UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2008

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)

     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 definition 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		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

     As of May 1, 2008, 60,335,101 shares of the registrant’s common stock, $0.01 par value, were issued and outstanding.

 

 

FORWARD-LOOKING STATEMENTS

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

     There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed under the heading “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 and Part II, Item 1A of this Company’s Quarterly Report on Form 10-Q, including: (1) general business, economic and political conditions may significantly affect our earnings; (2) if we cannot effectively manage the impact of the volatility of interest rates, our earnings could be adversely affected; (3) the value of our mortgage servicing rights could decline with reduction in interest rates; (4) gains on mortgage servicing rights may be difficult to realize due to disruption in the capital markets; (5) we use estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; (6) current and further deterioration in the housing and commercial real estate markets may lead to increased loss severities and further worsening of delinquencies and non-performing assets in our loan portfolios. Consequently, our allowance for loan losses may not be adequate to cover actual losses, and we may be required to materially increase our reserves; (7) our secondary market reserve for losses could be insufficient; (8) our home lending profitability could be significantly reduced if we are not able to resell mortgages; (9) our commercial real estate and commercial business loan portfolios carry heightened credit risk; (10) we have substantial risks in connection with securitizations and loan sales; (11) our ability to borrow funds and raise capital could be limited, which could adversely affect our earnings; (12) we may be required to raise capital at terms that are materially adverse to our stockholders; (13) our holding company is dependent on the Bank for funding of obligations and dividends; (14) we may not be able to replace key members of senior management or attract and retain qualified relationship managers in the future; (15) the network and computer systems on which we depend could fail or experience a security breach; (16) our business is highly regulated; (17) our business has volatile earnings because it operates based on a multi-year cycle; (18) our loans are geographically concentrated in only a few states; (19) a larger percentage or our loans are collateralized by real estate, and an adverse change in the real estate market may result in losses and adversely affect our portfolio; (20) a significant part of our business strategy involves adding new branch locations, and our failure to grow may adversely affect our business, prospects, and results of operations and financial condition; (21) we are subject to heightened regulatory scrutiny with respect to bank secrecy and anti-money laundering statutes and regulations; and (22) certain hedging strategies that we use to manage our investment in mortgage servicing rights may be ineffective to offset any adverse changes in the fair value of these assets due to changes in interest rate; and (23) we depend on our institutional counterparties to provide services that are critical to our business. If one or more of our institutional counterparties defaults on its obligations to us or becomes insolvent, it could materially adversely affect our earnings, liquidity, capital position and financial condition.

     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, 2008 (unaudited) and December 31, 2007.
Unaudited Consolidated Statements of Operations — For the three months ended March 31, 2008 and 2007.
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) — For the three months ended March 31, 2008 (unaudited) and for the year ended December 31, 2007.
Unaudited Consolidated Statements of Cash Flows — For the three months ended March 31, 2008 and 2007.
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, as Furnished by the Chief Executive Officer
Section 906 Certification, as Furnished by the Chief Financial Officer

Flagstar Bancorp, Inc.

		At March 31,				At December 31,
		2008				2007
		(Unaudited)
Assets
Cash and cash items		$	138,351			$	129,992
Interest-bearing deposits			209,358				210,177
Cash and cash equivalents			347,709				340,169
Securities classified as trading			36,308				13,703
Securities classified as available for sale			2,364,007				1,308,608
Mortgage-backed securities held to maturity (fair value $1.3 billion at December 31, 2007)			—				1,255,431
Other investments			28,402				26,813
Loans available for sale			3,137,410				3,511,310
Loans held for investment			8,574,024				8,134,397
Less: allowance for loan losses			(121,400	)			(104,000	)
Loans held for investment, net			8,452,624				8,030,397
Total interest-earning assets			14,228,109				14,356,439
Accrued interest receivable			55,806				57,888
Repossessed assets, net			136,490				109,274
Federal Home Loan Bank stock			348,944				348,944
Premises and equipment, net			242,545				237,652
Mortgage servicing rights at fair value			486,584				—
Mortgage servicing rights, net			11,291				413,986
Other assets			275,192				138,561
Total assets		$	15,923,312			$	15,792,736
Liabilities and Stockholders’ Equity Liabilities
Deposits		$	8,427,804			$	8,236,744
Federal Home Loan Bank advances			6,207,000				6,301,000
Security repurchase agreements			108,000				108,000
Long term debt			248,685				248,685
Total interest-bearing liabilities			14,991,489				14,894,429
Accrued interest payable			40,248				47,070
Secondary market reserve			27,400				27,600
Other liabilities			160,521				130,659
Total liabilities			15,219,658				15,099,758
Commitments and Contingencies
Stockholders’ Equity
Common stock $.01 par value, 150,000,000 shares authorized; 63,667,079 and 63,656,979 shares issued, and 60,325,344 and 60,270,624 shares outstanding, at March 31, 2008, and December 31, 2007, respectively			637				637
Additional paid in capital			63,775				64,350
Accumulated other comprehensive loss			(18,611	)			(11,495	)
Retained earnings			698,983				681,165
Treasury stock, at cost, 3,341,735 shares at March 31, 2008, and 3,386,355 at December 31, 2007			(41,130	)			(41,679	)
Total stockholders’ equity			703,654				692,978
Total liabilities and stockholders’ equity		$	15,923,312			$	15,792,736

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

Flagstar Bancorp, Inc.

		For the Three Months Ended
		March 31,
		2008				2007
		(Unaudited)
Interest Income
Loans		$	176,294			$	187,252
Mortgage-backed securities			15,576				14,617
Securities available for sale			15,591				13,598
Interest-bearing deposits			2,768				3,501
Other			624				1,602
Total interest income			210,853				220,570
Interest Expense
Deposits			84,050				85,026
FHLB advances			64,558				67,852
Security repurchase agreements			3,155				12,393
Other			4,292				2,448
Total interest expense			156,055				167,719
Net interest income			54,798				52,851
Provision for loan losses			34,262				8,293
Net interest income after provision for loan losses			20,536				44,558
Non-Interest Income
Loan fees and charges			884				1,229
Deposit fees and charges			6,031				4,978
Loan administration			(17,046	)			2,183
Net gain on loan sales			63,425				25,154
Net gain on sales of mortgage servicing rights			287				115
Net gain on sales of securities available for sale			—				729
Loss on trading securities			(9,482	)			—
Other fees and charges			8,575				5,078
Total non-interest income			52,674				39,466
Non-Interest Expense
Compensation and benefits			53,993				39,492
Occupancy and equipment			19,821				16,768
Communication			1,785				1,074
Other taxes			891				(573	)
General and administrative			12,678				15,084
Total non-interest expense			89,168				71,845
(Loss) earnings before federal income taxes			(15,958	)			12,179
(Benefit) provision for federal income taxes			(5,359	)			4,420
Net (Loss) Earnings		$	(10,599	)		$	7,759
(Loss) earnings per share
Basic		$	(0.18	)		$	0.12
Diluted		$	(0.17	)		$	0.12

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

Flagstar Bancorp, Inc.

