UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
 _________________
 
 Form
10-Q
 (Mark
One)
 þQUARTERLY
      REPORT PURSUANT TO SECTION 13 OR
15(d)
 OF
THE SECURITIES EXCHANGE ACT OF 1934
 
 For
the quarterly period ended June 30, 2009
 
 or
 
  ̈TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15 (d)
 OF
      THE SECURITIES EXCHANGE ACT OF 1934
 
 Commission
file number:  000-25391
 _________________
 
 Capitol
Federal Financial
 (Exact name of registrant as
specified in its charter)
 
 United
States                                                                   48-1212142
 (State or other jurisdiction of
incorporation                         (I.R.S.
Employer
 or
organization)                                                          Identification
No.)
  700
Kansas Avenue, Topeka,
Kansas                                              66603
 (Address
of principal executive
offices)                                      (Zip
Code)
 
 Registrant’s
telephone number, including area code:
 (785)
235-1341
 
 
 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 requirements for the past
90 days.   Yes þ    No
 ̈
  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 of 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  ̈  No  ̈
 
 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 “accelerated filer, large accelerated filer, and smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large
accelerated filer    þ         Accelerated
filer     ̈        Non-accelerated
filer    ̈      Smaller
Reporting Company    ̈
 (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   ̈    No  þ
 
 As
of July 27, 2009, there were 74,098,655 shares of Capitol Federal Financial
Common Stock outstanding.
 
 
 
  1
  
 PART I -- FINANCIAL INFORMATION
              Page
                NumberItem
      1.  Financial Statements (Unaudited):Consolidated Balance
      Sheets at June 30, 2009 and September 30, 2008
              3Consolidated
      Statements of Income for the three and nine months
      endedJune
      30, 2009 and June 30, 2008
              4Consolidated
      Statement of Stockholders’ Equity for the nine months
      endedJune
      30, 2009
              5Consolidated Statements of
      Cash Flows for the nine months endedJune
      30, 2009 and June 30, 2008
              6Notes to Consolidated
      Financial Statements
              8Item
      2.  Management’s
      Discussion and Analysis of Financial Condition
    andResults
      of Operations
              18Item
      3.  Quantitative and Qualitative Disclosure about
      Market Risk
              56Item
      4.  Controls and Procedures
              63PART
      II -- OTHER INFORMATIONItem
      1.    Legal Proceedings
              63Item
      1A. Risk
      Factors
              63Item
      2.    Unregistered Sales of Equity Securities
      and Use of Proceeds
              63Item
      3.    Defaults Upon Senior
      Securities
              63Item
      4.    Submission of Matters to a Vote of Security
      Holders
              63Item
      5.    Other Information
              64Item
      6.    Exhibits
              64Signature
      Page
              65INDEX
      TO EXHIBITS
              66
 
  2
  PART
I -- FINANCIAL INFORMATION
 Item
1. Financial Statements
 CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY
 CONSOLIDATED BALANCE SHEETS
 (Dollars
in thousands except per share data and amounts)
 June
      30,
                              
                              
                              September
      30,2009
                              
                              
                              2008ASSETS:
                              
                              (Unaudited)Cash
      and cash equivalents
                              
                              $
                              74,101
                              
                              
                              $
                              87,138Investment
      securities:Available-for-sale
      (“AFS”) at estimated fair value (amortized cost of $260,886 and
      $51,700)
                              
                              
                              259,309
                              
                              
                              
                              49,586Held-to-maturity
      (“HTM”) at cost (estimated fair value of $63,757 and
    $92,211)
                              
                              
                              62,857
                              
                              
                              
                              92,773Mortgage-backed
      securities (“MBS”):AFS,
      at estimated fair value (amortized cost of $1,433,171 and
      $1,491,536)
                              
                              
                              1,472,547
                              
                              
                              
                              1,484,055HTM,
      at cost (estimated fair value of $643,110 and $743,764)
                              
                              
                              628,451
                              
                              
                              
                              750,284Loans
      receivable, net
                              
                              
                              5,541,731
                              
                              
                              
                              5,320,780Capital
      stock of Federal Home Loan Bank (“FHLB”), at cost
                              
                              
                              132,071
                              
                              
                              
                              124,406Accrued
      interest receivable
                              
                              
                              32,828
                              
                              
                              
                              33,704Premises
      and equipment, net
                              
                              
                              35,008
                              
                              
                              
                              29,874Real
      estate owned (“REO”), net
                              
                              
                              5,077
                              
                              
                              
                              5,146Other
      assets
                              
                              
                              75,312
                              
                              
                              
                              77,503TOTAL
      ASSETS
                              
                              $
                              8,319,292
                              
                              
                              $
                              8,055,249LIABILITIES:Deposits
                              
                              $
                              4,175,251
                              
                              
                              $
                              3,923,883Advances
      from FHLB
                              
                              
                              2,410,949
                              
                              
                              
                              2,447,129Other
      borrowings, net
                              
                              
                              713,609
                              
                              
                              
                              713,581Advance
      payments by borrowers for taxes and insurance
                              
                              
                              30,412
                              
                              
                              
                              53,213Income
      taxes payable
                              
                              
                              4,500
                              
                              
                              
                              6,554Deferred
      income tax liabilities, net
                              
                              
                              24,477
                              
                              
                              
                              3,223Accounts
      payable and accrued expenses
                              
                              
                              37,460
                              
                              
                              
                              36,450Total
      liabilities
                              
                              
                              7,396,658
                              
                              
                              
                              7,184,033STOCKHOLDERS'
      EQUITY:Preferred
      stock ($0.01 par value) 50,000,000 shares authorized; none
      issued
                              
                              
                              --
                              
                              
                              
                              --Common
      stock ($0.01 par value) 450,000,000 shares authorized,
      91,512,287shares
      issued; 74,098,155 and 74,079,868 shares outstandingas
      of June 30, 2009 and September 30, 2008, respectively
                              
                              
                              915
                              
                              
                              
                              915Additional
      paid-in capital
                              
                              
                              451,543
                              
                              
                              
                              445,391Unearned
      compensation, Employee Stock Ownership Plan (“ESOP”)
                              
                              
                              (8,569
                              )
                              
                              
                              (10,082
                              )Unearned
      compensation, Recognition and Retention Plan (“RRP”)
                              
                              
                              (403
                              )
                              
                              
                              (553
                              )Retained
      earnings
                              
                              
                              775,214
                              
                              
                              
                              759,375Accumulated
      other comprehensive gain (loss)
                              
                              
                              23,512
                              
                              
                              
                              (5,968
                              )Less
      shares held in treasury (17,414,132 and 17,432,419 shares as
      ofJune
      30, 2009 and September 30, 2008, respectively, at cost)
                              
                              
                              (319,578
                              )
                              
                              
                              (317,862
                              )Total
      stockholders' equity
                              
                              
                              922,634
                              
                              
                              
                              871,216TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                              
                              $
                              8,319,292
                              
                              
                              $
                              8,055,249
 See
accompanying notes to consolidated interim financial statements.
 <Index>
  3
  CAPITOL FEDERAL FINANCIAL AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF INCOME (Unaudited)
 (Dollars
and share counts in thousands except per share data)
 
 For
      the Three Months Ended
                            
                            
                            For
      the Nine Months EndedJune
      30,
                            
                            
                            June
      30,2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008INTEREST
      AND DIVIDEND INCOME:Loans
      receivable
                            
                            $
                            76,745
                            
                            
                            $
                            74,651
                            
                            
                            $
                            230,907
                            
                            
                            $
                            226,190MBS
                            
                            
                            24,211
                            
                            
                            
                            24,869
                            
                            
                            
                            75,701
                            
                            
                            
                            62,242Investment
      securities
                            
                            
                            1,279
                            
                            
                            
                            1,298
                            
                            
                            
                            3,560
                            
                            
                            
                            8,489Capital
      stock of FHLB
                            
                            
                            793
                            
                            
                            
                            1,502
                            
                            
                            
                            2,351
                            
                            
                            
                            5,446Cash
      and cash equivalents
                            
                            
                            50
                            
                            
                            
                            465
                            
                            
                            
                            167
                            
                            
                            
                            3,262Total
      interest and dividend income
                            
                            
                            103,078
                            
                            
                            
                            102,785
                            
                            
                            
                            312,686
                            
                            
                            
                            305,629INTEREST
      EXPENSE:FHLB
      advances
                            
                            
                            25,307
                            
                            
                            
                            30,248
                            
                            
                            
                            81,505
                            
                            
                            
                            96,205Deposits
                            
                            
                            24,705
                            
                            
                            
                            31,174
                            
                            
                            
                            76,201
                            
                            
                            
                            104,352Other
      borrowings
                            
                            
                            7,144
                            
                            
                            
                            4,682
                            
                            
                            
                            21,978
                            
                            
                            
                            10,762Total
      interest expense
                            
                            
                            57,156
                            
                            
                            
                            66,104
                            
                            
                            
                            179,684
                            
                            
                            
                            211,319NET
      INTEREST AND DIVIDEND INCOME
                            
                            
                            45,922
                            
                            
                            
                            36,681
                            
                            
                            
                            133,002
                            
                            
                            
                            94,310PROVISION
      FOR LOAN LOSSES
                            
                            
                            3,112
                            
                            
                            
                            1,602
                            
                            
                            
                            5,768
                            
                            
                            
                            1,721NET
      INTEREST AND DIVIDEND INCOMEAFTER
      PROVISION FOR LOAN LOSSES
                            
                            
                            42,810
                            
                            
                            
                            35,079
                            
                            
                            
                            127,234
                            
                            
                            
                            92,589OTHER
      INCOME:Retail
      fees and charges
                            
                            
                            4,671
                            
                            
                            
                            4,566
                            
                            
                            
                            13,271
                            
                            
                            
                            13,150Gains
      on sale of loans held-for-sale (“LHFS”), net
                            
                            
                            1,629
                            
                            
                            
                            244
                            
                            
                            
                            2,169
                            
                            
                            
                            501Insurance
      commissions
                            
                            
                            528
                            
                            
                            
                            486
                            
                            
                            
                            1,892
                            
                            
                            
                            1,661Loan
      fees
                            
                            
                            564
                            
                            
                            
                            572
                            
                            
                            
                            1,730
                            
                            
                            
                            1,751Income
      from bank-owned life insurance (“BOLI”)
                            
                            
                            262
                            
                            
                            
                            577
                            
                            
                            
                            887
                            
                            
                            
                            1,810Other,
      net
                            
                            
                            578
                            
                            
                            
                            900
                            
                            
                            
                            1,900
                            
                            
                            
                            3,565Total
      other income
                            
                            
                            8,232
                            
                            
                            
                            7,345
                            
                            
                            
                            21,849
                            
                            
                            
                            22,438OTHER
      EXPENSES:Salaries
      and employee benefits
                            
                            
                            10,715
                            
                            
                            
                            11,021
                            
                            
                            
                            32,447
                            
                            
                            
                            31,729Occupancy
      of premises
                            
                            
                            3,936
                            
                            
                            
                            3,750
                            
                            
                            
                            11,428
                            
                            
                            
                            10,384Federal
      insurance premium
                            
                            
                            5,307
                            
                            
                            
                            116
                            
                            
                            
                            5,700
                            
                            
                            
                            350Advertising
                            
                            
                            1,704
                            
                            
                            
                            1,216
                            
                            
                            
                            5,393
                            
                            
                            
                            3,433Deposit
      and loan transaction fees
                            
                            
                            1,276
                            
                            
                            
                            1,364
                            
                            
                            
                            3,998
                            
                            
                            
                            3,935Regulatory
      and other services
                            
                            
                            857
                            
                            
                            
                            1,267
                            
                            
                            
                            2,986
                            
                            
                            
                            4,345Office
      supplies and related expense
                            
                            
                            582
                            
                            
                            
                            493
                            
                            
                            
                            2,030
                            
                            
                            
                            1,614Other,
      net
                            
                            
                            2,034
                            
                            
                            
                            609
                            
                            
                            
                            6,650
                            
                            
                            
                            4,404Total
      other expenses
                            
                            
                            26,411
                            
                            
                            
                            19,836
                            
                            
                            
                            70,632
                            
                            
                            
                            60,194INCOME
      BEFORE INCOME TAX EXPENSE
                            
                            
                            24,631
                            
                            
                            
                            22,588
                            
                            
                            
                            78,451
                            
                            
                            
                            54,833INCOME
      TAX EXPENSE
                            
                            
                            9,155
                            
                            
                            
                            8,233
                            
                            
                            
                            28,991
                            
                            
                            
                            19,638NET
      INCOME
                            
                            $
                            15,476
                            
                            
                            $
                            14,355
                            
                            
                            $
                            49,460
                            
                            
                            $
                            35,195Basic
      earnings per common share
                            
                            $
                            0.21
                            
                            
                            $
                            0.20
                            
                            
                            $
                            0.68
                            
                            
                            $
                            0.48Diluted
      earnings per common share
                            
                            $
                            0.21
                            
                            
                            $
                            0.20
                            
                            
                            $
                            0.68
                            
                            
                            $
                            0.48Dividends
      declared per public share
                            
                            $
                            0.50
                            
                            
                            $
                            0.50
                            
                            
                            $
                            1.61
                            
                            
                            $
                            1.50Basic
      weighted average common shares
                            
                            
                            73,173
                            
                            
                            
                            72,933
                            
                            
                            
                            73,116
                            
                            
                            
                            72,922Diluted
      weighted average common shares
                            
                            
                            73,232
                            
                            
                            
                            73,021
                            
                            
                            
                            73,190
                            
                            
                            
                            72,985
  See
accompanying notes to consolidated interim financial
statements.
  4
  CAPITOL FEDERAL FINANCIAL AND
SUBSIDIARY
 CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
 (Unaudited)
 (Dollars
in thousands)
 
 
 AccumulatedAdditional
                      
                      
                      Unearned
                      
                      
                      Unearned
                      
                      
                      
                      
                      
                      OtherCommon
                      
                      
                      Paid-In
                      
                      
                      Compensation
                      
                      
                      Compensation
                      
                      
                      Retained
                      
                      
                      Comprehensive
                      
                      
                      TreasuryStock
                      
                      
                      Capital
                      
                      
                      ESOP
                      
                      
                      RRP
                      
                      
                      Earnings
                      
                      
                      Gain
      (Loss)
                      
                      
                      Stock
                      
                      
                      TotalBalance
      at October 1, 2008
                      
                      $
                      915
                      
                      
                      $
                      445,391
                      
                      
                      $
                      (10,082
                      )
                      
                      $
                      (553
                      )
                      
                      $
                      759,375
                      
                      
                      $
                      (5,968
                      )
                      
                      $
                      (317,862
                      )
                      
                      $
                      871,216Comprehensive
      income:Net
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      49,460
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      49,460Changes
      in unrealized gains (losses) onsecurities
      AFS, net of deferred incometaxes
      of $17,914
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      29,480
                      
                      
                      
                      
                      
                      
                      
                      29,480Total
      comprehensive income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      78,940ESOP
      activity, net
                      
                      
                      
                      
                      
                      
                      4,653
                      
                      
                      
                      1,513
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      6,166RRP
      activity, net
                      
                      
                      
                      
                      
                      
                      128
                      
                      
                      
                      
                      
                      
                      
                      (100
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      24
                      
                      
                      
                      52Stock
      based compensation - stock options and RRP
                      
                      
                      
                      
                      
                      
                      225
                      
                      
                      
                      
                      
                      
                      
                      250
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      475Acquisition
      of treasury stock
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (2,426
                      )
                      
                      
                      (2,426
                      )Stock
      options exercised
                      
                      
                      
                      
                      
                      
                      1,146
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      686
                      
                      
                      
                      1,832Dividends
      on common stock to publicstockholders
      ($1.61 per public share)
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (33,621
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (33,621
                      )Balance
      at June 30, 2009
                      
                      $
                      915
                      
                      
                      $
                      451,543
                      
                      
                      $
                      (8,569
                      )
                      
                      $
                      (403
                      )
                      
                      $
                      775,214
                      
                      
                      $
                      23,512
                      
                      
                      $
                      (319,578
                      )
                      
                      $
                      922,634
 
 
 See
accompanying notes to consolidated interim financial statements.
 
