7,257,066(1)(2) 64.51%
Mark T. Hammond......... 1,330,978(2) 11.83%
Michael W. Carrie....... -- *
Joan H. Anderson........ -- *
Mary Kay McGuire........ -- *
Harry S. Ellman......... -- *
Ronald I. Nichols,
Sr. ................... -- *
James D. Coleman........ -- *
William B. Bortels...... -- *
Charles Bazzy........... -- *
Directors and Executive
Officers as a Group
(10 persons)........... 8,588,044 76.34%
</TABLE>
- --------
*Less than 1%
(1) Includes 1,325,919 shares of Common Stock held by Mr. Hammond's wife,
Janet G. Hammond, and as to which Mr. Hammond disclaims beneficial
ownership. For the definition of "beneficial ownership," see the table
under "--Security Ownership of Certain Beneficial Owners."
(2) Includes shares held directly or by trust. Thomas J. Hammond is the father
of Mark T. Hammond.

LIABILITY OF DIRECTORS; INDEMNIFICATION

The Company's Restated Articles of Incorporation contain a provision,
authorized by the MBCA, designed to eliminate in certain circumstances the
personal liability of directors for monetary damages to the Company or its
stockholders for breach of their fiduciary duty as directors. This provision,
however, does not limit the liability of any director who breached his duty of
loyalty to the Company or its stockholders, failed to act in good faith,
obtained an improper personal benefit or paid a dividend or approved a stock
repurchase or redemption that was prohibited under Michigan law. This
provision will not limit or eliminate the rights of the Company or any
stockholder to seek an injunction or any other nonmonetary relief in the event
of a breach of a director's duty of care. In addition, this provision applies
only to claims against a director arising out of his role as a director and
does not relieve a director from liability unrelated to his fiduciary duty of
care or from a violation of statutory law such as certain liabilities imposed
on a director under the federal securities laws.

The Company's Restated Articles of Incorporation and Restated Bylaws also
provide that the Company shall indemnify all directors and officers of the
Company to the full extent permitted by the MBCA. Under the provisions of the
MBCA, any director or officer who, in his capacity as such, is made or
threatened to be made a party to any suit or proceeding, may be indemnified if
the Board determines such director or officer acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company or its stockholders.

Officers and directors are covered within specified monetary limits by
insurance against certain losses arising from claims made by reason of their
being directors or officers of the Company or of the Company's subsidiaries
and the Company's officers and directors are indemnified against such losses
by reason of their being or having been directors or officers of another
corporation, partnership, joint venture, trust or other enterprise at the
Company's or its subsidiaries' request.

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<PAGE>

SELLING STOCKHOLDERS

The Selling Stockholders consist of Thomas J. Hammond, his wife Janet G.
Hammond, and their children Mark T. Hammond, Catherine H. Rondeau and Carrie
C. Langdon. The Selling Stockholders own all of the outstanding Common Stock
of the Company as of the date of this Prospectus and have, collectively, owned
all of the outstanding shares of Common Stock of the Company since its
formation.

As of the date hereof, outstanding Common Stock of the Company consisted of
11,250,000 shares. The following table sets forth information, as of the date
of this Prospectus, regarding the ownership of the Company's Common Stock by
the Selling Stockholders, the stock which they will respectively beneficially
own following the Offering (assuming that the over-allotment options are not
exercised) and their current respective positions with the Company or the
Bank, if any.

<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF SHARES OF COMMON STOCK
COMMON STOCK PERCENT OWNED COMMON COMMON STOCK PERCENT OWNED
NAME OF BENEFICIAL OWNED BEFORE BEFORE THE STOCK OWNED AFTER THE AFTER THE
OWNER THE OFFERING(3) OFFERING OFFERED HEREBY OFFERING OFFERING(4)(5)
------------------ --------------- ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Thomas J. Hammond(1).... 5,931,147 52.72% 3,084,195 2,846,952 21.17%
Janet G. Hammond........ 1,325,919 11.79% 689,478 636,441 4.73%
Mark T. Hammond(2)...... 1,330,978 11.83% 692,109 638,869 4.75%
Catherine H. Rondeau.... 1,330,978 11.83% 692,109 638,869 4.75%
Carrie C. Langdon....... 1,330,978 11.83% 692,109 638,869 4.75%
---------- ------ --------- --------- -----
11,250,000 100.00% 5,850,000 5,400,000 40.15%
========== ====== ========= ========= =====
</TABLE>
- --------
(1) Thomas J. Hammond is Chairman and Chief Executive Officer of the Company
and the Bank.
(2) Mark T. Hammond is Vice Chairman and President of the Company and the
Bank.
(3) Except as otherwise disclosed above, includes shares owned directly by
directors and executive officers of the Company as well as shares held by
their spouses and children and by trusts as to which certain directors and
executive officers are trustees.
(4) Reflects 13,450,000 shares of Common Stock to be outstanding following the
Offering, assuming that the over-allotment option is not exercised. See
"Underwriting."
(5) Such ownership percentage reflects the fact that there will be no
purchases by the Selling Stockholders of any shares in the Offering.

CERTAIN ARRANGEMENTS CONCERNING THE SELLING STOCKHOLDERS

The following summary of certain material provisions of the Underwriting
Agreements and the Selling Stockholders Agreement does not purport to be
complete and is qualified in its entirety by reference to the Underwriting
Agreements and the Selling Stockholders Agreement, respectively, each of which
is an exhibit to the Registration Statement of which this Prospectus forms a
part.

Pursuant to the U.S. underwriting agreement relating to the offering of
shares of Common Stock in the United States and Canada (the "U.S. Underwriting
Agreement"), the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part, among the Company, the Bank,
the Selling Stockholders and each of the underwriters named under the caption
"Underwriting" herein (the "U.S. Underwriters"), for whom Lehman Brothers
Inc., PaineWebber Incorporated and Roney & Co. are acting as representatives
(the "Representatives"), and the international underwriting agreement relating
to the offering of shares of Common Stock outside of the United States and
Canada (the "International Underwriting Agreement"), and together with the
U.S. Underwriting Agreement, the "Underwriting Agreements"), the form of which
is filed as an exhibit to the Registration Statement of which this Prospectus
forms a part, among the Company, the Bank, the Selling Stockholders and each
of the international managers named under the caption "Underwriting" herein
(the "International Managers", and together with the U.S. Underwriters, the
"Underwriters"), for whom Lehman Brothers International (Europe), PaineWebber
Incorporated and Roney & Co. are acting as the lead

79
<PAGE>

managers (the "Lead Managers"), each Selling Stockholder has agreed to sell
52% of their respective shares of Common Stock (or such additional amount as
may be necessary to satisfy a proportionate amount of the Underwriters' over-
allotment options) in conjunction with the Company's sale of newly issued
shares pursuant to the Offering (the "Offered Common Stock"). In consideration
of the obligations assumed by the Selling Stockholders, the Company has agreed
in the Underwriting Agreements and the Selling Stockholders Agreement that the
expenses of the Offering in excess of one half of the Underwriters' fee with
respect to all Common Stock to be sold in the Offering will be paid by the
Company. The Selling Stockholders have also agreed not to offer, sell or
otherwise dispose of any of the remaining shares of Common Stock which they
hold for a period of 180 days following the date of this Prospectus without
the prior written consent of Lehman Brothers Inc. on behalf of the
Representatives and the Lead Managers. See "Underwriting."

Pursuant to the Selling Stockholders Agreement, the Company is obligated, at
any time beginning one year after the completion of the Offering, upon the
demand of the holder(s) of a majority of the shares of Common Stock then held
by the Selling Stockholders, to file and use its best efforts to cause to
become effective promptly, a registration statement under the Securities Act
with respect to shares of Common Stock then held by such Selling Stockholders.
The Company is also obligated to take action to keep such registration
statement effective (subject to occasional periods of suspension of such
effectiveness as necessary) until the first to occur of (i) the date on which
all shares of Common Stock registered thereunder have been sold or (ii) the
date on which such registration under the Securities Act is no longer required
to sell such shares without restriction. In connection with the Selling
Stockholders Agreement, each of the Selling Stockholders and the Company have
made certain representations and warranties.

DESCRIPTION OF CAPITAL STOCK

GENERAL

The Company is authorized to issue 40,000,000 shares of the Common Stock and
10,000,000 shares of serial preferred stock, par value $0.01 per share. Prior
to the Offering, 11,250,000 shares of the Common Stock have been issued and
are outstanding and none of the serial preferred stock has been issued. The
Company currently expects to issue 2,200,000 additional shares of Common Stock
in the Offering (or 2,530,000 additional shares if the Underwriters exercise
their over-allotment option) and no shares of serial preferred stock. The
Company has reserved for future issuance under the Option Plan an amount of
authorized but unissued shares of Common Stock equal to 10% of the shares
outstanding after the Offering.

THE CAPITAL STOCK OF THE COMPANY WILL REPRESENT NONWITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE
FDIC.

COMMON STOCK

VOTING RIGHTS. Each share of the Common Stock will have the same relative
rights and will be identical in all respects with every other share of the
Common Stock. The holders of the Common Stock will possess exclusive voting
rights in the Company, except to the extent that shares of serial preferred
stock issued in the future may have voting rights, if any. Each holder of
shares of the Common Stock will be entitled to one vote for each share held of
record on all matters submitted to a vote of holders of shares of the Common
Stock except to the extent voting rights may be diminished as discussed in
"Restrictions on Acquisition of the Company."

DIVIDENDS. The Company may pay dividends on its capital stock if, as and
when declared by the Board of Directors, subject to compliance with
limitations imposed by law. See "Dividend Policy." The holders of Common Stock
will be entitled to receive and share equally in such dividends as may be
declared by the Board of Directors out of funds legally available therefor. If
the Company issues serial preferred stock, the holders thereof may have a
priority over the holders of the Common Stock with respect to the receipt of
dividends.

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<PAGE>

LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Company, each holder of its Common Stock would be entitled to receive,
after payment or provision for payment of all debts and liabilities of the
Company, a pro rata portion of all assets of the Company. If any serial
preferred stock is issued, the holders thereof may have a priority over the
holders of the Common Stock in the distribution of the Company's assets in a
liquidation or dissolution of the Company.

RESTRICTIONS ON ACQUISITION OF THE COMMON STOCK. See "Restrictions on the
Acquisition of the Company and the Bank" and "Certain Anti-Takeover Provisions
in the Restated Articles of Incorporation and Restated Bylaws" for discussions
of the limitations on the acquisition of shares of the Common Stock.

OTHER CHARACTERISTICS. Holders of the Common Stock will not have preemptive
rights with respect to any additional shares of the Common Stock which may be
issued in the future. The Common Stock is not subject to call for redemption.
Upon payment of the public offering price for the Common Stock, all such stock
will be duly authorized, fully paid and non-assessable.

TRANSFER AGENT AND REGISTRAR. Registrar and Transfer Company, Cranford, New
Jersey, will act as transfer agent and registrar for the Common Stock.

ISSUANCE OF ADDITIONAL SHARES. Except as may be allowed or required under
the Company's Stock Option Plan or Employee Stock Purchase Plan, the Company
has no present plans, proposals, arrangements or understandings to issue
additional shares of authorized Common Stock or serial preferred stock. In the
future, the authorized but unissued and unreserved shares of Common Stock will
be available for general corporate purposes, including but not limited to,
possible issuance as stock dividends, in connection with mergers or
acquisitions, under a cash dividend reinvestment or stock purchase plan, in a
public or private offering, or pursuant to future employee benefit plans.
Normally, no stockholder approval would be required for the issuance of these
additional shares, although certain transactions or employee benefit plans may
otherwise be required to be approved by the Company's stockholders.

SERIAL PREFERRED STOCK

None of the authorized shares of serial preferred stock of the Company will
be issued in or outstanding following the Offering and the Board of Directors
has no present plans, proposals, arrangements or understandings to issue such
shares. The Board of Directors of the Company is authorized to issue serial
preferred stock and to fix and state voting powers, designations, preferences
or other special rights of such shares and the qualification, limitations and
restrictions thereof, subject to no prior stockholder approval. If and when
issued, the serial preferred stock is likely to rank prior to the Common Stock
as to dividend rights, liquidation preferences or both, and may have full or
limited voting rights. The Board of Directors, without the approval of the
holders of the Common Stock, may issue serial preferred stock with voting and
other rights which could adversely affect the voting power of the holders of
the Common Stock.

RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE BANK

CHANGE IN BANK CONTROL ACT AND SAVINGS INSTITUTION HOLDING COMPANY PROVISIONS
OF HOME OWNERS' LOAN ACT

Federal laws and regulations contain a number of provisions which affect the
acquisition of insured institutions such as the Bank, and a savings
institution holding company such as the Company. The Change in Bank Control
Act provides that no person, acting directly or indirectly or through or in
concert with one or more persons, may acquire control of a savings association
unless the OTS has been given 60 days' prior written notice and the OTS does
not issue a notice disapproving the proposed acquisition. In addition, certain
provisions of the HOLA provide that no company may acquire control of a
savings association holding company without the prior approval of the OTS.

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<PAGE>

Pursuant to applicable regulations, control of a savings association or its
holding company is conclusively deemed to have been acquired by, among other
things, the acquisition of more than 25% of any class of voting stock of a
savings association or its holding company or the ability to control the
election of a majority of the directors of either entity. Moreover, control is
presumed to have been acquired, subject to rebuttal, upon the acquisition of
more than 10% of any class of voting stock, or more than 25% of any class of
stock, of a savings association or its holding company, where one or more
enumerated "control factors" are also present in the acquisition. The OTS may
prohibit an acquisition of control if it finds, among other things, that (i)
the acquisition would result in a monopoly or substantially lessen
competition, (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the savings association, or (iii) the
competence, experience, or integrity of the acquiring person indicates that it
would not be in the interest of the depositors or the public to permit the
acquisition of control by such person.

MICHIGAN ANTI-TAKEOVER STATUTES

Michigan has enacted several statutes which impose restrictions on
acquisition of the Company. Chapter 7A of the MBCA is applicable to certain
corporations organized under the laws of Michigan including the Company.
Subject to certain exceptions, Chapter 7A provides that a corporation shall
not engage in any business combination with any "interested stockholder"
unless an advisory statement is given by the board of directors and the
combination is approved by a vote of at least 90% of the votes of each class
of stock entitled to vote, and at least two-thirds of the votes of each class
of stock entitled to vote other than the voting shares owned by the interested
stockholder. However, these statutory requirements do not apply if, prior to
the date that an interested stockholder first becomes an interested
stockholder, the board of directors by resolution approves or exempts such
business combinations generally or a particular combination from the
requirements of the MBCA. Furthermore, the voting requirement does not apply
to a business combination if: (a) specified fair price criteria are met, as
described below; (b) the consideration to be given to the stockholders is in
cash or in the form the interested stockholder paid for shares of the same
class or series; and (c) between the time the interested stockholder becomes
an interested stockholder and before the consummation of a business
combination the following conditions are met: (1) any preferred stock
dividends are declared and paid on their regular date; (2) the annual dividend
rate of stock other than preferred stock is not reduced and is raised if
necessary to reflect any transaction which reduces the number of outstanding
shares; (3) the interested stockholder does not receive any financial
assistance or tax advantage from the corporation other than proportionally as
a stockholder; (4) the interested stockholder does not become the beneficial
owner of any additional shares of the corporation; and (5) at least five years
have elapsed. An "interested stockholder" is generally defined to mean any
person that: (a) is the owner of 10% or more of the outstanding voting stock
of such corporation, or (b) is an affiliate of a corporation and was the owner
of 10% or more of the outstanding voting stock of the corporation at any time
within two years immediately prior to the relevant date.

Chapter 7A's fair price criteria include the following: (a) the aggregate
amount of the cash and market value of the noncash consideration to be
received by the holders of common stock is at least as much as the higher of
(1) the highest price the interested stockholder paid for stock of the same
class or series within the two-year period immediately prior to the
announcement date of the combination proposal, and (2) the market value of
stock of the same class or series on the announcement date or on the
determination date; and (b) the aggregate amount of the cash and market value
of the noncash consideration to be received by holders of stock other than
common stock is at least as much as the highest of (1) the highest price the
interested stockholder paid for the same class or series within the two-year
period immediately prior to the announcement date of the combination proposal,
(2) the highest preferential amount per share to which the holders of such
stock are entitled in the event of any liquidation, dissolution, or winding up
of the corporation, and (3) the market value of stock of the same class or
series on the announcement date or on the determination date.

Under certain circumstances, Chapter 7A may make it more difficult for an
"interested stockholder" to effect various business combinations with a
corporation for a five-year period, although the stockholders may elect that
the Company not be governed by this section, upon the affirmative vote of 90%
of the outstanding

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voting shares and two thirds of the shares not owned by the interested
stockholder. The Company's stockholders have taken no action to exclude the
Company from restrictions imposed under Chapter 7A of the MBCA and the
Restated Articles of Incorporation include these provisions by reference. It
is anticipated that the provisions of Chapter 7A may encourage companies
interested in acquiring the Company to negotiate in advance with the Board of
Directors.

Chapter 7B of the MBCA is also applicable to certain corporations organized
under the laws of Michigan including the Company. Subject to certain
exceptions, Chapter 7B provides that once a person proposes to make or makes a
"control share acquisition" and delivers an acquiring person statement to the
corporation, the stockholders must vote on whether the control shares may
exercise voting rights. Such rights are granted only by resolution approved by
both (a) a majority of the votes cast by holders entitled to vote and a
majority of any class entitled to vote, and (b) a majority of the votes cast
and a majority of any class entitled to vote excluding the interested shares.
"Control shares" means shares which, if voted, would have voting power when
added together with all other shares a person either owns or directs the
exercise, within the following ranges: (a) at least 20% but less than 33 1/3%
of all voting power; (b) at least 33 1/3% but less than a majority of all
voting power; or (c) a majority of all voting power. An acquisition of shares
is not considered a control share acquisition under certain circumstances,
including where the acquisition is part of a merger or share exchange if the
corporation is a party to the agreement of merger or share exchange.

If authorized by the corporation's articles of incorporation or bylaws (i)
control shares acquired in a control share acquisition with respect to which
no acquiring person statement has been filed may be redeemed by the
corporation at any time more than 60 days after the end of the control share
acquisition at "fair value;" and (ii) control shares acquired in a control
share acquisition which are not accorded full voting rights may be redeemed by
the corporation at "fair value." Unless provided otherwise in the
corporation's articles of incorporation or bylaws, in the event that control
shares acquired in a control share acquisition are accorded full voting rights
and the acquiring person has acquired a majority of all voting power of the
corporation, the shareholders of the corporation, other than the acquiring
person, have dissenters' rights.

