UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Mark One)

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

For the quarterly period ended June 30, 2007

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

(Exact name of registrant as specified in its charter)

Michigan		38-3150651
(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification No.)
5151 Corporate Drive, Troy, Michigan		48098-2639
(Address of principal executive offices)		(Zip code)

(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. Yes þ No o.

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company o

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

     As of August 6, 2007, 60,261,799 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.

 

 

EXPLANATORY NOTE

     On August 6, 2007, Flagstar Bancorp, Inc. (the “Company”) issued a press release and filed a related Current Report on Form 8-K with the Securities and Exchange Commission (“SEC”) in which it announced that it would be restating its previously issued Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 and for the quarter ended March 31, 2007 in response to then-recently received comments from the SEC. The Company also announced that it was having continuing discussions with the SEC and that the ultimate resolution of those discussions might have an effect on the disclosures contained in our filings with the SEC.

     This Amendment No. 1 (“Form 10-Q/A”) to the Company’s Form 10-Q for the quarterly period ended June 30, 2007 that was originally filed with the SEC on August 9, 2007 (the “Original Form 10-Q”) is being filed in response to and as a result of comments received from the staff of the SEC. The revisions and additional disclosures are based on additional comments subsequently received from the SEC staff.

     Except as required to reflect the items described below, no other modifications or updates have been made to the Original Form 10-Q. Information not affected by items described below remains unchanged and reflects the disclosures made at the time of, and as of the dates described in, the Original Form 10-Q (including with respect to exhibits), and does not modify or update disclosures (including forward-looking statements) that may have been affected by events or changes in facts occurring after the filing date of the Original Form 10-Q. Accordingly, this Form 10-Q/A should be read in conjunction with the Company’s filings made with the SEC subsequent to the filings of the Original Form 10-Q, as information in such filings may have updated or superseded certain information contained in this Form 10-Q/A.

Part I. Item 1.

	•		Revised the wording in Part I, Item 1, Financial Statements, Consolidated Statements of Cash Flows, Supplemental Disclosures of Cash Flow Information to conform to the wording in our 2006 Form 10-K/A.
	•		Expanded the presentation and disclosure of the facts and circumstances resulting in the other-than-temporary-impairments recognized on the private-label securitization, including the manner in which we measure such impairment. This revision is reflected in Part I, Item 1, Financial Statements, Note 4 – Investment Securities.
	•		Expanded the presentation in Part I, Item 1, Financial Statements, Note 5 –Private-label Securitization Activity to include credit risk information on our securitizations.
	•		Added a footnote in Part I, Item 1, Financial Statements, Note 6 – Accumulated Other Comprehensive (Loss) Income to identify the components of the balance in accumulated other comprehensive (loss) income and changes to such components for each statement of financial condition presented.
	•		Expanded the disclosure in Part I, Item 1, Financial Statements, Note 7 – Stock-Based Compensation to include additional information related to our stock-based compensation plan.

Part I. Item 2.

	•		Clarified the wording in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operation, Non-Interest Income – Loan Fees and Charges to indicate that loan fees and charges were recorded during the periods rather than collected.
	•		Revised the presentation in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operation, Non-Interest Income – Net Gain on Loan Sales to provide information on the components of our net gain on loan sales.
	•		Expanded the presentation and disclosure of the facts and circumstances reflected in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Non-Interest Income – Net Gain (Loss) on Securities Available for Sale resulting in the $3.6 million other-than-temporary impairment recognized on the private-label securitization completed in 2005, including our measurement process of the impairment.
	•		Clarified the disclosure presented in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Repurchased Assets to emphasize that repurchased assets are loans that the Company reacquired as a result of representation and warranty issues related to loan sales or securitizations rather than as a result of non-performance at the time of repurchase.
	•		Expanded the disclosure in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Secondary Market Reserve to provide additional information with respect to the time frame during which the loan sales remain subject to such customary representations and warranties.

FORWARD–LOOKING STATEMENTS

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

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

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

Consolidated Statements of Financial Condition – June 30, 2007 (unaudited) and December 31, 2006.

Unaudited Consolidated Statements of Earnings — For the three and six months ended June 30, 2007 and 2006.

Consolidated Statements of Stockholders’ Equity and Comprehensive (Loss) Income — For the six months ended June 30, 2007 (unaudited) and for the year ended December 31, 2006.

Unaudited Consolidated Statements of Cash Flows — For the six months ended June 30, 2007 and 2006 (restated).

Unaudited Notes to Consolidated Financial Statements.

Flagstar Bancorp, Inc.
Consolidated Statements of Financial Condition
(In thousands, except for share data)

