UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2007

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

(Exact name of registrant as specified in its charter)

Michigan		38-3150651
(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification No.)
5151 Corporate Drive		48098
(Address of principal executive offices)		(Zip code)

(248) 312-2000

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

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer o    Accelerated filer þ    Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No þ.

     As of May 7, 2007, 60,445,709 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.

 

 

FORWARD—LOOKING STATEMENTS

     This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Flagstar Bancorp, Inc. (“Flagstar” or the “Company”) and these statements are subject to risk and uncertainty. Forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, include those using words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions.

     There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed under the heading “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, including: (1) competitive pressures among depository institutions increase significantly; (2) changes in the interest rate environment reduce interest margins; (3) the Company’s estimates of prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions differ materially from actual results; (4) general economic conditions, either national or in the states in which the Company does business, are less favorable than expected; (5) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions adversely affect the businesses in which the Company is engaged; (7) changes and trends in the securities markets result in an adverse effect to the Company; (8) a delayed or incomplete resolution of regulatory issues; (9) the impact of reputational risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity; and (10) the outcome of regulatory and legal investigations and proceedings.

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

Consolidated Statements of Financial Condition — March 31, 2007 (unaudited) and December 31, 2006.

Unaudited Consolidated Statements of Earnings — For the three months ended March 31, 2007 and 2006.

Consolidated Statements of Stockholders’ Equity and Comprehensive Income — For the three months ended March 31, 2007 (unaudited) and for the year ended December 31, 2006.

Unaudited Consolidated Statements of Cash Flows — For the three months ended March 31, 2007 and 2006.

Unaudited Notes to Consolidated Financial Statements.

Statement regarding Computation of Net Earnings per Share

Section 302 Certification of Chief Executive Officer

Section 302 Certification of Chief Financial Officer

Section 906 Certification of Chief Executive Officer

Section 906 Certification of Chief Financial Officer

Flagstar Bancorp, Inc.

		At March 31,				At December 31,
		2007				2006
		(Unaudited)
Assets
Cash and cash items		$	111,735			$	136,675
Interest-bearing deposits			398,188				140,561
Cash and cash equivalents			509,923				277,236
Securities classified as trading			16,247				—
Securities classified as available for sale			983,825				617,450
Mortgage-backed securities held to maturity (fair value $1.2 billion and $1.6 billion at March 31, 2007, and December 31, 2006, respectively)			1,156,805				1,565,420
Other investments			23,773				24,035
Loans available for sale			3,791,142				3,188,795
Loans held for investment			7,981,945				8,939,685
Less: allowance for loan losses			(48,500	)			(45,779	)
Loans held for investment, net			7,933,445				8,893,906
Total interest-earning assets			14,303,425				14,430,167
Accrued interest receivable			50,312				52,758
Repossessed assets, net			76,765				80,995
Federal Home Loan Bank stock			329,027				277,570
Premises and equipment, net			221,911				219,243
Mortgage servicing rights, net			226,794				173,288
Other assets			112,153				126,509
Total assets		$	15,432,122			$	15,497,205
Liabilities and Stockholders’ Equity
Liabilities
Deposits		$	7,975,382			$	7,623,488
Federal Home Loan Bank advances			5,604,000				5,407,000
Security repurchase agreements			625,426				990,806
Long term debt			207,472				207,472
Total interest-bearing liabilities			14,412,280				14,228,766
Accrued interest payable			48,597				46,302
Federal income taxes payable			32,747				29,674
Secondary market reserve			26,500				24,200
Payable for securities purchased			—				249,694
Other liabilities			114,340				106,335
Total liabilities			14,634,464				14,684,971
Commitments and Contingencies			—				—
Stockholders’ Equity
Common stock $.01 par value, 150,000,000 shares authorized; 63,644,139 and 63,604,590 shares issued and outstanding at March 31, 2007, and December 31, 2006, respectively			636				636
Additional paid in capital			63,451				63,223
Accumulated other comprehensive income			6,834				5,182
Retained earnings			743,203				743,193
Treasury stock, at cost, 1,284,300 shares at March 31, 2007, and none at December 31, 2006			(16,466	)			—
Total stockholders’ equity			797,658				812,234
Total liabilities and stockholders’ equity		$	15,432,122			$	15,497,205

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

Flagstar Bancorp, Inc.

		For the Three Months Ended
		March 31,
		2007				2006
		(Unaudited)
Interest Income
Loans		$	187,252			$	171,773
Mortgage-backed securities			14,617				17,152
Securities available for sale			13,598				—
Interest-bearing deposits			3,501				—
Other			1,602				2,374
Total interest income			220,570				191,299
Interest Expense
Deposits			85,026				75,217
FHLB advances			67,852				39,973
Security repurchase agreements			12,393				13,496
Other			3,327				3,938
Total interest expense			168,598				132,624
Net interest income			51,972				58,675
Provision for loan losses			8,293				4,063
Net interest income after provision for loan losses			43,679				54,612
Non-Interest Income
Loan fees and charges			638				1,611
Deposit fees and charges			4,978				4,811
Loan administration			2,615				4,355
Net gain on loan sales			25,154				17,084
Net gain on sales of mortgage servicing rights			115				8,586
Net gain (loss) on securities available for sale			729				(3,557	)
Other fees and charges			5,669				9,731
Total non-interest income			39,898				42,621
Non-Interest Expense
Compensation and benefits			39,492				36,274
Occupancy and equipment			16,768				16,887
Communication			1,074				1,224
Other taxes			(573	)			2,029
General and administrative			14,637				11,656
Total non-interest expense			71,398				68,070
Earnings before federal income taxes			12,179				29,163
Provision for federal income taxes			4,420				10,253
Net Earnings		$	7,759			$	18,910
Earnings per share
Basic		$	0.12			$	0.30
Diluted		$	0.12			$	0.29

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

Flagstar Bancorp, Inc.

										Accumulated
						Additional				Other												Total
		Common				Paid in				Comprehensive				Retained				Treasury				Stockholders
		Stock				Capital				Income				Earnings				Stock				Equity
Balance at January 1, 2006		$	632			$	57,304			$	7,834			$	706,113			$	—			$	771,883
Net earnings			—				—				—				75,202				—				75,202
Reclassification of gain on swap extinguishment			—				—				(1,167	)			—				—				(1,167	)
Change in net unrealized loss on swaps used in cash flow hedges			—				—				(1,874	)			—				—				(1,874	)
Change in net unrealized gain on securities available for sale			—				—				389				—				—				389
Total comprehensive income			—				—				—				—				—				72,550
Stock options exercised			4				2,201				—				—				—				2,205
Stock-based compensation			—				2,718				—				—				—				2,718
Tax benefit from stock-based compensation			—				1,000				—				—				—				1,000
Dividends paid ($0.60 per share)			—				—				—				(38,122	)			—				(38,122	)
Balance at December 31, 2006			636				63,223				5,182				743,193				—				812,234
(Unaudited)
Net earnings			—				—				—				7,759				—				7,759
Reclassification of gain on swap extinguishment			—				—				(30	)			—				—				(30	)
Change in net unrealized loss on swaps used in cash flow hedges			—				—				(1,000	)			—				—				(1,000	)
Change in net unrealized gain on securities available for sale			—				—				2,682				—				—				2,682
Total comprehensive income			—				—				—				—				—				9,411
Adjustment to initially apply FIN 48			—				—				—				(1,428	)			—				(1,428	)
Stock options exercised			—				24				—				—				—				24
Stock-based compensation			—				263				—				—				—				263
Tax effect from stock-based compensation			—				(59	)			—				—				—				(59	)
Purchase of treasury stock			—				—				—				—				(16,466	)			(16,466	)
Dividends paid ($0.10 per share)			—				—				—				(6,321	)			—				(6,321	)
Balance at March 31, 2007		$	636			$	63,451			$	6,834			$	743,203			$	(16,466	)		$	797,658

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

Flagstar Bancorp, Inc.