 
 <Index>
 
  5
  CAPITOL
FEDERAL FINANCIAL AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)
 (Dollars
in thousands)
 For
      the Nine Months EndedJune
      30,2009
                          
                          
                          2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                          
                          $
                          49,460
                          
                          
                          $
                          35,195Adjustments
      to reconcile net income to net cash provided byoperating
      activities:FHLB
      stock dividends
                          
                          
                          (2,351
                          )
                          
                          
                          (5,446
                          )Provision for
      loan losses
                          
                          
                          5,768
                          
                          
                          
                          1,721Originations
      of LHFS
                          
                          
                          (858
                          )
                          
                          
                          (32,555
                          )Proceeds
      from sales of LHFS
                          
                          
                          97,838
                          
                          
                          
                          31,220Amortization
      and accretion of premiums and discounts onMBS
      and investment securities
                          
                          
                          1,377
                          
                          
                          
                          496Depreciation
      and amortization of premises and equipment
                          
                          
                          3,751
                          
                          
                          
                          3,934Amortization
      of deferred amounts related to FHLB advances, net
                          
                          
                          2,208
                          
                          
                          
                          1,294Common
      stock committed to be released for allocation - ESOP
                          
                          
                          6,166
                          
                          
                          
                          5,350Stock
      based compensation - stock options and RRP
                          
                          
                          475
                          
                          
                          
                          575Other,
      net
                          
                          
                          (1,432
                          )
                          
                          
                          (442
                          )Changes
      in:Accrued
      interest receivable
                          
                          
                          876
                          
                          
                          
                          3,561Other
      assets
                          
                          
                          2,052
                          
                          
                          
                          (2,185
                          )Income
      taxes payable/receivable
                          
                          
                          1,840
                          
                          
                          
                          15,583Accounts
      payable and accrued expenses
                          
                          
                          1,010
                          
                          
                          
                          (4,362
                          )Net
      cash provided by operating activities
                          
                          
                          168,180
                          
                          
                          
                          53,939CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from maturities or calls of investment securities AFS
                          
                          
                          45,032
                          
                          
                          
                          99,791Purchases
      of investment securities AFS
                          
                          
                          (255,046
                          )
                          
                          
                          (49,248
                          )Proceeds
      from maturities or calls of investment securities HTM
                          
                          
                          39,600
                          
                          
                          
                          514,108Purchases
      of investment securities HTM
                          
                          
                          (10,116
                          )
                          
                          
                          (185,138
                          )Principal
      collected on MBS AFS
                          
                          
                          227,574
                          
                          
                          
                          171,534Purchases
      of MBS AFS
                          
                          
                          (169,452
                          )
                          
                          
                          (1,044,847
                          )Principal
      collected on MBS HTM
                          
                          
                          125,176
                          
                          
                          
                          215,767Purchases
      of MBS HTM
                          
                          
                          (3,217
                          )
                          
                          
                          (5,483
                          )Proceeds
      from the redemption of capital stock of FHLB
                          
                          
                          3,688
                          
                          
                          
                          28,861Purchases
      of capital stock of FHLB
                          
                          
                          (9,002
                          )
                          
                          
                          (12,926
                          )Loan
      originations, net of principal collected
                          
                          
                          (196,002
                          )
                          
                          
                          (85,692
                          )Loan
      purchases, net of principal collected
                          
                          
                          (133,849
                          )
                          
                          
                          45,015Net
      deferred fee activity
                          
                          
                          1,330
                          
                          
                          
                          463Purchases
      of premises and equipment
                          
                          
                          (8,944
                          )
                          
                          
                          (5,113
                          )Proceeds
      from sales of REO
                          
                          
                          6,047
                          
                          
                          
                          4,084Net
      cash used in investing activities
                          
                          
                          (337,181
                          )
                          
                          
                          (308,824
                          )
 
 (Continued)
  6
  
 
 For
      the Nine Months EndedJune
      30,2009
                      
                      
                      2008CASH
      FLOWS FROM FINANCING ACTIVITIES:Dividends
      paid
                      
                      $
                      (33,621
                      )
                      
                      $
                      (31,091
                      )Deposits,
      net of withdrawals
                      
                      
                      251,368
                      
                      
                      
                      38,761Proceeds
      from advances/line of credit from FHLB
                      
                      
                      1,561,102
                      
                      
                      
                      725,000Repayments
      on advances/line of credit from FHLB
                      
                      
                      (1,561,102
                      )
                      
                      
                      (925,000
                      )Deferred
      FHLB prepayment penalty
                      
                      
                      (38,388
                      )
                      
                      
                      --Proceeds
      from repurchase agreements
                      
                      
                      --
                      
                      
                      
                      400,000Change
      in advance payments by borrowers for taxes
    and insurance
                      
                      
                      (22,801
                      )
                      
                      
                      (22,208
                      )Acquisitions
      of treasury stock
                      
                      
                      (2,426
                      )
                      
                      
                      (7,307
                      )Stock
      options exercised and excess tax benefits from stock
    options
                      
                      
                      1,832
                      
                      
                      
                      376Net
      cash provided by financing activities
                      
                      
                      155,964
                      
                      
                      
                      178,531NET
      DECREASE IN CASH AND CASH EQUIVALENTS
                      
                      
                      (13,037
                      )
                      
                      
                      (76,354
                      )CASH
      AND CASH EQUIVALENTS:Beginning
      of period
                      
                      
                      87,138
                      
                      
                      
                      162,791End
      of period
                      
                      $
                      74,101
                      
                      
                      $
                      86,437SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Income
      tax payments, net of refund
                      
                      $
                      27,116
                      
                      
                      $
                      4,003Interest
      payments, net of interest credited to deposits
                      
                      $
                      103,229
                      
                      
                      $
                      106,659SUPPLEMENTAL
      DISCLOSURE OF NON-CASHINVESTING
      AND FINANCING ACTIVITIES:Loans
      transferred to REO
                      
                      $
                      7,320
                      
                      
                      $
                      4,188Fair
      value change related to fair value hedge:Interest
      rate swaps hedging FHLB advances
                      
                      $
                      --
                      
                      
                      $
                      (13,817
                      )Transfer
      of loans receivable to LHFS, net
                      
                      $
                      94,672
                      
                      
                      $
                      --
 
 (Concluded)
 See
accompanying notes to consolidated interim financial statements.
 <Index>
 7
 
 
 Notes to Consolidated Interim Financial Statements
(Unaudited)
 
 1.   Basis
of Financial Statement Presentation
 
 The
accompanying consolidated financial statements of Capitol Federal Financial
(“CFFN”) and subsidiary (the “Company”) have been prepared in accordance with
generally accepted accounting principles in the United States of America
(“GAAP”) for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements.  In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included.  These statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company’s 2008 Annual Report on Form 10-K filed with the
Securities and Exchange Commission (“SEC”).  Interim results are not
necessarily indicative of results for a full year.
 
 In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting
periods.  Significant estimates include the allowance for loan losses
(“ALLL”), other-than-temporary declines in the fair value of securities and
other financial instruments. Actual results could differ from those
estimates.  See “Item 2- Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Critical Accounting
Policies.”
 
 The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiary, Capitol Federal Savings Bank (the “Bank”). The Bank has
a wholly owned subsidiary, Capitol Funds, Inc.  Capitol Funds, Inc.
has a wholly owned subsidiary, Capitol Federal Mortgage Reinsurance
Company.  All intercompany accounts and transactions have been
eliminated.
 
 2.   Earnings
Per Share (“EPS”)
 
 The
Company accounts for the 3,024,574 shares acquired by its ESOP in accordance
with Statement of Position (“SOP”) 93-6 and the shares awarded pursuant to its
RRP in a manner similar to the ESOP shares.  Shares acquired by the
ESOP and shares awarded pursuant to the RRP are not considered in the basic
average shares outstanding until the shares are committed for allocation or
vested to an employee’s individual account.  The following is a
reconciliation of the numerators and denominators of the basic and diluted EPS
calculations.
 
 For
      the Three Months Ended
                  
                  
                  For
      the Nine Months EndedJune
      30,
                  
                  
                  June
      30,2009(1)
      (2)
                  
                  
                  2008(3)
                  
                  
                  2009(1)(2)
                  
                  
                  2008(4)(5)(Dollars
      in thousands, except per share amounts)Net
      income
                  
                  $
                  15,476
                  
                  
                  $
                  14,355
                  
                  
                  $
                  49,460
                  
                  
                  $
                  35,195Average
      common shares outstanding
                  
                  
                  73,071,448
                  
                  
                  
                  72,832,039
                  
                  
                  
                  73,065,433
                  
                  
                  
                  72,870,800Average
      committed ESOP shares outstanding
                  
                  
                  101,374
                  
                  
                  
                  101,374
                  
                  
                  
                  50,779
                  
                  
                  
                  50,778Total
      basic average common shares outstanding
                  
                  
                  73,172,822
                  
                  
                  
                  72,933,413
                  
                  
                  
                  73,116,212
                  
                  
                  
                  72,921,578Effect
      of dilutive RRP shares
                  
                  
                  3,842
                  
                  
                  
                  5,240
                  
                  
                  
                  5,626
                  
                  
                  
                  4,295Effect
      of dilutive stock options
                  
                  
                  55,832
                  
                  
                  
                  82,132
                  
                  
                  
                  67,663
                  
                  
                  
                  58,784Total
      diluted average common shares outstanding
                  
                  
                  73,232,496
                  
                  
                  
                  73,020,785
                  
                  
                  
                  73,189,501
                  
                  
                  
                  72,984,657Net
      earnings per share:Basic
                  
                  $
                  0.21
                  
                  
                  $
                  0.20
                  
                  
                  $
                  0.68
                  
                  
                  $
                  0.48Diluted
                  
                  $
                  0.21
                  
                  
                  $
                  0.20
                  
                  
                  $
                  0.68
                  
                  
                  $
                  0.48
 
 8
 (1)Options to purchase 72,050 shares of common stock at prices between
$38.77 per share and $43.46 per share were outstanding as of June 30, 2009, but
were not included in the computation of diluted EPS because they were
anti-dilutive for the three and nine months ended June 30, 2009.
 
 (2)At June 30, 2009, there were 2,000 unvested RRP shares at $39.95 per
share that were excluded from the computation of diluted EPS because they were
anti-dilutive for the three and nine months ended June 30, 2009.
 
 (3)Options to purchase 31,500 shares of common stock at $38.77 per share
were outstanding as of June 30, 2008, but were not included in the computation
of diluted EPS because they were anti-dilutive for the three months ended June
30, 2008.
 
 (4)Options to purchase 128,055 shares of common stock at prices between
$32.23 per share and $38.77 per share were outstanding as of June 30, 2008, but
were not included in the computation of diluted EPS because they were
anti-dilutive for the nine months ended June 30, 2008.
 
 (5)At June 30, 2008, there were 6,000 unvested RRP shares at $32.30 per
share that were excluded from the computation of diluted EPS because they were
anti-dilutive for the nine months ended June 30, 2008.
 
 3.   Recent
Accounting Pronouncements
 
 In
January 2009, the Financial Accounting Standards Board (“FASB”) issued Staff
Position (“FSP”) Emerging Issues Task Force (“EITF”) 99-20-1, “Amendments to the
Impairment Guidance of EITF Issue No. 99-20.”  FSP EITF 99-20-1
eliminates the requirement that a security holder’s best estimate of cash flows
be based upon those that “a market participant” would use.  Instead,
an other-than-temporary impairment (“OTTI”) should be recognized as a realized
loss through earnings when it is probable there has been an adverse change in
the security holder’s estimated cash flows from previous
projections.  This treatment is consistent with the impairment model
in Statement of Financial Accounting Standards (“SFAS”) No. 115 “Accounting for
Certain Investments in Debt and Equity Securities.”  FSP EITF 99-20-1
was effective for the Company for the period ended December 31,
2008.  The Company’s adoption of the FSP did not have a material
impact on its financial condition or results of operations.
 
 In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly.”  The FSP provides
additional guidance on valuation techniques for estimating the fair value of
assets or liabilities in accordance with SFAS No. 157 “Fair Value Measurements”
when there has been a significant decrease in volume and level of market
activity.  The FSP provides guidance on identifying circumstances that
indicate a transaction is not orderly.  As part of the judgment
involved with estimating fair value, the entity will need to determine which
valuation technique or techniques are the most appropriate, and, within those
techniques, which results are “most representative” of fair value under market
conditions.  FSP FAS 157-4 emphasizes that the notion of exit price in
an orderly transaction (that is, not a forced liquidation or distressed sale)
between market participants at the measurement date under current market
conditions remains unchanged.  FSP FAS 157-4 was effective for the
Company for the period ended June 30, 2009.  The Company’s adoption of
the FSP did not have a material impact on its financial condition or results of
operations.
 
 In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation
of Other-Than-Temporary Impairments.”  The FSP amends existing OTTI
guidance in GAAP for debt securities to make the guidance more operational and
to improve the presentation and disclosure of OTTI on debt and equity securities
in the financial statements.  An OTTI is present for a security which
has a fair value less than amortized cost if an entity has the intent to sell
the impaired security, it is more likely than not that the entity will be
required to sell the impaired security before recovery, or if the entity does
not expect to recover the entire amortized cost basis of the impaired
security.  If the entity has the intent to sell the security or it is
more likely than not that it will be required to sell the security, the entire
impairment (amortized cost basis over fair value) should be recognized in
earnings as a credit loss.  If an entity does not intend to sell the
security and it is not more likely than not that the entity will be required to
sell the security, the credit component of the impairment should be recognized
in earnings, and the non-credit component should be recognized in other
comprehensive income.  The FSP does not amend existing recognition and
measurement guidance related to OTTI of equity securities.  The FSP
expands and increases the frequency of existing disclosures about OTTI for debt
and equity securities and requires new disclosures to help users of financial
statements understand the significant inputs used in determining credit losses,
as well as a rollforward of that amount each period.  The FSP was
effective for the Company for the period ended June 30, 2009.  The
Company’s adoption of the FSP did not have a material impact on its financial
condition or results of operations.
  9
   
 In April
2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (“APB”)
Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial
Instruments.”  The FSP amends the disclosure requirements of SFAS No.
107, “Disclosures about Fair Value of Financial Instruments”, to require fair
value disclosures of financial instruments in interim financial statements as
well as in annual financial statements.  The FSP also amends APB No.
28,” Interim Financial Reporting”, to require such disclosures in all interim
financial statements.  The FSP requires an entity to disclose in the
body or in the accompanying footnotes of its interim financial statements and
its annual financial statements the fair value of all financial instruments,
whether recognized or not recognized in the consolidated balance sheet, as
required by FAS No. 107.  The FSP also requires entities to disclose
the methods and significant assumptions used to estimate the fair value of
financial instruments, and to disclose significant changes in methods or
assumptions used to estimate fair values.  The FSP was effective for
the Company for the period ended June 30, 2009.  Since the provisions
of the FSP are disclosure related, the Company’s adoption of the FSP did not
have an impact on its financial condition or results of
operations.
  In April
2009, the SEC issued Staff Accounting Bulletin (“SAB”) 111 which amends Topic
5.M “Other-Than-Temporary Impairment of Certain Investments in Debt and Equity
Securities” to exclude investments in debt securities from the scope of the
other-than-temporary impairment guidance.  SAB 111 was issued in
response to the FASB’s issuance of FSB FAS 115-2 and FAS 124-2.  The
SEC staff has not changed its views in SAB Topic 5.M on investments in equity
securities.  SAB 111 was effective for the Company for the period
ended June 30, 2009.  The Company’s adoption of SAB 111 did not have a
material impact on its financial condition or results of operation.
 