										Accumulated
						Additional				Other												Total
		Common				Paid in				Comprehensive				Retained				Treasury				Stockholders’
		Stock				Capital				Income (Loss)				Earnings				Stock				Equity
Balance at January 1, 2007		$	636			$	63,223			$	5,182			$	743,193			$	—			$	812,234
Net loss			—				—				—				(39,225	)			—				(39,225	)
Reclassification of gain on swap extinguishment			—				—				(101	)			—				—				(101	)
Change in net unrealized loss on swaps used in cash flow hedges			—				—				(3,957	)			—				—				(3,957	)
Change in net unrealized loss on securities available for sale			—				—				(12,619	)			—				—				(12,619	)
Total comprehensive loss			—				—				—				—				—				(55,902	)
Adjustment to initially apply FIN 48			—				—				—				(1,428	)			—				(1,428	)
Stock options exercised			1				69				—				—				—				70
Stock-based compensation			—				1,083				—				—				—				1,083
Tax effect from stock-based compensation			—				(25	)			—				—				—				(25	)
Purchase of treasury stock			—				—				—				—				(41,705	)			(41,705	)
Issuance of treasury stock			—				—				—				—				26				26
Dividends paid ($0.35 per share)			—				—				—				(21,375	)			—				(21,375	)
Balance at December 31, 2007 (Unaudited)			637				64,350				(11,495	)			681,165				(41,679	)			692,978
Net loss			—				—				—				(10,599	)			—				(10,599	)
Reclassification of gain on dedesignation of swaps used in cash flow hedges			—				—				(236	)			—				—				(236	)
Change in net unrealized loss on securities available for sale			—				—				(6,880	)			—				—				(6,880	)
Total comprehensive loss			—				—				—				—				—				(17,715	)
Cumulative effect adjustment due to change of accounting for residential mortgage servicing rights			—				—				—				28,417				—				28,417
Restricted stock issued			—				(549	)			—				—				549				—
Stock options exercised			—				42				—				—				—				42
Stock-based compensation			—				130				—				—				—				130
Tax effect from stock-based compensation			—				(198	)			—				—				—				(198	)
Balance at March 31, 2008		$	637			$	63,775			$	(18,611	)		$	698,983			$	(41,130	)		$	703,654

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

Flagstar Bancorp, Inc.

		For the Three Months Ended
		March 31,
		2008				2007
		(Unaudited)
Operating Activities
Net (loss) earnings		$	(10,599	)		$	7,759
Adjustments to net (loss) earnings to net cash used in operating activities
Provision for loan losses			34,262				8,293
Depreciation and amortization			6,434				21,449
Decrease in valuation allowance in mortgage servicing rights			(119	)			(448	)
Loss on fair value of residential mortgage servicing rights, net of hedging gains			46,961				—
Stock-based compensation expense			130				374
Loss on interest rate swaps			1,611				—
Net gain on the sale of assets			(370	)			(878	)
Net gain on loan sales			(63,425	)			(25,154	)
Net gain on sales of mortgage servicing rights			(287	)			(115	)
Net gain on securities classified as available for sale			—				(729	)
Unrealized loss on trading securities			9,482				—
Proceeds from sales of loans available for sale			6,271,453				4,714,831
Origination and repurchase of mortgage loans available for sale, net of principal repayments			(6,489,510	)			(5,380,030	)
Decrease in accrued interest receivable			2,082				2,446
(Increase) decrease in other assets			(123,830	)			12,817
(Decrease) increase in accrued interest payable			(6,822	)			2,295
Net tax effect for stock grants issued			198				59
(Decrease) increase in federal income taxes payable			(14,592	)			6,204
Decrease in payable for securities purchased			—				(249,694	)
Increase (decrease) in other liabilities			10,244				(5,628	)
Net cash used in operating activities			(326,697	)			(886,149	)
Investing Activities
Net change in other investments			(1,589	)			262
Repayment of mortgage-backed securities held to maturity			90,846				92,238
Proceeds from sale of investment securities available for sale			—				171,441
Repayment (purchase) of investment securities available for sale			26,157				(218,023	)
Proceeds from sales of portfolio loans			—				620,866
Origination of portfolio loans, net of principal repayments			100,244				310,154
Purchase of Federal Home Loan Bank stock			—				(51,457	)
Proceeds from the disposition of repossessed assets			18,990				26,255
Acquisitions of premises and equipment, net of proceeds			(9,815	)			(8,102	)
Proceeds from the sale of mortgage servicing rights			—				116
Net cash provided by investing activities			224,833				943,750
Financing Activities
Net increase in deposit accounts			191,060				351,894
Net decrease in security repurchase agreements			—				(365,380	)
Net (decrease) increase in Federal Home Loan Bank advances			(94,000	)			197,000
Net receipt of payments of loans serviced for others			5,213				8,170
Net receipt of escrow payments			7,287				6,335
Proceeds from the exercise of stock options			42				(87	)
Net tax effect of stock grants issued			(198	)			(59	)
Dividends paid to stockholders			—				(6,321	)
Purchase of treasury stock			—				(16,466	)
Net cash provided by financing activities			109,404				175,086
Net increase in cash and cash equivalents			7,540				232,687
Beginning cash and cash equivalents			340,169				277,236
Ending cash and cash equivalents		$	347,709			$	509,923

		For the Three Months Ended
		March 31,
		2008				2007
		(Unaudited)
Supplemental disclosure of cash flow information:
Loans held for investment transferred to repossessed assets		$	62,699			$	26,720
Total interest payments made on deposits and other borrowings		$	162,876			$	166,303
Federal income taxes paid		$	—			$	—
Reclassification of mortgage loans originated for portfolio to mortgage loans available for sale		$	—			$	693,283
Reclassification of mortgage loans originated available for sale then transferred to portfolio loans		$	592,874			$	125,721
Mortgage servicing rights resulting from sale or securitization of loans		$	100,752			$	68,034
Reclassification of mortgage backed securities held to maturity to securities available for sale		$	1,163,681			$	315,344

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

Flagstar Bancorp, Inc.