		For the Three Months Ended
		March 31,
		2007				2006
		(Unaudited)
Operating Activities
Net earnings		$	7,759			$	18,910
Adjustments to net earnings to net cash used in operating activities
Provision for loan losses			8,293				4,063
Depreciation and amortization			21,449				31,618
Decrease in valuation allowance in mortgage servicing rights			(448	)			—
Stock-based compensation expense			374				683
Net gain on the sale of assets			(878	)			(106	)
Net gain on loan sales			(25,154	)			(17,084	)
Net loss on securities available for sale			—				3,557
Net gain on sales of mortgage servicing rights			(115	)			(8,586	)
Net gain on securities classified as available for sale			(729	)			—
Proceeds from sales of loans available for sale			5,335,697				3,895,767
Investment in securities classified as trading			(16,247	)			—
Origination and repurchase of mortgage loans available for sale, net of principal repayments			(5,349,048	)			(3,963,205	)
Decrease in accrued interest receivable			2,446				1,037
Decrease (increase) in other assets			12,817				(13,982	)
Increase in accrued interest payable			2,295				937
Net tax effect for stock grants issued			59				(156	)
Increase in federal income taxes payable			6,204				7,119
Decrease in payable for securities purchased			(249,694	)			—
Decrease in other liabilities			(5,628	)			(3,331	)
Net cash used in operating activities			(250,548	)			(42,759	)
Investing Activities
Net change in other investments			262				(1,336	)
Repayment of mortgage-backed securities held to maturity			92,238				29,558
Proceeds from sale of investment securities available for sale			171,441				—
Purchase of investment securities available for sale			(218,023	)			—
Origination of portfolio loans, net of principal repayments			363,458				133,615
Purchase of Federal Home Loan Bank stock			(51,457	)			—
Proceeds from the disposition of repossessed assets			26,255				10,693
Acquisitions of premises and equipment, net of proceeds			(8,102	)			(13,715	)
Increase in mortgage servicing rights			(68,039	)			(46,368	)
Proceeds from the sale of mortgage servicing rights			116				25,560
Net cash provided by investing activities			308,149				138,007
Financing Activities
Net increase in deposit accounts			351,894				287,887
Net (decrease) increase in security repurchase agreements			(365,380	)			43,439
Net increase (decrease) in Federal Home Loan Bank advances			197,000				(381,000	)
Net receipt (disbursement) of payments of loans serviced for others			8,170				(2,198	)
Net receipt of escrow payments			6,335				9,561
Proceeds from the exercise of stock options			(87	)			2,181
Net tax effect of stock grants issued			(59	)			156
Dividends paid to stockholders			(6,321	)			(9,522	)
Purchase of treasury stock			(16,466	)			—
Net cash provided by (used in) financing activities			175,086				(49,496	)
Net increase in cash and cash equivalents			232,687				45,752
Beginning cash and cash equivalents			277,236				201,163
Ending cash and cash equivalents		$	509,923			$	246,915
Supplemental disclosure of cash flow information
Loans held for investment transferred to repossessed assets		$	26,720			$	22,317
Total interest payments made on deposits and other borrowing		$	166,303			$	131,687
Federal income taxes paid		$	—			$	—
Mortgage loans available for sale transferred to held for investment		$	125,721			$	91,539
Mortgage loans held for investment transferred to available for sale		$	693,283			$	674,263

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

Flagstar Bancorp, Inc.

Note 1. Nature of Business

     Flagstar Bancorp, Inc. (“Flagstar” or the “Company”), is the holding company for Flagstar Bank, FSB (the “Bank”), a federally chartered stock savings bank founded in 1987. With $15.4 billion in assets at March 31, 2007, Flagstar is the largest savings institution and second largest banking institution headquartered in Michigan.

     The Company’s principal business is obtaining funds in the form of deposits and borrowings and investing those funds in single-family mortgages and other types of loans. The acquisition or origination of single-family mortgage loans is the Company’s primary lending activity. The Company also originates consumer loans, commercial real estate loans, and non-real estate commercial loans.

     The Company sells or securitizes most of the mortgage loans that it originates. The Company generally retains the right to service the mortgage loans that it sells. These mortgage-servicing rights (“MSRs”) are occasionally sold by the Company in transactions separate from the sale of the underlying mortgages. The Company may also invest in a significant amount of its loan production in order to maximize the Company’s leverage ability and to receive the interest spread between earning assets and paying liabilities. The Company also acquires funds on a wholesale basis from a variety of sources and services a significant volume of loans for others.

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

Note 2. Basis of Presentation

     The accompanying unaudited consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated. In accordance with current accounting principles, the Company’s trust subsidiaries are not consolidated. In addition, certain prior period amounts have been reclassified to conform to the current period presentation.

     The unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. The accompanying interim financial statements are unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three month period ended March 31, 2007, are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. For further information, you should refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The Form 10-K can be found on the Company’s Investor Relations web page, at www.flagstar.com, and on the website of the Securities and Exchange Commission, at www.sec.gov.

Note 3. Recent Accounting Developments

Establishing Standards on Measuring Fair Value

     In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 157, “Fair Value Measurements.” SFAS 157 defines the term “fair value” for U.S. GAAP purposes, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. It also clarifies that the exchange price is the price in an orderly transaction between market participants to sell an asset or transfer a liability at a measurement date. SFAS 157 emphasizes that fair value is a market-based measurement and not an entity-specific measurement. It also establishes a hierarchy used in such measurement and expands the required disclosures of assets and liabilities measured at fair value. Management will be required to adopt SFAS 157 beginning in 2008. The adoption of this standard is not expected to have a material impact on the Company’s financial condition, results of operation or liquidity.

Fair Value Option

     In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 allows entities to elect to measure those financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The election may be applied instrument by instrument, is irrevocable once made and must be applied to the entire instrument and not to specified risks, specific cash flows or other limited aspects of that instrument. An entity is restricted in choosing the dates to elect the fair value option for an eligible item. SFAS 159 applies to the Company effective January 1, 2008. Management of the Company is currently evaluating the potential impact of SFAS 159 on the Company’s financial condition, results of operation or liquidity.

Note 4. Investment Securities

     As of March 31, 2007 and December 31, 2006, investment securities were comprised of the following (in thousands):

		March 31,				December 31,
		2007				2006
Securities — trading		$	16,247			$	—
Securities — available for sale
AAA-rated non-agency securities		$	937,654			$	497,089
AAA-rated agency securities			—				77,910
Non-investment grade residual securities			46,171				42,451
Total mortgage-backed securities — available for sale		$	983,825			$	617,450
Mortgage-backed securities — held to maturity
AAA-rated non-agency securities		$	—			$	332,362
AAA-rated agency securities			1,156,805				1,233,058
Total mortgage-backed securities — held to maturity		$	1,156,805			$	1,565,420
Other investments
Mutual funds		$	23,060			$	23,320
U.S. Treasury bonds			713				715
Total other investments		$	23,773			$	24,035

     At March 31, 2007, the Company had $16.2 million in securities classified as trading. These securities are non-investment grade residual assets from a private securitization completed on March 15, 2007. The securities are recorded at fair value with any unrealized gains and losses reported in the consolidated statement of earnings. Prior to this transaction, the Company had no securities classified as trading.

     At March 31, 2007, the Company had $983.8 million in securities classified as available for sale which were comprised of AAA rated agency securities, non-agency securities and non-investment grade residual securities arising from its private securitizations. Securities available for sale are carried at fair value, with unrealized gains and losses reported as a component of other comprehensive income. During the quarter ended March 31, 2007, the Company received written guidance from the OTS on regulatory capital treatment being used by the Bank for securities retained from a guaranteed mortgage securitization of fixed second mortgage loans completed in April 2006. The securities had been initially recorded as held to maturity because the underlying bonds were AAA rated and insured by a private insurance company and, therefore, the Bank expected that the securities would receive 20% risk-weighted capital treatment rather than 50% or 100% risk-weighted treatment. At the time, the Company had both the ability and intent to hold the securities to maturity. In its guidance, the OTS advised the Company that the recharacterization of the underlying loans in the guaranteed mortgage securitization did not decrease the risk associated with carrying fixed second mortgage loans because the capital rules did not recognize private insurance companies as eligible guarantors. Because of this information received from the OTS, the Company’s capital treatment of the underlying securities changed significantly. As a result, the Company no longer intends to hold the securities to maturity and during the quarter ended March 31, 2007, reclassified $321.1 million securities associated with the guaranteed mortgage securitization of fixed second mortgage loans completed in April 2006 to available for sale. Management does not believe that this capital treatment could have been reasonably anticipated and the reclassification to available for sale will not impact the held to maturity status of the Company’s other held to maturity securities.