Under certain circumstances, Chapter 7B may make it more difficult for an
"acquiring person" to exercise control over a corporation due to the
limitations placed on that person's ability to vote the control shares,
although the corporation may, before any such control share acquisition, elect
not to be governed by this chapter by adopting an amendment to the
corporation's articles of incorporation or bylaws. The Company's Restated
Articles of Incorporation and Restated Bylaws do not exclude the Company from
the provisions of Chapter 7B of the MBCA and the Restated Articles of
Incorporation incorporate its current provisions by reference. The Company's
Restated Articles of Incorporation also include provisions authorizing a
forced redemption of control shares under certain circumstances as specified
by Chapter 7B. It is anticipated that the provisions of Chapter 7B may
encourage acquiring persons interested in obtaining control over the Company
to negotiate in advance with the Board of Directors.

Section 1368 of the MBCA, which is applicable to corporations organized
under the laws of Michigan including the Company, prohibits a corporation from
purchasing, either directly or indirectly, any of its shares that are listed
on a national securities exchange from any person who holds at least 3% of its
shares unless one of the following conditions is met: (a) the corporation
makes an equivalent offer to all other holders of the same shares; (b) the
purchase is authorized in advance by the stockholders entitled to vote
thereon; (c) the purchase meets the requirements of the articles of
incorporation for such a purchase; (d) the shares are beneficially owned by
the person for at least two years prior to the purchase date; (e) the purchase
is made on the open market; (f) the purchase price is not more than the
average market price of the shares during the 30 business days prior to the
purchase date; or (g) the purchase is otherwise authorized by the MBCA. Under
certain circumstances, Section 368 prevents a stockholder from selling his
shares back to the corporation at a premium within two years of that
stockholder's purchase of the shares unless one of the other conditions is
met. However, the stockholders may approve such a purchase by the corporation
or the corporation may include in its articles of incorporation lesser
requirements for such a transaction. The Company's Restated Articles of
Incorporation do not contain any

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provisions exempting the Company from the provisions of Section 368 of the
MBCA. It is anticipated that the provisions of Section 368 may discourage
persons from obtaining quantities of the Company's stock for the sole purpose
of eliciting a premium from the Company in a resale of those shares.

CERTAIN ANTI-TAKEOVER PROVISIONS IN THE RESTATED
ARTICLES OF INCORPORATION AND RESTATED BYLAWS

The following discussion is a general summary of certain provisions of the
Restated Articles of Incorporation ("Restated Articles") and Restated Bylaws
of the Company which may be deemed to have an "anti-takeover" effect. The
description of these provisions is necessarily general and reference should be
made in each case to the Restated Articles and Restated Bylaws of the Company,
which are incorporated herein by reference.

In addition to discouraging a takeover attempt which a majority of the
stockholders of the Company might determine to be in their best interest or in
which the stockholders of the Company might receive a premium over the current
market prices for their shares, the effect of these provisions may render the
removal of management more difficult. It is thus possible that incumbent
officers and directors might be able to retain their positions (at least until
their term of office expires) even though a majority of the stockholders
desire a change.

CLASSIFIED BOARD OF DIRECTORS

Article X of the Restated Articles provides that the Board of Directors is
to be divided into three classes which shall be as nearly equal in number as
possible. Under Article X, the directors in each class serve for terms of
three years and until their respective successors are elected and qualified,
with approximately one-third of the directors elected each year. Article XI
provides that a director may be removed only by the affirmative vote of the
holders of at least 80% of the outstanding shares entitled to vote and only
for cause.

A classified Board of Directors could make it more difficult for
stockholders to change a majority, whereas a majority of a non-classified
board could be changed in one year. In the absence of the provisions of the
Restated Articles classifying the Board, all of the directors would be elected
each year.

Management of the Company believes that the staggered election of directors
tends to promote continuity of management because only one-third of the Board
of Directors are subject to election each year. Staggered terms help to ensure
that, at any one time, approximately two-thirds of the Board will be comprised
of persons who have at least one year's experience as directors of the
Company. In addition, the use of staggered terms moderates the pace of changes
in the Board of Directors by extending the minimum time required to elect a
majority of directors from one to two years.

AVAILABILITY OF SERIAL PREFERRED STOCK

The Company's Restated Articles authorize the issuance of up to 10,000,000
shares of serial preferred stock, which may be issued with rights and
preferences that could impede an acquisition. This preferred stock, none of
which has yet been issued by the Company, together with authorized but
unissued shares of common stock (the Restated Articles authorize the issuance
of up to 40,000,000 shares of the Common Stock), could also represent
additional capital stock required to be purchased by the acquirer.

ADVANCE NOTICE REQUIREMENT FOR NOMINATIONS

Article VIII of the Company's Restated Articles provides that any
stockholder desiring to make a nomination for the election of directors or a
proposal for new business at a meeting of stockholders must submit written
notice to the Secretary of the Company not fewer than 30 or more than 60 days
in advance of the meeting. Management believes that it is in the best
interests of the Company and its stockholders to provide sufficient time to
enable management to disclose to stockholders information about a dissident
slate of nominations for

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directors. This advance notice requirement may also give management time to
solicit its own proxies in an attempt to defeat any dissident slate of
nominations should management determine that doing so is in the best interest
of stockholders generally. Similarly, adequate advance notice of stockholder
proposals will give management time to study such proposals and to determine
whether to recommend to the stockholders that such proposals be adopted.

SIZE OF BOARD OF DIRECTORS; FILLING OF VACANCIES

Article X of the Company's Restated Articles provide that the number of
directors of the Company (exclusive of directors, if any, to be elected by the
holders of any to-be-issued shares of preferred stock of the Company) should
not be fewer than 7 or more than 11 as shall be provided from time to time in
accordance with the Company's Restated Bylaws. Additionally, the power to
determine the number of directors within these numerical limitations and the
power to fill vacancies, whether occurring by reason of an increase in the
number of directors or by resignation, is vested in the Company's Board of
Directors. The overall effect of such provisions may be to prevent a person or
entity from immediately acquiring control of the Company through an increase
in the number of the Company's directors and election of his, or its nominees
to fill the newly created vacancies.

AMENDMENT OF BYLAWS

Article XVII of the Company's Restated Articles provides that the Company's
Bylaws may be amended by the affirmative vote of either two-thirds of the
Company's Board of Directors or the holders of at least 80% of the outstanding
shares of the Company's stock entitled to vote generally in the election of
directors. Absent this provision, Michigan law provides that a corporation's
bylaws may be amended by the holders of a majority of the voting power of the
corporation present and entitled to vote at a duly held meeting. The Company's
Restated Bylaws contain numerous provisions concerning its governance, such as
fixing the number of directors and determining the number of directors
constituting a quorum. By reducing the ability of a potential corporate raider
to make changes in the Company's Bylaws and to reduce the authority of the
Board or Directors or impede its ability to manage the Company, this provision
of the Restated Articles could have the effect of discouraging a tender offer
or other takeover attempt where the ability to make fundamental changes
through bylaw amendments is an important element of the takeover strategy of
the acquirer.

AMENDMENT OF ARTICLES

Article XVIII of the Company's Restated Articles provides that specified
provisions contained in the Restated Articles may not be repealed or amended
except by an affirmative vote of at least 80% of the outstanding shares of the
Company's stock entitled to vote generally in the election of directors;
provided, however, that such provisions may be repealed or amended upon a
majority of stockholder vote if first approved by a majority of the continuing
Directors, as defined in Article XVIII. This requirement exceeds the majority
vote of stockholders present and entitled to vote that it would otherwise be
required by Michigan law for the repeal or amendment of a provision of the
Restated Articles. The specific provisions for which an 80% vote is required
by Article XVIII are (i) Article VII providing for withholding of cumulative
voting in the election of directors; (ii) Article VIII requiring written
notice to the Company of nominations for the election of directors and new
business proposals, quorum requirements and the calling of special meetings;
(iii) Article IX eliminating the power of stockholders to act by written
consent without a meeting; (iv) Article X governing the number of the
Company's Board of Directors, the filling of vacancies on the Board of
Directors and classified terms of the Board of Directors; (v) Article XI
governing the removal of directors; (vi) Article XII providing for the
indemnification of directors, officers, employees and agents of the Company;
(vii) Article XIII pertaining to the elimination of the liability of the
directors to the Company and its stockholders for monetary damages, with
certain exceptions, for breach of fiduciary duty; (viii) Article XV providing
for the applicability to the Company of Section 7A of the MBCA, which
restricts business combinations involving the Company and "interested
stockholders;" (ix) Article XVI providing for the applicability to the Company
of Section 7B of the MBCA, which eliminates voting rights of persons who hold
20%, 33 1/3% and a majority of all outstanding shares of

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Common Stock unless stockholder approval is received at each such level; and
(x) Article XVII and Article XIX governing the required stockholder vote for
amending the Restated Bylaws and Restated Articles of the Company. See
"Restrictions on Acquisition of the Company and the Bank--Michigan Anti-
Takeover Statutes."

BENEFIT PLANS

In addition to the provisions of the Company's Restated Articles and
Restated Bylaws described above, certain benefit plans of the Company and the
Bank contain provisions that also may discourage hostile takeover attempts
which the Boards of Directors of the Company and the Bank might conclude are
not in the best interests of the Company, the Bank or the Company's
stockholders. For a description of the benefit plans and the provisions of
such plans relating to changes in control of the Company or the Bank, see
"Management--Certain Benefit Plans and Agreements."

THE PURPOSE AND EFFECT OF THE ANTI-TAKEOVER PROVISIONS IN THE COMPANY'S
RESTATED ARTICLES AND RESTATED BYLAWS

The Boards of Directors of the Company and the Bank believe that the
provisions described above reduce the Company's vulnerability to takeover
attempts and certain other transactions which have not been negotiated with
and approved by its Board of Directors. These provisions also assist the
Company and the Bank in the orderly deployment of the net proceeds of the
Offering into productive assets during the initial period after the Offering.
The Boards of Directors of the Company and the Bank believe these provisions
are in the best interests of the Bank and of the Company and its stockholders.
In the judgment of the Boards of Directors of the Company and the Bank, the
Company's Board is in the best position to consider all relevant factors and
to negotiate for what is in the best interests of the stockholders and the
Company's other constituents. Accordingly, the Boards of Directors of the
Company and the Bank believe that it is in the best interests of the Company
and its stockholders to encourage potential acquirers to negotiate directly
with the Company's Board of Directors and that these provisions encourage such
negotiations and discourage nonnegotiated takeover attempts. It is also the
view of the Board of Directors that these provisions should not discourage
persons from proposing a merger or other transaction at prices reflective of
the true value of the Company and which is in the best interests of all
stockholders.

Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts which
have not been negotiated with and approved by the Board of Directors present
to stockholders the risk of a takeover on terms which may be less favorable
than might otherwise be available. A transaction which is negotiated and
approved by the Board of Directors, on the other hand, can be carefully
planned and undertaken at an opportune time in order to obtain maximum value
for the Company and stockholders, with due consideration given to matters such
as the management and business of the acquiring corporation and maximum
strategic development of the Company's assets.

An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above then
current market prices, such offers are sometimes made for less than all the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an
enterprise which is under different management and whose objectives may not be
similar to those of the remaining stockholders. The concentration of control
that could result from a tender offer or other takeover attempt could also
deprive the Company's remaining stockholders of the benefits of having the
Common Stock quoted on the Nasdaq National Market and of certain protective
provisions of the Securities Exchange Act of 1934, as amended (the "Exchange
Act").

Despite the belief of the Company as to the benefits to stockholders of
these provisions of the Company's Restated Articles and Restated Bylaws, these
provisions may also have the effect of discouraging a future takeover attempt
which would not be approved by the Company's Board of Directors, but pursuant
to which the

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stockholders may receive a substantial premium for their shares over then
current market prices. As a result, stockholders who might desire to
participate in such a transaction may not have any opportunity to do so. Such
provisions will also render the removal of the Company's Board of Directors
and management more difficult and may tend to stabilize the Company's stock
price, thus limiting gains which might otherwise be reflected in price
increases due to a potential merger or acquisition. The Board of Directors,
however, has concluded that the potential benefits of these provisions
outweigh the possible disadvantages. Pursuant to applicable law, at any annual
or special meeting of its stockholders, the Company may adopt additional
provisions to its Restated Articles regarding the acquisition of its equity
securities that would be permitted to a Michigan corporation. The Company does
not presently intend to propose the adoption of further restrictions on the
acquisition of the Company's equity securities.

UNDERWRITING

Under the terms of, and subject to the conditions contained in, the U.S.
Underwriting Agreement, the U.S. Underwriters have severally agreed to
purchase from the Company and the Selling Stockholders, and the Company and
the Selling Stockholders have agreed to sell to each U.S. Underwriter, the
aggregate number of shares of Common Stock set forth opposite the name of each
such U.S. Underwriter below:

<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
----------------- ---------
<S> <C>
Lehman Brothers Inc................................................
PaineWebber Incorporated...........................................
Roney & Co., L.L.C. ...............................................
---
Total............................................................
===

Under the terms of, and subject to the conditions contained in, the
International Underwriting Agreement, the International Managers have
severally agreed to purchase from the Company and the Selling Stockholders,
and the Company and the Selling Stockholders have agreed to sell to each
International Manager, the aggregate number of shares of Common Stock set
forth opposite the name of each such International Manager below:
<CAPTION>
NUMBER
INTERNATIONAL MANAGERS OF SHARES
---------------------- ---------
<S> <C>
Lehman Brothers International (Europe).............................
PaineWebber International (U.K.) Ltd. .............................
Roney & Co., L.L.C. ...............................................
---
Total............................................................
===
</TABLE>

The Company and the Selling Stockholders have been advised by the
Representatives and the Lead Managers that the U.S. Underwriters and the
International Managers propose to offer the shares to the public at the
initial public offering price set forth on the cover page of this Prospectus,
and to certain dealers at such price less a selling concession not in excess
of $ per share. The U.S. Underwriters and the International Managers may
allow, and such dealers may re-allow, a concession not in excess of $ per
share to certain other Underwriters or to certain other brokers or dealers.
After the initial offering to the public, the offering price and other selling
terms may be changed by the Representatives and the Lead Managers.

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<PAGE>

The Underwriting Agreements provide that the obligations of the several U.S.
Underwriters and the International Managers, respectively, to pay for and
accept delivery of the shares of Common Stock offered hereby are subject to
certain conditions and that if any of the above shares of Common Stock are
purchased by the U.S. Underwriters pursuant to the U.S. Underwriting Agreement
or by the International Managers pursuant to the International Underwriting
Agreement, all the shares of Common Stock agreed to be purchased by either the
U.S. Underwriters or the International Managers, as the case may be, pursuant
to their respective Underwriting Agreements, must be so purchased. The initial
public offering price and underwriting discounts and commissions for the U.S.
Offering and the International Offering are identical. The closing of the U.S.
Offering is a condition to the closing of the International Offering. The
closing of the International Offering is a condition to the closing of the
U.S. Offering.

At the request of the Company, the U.S. Underwriters initially have reserved
up to 800,000 shares of Common Stock for sale at the initial public offering
price to all the employees and directors of the Company who have expressed an
interest in purchasing such shares and, in management's discretion, to those
customers of the Company with whom the Company has maintained long-standing
and significant business relationships, although no such customers have yet
been identified. The purpose of selling such shares in this manner is to
facilitate equity ownership of the Company by persons whose efforts can
directly contribute to the Company's continued profitability, thereby
providing an enhanced economic incentive for those persons to act in the best
interests of the Company. The number of shares of Common Stock available for
sale to the general public will be reduced to the extent such persons purchase
such reserved shares. Any such reserved shares which are not so purchased will
be offered by the U.S. Underwriters to the general public on the same basis as
the other shares offered thereby.

The Company and the Bank (subject to certain restrictions), jointly and
severally, and the Selling Stockholders, jointly and severally, have agreed in
the Underwriting Agreements to indemnify the U.S. Underwriters and the
International Managers against certain liabilities, including liabilities
under the Securities Act, and to contribute to payments that the U.S.
Underwriters and the International Managers may be required to make in respect
thereof.

The Company and the Selling Stockholders have granted to the U.S.
Underwriters a 30-day option to purchase up to an additional and shares
of Common Stock, respectively, on the same terms and conditions as set forth
above to cover over-allotments, if any. The Company and the Selling
Stockholders have granted the International Managers a similar option to
purchase up to an additional and shares of Common Stock, respectively,
to cover over-allotments, if any. To the extent that such option is exercised,
each Underwriter will be committed, subject to certain conditions, to purchase
a number of the additional shares of Common Stock proportionate to such
Underwriter's initial commitment as indicated in the preceding tables.

The U.S. Underwriters and the International Managers have entered into an
Agreement Between U.S. Underwriters and International Managers pursuant to
which each U.S. Underwriter has agreed that, as part of the distribution of
the shares of Common Stock (plus any of the shares of Common Stock to cover
over-allotments) offered in the U.S. Offering, (a) it is not purchasing any of
such shares of Common Stock for the account of anyone other than a U.S. or
Canadian Person (as defined below) and (b) it has not offered or sold, and
will not offer, sell, resell or deliver, directly or indirectly, any of such
shares of Common Stock outside the United States or Canada or to anyone other
than a U.S. or Canadian Person. In addition, pursuant to the same agreement,
each International Manager has agreed that, as part of the distribution of the
shares of Common Stock (plus any of the shares of Common Stock to cover over-
allotments) offered in the International Offering, (a) it is not purchasing
any of such shares of Common Stock for the account of any U.S. or Canadian
Person and (b) it has not offered or sold, and will not offer, sell, resell or
deliver, directly or indirectly, any of such shares of Common Stock in the
United States or Canada or to any U.S. or Canadian Person. Each International
Manager has also agreed that it will offer to sell shares of Common Stock only
in compliance with all relevant requirements of any applicable laws.