		At June 30,				At December 31,
		2007				2006
		(Unaudited)
Assets
Cash and cash items		$	107,541			$	136,675
Interest-bearing deposits			167,367				140,561
Cash and cash equivalents			274,908				277,236
Securities classified as trading			20,487				—
Securities classified as available for sale			973,787				617,450
Mortgage-backed securities held to maturity (fair value $1.1 billion and $1.6 billion at June 30, 2007, and December 31, 2006, respectively)			1,069,350				1,565,420
Other investments			24,233				24,035
Loans available for sale			5,110,768				3,188,795
Loans held for investment			7,655,473				8,939,685
Less: allowance for loan losses			(53,400	)			(45,779	)
Loans held for investment, net			7,602,073				8,893,906
Total interest-earning assets			14,968,065				14,430,167
Accrued interest receivable			56,144				52,758
Repossessed assets, net			78,916				80,995
Federal Home Loan Bank stock			329,027				277,570
Premises and equipment, net			223,330				219,243
Mortgage servicing rights, net			266,545				173,288
Other assets			149,910				126,509
Total assets		$	16,179,478			$	15,497,205
Liabilities and Stockholders’ Equity Liabilities
Deposits		$	7,697,810			$	7,623,488
Federal Home Loan Bank advances			5,529,055				5,407,000
Security repurchase agreements			1,705,418				990,806
Long term debt			233,246				207,472
Total interest-bearing liabilities			15,165,529				14,228,766
Accrued interest payable			47,813				46,302
Federal income taxes payable			36,188				29,674
Secondary market reserve			27,300				24,200
Payable for securities purchased			—				249,694
Other liabilities			132,373				106,335
Total liabilities			15,409,203				14,684,971
Commitments and Contingencies			—				—
Stockholders’ Equity
Common stock $0.01 par value, 150,000,000 shares authorized; 63,648,041 and 63,604,590 shares issued and outstanding at June 30, 2007, and December 31, 2006, respectively			637				636
Additional paid in capital			63,758				63,223
Accumulated other comprehensive (loss) income			(4,736	)			5,182
Retained earnings			752,321				743,193
Treasury stock, at cost, 3,388,430 shares at June 30, 2007, and none at December 31, 2006			(41,705	)			—
Total stockholders’ equity			770,275				812,234
Total liabilities and stockholders’ equity		$	16,179,478			$	15,497,205

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 Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
								(Unaudited)
Interest Income
Loans		$	189,958			$	170,121			$	377,208			$	341,893
Mortgage-backed securities			13,768				21,148				28,385				38,300
Securities available for sale			13,524				—				27,122				—
Interest-bearing deposits			2,674				—				6,176				—
Other			2,540				1,379				4,142				3,754
Total interest income			222,464				192,648				443,033				383,947
Interest Expense
Deposits			86,038				82,055				171,064				157,272
FHLB advances			64,882				42,497				132,734				82,470
Security repurchase agreements			18,041				13,051				30,434				26,546
Other			3,586				4,307				6,913				8,246
Total interest expense			172,547				141,910				341,145				274,534
Net interest income			49,917				50,738				101,888				109,413
Provision for loan losses			11,452				5,859				19,745				9,923
Net interest income after provision for loan losses			38,465				44,879				82,143				99,490
Non-Interest Income
Loan fees and charges			837				1,239				1,475				2,850
Deposit fees and charges			5,710				5,692				10,688				10,503
Loan administration			3,149				309				5,764				4,664
Net gain on loan sales			28,144				9,650				53,298				26,735
Net gain on sales of mortgage servicing rights			5,610				34,932				5,725				43,518
Net gain (loss) on securities available for sale			—				—				729				(3,557	)
Other fees and charges			13,994				9,750				19,663				19,481
Total non-interest income			57,444				61,572				97,342				104,194
Non-Interest Expense
Compensation and benefits			39,150				34,943				78,642				71,217
Occupancy and equipment			17,014				16,722				33,782				33,609
Communication			2,330				963				3,404				2,187
Other taxes			(10	)			(3,659	)			(583	)			(1,630	)
General and administrative			13,750				13,385				28,387				25,041
Total non-interest expense			72,234				62,354				143,632				130,424
Earnings before federal income taxes			23,675				44,097				35,853				73,260
Provision for federal income taxes			8,544				15,457				12,963				25,710
Net Earnings		$	15,131			$	28,640			$	22,890			$	47,550
Earnings per share
Basic		$	0.25			$	0.45			$	0.37			$	0.75
Diluted		$	0.25			$	0.44			$	0.37			$	0.74

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				Treasury				Stockholders’
		Stock				Capital				(Loss) 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			—				—				—				22,890				—				22,890
Reclassification of gain on swap extinguishment			—				—				(60	)			—				—				(60	)
Change in net unrealized loss on swaps used in cash flow hedges			—				—				(1,323	)			—				—				(1,323	)
Change in net unrealized gain on securities available for sale			—				—				(8,535	)			—				—				(8,535	)
Total comprehensive income			—				—				—				—				—				12,972
Adjustment to initially apply FIN 48			—				—				—				(1,428	)			—				(1,428	)
Stock options exercised			1				31				—				—				—				32
Stock-based compensation			—				547				—				—				—				547
Tax effect from stock-based compensation			—				(43	)			—				—				—				(43	)
Purchase of treasury stock			—				—				—				—				(41,705	)			(41,705	)
Dividends paid ($0.20 per share)			—				—				—				(12,334	)			—				(12,334	)
Balance at June 30, 2007		$	637			$	63,758			$	(4,736	)		$	752,321			$	(41,705	)		$	770,275