     At March 31, 2007, the Company had $1.2 billion in AAA rated mortgage-backed securities classified as held to maturity. Of such securities, $624.4 million were pledged as collateral for security repurchase agreements at March 31, 2007.

     The Company has other investments because of interim investment strategies in trust subsidiaries, collateral requirements required in swap and deposit transactions, and Community Reinvestment Act investment requirements. U.S. Treasury bonds in the amount of $514,000 and $517,000 are pledged as collateral in association with the issuance of certain trust preferred securities at March 31, 2007 and December 31, 2006, respectively.

Note 5. Securitization Activity

     On March 15, 2007, the Company sold $620.9 million in closed-ended, fixed and adjustable rate mortgage loans (the “Second Mortgage Securitization”) and recorded $22.6 million in residual interests and servicing assets as a result of the non-agency securitization. The residual interests are categorized as securities classified as trading and are therefore recorded at fair value. Any gains or losses realized on the sale of such securities and any subsequent changes in unrealized gains and losses are reported in the consolidated statement of earnings.

     Certain cash flows received from securitization trusts outstanding, including the trust arising from the Second Mortgage Securitization, were as follows (in thousands):

		For the Three Months Ended March 31,
		2007				2006
Proceeds from new securitizations		$	620,866			$	—
Proceeds from collections reinvested in securitizations			42,230				25,296
Servicing fees received			1,215				726
Loan repurchases for representations and warranties			—				(500	)

Note 6. Stock-Based Compensation

     On January 1, 2006, the Company adopted SFAS No. 123R using the modified prospective method. SFAS No. 123R requires all share-based payment to employees, including grants of employee stock options and stock appreciation rights, to be recognized as expense in the consolidated statement of earnings based on their fair values. The total amount of compensation is determined based on the fair value of the options when granted and is expensed over the required service period, which is normally the vesting period of the options. SFAS No. 123R applies to awards granted or modified on or after January 1, 2006, and to any unvested awards that were outstanding at December 31, 2005. Consequently, compensation expense is recorded for prior option grants that vest on or after January 1, 2006, the date of adoption. In accordance with SFAS No. 123R, for the period beginning January 1, 2006, only the excess tax benefits from the exercise of stock options are presented as financing cash flows. The excess tax effect totaled $(0.1) million and $0.2 million for the three months ended March 31, 2007, and 2006, respectively. During the quarter ended March 31, 2007, there were no options granted.

     Cash-Settled Stock Appreciation Rights

     The Company used the following weighted average assumptions in applying the Black-Scholes model to determine the fair value of cash-settled stock appreciation rights issued during the three months ended March 31, 2007: dividend yield of 3.2%; expected volatility of 21.44%; a risk-free rate of 4.51%; and an expected life range of 4.2 to 4.8 years.

     The following table presents the status and changes in cash-settled stock appreciation rights:

						Weighted Average
		Shares				Exercise Price
Stock Appreciation Rights Awarded:
Non-vested balance at December 31, 2006			328,873			$	16.28
Granted			552,554			$	14.48
Vested			(82,197	)		$	16.28
Forfeited			(545	)		$	14.48
Non-vested balance at March 31, 2007			798,685

     For the three months ended March 31, 2007 and 2006, the Company recorded stock-based compensation expense of $0.4 million ($0.2 million net of tax) and $0.7 million ($0.4 million net of tax), respectively.

     Restricted Stock Units

     The Company issues restricted stock units to officers, directors and key employees in connection with year-end compensation. Restricted stock units generally vest as outlined in the applicable restricted stock unit agreements and are delivered shortly after the grant date. The Company incurred expenses of approximately $0.3 million with respect to restricted stock units for each of the periods ended March 31, 2007, and 2006. As of March 31, 2007, restricted stock units outstanding had a market value of $1.7 million.

Note 7. Stockholders’ Equity

     On January 31, 2007, the Company announced that the board of directors had adopted a Stock Repurchase Program under which the Company was authorized to repurchase up to $40.0 million worth of outstanding common stock. On February 27, 2007, the Company announced that the board of directors had increased the authorized repurchase amount to $50.0 million. On April 26, 2007, the Board increased the authorized repurchase amount to $75.0 million. This program expires on January 31, 2008. At March 31, 2007, $16.5 million has been used to repurchase shares under the plan.

Note 8. Segment Information

     The Company’s operations are broken down into two business segments: banking and home lending. Each business operates under the same banking charter but is reported on a segmented basis for this report. Each of the business lines is complementary to each other. The banking operation includes the gathering of deposits and investing those deposits in duration-matched assets primarily originated by the home lending operation. The banking group holds these loans in the investment portfolio in order to earn income based on the difference or “spread” between the interest earned on loans and the interest paid for deposits and other borrowed funds. The home lending operation involves the origination, packaging, and sale of loans in order to receive transaction income. The home lending operation also services mortgage loans for others and sells MSRs into the secondary market. Funding for the home lending operation is provided by deposits and borrowings garnered by the banking group. All of the non-bank consolidated subsidiaries are included in the banking segment. No such subsidiary is material to the Company’s overall operations.

     Following is a presentation of financial information by segment for the periods indicated (in thousands):

		For the Three Months Ended March 31, 2007
		Bank				Home Lending
2007:		Operations				Operations				Elimination				Combined
Net interest income		$	33,493			$	18,479			$	—			$	51,972
Gain on sale revenue			—				25,269				—				25,269
Other income			10,652				3,977				—				14,629
Total net interest income and non-interest income			44,145				47,725				—				91,870
Earnings before federal income taxes			7,636				4,543				—				12,179
Depreciation and amortization			2,504				18,945				—				21,449
Capital expenditures			4,779				3,320				—				8,099
Identifiable assets			14,810,835				4,241,287				(3,620,000	)			15,432,122
Inter-segment income (expense)			27,150				(27,150	)			—				—

		For the Three Months Ended March 31, 2006
		Bank				Home Lending
2006:		Operations				Operations				Elimination				Combined
Net interest income		$	43,949			$	14,726			$	—			$	58,675
Gain on sale revenue			—				25,670				—				25,670
Other income			5,383				11,568				—				16,951
Total net interest income and non-interest income			49,332				51,964				—				101,296
Earnings before federal income taxes			22,644				6,519				—				29,163
Depreciation and amortization			3,145				28,018				—				31,163
Capital expenditures			11,991				1,408				—				13,399
Identifiable assets			14,126,573				3,064,885				(2,140,000	)			15,051,458
Inter-segment income (expense)			16,050				(16,050	)			—				—

Note 9. Accounting for Uncertainty in Income Taxes

     In June 2006, FASB issued FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109,” (“FIN 48”), to clarify the accounting treatment for uncertain income tax positions when applying FASB Statement No. 109, “Accounting for Income Taxes.” This interpretation prescribes a financial statement recognition threshold and measurement attribute for any tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

     Effective January 1, 2007, the Company adopted FIN 48. As a result, the Company recorded the estimated value of its uncertain tax positions by increasing its tax liability by an additional $1.4 million and recording a corresponding reduction to retained earnings. The liability for uncertain tax position is carried in other liabilities in the consolidated statement of financial position as of March 31, 2007. The Company does not expect any reasonably possible material changes to the estimated amount in its liability associated with its uncertain tax position through December 31, 2007.

     The Company recognizes accrued interest and penalties related to uncertain tax positions in federal and other tax expense. At January 1, 2007, the Company had accrued approximately $0.7 million for the payment of tax related interest.

