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, 2010

OR

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o 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 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 6, 2010, 1,532,890,170 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, 2009 and under Part II, Item 1A of this quarterly report on Form 10-Q, including: (1) our business has been and may continue to be adversely affected by conditions in the global financial markets and economic conditions generally; (2) defaults by another larger financial institution could adversely affect financial markets generally; (3) we may be required to raise capital at terms that are materially adverse to our stockholders; (4) if we cannot effectively manage the impact of the volatility of interest rates our earnings could be adversely affected; (5) if we do not meet the New York Stock Exchange continued listing requirements, our common stock may be delisted; (6) current and further deterioration in the housing market, as well as the number of programs that have been introduced to address the situation by government agencies and government sponsored enterprises, may lead to increased costs to service loans which could affect our margins or impair the value of our mortgage servicing rights; (7) current and further deterioration in the housing and commercial real estate markets may lead to increased loss severities and further increases in 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; (8) changes in the fair value or ratings downgrades of our securities may reduce our stockholders’ equity, net earnings, or regulatory capital ratios; (9) 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 rates and market liquidity; (10) our ability to borrow funds, maintain or increase deposits or raise capital could be limited, which could adversely affect our liquidity and earnings; (11) our business is highly regulated and subject to change; (12) we are subject to the restrictions and conditions of supervisory agreements with the Office of Thrift Supervision. Failure to comply with the supervisory agreements could result in further enforcement action against us; (13) increases in deposit insurance premiums and special Federal Deposit Insurance Corporation assessments will adversely affect our earnings; (14) we are subject to heightened regulatory scrutiny with respect to bank secrecy and anti-money laundering statutes and regulations; (15) future dividend payments and common stock repurchases may be restricted; (16) 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 have a material adverse affect on our earnings, liquidity, capital position and financial condition; (17) we use estimates in determining the fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; (18) our home equity lines of credit funding reimbursements have been negatively impacted by loan losses; (19) our secondary market reserve for losses could be insufficient; (20) our home lending profitability could be significantly reduced if we are not able to resell mortgages; (21) our holding company is dependent on Flagstar Bank for funding of obligations and dividends; (22) we may be exposed to other operational and reputational risks; (23) we have many new members of our executive team; (24) the potential loss of key members of senior management or the inability to attract and retain qualified relationship managers in the future could affect our ability to operate effectively; (25) the network and computer systems on which we depend could fail or experience a security breach; (26) our loans are geographically concentrated in only a few states; (27) we are subject to environmental liability risk associated with lending activities; (28) severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact our business; (29) general business, economic and political conditions may significantly affect our earnings; (30) we are a controlled company that is exempt from certain New York Stock Exchange corporate governance requirements; and (31) our controlling stockholder has significant influence over us, including control over decisions that require the approval of stockholders, whether or not such decisions are in the best interests of other stockholders.

     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.

FLAGSTAR BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2010
TABLE OF CONTENTS

PART I. — FINANCIAL INFORMATION			4
Item 1. Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			41
Item 3. Quantitative and Qualitative Disclosures about Market Risk			71
Item 4. Controls and Procedures			71
PART II. — OTHER INFORMATION			72
Item 1. Legal Proceedings			72
Item 1A. Risk Factors			72
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			72
Item 3. Defaults upon Senior Securities			72
Item 4. (Removed and Reserved)			72
Item 5. Other Information			72
Item 6. Exhibits			73
SIGNATURES			74
EX-11
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

The consolidated financial statements of the Company are as follows:
Consolidated Statements of Financial Condition — March 31, 2010 (unaudited) and December 31, 2009.
Unaudited Consolidated Statements of Operations — For the three months ended March 31, 2010 and 2009.
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss — For the three months ended March 31, 2010 (unaudited) and the year ended December 31, 2009.
Unaudited Consolidated Statements of Cash Flows — For the three months ended March 31, 2010 and 2009.
Unaudited Notes to Consolidated Financial Statements.

Flagstar Bancorp, Inc.

		March 31,				December 31,
		2010				2009
		(Unaudited)
Assets
Cash and cash items		$	61,342			$	73,019
Interest-bearing deposits			909,808				1,009,470
Cash and cash equivalents			971,150				1,082,489
Securities classified as trading			893,318				330,267
Securities classified as available for sale			733,788				605,621
Other investments — restricted			4,428				15,601
Loans available for sale ($1,371,476 and $1,937,171 at fair value a March 31, 2010 and December 31, 2009, respectively)			1,873,744				1,970,104
Loans held for investment ($13,671 and $11,287 at fair value at March 31, 2010 and December 31, 2009, respectively)			7,580,679				7,714,308
Less: allowance for loan losses			(538,000	)			(524,000	)
Loans held for investment, net			7,042,679				7,190,308
Total interest-earning assets			11,457,765				11,121,371
Accrued interest receivable			52,707				44,941
Repossessed assets, net			167,265				176,968
Federal Home Loan Bank stock			373,443				373,443
Premises and equipment, net			237,870				239,318
Mortgage servicing rights at fair value			540,800				649,133
Mortgage servicing rights, net			2,647				3,241
Other assets			1,439,003				1,331,897
Total assets		$	14,332,842			$	14,013,331
Liabilities and Stockholders’ Equity
Deposits		$	8,145,679			$	8,778,469
Federal Home Loan Bank advances			3,900,000				3,900,000
Security repurchase agreements			108,000				108,000
Long term debt			300,182				300,182
Total interest-bearing liabilities			12,453,861				13,086,651
Accrued interest payable			21,726				26,086
Secondary market reserve			76,000				66,000
Other liabilities			676,491				237,870
Total liabilities			13,228,078				13,416,607
Commitments and Contingencies
Stockholders’ Equity
Preferred stock $0.01 par value, liquidation value $1,000 per share, 25,000,000 shares authorized; 266,657 issued and outstanding at March 31, 2010 and December 31, 2009, respectively			3				3
Common stock $0.01 par value, 3,000,000,000 shares authorized; 1,470,076,137 and 468,770,671 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively			14,701				4,688
Additional paid in capital — preferred			245,124				243,778
Additional paid in capital — common			1,013,100				443,230
Accumulated other comprehensive loss			(39,552	)			(48,263	)
Retained earnings (accumulated deficit)			(128,612	)			(46,712	)
Total stockholders’ equity			1,104,764				596,724
Total liabilities and stockholders’ equity		$	14,332,842			$	14,013,331

