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 ~~September 30, 2006~~March 31, 2007


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

Commission File Number: 001-16577~~001-16577~~

~~FLAGSTAR BANCORP, INC.~~ (FLAGSTAR LOGO)

(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

(Registrant’s telephone number, including area code)

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. Yesþ Noo.

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 filero Accelerated filerþ Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ.

As of ~~October 31, 2006, 63,587,477~~May 7, 2007, 60,445,709 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.

~~FORWARD–~~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, ~~2005,~~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.

Consolidated Statements of Financial Condition ~~— September 30, 2006 (unaudited) and December 31, 2005.~~

(In thousands, except for share data)


	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.

~~Unaudited~~ Consolidated Statements of Earnings ~~— For the three and nine months ended September 30, 2006 and 2005.~~

(In thousands, except per share data)


	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.

Consolidated Statements of Stockholders’ Equity and Comprehensive Income ~~— For the nine months ended September 30, 2006 (unaudited) and for the year ended December 31, 2005.~~

(In thousands, except per share data)


						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.

~~Unaudited~~ Consolidated Statements of Cash Flows ~~— For the nine months ended September 30, 2006 and 2005.~~

~~Unaudited Notes to Consolidated Financial Statements.~~(In thousands)

~~Statement regarding Computation~~


	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 ~~Net Earnings per Share~~~~Section 302 Certification of Chief Executive OfficerSection 302 Certification of Chief Financial OfficerSection 906 Certification of Chief Executive OfficerSection 906 Certification of Chief Financial Officer~~

~~Flagstar Bancorp, Inc.~~

~~Consolidated Statements of Financial Condition~~

~~(In thousands, except for share data)~~

At September 30, At December 31,
2006 2005
(Unaudited)
Assets

Cash and cash equivalents $ 346,774 $ 201,163
Mortgage-backed securities held to maturity (fair value $1.6 billion and $1.4 billion at September 30, 2006 and December 31, 2005, respectively) 1,552,040 1,414,986
Securities available for sale 32,295 26,148
Other investments 25,074 21,957
Loans available for sale 3,286,263 1,773,394
Loans held for investment 8,924,181 10,576,471
Less: allowance for loan losses (42,744 ) (39,140 )

Loans held for investment, net 8,881,437 10,537,331

Total earning assets 13,777,109 13,773,816
Accrued interest receivable 53,136 48,399
Repossessed assets, net 71,514 47,724
Federal Home Loan Bank stock 274,507 292,118
Premises and equipment, net 212,795 200,789
Mortgage servicing rights, net 150,663 315,678
Other assets 233,527 195,743

Total assets $ 15,120,025 $ 15,075,430

Liabilities and Stockholders’ Equity Liabilities

Deposits $ 8,212,773 $ 7,979,000
Federal Home Loan Bank advances 4,517,308 4,225,000
Security repurchase agreements 734,495 1,060,097
Long term debt 207,472 207,497

Total interest-bearing liabilities 13,672,048 13,471,594
Accrued interest payable 48,329 41,288
Undisbursed payments on loans serviced for others 208,629 407,104
Escrow accounts 230,316 219,028
Liability for checks issued 19,323 23,222
Federal income taxes payable 51,655 75,271
Secondary market reserve 23,900 17,550
Other liabilities 50,813 48,490

Total liabilities 14,305,013 14,303,547

Commitments and Contingencies — —

Stockholders’ Equity

Common stock — $.01 par value, 150,000,000 shares authorized; 63,571,427 and 63,208,038 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively 636 632
Additional paid in capital 62,559 57,304
Accumulated other comprehensive income 5,984 7,834
Retained earnings 745,833 706,113

Total stockholders’ equity 815,012 771,883

Total liabilities and stockholders’ equity $ 15,120,025 $ 15,075,430

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

~~Flagstar Bancorp, Inc.~~

~~Consolidated Statements of Earnings~~

~~(In thousands, except per share data)~~

For the three months ended For the nine months ended
September 30, September 30,
2006 2005 2006 2005
(Unaudited)
Interest Income

Loans $ 184,328 $ 180,698 $ 526,222 $ 509,004
Mortgage-backed securities held to maturity 19,878 4,502 58,177 5,055
Other 1,351 191 5,104 569

Total interest income 205,557 185,391 589,503 514,628

Interest Expense

Deposits 87,054 67,819 244,326 182,478
FHLB advances 48,677 51,593 131,147 133,783
Security repurchase agreements 13,161 — 39,707 —
Other 3,037 5,205 11,282 13,941

Total interest expense 151,929 124,617 426,462 330,202

Net interest income 53,628 60,774 163,041 184,426
Provision for loan losses 7,291 3,690 17,213 12,840

Net interest income after provision for loan losses 46,337 57,084 145,828 171,586

Non-Interest Income

Loan fees and charges 2,146 3,587 4,996 9,422
Deposit fees and charges 5,080 4,356 15,584 12,333
Loan administration 7,766 (1,913 ) 12,430 5,701
Net gain (loss) on loan sales (8,197 ) 3,426 18,538 45,351
Net gain on sales of mortgage servicing rights 45,202 492 88,719 7,002
Net loss on securities available for sale (2,144 ) — (5,701 ) —
Other fees and charges 4,485 10,819 23,966 31,388

Total non-interest income 54,338 20,767 158,532 111,197

Non-Interest Expense

Compensation and benefits 37,518 30,275 108,735 92,613
Occupancy and equipment 17,726 16,122 51,335 50,568
Communication 1,108 2,573 3,295 5,688
Other taxes (21 ) 1,797 (1,652 ) 6,327
General and administrative 12,522 12,461 37,564 38,829

Total non-interest expense 68,853 63,228 199,277 194,025

Earnings before federal income taxes 31,822 14,623 105,083 88,758
Provision for federal income taxes 11,070 5,163 36,780 31,720

Net Earnings
$ 20,752 $ 9,460 $ 68,303 $ 57,038

Net earnings per share — basic
$ 0.33 $ 0.15 $ 1.08 $ 0.92

Net earnings per share — diluted
$ 0.32 $ 0.15 $ 1.06 $ 0.89

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

~~Flagstar Bancorp, Inc.~~

~~Consolidated Statements of Stockholders’ Equity and Comprehensive Income~~

~~(In thousands, except per share data)~~

Accumulated
Additional Other Total
Common Paid in Comprehensive Retained Stockholders’
Stock Capital Income Earnings Equity
Balance at January 1, 2005 $ 614 $ 40,754 $ 5,343 $ 682,243 $ 728,954

Net earnings — — — 79,865 79,865
Reclassification of gain on swap extinguishment – net of tax — — (1,335 ) — (1,335 )
Net unrealized gain on swaps used in cash flow hedges – net of tax — — 3,328 — 3,328
Net unrealized gain on securities available for sale – net of tax — — 498 — 498

Total comprehensive income — — — — 82,356
Stock options exercised and grants issued, net 18 8,171 — — 8,189
Tax benefit from stock-based compensation — 8,379 — — 8,379
Dividends paid ($0.90 per share) — — — (55,995 ) (55,995 )

Balance at December 31, 2005 (Unaudited) 632 57,304 7,834 706,113 771,883

Net earnings — — — 68,303 68,303
Reclassification of gain on swap extinguishment – net of tax — — (1,001 ) — (1,001 )
Net unrealized loss on swaps used in cash flow hedges – net of tax — — (1,253 ) — (1,253 )
Net unrealized gain on securities available for sale – net of tax — — 404 — 404

Total comprehensive income — — — — 66,453
Stock options exercised and grants issued, net 4 4,350 — — 4,354
Tax benefit from stock-based compensation — 905 — — 905
Dividends paid ($0.45 per share) — — — (28,583 ) (28,583 )

Balance at September 30, 2006 $ 636 $ 62,559 $ 5,984 $ 745,833 $ 815,012

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

~~Flagstar Bancorp, Inc.~~

~~Consolidated Statements of Cash Flows~~

~~(In thousands)~~

For the nine months ended
September 30,
2006 2005
(Unaudited)
Operating Activities

Net earnings $ 68,303 $ 57,038
Adjustments to net earnings to net cash used in operating activities
Provision for loan losses 17,213 12,840
Depreciation and amortization 80,129 89,264
FHLB stock dividends — (5,035 )
Net gain on the sale of assets (2,010 ) (1,449 )
Net gain on loan sales (18,538 ) (45,351 )
Net gain on sales of mortgage servicing rights (88,719 ) (7,002 )
Net loss on securities available for sale 5,701 —
Proceeds from sales of loans available for sale 11,903,799 18,325,046
Originations and repurchase of mortgage loans available for sale, net of principal repayments (12,401,103 ) (19,139,818 )
Increase in accrued interest receivable (4,737 ) (12,904 )
(Increase) decrease in other assets (39,682 ) 102,766
Increase in accrued interest payable 7,041 9,879
(Decrease) increase in the liability for checks issued (3,899 ) 3,830
Net tax benefit for stock grants issued (905 ) —
(Decrease) increase in federal income taxes payable (22,667 ) 30,670
Increase (decrease) in other liabilities 8,673 (9,460 )

Net cash used in operating activities (491,401 ) (589,686 )

Investing Activities

Net change in other investments (3,117 ) (2,908 )
Repayments of mortgage-backed securities held to maturity 300,543 9,650
Origination of portfolio loans, net of principal repayments 125,386 (1,295,941 )
Redemption (purchase) of Federal Home Loan Bank stock 17,611 (47,788 )
Investment in unconsolidated subsidiaries — 3,095
Proceeds from the disposition of repossessed assets 42,068 31,952
Acquisitions of premises and equipment, net of proceeds for sales (32,032 ) (35,430 )
Capitalization of mortgage servicing rights (175,141 ) (261,612 )
Proceeds from the sale of mortgage servicing rights 371,751 36,732

Net cash provided by (used in) investing activities 647,069 (1,562,250 )

Financing Activities

Net increase in deposit accounts 233,773 781,760
Net decrease in security repurchase agreements (325,602 ) —
Issuance of junior subordinated debt — 100,000
Net increase in Federal Home Loan Bank advances 292,308 1,283,279
Payment on other long term debt (25 ) (25 )
Net disbursement of payments of loans serviced for others (198,475 ) (29,266 )
Net receipt of escrow payments 11,288 121,093
Proceeds from the exercise of stock options 4,354 4,934
Net tax benefit for stock grants issued 905 —
Dividends paid to stockholders (28,583 ) (46,513 )

Net cash (used in) provided by financing activities (10,057 ) 2,215,262

Net increase in cash and cash equivalents 145,611 63,326
Beginning cash and cash equivalents 201,163 168,442

Ending cash and cash equivalents $ 346,774 $ 231,768

~~Flagstar Bancorp, Inc.~~
~~Consolidated Statements of Cash Flows – Continued~~
~~(In thousands)~~

For the nine months ended
September 30,
2006 2005
(Unaudited)
Supplemental disclosure of cash flow information:

Loans held for investment transferred to repossessed assets $ 77,322 $ 38,351

Total interest payments made on deposits and other borrowings $ 419,421 $ 320,323

Federal income taxes paid $ 61,253 $ —

Mortgage loans available for sale transferred to held for investment $ 247,771 $ 735,907

Mortgage loans held for investment transferred to available for sale $ 1,256,646 $ —

Recharacterization of loans held for investment to mortgage-backed securities held to maturity $ 440,707 $ 834,848

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

Flagstar Bancorp, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1.Nature of Business

Flagstar Bancorp, Inc. (“Flagstar” or the “Company”), is ~~a New York Stock Exchange – listed company (NYSE: FBC) headquartered in Troy, Michigan, which serves as~~ the holding company for Flagstar Bank, FSB (the “Bank”), a federally chartered stock savings bank founded in 1987. With ~~$15.1~~$15.4 billion in assets at ~~September 30, 2006,~~March 31, 2007, Flagstar is the largest ~~publicly traded~~ savings ~~bank~~institution and second largest banking institution headquartered in ~~the Midwest.~~Michigan.

The Company’s principal business is ~~investing in various types of loans using~~obtaining funds ~~obtained~~ in the form of deposits and ~~borrowings.~~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, and it~~originates. The Company generally retains the right to service the mortgage loans that it sells. These ~~mortgage servicing~~mortgage-servicing rights (“MSRs”) ~~generate loan administration income for the Company before amortization and~~ are ~~periodically~~occasionally sold by the Company ~~as the related loans are originated (“flow basis”) or after a sufficient amount of MSRs have been accumulated (“bulk basis”)~~ in transactions separate from the sale of the underlying mortgages. The Company may also ~~retain loans for its own portfolio as part~~invest in a significant amount of its ~~asset growth and retail bank strategies~~loan production in order to maximize the Company’s leverage ability and to receive the interest spread between ~~interest-earning~~earning assets and ~~interest-paying~~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 ~~of Indianapolis~~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 ~~up to~~through the ~~applicable limits.~~Deposit Insurance Fund (“DIF”).