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

     Where we say “we,” “us,” or “our,” we usually mean Flagstar Bancorp, Inc. In some cases, a reference to “we,” “us,” or “our” will include our wholly-owned subsidiary Flagstar Bank, FSB, and Flagstar Capital Markets Corporation, its wholly-owned subsidiary, which we collectively refer to as the “Bank.”

General

     Operations of the Bank are categorized into two business segments: banking and home lending. Each segment operates under the same banking charter, but is reported on a segmented basis for financial reporting purposes. For certain financial information concerning the results of operations of our banking and home lending operations, see Note 8 of the Notes to Consolidated Financial Statements, in Item 1, Financial Statements, herein.

     Banking Operation. We provide a full range of banking services to consumers and small businesses in Michigan, Indiana and Georgia. Our banking operation involves the gathering of deposits and investing those deposits in duration-matched assets consisting primarily of mortgage loans originated by our home lending operation. The banking operation holds these loans in its loans held for investment portfolio in order to earn income based on the difference, or “spread,” between the interest earned on loans and investments and the interest paid for deposits and other borrowed funds. At March 31, 2007, we operated a network of 155 banking centers and provided banking services to approximately 201,200 customers. During the first three months of 2007, we opened four banking centers, including three in Michigan and one in Georgia. During 2007, we expect to open five additional branches in the Atlanta, Georgia area and four additional branches in Michigan.

     Home Lending Operation. Our home lending operation originates, acquires, securitizes and sells residential mortgage loans on one-to-four family residences in order to generate transactional income. The home lending operation also services mortgage loans on a fee basis for others and occasionally sells mortgage servicing rights into the secondary market. Funding for our home lending operation is provided primarily by deposits and borrowings obtained by our banking operation.

Critical Accounting Policies

     Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, we have identified five policies that, due to the judgment, estimates and assumptions inherent in those policies, are critical to an understanding of our consolidated financial statements. These policies relate to: (a) the determination of our allowance for loan losses; (b) the valuation of our MSRs; (c) the valuation of our residuals; (d) the valuation of our derivative instruments; and (e) the determination of our secondary market reserve. We believe that the judgment, estimates and assumptions used in the preparation of our consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of our consolidated financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition. For further information on our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended December 31, 2006, which is available on our website, www.flagstar.com, under the Investor Relations section, or on the website of the SEC, at www.sec.gov.

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

		For the Three Months Ended
		March 31,
		2007				2006
Return on average assets			0.19	%			0.50	%
Return on average equity			3.85	%			9.73	%
Efficiency ratio			77.7	%			67.2	%
Equity/assets ratio (average for the period)			5.06	%			5.20	%
Mortgage loans originated or purchased		$	5,489,329			$	4,348,153
Other loans originated or purchased		$	263,819			$	325,939
Mortgage loans sold		$	5,289,617			$	3,894,070
Interest rate spread — Bank only 1			1.34	%			1.56	%
Net interest margin — Bank only 2			1.43	%			1.65	%
Interest rate spread — Consolidated 1			1.33	%			1.57	%
Net interest margin — Consolidated 2			1.42	%			1.72	%
Dividend payout ratio			81.5	%			50.4	%
Average common shares outstanding			63,427				63,367
Average fully diluted shares outstanding			64,041				64,181
Charge-offs to average investment loans (annualized)			0.26	%			0.15	%

		March 31,				December 31,				March 31,
		2007				2006				2006
Equity-to-assets ratio			5.17	%			5.24	%			5.20	%
Core capital ratio 3			6.29	%			6.37	%			6.33	%
Total risk-based capital ratio 3			11.42	%			11.55	%			11.20	%
Book value per share		$	12.79			$	12.77			$	12.33
Number of common shares outstanding			62,360				63,605				63,488
Mortgage loans serviced for others		$	19,124,378			$	15,032,504			$	29,242,906
Capitalized value of mortgage servicing rights			1.19	%			1.15	%			1.10	%
Ratio of allowance to non-performing loans			65.0	%			80.2	%			68.2	%
Ratio of allowance to loans held for investment			0.61	%			0.51	%			0.40	%
Ratio of non-performing assets to total assets			1.04	%			1.03	%			1.00	%
Number of banking centers			155				151				141
Number of home lending centers			72				76				97
Number of salaried employees			2,522				2,510				2,421
Number of commissioned employees			448				444				594

Results of Operations

Net Earnings

     Net earnings for the three months ended March 31, 2007 was $7.8 million ($0.12 per share-diluted), an $11.1 million decrease from the $18.9 million ($0.29 per share-diluted) reported in the comparable 2006 period. The overall decrease resulted from a $2.7 million decrease in non-interest income, a $3.3 million increase in non-interest expense and a $10.9 million decrease in net interest income after provision for loan losses, offset in part by a $5.8 million decrease in federal income tax expense.

Net Interest Income

     We recorded $52.0 million in net interest income before provision for loan losses for the three months ended March 31, 2007, a 11.4% decline from $58.7 million recorded for the comparable 2006 period. The decline reflects a $29.3 million increase in interest income offset by a $36.0 million increase in interest expense, primarily as a result of rates paid on deposits, FHLB advances and security repurchase agreements that increased more than the increase in yields earned on loans and mortgage-backed securities. In addition, in the three months ended March 31, 2007, as compared to the same period in 2006, we increased our average interest-earning assets by $1.0 billion and our average interest-paying liabilities by $1.1 billion.

     Average interest-earning assets as a whole repriced up 45 basis points during the three months ended March 31, 2007 while average interest-bearing liabilities repriced up 69 basis points during the same period, resulting in the decrease in our interest rate spread of 24 basis points to 1.33% for the three months ended March 31, 2007, from 1.57% for the comparable 2006 period. The Company recorded a net interest margin of 1.42% at March 31, 2007 as compared to 1.72% at March 31, 2006. At the Bank level, the net interest margin was 1.43% at March 31, 2007, as compared to 1.65% in March 31, 2006.

     Average Yields Earned and Rates Paid. The following table presents interest income from average interest-earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates at the Company rather than the Bank. Interest income from earning assets includes the amortization of net premiums and net deferred loan origination costs of $7.2 million and $6.5 million for the three months ended March 31, 2007 and 2006, respectively. Non-accruing loans were included in the average loan amounts outstanding.

		Three months ended March 31,
		2007												2006
		Average								Yield				Average								Yield
		Balance				Interest				Rate				Balance				Interest				Rate
		(Dollars in thousands)
Interest-earning assets:
Loans receivable, net		$	12,300,421			$	187,252				6.09	%		$	12,326,019			$	171,773				5.57	%
Mortgage-backed securities held to maturity			1,337,862				14,617				4.43	%			1,411,406				17,152				4.86	%
Other			1,154,015				18,701				6.57	%			108,092				2,374				8.79	%
Total interest-earning assets			14,792,298				220,570				5.98	%			13,845,517				191,299				5.53	%
Other assets			1,149,618												1,270,082
Total assets		$	15,941,916											$	15,115,599
Interest-bearing liabilities
Deposits		$	7,582,031			$	85,026				4.55	%		$	8,138,226				75,217				3.75	%
FHLB advances			5,845,473				67,852				4.71	%			3,996,170				39,973				4.06	%
Security repurchase agreements			1,021,812				12,393				4.92	%			1,198,474				13,496				4.57	%
Other			252,959				3,327				5.33	%			258,214				3,938				6.19	%
Total interest-bearing liabilities			14,702,275				168,598				4.65	%			13,591,084				132,624				3.96	%
Other liabilities			433,531												746,895
Stockholders’ equity			806,110												777,620
Total liabilities and stockholders’ equity		$	15,941,916											$	15,115,599
Net interest-earning assets		$	90,023											$	254,433
Net interest income						$	51,972											$	58,675
Interest rate spread 1											1.33	%											1.57	%
Net interest margin 2											1.42	%											1.72	%
Ratio of average interest-earning assets to average interest-bearing liabilities											101	%											102	%

     Rate/Volume Analysis. The following table presents the dollar amount of changes in interest income and interest expense for the components of interest-earning assets and interest-bearing liabilities, which are presented in the preceding table. The table below distinguishes between the changes related to average outstanding balances (changes in volume while holding the initial rate constant) and the changes related to average interest rates (changes in average rates while holding the initial balance constant). Changes attributable to both a change in volume and a change in rates are included as changes in rate.