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

Flagstar Bancorp, Inc.

		For the Three Months Ended
		March 31,
		2010				2009
		(Unaudited)
Interest Income
Loans		$	110,195			$	158,622
Securities classified as available for sale or trading			15,367				25,477
Interest-bearing deposits			643				856
Other			1				23
Total interest income			126,206				184,978
Interest Expense
Deposits			41,887				67,350
FHLBI advances			41,788				56,809
Security repurchase agreements			1,153				1,153
Other			3,695				2,936
Total interest expense			88,523				128,248
Net interest income			37,683				56,730
Provision for loan losses			63,559				158,214
Net interest expense after provision for loan losses			(25,876	)			(101,484	)
Non-Interest Income
Loan fees and charges			16,329				32,922
Deposit fees and charges			8,413				7,233
Loan administration			26,150				(31,801	)
(Loss) gain on trading securities			(3,312	)			23,747
Loss on residual and transferors’ interest			(2,682	)			(12,535	)
Net gain on loan sales			52,566				195,694
Net loss on sales of mortgage servicing rights			(2,213	)			(82	)
Net gain on securities available for sale			2,166				—
Total other-than-temporary impairment gain (loss)			15,688				(126,172	)
Gain (loss) recognized in other comprehensive income before taxes			18,974				(108,930	)
Net impairment loss recognized in earnings			(3,286	)			(17,242	)
Other fees and charges			(22,133	)			(6,977	)
Total non-interest income			71,998				190,959
Non-Interest Expense
Compensation, commissions and benefits			61,022				91,789
Occupancy and equipment			16,011				18,879
Asset resolution			16,573				24,873
Federal insurance premiums			10,047				1,722
Other taxes			855				1,007
Warrant expense			1,227				11,028
General and administrative			17,607				33,371
Total non-interest expense			123,342				182,669
Loss before federal income taxes			(77,220	)			(93,194	)
Benefit for federal income taxes			—				(28,696	)
Net Loss			(77,220	)			(64,498	)
Preferred stock dividend/accretion			(4,680	)			(2,919	)
Net loss applicable to common stock		$	(81,900	)		$	(67,417	)
Loss per share
Basic		$	(0.11	)		$	(0.76	)
Diluted		$	(0.11	)		$	(0.76	)

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

Flagstar Bancorp, Inc.

										Preferred				Common				Accumulated
										Additional				Additional				Other								Retained				Total
		Preferred				Common				Paid in				Paid in				Comprehensive				Treasury				Earnings				Stockholders’
		Stock				Stock				Capital				Capital				Income (Loss)				Stock				(Deficit)				Equity
Balance at January 1, 2009			—				836				—				119,024				(81,742	)			—				434,175				472,293
Net loss			—				—				—				—				—				—				(496,678	)			(496,678	)
Reclassification of gain on sale of securities available for sale																			(5,561	)			—				—				(5,775	)
Reclassification of loss on securities available for sale due to other-than-temporary impairment			—				—				—				—				13,486				—				—				13,486
Change in net unrealized loss on securities available for sale			—				—				—				—				58,468				—				—				58,682
Total comprehensive loss			—				—				—				—				—				—				—				(430,285	)
Cumulative effect for adoption of new guidance for other-than-temporary impairments recognition on debt securities debt securities			—				—				—				—				(32,914	)			—				32,914				—
Issuance of preferred stock			6				—				507,488				—				—				—				—				507,494
Conversion of preferred stock			(3	)			3,750				(268,574	)			264,827				—				—				—				—
Issuance of common stock			—				67				—				5,254				—				—				—				5,321
Reclassification of Treasury Warrants			—				—				—				49,673				—				—				—				49,673
Issuance of common stock for exercise of May Warrants			—				31				—				4,345				—				—				—				4,376
Restricted stock issued			—				1				—				(46	)			—				—				—				(45	)
Dividends on preferred stock			—				—				—				—				—				—				(12,259	)			(12,259	)
Accretion of preferred stock			—				—				4,864				—				—				—				(4,864	)			—
Stock-based compensation			—				3				—				619				—				—				—				622
Tax effect from stock-based compensation			—				—				—				(466	)			—				—				—				(466	)
Balance at December 31, 2009			3				4,688				243,778				443,230				(48,263	)			—				(46,712	)			596,724
(Unaudited)
Net loss			—				—				—				—				—				—				(77,220	)			(77,220	)
Reclassification of gain on sale of securities available for sale			—				—				—				—				(1,594	)			—				—				(1,594	)
Reclassification of loss on securities available for sale due to other-than-temporary impairment			—				—				—				—				3,286				—				—				3,286
Change in net unrealized loss on securities available for sale			—				—				—				—				7,019				—				—				7,019
Total comprehensive loss			—				—				—				—				—				—				—				(68,509	)
Issuance of common stock			—				9,989				—				567,261				—				—				—				577,250
Restricted stock issued			—				—				—				(12	)			—				—				—				(12	)
Dividends on preferred stock			—				—				—				—				—				—				(3,334	)			(3,334	)
Accretion of preferred stock			—				—				1,346				—				—				—				(1,346	)			—
Stock-based compensation			—				24				—				2,737				—				—				—				2,761
Tax effect from stock-based compensation			—				—				—				(116	)			—				—				—				(116	)
Balance at March 31, 2010		$	3			$	14,701			$	245,124			$	1,013,100			$	(39,552	)		$	—			$	(128,612	)		$	1,104,764