 In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” which is intended to
assist management in assessing and disclosing subsequent events by establishing
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before the financial statements are issued or are
available to be issued.  Financial statements are considered to be
available to be issued when they are complete in a form and format that complies
with GAAP and all necessary approvals for issuance, such as from management, the
board of directors, and/or significant shareholders, have been
obtained.  The date through which an entity has evaluated subsequent
events and the basis for that date should also be
disclosed.   Management must perform its assessment of subsequent
events for both interim and annual financial reporting periods.  SFAS
No. 165 was effective for the Company for the period ended June 30,
2009.  The Company’s adoption of SFAS No. 165 did not have a material
impact on its financial condition or results of operations.
  In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets an Amendment of FASB Statement No. 140.”  The objective of SFAS
No. 166 is to improve the relevance, representational faithfulness, and
comparability of the information provided in the financial statements related to
the transfer of financial assets; the effects of a transfer on the company’s
financial position, financial performance and cash flows; and a transferor’s
continuing involvement in transferred financial assets.  SFAS No. 166
is effective for financial asset transfers occurring after the beginning of an
entity’s first fiscal year that begins after November 15, 2009, which for the
Company is October 1, 2010.  Early adoption is
prohibited.  The Company has not yet completed its assessment of the
impact of SFAS No. 166.
  In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” to improve financial reporting by entities involved with variable
interest entities.  SFAS No. 167 carries forward the scope of FASB
Interpretation No. 46(R), with the addition of entities previously considered
qualifying special-purpose entities, as the concept of these entities was
eliminated in SFAS No. 166.  SFAS No. 167 is effective as of the
beginning of the first fiscal year that begins after November 15, 2009, which
for the Company is October 1, 2010.  Early adoption is
prohibited.  The Company has not yet completed its assessment of the
impact of SFAS No. 167.
  In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles” which replaces
SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” as the
source of authoritative accounting principles recognized by FASB to be applied
by nongovernmental entities in the preparation of financial statements in
conformity with GAAP.  SFAS No. 168 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009, which for the Company is September 30, 2009.  Since the
underlying GAAP guidance for nongovernmental entities will not change as a
result of the issuance of SFAS No. 168, the Company’s adoption of the SFAS is
not expected to have an impact on its financial condition or results of
operations.  References to codification guidance will be updated in
the Annual Report on Form 10-K for the fiscal year ending September 30,
2009.
  10
  
 
 4.   Fair
Value of Financial Instruments
 
 Fair
Value Measurements
 Effective
October 1, 2008, the Company adopted SFAS No. 157 “Fair Value Measurements”
which defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. The statement applies
whenever other standards require or permit assets or liabilities to be measured
at fair value.  The statement does not require new fair value
measurements, but rather provides a definition and framework for measuring fair
value which will result in greater consistency and comparability among financial
statements prepared under GAAP. The Company’s adoption of SFAS No. 157 did
not have a material impact on its financial condition or results of
operations.
 
 The
Company uses fair value measurements to record fair value adjustments to certain
assets and to determine fair value disclosures. The Company did not have any
liabilities that were measured at fair value at June 30, 2009.  The
Company’s AFS securities are recorded at fair value on a recurring
basis.  Additionally, from time to time, the Company may be required
to record at fair value other assets or liabilities on a non-recurring basis,
such as REO, LHFS, and impaired loans. These non-recurring fair value
adjustments involve the application of lower-of-cost-or-fair value accounting or
write-downs of individual assets.
 
 In
accordance with SFAS No. 157, the Company groups its assets at fair value
in three levels, based on the markets in which the assets are traded and the
reliability of the assumptions used to determine fair value. These levels
are:
 
 •
              
              Level
      1 — Valuation is based upon quoted prices for identical instruments traded
      in active markets.•
              
              Level
      2 — Valuation is based upon quoted prices for similar instruments in
      active markets, quoted prices for identical or similar instruments in
      markets that are not active, and model-based valuation techniques for
      which all significant assumptions are observable in the
      market.•
              
              Level
      3 — Valuation is generated from model-based techniques that use
      significant assumptions not observable in the market. These unobservable
      assumptions reflect the Company’s own estimates of assumptions that market
      participants would use in pricing the asset or liability. Valuation
      techniques include the use of option pricing models, discounted cash flow
      models, and similar techniques. The results cannot be determined with
      precision and may not be realized in an actual sale or immediate
      settlement of the asset or liability.
 The
Company bases its fair values on the price that would be received to sell an
asset in an orderly transaction between market participants at the measurement
date.  SFAS No. 157 requires the Company to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring
fair value.
 
 The
following is a description of valuation methodologies used for assets measured
at fair value on a recurring basis.
 
 AFS
Securities
 The
Company’s AFS securities portfolio is carried at estimated fair value on a
recurring basis, with any unrealized gains and losses, net of taxes, reported as
accumulated other comprehensive income/loss in stockholders'
equity.  In the table below, in accordance with FSP FAS 157-4, the
Company has disclosed its major security types based on the nature and risks of
the securities.  Substantially all of the securities within the AFS
portfolio are issued by U.S. Government sponsored enterprises or
agencies.  The fair values for all the AFS securities are obtained
from independent nationally recognized pricing services. Various modeling
techniques are used to determine pricing for the Company’s securities, including
option pricing and discounted cash flow models. The inputs to these models may
include benchmark yields, reported trades, broker/dealer quotes, issuer spreads,
benchmark securities, bids, offers and reference data.  There are some
AFS securities in the AFS portfolio that have significant unobservable input
requiring the independent pricing services to use some judgment in pricing the
related securities.  These AFS securities are classified as Level
3.  All other AFS securities are classified as Level
2.
  11
  
 
 The
following table provides the level of valuation assumption used to determine the
carrying value of the Company’s assets measured at fair value on a recurring
basis at June 30, 2009:
 
 Quoted
      Prices
                    
                    
                    Significant
                    
                    
                    Significantin
      Active Markets
                    
                    
                    Other
                    
                    
                    UnobservableCarrying
                    
                    
                    for
      Identical Assets
                    
                    
                    Observable
      Inputs
                    
                    
                    InputsValue
                    
                    
                    (Level
      1)
                    
                    
                    (Level
      2)
                    
                    
                    (Level
      3)(1)(Dollars
      in thousands)AFS
      securities:U.S.
      government-sponsored agencies
                    
                    $
                    254,745
                    
                    
                    $
                    --
                    
                    
                    $
                    254,745
                    
                    
                    $
                    --Municipal
      bonds
                    
                    
                    2,738
                    
                    
                    
                    --
                    
                    
                    
                    2,738
                    
                    
                    
                    --Trust
      preferred securities
                    
                    
                    1,826
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    1,826MBS
                    
                    
                    1,472,547
                    
                    
                    
                    --
                    
                    
                    
                    1,472,547
                    
                    
                    
                    --$
                    1,731,856
                    
                    
                    $
                    --
                    
                    
                    $
                    1,730,030
                    
                    
                    $
                    1,826
 
 (1)
The Company’s Level 3 AFS securities were immaterial as of June 30, 2009 and had
no material activity during the nine months ended June 30, 2009.
 
 The
following is a description of valuation methodologies used for significant
assets measured at fair value on a non-recurring basis.
 
 Loans
Receivable
 Loans
which meet certain criteria are evaluated individually for impairment. A loan is
considered impaired when, based upon current information and events, it is
probable the Bank will be unable to collect all amounts due, including principal
and interest, according to the contractual terms of the loan
agreement.  Substantially all of the Bank’s impaired loans at June 30,
2009 are secured by real estate.  These impaired loans are
individually assessed to determine that the carrying value of the loan is not in
excess of the fair value of the collateral, less estimated selling costs. Fair
value is estimated through current appraisals, real estate brokers or listing
prices.  Fair values may be adjusted by management to reflect current
economic and market conditions and, as such, are classified as Level
3.  Impaired loans at June 30, 2009 were $29.4 million. Based on this
evaluation, the Company maintains an allowance for loan losses of $4.4 million
at June 30, 2009 for such impaired loans.
 
 REO,
net
 REO
represents real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure and is carried at the lower of cost or fair value less estimated
selling costs.  Fair value is estimated through current appraisals,
real estate brokers or listing prices.  As these properties are
actively marketed, estimated fair values may be adjusted by management to
reflect current economic and market conditions and, as such, are classified as
Level 3.  REO at June 30, 2009 was $5.1 million. During the three
and nine months ended June 30, 2009, charge-offs to the allowance for loan
losses related to loans that were transferred to REO were $328
thousand and $1.0 million, respectively. Write downs related to REO that were
charged to other expense were $245 thousand and $885
thousandfor the three and nine months ended June 30,
2009.
  12
  
 
 The
following table provides the level of valuation assumption used to determine the
carrying value of the Company’s assets measured at fair value on a non-recurring
basis at June 30, 2009:
 
 Quoted
      Prices
                    
                    
                    Significant
                    
                    
                    Significantin
      Active Markets
                    
                    
                    Other
                    
                    
                    UnobservableCarrying
                    
                    
                    for
      Identical Assets
                    
                    
                    Observable
      Inputs
                    
                    
                    InputsValue
                    
                    
                    (Level
      1)
                    
                    
                    (Level
      2)
                    
                    
                    (Level
      3)(Dollars
      in thousands)Impaired
      loans
                    
                    $
                    29,399
                    
                    
                    $
                    --
                    
                    
                    $
                    --
                    
                    
                    $
                    29,399REO,
      net
                    
                    
                    5,077
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    5,077$
                    34,476
                    
                    
                    $
                    --
                    
                    
                    $
                    --
                    
                    
                    $
                    34,476
 
 
 
 Fair
Value Disclosures
 Effective
June 30, 2009, the Company adopted FSP FAS 107-1 and ABP Opinion No. 28-1,
“Interim Disclosures about Fair Value of Financial Instruments.”  The
FSP requires interim and annual disclosures of the fair value of financial
instruments, the methods and significant assumptions used to determine the
estimated fair values and significant changes in the methods or assumptions used
to calculate the estimated fair values.  The Company determined
estimated fair value amounts using available market information and a selection
from a variety of valuation methodologies. However, considerable judgment is
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented are not necessarily indicative of the
amount the Company could realize in a current market exchange. The use of
different market assumptions and estimation methodologies may have a material
effect on the estimated fair value amounts.  The fair value estimates
presented herein are based on pertinent information available to management as
of June 30, 2009 and September 30, 2008. Although management is not aware of any
factors that would significantly affect the estimated fair value amounts, such
amounts have not been comprehensively revalued for purposes of these financial
statements since that date.
 
 The
estimated fair values of the Company’s financial instruments as of June 30, 2009
and September 30, 2008 are as follows:
 At
                    
                    
                    AtJune
      30, 2009
                    
                    
                    September
      30, 2008Carrying
                    
                    
                    Fair
                    
                    
                    Carrying
                    
                    
                    FairAmount
                    
                    
                    Value
                    
                    
                    Amount
                    
                    
                    Value(Dollars
      in thousands)Assets:Cash
      and cash equivalents
                    
                    $
                    74,101
                    
                    
                    $
                    74,101
                    
                    
                    $
                    87,138
                    
                    
                    $
                    87,138Investment
      securities:AFS
                    
                    
                    259,309
                    
                    
                    
                    259,309
                    
                    
                    
                    49,586
                    
                    
                    
                    49,586HTM
                    
                    
                    62,857
                    
                    
                    
                    63,757
                    
                    
                    
                    92,773
                    
                    
                    
                    92,211MBS:AFS
                    
                    
                    1,472,547
                    
                    
                    
                    1,472,547
                    
                    
                    
                    1,484,055
                    
                    
                    
                    1,484,055HTM
                    
                    
                    628,451
                    
                    
                    
                    643,110
                    
                    
                    
                    750,284
                    
                    
                    
                    743,764Loans
      receivable
                    
                    
                    5,541,731
                    
                    
                    
                    5,693,858
                    
                    
                    
                    5,320,780
                    
                    
                    
                    5,301,179Capital
      stock of FHLB
                    
                    
                    132,071
                    
                    
                    
                    132,071
                    
                    
                    
                    124,406
                    
                    
                    
                    124,406Liabilities:Deposits
                    
                    
                    4,175,251
                    
                    
                    
                    4,238,765
                    
                    
                    
                    3,923,883
                    
                    
                    
                    3,934,188Advances
      from FHLB
                    
                    
                    2,410,949
                    
                    
                    
                    2,543,948
                    
                    
                    
                    2,447,129
                    
                    
                    
                    2,485,545Other
      borrowings
                    
                    
                    713,609
                    
                    
                    
                    737,770
                    
                    
                    
                    713,581
                    
                    
                    
                    716,951
 
 
 The
following methods and assumptions were used to estimate the fair value of the
financial instruments:
 
 Cash and Cash Equivalents-
The carrying amounts of cash and cash equivalents are considered to approximate
their fair value due to the nature of the financial asset.
  13
  
 
 Investment Securities and MBS -Estimated fair values of securities are based on one of three
methods:  1) quoted market prices where available, 2) quoted market
prices for similar instruments if quoted market prices are not available, 3)
unobservable data that represents the Bank’s assumptions about items that market
participants would consider in determining fair value where no market data is
available.  AFS securities are carried at estimated fair
value.  HTM securities are carried at amortized cost.
 
 Loans Receivable - Fair
values are estimated for portfolios with similar financial
characteristics.  Loans are segregated by type, such as one- to
four-family residential mortgages, multi-family residential mortgages,
nonresidential and installment loans.  Each loan category is further
segmented into fixed and adjustable interest rate categories.  Market
pricing sources are used to approximate the estimated fair value of fixed and
adjustable-rate one- to four-family residential mortgages.  For all
other loan categories, future cash flows are discounted using the LIBOR curve at
which similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturity.
 
 Capital Stock of FHLB– The
carrying value of FHLB stock equals cost.  The fair value is based on
redemption at par value.
 
 Deposits - The estimated fair
value of demand deposits and savings accounts is the amount payable on demand at
the reporting date. The estimated fair value of fixed-maturity certificates of
deposit is estimated by discounting the future cash flows using the rates
currently offered by the Bank for certificates of similar remaining
maturities.
 
 Advances from FHLB - The
estimated fair value of advances from FHLB are determined by discounting the
future cash flows of each advance using the LIBOR curve.
 
 Other Borrowings– Other
borrowings consists of repurchase agreements and Junior Subordinated Deferrable
Interest Debentures (“the debentures”).The estimated fair value
of the repurchase agreements is determined by discounting the future cash flows
of each agreement using the LIBOR curve.  The debentures have a
variable rate structure.  The Company was able to prepay the
debentures at a premium until April 2009, at which point the borrowings became
redeemable at par.  The carrying value of the debentures approximates
their estimated fair value.
 
  14
  
 
 5.   Securities
 
 The
following tables reflect the amortized cost, estimated fair value, and gross
unrealized gains and losses of AFS and HTM securities at June 30, 2009 and
September 30, 2008.  The majority of the security portfolio is
composed of securities issued by U.S. government-sponsored
enterprises.
  June
      30, 2009Gross
                                                            
                                                            
                                                            Gross
                                                            
                                                            
                                                            EstimatedAmortized
                                                            
                                                            
                                                            Unrealized
                                                            
                                                            
                                                            Unrealized
                                                            
                                                            
                                                            FairCost
                                                            
                                                            
                                                            Gains
                                                            
                                                            
                                                            Losses
                                                            
                                                            
                                                            Value(Dollars
      in thousands)AFS:U.S.
      government-sponsored agencies
                                                            
                                                            $
                                                            254,424
                                                            
                                                            
                                                            $
                                                            549
                                                            
                                                            
                                                            $
                                                            228
                                                            
                                                            
                                                            $
                                                            254,745Municipal
      bonds
                                                            
                                                            
                                                            2,673
                                                            
                                                            
                                                            
                                                            99
                                                            
                                                            
                                                            
                                                            34
                                                            
                                                            
                                                            
                                                            2,738Trust
      preferred securities
                                                            
                                                            
                                                            3,789
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            1,963
                                                            
                                                            
                                                            
                                                            1,826MBS
                                                            
                                                            
                                                            1,433,171
                                                            
                                                            
                                                            
                                                            40,819
                                                            
                                                            
                                                            
                                                            1,443
                                                            
                                                            
                                                            
                                                            1,472,5471,694,057
                                                            
                                                            
                                                            
                                                            41,467
                                                            
                                                            
                                                            
                                                            3,668
                                                            
                                                            
                                                            
                                                            1,731,856HTM:Municipal
      bonds
                                                            
                                                            
                                                            62,857
                                                            
                                                            
                                                            
                                                            1,171
                                                            
                                                            
                                                            
                                                            271
                                                            
                                                            
                                                            
                                                            63,757MBS
                                                            
                                                            
                                                            628,451
                                                            
                                                            
                                                            
                                                            15,100
                                                            
                                                            
                                                            
                                                            441
                                                            
                                                            
                                                            
                                                            643,110691,308
                                                            
                                                            
                                                            
                                                            16,271
                                                            
                                                            
                                                            
                                                            712
                                                            
                                                            
                                                            
                                                            706,867$
                                                            2,385,365
                                                            
                                                            
                                                            $
                                                            57,738
                                                            
                                                            
                                                            $
                                                            4,380
                                                            
                                                            
                                                            $
                                                            2,438,723September 30, 2008Gross
                                                            