		Three Months Ended March 31,
		2007 Versus 2006
		Increase (Decrease) due to:
		Rate				Volume				Total
		(In thousands)
Interest-earning assets:
Loans receivable, net		$	15,835			$	(356	)		$	15,479
Mortgage-backed securities-held to maturity			(1,641	)			(894	)			(2,535	)
Other			(6,657	)			22,984				16,327
Total			7,537				21,734				29,271
Interest-bearing liabilities:
Deposits			14,952				(5,143	)			9,809
FHLB advances			9,366				18,513				27,879
Security repurchase agreements			888				(1,991	)			(1,103	)
Other			(531	)			(80	)			(611	)
Total			24,675				11,299				35,974
Change in net interest income		$	(17,138	)		$	10,435			$	(6,703	)

     The rate/volume table above indicates that, in general, interest rates on deposits and other liabilities increased to a greater extent than interest rates on our loan products and securities during the three months ended March 31, 2007. The adverse impact of these rate changes on our net interest margin for the periods was only partially offset by the increased volume of interest-earning assets over interest-bearing liabilities.

     Our interest income on loans increased as a result of increased yields on new loan production. This increase offset the decline in interest income attributable to a slightly reduced volume of loans, which declined as certain loans were pooled and sold. Similarly, the increase in interest income arising from other interest-earning assets related principally to the increase in the volume of securities classified as available for sale and interest-bearing deposits.

     The increase in interest rates occurred despite our use of security repurchase agreements, which had lower funding costs than FHLB advances or borrowings with similar short-term maturities. Our interest expense from security repurchase agreements was $12.4 million for the three months ended March 31, 2007 and $13.5 million for the three months ended March 31, 2006. Interest expense on FHLB advances increased to $67.9 million for the three months ended March 31,2007, as average FHLB advances increased to handle funding needs as average deposit volumes decreased. Also, as FHLB advances matured or were called they were replaced at the higher current market rate.

     Our interest expense related to deposits increased because of increases in our rates offset in part by a decrease in our volume of deposits. The rate increase reflects the continuing competition for deposits we face with our Midwest branches.

Provision for Loan Losses

     During the three months ended March 31, 2007, we recorded a provision for loan losses of $8.3 million as compared to $4.1 million recorded during the same period in 2006. The provisions reflect our estimates to maintain the allowance for loan losses at a level management believes is appropriate to cover probable and inherent losses in the portfolio and had the effect of increasing our allowance for loan losses by $2.7 million. Net charge-offs increased in the 2007 period to $5.6 million, compared to $3.7 million for the same period in 2006, and as a percentage of investment loans, increased to an annualized 0.26% from 0.15%. The increase in charge-offs as a percentage of investment loans reflects the relative decline in the balance of our investment loan portfolio as we continue to convert investment loans to mortgage-backed securities held to maturity as part of our overall risk management and funding cost containment strategies coupled with an increase in net charge-offs. See “Financial Condition — Allowance for Loan Losses,” below, for further information.

Non-Interest Income

     Our non-interest income consists of (i) loan fees and charges, (ii) deposit fees and charges, (iii) loan administration fees, (iv) net gains from loan sales, (v) net gains from sales of MSRs, (vi) net gain (loss) on securities available for sale and (vii) other fees and charges. During the three months ended March 31, 2007, non-interest income decreased to $39.9 million from $42.6 million in the comparable 2006 period.

     Loan Fees and Charges. Both our home lending operation and banking operation earn loan origination fees and collect other charges in connection with originating residential mortgages and other types of loans.

     Loan fees collected during the three months ended March 31, 2007 totaled $18.1 million compared to $11.4 million collected during the comparable 2006 period. This increase is the result of the $1.1 billion increase in total loan production to $5.8 billion for the quarter ended March 31, 2007, compared to $4.7 billion in the same 2006 period.

     Deposit Fees and Charges. Our banking operation collects deposit fees and other charges such as fees for non-sufficient funds checks, cashier check fees, ATM fees, overdraft protection, and other account fees for services we provide to our banking customers. The amount of these fees tends to increase as a function of the growth in our average deposit base.

     During the three months ended March 31, 2007, we collected $5.0 million in deposit fees versus $4.8 million in the comparable 2006 period. This increase is attributable to the increase in our average deposit base as our banking franchise continues to expand, as well as our general increase in deposit fees during 2007.

     Loan Administration. When our home lending operation sells mortgage loans in the secondary market it usually retains the right to continue to service these loans and earn a servicing fee. When an underlying loan is prepaid or refinanced, the mortgage servicing right for that loan is fully amortized as no further fees will be earned for servicing that loan. During periods of falling interest rates, prepayments and refinancings generally increase and, unless we provide replacement loans, it will usually result in a reduction in loan servicing fees and increases in amortization recorded on the MSR portfolio.

     Net loan administration fee income decreased to $2.6 million during the three months ended March 31, 2007, from $4.4 million in the 2006 period. The $1.8 million decrease was the result of a $10.7 million decrease in the servicing fee revenue, which was offset by an $8.9 million decrease in amortization expense of the MSRs. The decrease in the servicing fee revenue was the result of loans serviced for others averaging $17.2 billion during the 2007 period versus $28.9 billion during the 2006 period. The decrease in amortization expense was the result of a lower average balance that also had relatively fewer prepayments and a greater proportion of more seasoned loans in comparison to the corresponding period in 2006.

     The unpaid principal balance of loans serviced for others was $19.1 billion at March 31, 2007, versus $15.0 billion serviced at December 31, 2006, and $29.2 billion serviced at March 31, 2006. At March 31, 2007, the weighted average servicing fee on these loans was 0.37% (i.e., 37 basis points) and the weighted average age was 15 months.

     Net Gain on Loan Sales. Our home lending operation records the transaction fee income it generates from the origination, securitization, and sale of mortgage loans in the secondary market. The amount of net gain on loan sales recognized is a function of the volume of mortgage loans sold and the gain on sale spread achieved, net of related selling expenses. Net gain on loan sales is also increased or decreased by any mark to market pricing adjustments on loan commitments and forward sales commitments in accordance with SFAS 133, “Accounting for Derivative Instruments” (“SFAS 133”), increases to the secondary market reserve related to loans sold during the period, and related administrative expenses. The volatility in the gain on sale spread is attributable to market pricing, which changes with demand and the general level of interest rates. Generally, we are able to sell loans into the secondary market at a higher margin during periods of low or decreasing interest rates. Typically, as the volume of acquirable loans increases in a lower or falling interest rate environment, we are able to pay less to acquire loans and are then able to achieve higher spreads on the eventual sale of the acquired loans. In contrast, when interest rates rise, the volume of acquirable loans decreases and therefore we may need to pay more in the acquisition phase, thus decreasing our net gain achievable. Our net gain was also affected by declining spreads available from securities we sell that are guaranteed by Fannie Mae and Freddie Mac, and by an over-capacity in the mortgage business that has placed continuing downward pressure on loan pricing opportunities for conventional residential mortgage products.

     The following table provides a reconciliation of the net gain on loan sales reported in our consolidated financial statements to our total gain on loans sold within the period (dollars in thousands):

		For the Three Months Ended March 31,
		2007				2006
Net gain on loan sales		$	25,154			$	17,084
Add: SFAS 133 adjustments			(3,945	)			(10,127	)
Add: LOCOM adjustment			26				4,745
Add: provision to secondary market reserve			2,163				1,006
Total gain on loans sold		$	23,398			$	12,708
Loans sold or securitized		$	5,289,617			$	3,894,070
Spread achieved			0.44	%			0.33	%

     For the three months ended March 31, 2007, there was a net gain on loan sales of $25.2 million, as opposed to a $17.1 million gain in the 2006 period, an increase of $8.1 million. The 2007 period reflects the sale of $5.3 billion in loans versus $3.9 billion sold in the 2006 period. Management believes changes in market conditions during the 2007 period resulted in an increased mortgage loan origination volume ($5.5 billion in the 2007 period vs. $4.3 billion in the 2006 period) and an increased overall gain on sale spread (44 basis points in the 2007 period versus 33 basis points in the 2006 period).