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

Flagstar Bancorp, Inc.

		For the Three Months Ended
		March 31,
		2010				2009
		(Unaudited)
Operating Activities
Net loss		$	(77,220	)		$	(64,498	)
Adjustments to net loss to net cash used in operating activities
Provision for loan losses			63,559				158,214
Depreciation and amortization			4,648				5,776
Increase in valuation allowance in mortgage servicing rights			176				1,548
Loss on fair value of residential mortgage servicing rights net of hedging gains (losses)			41,471				69,571
Stock-based compensation expense			2,761				255
(Gain) loss on interest rate swap			(221	)			(99	)
Net loss on the sale of assets			4,480				1,262
Net gain on loan sales			(52,566	)			(195,694	)
Net loss on sales of mortgage servicing rights			2,213				82
Net gain on sale securities classified as available for sale			(2,166	)			—
Other than temporary impairment losses on securities classified as available for sale			3,286				17,242
Net loss (gain) on trading securities			3,312				(23,747	)
Net loss on residual and transferor interest			2,682				12,535
Proceeds from sales of loans available for sale			5,079,635				6,776,177
Origination and repurchase of mortgage loans available for sale, net of principal repayments			(4,874,084	)			(9,379,932	)
Purchase of trading securities			(746,589	)			(831,552	)
Increase in accrued interest receivable			(7,766	)			(6,887	)
Proceeds from sales of trading securities			178,480				518,793
Increase in other assets			(107,038	)			(30,219	)
Decrease in accrued interest payable			(4,360	)			(6,525	)
Net tax effect of stock grants issued			115				453
Decrease (increase) liability for checks issued			(3,930	)			1,111
Decrease (increase) in federal income taxes payable			457				(5,637	)
Increase in payable for mortgage repurchase option			441,020				—
(Decrease) increase in other liabilities			(2,191	)			49,250
Net cash used in operating activities			(49,836	)			(2,932,521	)
Investing Activities
Net change in other investments			11,173				(2,461	)
Proceeds from the sale of investment securities available for sale			54,948				—
Net (purchase) repayment of investment securities available for sale			(176,078	)			42,717
Proceeds from sales of portfolio loans			(109,496	)			16,403
Origination of portfolio loans, net of principal repayments			44,167				13,800
Proceeds from the disposition of repossessed assets			48,943				50,737
Acquisitions of premises and equipment, net of proceeds			(2,949	)			(4,787	)
Proceeds from the sale of mortgage servicing rights			112,848				1,543
Net cash (used in) provided by investing activities			(16,444	)			117,952
Financing Activities
Net (decrease) increase in deposit accounts			(632,790	)			1,944,696
Net receipt of payments of loans serviced for others			14,636				107,915
Net (disbursement) receipt of escrow payments			(705	)			15,238
Net tax benefit for stock grants issued			(116	)			(453	)
Dividends paid to preferred stockholders			(3,334	)			—
Issuance of preferred stock			—				544,365
Issuance of common stock			577,250				5,321
Net cash (used in) provided by financing activities			(45,059	)			2,617,082
Net decrease in cash and cash equivalents			(111,339	)			(197,487	)
Beginning cash and cash equivalents			1,082,489				506,905
Ending cash and cash equivalents		$	971,150			$	309,418
Loans held for investment transferred to repossessed assets		$	93,155			$	117,462
Total interest payments made on deposits and other borrowings		$	92,883			$	134,773

		For the Three Months Ended
		March 31,
		2010				2009
		(Unaudited)
Federal income taxes paid		$	—			$	590
Reclassification of mortgage loans originated for portfolio to mortgage loans available for sale for sale		$	109,496			$	16,403
Mortgage servicing rights resulting from sale or securitization of loans		$	48,267			$	82,680

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 $14.3 billion in assets at March 31, 2010, Flagstar is the largest insured depository 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 may also originate consumer loans, commercial real estate loans and non-real estate commercial loans. The Company 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 to enhance the Company’s leverage and to receive the interest spread between earning assets and paying liabilities.

     The Bank is a member of the Federal Home Loan Bank System (“FHLBI”) 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 (the “SEC”). 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, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. We have evaluated the financial statements for subsequent events through the date of the filing of the Form 10-Q. 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, 2009, which can be found on the Company’s Investor Relations web page, at www.flagstar.com, and on the website of the SEC, at www.sec.gov.