                                                            
                                                            Gross
                                                            
                                                            
                                                            EstimatedAmortized
                                                            
                                                            
                                                            Unrealized
                                                            
                                                            
                                                            Unrealized
                                                            
                                                            
                                                            FairCost
                                                            
                                                            
                                                            Gains
                                                            
                                                            
                                                            Losses
                                                            
                                                            
                                                            Value(Dollars in thousands)AFS:U.S.
      government-sponsored agencies
                                                            
                                                            $
                                                            45,155
                                                            
                                                            
                                                            $
                                                            --
                                                            
                                                            
                                                            $
                                                            967
                                                            
                                                            
                                                            $
                                                            44,188Municipal
      bonds
                                                            
                                                            
                                                            2,686
                                                            
                                                            
                                                            
                                                            61
                                                            
                                                            
                                                            
                                                            4
                                                            
                                                            
                                                            
                                                            2,743Trust
      preferred securities
                                                            
                                                            
                                                            3,859
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            1,204
                                                            
                                                            
                                                            
                                                            2,655MBS
                                                            
                                                            
                                                            1,491,536
                                                            
                                                            
                                                            
                                                            3,940
                                                            
                                                            
                                                            
                                                            11,421
                                                            
                                                            
                                                            
                                                            1,484,0551,543,236
                                                            
                                                            
                                                            
                                                            4,001
                                                            
                                                            
                                                            
                                                            13,596
                                                            
                                                            
                                                            
                                                            1,533,641HTM:U.S.
      government-sponsored agencies
                                                            
                                                            
                                                            37,397
                                                            
                                                            
                                                            
                                                            19
                                                            
                                                            
                                                            
                                                            647
                                                            
                                                            
                                                            
                                                            36,769Municipal
      bonds
                                                            
                                                            
                                                            55,376
                                                            
                                                            
                                                            
                                                            408
                                                            
                                                            
                                                            
                                                            342
                                                            
                                                            
                                                            
                                                            55,442MBS
                                                            
                                                            
                                                            750,284
                                                            
                                                            
                                                            
                                                            2,105
                                                            
                                                            
                                                            
                                                            8,625
                                                            
                                                            
                                                            
                                                            743,764843,057
                                                            
                                                            
                                                            
                                                            2,532
                                                            
                                                            
                                                            
                                                            9,614
                                                            
                                                            
                                                            
                                                            835,975$
                                                            2,386,293
                                                            
                                                            
                                                            $
                                                            6,533
                                                            
                                                            
                                                            $
                                                            23,210
                                                            
                                                            
                                                            $
                                                            2,369,616
 
   15
  
 The
following tables summarize the estimated fair value and gross unrealized losses
of those securities on which an unrealized loss at June 30, 2009 and September
30, 2008 was reported and the continuous unrealized loss position for the twelve
months prior to June 30, 2009 and September 30, 2008 or for a shorter period of
time, as applicable. At June 30, 2009 and September 30, 2008, there were 84 and
92 securities, respectively, in a continuous unrealized loss position for more
than 12 months.
 
 June
      30, 2009Less
      Than
                          
                          
                          Equal
      to or Greater12
      Months
                          
                          
                          Than
      12 MonthsCount
                          
                          
                          Estimated
                            Fair
      Value
                          
                          
                          Unrealized
                          
                          
                          Count
                          
                          
                          Estimated
                            Fair
      Value
                          
                          
                          UnrealizedLosses
                          
                          
                          LossesAFS:
                          
                          (Dollars
      in thousands)U.S.
      government-sponsored agencies
                          
                          
                          5
                          
                          
                          $
                          102,600
                          
                          
                          $
                          228
                          
                          
                          
                          --
                          
                          
                          $
                          --
                          
                          
                          $
                          --Municipal
      bonds
                          
                          
                          5
                          
                          
                          
                          1,293
                          
                          
                          
                          34
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --Trust
      preferred securities
                          
                          
                          1
                          
                          
                          
                          1,826
                          
                          
                          
                          1,963
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --MBS
                          
                          
                          12
                          
                          
                          
                          77,288
                          
                          
                          
                          1,106
                          
                          
                          
                          73
                          
                          
                          
                          37,919
                          
                          
                          
                          33723
                          
                          
                          $
                          183,007
                          
                          
                          $
                          3,331
                          
                          
                          
                          73
                          
                          
                          $
                          37,919
                          
                          
                          $
                          337HTM:Municipal
      bonds
                          
                          
                          22
                          
                          
                          $
                          11,649
                          
                          
                          $
                          234
                          
                          
                          
                          1
                          
                          
                          $
                          463
                          
                          
                          $
                          37MBS
                          
                          
                          6
                          
                          
                          
                          16,374
                          
                          
                          
                          83
                          
                          
                          
                          10
                          
                          
                          
                          44,352
                          
                          
                          
                          35828
                          
                          
                          $
                          28,023
                          
                          
                          $
                          317
                          
                          
                          
                          11
                          
                          
                          $
                          44,815
                          
                          
                          $
                          395September
      30, 2008Less
      Than
                          
                          
                          Equal
      to or Greater12
      Months
                          
                          
                          Than
      12 MonthsCount
                          
                          
                          Estimated
                            Fair
      Value
                          
                          
                          Unrealized
                          
                          
                          Count
                          
                          
                          Estimated
                            Fair
      Value
                          
                          
                          UnrealizedLosses
                          
                          
                          LossesAFS:
                          
                          (Dollars
      in thousands)U.S.
      government-sponsored agencies
                          
                          
                          2
                          
                          
                          $
                          44,189
                          
                          
                          $
                          967
                          
                          
                          
                          --
                          
                          
                          $
                          --
                          
                          
                          $
                          --Municipal
      bonds
                          
                          
                          2
                          
                          
                          
                          491
                          
                          
                          
                          4
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --Trust
      preferred securities
                          
                          
                          1
                          
                          
                          
                          2,655
                          
                          
                          
                          1,204
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --MBS
                          
                          
                          150
                          
                          
                          
                          956,968
                          
                          
                          
                          10,191
                          
                          
                          
                          62
                          
                          
                          
                          51,515
                          
                          
                          
                          1,230155
                          
                          
                          $
                          1,004,303
                          
                          
                          $
                          12,366
                          
                          
                          
                          62
                          
                          
                          $
                          51,515
                          
                          
                          $
                          1,230HTM:U.S.
      government-sponsored agencies
                          
                          
                          1
                          
                          
                          $
                          24,353
                          
                          
                          $
                          647
                          
                          
                          
                          --
                          
                          
                          $
                          --
                          
                          
                          $
                          --Municipal
      bonds
                          
                          
                          47
                          
                          
                          
                          24,522
                          
                          
                          
                          342
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --MBS
                          
                          
                          42
                          
                          
                          
                          417,400
                          
                          
                          
                          5,004
                          
                          
                          
                          30
                          
                          
                          
                          166,807
                          
                          
                          
                          3,62190
                          
                          
                          $
                          466,275
                          
                          
                          $
                          5,993
                          
                          
                          
                          30
                          
                          
                          $
                          166,807
                          
                          
                          $
                          3,621
 
 On a
quarterly basis, management conducts a formal review of securities for the
presence of OTTI.  Management assesses whether an OTTI is present when
the fair value of a security is less than its amortized cost basis at the
balance sheet date.  For such securities, OTTI is considered to have
occurred if the Company intends to sell the security, if it is more likely than
not the Company will be required to sell the security before recovery of its
amortized cost basis or if the present values of expected cash flows is not
sufficient to recover the entire amortized cost.
  16
  
 
 The
unrealized losses are primarily a result of increases in market yields from the
time of purchase.  In general, as market yields rise, the fair value
of securities will decrease; as market yields fall, the fair value of securities
will increase. Management generally views changes in fair value caused by
changes in interest rates as temporary; therefore, these securities have not
been classified as other-than-temporarily impaired.  Additionally, the
impairment is also considered temporary because scheduled coupon payments have
been made, it is anticipated that the entire principal balance will be collected
as scheduled, and management neither intends to sell the securities and it is
not more likely than not that the Company will be required to sell the
securities before the recovery of the remaining amortized cost
amount.
 
 The
amortized cost and estimated fair value of securities by remaining contractual
maturity without consideration for call features or pre-refunding dates as of
June 30, 2009 are shown below.  Actual maturities of MBS may differ
from contractual maturities because borrowers have the right to call or prepay
obligations, sometimes without penalties.  Maturities of MBS depend on
the repayment characteristics and experience of the underlying financial
instruments.
  June
      30, 2009Available-For-Sale
                          
                          
                          Held-To-MaturityEstimated
                          
                          
                          
                          
                          
                          EstimatedAmortized
                          
                          
                          Fair
                          
                          
                          Amortized
                          
                          
                          FairCost
                          
                          
                          Value
                          
                          
                          Cost
                          
                          
                          Value(Dollars
      in thousands)One
      year or less
                          
                          $
                          --
                          
                          
                          $
                          --
                          
                          
                          $
                          194
                          
                          
                          $
                          194One
      year through five years
                          
                          
                          254,801
                          
                          
                          
                          255,123
                          
                          
                          
                          12,545
                          
                          
                          
                          12,810Five
      years through ten years
                          
                          
                          70,939
                          
                          
                          
                          74,015
                          
                          
                          
                          371,814
                          
                          
                          
                          381,521Ten
      years and thereafter
                          
                          
                          1,368,317
                          
                          
                          
                          1,402,718
                          
                          
                          
                          306,755
                          
                          
                          
                          312,342$
                          1,694,057
                          
                          
                          $
                          1,731,856
                          
                          
                          $
                          691,308
                          
                          
                          $
                          706,867
 
  
  Issuers
of certain securities have the right to call and prepay obligations with or
without prepayment penalties.  As of June 30, 2009, the amortized cost
of the securities in our portfolio which are callable or have pre-refunding
dates within one year totaled $206.2 million.  All dispositions of
securities for the nine months ended June 30, 2009 and twelve months ended
September 30, 2008 were the result of principal repayments, maturities, or
calls.
 As of
June 30, 2009, the Bank had pledged AFS and HTM MBS as collateral with an
amortized cost of $933.3 million and an estimated fair value of $960.0 million
to the public unit depositors, repurchase agreement counterparties, and the
Federal Reserve Bank.
 
 6.   FHLB
Advances
 
 During
the nine months ended June 30, 2009, the Bank prepaid $875.0 million of
fixed-rate FHLB advances with a weighted average interest rate of 5.65% and a
weighted average remaining term to maturity of 11 months.  The prepaid
FHLB advances were replaced with $875.0 million of fixed-rate FHLB advances,
with a weighted average contractual interest rate of 3.41% and an average term
of 69 months.  The Bank paid a $38.4 million penalty to the FHLB as a
result of prepaying the FHLB advances.  The prepayment penalty will be
deferred and recognized in interest expense over the life of the new FHLB
advances.  As a result, the prepayment penalty will effectively
increase the interest rate on the new advances 96 basis points at the time of
the transaction.  The benefit of the refinance will be recognized in
the form of an immediate decrease in interest expense, and a decrease in
interest rate sensitivity, as the maturities of the refinanced advances were
extended at a lower rate.  In accordance with EITF 96-19, “Debtor’s
Accounting for a Modification or Exchange of Debt Instruments”, the prepayment
penalty was deferred as an adjustment to the carrying value of the new advances
since the new FHLB advances were not “substantially different,” as defined
within EITF 96-19, from the prepaid FHLB advances.  The present value
of the cash flows under the terms of the new FHLB advances was not more than 10%
different from the present value of the cash flows under the terms of the
prepaid FHLB advances (including the prepayment penalty) and there were no
embedded conversion options in the prepaid FHLB advances or in the new FHLB
advances.  The following table presents the face value of FHLB
advances and the maturities and rates for all FHLB advances outstanding at June
30, 2009.
  17
  
 
 Weighted
                        
                        
                        WeightedFHLB
                        
                        
                        Average
                        
                        
                        AverageAdvances
                        
                        
                        Contractual
                        
                        
                        EffectiveMaturity
      by fiscal year
                        
                        Amount
                        
                        
                        Rate
                        
                        
                        Rate(1)(Dollars in thousands)2009
                        
                        $
                        20,000
                        
                        
                        
                        5.09
                        %
                        
                        
                        5.09
                        %2010
                        
                        
                        350,000
                        
                        
                        
                        4.49
                        
                        
                        
                        4.492011
                        
                        
                        276,000
                        
                        
                        
                        4.87
                        
                        
                        
                        4.872012
                        
                        
                        350,000
                        
                        
                        
                        3.35
                        
                        
                        
                        3.352013
                        
                        
                        525,000
                        
                        
                        
                        3.72
                        
                        
                        
                        4.062014
                        
                        
                        450,000
                        
                        
                        
                        3.14
                        
                        
                        
                        3.90Thereafter
                        
                        
                        475,000
                        
                        
                        
                        3.67
                        
                        
                        
                        4.28$
                        2,446,000
                        
                        
                        
                        3.80
                        %
                        
                        
                        4.13
                        %
 
 (1) The
effective rate includes the net impact of the amortization of deferred
prepayment penalties related to the prepayment of certain FHLB advances and
deferred gains related to the termination of interest rate swaps during fiscal
year 2008.
 
 7.   Subsequent
Events
  Management
has evaluated events and transactions that occurred after the balance sheet date
of June 30, 2009 through August 4, 2009, the date the financial statements were
available to be issued.  No material events or transactions which
would require adjustments to or disclosures in the consolidated financial
statements occurred during this period.
  
 Item 2.   Management’s Discussion and Analysis of
Financial Condition and Results of Operations
 
 The
Company and its wholly-owned subsidiary, the Bank, may from time to time make
written or oral “forward-looking statements,” including statements contained in
the Company’s filings with the SEC.  These forward-looking statements
may be included in this Quarterly Report on Form 10-Q and the exhibits attached
to it, in the Company’s reports to stockholders and in other communications by
the Company, which are made in good faith by us pursuant to the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995.
 
 These
forward-looking statements include statements about our beliefs, plans,
objectives, goals, expectations, anticipations, estimates and intentions, that
are subject to significant risks and uncertainties, and are subject to change
based on various factors, some of which are beyond our control.  The
words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,”
“expect,” “intend,” “plan” and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause our
future results to differ materially from the plans, objectives, goals,
expectations, anticipations, estimates and intentions expressed in the
forward-looking statements:
 
 ·
              our
      ability to continue to maintain overhead costs at reasonable
      levels;
 ·
              our
      ability to continue to originate a significant volume of one- to
      four-family mortgage loans in our market
area;
 ·
              our
      ability to acquire funds from or invest funds in wholesale or secondary
      markets;
 ·
              the
      future earnings and capital levels of the Bank, which could affect the
      ability of the Company to pay dividends in accordance with its dividend
      policies;
 ·
              fluctuations
      in deposit flows, loan demand, and/or real estate values, which may
      adversely affect our business;
 ·
              the
      credit risks of lending and investing activities, including changes in the
      level and direction of loan delinquencies and write-offs and changes in
      estimates of the adequacy of the allowance for loan
  losses;
 ·
              the
      strength of the U.S. economy in general and the strength of the local
      economies in which we conduct
operations;
 ·
              the
      effects of, and changes in, trade, monetary and fiscal policies and laws,
      including interest rate policies of the Board of Governors of the Federal
      Reserve System;
 ·
              the
      effects of, and changes in, foreign and military policies of the United
      States Government;
  18
  
 
 ·
              inflation,
      interest rate, market and monetary
fluctuations;
 ·
              our
      ability to access cost-effective
funding;
 ·
              the
      timely development of and acceptance of our new products and services and
      the perceived overall value of these products and services by users,
      including the features, pricing and quality compared to competitors’
      products and services;
 ·
              the
      willingness of users to substitute competitors’ products and services for
      our products and services;
 ·
              our
      success in gaining regulatory approval of our products and services and
      branching locations, when required;
 ·
              the
      impact of changes in financial services laws and regulations, including
      laws concerning taxes, banking securities and insurance and the impact of
      other governmental initiatives affecting the financial services
      industry;
 ·
              implementing
      business initiatives may be more difficult or expensive than
      anticipated;
 ·
              technological
      changes;
 ·
              acquisitions
      and dispositions;
 ·
              changes
      in consumer spending and saving habits;
and
 ·
              our
      success at managing the risks involved in our
  business
 
 This list
of important factors is not all inclusive.  We do not undertake to
update any forward-looking statement, whether written or oral, that may be made
from time to time by or on behalf of the Company or the Bank.
 
 As used
in this Form 10-Q, unless we specify otherwise, “the Company,” “we,” “us,” and
“our” refer to Capitol Federal Financial, a United States corporation. “Capitol
Federal Savings,” and “the Bank,” refer to Capitol Federal Savings Bank, a
federal savings bank and the wholly-owned subsidiary of Capitol Federal
Financial. “MHC” refers to Capitol Federal Savings Bank MHC, a mutual holding
company and majority-owner of Capitol Federal Financial.
 