On May 30, 2006, the Company formed Flagstar Capital Markets Corporation (“FCMC”) as a wholly-owned subsidiary of the Bank. FCMC performs functions that were previously handled by the Bank’s capital markets group, which were transferred to FCMC at the time of its creation. These functions include maintaining investment loans on the balance sheet, the purchase of securities, the sale and securitization of mortgage loans, the maintenance and sale of mortgage servicing rights, the development of new loan products, the establishment of pricing for mortgage loans to be acquired, providing for lock-in support, and the management of the interest rate risk associated with these activities.

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 ~~and nine~~ month ~~periods~~period ended ~~September 30, 2006,~~March 31, 2007, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2006.~~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, ~~2005.~~2006. The Form 10-K can be found on the Company’s Investor Relations web page, atwww.flagstar.com, and on the website of the Securities and Exchange Commission, atwww.sec.gov.

Note 3.Recent Accounting Developments

~~Servicing of Financial Assets~~Establishing Standards on Measuring Fair Value

In ~~March~~September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) ~~No. 156~~~~, “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140.”~~SFAS No. 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract. It requires all separately recognized servicing assets and servicing liabilities to be initially

measured at fair value. SFAS No. 156 permits an entity to choose either an amortization or fair value measurement method for each class of separately recognized servicing assets and servicing liabilities. It also permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights. Lastly, it requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value and additional disclosures for all separately recognized servicing assets and servicing liabilities. The Company early-adopted SFAS No. 156 and elected to retain the amortization method for all classes of servicing assets. Had the Company elected the fair value method on January 1, 2006, the Company’s retained earnings would have increased by approximately $68 million, net of tax.

~~Accounting for Uncertainty in Income Taxes~~

~~In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48,~~~~“Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,”~~ ~~(“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109,~~~~“Accounting for Income Taxes.”~~This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a 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. The standard is required to be adopted by the Company on January 1, 2007. Management is currently analyzing the impact of this interpretation on the Company’s financial condition, results of operation and liquidity.

~~Establishing Standards on Measuring Fair Value~~

~~In September 2006, the FASB issued SFAS No.~~ 157, “Fair Value Measurements.”SFAS ~~No.~~ 157 defines ~~fair value,~~the term “fair value” for U.S. GAAP purposes, establishes a framework for measuring fair value, ~~in accordance with U.S. GAAP,~~ and expands disclosures about fair value measurements. ~~The statement~~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 ~~the~~a measurement date. ~~The statement~~SFAS 157 emphasizes that fair value is a market-based measurement and not an entity-specific measurement. It also establishes a ~~fair value~~ hierarchy used in ~~fair value measurements~~such measurement and expands the required disclosures of assets and liabilities measured at fair value. Management will be required to adopt ~~this statement~~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.

~~Accounting for Defined Benefit Pension and Other Postretirement Plans~~Fair Value Option

In ~~September 2006,~~February 2007, the FASB issued SFAS ~~No. 158~~ 159,“~~Employers’ Accounting~~The Fair Value Option for ~~Defined Benefit Pension~~Financial Assets and ~~Other Postretirement Plans.~~Financial Liabilities.”SFAS ~~No. 158 amends SFAS statements No. 87, 88, 106 and 132(R). SFAS No. 158 requires employers~~159 allows entities to ~~recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status. Secondly, it requires employers~~elect to measure ~~the plans assets~~those financial instruments and ~~obligations~~certain other items at fair value that ~~determine its funded status as of the end of the fiscal year. Lastly, employers~~ are ~~required to recognize changes in the funded status of a defined benefit postretirement plan in the year that the changes occur with the changes reported in comprehensive income. The standard is~~not currently required to be ~~adopted~~measured at fair value. The election may be applied instrument by ~~entities having fiscal years ending after December 15, 2006. Because~~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 ~~does not have any defined benefit plans or other post retirement plans, this standard~~effective January 1, 2008. Management of the Company is ~~not expected to have an~~currently evaluating the potential impact of SFAS 159 on the Company’s financial condition, results of operation or liquidity.

~~Quantifying Financial Statement Misstatements~~Note 4.Investment Securities

~~In September~~As of March 31, 2007 and December 31, 2006, ~~the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108 expresses the views~~investment securities were comprised of the ~~SEC regarding~~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 ~~process~~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 ~~quantifying financial statement misstatements~~earnings. Prior to ~~determine if any restatement~~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 ~~prior financial statements is required.~~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 ~~statement addresses~~securities had been initially recorded as held to maturity because the ~~two techniques commonly used in practice in accumulating~~underlying bonds were AAA rated and ~~quantifying misstatements,~~insured by a private insurance company and, ~~requires~~therefore, the Bank expected that the ~~technique~~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 ~~most severe result be used~~guaranteed mortgage securitization of fixed second mortgage loans completed in ~~determining whether a misstatement is material. The standard is required~~April 2006 to ~~be adopted by~~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 ~~on January 1,~~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 ~~adoption~~Company has other investments because of ~~this standard is not expected to have~~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 ~~material impact~~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 ~~Company’s financial condition, results~~sale of ~~operation or liquidity.~~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 4.6.Stock-Based Compensation

On May 26, 2006, the Company’s shareholders approved the Flagstar Bancorp, Inc. 2006 Equity Incentive Plan (the “2006 Plan”). The 2006 Plan consolidates, amends and restates the Company’s 1997 Employees and Directors Stock Option Plan, its 2000 Stock Incentive Plan, and its 1997 Incentive Compensation Plan (each, a “Prior Plan”). Awards still outstanding under any of the Prior Plans will continue to be governed by their respective terms. Under the 2006 Plan, key employees, officers, directors and others expected to provide significant services to the Company and its affiliates are eligible to receive
10

awards. Awards that may be granted under the 2006 Plan include stock options, incentive stock options, cash-settled stock appreciation rights, restricted stock units, performance shares and performance units and other awards.

Under the 2006 Plan, the exercise price of any option granted must be at least equal to the fair market value of the Company’s common stock on the date of grant. Non-qualified stock options granted to directors expire five years from the date of grant. Grants other than non-qualified stock options have term limits set by the Board in the applicable agreement. Stock appreciation rights expire seven years from the date of grant.

~~In December 2004, the FASB issued SFAS No. 123R (revised 2004), “~~~~Share-Based Payment~~,” (“SFAS No. 123R”) which requires that compensation costs related to share-based payment transactions be recognized in financial statements. SFAS No. 123R eliminated the alternative to use the intrinsic method of accounting previously allowed under Accounting Principles Board (“APB”) Opinion No. 25, “~~Accounting for Stock Issued to Employees~~,” which generally did not require any compensation expense to be recognized in the financial statements for the grant of stock options to employees if certain conditions were met . Only certain pro forma disclosures of share-based payments were required.

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 ~~expense~~ 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.

Prior to the adoption of SFAS No. 123R, the Company accounted for its Prior Plan under the recognition and measurement principles of APB Opinion No. 25. The Company reported all tax benefits resulting from the exercise of stock options as financing cash flows in the consolidated statements of cash flows. 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 ~~benefits~~effect totaled ~~$0.1~~$(0.1) million and ~~$0.9~~$0.2 million for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2007, and 2006, respectively. During the quarter ended March 31, 2007, there were no options granted.

The fair value concepts were not changed significantly in SFAS No. 123R; however, in adopting this standard, companies must choose among alternative valuation models and amortization assumptions. The Company has elected to continue to use both the Black-Scholes option pricing model and the straight-line method of amortization of compensation expense over the requisite service period of the grant. The Company will reconsider use of the Black-Scholes model if additional information in the future indicates another model would be more appropriate at that time, or if grants issued in future periods have characteristics that could not be reasonably estimated using this model.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 ~~options it~~cash-settled stock appreciation rights issued during the ~~year~~three months ended ~~December~~March 31, ~~2005:~~2007: dividend yield of ~~4.80%~~3.2%; expected volatility of ~~45.28%~~21.44%; a risk-free rate of ~~3.80%~~4.51%; and an expected life range of ~~five years. There were no options granted during the nine-month period ending September 30, 2006.~~

~~The following table summarizes the activity that occurred in the nine month period ended September 30, 2006, and the year ended December 31, 2005:~~

Number of Shares
September 30, December 31,
2006 2005
(Unaudited)
Options outstanding, beginning of period 3,417,366 4,961,529
Options granted — 372,792
Options exercised (326,340 ) (1,788,354 )
Options canceled, forfeited and expired (23,234 ) (128,601 )

Options outstanding, end of period 3,067,792 3,417,366

Options exercisable, end of period 2,920,342 2,861,884

Weighted Average Exercise Price
September 30, December 31,
2006 2005
(Unaudited)
Options outstanding, beginning of period $ 13.20 $ 9.34
Options granted — 20.50
Options exercised 6.11 4.17
Options canceled, forfeited and expired 17.27 15.64
Options outstanding, end of period 13.73 13.20
Options exercisable, end of period 13.79 13.20

~~The following information pertains~~4.2 to ~~the stock options under the Prior Plans, and now contained in the 2006 Plan, that were not exercised at September 30, 2006 (unaudited):~~

Options Outstanding Options Exercisable
Weighted
Number of Average Weighted Number of Weighted
Options Remaining Average Options Average
Outstanding at Contractual Exercise Exercisable at Exercise
Range of Grant Price September 30, 2006 Life (Years) Price September 30, 2006 Price

$ 1.76 130,149 3.76 $ 1.76 130,149 $ 1.76
1.96 – 4.77 28,050 2.44 3.49 28,050 3.49
5.01 94,738 4.64 5.01 94,738 5.01
5.29 – 6.06 108,401 2.72 5.34 108,401 2.72
11.80 1,120,831 4.35 11.80 1,120,831 11.80
12.27 – 15.23 771,149 4.83 12.31 623,699 12.27
19.35 – 20.06 36,429 5.82 19.70 36,429 19.70
20.73 339,863 6.84 20.73 339,863 20.73
22.68 287,456 7.28 22.68 287,456 22.68
24.72 150,726 6.70 24.72 150,726 24.72

3,067,792 $ 13.73 2,920,342 $ 13.79

~~At September 30, 2006, the number of options available for future grants was 2,293,514.~~

The Company used the following weighted average assumptions in applying the Black-Scholes model to determine the fair value of the cash-settled stock appreciation rights it issued during the nine months ended September 30, 2006: dividend yield of 3.68%; expected volatility of 21.98%; a risk-free rate of 4.99%; and an expected life of five4.8 years.

The following table presents the status and changes in cash-settled stock appreciation ~~rights issued under the 2006 Plan:~~rights:

Weighted Average
Stock Appreciation Rights Awarded: Shares Fair Value
Non-vested balance at December 31, 2005 —
Granted 328,873 $ 2.10
Vested —
Forfeited —

Non-vested balance at September 30, 2006 328,873

The following table illustrates the effect on net earnings and earnings per share as of and for the three and nine months ended September 30, 2005 as if the Company had applied the fair value recognition provisions of SFAS No. 123R to stock-based employee compensation (in thousands, except per share data):

For the three For the nine
months ended months ended
September 30, 2005 September 30, 2005
Net earnings, as reported $ 9,460 $ 57,038

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (654 ) (1,962 )

Pro forma net earnings $ 8,806 $ 55,076

Basic earnings per share
As reported $ 0.15 $ 0.92
Pro forma $ 0.14 $ 0.89

Diluted earnings per share
As reported $ 0.15 $ 0.89
Pro forma $ 0.14 $ 0.86

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 ~~and nine~~ months ended ~~September 30,~~March 31, 2007 and 2006, the Company recorded stock-based compensation expense of $0.4 million ($~~0.3~~0.2 million net of tax) and ~~$1.8~~$0.7 million ($~~1.2~~0.4 million net of tax), respectively or less than $0.01 per share and $0.02 per share, diluted. The future effect of SFAS No. 123R on results of operations will depend on the level of future grants, the vesting period of those grants, the fair value of the options granted at such date and the fair value of the cash-settled stock appreciation rights. Consequently, the current effects on the Company’s results as a result of adopting FASB No. 123R in 2006 are not necessarily representative of effects for future periods.

~~Note 5.~~~~Securities Available for Sale~~

The Company recorded $26.1 million in residual interests as of December 31, 2005, as a result of its non-agency securitization of $600 million in home equity line of credit loans (the “HELOC Securitization”). In addition, each month, draws on the home equity lines of credit in the trust established in the HELOC Securitization are purchased from the Company by the trust, resulting in additional residual interests to the Company. These residual interests are recorded as securities available for sale and are therefore recorded at fair value. Any gains or losses realized on the sale of such securities or any unrealized losses that are deemed to be other-than-temporarily impaired (“OTTI”) are reported in the consolidated statement of earnings. All unrealized gains or losses that are deemed to be temporary are reported in the consolidated statement of stockholders’ equity and comprehensive income under accumulated other comprehensive income.respectively.

1310

~~At September 30, 2006,~~Restricted Stock Units

The Company issues restricted stock units to officers, directors and key ~~assumptions used~~employees in ~~determining~~connection with year-end compensation. Restricted stock units generally vest as outlined in the ~~fair~~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 ~~residual interests resulting from the securitization completed in December 2005 were a prepayment speed of 52%, projected credit losses of 1.25% and a discount rate of 15%.~~$1.7 million.