Note 3 — Recent Developments

Capital Investment

     On January 27, 2010, MP Thrift Investments, L.P. (“MP Thrift”) exercised its rights to purchase 422,535,212 shares of the Company’s common stock for approximately $300 million in a rights offering to purchase up to 704,234,180 shares of common stock which expired on February 8, 2010. Pursuant to the rights offering, each stockholder of record as of December 24, 2009 received 1.5023 non-transferable subscription rights for each share of common stock owned on the record date and entitled the holder to purchase one share of common stock at the subscription price of $0.71. During the rights offering, the Company’s stockholders (other than MP Thrift) exercised their rights to purchase 806,950 shares of common stock, which means, in the aggregate, the Company issued 423,342,162 shares of common stock in the rights offering for approximately $300.6 million.

     On March 31, 2010, the Company completed a registered offering of 575,000,000 shares of common stock, which included 75,000,000 shares issued pursuant to the underwriters’ over-allotment option, which was exercised in full on March 29, 2010. The Company issued and sold to the Underwriters 575,000,000 shares of the Company’s common stock, $0.01 par value per share. The public offering price of the Common Stock was $0.50 per share. MP Thrift participated in this registered offering and purchased 200,000,000 shares at $0.50 per shares. The offering resulted in aggregate net proceeds of approximately $276.1 million, after deducting underwriting fees and offering expenses.

Supervisory Agreements

     On January 27, 2010, the Company and the Bank each entered into a supervisory agreement with the OTS (respectively, the “Bancorp Supervisory Agreement” and the “Bank Supervisory Agreement” and, collectively, the “Supervisory Agreements”). The Company and the Bank have taken numerous steps to comply with, and intend to comply in the future with, all of the requirements of the Supervisory Agreements, and do not believe that the Supervisory Agreements will materially constrain management’s ability to implement their business plan. The Supervisory Agreements will remain in effect until terminated, modified, or suspended in writing by the OTS, and the failure to comply with the Supervisory Agreements could result in the initiation of further enforcement action by the OTS, including the imposition of further operating restrictions and result in additional enforcement actions against us.

Note 4. Recent Accounting Developments

     Accounting Standards Update (ASU) No. 2009-16, “Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets.” ASU 2009-16 amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. ASU 2009-16 eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. ASU 2009-16 also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The provisions of ASU 2009-16 became effective on January 1, 2010 and did not have a significant impact on the Company’s consolidated financial position, results of operations or liquidity.

     ASU No. 2009-17, “Consolidations (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” ASU 2009-17 amends prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. ASU 2009-17 requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. As further discussed below, ASU No. 2010-10, “Consolidations (Topic 810),” deferred the effective date of ASU 2009-17 for a reporting entity’s interests in investment companies. The provisions of ASU 2009-17 became effective on January 1, 2010 and did not have a significant impact on the Company’s consolidated financial position, results of operations or liquidity.

     ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures About Fair Value Measurements.” ASU 2010-06 requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. ASU 2010-06 further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a

subset of assets or liabilities within a line item in the statement of financial position and (ii) company’s should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy will be required for the Company beginning January 1, 2011. The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective for the Company on January 1, 2010. See Note 5, “Fair Value Accounting”.

     ASU No. 2010-09, “Subsequent Events (Topic 855) — Amendments to Certain Recognition and Disclosure Requirements.” ASU 2010-09 removes the requirement for companies that are subject to the periodic reporting requirements of the Securities Exchange Act of 1934 to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC’s literature. All of the amendments in the ASU were effective upon issuance, except for the use of the issued date for conduit debt obligors, which will be effective for interim or annual periods ending after June 15, 2010. The adoption of this guidance and is not expected to have a significant impact on the Company’s consolidated financial position, results of operations or liquidity.

     ASU No. 2010-11, “Derivatives and Hedging (Topic 815) — Scope Exception Related to Embedded Credit Derivatives.” ASU 2010-11 clarifies that the only form of an embedded credit derivative that is exempt from embedded derivative bifurcation requirements are those that relate to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. The provisions of ASU 2010-11 will be effective for the Company for interim reporting periods beginning after June 15, 2010 and are not expected to have a significant impact on the Company’s consolidated financial position, results of operations or liquidity.

Note 5 — Fair Value Accounting

     The Company adheres to guidance related to fair value measurements and additional guidance for financial instruments. This guidance establishes a framework for measuring fair value and prescribes disclosures about fair value measurements. The guidance also establishes a uniform definition of fair value. The definition of fair value under this guidance 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 previous fair value guidance, 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.

     The accounting guidance for financial instruments 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 this guidance, the Company, applies the fair value option for certain non-investment grade residual securities from private-label securitizations. In accordance with this guidance, the Company applies fair value accounting to these residual securities and classified these investments as securities — trading to provide consistency in the accounting for the Company’s residual interests.

     The Company applies the fair value measurement method for residential MSRs under guidance related to servicing assets and liabilities. Management applies 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.

     Effective January 1, 2009, the Company elected the fair value option for the majority of its loans available for sale in accordance with the accounting guidance for financial instruments. Only loans available for sale originated subsequent to January 1, 2009 were affected. Prior to the Company’s fair value election, loans available for sale were carried at the lower of aggregate cost or estimated fair value; therefore, any increase in fair value to such loans was not realized until such loans were sold. The effect on consolidated operations of this election amounted to recording additional gains on loan sales of $14.1 million for the three month period ended March 31, 2010, respectively, based upon an increase in fair value during the period rather than at a later time when the loans were sold. See Note 7, “Loans Available for Sale.”