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

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

		For the Six Months Ended June 30,
		2007				2006
		(Unaudited)
						(as restated)
Operating Activities
Net earnings		$	22,890			$	47,550
Adjustments to net earnings to net cash used in operating activities
Provision for loan losses			19,745				9,923
Depreciation and amortization			46,147				62,464
Decrease in valuation allowance in mortgage servicing rights			(408	)			—
Stock-based compensation expense			725				1,415
Net gain on the sale of assets			(1,777	)			(172	)
Net gain on loan sales			(53,298	)			(26,735	)
Net gain on sales of mortgage servicing rights			(5,725	)			(43,518	)
Net (gain) loss on securities classified as available for sale			(729	)			3,557
Proceeds from sales and securitizations of loans available for sale			10,433,710				7,048,928
Origination and repurchase of mortgage loans available for sale, net of principal repayments			(12,477,316	)			(7,950,092	)
Increase in accrued interest receivable			(3,386	)			(1,867	)
Increase in other assets			(25,438	)			(76,989	)
Increase in accrued interest payable			1,511				4,803
Net tax effect for stock grants issued			43				(831	)
(Decrease) increase in federal income taxes payable			(1,412	)			16,564
Decrease in payable for securities purchased			(249,694	)			—
(Decrease) increase in other liabilities			(2,813	)			3,033
Net cash used in operating activities			(2,297,225	)			(901,967	)
Investing Activities
Net change in other investments			(198	)			(2,363	)
Repayment of mortgage-backed securities held to maturity			178,823				223,937
Purchase of mortgage-backed securities held to maturity			—				(39,649	)
Proceeds from sale of investment securities available for sale			171,441				—
Purchase of investment securities available for sale, net of principal repayments			(202,794	)			—
Proceeds from sales of portfolio loans			693,283				814,560
Origination of portfolio loans, net of principal repayments			526,147				(392,329	)
Purchase of Federal Home Loan Bank stock			(51,457	)			—
Investment in unconsolidated subsidiary			774				—
Proceeds from the disposition of repossessed assets			47,927				22,699
Acquisitions of premises and equipment, net of proceeds			(14,793	)			(22,963	)
Proceeds from the sale of mortgage servicing rights			33,459				194,502
Net cash provided by investing activities			1,382,612				798,394
Financing Activities
Net increase (decrease) in deposit accounts			74,322				(80,181	)
Net increase in security repurchase agreements			714,612				85,481
Net increase in Federal Home Loan Bank advances			122,055				65,000
Issuance of junior subordinated debt			25,000				—
Net receipt of payments of loans serviced for others			6,226				2,127
Net receipt of escrow payments			24,298				19,307
Proceeds from the exercise of stock options			(146	)			3,045
Net tax effect of (benefit for) stock grants issued			(43	)			831
Dividends paid to stockholders			(12,334	)			(19,050	)
Purchase of treasury stock			(41,705	)			—
Net cash provided by financing activities			912,285				76,560
Net decrease in cash and cash equivalents			(2,328	)			(27,013	)
Beginning cash and cash equivalents			277,236				201,163
Ending cash and cash equivalents		$	274,908			$	174,150

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

		For the Six Months Ended June 30,
		2007				2006
		(Unaudited)
						(as restated)
Supplemental Disclosure of Cash Flow Information
Loans held for investment transferred to repossessed assets		$	56,315			$	53,388
Total interest payments made on deposits and other borrowing		$	339,634			$	269,130
Federal income taxes paid		$	—			$	8,353
Recharacterization of loans held for investment to mortgage-backed securities held to maturity		$	—			$	435,380
Reclassification of mortgage loans originated for portfolio to mortgage loans available for sale		$	167,943			$	156,584
Reclassification of mortgage loans originated available for sale then transferred to portfolio loans		$	693,283			$	814,560
Mortgage servicing rights resulting from sale or securitization of loans		$	154,000			$	113,538
Retention of residual interests in securitization transactions		$	29,398			$	8,733

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 the holding company for Flagstar Bank, FSB (the “Bank”), a federally chartered stock savings bank founded in 1987. With $16.2 billion in assets at June 30, 2007, Flagstar is the largest savings institution and second largest banking institution headquartered in Michigan.

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

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

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

Note 2. Basis of Presentation

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

     The unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. The accompanying interim consolidated 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 six month periods ended June 30, 2007, are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. For further information, you should refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2006. The Form 10-K/A can be found on the Company’s Investor Relations web page, at www.flagstar.com, and on the website of the Securities and Exchange Commission, at www.sec.gov.

Note 3. Recent Accounting Developments

Establishing Standards on Measuring Fair Value

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

Fair Value Option

     In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 allows entities to elect to measure those financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The election may be applied instrument by instrument, is irrevocable

once made and must be applied to the entire instrument and not to specified risks, specific cash flows or other limited aspects of that instrument. An entity is restricted in choosing the dates to elect the fair value option for an eligible item. SFAS 159 applies to the Company effective January 1, 2008. Management of the Company is currently evaluating the potential impact of SFAS 159 on the Company’s financial condition, results of operation or liquidity.

Note 4. Investment Securities

     As of June 30, 2007 and December 31, 2006, investment securities were comprised of the following (in thousands):

		June 30,				December 31,
		2007				2006
Securities — trading		$	20,487			$	—
Securities — available for sale
AAA-rated non-agency securities		$	922,425			$	497,089
AAA-rated agency securities			—				77,910
Non-investment grade residual securities			51,362				42,451
Total mortgage-backed securities — available for sale		$	973,787			$	617,450
Mortgage-backed securities — held to maturity
AAA-rated non-agency securities		$	—			$	332,362
AAA-rated agency securities			1,069,350				1,233,058
Total mortgage-backed securities — held to maturity		$	1,069,350			$	1,565,420
Other investments
Mutual funds		$	23,523			$	23,320
U.S. Treasury bonds			710				715
Total other investments		$	24,233			$	24,035

     At June 30, 2007, the Company had $20.5 million in securities classified as trading. These securities are non-investment grade residual assets from a private securitization that was closed in March with a secondary closing in June 2007. The securities are recorded at fair value with any unrealized gains and losses reported in the consolidated statement of earnings. Prior to this transaction, the Company had no securities classified as trading.