Note 7.Stockholders’ Equity

On ~~April 28, 2006,~~January 31, 2007, the Company ~~completed a guaranteed mortgage securitization transaction of approximately $400 million of fixed second mortgage loans~~announced that the ~~Company held at the time in its investment portfolio (the “Second Mortgage Securitization”). The transaction was treated as~~board of directors had adopted a ~~recharacterization of loans held for investment to mortgage-backed securities held to maturity, and therefore no gain on sale was recorded. The securitization resulted in~~Stock Repurchase Program under which the Company ~~recording a residual interest~~was authorized to repurchase up to $40.0 million worth of ~~approximately $9.9~~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 ~~that is carried as a security available for sale. At September 30, 2006, key assumptions~~has been used ~~in determining~~to repurchase shares under the ~~value of residual interests resulting from this securitization were a prepayment speed of 25%, projected credit losses of 1.50% and a discount rate of 15%.~~plan.

The table below sets forth key economic assumptions and the hypothetical sensitivity of the fair value of residual interests to an immediate adverse change in any single key assumption. Changes in fair value based on 10% and 20% variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. The effect of a variation in a particular assumption on the fair value of the residual interest is calculated without changing any other assumptions. In practice, changes in one factor may result in changes in other factors, such as increases in market interest rates, that may magnify or counteract sensitivities.

Assumptions
Prepayment Projected Discount
HELOC Securitization Fair Value Speed Credit Losses Rate
(Dollars in thousands)
Residual asset as of September 30, 2006 $ 20,938 52 % 1.25 % 15 %
Impact on fair value of 10% adverse change in assumption $ 1,443 $ 388 $ 509
Impact on fair value of 20% adverse change in assumption $ 2,597 $ 776 $ 999

Assumptions
Second Mortgage Prepayment Projected Discount
Securitization Fair Value Speed Credit Losses Rate
(Dollars in thousands)
Residual asset as of September 30, 2006 $ 11,357 25 % 1.50 % 15 %
Impact on fair value in 10% adverse change in assumption $ 56 $ 409 $ 583
Impact on fair value in 20% adverse change in assumption $ 117 $ 818 $ 1,126

Note 6.8.Segment Information

The Company’s operations are ~~comprised of~~broken down into two business segments: banking and home lending. Each business operates under the same banking charter ~~and is complementary to the other,~~ 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 ~~such as loans and securities. It~~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,”~~“spread” between the interest earned on loans and the interest paid for deposits and other borrowed funds. ~~All of the non-bank consolidated subsidiaries are included in the banking operation.~~

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 ~~the related~~ MSRs ininto the secondary market. Funding for the home lending operation is provided by deposits ~~garnered~~ and borrowings ~~incurred~~garnered by the banking ~~group, as well as proceeds from loan sales and MSR sales generated by~~group. All of the ~~home lending group.~~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 September 30, 2006										For the Three Months Ended March 31, 2007
	Banking		Home Lending								Bank		Home Lending
2006:	Operation		Operation			Elimination			Combined
2007:											Operations		Operations			Elimination			Combined
Net interest income	$	42,111	$	11,517		$	—		$	53,628	$	33,493	$	18,479		$	—		$	51,972
Gain on sale revenue		—		37,005			—			37,005		—		25,269			—			25,269
Other income		4,159		13,174			—			17,333		10,652		3,977			—			14,629
Total net interest income and non-interest income		46,270		61,696			—			107,966		44,145		47,725			—			91,870
Earnings before federal income taxes		14,378		17,444			—			31,822		7,636		4,543			—			12,179
Depreciation and amortization		2,492		15,173			—			17,665		2,504		18,945			—			21,449
Capital expenditures		7,407		1,641			—			9,048		4,779		3,320			—			8,099
Identifiable assets		14,416,661		3,753,364			(3,050,000	)		15,120,025		14,810,835		4,241,287			(3,620,000	)		15,432,122
Inter-segment income (expense)		22,875		(22,875	)		—			—		27,150		(27,150	)		—			—

For the nine months ended September 30, 2006
Banking Home Lending
Operation Operation Elimination Combined
Net interest income $ 124,798 $ 38,243 $ — $ 163,041
Gain on sale revenue — 107,257 — 107,257
Other income 18,410 32,865 — 51,275
Total net interest income and non-interest income 143,208 178,365 — 321,573
Earnings before federal income taxes 47,589 57,494 — 105,083
Depreciation and amortization 7,209 72,920 — 80,129
Capital expenditures 29,504 2,382 — 31,886
Identifiable assets 14,416,661 3,753,364 (3,050,000 ) 15,120,025
Inter-segment income (expense) 57,300 (57,300 ) — —

For the three months ended September 30, 2005
Banking Home Lending
2005: Operation Operation Elimination Combined
Net interest income $ 44,162 $ 16,612 $ — $ 60,774
Gain on sale revenue — 3,918 — 3,918
Other income 15,982 867 — 16,849
Total net interest income and non-interest income 60,144 21,397 — 81,541
Earnings before federal income taxes 33,559 (18,936 ) — 14,623
Depreciation and amortization 2,384 34,844 — 37,228
Capital expenditures 4,901 5,918 — 10,819
Identifiable assets 14,442,011 2,215,034 (1,200,000 ) 15,457,045
Inter-segment income (expense) 9,000 (9,000 ) — —


	For the nine months ended September 30, 2005										For the Three Months Ended March 31, 2006
	Banking		Home Lending								Bank		Home Lending
	Operation		Operation			Elimination			Combined
2006:											Operations		Operations			Elimination			Combined
Net interest income	$	136,708	$	47,718		$	—		$	184,426	$	43,949	$	14,726		$	—		$	58,675
Gain on sale revenue		—		52,353			—			52,353		—		25,670			—			25,670
Other income		40,392		18,452			—			58,844		5,383		11,568			—			16,951
Total net interest income and non-interest income		177,100		118,523			—			295,623		49,332		51,964			—			101,296
Earnings before federal income taxes		91,657		(2,899	)		—			88,758		22,644		6,519			—			29,163
Depreciation and amortization		7,455		81,809			—			89,264		3,145		28,018			—			31,163
Capital expenditures		24,498		10,889			—			35,387		11,991		1,408			—			13,399
Identifiable assets		14,442,011		2,215,034			(1,200,000	)		15,457,045		14,126,573		3,064,885			(2,140,000	)		15,051,458
Inter-segment income (expense)		31,275		(31,275	)		—			—		16,050		(16,050	)		—			—

1511

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 ~~FCMC,~~Flagstar Capital Markets Corporation, its wholly-owned subsidiary, which we collectively refer to as the “Bank.”

General

~~We have no significant business other than of the Bank.~~ 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 68 of the Notes to Consolidated Financial Statements, in Item 1, Financial Statements, herein.

Banking ~~Operation~~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 ~~the borrowing of funds and~~ investing ~~all these amounts~~those deposits in duration-matched assets consisting primarily of ~~mortgages~~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 ~~September 30, 2006,~~March 31, 2007, we operated a ~~branch~~ network of ~~146~~155 banking ~~centers. We continue~~centers and provided banking services to ~~focus on expanding our branch network to increase our access to retail deposit funding sources.~~approximately 201,200 customers. During the first ~~nine~~three months of ~~2006,~~2007, we opened 10four banking ~~centers.~~centers, including three in Michigan and one in Georgia. During ~~the remainder of 2006,~~2007, we expect to open ~~a total of~~ five ~~more banking centers~~additional branches in the Atlanta, ~~area.~~Georgia area and four additional branches in Michigan.

Home Lending ~~Operation~~Operation.. Our home lending operation originates, ~~packages~~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 ~~MSRs in~~mortgage servicing rights into the secondary market. Funding for our home lending operation is provided primarily by deposits and borrowings obtained ~~from~~by our banking ~~operations, other borrowings and proceeds from loan sales and MSR sales.~~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 ~~four~~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 ~~derivatives;~~residuals; (d) the valuation of our derivative instruments; and ~~(d)~~(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, ~~2005,~~2006, which is available on our website,www.flagstar.com, under the Investor Relations section, or on the website of the SEC, atwww.sec.gov.

1613

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


	For the three months ended						For the nine months ended						For the Three Months Ended
	September 30,						September 30,						March 31,
	2006			2005			2006			2005			2007			2006
Return on average assets		0.55	%		0.25	%		0.60	%		0.52	%		0.19	%		0.50	%
Return on average equity		10.10	%		5.03	%		12.23	%		10.19	%		3.85	%		9.73	%
Efficiency ratio		63.8	%		77.5	%		62.0	%		65.6	%		77.7	%		67.2	%

Equity/assets ratio (average for the period)		5.46	%		4.95	%		4.93	%		5.14	%		5.06	%		5.20	%

Mortgage loans originated or purchased	$	4,633,986		$	8,306,439		$	13,882,989		$	22,623,153		$	5,489,329		$	4,348,153
Other loans originated or purchased	$	200,161		$	489,665		$	885,158		$	1,274,541		$	263,819		$	325,939
Mortgage loans sold	$	4,045,915		$	6,983,384		$	11,904,611		$	18,312,923		$	5,289,617		$	3,894,070

Interest rate spread – Bank only¹		1.44	%		1.63	%		1.44	%		1.69	%
Net interest margin – Bank only²		1.67	%		1.84	%		1.65	%		1.90	%
Interest rate spread – Consolidated¹		1.47	%		1.68	%		1.48	%		1.74	%
Net interest margin – Consolidated²		1.54	%		1.72	%		1.57	%		1.85	%

Average common shares outstanding (000’s)		63,548			62,288			63,475			61,945
Average fully diluted shares outstanding (000’s)		64,304			64,186			64,323			64,118

Interest rate spread — Bank only¹														1.34	%		1.56	%
Net interest margin — Bank only²														1.43	%		1.65	%
Interest rate spread — Consolidated¹														1.33	%		1.57	%
Net interest margin — Consolidated²														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)		0.18	%		0.16	%		0.19	%		0.18	%		0.26	%		0.15	%


	September 30,			June 30,			December 31,			September 30,			March 31,			December 31,			March 31,
	2006			2006			2005			2005			2007			2006			2006
Equity-to-assets ratio		5.39	%		5.28	%		5.12	%		4.83	%		5.17	%		5.24	%		5.20	%
Core capital ratio³		6.52	%		6.39	%		6.26	%		5.99	%		6.29	%		6.37	%		6.33	%
Total risk-based capital ratio³		11.52	%		11.15	%		11.09	%		10.44	%		11.42	%		11.55	%		11.20	%

Book value per share	$	12.82		$	12.65		$	12.21		$	11.96		$	12.79		$	12.77		$	12.33
Number of common shares outstanding		63,571			63,529			63,208			62,368			62,360			63,605			63,488

Mortgage loans serviced for others	$	14,829,396		$	22,379,937		$	29,648,088		$	31,282,929		$	19,124,378		$	15,032,504		$	29,242,906
Capitalized value of mortgage servicing rights		1.02	%		1.03	%		1.06	%		1.13	%		1.19	%		1.15	%		1.10	%

Ratio of allowance to non-performing loans		77.1	%		79.2	%		60.7	%		69.6	%		65.0	%		80.2	%		68.2	%
Ratio of allowance to loans held for investment		0.48	%		0.42	%		0.37	%		0.31	%		0.61	%		0.51	%		0.40	%
Ratio of non-performing assets to total assets		1.05	%		0.99	%		0.98	%		0.86	%		1.04	%		1.03	%		1.00	%

Number of banking centers		146			145			137			129			155			151			141
Number of home lending centers		85			87			101			105			72			76			97
Number of salaried employees		2,559			2,548			2,405			2,414			2,522			2,510			2,421
Number of commissioned employees		491	⁴		530	⁴		689			790			448			444			594


¹		Interest rate spread is the difference between the annualized average yield earned on average interest-earning assets for the period and the annualized average rate of interest paid on average interest-bearing liabilities for the period.

²		Net interest margin is the annualized effect of the net interest income divided by that period’s average interest-earning assets.

³		Based on adjusted total assets for purposes of tangible capital and core capital, and risk-weighted assets for purposes of risk-based capital and total risk based capital. These ratios are applicable to the Bank only.

⁴		~~Commissioned employees also receive a base salary.~~

~~RESULTS OF OPERATIONS~~Results of Operations

Net Earnings

~~Three months.~~Net earnings for the three months ended ~~September 30, 2006~~March 31, 2007 was ~~$20.8~~$7.8 million ($~~0.32~~0.12 per share-diluted), an ~~$11.3~~$11.1 million ~~increase~~decrease from the ~~$9.5~~$18.9 million ($~~0.15~~0.29 per share-diluted) reported in the comparable ~~2005~~2006 period. The overall ~~increase~~decrease resulted from a ~~$33.6~~$2.7 million ~~increase~~decrease in non-interest income, ~~offset in part by~~ a ~~$5.6~~$3.3 million increase in non-interest expense and a ~~$10.8~~$10.9 million decrease in net interest income after provision for loan losses, ~~and~~offset in part by a ~~$5.9~~$5.8 million ~~increase~~decrease in federal income tax expense.