The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Underwriting Agreements and the
Agreement Between U.S. Underwriters and International Managers,

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<PAGE>

including (i) certain purchases and sales between the U.S. Underwriters and
the International Managers, (ii) certain offers, sales, resales, deliveries or
distributions in or through investment advisors or other persons exercising
investment discretion, (iii) purchases, offers or sales by a U.S. Underwriter
who is also acting as an International Manager or by an International Manager
who is also acting as a U.S. Underwriter and (iv) other transactions
specifically approved by the Representatives and the Lead Managers. As used
herein, (a) the term "United States" means the United States of America
(including the District of Columbia) and its territories, its possessions and
other areas subject to its jurisdiction, (b) the term "Canada" means Canada,
its provinces, territories and possessions and other areas subject to its
jurisdiction and (c) the term "U.S. or Canadian Person" means any resident or
citizen of the United States or Canada, any corporation, partnership or other
entity created or organized in or under the laws of the United States or
Canada or any political subdivision thereof or any estate or trust, the income
of which is subject to United States federal income taxation or Canadian
income taxation regardless of its source (other than a foreign branch of any
U.S. or Canadian Person), and includes any United States or Canadian branch of
a person who is not otherwise a U.S. or Canadian Person.

Pursuant to the Agreement Between U.S. Underwriters and International
Managers, sales may be made between the U.S. Underwriters and the
International Managers of such number of shares of Common Stock as may be
mutually agreed upon. Unless otherwise agreed, the price of any shares of
Common Stock so sold shall be the public offering price as then in effect for
the shares of Common Stock being sold by the U.S. Underwriters and the
International Managers, less the selling concession allocable to such shares
of Common Stock. To the extent that there are sales between the U.S.
Underwriters and the International Managers pursuant to the Agreement Between
U.S. Underwriters and International Managers, the number of shares of Common
Stock initially available for sale by the U.S. Underwriters or by the
International Managers may be more or less than the amount appearing on the
cover page of this Prospectus.

This Prospectus is not, and under no circumstances is to be construed as, an
advertisement or a public offering of shares of Common Stock in Canada or any
province or territory thereof. Any offer or sale of shares of Common Stock in
Canada may only be made pursuant to an exemption from the requirement to file
a prospectus in the province or territory of Canada in which such offer or
sale is made.

Each International Manager has represented and agreed that (i) it has not
offered or sold and prior to the date six months after the latest closing date
will not offer or sell any shares of Common Stock to persons in the United
Kingdom except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995; (ii)
it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 ("1986 Act") with respect to anything done by it
in relation to the shares of Common Stock in, from or otherwise involving the
United Kingdom; and (iii) it has only issued or passed on, and will only issue
and pass on to any person in the United Kingdom, any investment advertisement
(within the meaning of the 1986 Act) relating to the shares of Common Stock if
that person falls within Article II(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 or is a person to whom
such document may otherwise lawfully be issued or passed on.

No action has been taken or will be taken in any jurisdiction by the
Company, the Selling Stockholders or the Underwriters that would permit a
public offering of shares of Common Stock in any jurisdiction where action for
that purpose is required, other than the United States. Persons into whose
possession this Prospectus comes are required by the Company, the Selling
Stockholders and the Underwriters to inform themselves about, and to observe
any restrictions as to, the offering of shares of Common Stock offered
pursuant to the Offering and the distribution of this Prospectus.

Purchasers of shares of Common Stock offered hereby may be required to pay
stamp taxes and other charges in accordance with the laws and practices of the
country of purchase in addition to the offering price set forth on the cover
page hereof.

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<PAGE>

The Representatives and the Lead Managers have informed the Company that the
U.S. Underwriters and the International Managers do not intend to confirm
sales to any accounts over which they exercise discretionary authority.

The Selling Stockholders, who presently own 100% of the outstanding shares
of Common Stock, have agreed not to offer, sell or otherwise dispose of their
remaining shares held after the Offering, with certain limited exceptions, for
a period of 180 days after the date of this Prospectus without the prior
written consent of Lehman Brothers Inc. on behalf of the Representatives and
the Lead Managers. Except for Common Stock to be sold in this Offering and
except for the Common Stock that may be issued pursuant to the Option Plan
(see "Management--Certain Benefit Plans and Agreements--Stock Option Plan"),
the Company has agreed not to offer, sell, contract to sell or otherwise issue
any Common Stock or other capital stock prior to the expiration of 180 days
from the date of this Prospectus without the prior written consent of Lehman
Brothers Inc. on behalf of the Representatives and the Lead Managers.

Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price will be negotiated among the Company,
the Selling Stockholders and the Representatives and the Lead Managers. Among
the factors to be considered in determining the initial public offering price
of the Common Stock, in addition to the prevailing market conditions, are the
Company's historical performance, capital structure, estimates of the business
potential and earnings prospects of the Company, an assessment of the
Company's management, consideration of the above factors in relation to the
market values of the companies in related businesses and other factors deemed
relevant. The initial public offering price set forth on the cover page of
this Prospectus should not, however, be considered an indication of the actual
value of the Common Stock. Such price will be subject to change as a result of
market conditions and other factors. There can be no assurance that an active
trading market will develop for the Common Stock or that the Common Stock will
trade in the public market subsequent to the Offering at or above the initial
public offering price.

Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase shares of Common
Stock. As an exception to these rules, the Representatives and the Lead
Managers are permitted to engage in certain transactions that stabilize the
price of the Common Stock. Such transactions may consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the Common
Stock.

If the Underwriters create a short position in the Common Stock in
connection with the Offering, (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the Representatives
and the Lead Managers may reduce that short position by purchasing Common
Stock in the open market. The Representatives and the Lead Managers also may
elect to reduce any short position by exercising all or part of the over-
allotment options described herein.

The Representatives and the Lead Managers also may impose a penalty bid on
certain Underwriters and selling group members. This means that if the
Representatives or the Lead Managers purchase shares of Common Stock in the
open market to reduce the Underwriters' short position or to stabilize the
price of the Common Stock they may reclaim the amount of the selling
concession from the Underwriters and selling group members who sold those
shares as part of this Offering.

In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
this Offering.

Neither the Company, the Selling Stockholders nor any of the Underwriters
makes any representation or prediction as to the direction or magnitude of any
effect that the transactions described above may have on the price of the
Common Stock. In addition, neither the Company, the Selling Stockholders nor
any of the Underwriters makes any representation that the Representatives or
Lead Managers will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.

90
<PAGE>

LEGAL MATTERS

The validity of the Common Stock offered hereby and certain other legal
matters will be passed upon for the Company by Reinhart, Boerner, Van Deuren,
Norris & Rieselbach, P.C., Washington, D.C. Certain legal matters relating to
Michigan law will be passed upon for the Company by Albert J. Gladner, Esq.,
First Vice President and General Counsel of the Bank. Certain legal matters
will be passed upon for the Underwriters by Simpson Thacher & Bartlett (a
partnership which includes professional corporations), New York, New York.
Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C., and Simpson Thacher
& Bartlett will rely as to matters of Michigan law upon the opinion of Mr.
Gladner.

EXPERTS

The consolidated financial statements of the Company as of December 31, 1996
and 1995 and for each of the three years in the period ended December 31, 1996
included in this Prospectus have been audited by Grant Thornton LLP,
independent certified public accountants, and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.

AVAILABLE INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby
(together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement"). This Prospectus, which forms a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement, certain parts of which have been omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock offered hereby, reference is made
to the Registration Statement. Statements contained in this Prospectus as to
the contents of any contract, agreement or other document are not necessarily
complete, although all material terms of such documents have been addressed in
this Prospectus, and in each instance, reference is made to the copy of the
document filed as an exhibit to the Registration Statement. The Registration
Statement may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices at Suite 1400, Northwest
Atrium Center, 500 West Madison Street, Chicago, Illinois 60661, and 7 World
Trade Center (13th Floor), New York, New York 10048. Copies of such material
can also be obtained from the Commission at prescribed rates through its
Public Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549.
The Commission maintains a World Wide Web site on the Internet that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of such
site is "http://www.sec.gov."

The Company is not currently subject to the informational requirements of
the Exchange Act. As a result of the Offering, the Company will become subject
to the informational requirements of the Exchange Act. The Company will
fulfill its obligations with respect to such requirements by filing periodic
reports and other information with the Commission. In addition, the Company
intends to furnish to its stockholders annual reports containing consolidated
financial statements examined by an independent public accounting firm.

91
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants....................... F-2
Consolidated Statements of Financial Condition as of December 31, 1996
and 1995................................................................ F-3
Consolidated Statements of Earnings for the Years Ended December 31,
1996, 1995 and 1994..................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994........................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994..................................................... F-6
Notes to Consolidated Financial Statements............................... F-8
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Flagstar Bancorp, Inc.

We have audited the accompanying consolidated statements of financial
condition of Flagstar Bancorp, Inc. and Subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of earnings, stockholders
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain a reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Flagstar Bancorp, Inc. and Subsidiaries as of December 31, 1996 and 1995,
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.

As described in notes 3 and 7, in May 1995, the Company adopted Statement of
Financial Accounting Standards No. 122, "Accounting for Certain Mortgage
Servicing Rights".

Grant Thornton LLP

Detroit, Michigan
March 3, 1997

F-2
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
ASSETS 1996 1995
------ ---------- ----------
<S> <C> <C>
Cash and cash equivalents.............................. $ 44,187 $ 29,119
Loans receivable
Mortgage loans held for sale......................... 840,767 620,455
Loans held for investment............................ 273,569 305,580
Less allowance for losses............................ (3,500) (2,102)
---------- ----------
1,110,836 923,933
Federal Home Loan Bank stock........................... 19,725 17,800
Other investments...................................... 887 818
---------- ----------
Total earning assets............................... 1,131,448 942,551
Accrued interest receivable............................ 6,626 4,307
Repossessed assets..................................... 10,363 2,359
Premises and equipment................................. 20,866 17,958
Mortgage servicing rights.............................. 30,064 27,957
Other assets........................................... 53,672 20,843
---------- ----------
Total assets....................................... $1,297,226 $1,045,094
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities
Deposit accounts..................................... $ 624,485 $ 526,974
Federal Home Loan Bank advances...................... 389,801 191,156
---------- ----------
Total interest bearing liabilities................. 1,014,286 718,130
Accrued interest payable............................. 2,712 2,215
Undisbursed payments on loans serviced for others.... 61,445 60,012
Escrow accounts...................................... 61,009 88,863
Liability for checks issued.......................... 39,813 85,849
Federal income taxes payable......................... 22,548 14,655
Other liabilities.................................... 16,945 12,925
---------- ----------
Total liabilities.................................. 1,218,758 982,649
Commitments and Contingencies (Notes 4, 6, 7, 12 and
16)................................................... -- --
Stockholders' Equity
Common stock--$0.01 par value, 40,000,000 shares
authorized, 11,250,000 shares issued and outstanding
at December 31, 1996 and 1995....................... 112 112
Additional paid in capital........................... 2,816 2,816
Retained earnings.................................... 75,540 59,517
---------- ----------
Total stockholders' equity......................... 78,468 62,445
---------- ----------
Total liabilities and stockholders' equity......... $1,297,226 $1,045,094
========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-3
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
INTEREST INCOME
Loans................................................. $74,588 $69,543 $33,533
Other................................................. 1,591 1,761 1,579
------- ------- -------
76,179 71,304 35,112
INTEREST EXPENSE
Deposits.............................................. 30,431 25,123 9,037
FHLB advances......................................... 14,291 15,072 3,726
Other................................................. 1,245 1,248 1,723
------- ------- -------
45,967 41,443 14,486
------- ------- -------
Net interest income................................... 30,212 29,861 20,626
Provision for losses.................................. 2,604 238 290
------- ------- -------
Net interest income after provision for losses........ 27,608 29,623 20,336
NON-INTEREST INCOME
Loan administration................................... 11,859 14,248 13,261
Net gain on loan sales and sales of mortgage servicing
rights............................................... 39,640 16,228 27,357
Other fees and charges................................ 7,035 6,512 2,114
------- ------- -------
58,534 36,988 42,732
------- ------- -------
NON-INTEREST EXPENSE
Compensation and benefits............................. 25,553 19,665 18,609
Occupancy and equipment............................... 12,126 9,062 7,340
General and administrative............................ 21,141 12,989 11,670
------- ------- -------
58,820 41,716 37,619
------- ------- -------
Earnings before federal income taxes.................. 27,322 24,895 25,449
Provision for federal income taxes.................... 10,299 9,419 9,318
------- ------- -------
NET EARNINGS.......................................... $17,023 $15,476 $16,131
======= ======= =======
Earnings per common share............................. $ 1.51 $ 1.37 $ 1.42
======= ======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-4
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID IN UNREALIZED RETAINED STOCKHOLDERS'
STOCK CAPITAL GAINS EARNINGS EQUITY
------ ---------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1994...................... $115 $2,885 $ 126 $31,988 $35,114
Net earnings............. -- -- -- 16,131 16,131
Sale of marketable
securities.............. -- -- (126) -- (126)
Stock repurchase......... (2) (56) -- (1,242) (1,300)
Dividends paid ($0.04 per
share).................. -- -- -- (400) (400)
---- ------ ----- ------- -------
Balance at December 31,
1994...................... 113 2,829 -- 46,477 49,419
Net earnings............. -- -- -- 15,476 15,476
Stock repurchase......... (1) (13) -- (436) (450)
Dividends paid ($0.18 per
share).................. -- -- -- (2,000) (2,000)
---- ------ ----- ------- -------
Balance at December 31,
1995...................... 112 2,816 -- 59,517 62,445
Net earnings............. -- -- -- 17,023 17,023
Dividends paid ($0.09 per
share).................. -- -- -- (1,000) (1,000)
---- ------ ----- ------- -------
Balance at December 31,
1996...................... $112 $2,816 $ -- $75,540 $78,468
==== ====== ===== ======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-5
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities
Net earnings............................ $ 17,023 $ 15,476 $ 16,131
Adjustments to reconcile net earnings to
net cash (used in) provided by
operating activities
Provision for losses................... 2,604 238 290
Depreciation and amortization.......... 17,287 11,072 9,022
Net gain on the sale of assets......... (187) (493) (569)
Net gain on loan sales and sales of
mortgage servicing rights............. (39,640) (16,228) (27,357)
(Benefit) provision for deferred
federal income taxes.................. (773) 3,415 2,813
Proceeds from sales of loans held for
sale.................................. 6,604,080 4,783,070 3,668,870
Originations and repurchases of loans
held for sale, net of principal
repayments............................ (6,830,382) (5,011,843) (3,594,108)
Increase in accrued interest
receivable............................ (2,319) (1,214) (1,027)
Increase in other assets............... (34,369) (8,896) (670)
Increase in accrued interest payable... 497 1,254 343
Increase (decrease) in liability for
checks issued......................... (46,037) 46,496 (7,421)
Increase in federal taxes payable...... 8,666 3,750 1,628
Increase (decrease) in other
liabilities........................... 4,020 8,326 (722)
Decrease in unrealized gains........... -- -- (126)
----------- ----------- -----------
Net cash (used in) provided by
operating activities................ (299,530) (165,577) 67,097
Investing Activities
Cash used to acquire Security Savings
Bank, FSB, (Security), net of cash
received............................... -- -- (23,869)
Principal repayments from assets
acquired from Security................. -- -- 3,251
Proceeds from the disposition of assets
acquired from Security................. -- -- 74,300
Net decrease in liabilities acquired
from Security.......................... -- -- (2,918)
Principal repayment from other
investments............................ 31 32 --
Maturity of other investments........... 400 -- --
Purchase of other investments........... (500) -- --
Originations of loans held for
investment, net of principal
repayments............................. 31,936 (60,891) (157,698)
Principal repayments from mortgage-
backed securities...................... -- -- 163
Proceeds from the sale of mortgage-
backed securities...................... -- -- 5,176
Purchase of Federal Home Loan Bank
Stock.................................. (1,925) (5,034) (2,438)
Proceeds from the disposition of
repossessed assets..................... 1,813 675 1,796
Net decrease in real estate held for
investments............................ -- -- 5
Acquisitions of premises and equipment.. (7,596) (6,632) (6,591)
Proceeds from the disposition of
premises and equipment................. -- -- 37
Increase in mortgage servicing rights... (63,499) (31,106) (15,616)
Proceeds from the sale of mortgage
servicing rights....................... 85,203 29,040 38,183
----------- ----------- -----------
Net cash provided by (used in)
investing activities................ 45,863 (73,916) (86,219)
</TABLE>

The accompanying notes are an integral part of these statements.

F-6
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Financing Activities
Net increase (decrease) in deposit
accounts........................... $ 97,511 $218,984 $(80,478)
Net increase (decrease) in Federal
Loan Bank advances................. 198,645 (9,594) 140,750
Net receipt (disbursement) of
payments of loans serviced for
others............................. 1,433 25,023 (22,213)
Net (disbursement) receipt of escrow
payments........................... (27,854) 10,993 33
Stock repurchase.................... -- (450) (1,300)
Dividends paid to stockholders...... (1,000) (2,000) (400)
-------- -------- --------
Net cash provided by financing
activities...................... 268,735 242,956 36,392
-------- -------- --------
Net increase in cash and cash
equivalents......................... 15,068 3,463 17,270
Beginning cash and cash equivalents.. 29,119 25,656 8,386
-------- -------- --------
Ending cash and cash equivalents..... $ 44,187 $ 29,119 $ 25,656
======== ======== ========
Supplemental disclosure of cash flow
information:
Loans receivable transferred to
repossessed assets................. $ 10,577 $ 1,781 $ 1,367
======== ======== ========
Total interest payments made on
deposits and other borrowings...... $ 45,470 $ 40,189 $ 14,139
======== ======== ========
Federal income taxes paid........... $ 2,300 $ 2,500 $ 6,280
======== ======== ========
Loans held for investment
transferred to loans held for
sale............................... $ -- $185,111 $ --
======== ======== ========
Loans held for sale transferred to
loans held for investment.......... $ -- $ -- $106,261
======== ======== ========
Loans held for sale transferred to
mortgage-backed securities......... $ -- $ -- $ 1,438
======== ======== ========
Supplemental schedule of
acquisitions:
Flagstar Bank, FSB acquired Security Savings Bank, FSB, in
Jackson, Michigan at the close of business June 30, 1994 (Note
15).
Security Savings Bank Acquisition
Cash paid for common stock.......... $ 25,729
Fair value of assets acquired,
including $77,538 which were
subsequently disposed.............. $225,934
Fair value of liabilities acquired,
including $2,918 which were
subsequently repaid................ 209,241
--------
Fair value of net assets acquired... 16,693
--------
Core deposit premium................ $ 9,036
========
</TABLE>

The accompanying notes are an integral part of these statements.