     At June 30, 2007, the Company had $973.8 million in securities classified as available for sale, which were comprised of AAA-rated agency securities, AAA-rated 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 to the extent they are temporary in nature. If losses are, at any time, deemed to have arisen from “other-than-temporary impairments” (OTTI), then they are reported as an expense for that period. There are no securities that have been in an unrealized loss position for twelve months or more. At June 30, 2007, $880.0 million of the securities classified as available for sale were pledged as collateral for security repurchase agreements.

     During the quarter ended March 31, 2007, the Company received written guidance from the OTS on regulatory capital treatment being used by the Bank for securities retained from a guaranteed mortgage securitization of fixed second mortgage loans completed in April 2006. The securities had been initially recorded as held to maturity because the underlying bonds were AAA-rated and insured by a private insurance company and, therefore, the Bank expected that the securities would receive 20% risk-weighted capital treatment rather than 50% or 100% risk-weighted treatment. At the time, the Company had both the ability and intent to hold the securities to maturity. In its guidance, the OTS advised the Company that the recharacterization of the underlying loans in the guaranteed mortgage securitization did not decrease the risk associated with carrying fixed second mortgage loans because the capital rules did not recognize private insurance companies as eligible guarantors. Because of this information received from the OTS, the Company’s capital treatment of the underlying securities changed significantly. As a result, the Company no longer intends to hold the securities to maturity and during the quarter ended March 31, 2007, reclassified $321.1 million in securities associated with the guaranteed mortgage securitization of fixed second mortgage loans completed in April 2006 to available for sale. Upon reclassification of the securities to available for sale, the Company recognized a $1.3 million loss, before taxes, to other comprehensive income. 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 June 30, 2007, the Company had $1.1 billion in AAA-rated mortgage-backed securities classified as held to maturity. Of such securities, $869.0 million were pledged as collateral for security repurchase agreements at June 30, 2007.

     The Company has other investments because of interim investment strategies in trust subsidiaries, collateral requirements required in swap and deposit transactions, and Community Reinvestment Act investment requirements.

U.S. Treasury bonds in the amount of $710,000 and $715,000 are pledged as collateral in association with the issuance of certain trust preferred securities at June 30, 2007 and December 31, 2006, respectively.

     As a result of management’s periodic reviews for impairment in accordance with EITF 99-20, "Recognition of Interest Income and Impairment on Certain Investments” (“EITF 99-20”), during the three and six month periods ended June 30, 2007 the Company recorded no impairment on residual securities. For the three month period ended June 30, 2006, the Company recorded no impairment on residual securities. For the six month period ended June 30, 2006, the Company recorded $3.6 million in impairment charges on residual securities. The $3.6 million in impairment charges incurred during the 2006 period on the Company’s residual securities available for sale resulted from changes in the interest rate environment, benchmarking procedures applied against updated industry data and third party valuation data that resulted in adjusting the critical prepayment speed assumption utilized in valuing such security. Specifically, the Company completed a private-label securitization of home equity lines of credit (“HELOC”) in the fourth quarter of 2005. As short-term interest rates increased throughout the fourth quarter of 2005 and the first quarter of 2006 and the yield curve flattened, the prepayment speed of the portfolio increased at a much higher rate than anticipated by management. Management attributed this to fixed rate loans that became available at lower rates than the adjustable-rate HELOC loans in the securitization pool. The Company also noted that this increased prepayment speed with HELOCs was occurring industry wide. The appropriateness of adjusting the model’s prepayment speed upward was validated with both a third party validation firm and with backtesting procedures. Based on this information, the Company adjusted the cash flow model to incorporate the updated prepayment speed during the first quarter of 2006. At March 31, 2006, a significant deterioration of the residual asset was determined to have occurred. The Company further analyzed the result and determined that approximately $3.6 million of the deterioration was other than temporary.

Note 5. Private-label Securitization Activity

     Certain cash flows received from securitization trusts outstanding were as follows (in thousands):

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Proceeds from new securitizations		$	98,231			$	—			$	719,097			$	—
Proceeds from collections reinvested in securitizations			48,719				18,953				90,949				63,203
Servicing fees received			1,907				973				3,122				2,342
Provision for loan repurchases for representations and warranties			(642	)			(227	)			(642	)			(727	)

Credit Risk on Securitization

     With respect to the issuance of private-label securitizations, the Company retains certain limited credit exposure in that it retains non-investment grade residuals in addition to customary representations and warranties. The Company does not have credit exposure associated with non-performing loans in securitizations beyond its investment in retained interests in non-investment grade residuals. The value of the Company’s retained interests reflects the Company’s credit loss assumptions as to the underlying collateral pool. To the extent that actual credit losses exceed the assumptions, the value of the Company’s non-investment grade residuals will be diminished.

     The following table summarizes the collateral balance associated with the Company’s servicing portfolio of sold loans and the balance of related non-investment grade residuals retained at June 30, 2007 (in thousands):

						Balance of Retained
						Assets with Credit
		Total Loans				Exposure
		Serviced				Residuals
Private -label securitizations		$	2,573,082			$	71,849
GSEs			18,934,886				—
Other investors			867				—
Total		$	21,508,835			$	71,849

     Mortgage loans that have been securitized in private-label securitizations at June 30, 2007 and 2006 that are sixty days or more past due and the credit losses incurred in the securitization trusts are presented below (in thousands):

		Total Principal								Principal Amount								Credit Losses
		Amount of Loans								Of Loans 60 Days								(net of recoveries)
		Outstanding								Or More Past Due								For the Six Months Ended
		June 30,								June 30,								June 30,
		2007				2006				2007				2006				2007				2006
Securitized mortgage loans		$	2,573,082			$	838,934			$	6,055			$	1,617			$	5,916			$	211