Note 1. Nature of Business

     Flagstar Bancorp, Inc. (“Flagstar” or the “Company”), is the holding company for Flagstar Bank, FSB (the “Bank”), a federally chartered stock savings bank founded in 1987. With $15.9 billion in assets at March 31, 2008, Flagstar is the largest financial 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 it 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”) have occasionally been sold by the Company in transactions separate from the sale of the underlying mortgages. The Company may also retain a portion of its loan production on its statement of financial condition as loans held for investment in order to enhance the Company’s leverage ability and receive the 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 financial statements are unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three month period ended March 31, 2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. 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, 2007. The Form 10-K can be found on the Company’s Investor Relations web page, at www.flagstar.com, and on the website of the Securities and Exchange Commission, at www.sec.gov.

Note 3. Recent Accounting Developments

     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,” establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements. SFAS 157 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 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. The Company adopted SFAS 157 as of January 1, 2008. See Note 4, “Fair Value Accounting” for further information.

     In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The decision to elect the fair value option may be applied instrument by instrument, is irrevocable and must be applied to the entire instrument and not to specified risks, specific cash flows or portions of that instrument. An entity is restricted in choosing the dates to elect the fair value option for an eligible item. The Company adopted SFAS 159 effective January 1, 2008. See Note 4, “Fair Value Accounting” for further information.

     In November 2007, the FASB issued SFAS 160 “Non-controlling Interest in Consolidated Financial Statements — an amendment to ARB No. 51.” SFAS 160 changes the way consolidated net earnings are presented. The new standard requires consolidated net earnings to be reported at amounts attributable to both the parent and the non-controlling interest on the face of the consolidated statement of earnings. The adoption of this statement will result in more transparent reporting of the net earnings attributable to non-controlling interests. The statement establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary which does not result in deconsolidation. The statement also requires that a parent recognize a gain or loss in net earnings when a subsidiary is deconsolidated. The adoption of SFAS 160 is effective for the Company on January 1, 2009. Management does not expect that the adoption of this statement will have a material impact on the Company’s consolidated financial condition, results of operation or liquidity.

     In November 2007, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin 109 (“SAB 109”). SAB 109 expresses the views of the SEC regarding the written loan commitments that are accounted for at fair value through earnings under generally accepted accounting principles. SAB 109 supersedes SAB 105 and expresses the current view of the staff that, consistent with the guidance in SFAS 156 “Accounting for Servicing of Financial Assets” and SFAS 159 “The Fair Value Option for Financial Assets and Financial Liabilities,” the expected net future cash flows related to the associated servicing of the loans should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The adoption of SAB 109 is effective on a prospective basis for the Company’s derivative loan commitments issued or modified on or after January 1, 2008. The effect of this change resulted in an increase in the Company’s gain on loan sales by approximately $12 million during the three month period ended March 31, 2008.

     In December 2007, the SEC issued Staff Accounting Bulletin 110 (“SAB 110”). SAB 110 expresses the views of the SEC regarding the use of a “simplified” method in developing an estimate of the expected term of “plain vanilla” share options as discussed in SAB 107 and issued under SFAS 123 (revised 2004), “Share-Based Payment.” The SEC indicated in SAB 107 that it would accept a company’s decision to use the simplified method, regardless of whether the company had sufficient information to make more refined estimates of expected term. Under SAB 107, the SEC had believed detailed information about employee exercise behavior would be readily available and therefore would not expect companies to use the simplified method for share option grants after December 31, 2007. SAB 110 states that the SEC will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. The Company does not utilize the simplified method, and therefore management does not expect that this pronouncement will have an impact on the Company’s consolidated financial condition, results of operation or liquidity.

     In March 2008, the FASB issued SFAS 161 “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133.” SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves on the transparency of financial reporting. In adopting SFAS 161, entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial positions, financial performance and cash flows. Because this pronouncement affects only disclosures, this pronouncement will not have an impact on the Company’s consolidated financial condition, results of operation or liquidity. The adoption of SFAS 161 is effective for fiscal years beginning after November 15, 2008, with early adoption permitted. The Company does not expect to elect early adoption of SFAS 161.

Note 4. Fair Value Accounting

     

     On January 1, 2008, the Company adopted SFAS 157, “Fair Value Measurements” and SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 was issued to establish a uniform definition of fair value. The definition of fair value under SFAS 157 is market-based as opposed to company-specific and includes the following:

	•		Defines fair value as the price that would be received to sell an asset or paid to transfer a liability, in either case through an orderly transaction between market participants at a measurement date, and establishes a framework for measuring fair value;
	•		Establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date;
	•		Nullifies the guidance in EITF 02-3, which required the deferral of profit at inception of a transaction involving a derivative financial instrument in the absence of observable data supporting the valuation technique;
	•		Eliminates large position discounts for financial instruments quoted in active markets and requires consideration of the company’s creditworthiness when valuing liabilities; and
	•		Expands disclosures about instruments that are measured at fair value.

     SFAS 159 provides an option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized Company commitments and written loan commitments not previously recorded at fair value. In accordance with the provisions of SFAS 159, the Company, as of January 1, 2008, elected the fair value option for certain non-investment grade residual securities from private-label securitizations. The Company elected fair value on these residual securities and reclassified these investments to securities — trading to provide consistency in the accounting for the Company’s residual interests. The Company had recognized a permanent impairment on these residual securities as of December 31, 2007, thereby reducing the carrying value to fair value at that time. Thus, the fair value election had no impact on opening retained earnings. The decrease in fair value for the first quarter of 2008 of $7.5 million, before taxes, was included within the total loss on trading securities reported in the Company’s Consolidated Statement of Operations.

     Effective January 1, 2008, the Company elected the fair value measurement method for residential MSRs under SFAS 156 “Accounting for Servicing of Financial Assets an amendment of FASB 140.” Upon election, the carrying value of the residential MSRs was increased to fair value by recognizing a cumulative effect adjustment to retained earnings of $43.7 million before tax, or $28.4 million after tax. Management elected the fair value measurement method of accounting for residential MSRs to be consistent with the fair value accounting method required for its risk management strategy to hedge the fair value of these assets. Changes in the fair value of MSRs, as well as changes in fair value of the related derivative instruments, are recognized each period within loan administration income (loss) on the consolidated statement of operations.

Determination of Fair Value

     The following is a description of the Company’s valuation methodologies for assets measured at fair value which have been applied to all assets carried at fair value, whether as a result of the adoption of SFAS 159 or previously carried at fair value.

     The Company has an established process for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon internally developed models that use primarily market-based or independently-sourced market parameters, including interest rate yield curves and option volatilities. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, creditworthiness, liquidity and unobservable parameters that are applied consistently over time. Any changes to the valuation methodology are reviewed by management to determine appropriateness of the changes. As markets develop and the pricing for certain products becomes more transparent, the Company expects to continue to refine its valuation methodologies.

     The methods described above may produce a fair value estimate that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in different estimates of fair values of the same financial instruments at the reporting date.