Determination of 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

     The accounting guidance for fair value measurements and disclosures 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 and thereby favors use of Level 1 if appropriate information is available, and otherwise Level 2 and finally Level 3 if Level 2 input is not available. 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 within the valuation hierarchy 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 comprised of U.S. government sponsored agency mortgage-backed securities, United States Department of the Treasury (“U.S. Treasury”) bonds and non-investment grade residual securities that arose from private-label securitizations of the Company. The U.S. government sponsored agency mortgage-backed securities and U.S. Treasury bonds trade in an active, open market with readily observable prices and are therefore classified within the Level 1 valuation hierarchy. The 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. Under Level 3, 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 ratios, borrower credit scores and property type. See Note 10, “Private Label Securitization Activity” for the key assumptions used in the residual interest valuation process.

     Securities classified as available for sale. These securities are comprised of U.S. government sponsored agency mortgage-backed securities and collateralized mortgage obligations (“CMOs”). 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. Due to illiquidity in the markets, the Company determined the fair value of certain 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-restricted. 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 available for sale. At March 31, 2010, the majority of the Company’s loans originated and classified as available for sale were reported at fair value and classified as Level 2. The Company estimates the fair value of mortgage loans based on quoted market prices for securities backed by similar types of loans. Otherwise, the fair value of loans is estimated using discounted cash flows based upon management’s best estimate of market interest rates for similar collateral. The Company generally estimated the fair value of mortgage loans based on quoted market prices for securities backed by similar types of loans. 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, prepayment speeds and loss assumptions for similar collateral. At March 31, 2010, the Company continued to have a relatively small number of loans which were originated prior to the fair value election and accounted for at lower of cost or market. Loans subject to repurchase options of certain securitization transactions and classified as available for sale are accounted for at historical cost, based on current unpaid principal balance.

     Loans held for investment. The Company generally 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 are considered impaired if it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Once a loan is identified as impaired, the fair value of the impaired loan is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value or discounted cash flows. Impaired loans do not require an allowance if the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2010, substantially all of the total impaired loans were evaluated based on the fair value of the collateral rather than on discounted cash flows. 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 less costs to sell upon transfer to repossessed assets. Subsequently, repossessed assets are carried at the lower of carrying value or fair value, less anticipated marketing and selling costs. 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 repossessed 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 (“HELOCs”) and second mortgage loans obtained through private-label securitization transactions). Residential MSRs are accounted for at fair value on a recurring basis. Servicing rights associated with consumer loans are carried at amortized cost and 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 11, “Mortgage Servicing Rights” for the key assumptions used in the residential MSR valuation process.

     Consumer Loan Servicing Rights. 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 they 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 sale 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.

Liabilities

     Warrants. Warrant liabilities are valued using a binomial lattice model and are classified within Level 2 of the valuation hierarchy. Significant assumptions include expected volatility, a risk free rate and an expected life.

Assets and liabilities measured at fair value on a recurring basis

     The following tables presents the financial instruments carried at fair value as of March 31, 2010 and March 31, 2009, by caption on the Consolidated Statement of Financial Condition and by the valuation hierarchy (as described above):

														Total carrying
														value in the
														Consolidated
														Statement of
														Financial
March 31, 2010		Level 1				Level 2				Level 3				Condition
		(Dollars in thousands)
Securities classified as trading:
Residual interests		$	—			$	—			$	286			$	286
Mortgage-backed securities			893,032				—				—				893,032
Securities classified as available for sale			209,887				—				523,901				733,788
Loans available for sale			—				1,371,476				—				1,371,476
Loans held for investment			—				13,671				—				13,671
Residential mortgage servicing rights			—				—				540,800				540,800
Other investments-restricted			4,428				—				—				4,428
Derivative financial instruments:
Rate lock commitments			—				—				13,085				13,085
Forward loan commitments			—				7,709				—				7,709
Agency forwards			(4,713	)			—				—				(4,713	)
Treasury futures			3,028				—				—				3,028
Interest rate swaps			(526	)			—				—				(526	)
Warrant liabilities			—				(6,338	)			—				(6,338	)
Total assets and liabilities at fair value		$	1,105,136			$	1,386,518			$	1,078,072			$	3,569,726

														Total carrying
														value in the
														Consolidated
														Statement of
														Financial
March 31, 2009		Level 1				Level 2				Level 3				Condition
						(Dollars in thousands)
Securities classified as trading:
Residual interests		$	—			$	—			$	18,296			$	18,296
Mortgage-backed securities			1,674,844				—				—				1,674,844
Securities classified as available for sale			234,843				—				540,969				775,812
Loans available for sale			—				3,573,997				—				3,573,997
Residential mortgage servicing rights			—				—				515,500				515,500
Other investments-restricted			36,993				—				—				36,993
Derivative financial instruments:
Rate lock commitments			—				—				82,645				82,645
Forward agency and loan sales			(58,572	)			—				—				(58,572	)
Agency forwards			33,321				—				—				33,321
U.S. Treasury futures			3,911				—				—				3,911
Interest rate swaps			(1,349	)			—				—				(1,349	)
Warrant liabilities			—				(44,901	)			—				(44,901	)
Total assets and liabilities at fair value		$	1,923,991			$	3,529,096			$	1,157,410			$	6,610,497