~~Nine months.~~Net earnings for the nine months ended September 30, 2006 was $68.3 million ($1.06 per share-diluted), an $11.3 million increase from the $57.0 million ($0.89 per share-diluted) reported in the comparable 2005 period. On a period-to-period comparison basis, there was a $47.3 million increase in non-interest income, offset by a $5.2 million increase in non-interest expense in the 2006 period, a $25.7 million decrease in net interest income after provision for loan losses and a $5.1 million increase in federal income tax expense.

Net Interest Income

~~Three months.~~We recorded ~~$53.6~~$52.0 million in net interest income before provision for loan losses for the three months ended ~~September 30, 2006, an 11.8%~~March 31, 2007, a 11.4% decline from ~~$60.8~~$58.7 million recorded for the comparable ~~2005~~2006 period. The decline reflects a ~~$20.2~~$29.3 million increase in interest income offset by a ~~$27.3~~$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 ~~September 30, 2006,~~March 31, 2007, as compared to the same period in ~~2005,~~2006, we ~~decreased~~increased our average interest-earning assets by ~~$0.2~~$1.0 billion and our average interest-paying liabilities by ~~$0.3~~$1.1 billion.

Average interest-earning assets as a whole repriced up 6745 basis points during the three months ended ~~September 30, 2006,~~March 31, 2007 while average interest-bearing liabilities repriced up 8869 basis points during the same period, resulting in the decrease in our ~~net~~ interest rate spread of 2124 basis points to ~~1.47%~~1.33% for the three months ended ~~September 30, 2006,~~March 31, 2007, from ~~1.68%~~1.57% for the comparable ~~2005~~2006 period.

~~Nine months.~~We The Company recorded ~~$163.0 million in~~a net interest ~~income for~~margin of 1.42% at March 31, 2007 as compared to 1.72% at March 31, 2006. At the nine months ended September 30, 2006, an 11.6% decline from the $184.4 million recorded for the comparable 2005 period. The decline reflects a $74.9 million increase in interest income offset by a $96.3 million increase in interest expense, primarily as a result of rates paid on deposits, FHLB advances and security repurchase agreements that increased to a greater extent than the increase in yields earned on loans and mortgage-backed securities. In this same period, our average paying liabilities increased by $0.1 billion more than the increase in our average interest-earning assets. This caused a decline in the ratio of average interest-earning assets to average interest-bearing liabilities for the nine months ended September 30, 2006 to 102% from 103% for the nine months ended September 30, 2005. Together, the effect of these rate and volume changes resulted in the reduction inBank level, the net interest margin was 1.43% at March 31, 2007, as compared to ~~1.57% for the third quarter of 2006 from 1.85% for the third quarter of 2005.~~

Average interest-earning assets as a whole repriced up 51 basis points during the nine months ended September 30, 2006 while average interest-bearing liabilities repriced up 77 basis points during the same period, resulting1.65% in ~~the decrease in our net interest spread of 26 basis points to 1.48% for the nine months ended September 30, 2006 from 1.74% for the comparable 2005 period.~~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.~~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 ~~$6.0~~$7.2 million and ~~$7.4~~$6.5 million for the three months ended ~~September 30,~~March 31, 2007 and 2006, ~~and 2005,~~ respectively. ~~For both the nine months ended September 30, 2006 and 2005, interest income from earning assets included $21.2 million of amortization of net premiums and net deferred loan origination costs.~~ Non-accruing loans were included in the average loan amounts outstanding.


	Three months ended September 30,
	2006							2005							Three months ended March 31,
	(Dollars in thousands)														2007							2006
	Average				Yield/			Average				Yield/			Average				Yield			Average				Yield
	Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate
															(Dollars in thousands)
Interest-earning assets:

Loans receivable, net	$	12,137,127	$	184,328		6.07	%	$	13,739,838	$	180,698		5.26	%	$	12,300,421	$	187,252		6.09	%	$	12,326,019	$	171,773		5.57	%
Mortgage-backed securities-held to maturity		1,621,748		19,878		4.90			286,238		4,502		6.29
Mortgage-backed securities held to maturity																1,337,862		14,617		4.43	%		1,411,406		17,152		4.86	%
Other		55,822		1,351		9.67			27,022		191		2.84			1,154,015		18,701		6.57	%		108,092		2,374		8.79	%

Total interest-earning assets		13,814,697	$	205,557		5.95	%		14,053,098	$	185,391		5.28	%		14,792,298		220,570		5.98	%		13,845,517		191,299		5.53	%
Other assets		1,232,581							1,162,432							1,149,618							1,270,082


Total assets	$	15,047,278						$	15,215,530						$	15,941,916						$	15,115,599


Interest-bearing liabilities:

Interest-bearing liabilities
Deposits	$	8,040,584	$	87,054		4.30	%	$	8,220,828	$	67,819		3.27	%	$	7,582,031	$	85,026		4.55	%	$	8,138,226		75,217		3.75	%
FHLB advances		4,236,896		48,677		4.56			5,098,832		51,593		4.01			5,845,473		67,852		4.71	%		3,996,170		39,973		4.06	%
Security repurchase agreements		975,901		13,161		5.35			—		—		—			1,021,812		12,393		4.92	%		1,198,474		13,496		4.57	%
Other		207,751		3,037		5.85			409,200		5,205		5.09			252,959		3,327		5.33	%		258,214		3,938		6.19	%


Total interest-bearing liabilities		13,461,132	$	151,929		4.48	%		13,728,860	$	124,617		3.60	%		14,702,275		168,598		4.65	%		13,591,084		132,624		3.96	%
Other liabilities		764,447							734,062							433,531							746,895
Stockholders’ equity		821,699							752,608							806,110							777,620


Total liabilities and stockholders’ equity	$	15,047,278						$	15,215,530						$	15,941,916						$	15,115,599


Net interest-earning assets	$	353,565						$	324,238						$	90,023						$	254,433



Net interest income			$	53,628						$	60,774						$	51,972						$	58,675



Interest rate spread¹						1.47	%						1.68	%						1.33	%						1.57	%


Net interest margin²						1.54	%						1.72	%						1.42	%						1.72	%


Ratio of average interest-earning assets to average interest-bearing liabilities						103	%						102	%						101	%						102	%


¹		Interest rate spread is the difference between the annualized average yield earned on average interest-earning assets for the period and the annualized average rate of interest paid on average interest-bearing liabilities for the period.

²		Net interest margin is the annualized effect of the net interest income divided by that period’s average interest-earning assets.

Nine months ended September 30,
2006 2005
(Dollars in thousands)
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate

Interest-earning assets:

Loans receivable, net $ 12,189,169 $ 526,222 5.76 % $ 13,144,068 $ 509,004 5.16 %
Mortgage-backed securities-held to maturity 1,548,182 58,177 5.01 108,157 5,055 6.23
Other 118,322 5,104 5.75 52,260 569 1.45

Total interest-earning assets 13,855,673 $ 589,503 5.67 % 13,304,485 $ 514,628 5.16 %
Other assets 1,236,399 1,218,052

Total assets $ 15,092,072 $ 14,522,537

Interest-bearing liabilities:

Deposits $ 8,257,259 $ 244,326 3.96 % $ 7,919,520 $ 182,478 3.08 %
FHLB advances 4,082,026 131,147 4.30 4,708,358 133,783 3.80
Security repurchase agreements 1,072,735 39,707 4.95 — — —
Other 184,922 11,282 8.13 335,283 13,941 5.56

Total interest-bearing liabilities 13,596,942 $ 426,462 4.19 % 12,963,161 $ 330,202 3.42 %
Other liabilities 750,736 812,749
Stockholders’ equity 744,394 746,627

Total liabilities and stockholders’ equity $ 15,092,072 $ 14,522,537

Net interest-earning assets $ 258,731 $ 341,324

Net interest income $ 163,041 $ 184,426

Interest rate spread¹
1.48 % 1.74 %

Net interest margin²
1.57 % 1.85 %

Ratio of average interest-earning assets to average interest-bearing liabilities 102 % 103 %


¹		Interest rate spread is the difference between the annualized average yield earned on average interest-earning assets for the period and the annualized average rate of interest paid on average interest-bearing liabilities for the period.

²		~~Net interest margin is the annualized effect of the net interest income divided by that period’s average interest-earning assets.~~

2015

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 September 30,
2006 versus 2005
Increase (Decrease) due to:
Rate Volume Total
(In thousands)
Interest-earning assets:

Loans receivable, net $ 24,706 $ (21,076 ) $ 3,630
Mortgage-backed securities-held to maturity (5,625 ) 21,001 15,376
Other 956 204 1,160

Total $ 20,037 $ 129 $ 20,166

Interest-bearing liabilities:

Deposits $ 20,721 $ (1,486 ) $ 19,235
FHLB advances 5,796 (8,712 ) (2,916 )
Security repurchase agreements — 13,161 13,161
Other 417 (2,585 ) (2,168 )

Total $ 26,934 $ 378 $ 27,312

Change in net interest income $ (6,897 ) $ (249 ) $ (7,146 )


	Nine months ended September 30,									Three Months Ended March 31,
	2006 versus 2005									2007 Versus 2006
	Increase (Decrease) due to:									Increase (Decrease) due to:
	Rate			Volume			Total			Rate			Volume			Total
				(In thousands)						(In thousands)
Interest-earning assets:
Loans receivable, net	$	54,173		$	(36,955	)	$	17,218		$	15,835		$	(356	)	$	15,479
Mortgage-backed securities-held to maturity		(14,163	)		67,285			53,122			(1,641	)		(894	)		(2,535	)
Other		3,817			718			4,535			(6,657	)		22,984			16,327


Total	$	43,827		$	31,048		$	74,875			7,537			21,734			29,271

Interest-bearing liabilities:
Deposits	$	54,068		$	7,780		$	61,848			14,952			(5,143	)		9,809
FHLB advances		15,166			(17,802	)		(2,636	)		9,366			18,513			27,879
Security repurchase agreements		—			39,707			39,707			888			(1,991	)		(1,103	)
Other		3,594			(6,253	)		(2,659	)		(531	)		(80	)		(611	)


Total	$	72,828		$	23,432		$	96,260			24,675			11,299			35,974


Change in net interest income	$	(29,001	)	$	7,616		$	(21,385	)	$	(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 ~~and nine~~ months ended ~~September 30, 2006.~~March 31, 2007. The adverse impact of these rate changes on our net interest margin for the periods ~~were~~was only partially offset ~~in part~~ by the ~~effect~~increased volume of ~~the increase in~~ 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 ~~exchanged for mortgage-backed securities that we hold on our balance sheet as an investment.~~sold. Similarly, the increase in interest income arising from ~~mortgage-backed securities held-to-maturity~~other interest-earning assets related principally to the increase in the volume of ~~such~~ securities ~~created using our investment loans.~~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 ~~$13.2 million and $39.7~~was $12.4 million for the three ~~and nine~~ months ended September 30, 2006, respectively, were only partly offset by the related reduction in interest expense from FHLB advances. This reflects the shift of funding needs to the security repurchase agreements, despite their higher average cost of 5.35%March 31, 2007 and ~~4.95%~~$13.5 million for the three ~~and nine month periods~~

months ended ~~September 30, 2006, respectively, as compared to~~March 31, 2006. Interest expense on FHLB advances ~~costs of 4.56% and 4.30%~~increased to $67.9 million for the ~~similar respective periods. This differential reflects the effect of the combined long-term and short-term nature of the~~three months ended March 31,2007, as average FHLB advances ~~on its~~increased to handle funding needs as average ~~rate,~~deposit volumes decreased. Also, as ~~compared to~~FHLB advances matured or were called they were replaced at the primarily short-term nature of the security repurchase agreements. On comparable short-term maturities, the securities repurchase agreements had borrowing rates that were generally 16 basis points less than those for FHLB advances.higher current market rate.

Our interest expense related to deposits increased because of increases in ~~both~~ our rates ~~and~~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, as well as our use of higher-yielding certificates of deposits as a market penetration tool when opening new~~ branches.

Provision for Loan Losses

~~Three months.~~During the three months ended ~~September 30, 2006,~~March 31, 2007, we recorded a provision for loan losses of ~~$7.3~~$8.3 million as compared to ~~$3.7~~$4.1 million recorded during the same period in ~~2005.~~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.~~portfolio and had the effect of increasing our allowance for loan losses by $2.7 million. Net charge-offs ~~declined~~increased in the ~~2006~~2007 period to ~~$4.2~~$5.6 million, compared to ~~$4.7~~$3.7 million for the same period in ~~2005, but~~2006, and as a percentage of investment loans, increased to an annualized ~~0.18%~~0.26% from ~~0.16%~~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.~~strategies coupled with an increase in net charge-offs. See “Financial Condition –— Allowance for Loan Losses,” below, for further information.

~~Nine months.~~During the nine months ended September 30, 2006, we recorded a provision for loan losses of $17.2 million as compared to $12.8 million recorded during the same period in 2005. The provisions reflect our estimates to maintain the allowance for loan losses at a level management believes is appropriate to cover probable losses in the portfolio. Net charge-offs in the 2006 period totaled $13.6 million compared to $15.3 million for the same period in 2005. Net charge-offs were an annualized 0.19% and 0.18% of average investment loans for the nine months ended September 30, 2006 and 2005, respectively, which also reflects a reduced balance of investment loans resulting from the conversion of investment loans to mortgage-backed securities held to maturity. See “Financial Condition – Allowance for Loan Losses,” below, for further information.