Valuation Hierarchy

     SFAS 157 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy favors the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows.

•

Level 1 — Fair value is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets in which the Company can participate.

•

Level 2 — Fair value is based upon quoted prices for similar (i.e., not identical) assets and liabilities in active markets, and other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•

Level 3 — Fair value is based upon financial models using primarily unobservable inputs.

     A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

     The following is a description of the valuation methodologies used by the Company for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

     Assets

     Securities classified as trading. These securities are non-investment grade residual securities that arose from private-label securitizations of the Company in 2005, 2006 and 2007. These non-investment grade residual securities do not trade in an active, open market with readily observable prices and are therefore classified within the Level 3 valuation hierarchy. Accordingly, the fair value of residual securities is determined by discounting estimated net future cash flows using expected

prepayment rates and discount rates that approximate current market rates. Estimated net future cash flows include assumptions related to expected credit losses on these securities. The Company maintains a model that evaluates the default rate and severity of loss on the residual securities’ collateral, considering such factors as loss experience, delinquencies, loan-to-value ratio, borrower credit scores and property type.

     Securities classified as available for sale. Where quoted prices for securities are available in an active market, those securities are classified within Level 1 of the valuation hierarchy. If such quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of securities with similar characteristics, which would generally be classified within Level 2 of the valuation hierarchy, include certain AAA-rated U.S. government sponsored agency securities. Due to illiquidity in the markets, the Company determined the fair value of certain AAA-rated non-agency securities using internal valuation models and therefore classified them within the Level 3 valuation hierarchy as these models utilize significant inputs which are unobservable.

     Other Investments. Other investments are primarily comprised of various mutual fund holdings. These mutual funds trade in an active market and quoted prices are available. Other investments are classified within Level 1 of the valuation hierarchy.

     Loans held for investment. The Company does not record these loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS 114, “Accounting by Creditors for Impairment of a Loan,” (SFAS 114). The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2008, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as a nonrecurring Level 2 valuation.

     Repossessed assets. Loans on which the underlying collateral has been repossessed are adjusted to fair value upon transfer to repossessed assets. Subsequently, repossessed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as a nonrecurring Level 2 valuation.

     Mortgage Servicing Rights. The Company has obligations to service residential first mortgage loans and consumer loans (i.e. home equity lines of credit (“HELOC’s”) and second mortgage loans obtained through private-label securitization transactions). Effective January 1, 2008, the Company elected the fair value measurement method for residential MSRs under SFAS 156. Upon this election, residential MSRs began to be accounted for at fair value on a recurring basis. Consumer servicing assets are periodically evaluated for impairment.

     Residential Mortgage Servicing Rights

     The current market for residential mortgage servicing rights is not sufficiently liquid to provide participants with quoted market prices. Therefore, the Company uses an option-adjusted spread valuation approach to determine the fair value of residential MSRs. This approach consists of projecting servicing cash flows under multiple interest rate scenarios and discounting these cash flows using risk-adjusted discount rates. The key assumptions used in the valuation of residential MSRs include mortgage prepayment speeds and discount rates. Management periodically obtains third-party valuations of the residential MSR portfolio to assess the reasonableness of the fair value calculated by its internal valuation model. Due to the nature of the valuation inputs, residential MSRs are classified within Level 3 of the valuation hierarchy. See Note 9, “Mortgage Servicing Rights” for the key assumptions used in the residential MSR valuation process.

     Consumer Servicing Assets

     Consumer servicing assets are subject to periodic impairment testing. A valuation model, which utilizes a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a discount rate determined by management, is used in the completion of impairment testing. If the valuation model reflects a value less than the carrying value, consumer servicing assets are adjusted to fair value through a valuation allowance as determined by the model. As such, the Company classifies consumer servicing assets subject to nonrecurring fair value adjustments as Level 3 valuations.

     Derivative Financial Instruments. Certain classes of derivative contracts are listed on an exchange and are actively traded, and are therefore classified within Level 1 of the valuation hierarchy. These include U.S. Treasury futures, U.S.

Treasury options and interest rate swaps. The Company’s forward loan commitments may be valued based on quoted prices for similar assets in an active market with inputs that are observable and are classified within Level 2 of the valuation hierarchy. Rate lock commitments are valued using internal models with significant unobservable market parameters and therefore are classified within Level 3 of the valuation hierarchy.

     Assets measured at fair value on a recurring basis

     The following table presents the financial instruments carried at fair value as of March 31, 2008, by caption on the Consolidated Statement of Financial Condition and by SFAS 157 valuation hierarchy (as described above) (dollars in thousands):

														Total carrying
														value in the
														Consolidated
														Statement of
														Financial
		Level 1				Level 2				Level 3				Condition
Securities classified as trading:
Residual interests		$	—			$	—			$	36,308			$	36,308
Securities classified as available for sale			—				1,569,781				794,226				2,364,007
Residential mortgage servicing rights			—				—				486,584				486,584
Other investments			28,402				—				—				28,402
Derivative financial instruments
Rate lock commitments:			—				—				58,528				58,528
Forward agency and loan sales			—				(25,083	)			—				(25,083	)
Treasury futures			9,505				—				—				9,505
Treasury options			(3,552	)			—				—				(3,552	)
Interest rate swaps			(1,963	)			—				—				(1,963	)
Total assets at fair value		$	32,392			$	1,544,698			$	1,375,646			$	2,952,736

     Changes in Level 3 fair value measurements

     A determination to classify a financial instrument within Level 3 of the valuation hierarchy is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources); accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are included within the valuation methodology. Also, the Company manages the risk associated with the observable components of Level 3 financial instruments using securities and derivative positions that are classified within Level 1 or Level 2 of the valuation hierarchy; these Level 1 and Level 2 risk management instruments are not included below, and therefore the gains and losses in the tables do not reflect the effect of the Company’s risk management activities related to such Level 3 instruments.

     Fair value measurements using significant unobservable inputs

     The table below includes a rollforward of the Consolidated Statement of Financial Condition amounts for the three months ended March 31, 2008 (including the change in fair value) for financial instruments classified by the Company within Level 3 of the valuation hierarchy (in thousands).

																						Changes in
																						unrealized
																						gains and
																						(losses)
																						related to
						Total				Purchases,												financial
						realized/				issuances				Transfers								instruments
		Fair value,				unrealized				and				in and/or				Fair value,				held at
Three months ended		January 1,				gains/(losses)				settlements,				out of				March 31,				March 31,
March 31, 2008		2008				(c)				net				Level 3				2008				2008(c)
Securities classified as trading:
Residual interests(a)		$	13,703			$	(9,482	)		$	—			$	32,087			$	36,308			$	—
Securities classified as available for sale(b)			33,333				(2,367	)			(24,652	)			787,912	(e)			794,226				(2,367	)
Residential mortgage servicing rights (d)			445,962				(60,058	)			100,680				—				486,584				—
Derivative financial
Instruments:
Rate lock commitments			26,129				—				32,399				—				58,528				—
Totals		$	519,127			$	(71,907	)		$	108,427			$	819,999			$	1,375,646			$	(2,367	)

     The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These include assets that are measured at the lower of cost or market and had a fair value below cost at the end of the period as summarized below (in thousands).