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 tables below include a rollforward of the Consolidated Statement of Financial Condition amounts for the three months ended March 31, 2010 and 2009 (including the change in fair value) for financial instruments classified by the Company within Level 3 of the valuation hierarchy:

																						Changes in
																						unrealized
																						gains and
																						(losses)
																						related to
										Purchases,												financial
						Total				issuances				Transfers								instruments
		Fair value,				realized/				and				in and/or				Fair value				held at
For the three months ended		January 1,				unrealized				settlements,				out of				March				March
March 31, 2010		2010				gains/(losses)				net				Level 3				31, 2010				31, 2010
		(Dollars in thousands)
Securities classified as trading:
Residual interests (1)		$	2,057			$	(1,771	)		$	—			$	—			$	286			$	—
Securities classified as available for sale (2)(3)			538,376				7,914				(22,389	)			—				523,901				11,200
Residential mortgage servicing rights			649,133				(156,600	)			48,267				—				540,800				—
Derivative financial instruments:
Rate lock commitments			10,061				—				3,024				—				13,085				—
Totals		$	1,199,627			$	(150,457	)		$	28,902			$	—			$	1,078,072			$	11,200

																						Changes in
																						unrealized
																						gains and
																						(losses)
																						related to
										Purchases,												financial
						Total				issuances				Transfers								instruments
		Fair value,				realized/				and				in and/or				Fair value,				held at
Three months ended		January 1,				unrealized				settlements,				out of				March				March
March 31, 2009		2009				gains/losses				net				Level 3				31, 2009				31, 2009
		(Dollars in thousands)
Securities classified as trading:
Residual interests (1)		$	24,808			$	(6,512	)		$	—			$	—			$	18,296			$	—
Securities classified as available for Sale (2) (3)			563,083				2,916				(25,030	)			—				540,969				(20,158	)
Residential mortgage servicing rights			511,294				(78,474	)			82,680				—				515,500				—
Derivative financial Instruments:
Rate lock commitments			78,613				—				4,032				—				82,645				—
Totals		$	1,177,798			$	(82,070	)		$	61,682			$	—			$	1,157,410			$	(20,158	)

     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:

Assets Measured at Fair Value on a Nonrecurring Basis

		Balance at
		March 31, 2010				Level 1				Level 2				Level 3
		(Dollars in thousands)
Loans held for investment		$	527,788			$	—			$	527,788			$	—
Repossessed assets			167,265				—				167,265				—
Consumer loan servicing rights			2,647				—				—				2,647
Totals		$	697,700			$	—			$	695,053			$	2,647

		Balance at
		March 31, 2009				Level 1				Level 2				Level 3
		(Dollars in thousands)
Loans held for investment		$	452,269			$	—			$	452,269			$	—
Repossessed assets			106,546				—				106,546				—
Consumer servicing rights			7,271				—				—				7,271
Totals		$	566,086			$	—			$	558,815			$	7,271

Required Financial Disclosures about Fair Value of Financial Instruments

     The accounting guidance for financial instruments requires disclosures of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate their fair values. Certain financial instruments and all nonfinancial instruments are excluded from the scope of this guidance. Accordingly, the fair value disclosures required by this guidance are only indicative of the value of individual financial instruments as of the dates indicated and should not be considered an indication of the fair value of the Company.

     The following table presents the carrying amount and estimated fair value of certain financial instruments:

		March 31, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
						(Dollars in thousands)
Financial Instruments:
Assets:
Cash and cash equivalents		$	971,150			$	971,150			$	1,082,489			$	1,082,489
Securities — trading			893,318				893,318				330,267				330,267
Securities available for sale			733,788				733,788				605,621				605,621
Other investments — restricted			4,428				4,428				15,601				15,601
Loans available for sale			1,873,744				1,878,061				1,970,104				1,975,819
Loans held for investment, net			7,042,679				6,997,837				7,190,308				7,120,802
FHLBI stock			373,443				373,443				373,443				373,443
Mortgage servicing rights			543,447				543,682				652,374				652,656
Liabilities:
Retail deposits:
Demand deposits and savings accounts			(1,791,720	)			(1,685,253	)			(1,900,855	)			(1,799,776	)
Certificates of deposit			(3,330,182	)			(3,435,776	)			(3,546,616	)			(3,643,218	)
Government accounts			(650,247	)			(626,451	)			(557,495	)			(549,990	)
National certificates of deposit			(1,792,743	)			(1,828,685	)			(2,017,080	)			(2,455,684	)
Company controlled deposits			(580,787	)			(580,787	)			(756,423	)			(756,423	)
FHLBI advances			(3,900,000	)			(4,157,788	)			(3,900,000	)			(4,136,489	)
Security repurchase agreements			(108,000	)			(110,160	)			(108,000	)			(110,961	)
Long term debt			(300,182	)			(115,344	)			(300,182	)			(284,464	)
Warrant liabilities			(6,338	)			(6,338	)			(5,111	)			(5,111	)
Derivative Financial Instruments:
Forward delivery contracts			7,709				7,709				27,764				27,764
Commitments to extend credit			13,085				13,085				10,061				10,061
Interest rate swaps			(526	)			(526	)			(747	)			(747	)
U.S. Treasury and agency futures/forwards			(1,685	)			(1,685	)			(49,228	)			(49,228	)
Options			—				—				—				—

     The methods and assumptions that were used to estimate the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The following methods and assumptions were used to estimate the fair value for other financial instruments for which it is practicable to estimate that value:

     Cash and cash equivalents. Due to their short term nature, the carrying amount of cash and cash equivalents approximates fair value.