2216

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 ~~loss~~gain (loss) on securities available for sale and (vii) other fees and charges. During the three months ended ~~September 30, 2006,~~March 31, 2007, non-interest income ~~increased~~decreased to ~~$54.3~~$39.9 million from ~~$20.8~~$42.6 million in the comparable ~~2005 period. During the nine months ended September 30,~~ 2006 ~~non-interest income increased to $158.5 million from $111.2 million in the comparable 2005~~ 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.

~~Three months.~~Loan fees collected during the three months ended ~~September 30, 2006~~March 31, 2007 totaled ~~$2.1~~$18.1 million compared to ~~$3.6~~$11.4 million collected during the comparable ~~2005~~2006 period. This ~~decrease~~increase is the result of the ~~$4.0~~$1.1 billion ~~decrease~~increase in total loan production to ~~$4.8~~$5.8 billion for the quarter ended ~~September 30, 2006,~~March 31, 2007, compared to ~~$8.8~~$4.7 billion in the same ~~2005 period.~~

~~Nine months.~~~~Loan fees collected during the nine months ended September 30,~~ 2006 totaled $5.0 million compared to $9.4 million collected during the comparable 2005 period. This decrease is the result of the $9.1 billion decrease in total loan production to $14.8 billion for the nine months ended September 30, 2006, compared to $23.9 billion in the same 2005 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.

~~Three months.~~During the three months ended ~~September 30, 2006,~~March 31, 2007, we collected ~~$5.1~~$5.0 million in deposit fees versus ~~$4.4~~$4.8 million in the comparable ~~2005~~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 ~~2006.~~

~~Nine months.~~During the nine months ended September 30, 2006, we collected $15.6 million in deposit fees versus $12.3 million in the comparable 2005 period. This increase is attributable to the increase in our deposits as our banking franchise continues to expand, as well as our general increase in deposit fees during 2006.2007.

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, resulting in the establishment of an MSR asset. The MSR asset is amortized based on its expected life, with the expense netted against loan administration fee income.~~fee. When an underlying loan is prepaid or refinanced, ~~or if~~ the ~~MSR is sold by the Bank as part of its overall business model, the MSR~~mortgage servicing right for that loan is ~~written off through an accelerated amortization expense or against any sales proceeds, as appropriate,~~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 ~~loan.~~MSR portfolio.

~~Three months.~~Net loan administration fee income ~~increased~~decreased to ~~$7.8~~$2.6 million during the three months ended ~~September 30, 2006,~~March 31, 2007, from ~~a negative $1.9~~$4.4 million in the ~~2005~~2006 period. The ~~$9.7~~$1.8 million ~~increase~~decrease was the result of a ~~$9.9~~$10.7 million decrease in the servicing fee revenue, which was offset by ~~a $19.6~~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 ~~$13.7~~$17.2 billion during the ~~2006~~2007 period versus ~~$29.0~~$28.9 billion during the ~~2005~~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 ~~2005.~~2006.

The unpaid principal balance of loans serviced for others was ~~$14.8~~$19.1 billion at ~~September 30, 2006,~~March 31, 2007, versus ~~$29.6~~$15.0 billion serviced at December 31, ~~2005,~~2006, and ~~$31.3~~$29.2 billion serviced at ~~September 30, 2005.~~March 31, 2006. At ~~September 30, 2006,~~March 31, 2007, the weighted average servicing fee on these loans was ~~0.346 %~~0.37% (i.e., ~~34.6~~37 basis points) and the weighted average age was 1715 months.

~~Nine months.~~Net loan administration fee income increased to $12.4 million during the nine months ended September 30, 2006, from $5.7 million in the 2005 period. This $6.7 million increase was the result of the $1.9 million decrease in the servicing fee revenue, which was offset by an $8.6 million decrease in amortization expense of the MSRs. The decrease in the servicing fee revenue was the result of loans serviced for others averaging $22.3 billion during the 2006 period versus $25.4 billion during the 2005 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 2005.

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 ~~No.~~ 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 ~~gain~~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 ~~sale recorded~~loan sales reported in our consolidated financial statements to our total gain on loans sold within the ~~periods shown~~period (dollars in thousands):


	For the three months ended September 30,						For the nine months ended September 30,						For the Three Months Ended March 31,
	2006			2005			2006			2005			2007			2006
Net (loss) gain on loan sales	$	(8,197	)	$	3,426		$	18,538		$	45,351
Net gain on loan sales													$	25,154		$	17,084
Add: SFAS 133 adjustments		8,248			7,014			(471	)		(1,987	)		(3,945	)		(10,127	)
Add: LOCOM adjustment														26			4,745
Add: provision to secondary market reserve		1,626			1,518			4,052			3,980			2,163			1,006

Total gain on loans sold	$	1,677		$	11,958		$	22,119		$	47,344		$	23,398		$	12,708

Loans sold or securitized	$	4,045,915		$	6,983,384		$	11,904,611		$	18,312,923		$	5,289,617		$	3,894,070

Spread achieved		0.04	%		0.17	%		0.19	%		0.26	%		0.44	%		0.33	%

~~Three months.~~For the three months ended ~~September 30, 2006,~~March 31, 2007, there was a net ~~loss~~gain on loan sales of ~~$8.2~~$25.2 million, as opposed to a ~~$3.4~~$17.1 million gain in the ~~2005~~2006 period, ~~a decrease~~an increase of ~~$11.6~~$8.1 million. The ~~2006~~2007 period reflects the sale of ~~$4.0~~$5.3 billion in loans versus ~~$6.9~~$3.9 billion sold in the ~~2005~~2006 period. ~~The interest rate environment and continued significant competition for mortgage loans~~Management believes changes in market conditions during the ~~2006~~2007 period resulted in ~~a lower~~an increased mortgage loan origination volume ($~~4.6~~5.5 billion in the 2007 period vs. $4.3 billion in the 2006 ~~period vs. $8.3 billion in the 2005~~ period) and ~~a lower~~an increased overall gain on sale spread (4(44 basis points in the ~~2006~~2007 period versus 1733 basis points in the ~~2005 period).~~

~~Nine months.~~~~For the nine months ended September 30,~~ 2006 net gain on loan sales decreased $26.9 million, to $18.5 million, from $45.4 million in the 2005 period. The 2006 period reflects the sale of $11.9 billion in loans versus $18.3 billion sold in the 2005 period. The interest rate environment and continued significant competition for mortgage loans in the 2006 period resulted in a lower mortgage loan origination volume ($13.9 billion in the 2006 period vs. $22.6 billion in the 2005 period) and a lower overall gain on sale spread (19 basis points in the 2006 period versus 26 basis points in the 2005 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.

~~Three months.~~~~We sold MSRs attributable to underlying loans totaling $10.8 billion during the three month period ending September 30, 2006 versus $0.6 billion during the 2005 period.~~ During the three month period ending ~~September 30, 2006,~~March 31, 2007, we ~~sold $10.7 billion of servicing rights on a bulk basis and $0.1 billion of loans on a servicing released basis. We~~ did not sell any servicing rights on a bulk basis ~~but~~and we sold ~~$0.6~~$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 ~~2005~~2006 period.

For the three months ended ~~September 30, 2006,~~March 31, 2007, the net gain on the sale of MSRs ~~increased~~decreased from ~~$0.5~~$8.6 million during the ~~2005~~2006 period to ~~$45.2~~$0.1 million. The ~~increase~~decrease in the ~~2006~~2007 period reflected ~~better pricing achieved due to~~ the ~~increasing interest rate environment, as well as the substantially higher volume~~absence of any bulk sales in the ~~2006 period.~~

~~Nine months.~~We sold MSRs attributable to underlying loans totaling $24.0 billion during the nine month period ending September 30, 2006 versus $3.9 billion during the 2005 period. During the nine month period ending September 30, 2006, we sold $22.9 billion of servicing rights on a bulk basis and $1.1 billion of loans on a servicing released basis. For the same period in 2005, we sold $2.5 billion of servicing rights on a bulk basis and $1.4 billion on a servicing released basis for 2005.

For the nine months ended September 30, 2006, the net gain on the sale of MSRs increased from $7.0 million during the 2005 period to $88.7 million. The increase in the 2006 period reflected better pricing achieved due to the increasing interest rate environment, as well as the substantially higher volume of sales in the 20062007 period.

Net ~~Loss~~Gain (Loss) on Securities Available for Sale.~~Currently, securities~~Securities classified as available for sale are comprised of residual interests from private ~~securitizations. Net loss~~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 ~~is the~~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.

~~Three months.~~During the three months ended ~~September 30, 2006,~~March 31, 2007, we ~~recognized~~sold collateralized mortgage obligation securities amounting to approximately $171.0 million which resulted in a ~~$2.1 million~~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 ~~a securitization~~securitizations completed in ~~2005. Although the residual interest is accounted for as an available for sale asset, we determined that this impairment was other-than-temporary~~2005 and ~~therefore should be reflected as a loss.~~2006. For the three months ended ~~September 30, 2005, there were no securities available for sale.~~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 54 to the Notes to the ~~Consolidated Financial Statements, in Item 1, Financial Statements, herein.~~

~~Nine months.~~For the nine months ended September 30, 2006, we recognized a $5.7 million other-than-temporary impairment in our residual interest that arose from a securitization completed in 2005. Although the residual interest is accounted for as an available for sale asset, we determined that this impairment was other than temporary and therefore should be reflected as a loss. For the nine months ended September 30, 2005, there were no securities available for sale. For additional information, see Note 5 to the Notes to 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.

~~Three months.~~During the three months ended ~~September 30, 2006,~~March 31, 2007, we recorded ~~$2.8~~$4.0 million in cash dividends received on FHLB stock, compared to ~~$3.1~~$3.5 million received during the three months ended ~~September 30, 2005.~~March 31, 2006. At ~~September 30,~~March 31, 2007 and 2006, ~~and 2005,~~ we owned ~~$274.5~~$329.0 million and ~~$287.7~~$292.1 million of FHLB stock, respectively. We also recorded ~~$0.9 million and~~ $1.0 million in subsidiary income for the three months ended ~~September 30, 2006~~March 31, 2007 and ~~2005, respectively.~~

~~Nine months.~~During the nine months ended September 30, 2006, we recorded $10.4 million in cash dividends received on FHLB stock, compared to the $8.3 million received during the nine months ended September 30, 2005. We also recorded $2.9 million and $3.2 million in subsidiary income for the nine months ended September 30, 2006 and 2005, respectively.2006.

2518

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 ~~No.~~ 91, “"Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Lease” (“SFAS ~~No.91”~~91”). As required by SFAS ~~No.~~ 91, mortgage loan fees and certain direct origination costs (principally compensation and benefits) are capitalized as an adjustment to the basis of the loans originated during 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						For the nine months ended
	September 30,						September 30,						For the Three Months Ended
	2006			2005			2006			2005			March 31,
	(Dollars in thousands)												2007			2006
Compensation and benefits	$	41,715		$	37,231		$	120,346		$	113,263		$	42,424		$	39,873
Commissions		18,405			25,867			56,283			69,834			15,306			16,967
Occupancy and equipment		17,749			16,431			51,405			51,384			16,786			16,908
Advertising		3,003			1,670			6,641			5,907			1,849			1,489
Federal insurance premium		278			283			854			863			782			297
Communication		1,569			2,573			4,700			5,688
Communications														1,446			1,653
Other taxes		(21	)		1,797			(731	)		6,327			(573	)		2,447
Other		9,242			11,346			30,070			34,647			12,007			9,871

Subtotal		91,940			97,198			269,568			287,913			90,027			89,505
Less: capitalized direct costs of loan closings, under SFAS No. 91		(23,087	)		(33,970	)		(70,291	)		(93,888	)
Less: capitalized direct costs of loan closings, under SFAS 91														(18,629	)		(21,435	)

Non-interest expense	$	68,853		$	63,228		$	199,277		$	194,025		$	71,398		$	68,070

Efficiency ratio¹		63.8	%		77.5	%		62.0	%		65.6	%		77.7	%		67.2	%


¹		~~Total operating~~Operating and administrative expenses divided by the sum of net interest income and non-interest income.

~~Three months~~.Non-interest expense, before the capitalization of direct loan origination costs, ~~decreased $5.3~~increased $0.5 million to ~~$91.9~~$90.0 million during the three months ended ~~September 30, 2006,~~March 31, 2007, from ~~$97.2~~$89.5 million for the comparable ~~2005~~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 1714 more facilities at ~~September 30, 2006~~March 31, 2007 than at ~~September 30, 2005.~~March 31, 2006.

	•		We conducted business from 2025 fewer home lending centers at ~~September 30, 2006~~March 31, 2007 than at ~~September 30, 2005.~~March 31, 2006.

	•		The home lending operation originated ~~$4.6~~$5.5 billion in residential mortgage loans during the ~~2006~~2007 quarter versus ~~$8.3~~$4.3 billion in the comparable ~~2005~~2006 quarter.

	•		We employed ~~2,559~~2,522 salaried employees at ~~September 30, 2006~~March 31, 2007 versus ~~2,414~~2,421 salaried employees at ~~September 30, 2005.~~March 31, 2006.