Note 6. Accumulated Other Comprehensive (Loss) Income

     The following table sets forth the ending balance in accumulated other comprehensive (loss) income for each component (in thousands):

		June 30,				December 31,
		2007				2006
Net gain on interest rate swap extinguishment		$	41			$	101
Net unrealized gain on derivatives used in cashflow hedges			2,870				4,193
Net unrealized (loss) gain on securities available for sale			(7,647	)			888
Ending balance		$	(4,736	)		$	5,182

     The following table sets forth the changes to other comprehensive (loss) income and the related tax effect for each component (in thousands):

		For the Six				For the Year
		Months Ended				Ended
		June 30,				December 31,
		2007				2006
Gain (reclassified to earnings) on interest rate swap extinguishment		$	(93	)		$	(1,795	)
Related tax benefit			33				628
Unrealized loss on derivatives used in cash flow hedging relationships			(4,920	)			(8,487	)
Related tax benefit			1,721				2,970
Reclassification adjustment for gains included in earnings relating to cash flow hedging relationships			2,886				5,603
Related tax expense			(1,010	)			(1,960	)
Unrealized (loss) gain on securities available for sale			(13,131	)			805
Related tax benefit (expense)			4,596				(416	)
Change		$	(9,918	)		$	(2,652	)

Note 7. Stock-Based Compensation

     On January 1, 2006, the Company adopted SFAS 123R, “Share-Based Payment,” using the modified prospective method. SFAS 123R requires all share-based payments to employees, including grants of employee stock options and stock appreciation rights, to be recognized as an expense in the consolidated statement of earnings based on their fair values. The total amount of compensation is determined based on the fair value of the options when granted and is expensed over the required service period, which is normally the vesting period of the options. SFAS 123R applies to awards granted or modified on or after January 1, 2006, and to any unvested awards that were outstanding at December 31, 2005. Consequently, compensation expense is recorded for prior option grants that vest on or after January 1, 2006, the date of adoption. In accordance with SFAS 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. For the six months ended June 30, 2007 and 2006, the excess tax effect totaled $(0.1) million and $0.8 million, respectively. During the six months ended June 30, 2007, there were no options granted.

     For the three months ended June 30, 2007 and 2006, the Company recorded stock-based compensation expense of $0.4 million ($0.2 million net of tax) and $0.7 million ($0.4 million net of tax), respectively, or less than $0.01 per share, diluted. For the six months ended June 30, 2007 and 2006, the company recorded stock-based compensation expense of $0.7 million ($0.5 million net of tax) and $1.4 million ($0.9 million net of tax), respectively, or less than $0.01 per share, diluted, for each such period.

     Cash-Settled Stock Appreciation Rights

     The Company issues cash-settled stock appreciation rights (“SAR”) to officers and key employees in connection with year-end compensation. Cash-settled stock appreciation rights generally vest 25% of the grant on each of the first four anniversaries of the grant date. The standard term of a SAR is seven years beginning on the grant date. Grants of SARs will be settled only in cash and once made, a grant of a SAR which will be settled only in cash may not be later amended or modified to be settled in common stock or a combination of common stock and cash.

     The Company used the following weighted average assumptions in applying the Black-Scholes model to determine the fair value of cash-settled stock appreciation rights issued and outstanding during the three months ended June 30, 2007: dividend yield of 3.20%; expected volatility range of 19.40% to 21.55%; a risk-free rate range of 4.50% to 4.59%; and an expected life range of 3.90 to 4.85 years. The cash-settled stock appreciation rights generally vest over a four year period at the rate of 25% on each anniversary date of the grant.

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

										Weighted Average
						Weighted Average				Grant Date
		Shares				Exercise Price				Fair Value
Stock Appreciation Rights Awarded:
Non-vested balance at December 31, 2006			328,873			$	16.28			$	2.99
Granted			590,692			$	14.34			$	2.20
Vested			(82,228	)		$	16.28			$	2.99
Forfeited			(2,217	)		$	14.48			$	2.20
Non-vested balance at June 30, 2007			835,120							$	2.43

     Restricted Stock Units

     The Company issues restricted stock units to officers, directors and key employees in connection with year-end compensation. Restricted stock generally will vest in 50% increments on each annual anniversary of the date of grant beginning with the first anniversary. The Company incurred expenses of approximately $0.3 million and $0.2 million with respect to restricted stock units for the quarter ended June 30, 2007 and 2006, respectively. For the six months ended June 30, 2007 and 2006, the Company incurred expenses of approximately, $0.6 million and $0.4 million, respectively. As of June 30, 2007, restricted stock units outstanding had a market value of $1.8 million.

Note 8. Stockholders’ Equity

     On January 31, 2007, the Company announced that the board of directors had adopted a Stock Repurchase Program under which the Company was authorized to repurchase up to $40.0 million worth of shares 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 June 30, 2007, $41.7 million has been used to repurchase 3.4 million shares under the plan.