     Net Gain on the Sale of Mortgage Servicing Rights. As part of our business model, our home lending operation occasionally sells MSRs from time to time in transactions separate from the sale of the underlying loans. At the time of the MSR sale, we record a gain or loss based on the selling price of the MSRs less our carrying value and transaction costs. Accordingly, the amount of net gains on MSR sales depends upon the gain on sale spread and the volume of MSRs sold. The spread is attributable to market pricing, which changes with demand and the general level of interest rates. In general, if an MSR is sold on a “flow basis” shortly after it is acquired, little or no gain will be realized on the sale. MSRs created in a lower interest rate environment generally will have a higher market value because the underlying loan is less likely to be prepaid. Conversely, an MSR created in a higher interest rate environment will generally sell at a market price below the original fair value recorded because of the increased likelihood of prepayment of the underlying loans, resulting in a loss.

     During the three month period ending March 31, 2007, we did not sell any servicing rights on a bulk basis and we sold $0.5 billion of loans on a servicing released basis. We sold $2.4 million in servicing rights on a bulk basis, and $0.8 billion of loans on a servicing released basis during the 2006 period.

     For the three months ended March 31, 2007, the net gain on the sale of MSRs decreased from $8.6 million during the 2006 period to $0.1 million. The decrease in the 2007 period reflected the absence of any bulk sales in the 2007 period.

     Net Gain (Loss) on Securities Available for Sale. Securities classified as available for sale are comprised of residual interests from private securitizations and mortgage-backed and collateralized mortgage obligation securities. In addition to recognizing any gains or losses upon the sale of the securities we may also incur net losses on securities available for sale as a result of a reduction in the estimated fair value of the security when that decline has been deemed to be an other-than-temporary impairment.

     During the three months ended March 31, 2007, we sold collateralized mortgage obligation securities amounting to approximately $171.0 million which resulted in a gain of $729,000. During the three months ended March 31, 2007, we did not recognize any other-than-temporary impairment on our residual interest that arose from securitizations completed in 2005 and 2006. For the three months ended March 31, 2006, we recognized a $3.6 million impairment of our residual interest in the securitization completed in 2005. For additional information, see Note 4 to the Notes to the Consolidated Financial Statements, in Item 1, Financial Statements, herein.

     Other Fees and Charges. Other fees and charges include certain miscellaneous fees, including dividends received on FHLB stock and income generated by our subsidiaries.

     During the three months ended March 31, 2007, we recorded $4.0 million in cash dividends received on FHLB stock, compared to $3.5 million received during the three months ended March 31, 2006. At March 31, 2007 and 2006, we owned $329.0 million and $292.1 million of FHLB stock, respectively. We also recorded $1.0 million in subsidiary income for the three months ended March 31, 2007 and 2006.

Non-Interest Expense

     The following table sets forth the components of our non-interest expense, along with the allocation of expenses related to loan originations that are deferred pursuant to SFAS 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Lease” (“SFAS 91”). As required by SFAS 91, mortgage loan fees and certain direct origination costs (principally compensation and benefits) are capitalized as an adjustment to the basis of the loans originated during the period and amortized to expense over the lives of the respective loans rather than immediately expensed. Certain other expenses associated with loan production, however, are not required or allowed to be capitalized and are, therefore, expensed when incurred.

		For the Three Months Ended
		March 31,
		2007				2006
Compensation and benefits		$	42,424			$	39,873
Commissions			15,306				16,967
Occupancy and equipment			16,786				16,908
Advertising			1,849				1,489
Federal insurance premium			782				297
Communications			1,446				1,653
Other taxes			(573	)			2,447
Other			12,007				9,871
Subtotal			90,027				89,505
Less: capitalized direct costs of loan closings, under SFAS 91			(18,629	)			(21,435	)
Non-interest expense		$	71,398			$	68,070
Efficiency ratio 1			77.7	%			67.2	%

     Non-interest expense, before the capitalization of direct loan origination costs, increased $0.5 million to $90.0 million during the three months ended March 31, 2007, from $89.5 million for the comparable 2006 period. The following are the major changes affecting non-interest expense as reflected in the statements of earnings:

	•		The banking operation conducted business from 14 more facilities at March 31, 2007 than at March 31, 2006.
	•		We conducted business from 25 fewer home lending centers at March 31, 2007 than at March 31, 2006.
	•		The home lending operation originated $5.5 billion in residential mortgage loans during the 2007 quarter versus $4.3 billion in the comparable 2006 quarter.
	•		We employed 2,522 salaried employees at March 31, 2007 versus 2,421 salaried employees at March 31, 2006.
	•		We employed 160 full-time national account executives at March 31, 2007 versus 123 at March 31, 2006.
	•		We employed 288 full-time retail loan originators at March 31, 2007 versus 471 at March 31, 2006.
	•		We reinstated the base salaries for the Chairman and the CEO for 2007.

     Compensation and benefits expense increased $2.5 million during the 2007 period from the comparable 2006 period to $42.4 million, with the increase primarily attributable to regular salary increases for employees and additional staff and support personnel for the newly opened banking centers.

     The change in commissions paid to the commissioned sales staff, on a period over period basis, was a $1.7 million decrease. This decrease reflects the reduced number of full-time loan originators during the period, offset in part by a change in the compensation structure.

     The 21.6% increase in other expense during the 2007 period from the comparable 2006 period is reflective of the increased mortgage loan originations and the increased number of banking centers in operation during the period offset in part by the decreased number of home lending centers.

     During the three months ended March 31, 2007, we capitalized direct loan origination costs of $18.6 million, a decrease of $2.8 million from $21.4 million for the comparable 2006 period. This 13.1% decrease is a result of a $1.7 million decrease in commission expense and a reduction in the direct loan origination costs during the 2007 period versus the 2006 period.

Provision for Federal Income Taxes

     For the three months ended March 31, 2007, our provision for federal income taxes as a percentage of pretax earnings was 36.3% compared to 35.2% in 2006. For each period, the provision for federal income taxes varies from statutory rates primarily because of certain non-deductible corporate expenses.

Analysis of Items on Statement of Financial Condition

     Assets

     Securities Classified as Trading. Securities classified as trading are comprised of residual interests from the private securitization completed in March 2007. The residual interest in this securitization was $16.2 million at March 31, 2007. In accordance with FAS 155, “Accounting for Certain Hybrid Instruments", management has elected to initially and subsequently measure this residual interest from the March 2007 securitization, and subsequent securitizations at fair value. This does not affect the classification of the residuals from prior securitizations. Subsequent changes to fair value will be recorded in earnings.

     Securities Classified as Available for Sale. Securities classified as available for sale, which are comprised of mortgage-backed securities, collateralized mortgage obligations and residual interests from securitizations of mortgage loan products increased from $617.5 million at December 31, 2006, to $983.8 million at March 31, 2007. See Note 4 of the Notes to the Consolidated Financial Statements, in Item 1. Financial Statements herein.

     Mortgage-backed Securities Held to Maturity. Mortgage-backed securities held to maturity decreased from $1.6 billion at December 31, 2006 to $1.2 billion at March 31, 2007. The decrease was attributable to the reclassification of $321.1 million in mortgage-backed securities resulting from a private on-balance sheet securitization of second mortgage fixed rate loans in April 2006. See Note 4 of the Notes to the Consolidated Financial Statements, in Item 1. Financial Statements herein. At March 31, 2007, approximately $624.4 million of mortgage-backed securities were pledged as collateral under security repurchase agreements. At December 31, 2006, $1.0 billion of the mortgage-backed securities were pledged as collateral under security repurchase agreements.