Assets Measured at Fair Value on a Nonrecurring Basis

		Balance at
		March 31, 2008				Level 1				Level 2				Level 3
Loans held for investment		$	125,239			$	—			$	125,239			$	—
Repossessed assets			136,490				—				136,490				—
Consumer servicing assets			11,291				—				—				11,291
Totals		$	273,020			$	—			$	261,729			$	11,291

Note 5. Investment Securities

     As of March 31, 2008 and December 31, 2007, investment securities were comprised of the following (in thousands):

		March 31,				December 31,
		2008				2007
Securities — trading		$	36,308			$	13,703
Securities — available for sale
AAA-rated non-agencies		$	794,226			$	821,245
AAA-rated U.S. government sponsored agencies			1,569,781				454,030
Non-investment grade residual			—				33,333
Total securities — available for sale		$	2,364,007			$	1,308,608
Mortgage-backed securities — held to maturity
AAA-rated U.S. government sponsored agencies		$	—			$	1,255,431
Other investments
Mutual funds		$	27,700			$	26,107
U.S. Treasury bonds			702				706
Total other investments		$	28,402			$	26,813

     As of January 1, 2008, non-investment grade residuals amounting to $33.3 million that were classified as available for sale securities were reclassified to trading securities in accordance with SFAS 159. No gain or loss was recorded upon reclassification. See Note 4, “ Fair Value Accounting” for further information. At March 31, 2008, the Company had $36.3 million in securities classified as trading. These securities are non-investment grade residual securities from private-label securitizations. The securities are recorded at fair value with any unrealized gains and losses reported in the consolidated statement of operations. During the quarter ended March 31, 2008, the Company recognized losses related to these trading securities of $9.5 million as a result of the decrease in the fair value of the securities. The decline in the fair value of these residual securities was principally due to the increase in the actual and expected losses in the second mortgages and home equity lines of credit that underly this asset. The Company had no losses on trading securities during the quarter ended March 31, 2007.

     At March 31, 2008, the Company had $2.4 billion in securities classified as available for sale which were comprised of AAA-rated U.S. government sponsored agency securities and AAA-rated non-agency securities. Securities available for sale are carried at fair value, with unrealized gains and losses reported as a component of other comprehensive income (loss) 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 were no losses deemed OTTI for the three month period ended March 31, 2008.

     At March 31, 2008 and December 31, 2007, $1.3 billion and $570.0 million of the securities classified as available for sale, respectively, were pledged as collateral for security repurchase agreements or FHLB borrowings. Contractual maturities of the securities generally range from 2010 to 2035.

     As of March 31, 2008, the Company reclassified $1.2 billion of mortgage-backed securities, which were comprised of AAA-rated U.S. government sponsored agency securities, from held-to-maturity to available-for sale. Upon reclassification, the Company recorded a decrease in the carrying value of such securities of $8.5 million with a corresponding increase to other comprehensive loss. The reclassification was required because the Company’s management indicated it no longer had the intent to hold such securities to maturity because of its sale subsequent to March 31, 2008 of a significant portion of these securities. Management does not believe that its change of intent with respect to these securities has any affect on its intent with respect to any other of the Company’s investment securities.

     As a result of the reclassification noted above at March 31, 2008, the Company had no securities classified as held to maturity, although it held $1.3 billion of AAA-rated U.S. government sponsored agency securities as held to maturity at December 31, 2007. Of such securities, at December 31, 2007, $107.3 million were pledged as collateral for security repurchase agreements. Additionally, $0.3 million were pledged for certain swap agreements at December 31, 2007.

     The Company has other investments because of interim investment strategies in trust subsidiaries, collateral requirements required in swap and deposit transactions, and Community Reinvestment Act investment requirements. U.S. Treasury bonds in the amount of $502,000 and $505,000 are pledged as collateral in association with the issuance of certain trust preferred securities at March 31, 2008 and December 31, 2007, respectively.

     During the quarter ended March 31, 2007, the Company sold $171.0 million of available for sale U.S. government sponsored agency and non-agency mortgage-backed securities resulting in a gain of $0.7 million.

     The following table summarizes the amortized cost and estimated fair value of agency and non-agency mortgage-backed securities classified as available for sale (in thousands):

		March 31,				December 31,
		2008				2007
Amortized cost		$	2,392,639			$	1,326,656
Gross unrealized holding gains			7,384				4,647
Gross unrealized holding losses			(36,016	)			(22,695	)
Estimated fair value		$	2,364,007			$	1,308,608

     At March 31, 2008 and December 31, 2007, no available for sale securities had been in a continuous unrealized loss position for greater than twelve months.

     The unrealized losses on securities available for sale include $25.2 million on $749.8 million of AAA-rated investments in non-agency collateralized mortgage obligations (“CMOs”) at March 31, 2008. These CMOs consist of interests in investment vehicles backed by mortgage loans. In all of the CMOs, the Company’s investment is senior to a subordinated tranche(s) which have first loss exposure. Management concluded these unrealized losses are temporary in nature since they are not related to the underlying credit quality of the issuers and the Company has the intent and ability to hold these investments for a time necessary to recover its cost or will ultimately recover its cost at maturity (i.e., these investments have contractual maturities that, absent credit default, should allow the Company to recover its cost). The Company believes that these losses are primarily related to market interest rates and credit spreads rather than underlying credit issues associated with the issuers of the obligations. The CMOs were purchased in the fourth quarter of 2006 and first quarter of 2007 and have not experienced any losses to date. The Company does not believe it should have any loss of principal on these investments given its senior position and the protection that the subordinated classes provide.

     As of March 31, 2008, the aggregate amount of available for sale securities from each of the following non-agency issuers were greater than 10% of the Company’s stockholders’ equity.