	•		We employed ~~118~~160 full-time national account executives at ~~September 30, 2006~~March 31, 2007 versus ~~130~~123 at ~~September 30, 2005.~~March 31, 2006.

	•		We employed ~~373~~288 full-time retail loan originators at ~~September 30, 2006~~March 31, 2007 versus ~~660~~471 at ~~September 30, 2005.~~March 31, 2006.

	•		We reinstated the base salaries for the Chairman and the CEO for 2007.

Compensation and benefits expense increased ~~$4.5~~$2.5 million during the ~~2006~~2007 period from the comparable ~~2005~~2006 period to ~~$41.7~~$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 ~~$7.5~~$1.7 million decrease. This decrease reflects the ~~decreased volume~~reduced number of ~~mortgage~~full-time loan ~~originations~~originators during the period, offset in part by a change in the compensation structure.

The ~~18.6% decrease~~21.6% increase in other expense during the ~~2006~~2007 period from the comparable ~~2005~~2006 period is reflective of the ~~decreased~~increased mortgage loan originations and ~~the decreased number of retail loan origination centers offset in part by~~ the increased number of banking centers in operation during the ~~period.~~period offset in part by the decreased number of home lending centers.

During the three months ended ~~September 30, 2006,~~March 31, 2007, we capitalized direct loan origination costs of ~~$23.1~~$18.6 million, a decrease of ~~$10.9~~$2.8 million from ~~$34.0~~$21.4 million for the comparable ~~2005~~2006 period. This ~~32.0%~~13.1% decrease is a result of ~~the~~a $1.7 million decrease in ~~mortgage loan production during~~commission expense and a reduction in the ~~2006 period versus the 2005 production.~~

~~Nine months.~~~~Non-interest expense, before the capitalization of~~ direct loan origination costs ~~decreased $18.3 million to $269.6 million~~ during the ~~nine months ended September 30, 2006, from $287.9 million for the comparable 2005 period.~~

Compensation and benefits expense increased $7.0 million during the 2006 period from the comparable 2005 period to $120.3 million and was primarily attributable to regular salary increases for employees and additional staff and support personnel for the newly opened banking centers.

The largest change occurred in commissions paid to the commissioned sales staff. On a year over year basis, there was a $13.6 million decrease. This decrease is the direct result of the decreased volume of mortgage loan originations during the period, offset in part by the change in the compensation structure.

During the nine months ended September 30, 2006, we transferred our secondary mortgage activities into a newly formed wholly-owned subsidiary of the Bank to allow us a higher profile in the marketplace and to permit a more robust development of our capital market activities. It also has the potential benefit of reducing our overall state tax exposure going forward.

The 13.2% decrease in other expense during the 2006 period from the comparable 2005 period is reflective of the decreased mortgage loan originations and the decreased number of home lending centers offset in part by the increased number of banking centers in operation during the period.

During the nine months ended September 30, 2006, we capitalized direct loan origination costs of $70.3 million, a decrease of $23.6 million from $93.9 million for the comparable 2005 period. This 25.1% decrease is a result of the decrease in mortgage loan production during the 20062007 period versus the ~~2005 production.~~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.~~Assets~~Our assets totaled $15.1 billion~~

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 ~~September 30, 2006,~~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 ~~is unchanged~~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, ~~2005.~~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 ~~increased~~decreased from ~~$1.4~~$1.6 billion at December 31, ~~2005~~2006 to ~~$1.6~~$1.2 billion at ~~September 30, 2006.~~March 31, 2007. The ~~increase~~decrease was attributable to the ~~creation~~reclassification of ~~$384.5~~$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 ~~September 30, 2006,~~March 31, 2007, approximately ~~$756.7~~$624.4 million of mortgage-backed securities were pledged as collateral under security repurchase agreements. At December 31, ~~2005, $1.2~~2006, $1.0 billion of the mortgage-backed securities were pledged as collateral under security repurchase ~~agreements and $2.9 million under interest rate swap~~ agreements.

~~Securities Available for Sale~~Other Investments.~~. Securities available for sale, which are comprised solely of the residual interest~~Our investment portfolio decreased from ~~securitization of mortgage loan products, increased from $26.1~~$24.0 million at December 31, ~~2005~~2006, to ~~$32.3~~$23.8 million at ~~September 30, 2006. The increase was principally due to the securitization~~March 31, 2007. Investment securities consist of ~~fixed second mortgage loans in April 2006 that resulted in a residual interest of $9.9 million, offset~~contractually required collateral, regulatory required collateral, and investments made by ~~a $5.7 million reduction to fair value of the residual interest related to~~ our ~~December 2005 securitization. For more information, see Note 5 to Consolidated Financial Statements, in Item 1, Financial Statements, herein.~~non-bank subsidiaries.

Loans Available for ~~Sale~~Sale.. We sell a majority of the mortgage loans we ~~originate~~produce into the secondary market on a whole loan basis or by securitizing the loans into mortgage-backed securities. ~~Loans~~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 ~~increased $1.5~~of $3.8 billion, ~~or 83.3%, to $3.3~~which was an increase of $0.6 billion ~~at September 30, 2006,~~ from ~~$1.8~~$3.2 billion held at December 31, ~~2005. This increase~~2006. Our loan production is ~~primarily attributable~~typically inversely related to the ~~accumulation~~level of ~~various loans for sale on a whole~~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 ~~or securitization basis and a reclassification~~origination activity during periods of ~~approximately $1.3 billion~~falling interest rates is derived from refinancing of ~~adjustable rate mortgages from loans held for investment.~~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 ~~September 30, 2006~~March 31, 2007 decreased ~~$1.7~~$0.9 billion from December 31, ~~2005.~~2006. The decrease was principally attributable to a ~~guaranteed mortgage securitization~~reclassification of approximately ~~$400~~$693.3 million of second mortgage loans ~~in April 2006 and a reclassification of approximately $1.3 billion of adjustable rate mortgages~~ to loans available for sale.

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

September 30, 2006 December 31, 2005
(Dollars in thousands)
Loans held for investment:
Mortgage loans $ 6,427,010 $ 8,248,897
Second mortgage loans 589,860 700,492
Construction loans 64,014 65,646
Commercial real estate loans 1,260,338 995,411
Warehouse lending 203,187 146,694
Non-real estate commercial loans 14,484 8,411
Home equity lines of credit 267,996 334,350
Consumer loans 97,292 76,570

Total $ 8,924,181 $ 10,576,471

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 ~~$42.7~~$48.5 million at ~~September 30, 2006~~March 31, 2007 from ~~$39.1~~$45.8 million at December 31, ~~2005,~~2006, respectively. The allowance for loan losses as a percentage of non-performing loans ~~increased~~decreased to ~~77.1%~~65.0% from ~~60.7%~~80.2% at ~~September 30, 2006~~March 31, 2007 and December 31, ~~2005,~~2006, respectively. Our non-performing loans (i.e., loans that are past due 90 days or more) ~~declined~~increased to ~~$55.5~~$74.6 million from ~~$64.5~~$57.1 million at ~~September 30, 2006~~March 31, 2007 and December 31, ~~2005,~~2006, respectively. The allowance for loan losses as a percentage of investment loans increased to ~~0.48%~~0.61% from ~~0.37%~~0.51% at ~~September 30, 2006~~March 31, 2007 and December 31, ~~2005,~~2006, respectively. The increase in the allowance for loan losses at ~~September 30, 2006,~~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 ~~nine~~three months of the year to ~~1.18%~~1.64% as of ~~September 30, 2006,~~March 31, 2007, up from ~~1.10%~~1.34% as of December 31, ~~2005.~~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 ~~September 30, 2006, 86%~~March 31, 2007, 84.4% of all delinquent loans are loans in which we had a first lien position on residential real estate.

September 30, December 31,
Days Delinquent 2006 2005
(Dollars in thousands)
30 $ 33,738 $ 30,972
60 16,150 20,456
90 55,464 64,466

Total $ 105,352 $ 115,894

Investment loans $ 8,924,181 $ 10,576,471

Delinquency % 1.18 % 1.10 %

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


	Nine months ended						Year ended
	September 30,			September 30,			December 31,			Three Months Ended						Year Ended
	2006			2005			2005			March 31,			March 31,			December 31,
										2007			2006			2006
Beginning balance	$	39,140		$	38,318		$	38,318		$	45,779		$	39,140		$	39,140
Provision for loan losses		17,213			12,840			18,876			8,293			4,063			25,450
Charge-offs
Mortgage		(7,008	)		(10,088	)		(11,853	)
Home equity lines of credit		(4,056	)		(2,762	)		(3,411	)
Other consumer		(1,052	)		(573	)		(1,302	)
Commercial		(1,354	)		(3,055	)		(3,055	)
Mortgage loans											(3,400	)		(1,913	)		(9,833	)
Consumer loans											(2,529	)		(1,572	)		(7,806	)
Commercial loans											—			(315	)		(1,414	)
Construction loans											—			—			—
Other		(2,198	)		(42	)		(286	)		(370	)		(686	)		(2,560	)

Total charge-offs		(15,668	)		(16,520	)		(19,907	)		(6,299	)		(4,486	)		(21,613	)

Recoveries
Mortgage		489			966			1,508
Home equity lines of credit		790			119			134
Other consumer		457			78			113
Commercial		40			97			98
Mortgage loans											315			160			665
Consumer loans											331			603			1,720
Commercial loans											—			40			40
Construction loans											—			—			—
Other		283			—			—			81			—			377

Total recoveries		2,059			1,260			1,853			727			803			2,802


Charge-offs, net of recoveries		(13,609	)		(15,260	)		(18,054	)		(5,572	)		(3,683	)		(18,811	)

Ending balance	$	42,744		$	35,898		$	39,140		$	48,500		$	39,520		$	45,779

Net charge-off ratio (annualized)		0.19	%		0.18	%		0.16	%
Net charge-off ratio											0.26	%		0.15	%		0.20	%

Accrued Interest Receivable.Accrued interest receivable ~~increased~~decreased from ~~$48.4~~$52.8 million at December 31, ~~2005~~2006, to ~~$53.1~~$50.3 million at ~~September 30, 2006~~March 31, 2007, due to the timing of payments. We typically collect ~~loan~~ interest ~~one~~in the month following the month in ~~arrears.~~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 ~~the related~~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.

~~Loans~~ Repurchased assets are loans we have ~~repurchased~~reacquired because of representations and warranties issues related to loan sales or securitizations and that are ~~non-performing at the time are recorded as repurchased assets rather than loans held for investment.~~non-performing.

Repurchased assets totaled ~~$13.6~~$9.6 million at December 31, ~~2005~~2006 and ~~$10.7~~$9.2 million at ~~September 30, 2006.~~March 31, 2007. During the three months ended ~~September 30,~~March 31, 2007 and 2006 ~~and 2005~~ we repurchased ~~$23.3~~$16.6 million and ~~$17.1~~$12.3 million of non-performing loans, respectively. In the nine months ended September 30, 2006 and 2005, we repurchased $52.3 million and $44.8 million of non-performing loans, respectively. In most instances, these loans are subsequently foreclosed upon and the related real estate is later sold. Repurchased assets are included within other assets in our consolidated financial statements.

Premises and Equipment.Premises and equipment, net of accumulated depreciation, totaled ~~$212.8~~$221.9 million at ~~September 30, 2006,~~March 31, 2007, an increase of ~~$12.0~~$2.7 million, or ~~6.0%~~1.2%, from ~~$200.8~~$219.2 million at December 31, ~~2005.~~2006. The increase reflects the continued expansion of our retail banking center network.

Mortgage Servicing Rights.During the ~~nine~~three months ended ~~September 30, 2006,~~March 31, 2007, we capitalized ~~$175.1~~$68.0 million, amortized ~~$57.1~~$15.0 million, and sold ~~$283.0 million of MSRs.~~

no MSRs on a bulk basis. MSRs totaled ~~$150.7~~$226.8 million at ~~September 30, 2006~~March 31, 2007 with a fair value of approximately ~~$180.0~~$263.6 million based on an internal valuation model which utilized an average discounted cash flow rate equal to ~~10.5%~~10.1%, an average cost to service of ~~$40~~$42 per conventional loan and $55 per government or adjustable rate loan, and a weighted prepayment rate assumption of ~~28.2%~~18.3%. The portfolio contained ~~106,052~~140,952 loans, had a weighted average interest rate of ~~6.15%~~6.48%, a weighted average remaining term of ~~322~~315 months, and had been seasoned 106 months. At December 31, ~~2005,~~2006, the MSR balance was ~~$315.7~~$173.3 million with a fair value of ~~$421.1~~$197.6 million based on our internal ~~valuation.~~valuation model.