F-7
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--NATURE OF BUSINESS

Flagstar Bancorp, Inc. and Subsidiaries (formerly FSSB Holding Corporation)
("Company") is a non-diversified, unitary thrift holding company. The Company
provides retail banking services in southern Michigan and mortgage lending
services nationwide.

NOTE 2--CORPORATE STRUCTURE

The following is a listing of the subsidiaries of the Company:

Flagstar Bank, FSB ("Flagstar") (formerly First Security Savings Bank,
FSB) is a federally chartered stock savings bank and a member of the
Federal Home Loan Bank System ("FHLB").

Security Savings Bank, FSB ("Security") is a federally chartered stock
savings bank and a member of the Federal Home Loan Bank System ("FHLB").
Flagstar acquired the stock of Security on June 30, 1994. This acquisition
was accounted for using the purchase method of accounting. For regulatory
reporting purposes, Flagstar and Security (the "Banks") filed a
consolidated Thrift Financial Report ("TFR").

Security owned two subsidiaries, Mid Michigan Service Corporation
("MMSC") and SSB Funding Corporation ("Funding"). MMSC is a Michigan
corporation utilized to lease Security's main office facility and Funding
is a finance subsidiary, which is currently inactive.

On February 1, 1996, Security was merged with and into Flagstar Bank,
FSB. The consolidation took place to take advantage of name recognition and
operating efficiencies.

Flagstar owns two other subsidiaries, Boston Credit Corporation ("BCC")
and Mortgage Affiliated Services, Inc. ("MAS"). BCC is currently inactive
and MAS is an appraisal and document preparation company.

The Company owns five other subsidiaries, FSSB Real Estate Development
Corporation ("REDC"), Douglas Insurance Agency ("DIA"), FSSB Mortgage
Corporation ("Mortgage"), Mortgage Video Network, Inc. ("Video"), and First
Security Investment Group, Inc. ("Investment") whose results of operations
are not significant. During the first quarter of 1996, FSSB Mortgage
Corporation was made a part of Flagstar. This organizational change did not
have a significant impact on the operations of the Company.

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following summarizes the significant accounting policies of the Company
and subsidiaries (collectively referred to as the Company) applied in the
preparation of the accompanying consolidated financial statements.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company.
All significant intercompany balances and transactions have been eliminated.

Statement of Cash Flows

For purposes of the statements of cash flows, the Company considers its
investment in overnight deposits to be cash equivalents.

Loans Receivable

The Company originates loans which are designated to be held for investment
or sale during the origination process. Mortgage loans held for sale are
carried at the lower of aggregate cost or estimated market value.

F-8
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Management periodically reviews the portfolio and makes necessary adjustments
for market value. Net unrealized losses are recognized in a valuation
allowance by charges to earnings. Gains or losses recognized upon the sale of
loans are determined using the specific identification method. Mortgage loans
held for investment are carried at amortized cost. The Company has both the
intent and the ability to hold all mortgage loans held for investment for the
foreseeable future.

Allowance for Losses

The allowance is maintained at a level adequate to absorb losses inherent in
the loan portfolio. Management determines the adequacy of the allowance by
applying projected loss ratios to the risk ratings of loans both individually
and by category. The projected loss ratios incorporate such factors as recent
loss experience, current economic conditions, the risk characteristics of the
various categories and concentrations of loans, transfer risk and other
pertinent factors.

Loans which are deemed uncollectible are charged off and deducted from the
allowance. The provision for losses and recoveries on loans previously charged
off are added to the allowance. In addition, specific provision is made for
expected loan losses to reduce the recorded balances of loans receivable to
their estimated net realizable value. Such specific provision is based on
management's estimate of net realizable value considering the current and
anticipated operating or sales environment. These estimates of collateral
value are particularly susceptible to market changes that could result in
adjustments to the results of earnings in the future. Recovery of the carrying
value of such loans or the underlying collateral is dependent to a great
extent on economic, operating and other conditions that may be beyond the
Company's control.

The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
114 (as amended by SFAS No. 118), "Accounting by Creditors for Impairment of a
Loan," effective January 1, 1995, which addresses the accounting by creditors
for the impairment of certain loans. The provisions of SFAS 114 do not apply
to large groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment and loans that are measured at fair value or at the
lower of cost or fair value. The Company considers its residential mortgage
loan portfolio to represent a pool of smaller balance homogeneous loans.
Commercial, commercial real estate, construction and consumer loan portfolios
are specifically reviewed for impairment. The adoption had no effect on the
recorded allowance for losses.

The Company considers a loan impaired when it is probable, in the opinion of
management, that interest and principal may not be collected according to the
contractual terms of the loan agreement. Consistent with this definition, the
Company considers all non-accrual loans (with the exception of residential
mortgages) to be impaired. Impaired loans which have risk characteristics that
are unique to an individual borrower, are evaluated on a loan-by-loan basis.
However, impaired loans that have risk characteristics in common with other
impaired loans, (such as loan type, geographical location, or other
characteristics that would cause the ability of the borrowers to meet
contractual obligations to be similarly affected by changes in economic or
other conditions), are aggregated and historical statistics, such as average
recovery period and average amount recovered, along with a composite effective
interest rate are used as a means of measuring those impaired loans. Loan
impairment is measured by estimating the expected future cash flows and
discounting them at the respective effective interest rate or by valuing the
underlying collateral.

Loan Origination Fees, Commitment Fees and Related Costs

Loan fees received are accounted for in accordance with SFAS No. 91,
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases." Mortgage loan fees and
certain direct origination costs are capitalized. On loans held for sale, the
net fee or cost is

F-9
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

recognized at the time the loan is sold. For mortgage loans held for
investment, the deferred amount is accounted for as an adjustment to interest
income using a method that approximates the interest method.

Repossessed Assets

Repossessed assets include one-to-four family residential property,
commercial property, and one-to-four family homes under construction. At the
date of foreclosure, real estate properties acquired in settlement of loans
are recorded at the lower of cost or net realizable value. Valuations are
periodically performed by management, and a charge to earnings is made if the
carrying value of a property exceeds its estimated fair value. Costs of
holding repossessed assets, principally taxes and legal fees, are expensed as
incurred.

Federal Income Taxes

The Company accounts for income taxes on the asset and liability method.
Deferred tax assets and liabilities are recorded based on the difference
between the tax bases of assets and liabilities and their carrying amounts for
financial reporting purposes. Current taxes are measured by applying the
provisions of enacted tax laws to taxable income to determine the amount of
taxes receivable or payable.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation.
Land is carried at historical cost. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets as follows:

Office buildings--31 years
Computer hardware and software--3 to 5 years
Furniture, fixtures and equipment--5 to 7 years
Automobiles--3 years

During March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
This Statement requires that long-lived assets and goodwill related to those
assets to be held and used by an entity and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company adopted SFAS No. 121 effective January 1, 1996. Adoption of this
Statement did not have an impact on the financial condition or results of
operations of the Company.

Mortgage Servicing Rights

Mortgage servicing rights ("MSR") represent the cost of acquiring the right
to service mortgage loans. These costs are initially capitalized and
subsequently amortized in proportion to, and over the period of, the estimated
net loan servicing income.

In May 1995, the Company adopted SFAS No. 122, "Accounting for Mortgage
Servicing Rights." This requires the capitalization of a mortgage servicing
asset for every origination whether it be originated or purchased. SFAS No.
122 also dictates prescribed rules for the amortization, periodic valuation,
and the required valuation adjustment. Prior to adoption, a value was
capitalized for purchased mortgage servicing rights. This capitalization was
in accordance with SFAS Statement of Financial Accounting Standards No. 65,
"Accounting for Certain Mortgage Banking Practices."

The value of the mortgage servicing rights are periodically evaluated in
relation to the estimated discounted net future servicing revenues. The
portfolio is aggregated into stratifications based on loan term and type, and
note rate. Estimates of remaining loan lives and prepayment rates are
incorporated into this analysis. Changes in

F-10
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

these estimates could materially change the estimated fair value and any
valuation allowance. Valuation adjustments are recorded when the fair value of
the servicing asset is less than the amortized book value on a stratum basis.
Any valuation adjustment is recorded as an offset to the asset.

Loan Sales

The Company sells its held for sale mortgage loans to secondary market
investors on a non-recourse basis. At the time of the sale, the Company makes
certain representations and warranties to the investors. Should an investor
determine that a breach of such representations or warranties occurs, the
Company may be required to repurchase loans from the investor. Such
representations and warranties generally relate to the fact that the loans
have been underwritten in accordance with the investor's underwriting
guidelines and that the loans conform to the laws of the state of origination.
Gain or loss on the sale of such loans is recognized upon consummation of the
sale.

Earnings Per Share

Earnings per share is calculated by dividing net earnings by the weighted
average number of common shares outstanding.

After giving effect to the stock split referred to in Note 20, the weighted
average shares outstanding for computing earnings per share was 11,250,000,
11,274,047 and 11,388,617 for the years ended December 31, 1996, 1995 and
1994, respectively.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

The financial condition of a financial services company, and to some extent,
its operating performance, is dependent to a significant degree upon estimates
and appraisals of value, evaluations of creditworthiness and assumptions about
future events and economic conditions. Recent history has demonstrated that
these estimates, appraisals, evaluations and assumptions are subject to rapid
change, and that such changes can materially affect the reported financial
condition of a financial services company and its financial performance, and
may result in restrictions on an institution's ability to continue to operate
in its customary manner.

Reclassifications

Certain amounts within the accompanying consolidated financial statements
and the related notes have been reclassified to conform to the 1996
presentation.

Recently Issued Accounting Standards

In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This statement defines a fair value based method of accounting
for an employee stock option or similar equity instrument and encourages
adoption of that method for all employee stock compensation plans. However, it
also allows an entity to continue to measure compensation cost for those plans
using the intrinsic value based method currently being followed and make pro
forma disclosures of net earnings and earnings per share under the fair value
based method of accounting. This statement is effective for financial
statements with fiscal years beginning

F-11
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

after December 15, 1995, with earlier application encouraged. At December 31,
1996, the Company had no stock-based compensation plans. (See Note 20).

In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement requires that, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities
it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. This statement is
effective for transfers and servicing of financial assets and extinguishment
of liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. Management
believes that implementation of this pronouncement should have no material
effect on the consolidated financial statements.

In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
replaces the presentation of primary earnings per share ("EPS") with a
presentation of basic EPS, requires dual presentation of basic and diluted EPS
on the face of the statement of earnings regardless of whether basic and
diluted EPS are the same, and requires a reconciliation of the numerator and
denominator used in computing basic and diluted EPS. Basic EPS excludes
dilution and is computed by dividing earnings available to common stockholders
by the weighted average number of common shares outstanding for the period.
Diluted EPS is computed similarly to fully diluted EPS pursuant to APB Opinion
15. Diluted EPS reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then shared in
the earnings of the entity. This Statement is effective for financial
statements issued for periods ending after December 15, 1997, including
interim periods, earlier application is not permitted, and requires
restatement of all prior-period EPS data presented.

NOTE 4--LOANS RECEIVABLE

The loan portfolio is summarized as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
---------- --------
<S> <C> <C>
Held for sale--mortgage loans............................. $ 840,767 $620,455
Held for investment
Mortgage loans.......................................... 120,924 178,246
Commercial real estate loans............................ 13,565 30,504
Commercial loans........................................ 46,202 8,566
Construction loans...................................... 59,270 48,933
Consumer loans.......................................... 33,608 39,331
---------- --------
273,569 305,580
---------- --------
1,114,336 926,035
Less allowance for losses................................. (3,500) (2,102)
---------- --------
Total................................................. $1,110,836 $923,933
========== ========
</TABLE>

F-12
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Activity in the allowance for losses is summarized as follows (in
thousands):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Balance, beginning of period...................... $ 2,102 $1,871 $ 901
Allowance for losses of Security at date of
acquisition...................................... -- -- 1,001
Provision charged to earnings..................... 2,604 238 290
Charge-offs, net of recoveries.................... (1,206) (7) (321)
------- ------ ------
Balance, end of period............................ $ 3,500 $2,102 $1,871
======= ====== ======
</TABLE>

The Company has no commitments to make additional advances on restructured
or other nonperforming loans. Loans on which interest accruals have been
discontinued totaled approximately $30.6 million at December 31, 1996, $10.7
million at December 31, 1995 and $1.7 million at December 31, 1994. Interest
that would have been accrued on such loans totaled approximately $2,668,000,
$862,000 and $245,000 at December 31, 1996, 1995, and 1994, respectively.

At December 31, 1996 the recorded investment in impaired loans pursuant to
SFAS No. 114, totaled $3.9 million and the average outstanding balance for the
year ended December 31, 1996 was $3.1 million. No additional allowance for
losses was required on these loans because the measured values of the loans
exceeded the recorded investments in the loans. Interest income recognized on
impaired loans during the year ended December 31, 1996, was not significant.
At December 31, 1995, the Company had no recorded investment in impaired
loans.

NOTE 5--REPOSSESSED ASSETS

Repossessed assets include the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
------- ------
<S> <C> <C>
One-to-four family............................................ $10,133 $2,179
Commercial properties......................................... 230 180
------- ------
Repossessed assets............................................ $10,363 $2,359
======= ======
</TABLE>

NOTE 6--PREMISES AND EQUIPMENT

Premises and equipment balances are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- -------
<S> <C> <C>
Land...................................................... $ 3,330 $ 3,330
Office buildings.......................................... 2,643 2,312
Computer hardware and software............................ 15,421 10,941
Furniture, fixtures and equipment......................... 11,045 8,460
Automobiles............................................... 571 568
-------- -------
33,010 25,611
Less accumulated depreciation............................. (12,144) (7,653)
-------- -------
Premises and equipment, net............................... $ 20,866 $17,958
======== =======
</TABLE>

F-13
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Depreciation expense amounted to approximately $4.6 million, $3.1 million
and $2.1 million for the years ended December 31, 1996, 1995 and 1994,
respectively.

The Company maintains 15 deposit branches, 28 loan centers, nine
correspondent service centers, a loan servicing center, and three corporate
operation centers. Seven of the deposit branches and one of the loan
production facilities are owned by the Company. Lease rental expense totaled
approximately $4.1 million, $3.3 million and $3.1 million for the years ended
1996, 1995 and 1994, respectively. The following outlines the Company's
minimum contractual lease obligations as of December 31, 1996 (in thousands):

<TABLE>
<S> <C>
1997.................................. $2,603
1998.................................. 1,834
1999.................................. 1,357
2000.................................. 1,079
2001.................................. 463
------
Total............................... $7,336
======
</TABLE>

During January 1997, the Company exercised its option under an existing
lease agreement to purchase land and a building in Jackson County, Michigan
for $3.0 million.

The Company has committed to the development of additional software and
systems to be utilized in the mortgage banking segment. The amount committed
to the project amounted to approximately $1.8 million, of which approximately
$500,000 was paid during 1996.

NOTE 7--MORTGAGE SERVICING RIGHTS

Not included in the accompanying consolidated financial statements are
mortgage loans serviced for others. The unpaid principal balances of these
loans, including subservicing of approximately $3.6 billion and $536.3 million
at December 31, 1996 and 1995, respectively, are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ----------
<S> <C> <C>
Mortgage loans serviced for:
FHLMC and FNMA...................................... $4,658,056 $6,638,435
MSHDA............................................... 47,505 31,055
GNMA................................................ 6,458 7,217
Other investors..................................... 3,708,935 648,147
---------- ----------
$8,420,954 $7,324,854
========== ==========
</TABLE>

Custodial accounts maintained in connection with the above mortgage
servicing rights were approximately $106.3 million and $131.4 million at
December 31, 1996 and 1995, respectively. These amounts include payments for
principal, interest, taxes, and insurance collected on behalf of the
individual investor.

As discussed in Note 3, the Company adopted SFAS 122 in May 1995. The effect
of the adoption was to increase earnings by approximately $1.5 million before
taxes for 1995 or $0.13 per share.

F-14
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following is an analysis of the changes in the mortgage servicing rights
(in thousands):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Balance, beginning of period.................... $ 27,957 $ 18,179 $17,563
Additions....................................... 63,499 31,106 15,616
Sales........................................... (50,075) (15,684) (9,475)
Amortization.................................... (11,317) (5,644) (5,525)
-------- -------- -------
Balance, end of period.......................... $ 30,064 $ 27,957 $18,179
======== ======== =======
</TABLE>

At December 31, 1996 and 1995, the estimated fair value of the mortgage loan
servicing portfolio was approximately $54.0 million and $70.4 million,
respectively. The estimated fair value in excess of book value was
approximately $23.9 million and $42.4 million at December 31, 1996 and 1995,
respectively.

During October 1995, Flagstar committed to sell $2.0 billion of mortgage
servicing rights to a large national bank during 1996. The commitment required
quarterly installment sales of new production mortgage servicing rights. The
first installment was made in December 1995.

During 1996, Flagstar committed to sell $2.0 to $3.0 billion of mortgage
servicing rights during 1996 and 1997 to a major mortgage servicing company.
The commitment requires quarterly installment sales of new production mortgage
servicing rights. Flagstar has fulfilled $1.4 billion of this commitment, and
all of the October 1995 commitment, as of December 31, 1996.

NOTE 8--DEPOSIT ACCOUNTS

The deposit accounts are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
<S> <C> <C>
Demand, NOW and money market accounts..................... $ 66,661 $ 40,166
Savings accounts.......................................... 57,211 38,094
Certificate of deposit.................................... 500,613 448,714
-------- --------
Total deposit accounts.................................. $624,485 $526,974
======== ========
</TABLE>

Noninterest-bearing deposits included in the demand, NOW and money market
accounts balances at December 31, 1996 and 1995 were approximately $36.7
million and $10.9 million, respectively.

The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $279.5 million and $223.4 million at December
31, 1996 and 1995, respectively.