 The
following discussion and analysis is intended to assist in understanding the
financial condition and results of operations of the Company.  It
should be read in conjunction with the consolidated financial statements and
notes presented in this report.  The discussion includes comments
relating to the Bank, since the Bank is wholly owned by the Company and
comprises the majority of its assets and is the principal source of income for
the Company.  This discussion and analysis should be read in
conjunction with the management discussion and analysis included in the
Company’s 2008 Annual Report on Form 10-K filed with the SEC.
 
 
 Executive
Summary
 
 The
following summary should be read in conjunction with our Management’s Discussion
and Analysis of Financial Condition and Results of Operations in its
entirety.
 
 Our
principal business consists of attracting deposits from the general public and
investing those funds primarily in permanent loans secured by first mortgages on
owner-occupied, one- to four-family residences.  We also originate
consumer loans, loans secured by first mortgages on non-owner-occupied one- to
four-family residences, construction loans secured by one- to four-family
residences, commercial real estate loans, and multi-family real estate
loans.  While our primary business is the origination of one- to
four-family mortgage loans funded through retail deposits, we also purchase
whole loans and invest in certain investment securities and MBS using FHLB
advances and repurchase agreements as additional funding sources.
 
 The
Company is significantly affected by prevailing economic conditions including
federal monetary and fiscal policies and federal regulation of financial
institutions.  Deposit balances are influenced by a number of factors
including interest rates paid on competing personal investment products, the
level of personal income, and the personal rate of savings within our market
areas.  Lending activities are influenced by the demand for housing
and other loans, changing loan underwriting guidelines, as well as interest rate
pricing competition from other lending institutions.  The primary
sources of funds for lending activities include deposits, loan repayments,
investment income, borrowings, and funds provided from operations.
 
 The
Company’s results of operations are primarily dependent on net interest income,
which is the difference between the interest earned on loans, MBS, investment
securities, and cash, and the interest paid on deposits and
borrowings.  Net interest income is affected by the shape of the
market yield curve, the re-pricing of interest-earning assets and
interest-bearing liabilities on our balance sheet, and the prepayment rate on
our loans and MBS as it relates to reinvestment opportunities.  On a
weekly basis, management reviews deposit flows, loan demand, cash
 
 19
 levels,
and changes in several market rates to assess all pricing
strategies.  We generally price our loan and deposit products based
upon an analysis of our competition and changes in market rates.  The
Bank generally prices its first mortgage loan products based upon prices
available in the secondary market while considering the demand for our products
and our ability to service customers in a timely manner.  Generally,
deposit pricing is based upon a survey of peers in the Bank’s market areas, and
the need to attract funding and retain maturing deposits.  The
majority of our loans are fixed-rate products with maturities up to 30 years,
while the majority of our deposits have maturity or reprice dates of less than
two years.
 
 During
the third quarter of fiscal year 2009, the national economy continued to
contract due to an increase in unemployment and a general decline in household
wealth.  The financial services industry as a whole continued to
experience declines in credit quality and asset quality due largely to real
estate devaluations and an increase in unemployment caused by the ongoing
economic recession.  The Bank has not experienced the same magnitude
of adverse operational impacts felt by many financial institutions; however, we
are not immune to negative consequences arising from the economic recession and
sharp downturn in the housing and real estate markets nationally.  We
recorded a $3.1 million provision for loan losses during the current
quarter.  The additional provision reflects an increase in our
purchased loan loss factors in the formula analysis and purchased loan specific
valuation allowances and accounts for charge-offs during the quarter, primarily
related to purchased loans..  We have experienced an increase in the
overall balance of non-performing loans, but the balance of our non-performing
loans continues to remain at low levels relative to the size of our loan
portfolio.
 
 The
Company recognized net income of $15.5 million for the quarter ended June 30,
2009, compared to net income of $18.1 million for the quarter ended March 31,
2009.  The decrease in net income between the periods was primarily
due to the $3.8 million ($2.4 million on an after-tax basis) Federal Deposit
Insurance Corporation (“FDIC”) special assessment at June 30, 2009 and a $1.3
million increase in the regular quarterly deposit insurance premiums.Recent bank failures
have depleted the Deposit Insurance Fund (the “DIF”) below the required reserve
ratio which resulted in the FDIC increasing deposit insurance premiums and
charging a five basis point special assessment at June 30, 2009 based upon total
assets less Tier 1 capital.  The authority for the FDIC to impose any
additional special assessments terminates January 1, 2010.  See
additional discussion regarding the FDIC assessments in the section entitled
“Liquidity and Capital Resources.”
 
 Since
December 2008, mortgage rates have, at various points in time, declined to
record lows in response to the Federal Reserve’s purchase of U.S. agency debt
and MBS, which has spurred an increased demand for our loan modification program
and mortgage refinances.  Additionally, originations during fiscal
year 2009 have generally been at rates lower than the overall loan portfolio
rate.  As a result of modifications and refinances, approximately 20%
of our mortgage loan portfolio has repriced to lower market rates during fiscal
year 2009.  Our loan modification program allows existing loan
customers, whose loans have not been sold to third parties and who have been
current on their contractual loan payments for the previous 12 months, the
opportunity to modify their original loan terms to current loan terms being
offered.   During fiscal year 2009, we have modified $1.07
billion and refinanced $207.3 million of our originated
loans.  The weighted average interest rate reduction for the modified
loans is approximately 88 basis points.  In an effort to mitigate the
net interest income impact of the loan modifications, refinances and loan
originations at rates lower than the overall portfolio, the Bank refinanced
$875.0 million of FHLB advances during fiscal year 2009.  As a result
of refinancing the FHLB advances, the Bank was able to lower its contractual
interest rate on the refinanced advances by 224 basis points, from 5.65% to
3.41%.  See additional discussion regarding the FHLB advance refinance
in “Notes to Financial Statements - Note 6 - FHLB
Advances.”  Due to the positive gap position of the Bank, our
interest-earning assets are repricing faster than our interest-bearing
liabilities.  If interest rates were to increase, this would likely
result in net interest income expansion in future periods as our
interest-earning assets will reprice upward faster than our interest-bearing
liabilities.
 
 The Bank
continues to maintain access to liquidity in excess of forecasted needs by
diversifying its funding sources and maintaining a strong retail oriented
deposit portfolio.  We believe the turmoil in the credit and equity
markets has made deposit products in strong financial institutions, like the
Bank, desirable for many customers.  In response to the economic
recession, households have increased their personal savings rate which we
believe has contributed to our growth in deposits during fiscal year
2009.  We believe that our strong capital position (the Bank’s
tangible equity ratio at June 30, 2009 was 9.8% - see tangible equity to GAAP
equity reconciliation in “Liquidity and Capital Resources – Regulatory
Capital”), lending policies, and underwriting standards have helped position us
to better withstand these adverse economic conditions.  In addition,
the investments of the Bank are primarily government-agency backed securities
which are highly liquid and have not been credit impaired, and are therefore
available as collateral for additional borrowings or for sale if the need or
unforeseen conditions warrant.  See additional discussion regarding
liquidity in the section entitled “Liquidity and Capital
Resources.”
 
 In fiscal
year 2009, the Bank has opened three branches in our market areas in Kansas City
and Wichita, and has preliminary plans to open three additional branches in
those same market areas during fiscal year 2010.
  20
  
 
 
 Available
Information
 
 Company
and financial information, including press releases, Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all
amendments to those reports can be obtained free of charge from our investor
relations website, http://ir.capfed.com.  SEC filings are available on
our website immediately after they are electronically filed with or furnished to
the SEC, and are also available on the SEC’s website at
www.sec.gov.
 
 
 Critical
Accounting Policies
 
 Our most
critical accounting policies are the methodologies used to determine the
allowance for loan losses and other-than-temporary declines in the value of
securities.  These policies are important to the presentation of our
financial condition and results of operations, involve a high degree of
complexity, and require management to make difficult and subjective judgments
that may require assumptions or estimates about highly uncertain
matters.  The use of different judgments, assumptions, and estimates
could cause reported results to differ materially.  These critical
accounting policies and their application are reviewed at least annually by our
audit committee.  The following is a description of our critical
accounting policies and an explanation of the methods and assumptions underlying
their application.
 
 Allowance for Loan
Losses.Management maintains an allowance for loan losses to
absorb known and inherent losses in the loan portfolio based upon ongoing
quarterly assessments of the loan portfolio.  Our methodology for
assessing the appropriateness of the allowance for loan losses consists of a
formula analysis for general valuation allowances and specific valuation
allowances for identified problem loans and portfolio segments.  The
allowance for loan losses is maintained through provisions for loan losses which
are charged to income.  The provision for loan losses is established
after considering the results of management’s quarterly assessment of the
allowance for loan losses.
  All loans
that are not impaired, as defined in SFAS No. 114, “Accounting by Creditors for
Impairment of a Loan, an Amendment of FASB Statements No. 5 and 15” and SFAS No.
118 “Accounting by Creditors for Impairment of a Loan – Income Recognition and
Disclosures, an Amendment of FASB Statement No. 114,” are included in a formula
analysis, as permitted by SFAS No. 5, “Accounting for
Contingencies.”   Each quarter, the loan portfolio is segregated
into categories in the formula analysis based upon certain risk characteristics
such as loan type (one- to four-family, multi-family, etc.), interest payments
(fixed-rate, adjustable-rate), loan source (originated or purchased), and
payment status (i.e. current or number of days delinquent).  Loss
factors are assigned to each category in the formula analysis based on
management’s assessment of the potential risk inherent in each
category.  The greater the risks associated with a particular
category, the higher the loss factor.  Loss factors increase as
individual loans become classified, delinquent, the foreclosure process begins
or as economic and market conditions and trends warrant.
  Management
considers quantitative and qualitative factors when determining the
appropriateness of the allowance for loan losses.  Such factors
include changes in underwriting standards, the trend and composition of
delinquent and non-performing loans, results of foreclosed property
transactions, historical charge-offs, the current status and trends of local and
national economies and housing markets, changes in interest rates, and loan
portfolio growth and concentrations. Our allowance for loan loss methodology is
applied in a consistent manner; however, the methodology can be modified in
response to changing conditions.
  The loss
factors applied in the formula analysis are periodically reviewed by management
to assess whether the factors adequately cover probable and estimable losses
inherent in the loan portfolio.  The review considers such
factors as the trends and composition of delinquent and non-performing loans,
the results of foreclosed property transactions, and the status and trends of
the local and national economies and housing markets.  Our allowance
for loan loss methodology permits modifications to any loss factor used in the
computation of the formula analysis in the event that, in management’s judgment,
significant factors which affect the collectibility of the portfolio or any
category of the loan portfolio, as of the evaluation date, are not reflected in
the current loss factors.  Management’s evaluation of the inherent
loss with respect to these conditions is subject to a higher degree of
uncertainty because they are not identified with a specific problem loan or
portfolio segments. As such, the amounts actually observed with respect to these
losses can vary significantly from the estimated amounts. By assessing the
estimated losses inherent in our loan portfolio on a quarterly basis, management
can adjust specific and inherent loss estimates based upon more current
information.
 
 
 21
  The Bank
has been experiencing an increase in delinquencies, non-performing loans, net
loan charge-offs and losses on foreclosed property transactions, primarily on
purchased loans, as a result of the decline in housing and real estate markets,
as well as the ongoing economic recession.  During the quarter ended
March 31, 2009, management noted measurable differences in the performance and
loss experience, with respect to the ultimate disposition of the underlying
collateral, of our originated and purchased loan portfolios.  As a
result, loss factors on 30-89 day delinquent loans were modified based on
whether the loan is an originated or purchased loan.  The loss factors
for purchased loans were modified higher than the loss factors associated with
originated loans to account for the performance difference between the two
portfolios.  Management believes this modification to the formula
analysis will result in a more accurate estimate of the inherent losses in the
30-89 day delinquent loan portfolio.
  Additionally,
during the quarter ended March 31, 2009, the real estate market factors used to
calculate estimated current loan-to-value (“LTV”) ratios in the formula analysis
were modified as a result of management’s quarterly analysis.  The
real estate market factors used in the formula analysis are based on a
nationally recognized source of indices that management believes will more
accurately reflect the current market value of the underlying collateral and
therefore allocate loans to a more appropriate LTV category in the formula
analysis. The factors are updated in the formula analysis each quarter to
reflect current market activity.
  Specific
valuation allowances are established in connection with individual loan reviews
of specifically identified problem loans and the asset classification process,
including the procedures for impairment recognition under SFAS No. 114 and SFAS
No. 118.  Evaluations of loans for which full collectability is not
reasonably assured include evaluation of the estimated fair value of the
underlying collateral based upon current appraisals, real estate broker values
or listing prices.  Additionally, trends and composition of
non-performing loans, results of foreclosed property transactions and current
status and trends in economic and market conditions are also
evaluated.  During the quarter ended March 31, 2009, management noted
the updated estimated fair values obtained from loan servicers when a loan
became 90 days delinquent were not always an accurate representation of the fair
value of the collateral once it was sold.  The decline in fair value
between the date the loan became 90 days delinquent and the time the property
was sold was due to the continued decline in real estate values between those
points in time, as it often takes several months for a loan to work through the
foreclosure process.  As a result of the analysis, management began
applying market value adjustments to non-performing purchased loans as of March
31, 2009 to more accurately estimate the fair values of the underlying
collateral based upon recent trends.  The adjustments are determined
based on the location of the underlying collateral, recent losses recognized on
foreclosed property transactions and trends of non-performing purchased loans
entering REO.  Specific valuations on non-performing loans were
established if the adjusted estimated fair value was less than the current loan
balance.  Management intends to evaluate the appropriateness of the
market value adjustments each quarter.  The market value adjustments
will continue to be applied to non-performing loans until the real estate
markets and economy improve to such a level that the adjustments are no longer
necessary.
  Loans
with an outstanding balance of $1.5 million or more are reviewed annually if
secured by property in one of the following categories:  multi-family
(five or more units) property, unimproved land, other improved commercial
property, acquisition and development of land projects, developed building lots,
office building, single-use building, or retail building.  Specific
valuation allowances are established if the individual loan review determines a
quantifiable impairment.
  Assessing
the adequacy of the allowance for loan losses is inherently
subjective.  Actual results could differ from our estimates as a
result of changes in economic or market conditions.  Changes in
estimates could result in a material change in the allowance for loan
losses.  In the opinion of management, the allowance for loan losses,
when taken as a whole, is adequate to absorb reasonable estimated losses
inherent in our loan portfolio.  However, future adjustments may be
necessary if portfolio performance or economic or market conditions differ
substantially from the conditions that existed at the time of the initial
determinations.
  Securities
Impairment.  Management monitors the securities portfolio for
OTTI on an ongoing basis and performs a formal review
quarterly.  Management’s OTTI evaluation process conforms to the
guidance contained in EITF 99-20 “Recognition of Interest Income and Impairment
on Purchased and Retained Beneficial Interests in Securitized Financial Assets”,
FSP EITF 99-20-1 “Amendments to the Impairment Guidance of EITF Issue No.
99-20”, SFAS 115, “Accounting for Certain Investments in Debt and Equity
Securities”, FSP FAS 115-2 and FSP FAS 124-2 “Recognition and Presentation of
Other-Than Temporary Impairments”.  The process involves monitoring
market events and other items that could impact issuers.  The
evaluation includes, but is not limited to such factors as:  the
nature of the investment, the length of time the security has had a fair value
less than the cost basis, the cause(s) and severity of the loss, expectation of
an anticipated recovery period, recent events specific to the issuer or industry
including the issuer’s financial condition and the current ability to make
future payments in a timely manner, external credit ratings and recent
downgrades in such ratings, the Company’s intent to sell and whether it is more
likely than not the Company would be required to sell prior to recovery for debt
securities and changes in estimated cash flows of MBS.
  Management
determines whether OTTI losses should be recognized for securities by assessing
all known facts and circumstances surrounding the securities.  If the
Company intends to sell a security or if it is more likely than not that the
Company will be required to sell a security before recovery of its amortized
cost basis, OTTI has occurred and the difference between amortized cost and fair
value will be recognized as a loss in earnings.
   22
  
 If the
Company does not intend to sell the security but also does not expect to recover
the entire amortized cost basis of the security, an impairment loss would be
recognized in earnings in the amount of the expected amortized cost basis that
would not be collected (credit loss).  The remaining amount of OTTI
would be recognized in other comprehensive income (loss).
 