Note 9. Segment Information

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

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

		For the Three Months Ended June 30, 2007
		Bank				Home Lending
		Operations				Operations				Elimination				Combined
2007:
Net interest income		$	30,520			$	19,397			$	—			$	49,917
Gain on sale revenue			—				33,754				—				33,754
Other income			18,553				5,137				—				23,690
Total net interest income and non-interest income			49,073				58,288				—				107,361
Earnings before federal income taxes			9,213				14,462				—				23,675
Depreciation and amortization			2,480				22,218				—				24,698
Capital expenditures			6,714				—				—				6,714
Identifiable assets			15,477,401				5,623,077				(4,921,000	)			16,179,478
Inter-segment income (expense)			36,908				(36,908	)			—				—

		For the Six Months Ended June 30, 2007
		Bank				Home Lending
		Operations				Operations				Elimination				Combined
2007:
Net interest income		$	64,013			$	37,875			$	—			$	101,888
Gain on sale revenue			—				59,023				—				59,023
Other income			29,205				9,114				—				38,319
Total net interest income and non-interest income			93,218				106,012				—				199,230
Earnings before federal income taxes			16,849				19,004				—				35,853
Depreciation and amortization			4,984				41,163				—				46,147
Capital expenditures			14,812				—				—				14,812
Identifiable assets			15,477,401				5,623,077				(4,921,000	)			16,179,478
Inter-segment income (expense)			64,058				(64,058	)			—				—

		For the Three Months Ended June 30, 2006
		Bank				Home Lending
		Operations				Operations				Elimination				Combined
2006:
Net interest income		$	38,738			$	12,000			$	—			$	50,738
Gain on sale revenue			—				44,582				—				44,582
Other income			8,867				8,123				—				16,990
Total net interest income and non-interest income			47,605				64,705				—				112,310
Earnings before federal income taxes			14,002				30,095				—				44,097
Depreciation and amortization			2,308				28,737				—				31,045
Capital expenditures			9,438				—				—				9,438
Identifiable assets			14,278,882				3,396,982				(2,450,000	)			15,225,864
Inter-segment income (expense)			18,375				(18,375	)			—				—

		For the Six Months Ended June 30, 2006
		Bank				Home Lending
		Operations				Operations				Elimination				Combined
2006:
Net interest income		$	82,687			$	26,726			$	—			$	109,413
Gain on sale revenue			—				70,253				—				70,253
Other income			14,251				19,690				—				33,941
Total net interest income and non-interest income			96,938				116,669				—				213,607
Earnings before federal income taxes			33,211				40,049				—				73,260
Depreciation and amortization			4,717				57,747				—				62,464
Capital expenditures			22,097				740				—				22,837
Identifiable assets			14,278,882				3,396,982				(2,450,000	)			15,225,864
Inter-segment income (expense)			34,425				(34,425	)			—				—

Note 10. 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 109,” (“FIN 48”), to clarify the accounting treatment for uncertain income tax positions when applying FASB Statement 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 positions is carried in other liabilities in the consolidated statement of financial position as of June 30, 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. As of June 30, 2007, there have been no material changes to the disclosures noted above.

     The Company’s income tax returns are subject to review and examination by federal, state, and local government authorities. On an ongoing basis, numerous federal, state, and local examinations are in progress and cover multiple tax years. As of June 30, 2007, the federal taxing authority has completed its examination of the Company through the taxable year ended December 31, 2003. The years open to examination by state and local government authorities vary by jurisdiction.

Note 11. Restatement of Previously Issued Consolidated Financial Statements

     Subsequent to filing the Company’s Form 10-Q for the quarterly period ended March 31, 2007, the Company determined that its previously issued Consolidated Statements of Cash Flows contained errors in the classification of certain loan and securitization activities. As a result, the Company has restated the accompanying unaudited Consolidated Statement of Cash Flows for the six months ended June 30, 2006.

     The restatement resulted from the misclassification of cash flows from the sale of certain mortgage loans originally held for investment, which had been inappropriately classified as operating activities, and cash flows from certain mortgage loans originated as available for sale, which had been inappropriately classified as investing activities. In accordance with SFAS 102, “Statement of Cash Flows-Exemption of Certain Enterprises and Classification of Cash Flows from Certain Securities Acquired for Resale,” cash flows from the sale of mortgage loans originally held for investment should have been classified as investing activities, rather than operating activities and cash flows from mortgage loans originated to be sold, should have been classified as operating activities, rather than as investing activities.

     The restatement also resulted from the treatment of capitalized mortgage servicing rights and residual interests retained from the sale or securitization of loans. Previously, the Company had treated the retention of such interests as cash activities. In accordance with SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” the mortgage servicing rights and residual interests do not exist until they are separated from the associated loans when the loans are sold. Specifically, upon the sale of loans, the amounts related to the mortgage servicing rights or residual interests are reclassified on the consolidated statement of financial condition from loans held for sale and are, therefore, a non-cash transaction. As a result, the Company will show these mortgage servicing rights and residual interests as non-cash transactions in the supplemental disclosures within the Consolidated Statement of Cash Flows.

     As a result of the errors described above, the restatement affects the classification of these activities and the subtotals of cash flows from operating and investing activities presented in the affected Consolidated Statement of Cash Flows, but they have no impact on the total Cash and Cash Equivalents for the six months ended June 30, 2006. The restatement does not affect the Unaudited Consolidated Statement of Financial Condition, Consolidated Statement of Earnings or Consolidated Statement of Stockholders’ Equity and Comprehensive Income as of or for the period ended June 30, 2006.

     The effects of the restatement on the Consolidated Statement of Cash Flows for the six month period ended June 30, 2006 are reflected in the following table.