F-15
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following indicates the scheduled maturities of the Company's
certificates of deposit as of December 31, 1996 (in thousands):

<TABLE>
<S> <C>
Three months or less............................................... $142,516
Over three through six months...................................... 128,583
Over six through twelve months..................................... 141,378
One to two years................................................... 54,645
Thereafter......................................................... 33,491
--------
Total............................................................ $500,613
========
</TABLE>

Interest expense on deposit accounts is summarized as follows (in
thousands):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Demand, NOW and money market accounts................ $ 2,499 $ 1,824 $ 773
Passbook savings..................................... 428 228 127
Certificates of deposit.............................. 27,504 23,071 8,137
------- ------- ------
Total.............................................. $30,431 $25,123 $9,037
======= ======= ======
</TABLE>

NOTE 9--FHLB ADVANCES

The following indicates certain information related to the FHLB advances (in
thousands):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Maximum outstanding at any month end........... $389,801 $315,000 $200,750
Average monthly balance........................ 247,204 237,535 83,912
Average interest rate.......................... 5.78% 6.35% 4.44%
</TABLE>

Flagstar has the authority and approval from the FHLB to utilize a total of
$425 million in collateralized borrowings. Advances at December 31, 1996
principally mature during 1997 and 1998. Pursuant to collateral agreements
with the FHLB, advances are collateralized by non-delinquent single-family
residential mortgage loans.

NOTE 10--FEDERAL INCOME TAXES

Components of the provision for federal income taxes consists of the
following (in thousands):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Current provision.................................... $11,072 $6,004 $6,505
Deferred (benefit) provision......................... (773) 3,415 2,813
------- ------ ------
$10,299 $9,419 $9,318
======= ====== ======
</TABLE>

F-16
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The Company's effective tax rates differ from the statutory federal tax
rates. The following is a summary of such differences (in thousands):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Provision at statutory federal income tax rate....... $ 9,563 $8,713 $8,907
Increase resulting from:
Amortization of deposit premium.................... 450 450 225
Other, net......................................... 286 256 186
------- ------ ------
Provision at effective federal income tax rate....... $10,299 $9,419 $9,318
======= ====== ======
</TABLE>

The details of the net tax liability are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Mark-to-market adjustments on earning assets.......... $ 1,130 $ 1,031
Interest not accrued.................................. 934 255
Other................................................. 218 9
-------- --------
Total............................................... 2,282 1,295
-------- --------
Deferred tax liabilities:
Deferred fees......................................... (1,112) (567)
Bad debt reserves..................................... (704) (1,246)
Mortgage loan servicing rights........................ (10,199) (9,724)
Purchase accounting valuation adjustments............. (555) (835)
Premises and equipment................................ (885) (463)
Other................................................. (268) (674)
-------- --------
Total............................................... (13,723) (13,509)
-------- --------
Net deferred tax liability.............................. (11,441) (12,214)
Currently payable....................................... (11,107) (2,441)
-------- --------
Net tax liability....................................... $(22,548) $(14,655)
======== ========
</TABLE>

The Company files a consolidated federal income tax return on a calendar
year basis. Through its tax year ended December 31, 1995, Flagstar has
determined its deduction for bad debts based on the reserve method in lieu of
the specific charge-off method. Under the reserve method, Flagstar has
established and maintained a reserve for bad debts against which actual loan
losses are charged. As a qualifying thrift institution, Flagstar has
calculated its addition to its bad debt reserve under either, (1) the
"percentage of taxable income" method or (2) the "experience" method. Flagstar
used the percentage of taxable income method in determining its bad debt
reserve addition for its 1995 and 1994 tax years.

During August 1996, the President signed the Small Business Job Protection
Act of 1996 ("the Jobs Act") which contains certain provisions that require
all savings banks and thrifts to account for bad debts for income tax
reporting purposes in the same manner as banks. The effect on a large thrift
such as Flagstar is that it must change its tax method of accounting for
determining its allowable bad debt deduction from the reserve method to the
specific charge-off method. Consequently, the bad debt deduction based on a
percentage of taxable income or the experience method is no longer allowed for
years beginning after December 31, 1995.

F-17
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The bad debt reserves maintained for tax purposes and accumulated after 1987
are subject to recapture as part of the change. Base year reserves (generally
pre-1988 bad debt reserves) will not be recaptured unless Flagstar, or a
successor institution, liquidates, redeems shares or pays a dividend in excess
of earnings and profits.

The recapture of the post 1987 reserves will generally be taken into account
ratably over six years beginning with the 1996 tax year. Flagstar may defer
the recapture up to an additional two years if it meets certain residential
lending requirements during tax years beginning before January 1, 1998. Income
taxes have been provided for the temporary difference between the allowance
for losses and the increase in the bad debt reserve maintained for tax
purposes since the 1987 base year. The cumulative amount of this difference at
December 31, 1995 was approximately $3.5 million for Flagstar. As a result of
the Jobs Act, the cumulative difference of $3.5 million will be recaptured.
Management believes that Flagstar has met the conditions of the residential
lending requirements which allow deferral of the recapture of the reserve
during 1996. The Jobs Act had no effect on the base year reserves of Flagstar.
Consequently, Flagstar has not provided deferred taxes of approximately $1.4
million on the balance of its tax bad debt reserves as of the 1987 base year.

NOTE 11--EMPLOYEE BENEFITS

The Company maintains a 401(k) plan for its employees. Under the plan,
eligible employees may contribute up to 6% of their compensation up to a
maximum of $9,000 annually. The Company currently provides a matching
contribution up to 3% of an employee's annual compensation. The Company's
contributions vest at a rate such that an employee is fully vested after seven
years of service. The Company's contributions to the plan for the years ended
December 31, 1996, 1995 and 1994 were approximately $594,000, $493,000 and
$371,000, respectively. The Company may also make discretionary contributions
to the plan; however, none have been made.

NOTE 12--CONTINGENCIES

The Company is involved in certain lawsuits incidental to its operations.
Management, after review with its legal counsel, is of the opinion that
settlement of such litigation will not have a material effect on the Company's
financial condition.

A substantial part of the Company's business has involved the origination,
purchase, and sale of mortgage loans. During the past several years, numerous
individual claims and purported consumer class action claims were commenced
against a number of financial institutions, their subsidiaries, and other
mortgage lending institutions generally seeking civil statutory and actual
damages and rescission under the federal Truth in Lending Act (the "TILA"), as
well as remedies for alleged violations of various state unfair trade
practices laws and restitution or unjust enrichment in connection with certain
mortgage loan transactions.

The Company has a substantial mortgage loan servicing portfolio and
maintains escrow accounts in connection with this servicing. During the past
several years, numerous individual claims and purported consumer class action
claims were commenced against a number of financial institutions, their
subsidiaries, and other mortgage lending institutions generally seeking
declaratory relief that certain of the lenders' escrow account servicing
practices violate the Real Estate Settlement Practices Act and breach the
lenders' contracts with borrowers. Such claims also generally seek actual
damages and attorney's fees.

In addition to the foregoing, mortgage lending institutions have been
subjected to an increasing number of other types of individual claims and
purported consumer class action claims that relate to various aspects of the
origination, pricing, closing, servicing, and collection of mortgage loans and
that allege inadequate disclosure, breach of contract, or violation of state
laws. Claims have involved, among other things, interest rates and fees
charged in connection with loans, interest rate adjustments on adjustable-rate
mortgage loans, timely release of

F-18
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

liens upon loan payoffs, the disclosure and imposition of various fees and
charges, and the placing of collateral protection insurance.

While the Company has had various claims similar to those discussed above
asserted against it, management does not expect these claims to have a
material adverse effect on the Company's financial condition, results of
operations, or liquidity.

NOTE 13--REGULATORY MATTERS

The Financial Institutions Reform Recovery and Enforcement Act of 1989
("FIRREA"), which instituted major reforms in the operation and supervision of
the savings and loan industry, contains provisions for capital standards.
These standards require savings institutions to have a minimum regulatory
tangible capital (as defined in the regulation) equal to 1.50% of adjusted
total assets and a minimum 3.00% core capital (as defined) of adjusted total
assets. Additionally, savings institutions are required to meet a total risk-
based capital requirement of 8.00%.

Flagstar is also subject to the provisions of the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). FDICIA includes significant
changes to the legal and regulatory environment for insured depository
institutions, including reductions in insurance coverage for certain kinds of
deposits, increased supervision by the Federal regulatory agencies, increased
reporting requirements for insured institutions, and new regulations
concerning reporting on internal controls, accounting and operations.

FDICIA's prompt corrective action regulations define specific capital
categories based on an institutions' capital ratios. The capital categories,
in declining order, are "well" capitalized, "adequately capitalized",
"undercapitalized", "significantly undercapitalized", and "critically
undercapitalized." Institutions categorized as "undercapitalized" or worse are
subject to certain restrictions, including the requirement to file a capital
plan with OTS, and increased supervisory monitoring, among other things. Other
restrictions may be imposed on the institution either by the OTS or by the
FDIC, including requirements to raise additional capital, sell assets, or sell
the entire institution.

The following chart delineates the categories as defined in the FDICIA
legislation:

<TABLE>
<CAPTION>
TIER 1 TOTAL
RISK- RISKED-
CORE BASED BASED
CAPITAL CAPITAL CAPITAL
-------------- -------------- --------------
<S> <C> <C> <C>
"Well capitalized"...... 5.0% 6.0% 10.0%
"Adequately
capitalized"........... 4.0% 4.0% 8.0%
"Undercapitalized"...... Less than 4.0% Less than 4.0% Less than 8.0%
"Significantly
undercapitalized"...... Less than 3.0% Less than 3.0% Less than 6.0%
</TABLE>

At December 31, 1996, Flagstar's consolidated Core, Tier 1 risk-based, and
Total risk-based capital ratios were 6.01%, 10.48% and 10.91%, respectively.
These ratios place Flagstar in the "well capitalized" category.

F-19
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following is a calculation of Flagstar's consolidated regulatory capital
at December 31, 1996 (in thousands):

<TABLE>
<CAPTION>
TIER 1 TOTAL
RISK- RISK-
GAAP BASED TANGIBLE CORE BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
GAAP capital, as reported.......... $77,899 $77,899 $77,899 $77,899 $77,899
Nonallowed assets:
Core deposit premium............. (5,805)
Other assets..................... (313)
Additional capital items:
General valuation allowance...... 3,500
------- ------- ------- -------
Regulatory capital................. $77,899 72,094 77,899 81,086
=======
Minimum capital requirement %...... 1.50% 3.00% 8.00%
Minimum capital requirement $...... 19,365 38,904 59,458
------- ------- -------
Regulatory capital--excess......... $52,729 $38,995 $21,628
======= ======= =======
</TABLE>

At December 31, 1995, Flagstar's consolidated Core, Tier 1 risk-based, and
Total risk-based capital ratios were 5.84%, 9.83% and 10.12%, respectively.
These ratios place Flagstar in the "well capitalized" category.

The following is a calculation of Flagstar's consolidated regulatory capital
at December 31, 1995 (in thousands):

<TABLE>
<CAPTION>
TIER 1 TOTAL
RISK- RISK-
GAAP BASED TANGIBLE CORE BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
GAAP capital, as reported.......... $61,003 $61,003 $61,003 $61,003 $61,003
Nonallowed assets:
Core deposit premium............. (7,095)
Other assets..................... (306)
Additional capital items:
General valuation allowance...... 2,102
------- ------- ------- -------
Regulatory capital................. $61,003 53,908 61,003 62,799
=======
Minimum capital requirement %...... 1.50% 3.00% 8.00%
Minimum capital requirement $...... 15,566 31,346 49,655
------- ------- -------
Regulatory capital--excess......... $38,342 $29,657 $13,144
======= ======= =======
</TABLE>

The OTS risk-based capital regulation also includes an interest rate risk
(IRR) component that requires savings institutions with greater than normal
IRR, when determining compliance with the risk-based capital requirements, to
maintain additional total capital. The OTS has, however, indefinitely deferred
enforcement of its IRR requirements. Under the regulation, a savings
institution's IRR is measured in terms of the sensitivity of its "net
portfolio value" to changes in interest rates. A savings institution is
considered to have a "normal" level of IRR exposure if the decline in its net
portfolio value after an immediate 200 basis point increase or decrease in
market interest rates is less than 2% of the current estimated economic value
of its assets. If the OTS determines in the future to enforce the regulation's
IRR requirements, a savings institution with a greater than normal IRR would
be required to deduct from total capital, for purposes of calculating its
risk-based capital

F-20
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

requirement, an amount equal to one half the difference between the
institution's measured IRR and 2%, multiplied by the economic value of the
institution's total assets. Management does not believe that this regulation,
when enforced, will have a material impact on Flagstar.

The United States Congress has passed legislation that resulted in an
assessment on all Savings Association Insurance Fund ("SAIF") insured deposits
in order to recapitalize the SAIF. This one-time assessment amounted to
approximately 66 basis points on SAIF assessable deposits held as of March 31,
1995. The assessment amounted to approximately $3.4 million and was charged to
earnings during the third quarter of 1996.

NOTE 14--CONCENTRATIONS OF CREDIT

Properties collateralizing loans receivable are geographically disbursed
throughout the United States. As of December 31, 1996, approximately 38% of
these properties are located in Michigan (measured by principal balance), and
another 43% are located in the states of California, Colorado, Ohio, Florida,
Illinois, Texas, Maryland, Washington, Virginia, and Georgia. No other state
contains more than 2% of the properties collateralizing these loans.

NOTE 15--CORPORATE ACQUISITION

Flagstar entered into a definitive agreement on November 16, 1993 to acquire
all of the outstanding stock of Security Savings Bank, FSB of Jackson,
Michigan for $35 per share or approximately $25.9 million. As part of this
agreement, Security maintained its corporate identity and became an operating
subsidiary of Flagstar. The completion of this acquisition was finalized on
June 30, 1994, at the close of business. Had Security been a part of the
Company for all of 1994, the Company's earnings would have been reduced by
$581,000 or $0.05 per share.

In conjunction with Flagstar's acquisition of Security, a deposit premium
was capitalized in the amount of $9.0 million. This premium, which is included
in other assets, is being amortized over seven years on a straight-line
method. The premium, net of amortization, totals $5.8 million and $7.1 million
at December 31, 1996 and 1995, respectively. Amortization of the deposit
premium amounted to approximately $1.3 million, $1.3 million and $650,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.

NOTE 16--FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107 issued by the Financial Accounting Standards Board,
"Disclosures about Fair Value of Financial Instruments", requires the
disclosure of fair value information about financial instruments, whether or
not recognized in the statement of financial condition, where it is
practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Because assumptions used in these valuation techniques
are inherently subjective in nature, the estimated fair values cannot always
be substantiated by comparison to independent market quotes and, in many
cases, the estimated fair values could not necessarily be realized in an
immediate sale or settlement of the instrument.

The fair value estimates presented herein are based on relevant information
available to management as of December 31, 1996 and 1995. Management is not
aware of any factors that would significantly affect these estimated fair
value amounts. As these reporting requirements exclude certain financial
instruments and all non-financial instruments, the aggregate fair value
amounts presented herein do not represent management's estimate of the
underlying value of the Company. Additionally, such amounts exclude intangible
asset values such as the value of core deposit intangibles.

F-21
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following methods and assumptions were used by the Company to estimate
the fair value of each class of financial instruments and certain non-
financial instruments for which it is practicable to estimate that value:

Cash and cash equivalents: The carrying amount of cash and cash
equivalents approximates fair value.

Loans receivable: This portfolio consists of single family mortgage loans
held for sale and investment, collateralized commercial lines of credit,
commercial real estate loans, builder development project loans, consumer
credit obligations, and single family home construction loans. Mortgage
loans held for sale and investment are valued using fair values
attributable to similar mortgage loans. The fair value of the other loans
are valued based on the fair value of obligations with similar credit
characteristics.

Other investments: The carrying amount of other investments approximates
fair value.

Federal Home Loan Bank stock: No secondary market exists for Federal Home
Loan Bank (FHLB) stock. The stock is bought and sold at par by the FHLB.
The recorded value, therefore, is the fair value. The amount of stock
required to be purchased is based on total assets and is determined
annually.

Deposit Accounts: The fair value of demand deposits and savings accounts
approximates the carrying amount. The fair value of fixed-maturity
certificates of deposit is estimated using the rates currently offered for
deposits with similar remaining maturities.

Federal Home Loan Bank Advances: Rates currently available to the Company
for debt with similar terms and remaining maturities are used to estimate
the fair value of the existing debt.

Mortgage Servicing Rights: See Note 3 for a description of the method
used to value the mortgage servicing rights.

Financial instruments with off-balance-sheet risk: The fair value of
financial futures contracts, forward delivery contracts and fixed rate
commitments to extend credit are based on current market prices.

The following tables set forth the fair value of the Company's financial
instruments (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1996 1995
----------------- --------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Financial instruments:
Assets:
Cash and cash equivalents......... $ 44,187 $ 44,187 $ 29,119 $ 29,119
Mortgage loans held for sale...... 840,767 850,455 620,455 621,585
Loans held for investment......... 270,069 274,158 305,580 308,702
Other investments................. 887 887 818 818
Federal Home Loan Bank stock...... 19,725 19,725 17,800 17,800
Liabilities:
Deposits:
Demand deposits and savings
accounts......................... $123,872 $123,872 $ (78,260) $ (78,260)
Certificates of deposit........... 500,613 500,718 (448,714) (451,500)
FHLB advances....................... 389,801 389,635 (191,156) (190,800)
Off-balance sheet items:
Forward delivery contracts.......... -- (9,868) -- (9,366)
Commitments to extend credit........ -- 5,362 -- 1,789
Non-financial instruments:
Unrealized gains on mortgage
servicing rights (see Note 7)...... -- 23,900 -- 42,400
</TABLE>

F-22
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The Company enters into certain financial instruments with off-balance-sheet
risk in the ordinary course of business to reduce its exposure to changes in
interest rates. The Company utilizes only traditional financial instruments
for this purpose and does not enter into instruments such as leveraged
derivatives or structured notes. The financial instruments used for hedging
interest rate risk include financial futures contracts and forward delivery
contracts. A hedge is an attempt to reduce risk by creating a relationship
whereby any losses on the hedged asset or liability are expected to be
counterbalanced in whole or part by gains on the hedging financial instrument.
Thus, market risk resulting from a particular off-balance-sheet instrument is
normally offset by other on or off-balance-sheet transactions. The Company
seeks to manage credit risk by limiting the total amount of arrangements
outstanding, both by counterparty and in the aggregate, by monitoring the size
and maturity structure of the financial instruments, by assessing the
creditworthiness of the counterparty, and by applying uniform credit standards
for all activities with credit risk.