		Amortized				Fair
Name of Issuer		Cost				Value
		(in thousands)
Countrywide Alternative Loan Trust		$	85,465			$	83,752
Countrywide Home Loans			301,875				299,036
Flagstar Home Equity Loan Trust 2006-1			252,246				237,548
Goldman Sachs Mortgage Company			89,859				89,351
JP Morgan Mortgage Trust			85,844				84,539
		$	815,289			$	794,226

     The following table summarizes the amortized cost and estimated fair value of agency mortgage-backed securities classified as held to maturity (dollars in thousands):

		March 31,				December 31,
		2008				2007
Amortized cost		$	—			$	1,255,431
Gross unrealized holding gains			—				33,956
Gross unrealized holding losses			—				(304	)
Estimated fair value		$	—			$	1,289,083

Note 6. Loans Available for Sale

     The following table summarizes loans available for sale (dollars in thousands):

		March 31,				December 31,
		2008				2007
Mortgage loans		$	2,715,897			$	3,083,779
Consumer loans			177,280				170,891
Second mortgage loans			244,233				256,640
Total		$	3,137,410			$	3,511,310

     Loans available for sale are carried at the lower of aggregate cost or estimated fair value. These loans had an aggregate fair value that exceeded their recorded amount for each period presented. The Company generally estimates the fair

value of mortgage loans based on quoted market prices for securities backed by similar types of loans. Given the lack of liquidity in the secondary mortgage market at March 31, 2008 and December 31, 2007, significant management judgment was necessary to estimate the fair value of loans available for sale. Where quoted market prices were available, such market prices were utilized as estimates for fair values. Otherwise, the fair values of loans were estimated by discounting estimated cash flows using management’s best estimate of market interest rates for similar collateral.

Note 7. Loans Held for Investment

     Loans held for investment are summarized as follows (dollars in thousands):

		March 31,				December 31,
		2008				2007
Mortgage loans		$	6,103,777			$	5,823,952
Second mortgage loans			60,917				56,516
Commercial real estate loans			1,641,686				1,542,104
Construction loans			77,035				90,401
Warehouse lending			347,908				316,719
Consumer loans			318,694				281,746
Commercial loans			24,007				22,959
Total			8,574,024				8,134,397
Less allowance for loan losses			(121,400	)			(104,000	)
Total		$	8,452,624			$	8,030,397

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

		For the Three Months Ended March 31,
		2008				2007
Balance, beginning of period		$	104,000			$	45,779
Provision charged to operations			34,262				8,293
Charge-offs			(17,192	)			(6,299	)
Recoveries			330				727
Balance, end of period		$	121,400			$	48,500

     Loans on which interest accruals have been discontinued totaled approximately $268.3 million and $74.6 million at March 31, 2008 and 2007, respectively. Interest on these loans is recognized as income when collected. Interest that would have been accrued on such loans totaled approximately $3.2 million and $0.9 million during the three months ended March 31, 2008 and 2007, respectively. There were no loans greater than 90 days past due still accruing interest on the OTS method at March 31, 2008 and 2007.

     A loan is impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impaired loans were as follows (dollars in thousands):

		March 31,				December 31,
		2008				2007
Impaired loans with no allowance for loan losses allocated		$	55,716			$	22,307
Impaired loans with allowance for loan losses allocated			132,303				112,044
Total impaired loans		$	188,019			$	134,351
Amount of the allowance allocated to impaired loans		$	36,054			$	34,937
Average investment in impaired loans		$	161,185			$	70,582
Cash-basis interest income recognized during impairment		$	1,780			$	2,324

     Those impaired loans with no allowance for loan losses allocated represent loans for which the fair value of the related collateral less estimated selling costs exceeded the recorded investments in such loans. At March 31, 2008, approximately 96% of the total impaired loans were evaluated based on the fair value of related collateral.

Note 8. Private-label Securitization Activity

     During the quarter ended March 31, 2008, the Company did not consummate any private-label-securitizations transactions.

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

     At March 31 2008, key assumptions used in determining the value of residual interests resulting from the Company’s private-label securitizations were as follows:

										Annual				Weighted -
		Prepayment				Projected				Discount				Average Life
		Speed				Credit Losses				Rate				(in years)
2005 HELOC Securitization			23	%			3.84	%			20	%			3.1
2006 HELOC Securitization			18	%			9.12	%			20	%			4.0
2006 Second Mortgage Securitization			14	%			3.46	%			20	%			4.9
2007 Second Mortgage Securitization			15	%			4.31	%			20	%			5.1

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

		For the Three Months Ended March 31,
		2008				2007
Proceeds from new securitizations		$	—			$	620,866
Proceeds from collections reinvested in securitizations			6,960				42,230
Servicing fees received			1,756				1,215
Loan repurchases for representations and warranties			—				—

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 residual securities in addition to customary representations and warranties. The Company does not have credit exposure associated with non-performing loans in securitizations beyond its residual interests and the amount of draws on HELOCs that it funds and which are not reimbursed by the respective trust. The value of the Company’s residual interests reflects the Company’s credit loss assumptions as to the underlying collateral pool. To the extent that actual credit losses exceed these assumptions, the value of the Company’s residual interests will be diminished.

     The following table summarizes the loan balance associated with the Company’s servicing portfolio and the balance of related retained assets with credit exposure, which includes residual interests that are included as trading securities and unreimbursed HELOC draws that are included in loans held for investment at March 31, 2008 (in thousands):

						Balance of Retained
		Total Loans				Assets with Credit
		Serviced				Exposure
Private-label securitizations		$	1,344,041			$	50,053
Government sponsored agencies			37,033,171				—
Other investors			844				—
Total		$	38,378,056			$	50,053

     Mortgage loans that have been securitized in private-label securitizations at March 31, 2008 and 2007 that are sixty days or more past due and the credit losses incurred in the securitization trusts are presented below (in thousands):

																		Credit Losses
		Total Principal								Principal Amount								(Net of Recoveries)
		Amount of Loans								Of Loans 60 Days								For the Three
		Outstanding								Or More Past Due								Months Ended
		March 31,								March 31,								March 31,
		2008				2007				2008				2007				2008				2007
Securitized mortgages loans		$	1,344,041			$	1,518,396			$	28,501			$	4,318			$	16,266			$	2,441

Note 9. Mortgage Servicing Rights

     The Company has obligations to service residential first mortgage loans and consumer loans (HELOC and second mortgage loans obtained through private-label securitization transactions). A description of these classes of servicing assets follows.

     Residential Mortgage Servicing Rights. Servicing of residential first mortgage loans is a significant business activity of the Company. The Company recognizes MSR assets on residential first mortgage loans when it retains the obligation to service these loans upon sale and the servicing fee is more than adequate compensation. MSRs are subject to changes in value from prepayments of the underlying loans. Historically, the Company has treated this risk as a counterbalance to the increased production and gain on loan sale margins that tend to occur in an environment with increased prepayments. In the quarter ended March 31, 2008, the Company began to specifically hedge the risk by hedging the fair value of MSRs with derivative instruments which are intended to change in value inversely to part or all changes in the value of MSRs.