		June 30, 2006
		(Unaudited)
		(Dollars in Thousands)
Originally Reported:
Proceeds from sales of loans available for sale		$	7,863,488
Origination and repurchase of loans available for sale, net of principal repayments			(8,231,544	)
Net cash used in operating activities		$	(368,859	)
Proceeds from sales of loans held for investment		$	—
Origination of portfolio loans, net of principal repayments			2,661
Decrease in mortgage servicing rights			(113,538	)
Net cash used in investing activities		$	265,286
As Restated:
Proceeds from sales of loans available for sale		$	7,048,928
Origination and repurchase of mortgage loans available for sale, net of principal repayments			(7,950,092	)
Net cash used in operating activities		$	(901,967	)
Proceeds from sales of portfolio loans		$	814,560
Origination of portfolio loans, net of principal repayments			(392,329	)
Decrease in mortgage servicing rights			—
Net cash used in investing activities		$	798,394
Difference:
Proceeds from sales of loans available for sale		$	(814,560	)
Origination and repurchase of mortgage loans available for sale, net of principal repayments			281,452
Net cash used in operating activities		$	(533,108	)
Proceeds from sales of portfolio loans		$	814,560
Origination of portfolio loans, net of principal repayments			(394,990	)
Decrease in mortgage servicing rights			113,538
Net cash used in investing activities		$	533,108

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

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

General

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

     Banking Operation. We provide a full range of banking services to consumers and small businesses in Michigan, Indiana and Georgia. Our banking operation involves the gathering of deposits and investing those deposits in duration-matched assets consisting primarily of mortgage loans originated by our home lending operation. The banking operation holds these loans in its loans held for investment portfolio in order to earn income based on the difference, or “spread,” between the interest earned on loans and investments and the interest paid for deposits and other borrowed funds. At June 30, 2007, we operated a network of 156 banking centers and provided banking services to approximately 121,000 customers. During the first six months of 2007, we opened five banking centers, including three in Michigan and two in Georgia. During the remainder of 2007, we expect to open four additional branches in the Atlanta, Georgia area, three additional branches in Michigan, and one in Indiana.

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

Critical Accounting Policies

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

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

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Return on average assets			0.38	%			0.76	%			0.29	%			0.63	%
Return on average equity			7.69	%			14.46	%			5.79	%			12.12	%
Efficiency ratio			67.3	%			55.5	%			72.1	%			61.1	%
Equity/assets ratio (average for the period)			4.99	%			5.22	%			4.93	%			5.18	%
Mortgage loans originated or purchased		$	7,162,855			$	4,900,850			$	12,652,185			$	9,249,003
Other loans originated or purchased		$	258,936			$	358,057			$	522,754			$	684,997
Mortgage loans sold		$	5,730,633			$	3,964,625			$	11,020,249			$	7,858,695
Interest rate spread — Bank only 1			1.30	%			1.30	%			1.26	%			1.45	%
Net interest margin — Bank only 2			1.43	%			1.54	%			1.42	%			1.64	%
Interest rate spread — Consolidated 1			1.27	%			1.41	%			1.21	%			1.48	%
Net interest margin — Consolidated 2			1.35	%			1.49	%			1.39	%			1.60	%
Dividend payout ratio			39.7	%			33.3	%			53.9	%			40.1	%
Average common shares outstanding			60,691				63,509				62,051				63,438
Average fully diluted shares outstanding			61,110				64,446				62,552				64,333
Charge-offs to average investment loans (annualized)			0.36	%			0.23	%			0.33	%			0.20	%

		June 30,				March 31,				December 31,				June 30,
		2007				2007				2006				2006
Equity-to-assets ratio			4.76	%			5.17	%			5.24	%			5.28	%
Core capital ratio 3			6.04	%			6.29	%			6.37	%			6.39	%
Total risk-based capital ratio 3			10.96	%			11.42	%			11.55	%			11.15	%
Book value per share		$	12.78			$	12.79			$	12.77			$	12.65
Number of common shares outstanding			60,260				62,360				63,605				63,529
Mortgage loans serviced for others		$	21,508,835			$	19,124,378			$	15,032,504			$	22,379,937
Capitalized value of mortgage servicing rights			1.24	%			1.19	%			1.15	%			1.03	%
Ratio of allowance to non-performing loans			53.8	%			65.0	%			80.2	%			79.2	%
Ratio of allowance to loans held for investment			0.70	%			0.61	%			0.51	%			0.42	%
Ratio of non-performing assets to total assets			1.18	%			1.04	%			1.03	%			0.99	%
Number of banking centers			156				155				151				145
Number of home lending centers			73				72				76				87
Number of salaried employees			2,689				2,522				2,510				2,548
Number of commissioned employees			462				448				444				530

Results of Operations

Net Earnings

     Three months. Net earnings for the three months ended June 30, 2007 was $15.1 million ($0.25 per share-diluted), a $13.5 million decrease from the $28.6 million ($0.44 per share-diluted) reported in the comparable 2006 period. The overall decrease resulted from a $4.2 million decrease in non-interest income, a $9.8 million increase in non-interest expense and a $6.4 million decrease in net interest income after provision for loan losses, offset in part by a $7.0 million decrease in federal income tax expense.

     Six months. Net earnings for the six months ended June 30, 2007 was $22.9 million ($0.37 per share-diluted), a $24.7 million decrease from the $47.6 million ($0.74 per share-diluted) reported in the comparable 2006 period. On a period-to-period comparison basis, there was a $6.9 million decrease in non-interest income, a $13.2 million increase in non-interest expense in the 2007 period, and a $17.4 million decrease in net interest income after provision for loan losses offset by a $12.7 million decrease in federal income tax expense.

Net Interest Income

     Three months. We recorded $49.9 million in net interest income before provision for loan losses for the three months ended June 30, 2007, a 1.6% decline from $50.7 million recorded for the comparable 2006 period. The decline reflects a $29.9 million increase in interest income offset by a $30.6 million increase in interest expense, primarily as a result of rates paid on deposits, FHLB advances and security repurchase agreements that increased more frequently and to a greater extent than the increase in yields earned on loans, mortgage-backed securities and other investments. In addition, in the three months ended June 30, 2007, as compared to the same period in 2006, we increased our average interest-earning assets by $1.1 billion and our average interest-paying liabilities by $1.2 billion.