Financial Instruments with Off-Balance-Sheet Risk

Notional principal amounts indicated in the following table represent the
extent of the Company's involvement in particular classes of financial
instruments and generally exceed the expected future cash requirements
relating to the instruments.

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
---- ----
(IN MILLIONS)
<S> <C> <C>
Forward delivery contracts........................................ $665 $511
Commitments to extend credit...................................... 695 489
</TABLE>

All of the Company's financial instruments with off-balance sheet risk
expire within one year.

Financial Futures Contracts: There were no Treasury futures contracts
outstanding at December 31, 1996 or 1995. Gains or losses on futures
transactions are recorded on the specific identification method in response to
adjustments in the fair market value of the instruments. During 1996, 1995 and
1994, the Company recorded losses on financial futures amounting to
approximately $90,000, $1.3 million and $400,000, respectively.

Forward Delivery Contracts: Forward delivery contracts are entered into to
sell single family mortgage loans:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
---- ----
(IN MILLIONS)
<S> <C> <C>
Types
Fixed............................................................ $633 $470
Balloon.......................................................... 23 30
Variable......................................................... 9 11
---- ----
$665 $511
==== ====
</TABLE>

Substantially all forward delivery contracts are entered into with the
FHLMC, FNMA or GNMA.

Commitments to Extend Credit: The Company's exposure to credit loss for
commitments to extend credit is represented by the contractual amount of those
agreements. The Company uses the same credit policies in making funding
commitments as it does for on-balance-sheet instruments. These commitments
generally have fixed expiration dates or other termination clauses. Because
commitments may expire without being drawn upon, the total contract amounts do
not necessarily represent future cash requirements.

F-23
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1995
---- ----
(IN MILLIONS)
<S> <C> <C>
Single family...................................................... $585 $409
Other.............................................................. 110 80
---- ----
Total............................................................ $695 $489
==== ====
Fixed.............................................................. $670 $459
Variable........................................................... 25 30
---- ----
Total............................................................ $695 $489
==== ====
</TABLE>

NOTE 17--SEGMENT INFORMATION

The Company operates in two industry segments. The two industry segments are
mortgage banking and retail banking. Following is a presentation of financial
information by business segment for the period indicated (in thousands).

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
----------------------------------------------
RETAIL MORTGAGE
BANKING BANKING
SEGMENT SEGMENT ELIMINATIONS COMBINED
--------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Revenues....................... $ 13,791 $ 74,955 $ -- $ 88,746
Earnings before income taxes... 3,305 24,017 -- 27,322
Depreciation and amortization
of intangibles................ 1,589 15,698 -- 17,287
Capital expenditures........... 312 7,284 -- 7,596
Identifiable assets............ 387,201 1,112,676 (202,651) 1,297,226
Intersegment income (expense).. 14,186 (14,186) -- --
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
----------------------------------------------
RETAIL MORTGAGE
BANKING BANKING
SEGMENT SEGMENT ELIMINATIONS COMBINED
--------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Revenues....................... $ 12,390 $ 54,459 $ -- $ 66,849
Earnings before income taxes... 3,549 21,346 -- 24,895
Depreciation and amortization
of intangibles................ 1,728 9,344 -- 11,072
Capital expenditures........... 1,665 4,967 -- 6,632
Identifiable assets............ 307,620 782,802 (45,328) 1,045,094
Loans transferred to (from).... (185,111) 185,111 -- --
Intersegment income (expense).. (4,153) 4,153 -- --
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1994
----------------------------------------------
RETAIL MORTGAGE
BANKING BANKING
SEGMENT SEGMENT ELIMINATIONS COMBINED
--------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Revenues....................... $ 1,432 $ 61,926 $ -- $ 63,358
Earnings (loss) before income
taxes......................... (2,127) 27,576 -- 25,449
Depreciation and amortization
of intangibles................ 746 8,276 -- 9,022
Capital expenditures........... 664 5,927 -- 6,591
Identifiable assets............ 416,023 480,511 (173,384) 723,150
Loans transferred to (from).... 106,261 (106,261) -- --
Intersegment income (expense).. (2,358) 2,358 -- --
</TABLE>

F-24
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Revenues are comprised of net interest income (before the provision for
credit losses) and non-interest income. Non-interest expenses are fully
allocated to each segment. The intersegment income (expense) consists of
interest expense incurred or charged on intersegment borrowing.

NOTE 18--QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table represents summarized data for each of the quarters in
1996 and 1995 (in thousands except earnings (loss) per share data).

<TABLE>
<CAPTION>
1996 1995
-------------------------------- -------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income......... $18,500 $18,603 $19,558 $19,518 $21,035 $19,879 $16,762 $13,628
Interest expense........ 11,846 10,579 11,820 11,722 12,042 12,206 9,739 7,456
------- ------- ------- ------- ------- ------- ------- -------
Net interest income..... 6,654 8,024 7,738 7,796 8,993 7,673 7,023 6,172
Provision for losses.... 1,464 488 344 308 49 20 4 165
------- ------- ------- ------- ------- ------- ------- -------
Net interest income
after provision for
losses................. 5,190 7,536 7,394 7,488 8,944 7,653 7,019 6,007
Mortgage banking non-
interest income........ 16,553 8,756 24,293 8,129 11,272 9,968 7,846 7,128
Other non-interest
income................. 147 180 221 255 141 229 200 204
Non-interest expense.... 12,326 19,460 14,554 12,480 12,478 10,637 9,069 9,532
------- ------- ------- ------- ------- ------- ------- -------
Earnings (loss) before
income taxes........... 9,564 (2,988) 17,354 3,392 7,879 7,213 5,996 3,807
Provision for federal
income taxes........... 3,881 (949) 6,225 1,142 3,061 2,682 2,221 1,455
------- ------- ------- ------- ------- ------- ------- -------
Net earnings (loss)..... $ 5,683 $(2,039) $11,129 $ 2,250 $ 4,818 $ 4,531 $ 3,775 $ 2,352
======= ======= ======= ======= ======= ======= ======= =======
Earnings (loss) per
share.................. $ 0.50 $ (0.18) $ 0.99 $ 0.20 $ 0.43 $ 0.40 $ 0.33 $ 0.21
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>

F-25
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 19--HOLDING COMPANY ONLY FINANCIAL STATEMENTS

The following are unconsolidated financial statements for the Company. These
condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto (in thousands).

HOLDING COMPANY

CONDENSED STATEMENTS OF FINANCIAL POSITION

<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................. $ 122 $ 44
Investment in subsidiaries................................ 78,308 62,326
Other assets.............................................. 38 76
------- -------
Total assets............................................ $78,468 $62,446
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Other liabilities......................................... $ -- $ 1
------- -------
Total liabilities....................................... -- 1
STOCKHOLDERS' EQUITY
Common stock.............................................. 112 112
Additional paid in capital................................ 2,816 2,816
Retained earnings......................................... 75,540 59,517
------- -------
Total stockholders' equity.............................. 78,468 62,445
------- -------
Total liabilities and stockholders' equity.............. $78,468 $62,446
======= =======
</TABLE>

F-26
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

HOLDING COMPANY

CONDENSED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Income
Dividends from subsidiaries...................... $ 1,000 $ 2,450 $ 1,700
Expenses
General and administrative....................... 8 13 18
------- ------- -------
Earnings before undistributed earnings of
subsidiaries...................................... 992 2,437 1,682
Equity in undistributed earnings of subsidiaries... 16,031 13,039 14,449
------- ------- -------
Net earnings....................................... $17,023 $15,476 $16,131
======= ======= =======
</TABLE>

F-27
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

HOLDING COMPANY

CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings................................. $ 17,023 $ 15,476 $ 16,131
Adjustments to reconcile net earnings to net
cash provided by operating activities
Equity in undistributed earnings........... (15,982) (13,004) (14,208)
Change in other assets..................... 38 (21) (55)
Change in other liabilities................ (1) 1 --
Change in unrealized gains................. -- -- (126)
-------- -------- --------
Net cash provided by operating
activities.............................. 1,078 2,452 1,742
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid............................... (1,000) (2,000) (400)
Stock repurchase............................. -- (450) (1,300)
-------- -------- --------
Net cash used by financing activities.... (1,000) (2,450) (1,700)
Net increase in cash and cash equivalents.... 78 2 42
Cash and cash equivalents at beginning of
period...................................... 44 42 --
-------- -------- --------
Cash and cash equivalents at end of period... $ 122 $ 44 $ 42
======== ======== ========
</TABLE>

F-28
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 20--SUBSEQUENT EVENTS

Name Change

In January 1997, the Company changed its name from FSSB Holding Corporation
to Flagstar Bancorp, Inc.

Stock Split

In January 1997, the Company increased its common shares authorized to
40,000,000 and split its issued and outstanding shares 38.4246 to one. All
share and per share information in the financial statements have been
retroactively restated to give effect to the stock split.

Stock Offering

In conjunction with the stock split, the Company filed a registration
statement in February 1997 with the Securities and Exchange Commission to
offer 8,050,000 shares of common stock to the public, including 5,850,000
shares being sold by the stockholders of the Company.

Stock Option and Purchase Plans, and Other Compensation Plans

In January 1997, the Company's Board of Directors adopted resolutions to
implement various stock option and purchase plans and deferred and incentive
compensation plans effective upon the successful completion of the common
stock offering.

The purpose of the Stock Option Plan ("Option Plan") is to provide an
additional incentive to directors and employees by facilitating their purchase
of Common Stock. The Option Plan will have a term of 10 years from the date of
its approval by the Company stockholders, after which no awards may be made,
unless the plan is earlier terminated by the Board of Directors of the
Company. Pursuant to the Option Plan, a number of shares equal to 10% of the
shares of Common Stock (1,345,000 shares) that are to be outstanding following
the Offering would be reserved for future issuance by the Company.

It is intended that options granted under the Option Plan will constitute
both incentive stock options ("ISOs") and non-incentive stock options ("non-
ISOs"). ISOs are options that comply with certain restrictions pursuant the
Internal Revenue Code of 1986, as amended (the "Code") and thereby provide
favorable tax treatment to recipients, although they do not generally result
in tax deductions to the Company. Non-ISO's are stock options that fail to
qualify as ISO, either at the time of grant or upon exercise.

The exercise price for ISOs may not be less than 100% of the fair market
value of the shares on the date of the grant. Non-ISOs may be granted with any
exercise price, although a recipient will recognize taxable income upon the
receipt of a non-ISO with an exercise price that is substantially less than
its fair market value.

The initial grant of stock options under the Option Plan is expected to take
place on the date of the Option Plan's receipt of stockholder approval. It is
anticipated that the Company will account for the Option Plan in accordance
with the provisions of APB No. 25, "Accounting for Stock issued to Employees"
and adopt the disclosure requirements of SFAS No. 123.

Under the Employee Stock Purchase Plan ("Purchase Plan") eligible
participants, upon providing evidence of a purchase of the Company's common
shares from any third party and on the open market, would receive a payment
from the Company equal to 15% of the full price of the shares. Persons who own
5% or more of the outstanding Common Stock are not eligible to purchase shares
under the Purchase Plan. The Purchase Plan includes limitations on the maximum
reimbursement to a participant during a year. The Purchase Plan has not

F-29
<PAGE>

FLAGSTAR BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

been designed to comply with the requirements of the Internal Revenue Code
with respect to employee stock purchase plans.

The Incentive Compensation Plan ("Incentive Plan") is unfunded and benefits
are payable only in the form of cash from the Bank's general assets. The
Incentive Plan is administered by a committee which decides from year to year
which employees of the Company will be eligible to participate in the
Incentive Plan and the size of the bonus pool.

The Deferred Compensation Plan allows employees to defer up to 25% of their
annual compensation and directors to defer all of their compensation. Funds
deferred remain the property of the Company and are placed in a trust.
Participants may direct that their deferred amounts be invested in stock of
the Company. Upon withdrawal, the participant has the option of receiving the
stock or the proceeds of its sale at the market price at the time of
withdrawal.

F-30
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY U.S. UNDER-
WRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSONS IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UN-
DER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

-----------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 10
The Company.............................................................. 18
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Market for the Common Stock.............................................. 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Consolidated Financial and Other Data........................... 21
Management's Discussion and Analysis of Changes in Financial Condition
and Results of Operations............................................... 23
Business................................................................. 37
Regulation............................................................... 58
Management............................................................... 65
Selling Stockholders..................................................... 76
Description of Capital Stock............................................. 77
Restrictions on Acquisition of the Company and the Bank.................. 78
Certain Anti-Takeover Provisions in the Restated Articles of
Incorporation and Restated Bylaws....................................... 81
Underwriting............................................................. 84
Legal Matters............................................................ 88
Experts.................................................................. 88
Available Information.................................................... 88
Index to Consolidated Financial Statements............................... F-1
</TABLE>

-----------------

UNTIL , 1997 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIRE-
MENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

8,050,000 SHARES

[LOGO OF FLAGSTAR BANCORP APPEARS HERE]

COMMON STOCK

-----------------

PROSPECTUS
April , 1997

-----------------

LEHMAN BROTHERS

PAINEWEBBER INCORPORATED

RONEY & CO.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFEDTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated April 2, 1997

PROSPECTUS

8,050,000 SHARES

[LOGO OF FLAGSTAR BANCORP APPEARS HERE]

COMMON STOCK

------------

Of the shares of common stock, par value $0.01 per share (the "Common
Stock"), of Flagstar Bancorp, Inc. (the "Company") offered hereby, 2,200,000
shares are being issued and sold by the Company and 5,850,000 shares are being
sold by members of the Hammond family (collectively, the "Selling
Stockholders"), who prior to this offering own 100% of the Company. The Selling
Stockholders include Thomas J. Hammond, the Chairman of the Board and Chief
Executive Officer of the Company, and Mark T. Hammond, the Vice Chairman and
President of the Company. Of the 8,050,000 shares being offered hereby,
shares are being offered initially outside the United States and Canada by the
International Managers (the "International Offering") and shares are being
offered initially in the United States and Canada by the U.S. Underwriters (the
"U.S. Offering" and, together with the International Offering, the "Offering").
The initial public offering price and underwriting discounts and commissions
will be identical for both offerings. See "Underwriting." The Company was
formerly known as FSSB Holding Corporation and is the holding company and sole
stockholder of Flagstar Bank, FSB (the "Bank"), which was formerly known as
First Security Savings Bank, FSB. Following the consummation of the Offering,
the Selling Stockholders will own 5,400,000 shares of Common Stock representing
40.15% of the voting power of the Company, assuming no exercise of the
International Managers' and U.S. Underwriters' over-allotment options. See
"Selling Stockholders." The Company will not receive any of the proceeds from
the sale of the shares by the Selling Stockholders.

At the request of the Company, the U.S. Underwriters have reserved up to
800,000 shares of Common Stock for sale at the initial public offering price to
certain employees and customers of the Company and its affiliates.
------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 10.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION"), THE FEDERAL DEPOSIT INSURANCE
CORPORATION (THE "FDIC"), THE OFFICE OF THRIFT SUPERVISION (THE "OTS") OR
ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION, THE FDIC, THE OTS
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

------------

THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS
OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION, AND ARE NOT INSURED BY
THE FDIC OR ANY OTHER GOVERNMENTAL AGENCY.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2)(3) STOCKHOLDERS(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................. $ $ $ $
- --------------------------------------------------------------------------------
Total(4).................. $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters and International Managers (together, the "Underwriters")
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) Before deducting offering expenses payable by the Company, estimated to be
$ .
(3) Pursuant to an agreement among each of the Selling Stockholders and the
Company, the Company has agreed to pay 50% of the Underwriting Discounts
and Commissions in connection with the sale of shares of the Common Stock
in the Offering as well as all other fees and expenses incurred in
connection therewith. See "Selling Stockholders--Selling Stockholder
Agreement."
(4) The Company and the Selling Stockholders have granted to the International
Managers a 30-day option to purchase up to an additional and shares
of Common Stock, respectively, on the same terms and conditions as set
forth above to cover over-allotments, if any. The Company and the Selling
Stockholders have granted the U.S. Underwriters a similar option to
purchase up to an additional and shares of Common Stock,
respectively, to cover over-allotments, if any. If all such shares of
Common Stock are purchased, the total Price to Public, Underwriting
Discounts and Commissions, Proceeds to Company and Proceeds to Selling
Stockholders will be $ , $ , $ and $ , respectively. See
"Underwriting."
------------
The shares of Common Stock offered by this Prospectus are offered by the
International Managers subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
International Managers and to certain further conditions. It is expected that
delivery of certificates for the shares of Common Stock will be made at the
offices of Lehman Brothers Inc., New York, New York, on or about , 1997.
------------
LEHMAN BROTHERS

PAINEWEBBER INTERNATIONAL

RONEY & CO.

April , 1997
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY INTERNA-
TIONAL MANAGER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SO-
LICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITA-
TION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSONS IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION
TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFOR-
MATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HERE-
OF.

-----------------

TABLE OF CONTENTS

-----------------

UNTIL , 1997 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK IN THE UNITED STATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DE-
LIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN-
SOLD ALLOTMENTS OR SUBSCRIPTIONS.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

8,050,000 SHARES

[LOGO OF FLAGSTAR BANCORP APPEARS HERE]

COMMON STOCK

-----------------

PROSPECTUS
April , 1997

-----------------

LEHMAN BROTHERS

PAINEWEBBER INTERNATIONAL

RONEY & CO.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the expenses in connection with the sale and
distribution of the securities being registered hereby, other than
underwriting discounts and commissions. All such expenses are to be paid by
the Registrant.

<TABLE>
<S> <C>
SEC registration fee........................................... 59,000
NASD filing fee................................................ 20,000*
Nasdaq listing fee............................................. 53,000*
Blue Sky filing fees and expenses.............................. 10,000*
Accounting fees and expenses................................... 250,000*
Legal fees and expenses........................................ 500,000*
Printing, postage and mailing.................................. 650,000*
Stock transfer agent fees and certificates..................... 10,000*
Other.......................................................... 253,000*
----------
Total...................................................... $1,805,000
==========
</TABLE>
- --------
* Estimated

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Company's Restated Articles of Incorporation contain a provision,
authorized by the Michigan Business Corporation Act ("MBCA"), designed to
eliminate in certain circumstances the personal liability of directors for
monetary damages to the Company or its stockholders for breach of their
fiduciary duty as directors. This provision, however, does not limit the
liability of any director who breached his or her duty of loyalty to the
Company or its stockholders, failed to act in good faith, obtained an improper
personal benefit or paid a dividend or approved a stock repurchase or
redemption that was prohibited under Michigan law. This provision will not
limit or eliminate the rights of the Company or any stockholder to seek an
injunction or any other nonmonetary relief in the event of a breach of a
director's duty of care. In addition, this provision applies only to claims
against a director arising out of his or her role as a director and does not
relieve a director from liability unrelated to his or her fiduciary duty of
care or from a violation of statutory law such as certain liabilities imposed
on a director under the federal securities laws.