     Changes in the carrying value of residential MSRs, accounted for at fair value, for the three month period ended March 31, 2008 follow:

		For the Three Month
		Period Ended
		March 31, 2008
		(In Thousands)
Balance at beginning of period		$	402,243
Cumulative effect of change in accounting			43,719
Additions from loans sold with servicing retained			100,680
Changes in fair value due to:
Payoffs(a)			(17,942	)
All other changes in valuation inputs or assumptions (b)			(42,116	)
Fair value of MSRs at end of period		$	$486,584
Unpaid principal balance of loans serviced for others		$	$37,034,015

     Prior to January 1, 2008, all residential MSRs were accounted for at the lower of their initial carrying value, net of accumulated amortization, or fair value. Residential MSRs were periodically evaluated for impairment, and a valuation allowance established through a charge to operations when the carrying value exceeded the fair value and was believed to be temporary. Other-than-temporary impairments were recognized if the recoverability of the carrying value was determined to be remote. There were no other-than-temporary impairments recognized during 2007. Changes in the carrying value of the residential MSRs, accounted for using the amortization method, and the associated valuation allowance for the three month period ended March 31, 2007 follow:

		For the Three Month
		Period Ended
		March 31, 2007
		(In Thousands)
Balance at beginning of period		$	166,705
Additions from loans sold with servicing retained			61,949
Amortization			(14,237	)
Sales			—
Carrying value before valuation allowance at end of period			214,417
Valuation allowance
Balance at beginning of period			(448	)
Impairment recoveries			448
Balance at end of period			—
Net carrying value of amortization method MSRs at end of period		$	214,417
Unpaid principal balance of loans serviced for others		$	18,788,913
Fair value of residential MSRs:
Beginning of period		$	190,875
End of period		$	251,272

     The fair value of residential MSRs are estimated using a valuation model that calculated the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors, which were determined based on current market conditions. The Company periodically obtained third-party valuations of its residential MSRs to assess the reasonableness of the fair value calculated by the valuation model.

     The key economic assumptions used in determining the fair value of MSRs capitalized during the three month periods ended March 31, 2008 and 2007 periods were as follows:

		2008				2007
Weighted-average life (in years)			6.1				5.7
Weighted-average constant prepayment rate (CPR)			13.8	%			29.0	%
Weighted-average discount rate			8.5	%			9.6	%

     The key economic assumptions used in determining the fair value of MSRs at period end were as follows:

		March 31,
		2008				2007
Weighted-average life (in years)			5.3				5.4
Weighted-average CPR			15.2	%			17.2	%
Weighted-average discount rate			8.3	%			9.9	%

     Consumer Servicing Assets Consumer servicing assets represent servicing rights related to HELOC and second mortgage loans that were created in the Company’s private-label securitizations. These servicing assets are initially measured at fair value and subsequently accounted for using the amortization method. Under this method, the assets are amortized in proportion to and over the period of estimated servicing income and are evaluated for impairment on a periodic basis. When the carrying value exceeds the fair value and is believed to be temporary, a valuation allowance is established by a charge to loan administration income (loss) in the consolidated statement of operations. Other-than-temporary impairment is recognized when the recoverability of the carrying value is determined to be remote. When this situation occurs, the unrecoverable portion of the valuation allowance is applied as a direct write-down to the carrying value of the consumer servicing asset.

Unlike a valuation allowance, a direct write-down permanently reduces the carrying value of the consumer servicing asset and the valuation allowance, precluding recognition of subsequent recoveries. There were no other-than-temporary impairments on consumer servicing assets recognized during the three month periods ended March 31, 2008 and 2007.

     The fair value of consumer servicing assets is estimated by using an internal valuation model. This method is based on calculating the present value of estimated future net servicing cash flows, taking into consideration discount rates, prepayments, and servicing costs. The internal valuation model is validated periodically through a third-party valuation.

     Changes in the carrying value of the consumer servicing assets and the associated valuation allowance follow:

		For the Three Month Period
		March 31,
		2008				2007
		(In Thousands)
Consumer servicing assets
Balance at beginning of period		$	11,914			$	6,846
Additions:
From loans securitized with servicing retained			72				6,474
Subtractions:
Amortization			(643	)			(743	)
Carrying value before valuation allowance at end of period			11,343				12,577
Valuation allowance
Balance at beginning of period			(144	)			(150	)
Impairment recoveries (charges)			92				(1	)
Balance at end of period			(52	)			(151	)
Net carrying value of servicing assets at end of period		$	11,291			$	12,426
Unpaid principal balance of consumer loans serviced for others		$	1,344,041			$	1,518,395
Fair value of servicing assets:
Beginning of period		$	11,861			$	6,757
End of period		$	11,555			$	12,426

     The key economic assumptions used to estimate the fair value of these servicing assets at March 31, 2008 and 2007 were as follows:

		March 31
		2008				2007
Weighted-average life (in years)			2.7				2.7
Weighted-average discount rate			10.9	%			10.9	%

     Contractual Servicing Fees Contractual servicing fees, including late fees and ancillary income, for each type of loan serviced are presented below. Contractual servicing fees are included within loan administration income (loss) on the consolidated statements of operations.

		For the Three Months
		Ended March 31,
		2008				2007
Residential real estate		$	28,653			$	16,379
Consumer			1,756				1,215
Total		$	30,409			$	17,594

Note 10. Accumulated Other Comprehensive Loss

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

		March 31,				December 31,
		2008				2007
Net unrealized gain on derivatives used in cash flow hedges		$	—			$	236
Net unrealized loss on securities available for sale			(18,611	)			(11,731	)
Ending balance		$	(18,611	)		$	(11,495	)

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

		For the Three				For the Year
		Months Ended				Ended
		March 31, 2008				December 31, 2007
Gain (reclassified to earnings) on interest rate swap extinguishment		$	—			$	(155	)
Related tax benefit			—				54
Unrealized loss on derivatives used in cash flow hedging relationships			—				(11,377	)
Related tax benefit			—				3,981
Reclassification adjustment for gains included in earnings relating to cash flow hedging relationships			—				5,290
Related tax expense			—				(1,851	)
Gain (reclassified to earnings) on interest rate swap derecognition			(363	)			—
Related tax benefit			127				—
Unrealized loss on securities available for sale			(10,585	)			(19,414	)
Related tax benefit			3,705				6,795
Change		$	(7,116	)		$	(16,677	)

Note 11. Derivative Financial Instruments

     The Company follows the provisions of SFAS 133, as amended, for its derivative instruments and hedging activities, which require it to recognize all derivative instruments on the consolidated statements of financial condition at fair value. The following derivative financial instruments were identified and recorded at fair value as of March 31, 2008 and December 31, 2007:

	-		Fannie Mae, Freddie Mac and other forward loan sales contracts;
	-		Rate lock commitments;
	-		Interest rate swap agreements; and
	-		Treasury futures and options.