 
 Financial
Condition
 
 Total
assets increased from $8.06 billion at September 30, 2008 to $8.32 billion at
June 30, 2009.  The $264.0 million increase in assets was primarily
attributed to a $221.0 million increase in loans receivable substantially due to
loan purchases.  The growth in assets during fiscal year 2009 was
primarily funded by growth in deposits.  Deposits increased from $3.92
billion at September 30, 2008 to $4.18 billion at June 30, 2009.  The
$251.4 million increase was primarily in the certificate of deposit and money
market portfolios.  Stockholders’ equity increased from $871.2 million
at September 30, 2008 to $922.6 million at June 30, 2009.  The $51.4
million increase was due to net income of $49.5 million during fiscal year 2009
and an increase in accumulated other comprehensive gain (loss) of $29.5 million,
partially offset by $33.6 million of dividend payments during fiscal year
2009.
 
 The
following table presents selected balance sheet data for the Company at the
dates indicated.
 
 Balance
      atJune
      30,
                  
                  
                  March
      31,
                  
                  
                  December
      31,
                  
                  
                  September
      30,
                  
                  
                  June
      30,2009
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2008
                  
                  
                  2008(Dollars
      in thousands, except per share amounts)Total
      assets
                  
                  $
                  8,319,292
                  
                  
                  $
                  8,269,881
                  
                  
                  $
                  8,157,324
                  
                  
                  $
                  8,055,249
                  
                  
                  $
                  7,892,137Cash
      and cash equivalents
                  
                  
                  74,101
                  
                  
                  
                  52,025
                  
                  
                  
                  143,134
                  
                  
                  
                  87,138
                  
                  
                  
                  86,437Investment
      securities
                  
                  
                  322,166
                  
                  
                  
                  214,410
                  
                  
                  
                  105,965
                  
                  
                  
                  142,359
                  
                  
                  
                  144,346MBS
                  
                  
                  2,100,998
                  
                  
                  
                  2,204,369
                  
                  
                  
                  2,176,302
                  
                  
                  
                  2,234,339
                  
                  
                  
                  2,066,685Loans
      receivable, net
                  
                  
                  5,541,731
                  
                  
                  
                  5,377,699
                  
                  
                  
                  5,456,569
                  
                  
                  
                  5,320,780
                  
                  
                  
                  5,326,061Capital
      stock of FHLB
                  
                  
                  132,071
                  
                  
                  
                  131,278
                  
                  
                  
                  131,230
                  
                  
                  
                  124,406
                  
                  
                  
                  129,172Deposits
                  
                  
                  4,175,251
                  
                  
                  
                  4,116,514
                  
                  
                  
                  3,867,304
                  
                  
                  
                  3,923,883
                  
                  
                  
                  3,961,543Advances
      from FHLB
                  
                  
                  2,410,949
                  
                  
                  
                  2,411,560
                  
                  
                  
                  2,596,964
                  
                  
                  
                  2,447,129
                  
                  
                  
                  2,547,294Other
      borrowings
                  
                  
                  713,609
                  
                  
                  
                  713,609
                  
                  
                  
                  713,595
                  
                  
                  
                  713,581
                  
                  
                  
                  453,566Stockholders'
      equity
                  
                  
                  922,634
                  
                  
                  
                  916,391
                  
                  
                  
                  897,435
                  
                  
                  
                  871,216
                  
                  
                  
                  863,906Accumulated
      other comprehensive gain (loss)
                  
                  
                  23,512
                  
                  
                  
                  24,622
                  
                  
                  
                  14,263
                  
                  
                  
                  (5,968
                  )
                  
                  
                  (5,202
                  )Equity
      to total assets at end of period
                  
                  
                  11.1
                  %
                  
                  
                  11.1
                  %
                  
                  
                  11.0
                  %
                  
                  
                  10.8
                  %
                  
                  
                  10.9
                  %Bank
      tangible equity ratio (1)
                  
                  
                  9.8
                  %
                  
                  
                  9.9
                  %
                  
                  
                  10.0
                  %
                  
                  
                  10.0
                  %
                  
                  
                  10.0
                  %Book
      value per share
                  
                  $
                  12.60
                  
                  
                  $
                  12.52
                  
                  
                  $
                  12.27
                  
                  
                  $
                  11.93
                  
                  
                  $
                  11.84
 
 (1) See
tangible equity to GAAP equity reconciliation in “Liquidity and Capital
Resources – Regulatory Capital”.
 
  Loans
Receivable.  The loans receivable portfolio increased $221.0
million from $5.32 billion at September 30, 2008 to $5.54 billion at June 30,
2009.  The increase was primarily a result of $191.6 million of loan
purchases from nationwide lenders.  The loans purchased from
nationwide lenders during fiscal year 2009 had an average credit score of 745 at
the time of origination and a current weighted average LTV ratio of
50%.  The majority of the loans were seasoned loans and were
originated in years outside of the years with peak real estate values and
non-traditional underwriting standards.  Approximately 80% were
originated in 2004 or earlier and approximately 20% were originated in
2008.  Additionally, states that have experienced historically high
foreclosure rates were avoided.  We have not experienced any
significant performance problems with this group of purchased
loans.  See additional discussion regarding the underwriting standards
for purchased loans in “Lending Practices and Underwriting
Standards.”  At June 30, 2009 loans purchased from nationwide lenders
represented 14% of our loan portfolio and were secured by properties located in
each of the continental 48 states and Washington, D.C.  At June 30,
2009, purchases from nationwide lenders in the following states comprised 5% or
greater of total loans purchased from nationwide lenders:  Illinois
13%; Florida, New York and Texas 7%; and Arizona 5%. As of June 30, 2009, the
average balance of a purchased nationwide mortgage loan was approximately $370
thousand while the average balance of an originated mortgage loan was
approximately $140 thousand.
 
 
 23
  Included
in the loan portfolio at June 30, 2009 were $283.3 million of interest-only
loans, which were primarily purchased from nationwide lenders during fiscal year
2005.  These loans do not typically require principal payments during
their initial term, and have initial interest-only terms of either five or ten
years.  At June 30, 2009, $275.2 million, or 97%, of these loans were
still in their interest-only payment term.  As of June 30, 2009,
$126.8 million will begin to amortize principal within two years, $17.1 million
will begin to amortize principal within two-to-five years, $105.9 million will
begin to amortize principal within five-to-seven years, and the remaining $25.4
million will begin amortizing in seven-to-ten years.  Loans of this
type generally are considered to be of greater risk to the lender because of the
possibility that the borrower may default once principal payments
begin.  The loans had an average credit score of 737 and an average
LTV ratio of 80% or less at the time of purchase.  The Bank has not
purchased any interest-only loans since 2006.  At June 30, 2009, $12.0
million or approximately 40% of non-performing loans were
interest-only.  Non-performing interest-only loans represent
approximately 4% of the total interest-only portfolio at June 30,
2009.  See discussion regarding the allowance for loan losses in
“Critical Accounting Policies – Allowance for Loan Losses.”
 
  The
following table presents loan origination, refinance and purchase activity for
the periods indicated.  Loan originations, purchases and refinances
are reported together.  The fixed-rate one- to four-family loans less
than or equal to 15 years have an original maturity at origination of less than
or equal to 15 years, while fixed-rate one- to four-family loans greater than 15
years have an original maturity at origination of greater than 15
years.  The adjustable-rate one- to four-family loans less than or
equal to 36 months have a term to first reset of less than or equal to 36 months
at origination and adjustable-rate one- to four-family loans greater than 36
months have a term to first reset of greater than 36 months at
origination.
 
 For
      the Three Months Ended
                              
                              
                              For
      the Three Months EndedJune
      30, 2009
                              
                              
                              June
      30, 2008Amount
                              
                              
                              Rate
                              
                              
                              %
      of Total
                              
                              
                              Amount
                              
                              
                              Rate
                              
                              
                              %
      of TotalFixed-Rate:
                              
                              (Dollars
      in thousands)One-
      to four-family<=
      15 years
                              
                              $
                              108,316
                              
                              
                              
                              4.67
                              %
                              
                              
                              26.69
                              %
                              
                              $
                              62,965
                              
                              
                              
                              5.21
                              %
                              
                              
                              21.46
                              %>
      15 years
                              
                              
                              249,645
                              
                              
                              
                              5.06
                              
                              
                              
                              61.53
                              
                              
                              
                              163,671
                              
                              
                              
                              5.83
                              
                              
                              
                              55.77Other
      real estate
                              
                              
                              2,547
                              
                              
                              
                              6.25
                              
                              
                              
                              0.63
                              
                              
                              
                              675
                              
                              
                              
                              6.50
                              
                              
                              
                              0.23Consumer
                              
                              
                              3,044
                              
                              
                              
                              7.73
                              
                              
                              
                              0.75
                              
                              
                              
                              3,996
                              
                              
                              
                              8.03
                              
                              
                              
                              1.36Total
      fixed-rate
                              
                              
                              363,552
                              
                              
                              
                              4.98
                              
                              
                              
                              89.60
                              
                              
                              
                              231,307
                              
                              
                              
                              5.70
                              
                              
                              
                              78.82Adjustable-Rate:One-
      to four-family<=
      36 months
                              
                              
                              434
                              
                              
                              
                              4.63
                              
                              
                              
                              0.11
                              
                              
                              
                              4,220
                              
                              
                              
                              5.21
                              
                              
                              
                              1.44>
      36 months
                              
                              
                              17,020
                              
                              
                              
                              4.88
                              
                              
                              
                              4.19
                              
                              
                              
                              30,897
                              
                              
                              
                              5.52
                              
                              
                              
                              10.53Other
      real estate
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              1,800
                              
                              
                              
                              6.00
                              
                              
                              
                              0.61Consumer
                              
                              
                              24,742
                              
                              
                              
                              4.82
                              
                              
                              
                              6.10
                              
                              
                              
                              25,234
                              
                              
                              
                              5.84
                              
                              
                              
                              8.60Total
      adjustable-rate
                              
                              
                              42,196
                              
                              
                              
                              4.84
                              
                              
                              
                              10.40
                              
                              
                              
                              62,151
                              
                              
                              
                              5.64
                              
                              
                              
                              21.18Total
      originations, refinances and purchases
                              
                              $
                              405,748
                              
                              
                              
                              4.96
                              %
                              
                              
                              100.00
                              %
                              
                              $
                              293,458
                              
                              
                              
                              5.69
                              %
                              
                              
                              100.00
                              %Purchased
      loans included above:Fixed-Rate:Correspondent
                              
                              $
                              37,912
                              
                              
                              
                              5.11
                              %
                              
                              
                              
                              
                              
                              $
                              18,209
                              
                              
                              
                              5.51
                              %Nationwide
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              
                              
                              
                              
                              --
                              
                              
                              
                              --Adjustable-Rate:Correspondent
                              
                              
                              9,544
                              
                              
                              
                              5.04
                              
                              
                              
                              
                              
                              
                              
                              14,509
                              
                              
                              
                              5.51Nationwide
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              
                              
                              
                              
                              --
                              
                              
                              
                              --Total
      purchased loans
                              
                              $
                              47,456
                              
                              
                              
                              5.09
                              %
                              
                              
                              
                              
                              
                              $
                              32,718
                              
                              
                              
                              5.51
                              %
 
  24
  
 
 For
      the Nine Months Ended
                              
                              
                              For
      the Nine Months EndedJune
      30, 2009
                              
                              
                              June
      30, 2008Amount
                              
                              
                              Rate
                              
                              
                              %
      of Total
                              
                              
                              Amount
                              
                              
                              Rate
                              
                              
                              %
      of TotalFixed-Rate:
                              
                              (Dollars
      in thousands)One-
      to four-family<=
      15 years
                              
                              $
                              212,217
                              
                              
                              
                              4.83
                              %
                              
                              
                              18.89
                              %
                              
                              $
                              120,162
                              
                              
                              
                              5.36
                              %
                              
                              
                              16.46
                              %>
      15 years
                              
                              
                              582,938
                              
                              
                              
                              5.21
                              
                              
                              
                              51.89
                              
                              
                              
                              415,714
                              
                              
                              
                              5.85
                              
                              
                              
                              56.94Other
      real estate
                              
                              
                              14,483
                              
                              
                              
                              5.99
                              
                              
                              
                              1.29
                              
                              
                              
                              975
                              
                              
                              
                              6.58
                              
                              
                              
                              0.13Consumer
                              
                              
                              8,439
                              
                              
                              
                              7.68
                              
                              
                              
                              0.75
                              
                              
                              
                              15,081
                              
                              
                              
                              8.13
                              
                              
                              
                              2.07Total
      fixed-rate
                              
                              
                              818,077
                              
                              
                              
                              5.15
                              
                              
                              
                              72.82
                              
                              
                              
                              551,932
                              
                              
                              
                              5.81
                              
                              
                              
                              75.60Adjustable-Rate:One-
      to four-family<=
      36 months
                              
                              
                              138,958
                              
                              
                              
                              4.92
                              
                              
                              
                              12.37
                              
                              
                              
                              22,266
                              
                              
                              
                              5.33
                              
                              
                              
                              3.05>
      36 months
                              
                              
                              96,059
                              
                              
                              
                              5.20
                              
                              
                              
                              8.55
                              
                              
                              
                              88,606
                              
                              
                              
                              5.64
                              
                              
                              
                              12.14Other
      real estate
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              1,800
                              
                              
                              
                              6.00
                              
                              
                              
                              0.25Consumer
                              
                              
                              70,298
                              
                              
                              
                              4.91
                              
                              
                              
                              6.26
                              
                              
                              
                              65,430
                              
                              
                              
                              7.02
                              
                              
                              
                              8.96Total
      adjustable-rate
                              
                              
                              305,315
                              
                              
                              
                              5.01
                              
                              
                              
                              27.18
                              
                              
                              
                              178,102
                              
                              
                              
                              6.11
                              
                              
                              
                              24.40Total
      originations, refinances and purchases
                              
                              $
                              1,123,392
                              
                              
                              
                              5.11
                              %
                              
                              
                              100.00
                              %
                              
                              $
                              730,034
                              
                              
                              
                              5.88
                              %
                              
                              
                              100.00
                              %Purchased
      loans included above:Fixed-Rate:Correspondent
                              
                              $
                              84,887
                              
                              
                              
                              5.25
                              %
                              
                              
                              
                              
                              
                              $
                              40,486
                              
                              
                              
                              5.77
                              %Nationwide
                              
                              
                              256
                              
                              
                              
                              4.38
                              
                              
                              
                              
                              
                              
                              
                              --
                              
                              
                              
                              --Adjustable-Rate:Correspondent
                              
                              
                              20,643
                              
                              
                              
                              5.28
                              
                              
                              
                              
                              
                              
                              
                              54,456
                              
                              
                              
                              5.64Nationwide
                              
                              
                              191,313
                              
                              
                              
                              5.00
                              
                              
                              
                              
                              
                              
                              
                              155
                              
                              
                              
                              5.38Total
      purchased loans
                              
                              $
                              297,099
                              
                              
                              
                              5.09
                              %
                              
                              
                              
                              
                              
                              $
                              95,097
                              
                              
                              
                              5.69
                              %
 
 
 Loan
modification activity is not included in the tables above because a new loan is
not generated at the time of modification.  During the three and nine
months ended June 30, 2009, the Bank modified $477.5 million and $1.07 billion
loans, respectively, with a weighted average rate change of 92 basis points and
88 basis points, respectively.
  The Bank
generally prices its one- to four-family loan products based upon prices
available in the secondary market.  During the nine months ended June
30, 2009, the rate on the Bank’s 30-year fixed-rate one- to four-family loans,
with no points paid by the borrower, was approximately 230 basis points above
the average 10-year Treasury rate, while the rate on the Bank’s 15-year
fixed-rate one- to four-family loans were approximately 190 basis points above
the average 10-year Treasury rate.
   25
  The
following table summarizes the activity in the loan portfolio for the periods
indicated, excluding changes in loans in process, deferred fees and allowance
for loan losses.  Loans that were paid-off as a result of refinances
are included in ‘repayments.’  Loan modification activity is not
included in the activity in the following table because a new loan is not
generated at the time of modification.  See modification activity for
the three and nine months ended June 30, 2009 on the previous
page.  The modified balance and rate are included in the ending loan
portfolio balance and rate.
 