The Company's Restated Articles of Incorporation and Restated Bylaws also
provide that the Company shall indemnify all directors and officers of the
Company to the full extent permitted by the MBCA. Under the provisions of the
MBCA, any director or officer who, in his or her capacity as such, is made or
threatened to be made a party to any suit or proceeding, may be indemnified if
the Board determines such director or officer acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the Company or its stockholders.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

None.

II-1
<PAGE>

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

The following is the list of exhibits filed as part of this Registration
Statement and also serves as the Exhibit Schedules:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.1(a) Form of U.S. Underwriting Agreement.............................. **
1.1(b) Form of International Underwriting Agreement..................... **
1.2 Form of Custody Agreement........................................ **
1.3 Form of Selling Stockholders' Power of Attorney.................. **
3.1 Restated Articles of Incorporation of the Registrant............. **
3.2 By-Laws of the Registrant........................................ **
4 Form of Stock Certificate........................................ **
5 Opinion of Reinhart, Boerner, Van Deuren, Norris & Rieselbach,
P.C. regarding legality of securities being registered.......... **
10.1(a) Form of Employment Agreements between the Company and Thomas J.
Hammond, Mark T. Hammond, Joan H. Anderson and Michael W.
Carrie.......................................................... **
10.1(b) Form of Employment Agreements between the Bank and Thomas J.
Hammond, Mark T. Hammond, Joan H. Anderson and Michael W.
Carrie.......................................................... **
10.2 Form of Flagstar Bancorp, Inc. 1997 Employees and Directors Stock
Option Plan..................................................... ***
10.3 Form of Flagstar Bancorp, Inc. 1997 Employee Stock Acquisition
Plan............................................................ **
10.4 Form of Flagstar Bancorp, Inc. 1997 Incentive Compensation Plan.. **
10.5 Form of Flagstar Bancorp, Inc. 1997 Deferred Compensation Plan... **
21 Subsidiaries of the Registrant................................... **
23.1 Consent of Grant Thornton LLP.................................... *
23.2 Consent of Reinhart, Boerner, Van Deuren, Norris & Rieselbach,
P.C. (contained in Exhibit 5)................................... **
23.3 Consent of Albert J. Gladner, Esq. .............................. **
24 Powers of Attorney (see the signature page of this Registration
Statement)...................................................... **
27 Financial Data Schedule (SEC Use Only)........................... **
99.1 Consent of Newly Elected Director--Richard S. Elsea.............. **
99.2 Consent of Newly Elected Director--James D. Ishister............. **
99.3 Consent of Newly Elected Director--John Kersten.................. **
99.4 Consent of Newly Elected Director--Michael Kojaian............... **
99.5 Consent of Newly Elected Director--Michael W. Carrie............. **
</TABLE>
- --------
* Filed herewith.
** Previously filed.

*** Filed herewith and supersedes previously filed exhibit.

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes as follows:

(a) To provide to the Underwriters at the closing specified in the
Underwriting Agreement, certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to
each purchaser.

II-2
<PAGE>

(b) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(l) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(c) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.

II-3
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDED REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BLOOMFIELD
HILLS, STATE OF MICHIGAN, ON THE 23RD DAY OF APRIL, 1997.

Flagstar Bancorp, Inc.

By /s/ Thomas J. Hammond
-----------------------------------
THOMAS J. HAMMOND CHAIRMAN OF THE
BOARD AND CHIEF EXECUTIVE
OFFICER(DULY AUTHORIZED
REPRESENTATIVE)

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS PRE-
EFFECTIVE AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE
FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT IN THE CAPACITIES AND ON THE
DATES INDICATED.

SIGNATURE TITLE DATE

* Chairman of the
- ------------------------------------- Board and Chief
THOMAS J. HAMMOND Executive Officer
(Principal
Executive Officer)

* Executive Vice
- ------------------------------------- President, Chief
MICHAEL W. CARRIE Financial Officer
and Treasurer
(Principal
Financial and
Accounting Officer)

* Vice Chairman of the
- ------------------------------------- Board and President
MARK T. HAMMOND

* Director and
- ------------------------------------- Executive Vice
JOAN H. ANDERSON President

* Director, Senior
- ------------------------------------- Vice President and
MARY KAY MCGUIRE Secretary

* Director
- -------------------------------------
RONALD I. NICHOLS, SR.

* Director
- -------------------------------------
JAMES D. COLEMAN

* Director
- -------------------------------------
CHARLES BAZZY

* Director
- -------------------------------------
HARRY S. ELLMAN

* Director
- -------------------------------------
WILLIAM B. BORTELS

*By: /s/ Thomas J. Hammond April 23, 1997
--------------------------------
THOMAS J. HAMMOND
ATTORNEY-IN-FACT

II-4
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
-------------- ----------- ----
<C> <S> <C>
1.1(a) Form of U.S. Underwriting Agreement....................... **
1.1(b) Form of International Underwriting Agreement.............. **
1.2 Form of Custody Agreement................................. **
1.3 Form of Selling Stockholders' Power of Attorney........... **
3.1 Restated Articles of Incorporation of the Registrant...... **
3.2 By-Laws of the Registrant................................. **
4 Form of Stock Certificate................................. **
5 Opinion of Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, P.C. regarding legality of securities being
registered............................................... **
10.1(a) Form of Employment Agreements between the Company and
Thomas J. Hammond, Mark T. Hammond, Joan H. Anderson and
Michael W. Carrie........................................ **
10.1(b) Form of Employment Agreements between the Bank and Thomas
J. Hammond, Mark T. Hammond, Joan H. Anderson and Michael
W. Carrie................................................ **
10.2 Form of Flagstar Bancorp, Inc. 1997 Employees and
Directors Stock Option Plan.............................. ***
10.3 Form of Flagstar Bancorp, Inc. 1997 Employee Stock
Acquisition Plan......................................... **
10.4 Form of Flagstar Bancorp, Inc. 1997 Incentive Compensation
Plan..................................................... **
10.5 Form of Flagstar Bancorp, Inc. 1997 Deferred Compensation
Plan..................................................... **
21 Subsidiaries of the Registrant............................ **
23.1 Consent of Grant Thornton LLP............................. *
23.2 Consent of Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, P.C. (contained in Exhibit 5)................ **
23.3 Consent of Albert J. Gladner, Esq. ....................... **
24 Powers of Attorney (see the signature page of this
Registration Statement).................................. **
27 Financial Data Schedule (SEC Use Only).................... **
99.1 Consent of Newly Elected Director--Richard S. Elsea....... **
99.2 Consent of Newly Elected Director--James D. Isbister...... **
99.3 Consent of Newly Elected Director--John Kersten........... **
99.4 Consent of Newly Elected Director--Michael Kojaian........ **
99.5 Consent of Newly Elected Director--Michael W. Carrie...... **
</TABLE>
- --------
* Filed herewith.
** Previously filed.

*** Filed herewith and supersedes previously filed exhibit.

<PAGE>

Exhibit 10.2
Form of

FLAGSTAR BANCORP, INC.
1997 EMPLOYEES AND DIRECTORS STOCK OPTION PLAN

1. Purpose of the Plan.

The purpose of this Flagstar Bancorp, Inc. 1997 (the "Company")
Employees and Directors Stock Option Plan is to advance the interests of the
Company through providing select key Employees and Directors of the Company and
its Affiliates with the opportunity to acquire Shares. By encouraging such
stock ownership, the Company seeks to attract, retain and motivate the best
available personnel for positions of substantial responsibility and to provide
additional incentive to Directors and key Employees of the Company, the Bank or
any Affiliate to promote the success of the business.

2. Definitions.

As used herein, the following definitions shall apply.

(a) "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Bank or the Company, as such terms are defined
in Section 424(e) and (f), respectively, of the Code.

(b) "Agreement" shall mean a written agreement entered into in accordance
with Paragraph 5(c).

(d) "Bank" shall mean Flagstar Bank, FSB.

(e) "Board" shall mean the Board of Directors of the Company.

(f) "Change in Control" shall mean any one of the following events: (1)
the ownership, holding or power to vote more than 25% of the
Company's or the Bank's voting stock, (2) the acquisition of control
of the election of a majority of the Company's or the Bank's
directors, (3) the exercise of a controlling influence over the
management or policies of the Company or the Bank by any person or by
persons acting as a group within the meaning of Section 13(d) of
the Securities Exchange Act of 1934 or (4) during any period of two
consecutive years, individuals who at the beginning of such period
constitute the Board of Directors of the Company (the "Company

1
<PAGE>

Board") (the "Continuing Directors") cease for any reason to constitute at
least two-thirds thereof, provided that any individual whose election or
nomination for election as a member of the Company Board was approved by a
vote of at least two-thirds of the Continuing Directors then in office
shall be considered a Continuing Director. For purposes of this
subparagraph only, the term "person" refers to an individual or a
corporation, partnership, trust, association, joint venture, pool,
syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein. The decision of the
Committee as to whether a change in control has occurred shall be
conclusive and binding.

(g) "Code" shall mean the Internal Revenue Code of 1986, as amended.

(h) "Committee" shall mean the Stock Option Committee appointed by the Board
---------
in Board in accordance with Paragraph 5(a) hereof.

(i) "Common Stock" shall mean the common stock, par value $.01 per share, of
the Company.

(j) "Continuous Service" shall mean the absence of any interruption or
termination of service as an Employee or Director of the Company or the
Bank or an Affiliate. Continuous Service shall not be considered
interrupted in the case of sick leave, military leave or any other leave
of absence, in the case of transfers between payroll locations of the Bank
or between the Bank, an Affiliate or a successor, or in the case of a
Director's performance of services in an emeritus or advisory capacity.

(k) "Director" shall mean any member of the Board, and any member of the board
of directors of any Affiliate that the Board has by resolution designated
as being eligible for participation in this Plan.

(l) "Disability" shall mean a physical or mental condition, which in the sole
and absolute discretion of the Committee, is reasonably expected to be of
indefinite duration and to prevent substantially a Participant from
fulfilling his or her duties or responsibilities to the Bank or an
Affiliate.

(m) "Effective Date" shall mean the date specified in Paragraph 13 hereof.

(n) "Employee" shall mean any person employed by the Company or an Affiliate.

2
<PAGE>

(o) "Exercise Price" shall mean the price per Optioned Share at which an
Option may be exercised.

(p) "ISO" means as option to purchase Common Stock which meets the
requirements set forth in the Plan and which is intended to be and is
identified as an "incentive stock option" within the meaning of
Section 422 of the Code.

(q) "Market Value" shall mean the fair market value of the Common Stock,
as determined under Paragraph 7(b) hereof.

(r) "Non-Employee Director" shall mean any member of the Board who is a
Non-Employee Director within the meaning of Rule 16b-3.

(s) "Non-ISO" means an option to purchase Common Stock which meets the
requirements set forth in the Plan but which is not intended to be
and is not identified as an ISO.

(t) "Option" means an ISO and a Non-ISO.

(u) "Optioned Shares" shall mean Shares subject to an Award granted
pursuant to this Plan.

(v) "Participant" shall mean any person who receives an Award pursuant to
this Plan.

(w) "Plan" shall mean this Flagstar Bancorp, Inc. 1997 Employees and
Directors Stock Option Plan.

(x) "Rule 16b-3" shall mean Rule 16b-3 of the General Rules and
Regulations under the Securities and Exchange Act of 1934, as
amended.

(y) "Share" shall mean one share of Common Stock.

(z) "Year of Service" shall mean a full 12-month period of Continuous
Service, measured from the date of an Award and each annual
anniversary of that date, during which a Participant has been an
Employee or Director.

3. Term of the Plan and Awards.

3
<PAGE>

(a) Term of the Plan. The Plan shall continue in effect for a term of 10
-----------------
years from the Effective Date, unless sooner terminated pursuant to
Paragraph 15 hereof. No Award shall be granted under the Plan after 10
years from the Effective Date.

(b) Term of Awards. The term of each Award granted under the Plan shall be
---------------
established by the Committee, but shall not exceed 10 years; provided,
however, that in the case of an Employee who owns Shares representing
more than 10% of the outstanding Common Stock at the time an ISO is
granted, the term of such ISO shall not exceed five years.

4. Shares Subject to the Plan.

General Rule. The aggregate number of Shares deliverable pursuant to
-------------
Awards shall not exceed 1,345,000 Shares, as such number may be adjusted on
and after the Effective Date pursuant to Paragraph 10 hereof. Such Shares
may either be authorized but unissued Shares, Shares held in treasury, or
Shares held in a grantor trust created by the Company. If any Awards should
expire, become unexercisable, or be forfeited for any reason without having
been exercised, the Optioned Shares shall, unless the Plan shall have been
terminated, be available for the grant of additional Awards under the Plan.

5. Administration of the Plan.

(a) Composition of the Committee. The Plan shall be administered by the
-----------------------------
Stock Option Committee, which shall consist of not less than two
members of the Board, all of whom shall be Non-Employee Directors.
Members of the Committee shall serve at the pleasure of the Board.
In the absence of a duly appointed Committee, the Plan shall be
administered by those members of the Board who are Non-Employee
Directors.

(b) Powers of the Committee. Except as limited by the express provisions
------------------------
of the Plan or by resolutions adopted by the Board, the Committee
shall have sole and complete authority and discretion (i) to select
Participants and grant Awards, (ii) to determine the form and content
of Awards to be issued in the form of Agreements under the Plan, (iii)
to interpret the Plan, (iv) to prescribe, amend and rescind rules and
regulations relating to the Plan, and (v) to make other determinations
necessary or advisable for the administration of the Plan. The
Committee shall have and may exercise such other power and authority
as may be delegated to it by the Board from time to time. A majority
of the entire Committee shall constitute a quorum and the action of a
majority of the members present at any meeting at which

4
<PAGE>

a quorum is present, or acts approved in writing by all members of
the Committee without a meeting, shall be deemed the action of the
Committee.

(c) Agreement. Each Award shall be evidenced by a written agreement
----------
containing such provisions as may be approved by the Committee. Each
such Agreement shall constitute a binding contract between the
Company and the Participant and every Participant, upon acceptance of
such Agreement, shall be bound by the terms and restrictions of the
Plan and of such Agreement. The terms of each such Agreement shall be
in accordance with the Plan, but each Agreement may include such
additional provisions and restrictions determined by the Committee,
in its discretion, provided that such additional provisions and
restrictions are not inconsistent with the terms of the Plan. In
particular, the Committee shall set forth in each Agreement (i) the
Exercise Price of an Option, (ii) the number of Shares subject to,
and the expiration date of, the Award, (iii) the manner, time and
rate (cumulative or otherwise) of exercise or vesting of such Award,
and (iv) the restrictions, if any, to be placed upon such Award or
upon Shares which may be issued upon exercise of such Award.

The Chairman of the Committee and such other Directors and officers
as shall be designated by the Committee are herby authorized to
execute Agreements on behalf of the Company and to cause them to be
delivered to the recipients of Awards.

(d) Effect of the Committee' Decisions. All decisions, determinations and
-----------------------------------
interpretations of the Committee shall be final and conclusive on all
persons affected thereby.

(e) Indemnification. In addition to such other rights of indemnification
----------------
as they may have, the members of the Committee shall be indemnified
by the Company in connection with any claim, action, suit or
proceeding relating to any action taken or failure to act under or in
connection with the Plan or any Award, to the full extent provided
for under the Company's governing instruments with respect to the
indemnification of Directors.

6. Grant of Options.

(a) General Rule. In its sole discretion, the Committee may grant Awards
-------------
to select key Employees. In selection those Employees to whom Awards
will be granted and the number of shares covered by such Awards, the
Committee shall consider their respective positions, duties and
responsibilities, the value of their services to the Company and its
Affiliates,

5
<PAGE>
and any other factors the Committee may deem relevant. Notwithstanding the
foregoing, the Committee shall automatically make the Awards specified in
Paragraphs 6(b) and 6(d) hereof.

(b) Automatic Grants to Employees. On the Effective Date, each of the
-----------------------------
following Employees shall receive an Option (in the form of an ISO, to the
extent permissible under the Code) to purchase the number of Share listed
below, at an Exercise Price per Share equal to the Market Value of a Share
on the Effective Date; provided that such grant shall not be made to an
Employee whose Continuous Service terminates on or before the Effective
Date:

EMPLOYEE SHARES
----------------------------------------

Thomas W. Hammond 400,000
Mark T. Hammond 250,000
Michael W. Carrie 45,000 + 20,000
Joan H. Anderson 45,000
Mary Kay McGuire 15,000 + 20,000
7 Senior Vice Presidents 15,000 each*
6 First Vice Presidents 5,000 each*
22 Vice Presidents 2,500 each*
52 Assistant Vice Presidents 1,500 each*

----------

* Additional names are set forth on the Attachment to the Plan.

With respect to each of the above-named Employees, the Option granted
to the Employee hereunder (i) shall vest in accordance with the general
rule set forth in Paragraph 8(a) of the Plan, (ii) shall have a term of
ten years from the Effective Date, except as limited by Paragraph 3(b),
and (iii) shall be subject to the general rule set forth in Paragraph 8(c)
with respect to the effect of a Employee's termination of Continuous
Service on the Employees's right to exercise his Options.

(c) Special Rules for ISOs. The aggregate Market Value, as of the date the
----------------------
Option is granted, of the Shares with respect to which ISOs are
exercisable for the first time by an Employee during any calendar year
(under all stock option plans, as defined in Section 422 of the Code, of
the Company or any present or future Affiliate of the Company) shall not
exceed $100,000. Notwithstanding the foregoing, the Committee may grant
Options in excess

6
<PAGE>

of the foregoing limitations, in which case such Options granted in excess
of such limitation shall be Options which are Non-ISOs.

(d) Automatic Grants to Directors. Notwithstanding any other provisions of
this Plan, each Director who is not an Employee but is a Director on
the dates specified below shall receive Options to purchase the number
of Shares indicated of the Shares reserved under Paragraph 4(a)
hereof. Such Options shall have an Exercise Price per Share equal to
the Market Value of a Share on the date of grant.