     Loans held for investment. The fair value of loans is estimated by using internally developed discounted cash flow models using market interest rate inputs as well as management’s best estimate of spreads for similar collateral.

     FHLB stock. No secondary market exists for FHLB stock. The stock is bought and sold at par by the FHLB. Management believes that the recorded value is the fair value.

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

     FHLB Advances. Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of the existing debt.

     Security Repurchase Agreements. Rates currently available for repurchase agreements with similar terms and maturities are used to estimate fair values for these agreements.

     Long Term Debt. The fair value of the long-term debt is estimated based on a discounted cash flow model that incorporates the Company’s current borrowing rates for similar types of borrowing arrangements.

Note 6 — Investment Securities

     As of March 31, 2010 and December 31, 2009, investment securities were comprised of the following:

		Current				March 31,				December 31,
		Maturities				2010				2009
						(Dollars in thousands)
Securities — trading
U.S. government treasury bonds			2019-2040			$	754,184			$	—
U.S. government sponsored agencies			2038-2039				138,848				328,210
Non-investment grade residual interests							286				2,057
Total securities — trading						$	893,318			$	330,267
Securities — available-for-sale
Non-agencies			2035-2037			$	523,901			$	538,376
U.S. government sponsored agencies			2010-2040				209,887				67,245
Total securities — available-for-sale						$	733,788			$	605,621
Other investments — restricted
Mutual funds						$	4,428			$	15,601

Trading

     Securities classified as trading are comprised of AAA-rated U.S. government sponsored agency mortgage-backed securities, U.S. Treasury bonds, and non-investment grade residual interests from private-label securitizations. U.S. government sponsored agency mortgage-backed securities held in trading are distinguished from available-for-sale based upon the intent of the Company to use them as an economic offset against changes in the valuation of the MSR portfolio; however, these securities do not qualify as an accounting hedge as defined in current accounting guidance for derivatives and hedges.

     For U.S. Treasury bonds and U.S. government sponsored agency mortgage-backed securities held, we recorded a loss of $3.3 million during the three month period ended March 31, 2010, $3.8 million of which was unrealized loss on securities held at March 31, 2010. For the three month period ended March 31, 2009, we recorded a gain of $23.7 million, $21.4 million of which was unrealized gain on agency mortgage backed securities at March 31, 2009.

     The non-investment grade residual interests resulting from the Company’s private label securitizations were $0.3 million at March 31, 2010 versus $2.1 million at December 31, 2009. The fair value of non-investment grade residual securities classified as trading decreased as a result of the increase in the actual and expected losses in the second mortgages and HELOCs that underlie these assets.

     The fair value of residual interests is determined by discounting estimated net future cash flows using discount rates that approximate current market rates and expected prepayment 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 interests’ collateral, considering such factors as loss experience, delinquencies, loan-to-value ratio, borrower credit scores and property type.

Available-for-Sale

     At March 31, 2010 and December 31, 2009, the Company had $0.7 billion and $0.6 billion, respectively, in securities classified as available-for-sale which were comprised of U.S. government sponsored agency and non-agency collateralized mortgage obligations. Securities available-for-sale are carried at fair value, with unrealized gains and losses reported as a component of other comprehensive loss to the extent they are temporary in nature or “other-than-temporary impairments” (“OTTI”) as to non-credit related issues. If unrealized losses are, at any time, deemed to have arisen from OTTI, the credit related portion is reported as an expense for that period.

     The following table summarizes the amortized cost and estimated fair value of U.S. government sponsored agency and non-agency collateralized mortgage obligations classified as available-for-sale:

		March 31,				December 31,
		2010				2009
		(Dollars in thousands)
Amortized cost		$	799,900			$	679,872
Gross unrealized holding gains			540				2,118
Gross unrealized holding losses			(66,652	)			(76,369	)
Estimated fair value		$	733,788			$	605,621

     The following table summarizes by duration the unrealized loss positions, at March 31, 2010, on securities:

		Unrealized Loss Position with Duration												Unrealized Loss Position with
		12 Months and Over												Duration Under 12 Months
										Current												Current
						Number of				Unrealized								Number of				Unrealized
Type of Security		Principal				Securities				Loss				Principal				Securities				Loss
										(Dollars in thousands)
U.S. government sponsored agency securities		$	—				—			$	—			$	200,096				6			$	(1,521	)
Collateralized mortgage obligations			626,089				12				(65,131	)			—				—				—
Totals		$	626,089				12			$	(65,131	)		$	200,096				6			$	(1,521	)

     The unrealized losses on securities-available-for-sale amounted to $66.7 million on $826.2 million of principal of agency and non-agency CMOs at March 31, 2010. These CMOs consist of interests in investment vehicles backed by mortgage loans.

     An investment impairment analysis is triggered when the estimated market value is less than amortized cost for an extended period of time, generally six months. Before an analysis is performed, the Company also reviews the general market conditions for the specific type of underlying collateral for each security; in this case, the mortgage market in general has suffered from significant losses in value. With the assistance of third party experts as deemed necessary, the Company models the expected cash flows of the underlying mortgage assets using historical factors such as default rates, current delinquency rates and estimated factors such as prepayment speed, default speed and severity speed. Next, the cash flows are modeled through the appropriate waterfall for each CMO tranche owned; the level of credit support provided by subordinated tranches is included in the waterfall analysis. The resulting cash flow of principal and interest is then utilized by management to determine the amount of credit losses by security.