The principal balance of the loans underlying the ~~MSR’s~~MSRs was ~~$14.8~~$19.1 billion at ~~September 30, 2006~~March 31, 2007 versus ~~$29.6~~$15.0 billion at December 31, ~~2005,~~2006, with the ~~decline~~increase primarily attributable to having no bulk MSR sales during the ~~2006~~2007 period. The capitalized value of the MSRs was ~~1.02%~~1.19% at ~~September 30, 2006~~March 31, 2007 and ~~1.06%~~1.15% at December 31, ~~2005.~~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 September 30, For the nine months ended September 30,
2006 2005 2006 2005
Balance at beginning of period $ 22,379,937 $ 26,646,532 $ 29,648,088 $ 21,354,724
Loan servicing originated 4,045,915 6,983,384 11,904,611 18,312,923
Loan amortization/prepayments (757,630 ) (1,773,668 ) (2,738,450 ) (4,529,352 )
Loan servicing sales (10,838,826 ) (573,319 ) (23,984,853 ) (3,855,366 )

Ending balance $ 14,829,396 $ 31,282,929 $ 14,829,396 $ 31,282,929

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 ~~increased $37.8~~decreased $14.4 million, or ~~19.4%~~11.4%, to ~~$233.5~~$112.1 million at ~~September 30, 2006,~~March 31, 2007, from ~~$195.7~~$126.5 million at December 31, ~~2005.~~2006. The majority of this ~~increase~~decrease was attributable to receivables that ~~arose~~were offset against escrow accounts upon the ~~sale~~settlement of ~~MSRs during the quarter. Upon the sale of MSRs, a receivable is recorded for a portion of the sale proceeds. The balance due is normally received within 180 days after the sale date.~~certain litigation.

Liabilities

~~Liabilities~~.~~Our total liabilities of $14.3 billion remained unchanged from September 30, 2006 to December 31, 2005.~~

Deposit Accounts.Deposit accounts increased ~~$0.2~~$0.4 billion to ~~$8.2~~$8.0 billion at ~~September 30, 2006,~~March 31, 2007, from ~~$8.0~~$7.6 billion at December 31, ~~2005,~~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)


	September 30, 2006								December 31, 2005								March 31, 2007								December 31, 2006
			Weighted			Percent					Weighted			Percent					Weighted			Percent					Weighted			Percent
			Average			of					Average			of					Average			of					Average			of
	Balance		Rate			Balance			Balance		Rate			Balance			Balance		Rate			Balance			Balance		Rate			Balance

Demand accounts	$	351,233		0.85	%		4.3	%	$	374,816		0.60	%		4.7	%	$	392,476		1.52	%		4.92	%	$	380,162		1.28	%		4.99	%
Savings accounts		159,769		1.61			1.9			239,215		1.52			3.0			140,349		1.50			1.76			144,460		1.55			1.89
MMDA		620,019		3.98			7.6			781,087		2.98			9.8			609,754		4.13			7.65			608,282		4.05			7.98
Certificates of deposit⁽¹⁾		3,846,023		4.72			46.8			3,450,450		3.94			43.2			3,775,817		4.97			47.34			3,763,781		4.86			49.37

Total Retail Deposits		4,977,044		4.26			60.6			4,845,568		3.41			60.7			4,918,396		4.49			61.67			4,896,685		4.38			64.23


Municipal deposits		1,988,616		5.41			24.2			1,353,633		4.30			17.0			1,772,324		5.36			22.22			1,419,964		5.33			18.63
National accounts		1,247,113		3.59			15.2			1,779,799		3.42			22.3			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	$	8,212,773		4.43	%		100.0	%	$	7,979,000		3.56	%		100.0	%	$	7,975,382		4.42	%		100.0	%	$	7,623,488		4.30	%		100.0	%


(1)		The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately ~~$1.3~~$3.0 billion and ~~$1.2~~$2.6 billion at ~~September 30, 2006~~March 31, 2007 and December 31, ~~2005,~~2006, respectively.

(2)		These accounts represent the portion of the investor custodial accounts controlled by Flagstar that have been placed on deposit with the Bank.

The change in composition of our deposits reflects the industry trend of migration from lower-yielding demand deposit accounts and savings accounts to higher-yielding certificates of deposits. Principal causes of this migration include our use of high yielding CDs to penetrate new markets in which we have recently established branches as well as the currently competitive nature of deposit-gathering throughout the nation, especially in the Midwest in which most of our branches are located.

The municipal deposit channel was ~~$2.0~~$1.8 billion at ~~September 30, 2006,~~March 31, 2007, a ~~42.9%~~28.6% increase, as compared $1.4 billion at December 31, ~~2005.~~2006. These deposits have been garnered from local government units within our retail market area.

~~National deposit~~In past years, our national accounts ~~which are generated~~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 ~~investment brokers located across~~ the ~~country,~~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 ~~$0.6~~$0.1 billion to ~~$1.2~~$1.0 billion at ~~September 30, 2006,~~March 31, 2007, from ~~$1.8~~$1.1 billion at December 31, ~~2005.~~2006. These accounts were generally gathered in a lower interest rate environment, resulting in a lower average cost. At ~~September 30, 2006 they~~March 31, 2007, the national deposit accounts had a weighted maturity of ~~13.6~~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):


	September 30, 2006					December 31, 2005					March 31, 2007					December 31, 2006
			Weighted					Weighted					Weighted					Weighted
			Average					Average					Average					Average
	Amount		Rate			Amount		Rate			Amount		Rate			Amount		Rate

Floating daily rate advances	$	308		5.38	%	$	766,000		4.18	%
Short-term fixed rate term advances											$	2,304,000		4.93	%	$	2,757,000		4.95	%
Fixed rate putable advances		—		—			700,000		4.49			750,000		4.28	%		500,000		4.24	%
Fixed rate term advances		4,517,000		4.62			2,759,000		3.69
Long-term fixed rate term advances												2,550,000		4.45	%		2,150,000		4.28	%

Total	$	4,517,308		4.62	%	$	4,225,000		3.91	%	$	5,604,000		4.62	%	$	5,407,000		4.62	%

FHLB advances increased ~~$0.3~~$0.2 billion to ~~$4.5~~$5.6 billion at ~~September 30, 2006,~~March 31, 2007, from ~~$4.2~~$5.4 billion at December 31, ~~2005.~~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, ~~our~~the escrow accounts ~~and the ability to borrow using~~we hold, or alternative funding sources such as security repurchase agreements. Our approved line with the FHLB was ~~$6.8~~$7.5 billion at ~~September 30, 2006.~~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 ~~September 30, 2006~~March 31, 2007 and December 31, ~~2005,~~2006, we had security repurchase agreements amounting to ~~$0.7~~$0.6 billion and ~~$1.1~~$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 ~~September 30, 2006~~March 31, 2007 and December 31, ~~2005,~~2006, we had $207.5 million of long-term debt.

Accrued Interest Payable.Our accrued interest payable increased ~~$7.0~~$2.3 million from December 31, ~~2005~~2006 to ~~$48.3~~$48.6 million at ~~September 30, 2006.~~March 31, 2007. The increase was principally due to the increase in interest rates during ~~2006~~2007 on our interest-bearing liabilities.

~~Undisbursed Payments on Loans Serviced for Others~~Federal Income Taxes Payable. ~~Undisbursed payments on loans serviced for others decreased $198.5~~Federal income taxes payable increased $3.0 million to ~~$208.6~~$32.7 million at ~~September 30, 2006,~~March 31, 2007, from ~~$407.1~~$29.7 million at December 31, 2005. These amounts represent payments received from borrowers for interest, principal and related loan charges, which have not yet been remitted to the respective investors. These balances fluctuate with the size of the servicing portfolio and may2006. This increase ~~during a time of high payoff or refinance volume. During the 2006 period, we sold MSRs related to $24.0 billion in loans, reducing the borrower payments we would be receiving.~~

~~Escrow Accounts~~. Customer escrow accounts increased $11.3 million to $230.3 million at September 30, 2006, from $219.0 million at December 31, 2005. These amounts represent payments received from borrowers for taxes and insurance payments that have not yet been remitted to the tax authorities or insurance providers. These balances fluctuate with the size of the servicing portfolio and during the year before and after the remittance of scheduled payments.

~~Liability for Checks Issued~~. Liability for checks issued decreased $3.9 million to $19.3 million at September 30, 2006, from $23.2 million at December 31, 2005. These amounts represent checks issued to acquire mortgage loans that have not cleared for payment. These balances fluctuate with the size of the mortgage pipeline.

~~Federal Income Taxes Payable~~~~. Federal income taxes payable decreased $23.6 million to $51.7 million at September 30, 2006, from $75.3 million at December 31, 2005. This decrease~~ is attributable to ~~the estimated tax payments of $61.2 million, offset by~~ the provision for federal income taxes on earnings and the change in federal income tax on other comprehensive income during the ~~nine~~three months ended ~~September 30, 2006.~~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 during the preceding five years.~~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. ~~Changes in~~Increases to the secondary market reserve due to current loan sales ~~decrease~~reduce our net gain on loan ~~sales, while changes relating~~sales. Adjustments to our previous estimates are recorded as an increase or decrease in our other fees and charges.

~~Secondary~~The secondary market reserve increased ~~$6.3~~$2.3 million to ~~$23.9~~$26.5 million at ~~September 30, 2006,~~March 31, 2007, from ~~$17.6~~$24.2 million at December 31, ~~2005.~~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 September 30,						For the nine months ended September 30,						For the Three Months Ended March 31,
	2006			2005			2006			2005			2007			2006
Balance, beginning of period	$	20,600		$	15,600		$	17,550		$	19,002		$	24,200		$	17,550
Provision
Charged to gain on sale for current loan sales		1,626			1,518			4,052			3,980			2,163			1,006
Charged to other fees and charges for changes in estimates		5,072			2,580			11,681			3,572			2,733			3,075

Total		6,698			4,098			15,733			7,552			4,896			4,081
Charge-offs, net		(3,398	)		(3,798	)		(9,383	)		(10,654	)		(2,596	)		(3,631	)

Balance, end of period	$	23,900		$	15,900		$	23,900		$	15,900		$	26,500		$	18,000

Reserve levels are a function of expected losses based on actual pending and expected claims and repurchase requests, historical experience and loan volume. While the ultimate amount of repurchases and claims is uncertain, management believes that the reserves are adequate.

Payable for Securities Purchased.During the three months ended March 31, 2007, we settled our payable for securities purchased relating to security purchases prior to December 31, 2006. At March 31, 2007, there were no unsettled trades pending for securities purchased.

Liquidity and Capital

Liquidity.Liquidity refers to the ability or the financial flexibility to manage future cash flows in order to meet the needs of depositors and borrowers and fund operations on a timely and cost-effective basis. Our primary sources of funds are customer deposits, loan repayments and sales, advances from the FHLB, security repurchase agreements, cash generated from operations and customer escrow accounts. We believe that these sources of funds will continue to be adequate to meet our liquidity needs for the foreseeable future.

Retail deposits ~~increased $0.3 billion, or 6.4%,~~remained relatively unchanged in the ~~2006~~2007 period from the comparable ~~2005~~2006 period and totaled ~~$5.0~~$4.9 billion at ~~September 30,~~March 31, 2007 and 2006. ~~We believe that the increase reflects our continued expansion of our branching network as well as continued focus on growth in existing markets.~~

Mortgage loans sold during the ~~nine~~three months ended ~~September 30, 2006,~~March 31, 2007, totaled ~~$11.9~~$5.3 billion, ~~a decrease~~an increase of ~~$6.5~~$1.4 billion from the ~~$18.3~~$3.9 billion sold during the same period in ~~2005.~~2006. This ~~decrease~~increase reflects ~~our $8.7~~a $1.2 billion ~~decrease~~increase in mortgage loan originations during the ~~nine~~three months ended ~~September 30, 2006.~~March 31, 2007. We attribute this ~~decline~~increase to ~~a rising interest rate environment, resulting decline in~~an increased demand for fixed-rate mortgage ~~loans and a shift in consumer demand to high credit risk loans that we did not offer.~~loans. We sold ~~85.7%~~96.3% and ~~80.9%~~89.6% of our mortgage loan originations during the ~~nine-month periods~~three month period ended ~~September 30,~~March 31, 2007 and 2006, ~~and 2005,~~ respectively.

We use FHLB advances and security repurchase agreements to fund our daily operational liquidity needs and to assist in funding loan originations. We will continue to use these sources of funds as needed to supplement funds from deposits, loan and MSR sales and escrow accounts. We had ~~$4.5~~$5.6 billion of FHLB advances outstanding at ~~September 30, 2006.~~March 31, 2007. Such advances are usually repaid with the proceeds from the sale of mortgage loans or from alternative sources of financing. We currently have an authorized line of credit equal to ~~$6.8~~$7.5 billion, of which $7.3 billion was collateralized at ~~September 30, 2006. This line is collateralized~~March 31, 2007, by non-delinquent residential mortgage loans.

At ~~September 30, 2006,~~March 31, 2007, our security repurchase agreements totaled ~~$0.7~~$0.6 billion. There were no security repurchase agreements outstanding at September 30, 2005. We began using security repurchase agreements as an alternative-financing source in the fourth quarter of 2005 to obtain a competitive alternative to FHLB advances.