     Average interest-earning assets as a whole repriced up 37 basis points during the three months ended June 30, 2007 while average interest-bearing liabilities repriced up 51 basis points during the same period, resulting in the decrease in our interest rate spread of 14 basis points to 1.27% for the three months ended June 30, 2007, from 1.41% for the comparable 2006 period. The Company recorded a net interest margin of 1.35% at June 30, 2007 as compared to 1.49% at June 30, 2006. At the Bank level, the net interest margin was 1.43% at June 30, 2007, as compared to 1.54% at June 30, 2006.

     Six months. We recorded $101.9 million in net interest income for the six months ended June 30, 2007, a 6.9% decline from the $109.4 million recorded for the comparable 2006 period. The decline reflects a $59.1 million increase in interest revenue offset by a $66.6 million increase in interest expense, primarily as a result of increasing rates paid on deposits, FHLB advances and security repurchase agreements, which were greater than the increase in yields earned on loans, mortgage-backed securities and other investments. In this same period, our average paying liabilities and our average interest-earning assets both increased $1.1 billon. This caused a decrease in the ratio of average interest-earning assets to average interest-bearing liabilities for the six months ended June 30, 2007 to 101% from 102% for the six months ended June 30, 2006. This decrease is reflected in the reduction in the net interest margin, to 1.39% for the second quarter 2007 from 1.60% for the second quarter 2006.

     Average Yields Earned and Rates Paid. The following table presents interest income from average interest-earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates at the Company rather than the Bank. Interest income from earning assets includes the amortization of net premiums and net deferred loan origination costs of $7.8 million and $9.4 million for the three months ended June 30, 2007 and 2006, respectively. For the six months ended June 30, 2007 and 2006, interest income from earning assets included $14.0 million and $16.0 million of amortization of net premiums and net deferred loan origination costs, respectively. Non-accruing loans were included in the average loan amounts outstanding.

		Three Months Ended June 30,
		2007												2006
		Average								Yield				Average								Yield
		Balance				Interest				Rate				Balance				Interest				Rate
		(Dollars in thousands)
Interest-earning assets:
Loans receivable, net		$	12,473,096			$	189,958				6.09	%		$	11,862,874			$	170,121				5.74	%
Mortgage-backed securities held to maturity			1,124,507				13,768				4.91	%			1,622,432				21,148				5.21	%
Other			1,201,833				18,738				6.25	%			164,713				1,379				3.35	%
Total interest-earning assets			14,799,436				222,464				6.02	%			13,650,019				192,648				5.65	%
Other assets			963,243												1,512,362
Total assets		$	15,762,679											$	15,162,381
Interest-bearing liabilities
Deposits		$	7,529,648				86,038				4.58	%		$	8,132,394				82,055				4.05	%
FHLB advances			5,513,739				64,882				4.72	%			4,007,320				42,497				4.25	%
Security repurchase agreements			1,331,090				18,041				5.44	%			1,045,762				13,051				5.01	%
Other			207,873				3,586				6.92	%			241,943				4,307				7.14	%
Total interest-bearing liabilities			14,582,350				172,547				4.75	%			13,427,419				141,910				4.24	%
Other liabilities			393,561												942,964
Stockholders’ equity			786,768												791,998
Total liabilities and stockholders’ equity		$	15,762,679											$	15,162,381
Net interest-earning assets		$	217,086											$	222,600
Net interest income						$	49,917											$	50,738
Interest rate spread 1											1.27	%											1.41	%
Net interest margin 2											1.35	%											1.49	%
Ratio of average interest- earning assets to average interest-bearing liabilities											101	%											102	%

		Six Months Ended June 30,
		2007												2006
		Average								Yield				Average								Yield
		Balance				Interest				Rate				Balance				Interest				Rate
		(Dollars in thousands)
Interest-earning assets:
Loans receivable, net		$	12,386,759			$	377,208				6.09	%		$	12,094,447			$	341,893				5.58	%
Mortgage-backed securities held to maturity			1,231,184				28,385				4.61	%			1,515,919				38,300				5.05	%
Other			1,177,924				37,440				6.36	%			136,403				3,754				5.50	%
Total interest-earning assets			14,795,867				443,033				5.99	%			13,746,769				383,947				5.59	%
Other assets			1,221,206												1,392,172
Total assets		$	16,017,073											$	15,138,941
Interest-bearing liabilities
Deposits		$	7,555,840				171,064				4.58	%		$	8,135,310				157,272				3.91	%
FHLB advances			5,679,606				132,734				4.71	%			4,001,745				82,470				4.17	%
Security repurchase agreements			1,176,451				30,434				5.22	%			1,122,118				26,546				4.78	%
Other			230,416				6,913				6.07	%			250,078				8,246				6.67	%
Total interest-bearing liabilities			14,642,313				341,145				4.78	%			13,509,251				274,534				4.11	%
Other liabilities			584,350												844,862
Stockholders’ equity			790,410												784,828
Total liabilities and stockholders’ equity		$	16,017,073											$	15,138,941
Net interest-earning assets		$	153,554											$	237,518
Net interest income						$	101,888											$	109,413
Interest rate spread 1											1.21	%											1.48	%
Net interest margin 2											1.39	%											1.60	%
Ratio of average interest- earning assets to average interest-bearing liabilities											101	%											102	%