     The credit losses on the CMO portfolio reflect the economic conditions present in the U.S. over the course of the last two years. This includes high mortgage defaults, declines in collateral values and changes in homeowner behavior, such as intentionally defaulting on a note due to a home value worth less than the outstanding debt on the home.

     In the three month period ended March 31, 2010, additional OTTI due to credit losses on six investments with existing other-than-temporary impairment credit losses totaled $3.3 million while no additional OTTI due to credit loss was recognized on securities that did not already have such losses; all OTTI due to credit losses was recognized in current operations. In the three months ended March 31, 2009, additional credit losses on the original three and seven additional CMOs totaled $17.2 million, which was recognized in current operations.

     At March 31, 2010, the Company had total other-than-temporary impairment recoveries of $15.7 million on 12 securities in the available-for-sale portfolio with $38.6 million in total credit losses recognized through operations. At December 31, 2009, the Company had total other-than-temporary impairments of $111.6 million on 12 securities in the available-for-sale portfolio with $35.3 million in total credit losses recognized through operations.

     The following table shows the activity for OTTI credit loss for the quarter ended March 31, 2010:

										Additions on				Reduction
						Additions on				Securities with				for Sold				March 31,
		January 1, 2010				Securities with				Previous OTTI				Securities				2010
		Balance				No Prior OTTI				Recognized				with OTTI				Balance
		(Dollars in thousands)
Collateralized mortgage obligations		$	(35,272	)			—			$	(3,286	)			—			$	(38,558	)

     Gains (losses) on the sale of U.S. government sponsored agency mortgage-backed securities available for sale that are recently created with underlying mortgage products originated by the Company are reported within net gain on loan sale. Securities in this category have typically remained in the portfolio less than 90 days before sale. During the three months ended March 31, 2010, there were no sales of agency securities with underlying mortgage products recently originated by the Bank compared with a $11.1 million gain on $418.7 million of sales during the quarter ended March 31, 2009.

     Gain (loss) on sales for all other available for sale securities types are reported in net gain on sale of available for sales securities. During the three months ended March 31, 2010, the Company sold $54.6 million in agency and non-agency securities resulting in a net gain of $2.2 million versus the same period ended March 31, 2009 in which the Company sold no U.S. government sponsored agency and non-agency securities available for sale.

     As of March 31, 2010, the aggregate amount of available-for-sale securities from each of the following non-agency issuers was greater than 10% of the Company’s stockholders’ equity.

		Amortized				Fair Market
Name of Issuer		Cost				Value
		(Dollars in thousands)
Countrywide Home Loans		$	196,693			$	177,563
Flagstar Home Equity Loan Trust 2006-1			181,024				163,933
Total		$	377,717			$	341,496

Other Investments — Restricted

     The Company has other investments in its insurance subsidiary which are restricted as to their use. These assets can only be used to pay insurance claims in that subsidiary. These securities had a fair value that approximates their recorded amount for each period presented. During 2009, the Company executed commutation agreements with three of the four mortgage insurance companies it had reinsurance agreements with. Under each commutation agreement, the respective mortgage insurance company took back the ceded risk (thus again assuming the entire insured risk) and receives rights to all future premiums. In addition, the mortgage insurance company received all the cash held in trust, less any amount that is above the amount of total future liability. The Company had securities in its remaining reinsurance subsidiaries of $4.4 million and $15.6 million at March 31, 2010 and December 31, 2009, respectively.

Note 7 — Loans Available for Sale

     The following table summarizes loans available for sale:

		March 31,				December 31,
		2010				2009
		(Dollars in thousands)
Mortgage loans		$	1,873,738			$	1,970,104
Second mortgage loans			6				—
Total		$	1,873,744			$	1,970,104

     Effective January 1, 2009, the Company elected to record new originations of loans available for sale on the fair value method and as such no longer defers loan fees or expenses related to these loans. Because the fair value method was required to be adopted prospectively, only loans originated for sale subsequent to January 1, 2009 are affected. At March 31, 2010 and December 31, 2009, $1.3 billion and $1.9 billion of loans available for sale were recorded at fair value, respectively. The Company estimates the fair value of mortgage loans based on quoted market prices for securities backed by similar types of loans where quoted market prices were available. 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.

     In addition, for certain loans sold to Ginnie Mae, the Company as the servicer, has the option to repurchase without Ginnie Mae’s prior authorization, any individual loan when certain delinquency criteria are met. Once the Company has the unilateral ability to repurchase the delinquent loan, the Company has effectively regained control over the loan and is required under U.S. GAAP to recognize the loan and a corresponding repurchase liability on its balance sheet regardless of the Company’s intention to repurchase the loan. At March 31, 2010, the Company’s repurchase option asset and corresponding liability, included in other liabilities, was $441.0 million.

Note 8 — Loans Held for Investment

     Loans held for investment are summarized as follows:

		March 31,				December 31,
		2010				2009
		(Dollars in thousands)
Mortgage loans		$	4,803,425			$	4,990,994
Second mortgage loans			210,208				221,626
Commercial real estate loans			1,555,163				1,600,271
Construction loans			15,544				16,642
Warehouse lending			576,719				448,567
Consumer loans			407,742				423,842
Commercial loans			11,878				12,366
Total			7,580,679				7,714,308
Less allowance for loan losses			(538,000	)			(524,000	)
Total		$	7,042,679			$	7,190,308