 For
      the Three Months EndedJune
      30, 2009
                  
                  March
      31, 2009
                  
                  December
      31, 2008
                  
                  
                  September
      30, 2008Amount
                  
                  
                  Rate
                  
                  
                  Amount
                  
                  
                  Rate
                  
                  
                  Amount
                  
                  
                  Rate
                  
                  
                  Amount
                  
                  
                  Rate(Dollars
      in thousands)Beginning
      balance
                  
                  $
                  5,422,798
                  
                  
                  
                  5.50
                  %
                  
                  $
                  5,506,352
                  
                  
                  
                  5.63
                  %
                  
                  $
                  5,379,845
                  
                  
                  
                  5.66
                  %
                  
                  $
                  5,389,901
                  
                  
                  
                  5.63
                  %Originations
      and refinances:Fixed
                  
                  
                  325,640
                  
                  
                  
                  4.96
                  
                  
                  
                  276,888
                  
                  
                  
                  5.06
                  
                  
                  
                  130,406
                  
                  
                  
                  5.77
                  
                  
                  
                  140,565
                  
                  
                  
                  6.08Adjustable
                  
                  
                  32,652
                  
                  
                  
                  4.78
                  
                  
                  
                  25,269
                  
                  
                  
                  4.83
                  
                  
                  
                  35,437
                  
                  
                  
                  5.23
                  
                  
                  
                  45,333
                  
                  
                  
                  5.69Purchases:Fixed
                  
                  
                  37,912
                  
                  
                  
                  5.11
                  
                  
                  
                  33,226
                  
                  
                  
                  5.18
                  
                  
                  
                  14,005
                  
                  
                  
                  5.76
                  
                  
                  
                  7,309
                  
                  
                  
                  6.12Adjustable
                  
                  
                  9,544
                  
                  
                  
                  5.04
                  
                  
                  
                  70,349
                  
                  
                  
                  4.90
                  
                  
                  
                  132,064
                  
                  
                  
                  5.09
                  
                  
                  
                  17,225
                  
                  
                  
                  5.76Repayments
                  
                  
                  (322,104
                  )
                  
                  
                  
                  
                  
                  
                  (311,733
                  )
                  
                  
                  
                  
                  
                  
                  (183,532
                  )
                  
                  
                  
                  
                  
                  
                  (216,090
                  )Transfer
      of modified loans from
                    (to) LHFS, net
                  
                  
                  81,190
                  
                  
                  
                  
                  
                  
                  
                  (175,862
                  )
                  
                  
                  
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  --Other(1)
                  
                  
                  (502
                  )
                  
                  
                  
                  
                  
                  
                  (1,691
                  )
                  
                  
                  
                  
                  
                  
                  (1,873
                  )
                  
                  
                  
                  
                  
                  
                  (4,398
                  )Ending
      balance
                  
                  $
                  5,587,130
                  
                  
                  
                  5.36
                  %
                  
                  $
                  5,422,798
                  
                  
                  
                  5.50
                  %
                  
                  $
                  5,506,352
                  
                  
                  
                  5.63
                  %
                  
                  $
                  5,379,845
                  
                  
                  
                  5.66
                  %For
      the Nine Months EndedJune
      30, 2009
                  
                  June
      30, 2008Amount
                  
                  
                  Rate
                  
                  
                  Amount
                  
                  
                  Rate(Dollars
      in thousands)Beginning
      balance
                  
                  $
                  5,379,845
                  
                  
                  
                  5.66
                  %
                  
                  $
                  5,346,626
                  
                  
                  
                  5.68
                  %Originations
      and refinances:Fixed
                  
                  
                  732,934
                  
                  
                  
                  5.14
                  
                  
                  
                  511,446
                  
                  
                  
                  5.81Adjustable
                  
                  
                  93,359
                  
                  
                  
                  4.97
                  
                  
                  
                  123,491
                  
                  
                  
                  6.32Purchases:Fixed
                  
                  
                  85,143
                  
                  
                  
                  5.24
                  
                  
                  
                  40,486
                  
                  
                  
                  5.77Adjustable
                  
                  
                  211,956
                  
                  
                  
                  5.02
                  
                  
                  
                  54,611
                  
                  
                  
                  5.64Repayments
                  
                  
                  (817,369
                  )
                  
                  
                  
                  
                  
                  
                  (683,088
                  )Transfer
      of modified loans from
                    (to) LHFS, net
                  
                  
                  (94,672
                  )
                  
                  
                  
                  
                  
                  
                  --Other(1)
                  
                  
                  (4,066
                  )
                  
                  
                  
                  
                  
                  
                  (3,671
                  )Ending
      balance
                  
                  $
                  5,587,130
                  
                  
                  
                  5.36
                  %
                  
                  $
                  5,389,901
                  
                  
                  
                  5.66
                  %
 (1)“Other” consists of
transfers to REO and modification fees advanced.
 
  
 
 26
  The
following table presents the Company’s loan portfolio at the dates
indicated.
  June
      30, 2009
                            
                            
                            March
      31, 2009
                            
                            
                            September
      30, 2008Amount
                            
                            
                            Average
                              Rate
                            
                            
                            %
      of
                              Total
                            
                            
                            Amount
                            
                            
                            Average
                              Rate
                            
                            
                            %
      of
                              Total
                            
                            
                            Amount
                            
                            
                            Average
                              Rate
                            
                            
                            %
      of
                              Total(Dollars
      in thousands)Real Estate LoansOne-
      to four-family
                            
                            $
                            5,257,195
                            
                            
                            
                            5.34
                            %
                            
                            
                            94.09
                            %
                            
                            $
                            5,085,227
                            
                            
                            
                            5.49
                            %
                            
                            
                            93.77
                            %
                            
                            $
                            5,026,358
                            
                            
                            
                            5.61
                            %
                            
                            
                            93.43
                            %Multi-family
      and commercial
                            
                            
                            84,358
                            
                            
                            
                            6.01
                            
                            
                            
                            1.51
                            
                            
                            
                            67,278
                            
                            
                            
                            6.30
                            
                            
                            
                            1.24
                            
                            
                            
                            56,081
                            
                            
                            
                            6.44
                            
                            
                            
                            1.04Construction
      and development
                            
                            
                            41,429
                            
                            
                            
                            5.19
                            
                            
                            
                            0.74
                            
                            
                            
                            63,823
                            
                            
                            
                            5.28
                            
                            
                            
                            1.18
                            
                            
                            
                            85,178
                            
                            
                            
                            5.66
                            
                            
                            
                            1.58Total
      real estate loans
                            
                            
                            5,382,982
                            
                            
                            
                            5.35
                            
                            
                            
                            96.34
                            
                            
                            
                            5,216,328
                            
                            
                            
                            5.50
                            
                            
                            
                            96.19
                            
                            
                            
                            5,167,617
                            
                            
                            
                            5.62
                            
                            
                            
                            96.05Consumer LoansSavings
      loans
                            
                            
                            4,832
                            
                            
                            
                            5.52
                            
                            
                            
                            0.09
                            
                            
                            
                            4,524
                            
                            
                            
                            5.65
                            
                            
                            
                            0.08
                            
                            
                            
                            4,634
                            
                            
                            
                            5.95
                            
                            
                            
                            0.09Automobile
                            
                            
                            2,877
                            
                            
                            
                            6.96
                            
                            
                            
                            0.05
                            
                            
                            
                            3,083
                            
                            
                            
                            6.96
                            
                            
                            
                            0.06
                            
                            
                            
                            3,484
                            
                            
                            
                            7.00
                            
                            
                            
                            0.07Home
      equity
                            
                            
                            195,458
                            
                            
                            
                            5.64
                            
                            
                            
                            3.50
                            
                            
                            
                            197,939
                            
                            
                            
                            5.67
                            
                            
                            
                            3.65
                            
                            
                            
                            202,956
                            
                            
                            
                            6.53
                            
                            
                            
                            3.77Other
                            
                            
                            981
                            
                            
                            
                            7.97
                            
                            
                            
                            0.02
                            
                            
                            
                            924
                            
                            
                            
                            8.27
                            
                            
                            
                            0.02
                            
                            
                            
                            1,154
                            
                            
                            
                            7.13
                            
                            
                            
                            0.02Total
      consumer loans
                            
                            
                            204,148
                            
                            
                            
                            5.67
                            
                            
                            
                            3.66
                            
                            
                            
                            206,470
                            
                            
                            
                            5.70
                            
                            
                            
                            3.81
                            
                            
                            
                            212,228
                            
                            
                            
                            6.52
                            
                            
                            
                            3.95Total
      loans receivable
                            
                            
                            5,587,130
                            
                            
                            
                            5.36
                            %
                            
                            
                            100.00
                            %
                            
                            
                            5,422,798
                            
                            
                            
                            5.50
                            %
                            
                            
                            100.00
                            %
                            
                            
                            5,379,845
                            
                            
                            
                            5.66
                            %
                            
                            
                            100.00
                            %Less:Loans
      in process
                            
                            
                            23,740
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            27,058
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            43,186Deferred
      fees and discounts
                            
                            
                            11,417
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            10,577
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            10,088Allowance
      for loan losses
                            
                            
                            10,242
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            7,464
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            5,791Total
      loans receivable, net
                            
                            $
                            5,541,731
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            5,377,699
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            5,320,780
 
 
   27
  Lending
Practices and Underwriting Standards
 
 The
Bank’s primary lending activity is the origination of loans and the purchase of
loans from a select group of correspondent lenders.  These loans are
generally secured by first mortgages on owner-occupied, one- to four-family
residences in the Bank’s primary market areas and select market areas in
Missouri.  The Bank also makes consumer loans, construction loans
secured by residential or commercial properties, and multi-family real estate
loans secured by multi-family dwellings.  Additional lending volume
has been generated by purchasing whole one- to four-family mortgage loans from
nationwide lenders.  By purchasing loans from nationwide lenders, the
Bank is able to attain some geographic diversification in its loan portfolio,
and help mitigate the Bank’s interest rate risk exposure as the purchased loans
are predominately adjustable-rate or 15-year fixed-rate loans.  As a
result of the decline in real estate values and the economic recession,
particularly in some of the states where we have purchased loans, we have
experienced an increase in non-performing purchased loans.  At the
time these loans were purchased, they met our underwriting standards; however,
some are located in areas that have recently experienced high unemployment rates
and sharp declines in real estate values.  See additional discussion
regarding non-performing purchased loans in “Critical Accounting Policies –
Allowance for Loan Losses” and “Asset Quality.”  The loans purchased
during fiscal year 2009 had an average credit score of 745 and a current
weighted average LTV ratio of 50%.  We have not experienced any
significant performance problems with this group of purchased
loans.  See additional discussion regarding loans purchased during
fiscal year 2009 in “Financial Condition – Loans Receivable.”
 
 The
Bank’s one- to four-family loans are primarily fully amortizing fixed- or
adjustable-rate loans with contractual maturities of up to 30 years, except for
interest-only loans which require the payment of interest during the
interest-only period, all with payments due monthly.  Our one- to
four- family loans are generally not assumable and do not contain prepayment
penalties.  A “due on sale” clause, allowing the Bank to declare the
unpaid principal balance due and payable upon the sale of the secured property,
is generally included in the security instrument.
 
 Current
adjustable-rate one- to four-family loans originated by the Bank generally
provide for a specified rate limit or cap on the periodic adjustment to the
interest rate, as well as a specified maximum lifetime cap and minimum rate, or
floor.  As a consequence of using caps, the interest rates on these
loans may not be as rate sensitive as our cost of funds. Negative amortization
of principal is not allowed.  Borrowers are qualified based on the
principal, interest, taxes and insurance payments at the initial rate for three,
five and seven year adjustable-rate mortgage (“ARM”) loans.  After the
initial three, five or seven year period, the interest rate is repriced annually
and the new principal and interest payment is based on the new interest rate,
remaining unpaid principal balance and term of the ARM loan.  Our ARM
loans are not automatically convertible into fixed-rate loans; however, we do
allow borrowers to pay a modification fee to convert an ARM loan to a fixed-rate
loan.  ARM loans can pose different credit risks than fixed-rate
loans, primarily because as interest rates rise, the borrower’s payment also
rises, increasing the potential for default.  This specific risk type
is known as repricing risk.
 
 During
2008, the Bank discontinued offering an interest-only ARM product, but holds in
its portfolio originated and purchased interest-only ARM loans.  The
product was discontinued to reduce future credit risk exposure.  At
the time of origination, these loans did not require principal payments for a
period of up to ten years.  Borrowers were qualified based on a fully
amortizing payment at the initial loan rate.  The Bank was more
restrictive on debt-to-income ratios and credit scores on interest-only ARM
loans than on other ARM loans to offset the potential risk of payment shock at
the time the loan rate adjusts and/or the principal and interest payments
begin.   At June 30, 2009, 5% of our loan portfolio consisted of
non-amortizing interest-only ARM loans.  The majority of these loans
were purchased from nationwide lenders during fiscal year 2005.  These
loans had an initial interest-only term of either five or ten years, with
approximately equal distribution between the two terms.
 
 One- to
four-family loans are underwritten manually or by an automated underwriting
system developed by a third party.  The system’s components closely
resemble the Bank’s manual underwriting standards which are generally in
accordance with Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal
National Mortgage Association (“FNMA”) underwriting guidelines.  The
automated underwriting system analyzes the applicant’s data, with emphasis on
credit history, employment and income history, qualifying ratios reflecting the
applicant’s ability to repay, asset reserves, and loan-to-value
ratio.   Full documentation to support the applicant’s credit,
income, and sufficient funds to cover all applicable fees and reserves at
closing are required on all loans. Loans that do not meet the automated
underwriting standards are referred to a staff underwriter for manual
underwriting.    Properties securing one- to four-family
loans are appraised by either staff appraisers or fee appraisers, both of which
are independent of the loan origination function and have been approved by the
board of directors.
 
 For loans
with an LTV ratio in excess of 80% at the time of origination, private mortgage
insurance (“PMI”) is required in order to reduce the Bank’s loss exposure to
less than 80% of the appraised value or the purchase price of the
property.  The Bank will lend up to 97% of the lesser of the appraised
value or purchase price for one- to four-family loans provided the Bank is able
to obtain PMI.  Management continuously monitors the claim paying
ability of our PMI counterparties.  At this time, we believe that our
PMI counterparties have the ability to meet potential claim obligations we may
file in the foreseeable future.
  28
  
 
 The
underwriting standards of the lenders from whom the Bank purchases loans are
generally similar to the Bank’s internal underwriting standards.  “No
Doc” or “Stated Income, Stated Assets” loans are not
permitted.  Lenders are required to fully document all data sources
for each application.  Management believes these requirements reduce
the credit risk associated with these loans.  Before committing to
purchase a pool of loans from a nationwide lender, the Bank’s Chief Lending
Officer or Secondary Marketing Manager reviews specific criteria such as loan
amount, credit scores, LTV ratios, geographic location, and debt ratios of each
loan in the pool.  If the specific criteria do not meet the Bank’s
underwriting standards and compensating factors are not sufficient, then a loan
will be removed from the pool.  Once the review of the specific
criteria is complete and loans not meeting the Bank’s standards are removed from
the pool, changes are sent back to the lender for acceptance and
pricing.  Before the pool is funded, an approved Bank underwriter
reviews at least 25% of the loan files and the supporting documentation in the
pool.  Our standard contractual agreement with the lender includes
recourse options for any breach of representation or warranty with respect to
the loans purchased.
 
 The
underwriting of loans purchased through correspondent lenders is generally
performed by our underwriters, using our underwriting standards.  The
products offered by the correspondents are at least as restrictive as the Bank’s
own internal products and underwriting standards.  Correspondent
lenders are located within the metropolitan Kansas City market area and select
market areas in Missouri.  The Bank purchases approved loans and the
related servicing rights, on a loan-by-loan basis.
 
 In an
effort to offset the impact of repayments and to retain our customers, the Bank
offers existing loan customers whose loans have not been sold to third parties
the opportunity to modify their original loan terms to new loan terms generally
consistent with those currently being offered.  This is a convenient
tool for customers who may have considered refinancing from an ARM loan to a
fixed-rate loan, would like to reduce their term, or take advantage of lower
rates associated with current market rates.  The program helps ensure
the Bank maintains the relationship with the customer and significantly reduces
the amount of effort required for customers to obtain current market pricing and
terms without having to refinance their loans.  The Bank charges a fee
for this service generally comparable to fees charged on new
loans.  The Bank does not solicit customers for this program, but
considers it a valuable opportunity to retain customers who, due to our strict
initial underwriting, could likely obtain similar financing
elsewhere.
 