     The Company hedges the risk of overall changes in fair value of loans held for sale and rate lock commitments generally by selling forward contracts on securities of Fannie Mae, Freddie Mac and Ginnie Mae. Under SFAS 133, certain of these positions may qualify as a fair value hedge of a portion of the funded loan portfolio and result in adjustments to the carrying value of designated loans through gain on sale based on value changes attributable to the hedged risk. The forward contracts used to economically hedge the loan commitments are accounted for as non-designated hedges and naturally offset rate lock commitment mark-to-market gains and losses recognized as a component of gain on loan sale. The Bank recognized pre-tax gains of $20.8 million and $3.9 million for the three months ended March 31, 2008 and 2007, respectively, on its hedging activity relating to loans held for sale.

     The Company uses interest rate swap agreements to reduce its exposure to interest rate risk inherent in a portion of the current borrowings and anticipated deposits. A swap agreement is a contract between two parties to exchange cash flows based on specified underlying notional amounts and indices. Under SFAS 133, the swap agreements used to hedge the Company’s anticipated borrowings and advances qualify as cash flow hedges. Derivative gains and losses reclassed from accumulated other comprehensive (loss) income to current period operations are included in the line item in which the hedged cash flows are recorded. At December 31, 2007, accumulated other comprehensive (loss) income included a deferred after-tax net gain of $0.2 million related to derivatives used to hedge funding cash flows. On January 1, 2008, the Company derecognized all cash flow hedges. As such, the after-tax net gain of $0.2 million in accumulated other comprehensive income at December 31, 2007 was recognized through earnings during 2008.

     The Company recognizes ineffective changes in hedge values resulting from designated SFAS 133 hedges discussed above in the same statement of operations captions as effective changes when such material ineffectiveness occurs. There were no components of derivative instruments that were excluded from the assessment of hedge effectiveness. For 2007, the Company did not recognize any significant gains or losses due to ineffectiveness of its cash flow hedges. The Company had no designated cash flow hedges during 2008.

     Beginning in the first quarter of 2008, the Company began to hedge its residential MSR asset through the use of U.S. Treasury futures and options in order to mitigate the effect of changes in and volatility of the interest rate environment. Changes in the values of these derivative instruments are included in loan administration income in the non-interest income portion of the consolidated statement of operations. Because the residential MSRs are accounted for on the fair value method, gains or losses in hedging activities are expected to be offset by increases or decreases in the fair value of the residential MSR asset, although such changes may not be perfectly correlated.

     The Company had the following derivative financial instruments (dollars in thousands):

		March 31, 2008
		Notional				Fair				Expiration
		Amounts				Value				Dates
Mortgage banking derivatives:
Rate lock commitments		$	4,658,375			$	58,528				2008
Forward agency and loan sales			4,710,024				(25,083	)			2008
Mortgage servicing rights derivatives:
Treasury futures			1,446,600				9,505				2008
Treasury options			2,181,000				(3,552	)			2008
Borrowings and advances derivatives:
Interest rate swaps (LIBOR)			130,000				(1,963	)			2008-2010

		December 31, 2007
		Notional				Fair				Expiration
		Amounts				Value				Dates
Mortgage banking derivatives:
Rate lock commitments		$	3,069,134			$	26,129				2008
Forward agency and loan sales			3,845,065				(13,504	)			2008
Borrowings and advances hedges:
Interest rate swaps (LIBOR)			130,000				378				2008-2010

Counterparty Credit Risk

     The Bank is exposed to credit loss in the event of non-performance by the counterparties to its various derivative financial instruments. The Company manages this risk by selecting only large, well-established counterparties, spreading the credit risk among such counterparties, and by placing contractual limits on the amount of unsecured credit risk from any single counterparty.

Note 12. Stock-Based Compensation

     For the three months ended March 31, 2008 and 2007, the Company recorded stock-based compensation expense of $0.8 million ($0.5 million net of tax) and $0.4 million ($0.2 million net of tax), respectively.

Stock Options

     During the quarters ended March 31, 2008 and 2007, there were no stock options granted.

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 at the rate of 25% of the grant on each of the first four annual anniversaries of the grant date. The standard term of a SAR is seven years beginning on the grant date.

Grants of SARs may be settled only in cash and once made, 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 SARs issued during the three months ended March 31, 2008: dividend yield of zero; expected volatility of 56.6%; a risk-free rate range of 1.8% to 2.3%; and an expected life range of 3.2 years to 4.8 years.

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

						Weighted				Weighted Average
						Average				Grant Date
		Shares				Exercise Price				Fair Value
Stock Appreciation Rights Awarded:
Non-vested balance at December 31, 2007			822,799			$	14.91			$	1.89
Granted			740,283			$	6.86			$	2.29
Vested			(217,617	)		$	15.15			$	1.98
Forfeited			(1,282	)		$	8.16			$	2.27
Non-vested balance at March 31, 2008			1,344,183

Restricted Stock

     The Company issues restricted stock to officers, directors and key employees in connection with year-end compensation. Restricted stock generally will vest in 50% increments on each annual anniversary following the date of grant. The Company incurred expenses of approximately $0.3 million with respect to restricted stock for each of the periods ended March 31, 2008, and 2007. As of March 31, 2008, restricted stock outstanding had a market value of $2.1 million.

						Weighted Average
						Grant Date Fair Value
		Shares				per Share
Restricted Stock:
Non-vested at December 31, 2007			123,675			$	14.29
Granted			247,201				6.86
Vested			(75,998	)			14.37
Canceled and forfeited			(378	)			7.30
Non-vested at March 31, 2008			294,500

Note 13. 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 lending operation also services mortgage loans for others and sells MSRs into the secondary market. Funding for the lending operation is provided by deposits and borrowings garnered by the banking group. All of the non-bank consolidated subsidiaries are included in the banking segment. No such subsidiary is material to the Company’s overall operations.

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

		For the Three Months Ended March 31, 2008
		Bank				Home Lending
		Operations				Operations				Elimination				Combined
2008:
Net interest income		$	28,871			$	25,927			$	—			$	54,798
Gain on sale revenue			—				63,712				—				63,712
Other income (loss)			3,855				(14,893	)			—				(11,038	)
Total net interest income and non-interest income			32,726				74,746				—				107,472
(Loss) earnings before federal income taxes			(31,472	)			15,514				—				(15,958	)
Depreciation and amortization			2,983				3,451				—				6,434
Capital expenditures			9,811				—				—				9,811
Identifiable assets			14,803,758				4,004,554				(2,885,000	)			15,923,312
Inter-segment income (expense)			21,638				(21,638	)			—				—