     Other Investments. Our investment portfolio decreased from $24.0 million at December 31, 2006, to $23.8 million at March 31, 2007. Investment securities consist of contractually required collateral, regulatory required collateral, and investments made by our non-bank subsidiaries.

     Loans Available for Sale. We sell a majority of the mortgage loans we produce into the secondary market on a whole loan basis or by securitizing the loans into mortgage-backed securities. We generally sell or securitize our longer-term, fixed-rate mortgage loans, while we hold the shorter duration and adjustable rate mortgage loans for investment. At March 31, 2007, we held loans available for sale of $3.8 billion, which was an increase of $0.6 billion from $3.2 billion held at December 31, 2006. Our loan production is typically inversely related to the level of long-term interest rates. As long-term rates decrease, we tend to originate an increasing number of mortgage loans. A significant amount of the loan origination activity during periods of falling interest rates is derived from refinancing of existing mortgage loans. Conversely, during periods of increasing long-term rates increase, loan originations tend to decrease.

     Loans Held for Investment. Loans held for investment at March 31, 2007 decreased $0.9 billion from December 31, 2006. The decrease was principally attributable to a reclassification of approximately $693.3 million of second mortgage loans to loans available for sale.

     The following table sets forth the composition of our investment loan portfolio as of the dates indicated.

Loans Held for Investment

		March 31, 2007				December 31, 2006
		(Dollars in thousands)
Mortgage loans		$	5,909,807			$	6,211,765
Second mortgage loans			65,601				715,154
Commercial real estate loans			1,325,057				1,301,819
Construction loans			75,178				64,528
Warehouse lending			271,493				291,656
Consumer loans			315,267				340,157
Non-real estate commercial loans			19,542				14,606
Total loans held for investment portfolio			7,981,945				8,939,685
Allowance for loan losses			(48,500	)			(45,779	)
Total loans held for investment portfolio, net		$	7,933,445			$	8,893,906

     Allowance for Loan Losses. The allowance for loan losses represents management’s estimate of probable losses in our loans held for investment portfolio as of the date of the consolidated financial statements. The allowance provides for probable losses that have been identified with specific customer relationships and for probable losses believed to be inherent in the loan portfolio, but that have not been specifically identified.

     The allowance for loan losses increased to $48.5 million at March 31, 2007 from $45.8 million at December 31, 2006, respectively. The allowance for loan losses as a percentage of non-performing loans decreased to 65.0% from 80.2% at March 31, 2007 and December 31, 2006, respectively. Our non-performing loans (i.e., loans that are past due 90 days or more) increased to $74.6 million from $57.1 million at March 31, 2007 and December 31, 2006, respectively. The allowance for loan losses as a percentage of investment loans increased to 0.61% from 0.51% at March 31, 2007 and December 31, 2006, respectively. The increase in the allowance for loan losses at March 31, 2007, reflects management’s assessment of the effect of increased level of charge-offs within the higher risk loan categories, i.e. home equity lines of credit, second mortgages and other consumer loans. The delinquency rate increased in the first three months of the year to 1.64% as of March 31, 2007, up from 1.34% as of December 31, 2006.

     The allowance for loan losses is considered adequate based upon management’s assessment of relevant factors, including the types and amounts of non-performing loans, historical and current loss experience on such types of loans, and the current economic environment. The following table provides the amount of delinquent loans at the dates listed. At March 31, 2007, 84.4% of all delinquent loans are loans in which we had a first lien position on residential real estate.

Delinquent Loans

		March 31,				December 31,
		2007				2006
Days Delinquent		(Dollars in thousands)
30		$	32,251			$	40,140
60			23,863				22,163
90			74,570				57,071
Total		$	130,684			$	119,374
Investment loans		$	7,981,945			$	8,939,685
Delinquency %			1.64	%			1.34	%

     We currently calculate our delinquent loans using a method required by the Office of Thrift Supervision, when we prepare regulatory reports that we submit to the OTS each quarter. This method also called the “OTS Method”, considers a loan to be delinquent if no payment is received after the first day of the month following the month of the missed payment. Other companies with mortgage banking operations similar to ours usually use the Mortgage Bankers Association Method (“MBA Method”) which considers a loan to be delinquent if payment is not received by the end of the month of the missed

payment. The key difference between the two methods is that a loan considered “delinquent” under the MBA Method would not be considered “delinquent” under the OTS Method for another 30 days. Under the MBA Method of calculating delinquent loans, 30 day delinquencies equaled $116.1 million, 60 day delinquencies equaled $32.3 million and 90 day delinquencies equaled $101.0 million at March 31, 2007. Total delinquent loans under the MBA Method total $249.4 million or 3.12% of loans held for investment at March 31, 2007. By comparison, delinquent loans at December 31, 2006, totaled $237.9 million, or 2.66% of total loans held for investment.

     The following table shows the activity in the allowance for loan losses during the indicated periods (dollars in thousands):

Activity Within the Allowance For Loan Losses

		Three Months Ended								Year Ended
		March 31,				March 31,				December 31,
		2007				2006				2006
Beginning balance		$	45,779			$	39,140			$	39,140
Provision for loan losses			8,293				4,063				25,450
Charge-offs
Mortgage loans			(3,400	)			(1,913	)			(9,833	)
Consumer loans			(2,529	)			(1,572	)			(7,806	)
Commercial loans			—				(315	)			(1,414	)
Construction loans			—				—				—
Other			(370	)			(686	)			(2,560	)
Total charge-offs			(6,299	)			(4,486	)			(21,613	)
Recoveries
Mortgage loans			315				160				665
Consumer loans			331				603				1,720
Commercial loans			—				40				40
Construction loans			—				—				—
Other			81				—				377
Total recoveries			727				803				2,802
Charge-offs, net of recoveries			(5,572	)			(3,683	)			(18,811	)
Ending balance		$	48,500			$	39,520			$	45,779
Net charge-off ratio			0.26	%			0.15	%			0.20	%

     Accrued Interest Receivable. Accrued interest receivable decreased from $52.8 million at December 31, 2006, to $50.3 million at March 31, 2007, due to the timing of payments. We typically collect interest in the month following the month in which it is earned.

     Repurchased Assets. We sell a majority of the mortgage loans we produce into the secondary market on a whole loan basis or by securitizing the loans into mortgage-backed securities. When we sell or securitize mortgage loans, we make customary representations and warranties to the purchasers about various characteristics of each loan, such as the manner of origination, the nature and extent of underwriting standards applied and the types of documentation being provided. When a loan that we have sold or securitized fails to perform according to its contractual terms, the purchaser will typically review the loan file to determine whether defects in the origination process occurred and if such defects constitute a violation of our representations and warranties. If there are no such defects, we have no liability to the purchaser for losses it may incur on such loan. If a defect is identified, we may be required to either repurchase the loan or indemnify the purchaser for losses it sustains on the loan. Loans that are repurchased and that are performing according to their terms are included within our loans held for investment portfolio. Repurchased assets are loans we have reacquired because of representations and warranties issues related to loan sales or securitizations and that are non-performing.

     Repurchased assets totaled $9.6 million at December 31, 2006 and $9.2 million at March 31, 2007. During the three months ended March 31, 2007 and 2006 we repurchased $16.6 million and $12.3 million of non-performing loans, respectively. Repurchased assets are included within other assets in our consolidated financial statements.

     Premises and Equipment. Premises and equipment, net of accumulated depreciation, totaled $221.9 million at March 31, 2007, an increase of $2.7 million, or 1.2%, from $219.2 million at December 31, 2006. The increase reflects the continued expansion of our retail banking center network.

     Mortgage Servicing Rights. During the three months ended March 31, 2007, we capitalized $68.0 million, amortized $15.0 million, and sold no MSRs on a bulk basis. MSRs totaled $226.8 million at March 31, 2007 with a fair value of approximately $263.6 million based on an internal valuation model which utilized an average discounted cash flow rate equal to 10.1%, an average cost to service of $42 per conventional loan and $55 per government or adjustable rate loan, and a weighted prepayment rate assumption of 18.3%. The portfolio contained 140,952 loans, had a weighted average interest rate of 6.48%, a weighted average remaining term of 315 months, and had been seasoned 6 months. At December 31, 2006, the MSR balance was $173.3 million with a fair value of $197.6 million based on our internal valuation model.