(1) each Non-Employee Director of the Company or the Bank in
office on the day immediately prior to the Effective Date
shall receive Options to purchase 8,000 Shares;

(2) each Non-Employee Director who is elected to the Board of
the Company on or following the Effective Date shall upon
taking office receive Options to purchase 800 Shares;

(3) each Non-Employee Director of the Company or the Bank shall
receive on April 1, 1998 and each succeeding April 1,
Options to purchase 800 Shares; an individual serving on
the Boards of both the Company and the Bank shall be
entitled to Options to purchase a total of 800 Shares per
year.

7. Exercise Price for Options.

(a) Limits on Committee Discretion. The Exercise Price as to any
------------------------------
particular Option shall not be less than 50% of the Market Value of
the Shares on the date of grant (100% in the case of ISOs). In the
case of an Employee who owns Shares representing more than 10% of the
Company's outstanding Shares of Common Stock at the time an ISO is
granted, the Exercise Price shall not be less than 110% of the Market
Value of the Shares at the time the ISO is granted.

(b) Standards for Determining Exercise Price. If the Common Stock is
----------------------------------------
listed on a national securities exchange (including the Nasdaq
National Market) on the date in question, then the Market Value per
Share shall be the average of the highest and lowest selling prices on
such exchange on such date, or if there were no sales on such date,
then the Market Value per Share shall be

7
<PAGE>

the average of the highest and lowest selling price on such exchange
on the trading day immediately preceding such date on which sales
were effected. If the Common Stock is traded otherwise than on a
national securities exchange on the date in question, then the
Market Value per Share shall be the average of the bid and asked
price on such date, or, if there is no bid and asked price on such
date, then on the next prior business day on which there was a bid
and asked price. If no price is available, then the Market Value per
Share shall be its fair market value as determined by the Committee,
in its sole and absolute discretion. Notwithstanding the foregoing,
in the event that either (i) the Committee exercises its discretion
to impose transfer (or other) restrictions on the Shares subject to
an Option, or (ii) the Plan requires specified transfer restrictions,
the Committee shall make an appropriate adjustment in determining the
Market Value of the Shares subject to such an Option (in order to
take into account that their fair market value may be less than the
fair market value of unrestricted Shares).

8. Exercise of Options by Employees.

(a) Generally. Unless otherwise provided by the Committee pursuant to an
---------
applicable Agreement, each Option shall be fully (100%) exercisable
after the one year period following the date of its grant. An
Option may not be exercised for a fractional Share.

(b) Procedure for Exercise. An Employee may exercise Options, subject to
----------------------
provisions relative to its termination and any limitations on its
exercise, only by (1) written notice of intent to exercise the Option
with respect to a specified number of Shares, and (2) payment to the
Company (contemporaneously with delivery of such notice) in cash, in
Common Stock, or a combination of cash and Common Stock, of the
amount of the Exercise Price for the number of Shares with respect to
which the Option is then being exercised. Each such notice (and
payment where required) shall be delivered, or mailed by prepaid
registered or certified mail, addressed to the Treasurer of the
Company at the Company's executive offices. Common Stock utilized in
full or partial payment of the Exercise Price for Options shall be
valued at its Market Value at the date of exercise and may consist of
Shares subject to the Option being exercised. An Employee who
exercises Non-ISOs pursuant to this Paragraph may satisfy all
applicable federal, state and local income and employment tax
withholding obligations, in whole or in part, by irrevocably electing
to have the Company withhold shares of Common Stock, or to deliver to
the Company shares of Common Stock that the Employee already owns,
having a value equal to the amount required to be withheld; provided
that to the extent not inconsistent

8
<PAGE>

herewith, such election otherwise complies with those requirements
of Paragraphs 8 and 18 hereof.

(c) Period of Exercisability. Except to the extent otherwise provided
------------------------
in the terms of an Agreement, an Option may be exercised hereunder
only while the Employee is employed by the Company and has
maintained Continuous Service from the date of the grant of the
Option, or until the later of three months after termination of such
Continuous Service or the date on which the Option would otherwise
expire, except if the Employee's Continuous Service terminates by
reason of-

(1) "Just Cause" which for purposes hereof shall have the meaning
set forth in any unexpired employment or severance agreement of
the Employee (and, in the absence of any such agreement, shall
mean termination because of the Employee's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation [other
than traffic violations or similar offenses] or final cease-and-
desist order), then the Employee's to exercise such Option shall
expire on the date of such termination;

(2) death, then to the extent that the Employee would have been
entitled to exercise the Option immediately prior to his death,
such Option of the deceased Employee may be exercised within
two years from the date of his death (but not later than the
date on which the Option would otherwise expire) by the personal
representatives of his estate or person or persons to whom his
rights under such Option shall have passed by will or by laws of
descent and distribution;

(3) Disability, then to the extent that the Employee would have been
entitled to exercise the Option immediately prior to his or her
Disability, such Option may be exercised within one year from
the date of termination of employment due to Disability, but not
later than the date on which the Option would otherwise expire.

(d) Effect of the Committee's Decisions. The Committee's determination
-----------------------------------
whether an Employee's Continuous Service has ceased, and the
effective date thereof, shall be final and conclusive on all persons
affected thereby.

(e) Acceleration of Vesting. Notwithstanding the six-month period set
-----------------------
forth in Paragraph 8(a) hereof and except to the extent otherwise
provided in the

9
<PAGE>

terms of an Agreement, all Options held by an Employee whose service
with the Company or an Affiliate terminates due to death,
Disability, retirement, or a Change in Control shall be deemed fully
exercisable and non-forfeitable as of the Employee's last day of
service.

9. Exercise of Options by Non-Employee Directors.

(a) Generally. Unless otherwise provided by the Committee pursuant to an
---------
applicable Agreement, each Option shall be fully (100%) exercisable
after one year following the date of its grant.

(b) Terms of Exercise.
-----------------

(i) Options received by Directors who are not Employees will become
exercisable in accordance with the general rule set forth in
Paragraph 8(a) hereof, and may be exercised from time to time
in the manner set forth in Paragraph 8(b).

(ii) Options granted to Non-Employee Directors shall have a term of
5 years; provided that Options so granted shall expire one year
after the date on which a Director terminates Continuous
Service on the Board, but in no event later than the date on
which such Options would otherwise expire. In the event of
such Director's death during the term of his directorship, such
Options shall become immediately exercisable, and may be
exercised within two years from the date of his death by the
personal representatives of his estate or person or persons to
whom his rights under such Options shall have passed by will or
by laws of descent and distribution, but in no event later than
the date on which such Options would otherwise expire. In the
event of such Director's Disability during his or her
directorship, the Director's Options shall become immediately
exercisable, and such Options may be exercised within one year
of the termination of directorship due to Disability, but not
later than the date that the Options would otherwise expire.
Unless otherwise inapplicable or inconsistent with the
provisions of this Paragraph, the Options to be granted to
Directors hereunder shall be subject to all other provisions of
this Plan.

(c) Effect of the Committee's Decisions. The Committee's determination
-----------------------------------
whether a Director's Continuous Service has ceased, and the
effective date thereof, shall be final and conclusive on all persons
affected thereby.

10
<PAGE>

(d) Acceleration of Vesting. Notwithstanding the six-month period set
-----------------------
forth in Paragraph 9(a) hereof and except to the extent otherwise
provided in the terms of an Agreement, all Options held by a
Director whose service with the Bank terminates due to death,
Disability, retirement or a Charge in Control shall be deemed
fully exercisable and non-forfeitable as of the Director's last
day of service with the Bank.

10. Effect of Changes in Common Stock Subject to the Plan.

(a) Recapitalizations; Stock Splits, Etc. The number and kind of
------------------------------------
Shares reserved for issuance under the Plan, and the number and
kind of Shares subject to outstanding Awards, and the Exercise
Price thereof, shall be proportionately adjusted for any increase,
decrease, change or exchange of Shares for a different number or
kind of shares or other securities of the Company which results
from a merger, consolidation, recapitalization, reorganization,
reclassification, stock dividend, split-up, combination of shares
or similar event in which the number or kind of shares is changed
without the receipt or payment of consideration by the Company.

(b) Transactions in which the Company is Not the Surviving Entity. In
-------------------------------------------------------------
the event of (i) the liquidation or dissolution of the Company,
(ii) a merger or consolidation in which the Company is not the
surviving entity, or (iii) the sale or disposition of all or
substantially all of the Company's assets (any of the foregoing to
be referred to herein as a "Transaction"), all outstanding Awards,
together with the Exercise Prices thereof, shall be equitably
adjusted for any change or exchange of Shares for a different
number or kind of shares or other securities which results from
the Transaction.

(c) Special Rule for ISOs. Any adjustment made pursuant to
---------------------
subparagraphs (a) or (b) hereof shall be made in such a manner as
not to constitute a modification, within the meaning of Section
424(h) of the Code.

(d) Conditions and Restrictions on New, Additional, or Different
------------------------------------------------------------
Shares or Securities. If, by reason of any adjustment made
--------------------
pursuant to this Paragraph, a Participant becomes entitled to new,
additional, or different shares of stock or securities, such new,
additional, or different shares of stock or securities shall
thereupon be subject to all of the conditions and restrictions
which were applicable to the Shares pursuant to the Award before
the adjustment was made.

(e) Other Issuances. Except as expressly provided in this Paragraph,
---------------
the issuance by the Company of shares of stock of any class, or of
securities

11
<PAGE>

convertible into Shares or stock of another class, for cash or
property or for labor or services either upon direct sale or upon the
exercise of rights or warrants to subscribe therefor, shall not
affect, and no adjustment shall be made with respect to, the number,
class, or Exercise Price of Shares then subject to Awards or reserved
for issuance under the Plan.

11. Non-Transferability of Awards.

Awards may not be sold, pledged, assigned, hypothecated, transferred
or disposed of in any manner other than by will or by the laws of descent
and distribution. Notwithstanding any other provision of this Plan to the
contrary, to the extent permissible under Rule 16b-3, and except to the
extent otherwise provided in the terms of an Agreement, a Participant who
is granted Non-ISOs pursuant to this Plan may transfer such Non-ISOs to
his or her spouse, lineal ascendants, lineal descendants, or to a duly
established trust, provided that Non-ISOs so transferred may not again be
transferred other than (i) to the Participant originally receiving the
grant of Non-ISOs, or (ii) to an individual or trust to whom such
Participant could have transferred Non-ISOs pursuant to this Paragraph 11.
Non-ISOs which are transferred pursuant to this Paragraph 11 shall be
exercisable by the transferee subject to the same terms and conditions as
would have applied to such Non-ISOs in the hands of the Participant
originally receiving the grant of such Non-ISOs.

12. Time of Granting Awards.

The date of grant of an Award shall, for all purposes, be the later
of the date on which the Committee makes the determination of granting
such Award and the Effective Date. Notice of the determination shall be
given to each Participant to whom an Award is so granted within a
reasonable time after the date of such grant.

13. Effective Date.

The Plan shall become effective on April , 1997.

14. Modification of Awards.

At any time, and from time to time, the Board may authorize the
Committee to direct execution of an instrument providing for the
modification of any outstanding Award, provided no such modification shall
confer on the holder of said Award any right or benefit which could not be
conferred on him by the grant of a new Award at such time, or impair the
Award without the consent of the holder of the Award.

12
<PAGE>

15. Amendment and Termination of the Plan.

The Board may from time to time amend the terms of the Plan and
suspend or terminate the Plans. No amendment, suspension or termination
of the Plan shall, without the consent of any affected holders of an
Award, alter or impair any rights or obligations under any Award
theretofore granted.

16. Conditions Upon Issuance of Shares.

(a) Compliance with Securities Laws. Shares of Common Stock shall not
--------------------------------
be issued with respect to any Award unless the issuance and
delivery of such Shares shall comply with all relevant provisions
of law, including, without limitation, the Securities Act of 1933,
as amended, the rules and regulations promulgated thereunder, any
applicable state securities law and the requirements of any stock
exchange upon which the Shares may then be listed.

(b) Securities Laws. As a condition to the exercise of an Option, the
----------------
Company may require the person exercising the Option to make such
representations and warranties as may be necessary to assure the
availability of an exemption from the registration requirements of
federal or state securities laws.

(c) Committee Discretion. The Committee shall have the discretionary
---------------------
authority to impose in Agreements such restrictions on Shares as it may deem
appropriate or desirable, including but not limited to the authority to
impose a right of first refusal or to establish repurchase rights or both of
these restrictions.

17. Reservation of Shares.

The Company, during the term of the Plan, will reserve and keep
available for issuance a number of Shares sufficient to satisfy the
requirements of the Plan.

18. Withholding Tax.

The Company's obligation to deliver Shares upon exercise of
Options shall be subject to the Participant's satisfaction of all
applicable federal, state and local income and employment tax
withholding obligations.

19. No Employment or Other Rights.

<PAGE>

In no event shall an Employee's or Director's eligibility to
participate or participation in the Plan create or be deemed to create
any legal or equitable right of the Employee, Director or any other
party to continue service with the Company or any Affiliate. Except to
the extent provided in Paragraphs 6(b) and 6(d), no Employee or
Director shall have a right to be granted an Award or, having received
an Award, the right to again be granted an Award. However, an Employee
or Director who has been granted an Award may, if otherwise eligible,
be granted an additional Award or Awards.

20. Governing Law.

The Plan shall be governed by and construed in accordance with
the laws of the State of Michigan, except to the extent that federal
law shall be deemed to apply. Any action by an Employee arising with
respect to any claim regarding any award, any claim of right, or
otherwise arising with respect to this Plan or its administration,
shall only be brought in a court of competent jurisdiction with venue
in the State of Michigan.

14
<PAGE>

ATTACHMENT

FLAGSTAR BANCORP, INC.
1997 EMPLOYEES AND DIRECTORS STOCK OPTION PLAN

Section 6(b): Additional Participants
<TABLE>
<CAPTION>
Name Title
- --------------------------------------------------------------------------------
<S> <C>
M. David Bowers Senior Vice President
Jean R. Garrick Senior Vice President
Kirsten A. Hammond Senior Vice President
Geoffrey R. Langdon Senior Vice President
Marie A. Ralko Senior Vice President, Controller, Treasurer
Robert O. Rondeau, Jr. Senior Vice President
Karen F. Shreve Senior Vice President
Alessandro P. Dinello First Vice President
Albert J. Gladner First Vice President, General Counsel
John P. Marecki First Vice President
William M. Robinson, III First Vice President
Adelita A. Shubert First Vice President
Linda R. Terrasi First Vice President
Loren W. Anderson Vice President
Julie A. Austin Vice President
Brenda M. Barnett Vice President
Linda H. Bissell Vice President
William S. Brooks Vice President
Michael A. Hanrahan Vice President
Sidney H. Hawlik Vice President
Michael R. Hillman Vice President
Laura Horan Vice President
John R. Inch Vice President, Manager of Operations
Michael S. Kemp Vice President
Ricky L. Laber Vice President
Laura Lee Leavenworth Vice President
Jean E. Lutterbel Vice President
Dawn M. Mansell Vice President
John R. Morrison Vice President
Danielle Moseley Vice President
Genece M. Moss Vice President
Paul M. Perez Vice President
Patricia A. Polin Vice President
Margurite Shropshire Vice President
</TABLE>

<PAGE>

Name Title
- --------------------------------------------------------------------------------
<S> <C>
Alan R. Sorenson Vice President
Catherine C. Airo Assistant Vice President
Michelle P. Baratta Assistant Vice President
Gary J. Burkhart Assistant Vice President
John S. Burke Assistant Vice President
Andrea L. Bushong Assistant Vice President
Mae Lynn Campbell Assistant Vice President
Beverley A. Carter Assistant Vice President
Jennifer R. Chapdelaine Assistant Vice President
Sharon L. Cohn Assistant Vice President
John B. Collins Assistant Vice President
Kathleen C. Coopersmith Assistant Vice President
Melanie M. Crochet Assistant Vice President
James P. Crowley Assistant Vice President
Tommy E. Cruse Assistant Vice President
Mary E. D'Alessandro Assistant Vice President
Kathryn H. Dettloff Assistant Vice President
Mary Ann Drake Assistant Vice President
Robert G. Fuller Assistant Vice President
Terri M. Fuller Assistant Vice President
B. Lynn Gleeson Assistant Vice President
Edwin Garrett Griffin Assistant Vice President
David R. Hennon Assistant Vice President
Michael A. Hillebrand Assistant Vice President
Barbara A. Johnson Assistant Vice President
Kenneth R. Johnson Assistant Vice President
Robert M. Johnson Assistant Vice President
Timothy R. Kalaris Assistant Vice President
William J. Kalmar, Jr. Assistant Vice President
Thomas M. Klar Assistant Vice President
Linda M. Krasicky Assistant Vice President
Steven M. Laidlaw Assistant Vice President
Felicia L. Little Assistant Vice President
Deborah J. Lowry Assistant Vice President
Richard W. Luckadoo Assistant Vice President
Emelinda McNeal Assistant Vice President
Karen A. Nellett Assistant Vice President
Paul J. Orlando Assistant Vice President
Wendy L. Pardee Assistant Vice President
Donald Peters Assistant Vice President
Linda A. Peyton Assistant Vice President

</TABLE>
2

<PAGE>

Name Title
- --------------------------------------------------------------------------------
<S> <C>
Stephen M. Pittiglio Assistant Vice President
Angelo D. Rea Assistant Vice President
Barbara S. Robinson Assistant Vice President
Debra J. Ruhl Assistant Vice President
Charles D. Schatzley Assistant Vice President
Colleen Irish Spahr Assistant Vice President
David G. Spear Assistant Vice President
Cheryl L. Stawarz Assistant Vice President
Debra M. Strong Assistant Vice President
Peter J. Van Bever Assistant Vice President
David G. Wiens Assistant Vice President
Peggy C. Younglove Assistant Vice President

</TABLE>

<PAGE>

Exhibit 23.1

Consent of Independent Certified Public Accountants

We have issued our report dated March 3, 1997 accompanying the consolidated
financial statements of Flagstar Bancorp, Inc. contained in the Registration
Statement and Prospectus. We consent to the use of the aforementioned report in
the Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts".

/s/ Grant Thornton LLP

Detroit, Michigan
April 23, 1997