At ~~September 30, 2006,~~March 31, 2007, we had outstanding rate-lock commitments to lend ~~$2.1~~$3.1 billion in mortgage loans, along with outstanding commitments to make other types of loans totaling ~~$6.2~~$6.3 million. As such commitments may expire without being drawn upon, they do not necessarily represent future cash commitments. Also, at ~~September 30, 2006,~~March 31, 2007, we had outstanding commitments to sell ~~$2.9~~$2.5 billion of mortgage loans. We expect that our lending commitments will be funded within 90 days. Total commercial and consumer unused lines of credit totaled $1.7 billion at ~~September 30, 2006 and include $1.1 billion~~March 31, 2007, including $907.3 million of unused warehouse lines of credit to various mortgage companies, of which we had advanced ~~$203.2~~$284.1 million at ~~September 30, 2006.~~March 31, 2007. There iswas an additional ~~$107.9~~$182.3 million in undrawn lines of credit incontained within our HELOC ~~Securitization.~~Securitizations.

3325

Stock Repurchase Plan.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.

Regulatory Capital Adequacy.At ~~September 30, 2006,~~March 31, 2007, the Bank exceeded all applicable bank regulatory minimum capital requirements and was considered “well capitalized.” The Company is not subject to ~~any such~~regulatory capital requirements.

~~Additionally, we have issued~~The Bank’s regulatory capital includes proceeds from trust preferred securities that were issued in seven separate offerings to the capital markets and ~~had~~as to which $206.2 million inof such securities were outstanding at ~~September 30, 2006.~~March 31, 2007.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

In our home lending operations, we are exposed to market risk in the form of interest rate risk from the time the interest rate on a mortgage loan application is committed to by us through the time we sell or commit to sell the mortgage loan. On a daily basis, we analyze various economic and market factors and, based upon these analyses, project the amount of mortgage loans we expect to sell for delivery at a future date. The actual amount of loans sold will be a percentage of the amount of mortgage loans on which we have issued binding commitments (and thereby locked in the interest rate) but have 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, we will not have made commitments to sell these additional pipeline loans and may incur losses upon their sale as the market rate of interest will be higher than the mortgage interest rate committed to by us on such additional pipeline loans. To the extent that the hedging strategies utilized by us are not successful, our profitability may be adversely affected.

In addition to the home lending operations, Flagstar’s banking operations can be exposed to market risk due to differences in the timing of the maturity or repricing of assets versus liabilities, as well as the potential ~~parallel and non-parallel shifts~~shift in the yield curve. This risk is evaluated and managed on a Company-wide basis using a net portfolio value (NPV) analysis framework. The NPV analysis attempts to estimate the net sensitivity of the fair value of the assets and liabilities to changes in the levels of interest rates.

Management believes there has been no material change since December 31, ~~2005~~2006, in the type of interest rate risk or market risk that the Company currently assumes.

Item 4. Controls and Procedures

~~(a)~~(a) Disclosure Controls and Procedures.A review and evaluation was performed by our principal executive and financial officers regarding the effectiveness of our disclosure controls and procedures as of ~~September 30, 2006,~~March 31, 2007 pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended. Based on that review and evaluation, the principal executive and financial officers have concluded that our current disclosure controls and procedures, as designed and implemented, are ~~not~~ operating ~~effectively as a result of the material weakness in our internal control over financial reporting reported in Item 9A-~~~~Controls and Procedures~~~~to our Annual Report on Form 10-K for the year ended December 31, 2005.~~effectively.

~~(b)~~(b) Changes in Internal Controls.During the quarter ended ~~September 30, 2006,~~March 31, 2007, there has been no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934, as amended, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except as set forth below. For the year ended December 31, 2005, we reported a material weakness in our internal control over financial reporting due to issues relating to state taxes. The changes implemented during the third quarter with respect to remediation of the material weakness include the following:

~~Implemented procedures intended to ensure appropriate recording of tax expense.~~

While the changes in our internal controls described above are intended to remediate the material weakness identified in connection with our assessment of internal controls as of December 31, 2005, there can be no assurance that such remediation will be completed by December 31, 2006. Further, our testing and evaluation of the operating effectiveness and sustainability of several of the changes in internal controls have not been completed at this time. As a result, we may identify additional changes that are required to remediate or improve our internal control over financial reporting.

3426

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in response to Item 1A to Part I of our ~~2005~~2006 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Sale of Unregistered Securities

~~(a)~~

~~The Company made no unregistered sales of its equity securities during the quarter ended September 30, 2006.~~

The Company made no unregistered sales of its equity securities during the quarter ended March 31, 2007.

Issuer Purchases of Equity Securities

The following summarizes share repurchase activities during the three months ended March 31, 2007:

Total Number of Maximum Approximate
Total Shares Purchased Dollar Value (in thousands)
Number of as Part of Publicly of Shares that May Yet be
Shares Average Price Announced Purchased Under the
Purchased(1) Paid per Share Plans or Programs Plans or Programs (2)

Calendar Month:

January 2007 16,314 $14.77 — $40,000
February 2007 — — — 50,000
March 2007 1,294,831 12.80 1,284,300 33,500

Total
1,311,145 12.83 1,284,300 33,500

	~~(b)~~
(1)		~~The~~Some of the shares purchased by the Company ~~made no purchases of its equity securities~~ during the ~~third~~first quarter of ~~2006.~~2006 were in connection with the tax withholding of restricted stock granted under the 2000 Stock Incentive Plan. These purchases are not included against the maximum number of shares that may yet be purchased under the Board of Directors authorization.

(2)		On January 31, 2007, the Company announced that the board of directors adopted a Stock Repurchase Program under which the Company was authorized to repurchase up to $40.0 million worth of the 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.

Item 3. Defaults upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

3527

Item 6. Exhibits


11		Computation of Net Earnings per Share

31.1		Section 302 Certification of Chief Executive Officer

31.2		Section 302 Certification of Chief Financial Officer

32.1		Section 906 Certification, as furnished by the Chief Executive Officer

32.2		Section 906 Certification, as furnished by the Chief Financial Officer

3628

SIGNATURES

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


	FLAGSTAR BANCORP, INC.
Date: May 8, 2007	/s/ Mark T. Hammond
	Mark T. Hammond
	President and Chief Executive Officer (Duly Authorized Officer)


				~~FLAGSTAR BANCORP, INC.~~
	/s/ Paul D. Borja
	Paul D. Borja
	Executive Vice President and Chief Financial Officer (Principal Financial Officer)


~~Date: November 1, 2006~~		~~/s/ Mark T. Hammond~~
		~~Mark T. Hammond~~
		~~President and~~
		~~Chief Executive Officer~~
		~~(Duly Authorized Officer)~~

		~~/s/ Paul D. Borja~~

		~~Paul D. Borja~~
		~~Executive Vice President and~~
		~~Chief Financial Officer~~
		~~(Principal Financial Officer)~~

EXHIBIT INDEX


Ex. No.		Description

11		Statement regarding Computation of Net Earnings per Share

31.1		Section 302 Certification of Chief Executive Officer

31.2		Section 302 Certification of Chief Financial Officer

32.1		Section 906 Certification, as furnished by the Chief Executive Officer

32.2		Section 906 Certification, as furnished by the Chief Financial Officer


	At September 30,			At December 31,
	2006			2005
	(Unaudited)
Assets
Cash and cash equivalents	$	346,774		$	201,163
Mortgage-backed securities held to maturity (fair value $1.6 billion and $1.4 billion at September 30, 2006 and December 31, 2005, respectively)		1,552,040			1,414,986
Securities available for sale		32,295			26,148
Other investments		25,074			21,957
Loans available for sale		3,286,263			1,773,394
Loans held for investment		8,924,181			10,576,471
Less: allowance for loan losses		(42,744	)		(39,140	)

Loans held for investment, net		8,881,437			10,537,331

Total earning assets		13,777,109			13,773,816
Accrued interest receivable		53,136			48,399
Repossessed assets, net		71,514			47,724
Federal Home Loan Bank stock		274,507			292,118
Premises and equipment, net		212,795			200,789
Mortgage servicing rights, net		150,663			315,678
Other assets		233,527			195,743

Total assets	$	15,120,025		$	15,075,430

Liabilities and Stockholders’ Equity Liabilities
Deposits	$	8,212,773		$	7,979,000
Federal Home Loan Bank advances		4,517,308			4,225,000
Security repurchase agreements		734,495			1,060,097
Long term debt		207,472			207,497

Total interest-bearing liabilities		13,672,048			13,471,594
Accrued interest payable		48,329			41,288
Undisbursed payments on loans serviced for others		208,629			407,104
Escrow accounts		230,316			219,028
Liability for checks issued		19,323			23,222
Federal income taxes payable		51,655			75,271
Secondary market reserve		23,900			17,550
Other liabilities		50,813			48,490

Total liabilities		14,305,013			14,303,547


Commitments and Contingencies		—			—

Stockholders’ Equity
Common stock — $.01 par value, 150,000,000 shares authorized; 63,571,427 and 63,208,038 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively		636			632
Additional paid in capital		62,559			57,304
Accumulated other comprehensive income		5,984			7,834
Retained earnings		745,833			706,113

Total stockholders’ equity		815,012			771,883

Total liabilities and stockholders’ equity	$	15,120,025		$	15,075,430


	Number of Shares
	September 30,			December 31,
	2006			2005
	(Unaudited)
Options outstanding, beginning of period		3,417,366			4,961,529
Options granted		—			372,792
Options exercised		(326,340	)		(1,788,354	)
Options canceled, forfeited and expired		(23,234	)		(128,601	)

Options outstanding, end of period		3,067,792			3,417,366

Options exercisable, end of period		2,920,342			2,861,884


	Weighted Average Exercise Price
	September 30,		December 31,
	2006		2005
	(Unaudited)
Options outstanding, beginning of period	$	13.20	$	9.34
Options granted		—		20.50
Options exercised		6.11		4.17
Options canceled, forfeited and expired		17.27		15.64
Options outstanding, end of period		13.73		13.20
Options exercisable, end of period		13.79		13.20


	Options Outstanding						Options Exercisable
			Weighted
	Number of		Average		Weighted		Number of		Weighted
	Options		Remaining		Average		Options		Average
	Outstanding at		Contractual		Exercise		Exercisable at		Exercise
Range of Grant Price	September 30, 2006		Life (Years)		Price		September 30, 2006		Price

$ 1.76		130,149		3.76	$	1.76		130,149	$	1.76
1.96 – 4.77		28,050		2.44		3.49		28,050		3.49
5.01		94,738		4.64		5.01		94,738		5.01
5.29 – 6.06		108,401		2.72		5.34		108,401		2.72
11.80		1,120,831		4.35		11.80		1,120,831		11.80
12.27 – 15.23		771,149		4.83		12.31		623,699		12.27
19.35 – 20.06		36,429		5.82		19.70		36,429		19.70
20.73		339,863		6.84		20.73		339,863		20.73
22.68		287,456		7.28		22.68		287,456		22.68
24.72		150,726		6.70		24.72		150,726		24.72


		3,067,792			$	13.73		2,920,342	$	13.79


			Weighted Average
Stock Appreciation Rights Awarded:	Shares		Fair Value
Non-vested balance at December 31, 2005		—
Granted		328,873	$	2.10
Vested		—
Forfeited		—


Non-vested balance at September 30, 2006		328,873


	For the three			For the nine
	months ended			months ended
	September 30, 2005			September 30, 2005
Net earnings, as reported	$	9,460		$	57,038

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(654	)		(1,962	)


Pro forma net earnings	$	8,806		$	55,076


Basic earnings per share
As reported	$	0.15		$	0.92
Pro forma	$	0.14		$	0.89

Diluted earnings per share
As reported	$	0.15		$	0.89
Pro forma	$	0.14		$	0.86


				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


	Assumptions
			Prepayment			Projected			Discount
HELOC Securitization	Fair Value		Speed			Credit Losses			Rate
	(Dollars in thousands)
Residual asset as of September 30, 2006	$	20,938		52	%		1.25	%		15	%
Impact on fair value of 10% adverse change in assumption			$	1,443		$	388		$	509
Impact on fair value of 20% adverse change in assumption			$	2,597		$	776		$	999


	Assumptions
Second Mortgage			Prepayment			Projected			Discount
Securitization	Fair Value		Speed			Credit Losses			Rate
	(Dollars in thousands)
Residual asset as of September 30, 2006	$	11,357		25	%		1.50	%		15	%
Impact on fair value in 10% adverse change in assumption			$	56		$	409		$	583
Impact on fair value in 20% adverse change in assumption			$	117		$	818		$	1,126


	September 30,			December 31,
Days Delinquent	2006			2005
	(Dollars in thousands)
30	$	33,738		$	30,972
60		16,150			20,456
90		55,464			64,466

Total	$	105,352		$	115,894

Investment loans	$	8,924,181		$	10,576,471

Delinquency %		1.18	%		1.10	%


					Total Number of		Maximum Approximate
	Total				Shares Purchased		Dollar Value (in thousands)
	Number of				as Part of Publicly		of Shares that May Yet be
	Shares		Average Price		Announced		Purchased Under the
	Purchased(1)		Paid per Share		Plans or Programs		Plans or Programs (2)

Calendar Month:
January 2007		16,314		$14.77		—		$40,000
February 2007		—		—		—		50,000
March 2007		1,294,831		12.80		1,284,300		33,500

Total		1,311,145		12.83		1,284,300		33,500