     The principal balance of the loans underlying the MSRs was $19.1 billion at March 31, 2007 versus $15.0 billion at December 31, 2006, with the increase primarily attributable to having no bulk MSR sales during the 2007 period. The capitalized value of the MSRs was 1.19% at March 31, 2007 and 1.15% at December 31, 2006.

     The following table sets forth activity in loans serviced for others during the indicated periods (in thousands):

Activity of Mortgage Loans Serviced for Others
(In thousands)

		For the Three Months Ended March 31,
		2007				2006
Balance, beginning of period		$	15,032,504			$	29,648,088
Loan servicing originated			5,289,617				3,894,070
Loan amortization / prepayments			(746,171	)			(1,162,681	)
Loan servicing sales			(451,572	)			(3,136,571	)
Balance, end of period		$	19,124,378			$	29,242,906

     Other Assets. Other assets decreased $14.4 million, or 11.4%, to $112.1 million at March 31, 2007, from $126.5 million at December 31, 2006. The majority of this decrease was attributable to receivables that were offset against escrow accounts upon the settlement of certain litigation.

Liabilities

     Deposit Accounts. Deposit accounts increased $0.4 billion to $8.0 billion at March 31, 2007, from $7.6 billion at December 31, 2006, as certificates of deposit increased while all other deposit types (except municipals) decreased. The composition of our deposits was as follows:

Deposit Portfolio
(Dollars in thousands)

		March 31, 2007												December 31, 2006
						Weighted				Percent								Weighted				Percent
						Average				of								Average				of
		Balance				Rate				Balance				Balance				Rate				Balance
Demand accounts		$	392,476				1.52	%			4.92	%		$	380,162				1.28	%			4.99	%
Savings accounts			140,349				1.50				1.76				144,460				1.55				1.89
MMDA			609,754				4.13				7.65				608,282				4.05				7.98
Certificates of deposit (1)			3,775,817				4.97				47.34				3,763,781				4.86				49.37
Total Retail Deposits			4,918,396				4.49				61.67				4,896,685				4.38				64.23
Municipal deposits			1,772,324				5.36				22.22				1,419,964				5.33				18.63
National accounts			979,284				3.70				12.28				1,062,646				3.66				13.94
Company controlled deposits(2)			305,378				0.00				3.83				244,193				0.00				3.20
Total Deposits		$	7,975,382				4.42	%			100.0	%		$	7,623,488				4.30	%			100.0	%

     The municipal deposit channel was $1.8 billion at March 31, 2007, a 28.6% increase, as compared $1.4 billion at December 31, 2006. These deposits have been garnered from local government units within our retail market area.

     In past years, our national accounts division garnered funds through nationwide advertising of deposit rates and the use of investment banking firms. Since 2005, we have not solicited any funds through the division as we have been able to access more attractive funding sources through FHLB advances, security repurchase agreements and other forms of deposits that provide the potential for a long term customer relationship. National deposit accounts decreased a net $0.1 billion to $1.0 billion at March 31, 2007, from $1.1 billion at December 31, 2006. These accounts were generally gathered in a lower interest rate environment, resulting in a lower average cost. At March 31, 2007, the national deposit accounts had a weighted maturity of 3.7 months and are used for interest rate risk management.

     The company controlled accounts increased $0.1 billion to $0.3 billion at March 31, 2007. This increase reflects the increase in mortgage loans serviced for others.

     FHLB Advances. Our borrowings from the FHLB, known as FHLB advances, may include floating rate daily adjustable advances, fixed rate convertible (i.e., “putable”) advances, and fixed rate term (i.e., “bullet”) advances. The following is a breakdown of the advances outstanding (dollars in thousands):

		March 31, 2007								December 31, 2006
						Weighted								Weighted
						Average								Average
		Amount				Rate				Amount				Rate
Short-term fixed rate term advances		$	2,304,000				4.93	%		$	2,757,000				4.95	%
Fixed rate putable advances			750,000				4.28	%			500,000				4.24	%
Long-term fixed rate term advances			2,550,000				4.45	%			2,150,000				4.28	%
Total		$	5,604,000				4.62	%		$	5,407,000				4.62	%

     FHLB advances increased $0.2 billion to $5.6 billion at March 31, 2007, from $5.4 billion at December 31, 2006. We rely upon such advances as a source of funding for the origination or purchase of loans for sale in the secondary market and for providing duration specific medium-term financing. The outstanding balance of FHLB advances fluctuates from time to time depending upon our current inventory of loans available for sale that we fund with the advances and upon the availability of lower cost funding from our retail deposit base, the escrow accounts we hold, or alternative funding sources such as security repurchase agreements. Our approved line with the FHLB was $7.5 billion at March 31, 2007.

     Security Repurchase Agreements. Securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions and are recorded at the amounts at which the securities were sold plus accrued interest. Securities, generally mortgage backed securities, are pledged as collateral under these financing arrangements. The fair value of collateral provided to a party is continually monitored and additional collateral is provided by or returned to us, as appropriate. At March 31, 2007 and December 31, 2006, we had security repurchase agreements amounting to $0.6 billion and $1.0 billion, respectively.

     Long Term Debt. Our long-term debt principally consists of junior subordinated notes related to trust preferred securities issued by our special purpose trust subsidiaries under the Company rather than the Bank. The notes mature 30 years from issuance, are callable after five years and pay interest quarterly. At both March 31, 2007 and December 31, 2006, we had $207.5 million of long-term debt.

     Accrued Interest Payable. Our accrued interest payable increased $2.3 million from December 31, 2006 to $48.6 million at March 31, 2007. The increase was principally due to the increase in interest rates during 2007 on our interest-bearing liabilities.

     Federal Income Taxes Payable. Federal income taxes payable increased $3.0 million to $32.7 million at March 31, 2007, from $29.7 million at December 31, 2006. This increase is attributable to the provision for federal income taxes on earnings and the change in federal income tax on other comprehensive income during the three months ended March 31, 2007.

     Secondary Market Reserve. We sell most of the residential mortgage loans that we originate into the secondary mortgage market. When we sell mortgage loans, we make customary representations and warranties to the purchasers about various characteristics of each loan, such as the manner of origination, the nature and extent of underwriting standards applied and the types of documentation being provided. If a defect in the origination process is identified, we may be required to either repurchase the loan or indemnify the purchaser for losses it sustains on the loan. If there are no such defects, we have no liability to the purchaser for losses it may incur on such loan. We maintain a secondary market reserve to account for the expected losses related to loans we may be required to repurchase (or the indemnity payments we may have to make to purchasers). The secondary market reserve takes into account both our estimate of expected losses on loans sold during the current accounting period, as well as adjustments to our previous estimates of expected losses on loans sold. In each case, these estimates are based on our most recent data regarding loan repurchases, actual credit losses on repurchased loans and

recovery history, among other factors. Increases to the secondary market reserve due to current loan sales reduce our net gain on loan sales. Adjustments to our previous estimates are recorded as an increase or decrease in our other fees and charges.

     The secondary market reserve increased $2.3 million to $26.5 million at March 31, 2007, from $24.2 million at December 31, 2006. This increase is attributable to the Company’s increase in expected losses and historical experience of repurchases and claims.

     The following table provides a reconciliation of the secondary market reserve within the periods shown (in thousands):

Secondary Market Reserve

		For the Three Months Ended March 31,
		2007				2006
Balance, beginning of period		$	24,200			$	17,550
Provision
Charged to gain on sale for current loan sales			2,163				1,006
Charged to other fees and charges for changes in estimates			2,733				3,075
Total			4,896				4,081
Charge-offs, net			(2,596	)			(3,631	)
Balance, end of period		$	26,500			$	18,000