 The Bank
also originates construction-to-permanent loans primarily secured by one- to
four-family residential real estate.  Presently, all of the one- to
four-family construction loans are secured by property located within the Bank’s
market areas.  Construction loans are obtained primarily by homeowners
who will occupy the property when construction is complete.  The Bank
is also a participant with five other banking institutions on a construction
loan secured by a retail shopping center in Kansas with two major
retailers.  Construction loans to builders for speculative purposes
are not permitted.  The application process includes submission of
complete plans, specifications, and costs of the project to be
constructed.  These items are used as a basis to determine the
appraised value of the subject property.  All construction loans are
manually underwritten using the Bank’s internal underwriting
standards.  The construction and permanent loans are closed at the
same time allowing the borrower to secure the interest rate at the beginning of
the construction period and throughout the permanent
loan.  Construction draw requests and the supporting documentation are
reviewed and approved by management.  The Bank also performs regular
documented inspections of the construction project to ensure the funds are being
used for the intended purpose and the project is being completed according to
the plans and specifications provided.
 
 The Bank
offers a variety of secured consumer loans, including home equity loans and
lines of credit, home improvement loans, auto loans, and loans secured by
savings deposits.  The Bank also originates a very limited amount of
unsecured loans.  The Bank does not originate any consumer loans on an
indirect basis, such as contracts purchased from retailers of goods or services
which have extended credit to their customers.  All consumer loans are
originated in the Bank’s market areas.  Home equity loans may be
originated in amounts, together with the amount of the existing first mortgage,
of up to 95% of the value of the property securing the loan.  In order
to minimize risk of loss, home equity loans that are greater than 80% of the
value of the property, when combined with the first mortgage, require
PMI.  The term-to-maturity of home equity and home improvement loans
may be up to 20 years.  Other home equity lines of credit have no
stated term-to-maturity and require a payment of 1.5% of the outstanding loan
balance per month. Interest-only home equity lines of credit have a maximum term
of 12 months, monthly payments of accrued interest, and a balloon payment at
maturity.  Repaid principal may be re-advanced at any time, not to
exceed the original credit limit of the loan.  Other consumer loan
terms vary according to the type of collateral and the length of the
contract.  The majority of the consumer loan portfolio is comprised of
home equity lines of credit, which have interest rates that can adjust monthly
based upon changes in the prime rate, to a maximum of 18%.
 
 The
underwriting standards for consumer loans include a determination of the
applicant’s payment history on other debts and an assessment of their ability to
meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is a primary consideration, the underwriting
process also includes a comparison of the value of the security in relation to
the proposed loan amount.
  29
  
 
 Consumer
loans generally have shorter terms to maturity or reprice more frequently, which
reduces our exposure to changes in interest rates, and usually carry higher
rates of interest than do one- to four-family mortgage
loans.  However, consumer loans may entail greater risk than do one-
to four-family mortgage loans, particularly in the case of consumer loans that
are secured by rapidly depreciable assets, such as
automobiles.  Management believes that offering consumer loan products
helps to expand and create stronger ties to our existing customer base by
increasing the number of customer relationships and providing cross-marketing
opportunities.
 
 The
Bank’s multi-family and commercial real estate loans are secured primarily by
multi-family dwellings and small commercial buildings generally located in the
Bank’s market areas.  These loans are granted based on the income
producing potential of the property and the financial strength of the
borrower.  LTV ratios on multi-family and commercial real estate loans
usually do not exceed 80% of the appraised value of the property securing the
loans.  The net operating income, which is the income derived from the
operation of the property less all operating expenses, must be sufficient to
cover the payments related to the outstanding debt at the time of
origination.  The Bank generally requires personal guarantees of the
borrowers covering a portion of the debt in addition to the security property as
collateral for these loans.  Appraisals on properties securing these
loans are performed by independent state certified fee appraisers approved by
the board of directors.  Our multi-family and commercial real estate
loans are originated with either a fixed or adjustable interest
rate.  The interest rate on adjustable-rate loans is based on a
variety of indices, generally determined through negotiation with the
borrower.  While maximum maturities may extend to 30 years, these
loans frequently have shorter maturities and may not be fully amortizing,
requiring balloon payments of unamortized principal at maturity.
 
 Our
multi-family and commercial real estate loans are generally large dollar loans
and involve a greater degree of credit risk than one- to four-family mortgage
loans.  Such loans typically involve large balances to single
borrowers or groups of related borrowers.  Because payments on
multi-family and commercial real estate loans are often dependent on the
successful operation or management of the properties, repayment of such loans
may be subject to adverse conditions in the real estate market or the
economy.  If the cash flow from the project is reduced, or if leases
are not obtained or renewed, the borrower’s ability to repay the loan may be
impaired.  See “Asset Quality – Non-performing Loans.”
 
 Loans
over $500 thousand must be underwritten by two Class V underwriters, which is
the highest class of underwriter.  Any loan greater than $750 thousand
must be approved by the Asset and Liability Management Committee (“ALCO”) and
loans over $1.5 million must be approved by the board of
directors.  For loans requiring ALCO and/or board of directors’
approval, lending management is responsible for presenting to the ALCO and/or
board of directors information about the creditworthiness of the borrower and
the value of the subject property.  Information pertaining to the
creditworthiness of the borrower generally consists of a summary of the
borrower’s credit history, employment stability, sources of income, assets, net
worth, and debt ratios.  The value of the property must be supported
by an independent appraisal report prepared in accordance with our appraisal
policy.  Loans over $500 thousand are priced above the standard
mortgage rate.
  30
  
  Asset
Quality
  The
Bank’s traditional underwriting guidelines have provided the Bank with loans of
high quality and generally low delinquencies and low levels of non-performing
assets compared to national levels.  Of particular importance is the
complete documentation required for each loan the Bank originates and
purchases.  This allows the Bank to make an informed credit decision
based upon a thorough assessment of the borrower’s ability to repay the loan
compared to underwriting methodologies that do not require full
documentation.
 
 The
following matrix shows the balance of one-to four-family mortgage loans
cross-referenced by LTV ratio and credit score.  The LTV ratios used
in the matrix were based on the current loan balance and the most recent bank
appraisal available, or the lesser of the purchase price or original
appraisal.  In most cases, the most recent appraisal was obtained at
the time of origination.  The LTV ratios based upon appraisals
obtained at the time of origination may not necessarily indicate the extent to
which we may incur a loss on any given loan that may go into foreclosure as the
value of the underlying collateral may have declined since the time of
origination.  Credit scores were updated in March 2009 for loans
originated by the Bank and purchased loans.  Management will continue
to update credit scores as deemed necessary based upon economic
conditions.  Per the matrix, the greatest concentration of loans fall
into the “751 and above” credit score category and have a LTV ratio of less than
70%.  The loans falling into the “less than 660” credit score category
and having LTV ratios of more than 80% comprise the lowest
concentration.  The average LTV ratio of our one-to four-family
mortgage loans at June 30, 2009 was approximately 65%.
 
 Credit
      ScoreLess
      than 660
                  
                  
                  661
      to 700
                  
                  
                  701
      to 750
                  
                  
                  751
      and above
                  
                  Total%
      of
                  
                  
                  
                  
                  
                  %
      of
                  
                  
                  
                  
                  
                  %
      of
                  
                  
                  
                  
                  
                  %
      of
                  
                  
                  
                  
                  
                  %
      ofLTV ratio
                  
                  Amount
                  
                  
                  total
                  
                  
                  Amount
                  
                  
                  total
                  
                  
                  Amount
                  
                  
                  total
                  
                  
                  Amount
                  
                  
                  total
                  
                  
                  Amount
                  
                  
                  total(Dollars
      in thousands)Less
      than 70%
                  
                  $
                  127,680
                  
                  
                  
                  2.4
                  %
                  
                  $
                  152,523
                  
                  
                  
                  2.9
                  %
                  
                  $
                  443,595
                  
                  
                  
                  8.4
                  %
                  
                  $
                  1,922,397
                  
                  
                  
                  36.6
                  %
                  
                  $
                  2,646,195
                  
                  
                  
                  50.3
                  %70%
      to 80%
                  
                  
                  111,095
                  
                  
                  
                  2.1
                  
                  
                  
                  133,726
                  
                  
                  
                  2.6
                  
                  
                  
                  393,592
                  
                  
                  
                  7.5
                  
                  
                  
                  1,189,697
                  
                  
                  
                  22.6
                  
                  
                  
                  1,828,110
                  
                  
                  
                  34.8More
      than 80%
                  
                  
                  78,878
                  
                  
                  
                  1.5
                  
                  
                  
                  79,922
                  
                  
                  
                  1.5
                  
                  
                  
                  213,623
                  
                  
                  
                  4.1
                  
                  
                  
                  410,467
                  
                  
                  
                  7.8
                  
                  
                  
                  782,890
                  
                  
                  
                  14.9Total
                  
                  $
                  317,653
                  
                  
                  
                  6.0
                  %
                  
                  $
                  366,171
                  
                  
                  
                  7.0
                  %
                  
                  $
                  1,050,810
                  
                  
                  
                  20.0
                  %
                  
                  $
                  3,522,561
                  
                  
                  
                  67.0
                  %
                  
                  $
                  5,257,195
                  
                  
                  
                  100.0
                  %
  31
  
 
 The
following table presents the Company’s 30 to 89 day delinquent loans,
non-performing loans, and REO at the dates indicated.  Purchased loans
include loans purchased from nationwide lenders.  Non-performing loans
consist of loans 90 or more days delinquent and loans in the process of
foreclosure.  Non-performing assets include non-performing loans and
REO.
 June
      30,
                                                                              
                                                                              
                                                                              March
      31,
                                                                              
                                                                              
                                                                              December
      31,
                                                                              
                                                                              
                                                                              September
      30,
                                                                              
                                                                              
                                                                              June
      30,2009
                                                                              
                                                                              
                                                                              2009
                                                                              
                                                                              
                                                                              2008
                                                                              
                                                                              
                                                                              2008
                                                                              
                                                                              
                                                                              2008Number
                                                                              
                                                                              
                                                                              Amount
                                                                              
                                                                              
                                                                              Number
                                                                              
                                                                              
                                                                              Amount
                                                                              
                                                                              
                                                                              Number
                                                                              
                                                                              
                                                                              Amount
                                                                              
                                                                              
                                                                              Number
                                                                              
                                                                              
                                                                              Amount
                                                                              
                                                                              
                                                                              Number
                                                                              
                                                                              
                                                                              Amount(Dollars
      in thousands)Loans
      30-89 days delinquentOriginated
                                                                              
                                                                              
                                                                              193
                                                                              
                                                                              
                                                                              $
                                                                              13,825
                                                                              
                                                                              
                                                                              
                                                                              157
                                                                              
                                                                              
                                                                              $
                                                                              14,120
                                                                              
                                                                              
                                                                              
                                                                              199
                                                                              
                                                                              
                                                                              $
                                                                              15,691
                                                                              
                                                                              
                                                                              
                                                                              179
                                                                              
                                                                              
                                                                              $
                                                                              14,026
                                                                              
                                                                              
                                                                              
                                                                              160
                                                                              
                                                                              
                                                                              $
                                                                              12,591Purchased
                                                                              
                                                                              
                                                                              49
                                                                              
                                                                              
                                                                              
                                                                              13,225
                                                                              
                                                                              
                                                                              
                                                                              43
                                                                              
                                                                              
                                                                              
                                                                              9,698
                                                                              
                                                                              
                                                                              
                                                                              42
                                                                              
                                                                              
                                                                              
                                                                              9,359
                                                                              
                                                                              
                                                                              
                                                                              37
                                                                              
                                                                              
                                                                              
                                                                              7,083
                                                                              
                                                                              
                                                                              
                                                                              33
                                                                              
                                                                              
                                                                              
                                                                              6,621242
                                                                              
                                                                              
                                                                              
                                                                              27,050
                                                                              
                                                                              
                                                                              
                                                                              200
                                                                              
                                                                              
                                                                              
                                                                              23,818
                                                                              
                                                                              
                                                                              
                                                                              241
                                                                              
                                                                              
                                                                              
                                                                              25,050
                                                                              
                                                                              
                                                                              
                                                                              216
                                                                              
                                                                              
                                                                              
                                                                              21,109
                                                                              
                                                                              
                                                                              
                                                                              193
                                                                              
                                                                              
                                                                              
                                                                              19,212Non-performing
      loansOriginated
                                                                              
                                                                              
                                                                              144
                                                                              
                                                                              
                                                                              
                                                                              11,840
                                                                              
                                                                              
                                                                              
                                                                              128
                                                                              
                                                                              
                                                                              
                                                                              10,213
                                                                              
                                                                              
                                                                              
                                                                              124
                                                                              
                                                                              
                                                                              
                                                                              9,607
                                                                              
                                                                              
                                                                              
                                                                              100
                                                                              
                                                                              
                                                                              
                                                                              6,958
                                                                              
                                                                              
                                                                              
                                                                              89
                                                                              
                                                                              
                                                                              
                                                                              6,555Purchased
                                                                              
                                                                              
                                                                              59
                                                                              
                                                                              
                                                                              
                                                                              17,270
                                                                              
                                                                              
                                                                              
                                                                              45
                                                                              
                                                                              
                                                                              
                                                                              12,158
                                                                              
                                                                              
                                                                              
                                                                              32
                                                                              
                                                                              
                                                                              
                                                                              9,625
                                                                              
                                                                              
                                                                              
                                                                              25
                                                                              
                                                                              
                                                                              
                                                                              6,708
                                                                              
                                                                              
                                                                              
                                                                              26
                                                                              
                                                                              
                                                                              
                                                                              6,699203
                                                                              
                                                                              
                                                                              
                                                                              29,110
                                                                              
                                                                              
                                                                              
                                                                              173
                                                                              
                                                                              
                                                                              
                                                                              22,371
                                                                              
                                                                              
                                                                              
                                                                              156
                                                                              
                                                                              
                                                                              
                                                                              19,232
                                                                              
                                                                              
                                                                              
                                                                              125
                                                                              
                                                                              
                                                                              
                                                                              13,666
                                                                              
                                                                              
                                                                              
                                                                              115
                                                                              
                                                                              
                                                                              
                                                                              13,254REOOriginated
                                                                              
                                                                              
                                                                              36
                                                                              
                                                                              
                                                                              
                                                                              3,950
                                                                              
                                                                              
                                                                              
                                                                              48
                                                                              
                                                                              
                                                                              
                                                                              4,119
                                                                              
                                                                              
                                                                              
                                                                              38
                                                                              
                                                                              
                                                                              
                                                                              2,833
                                                                              
                                                                              
                                                                              
                                                                              36
                                                                              
                                                                              
                                                                              
                                                                              2,228
                                                                              
                                                                              
                                                                              
                                                                              31
                                                                              
                                                                              
                                                                              
                                                                              1,274Purchased
                                                                              
                                                                              
                                                                              5
                                                                              
                                                                              
                                                                              
                                                                              1,127
                                                                              
                                                                              
                                                                              
                                                                              10
                                                                              
                                                                              
                                                                              
                                                                              1,705
                                                                              
                                                                              
                                                                              
                                                                              6
                                                                              
                                                                              
                                                                              
                                                                              1,644
                                                                              
                                                                              
                                                                              
                                                                              12
                                                                              
                                                                              
                                                                              
                                                                              2,918
                                                                              
                                                                              
                                                                              
                                                                              5
                                                                              
                                                                              
                                                                              
                                                                              93341
                                                                              
                                                                              
                                                                              
                                                                              5,077
                                                                              
                                                                              
                                                                              
                                                                              58
                                                                              
                                                                              
                                                                              
                                                                              5,824
                                                                              
                                                                              
                                                                              
                                                                              44
                                                                              
                                                                              
                                                                              
                                                                              4,477
                                                                              
                                                                              
                                                                              
                                                                              48
                                                                              
                                                                              
                                                                              
                                                                              5,146
                                                                              
                                                                              
                                                                              
                                                                              36
                                                                              
                                                                              
                                                                              
                                                                              2,207Non-performing
      assetsas
      a percentage of total assets
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              0.41
                                                                              %
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              0.34
                                                                              %
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              0.29
                                                                              %
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              0.23
                                                                              %
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              0.20
                                                                              %Non-performing
      loansas
      a percentage of total loans
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              0.53
                                                                              %
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              0.42
                                                                              %
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              0.35
                                                                              %
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              0.26
                                                                              %
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              0.25
                                                                              %
 
 
 
 Loans 30
to 89 days delinquent increased $6.0 million from $21.1 million at September 30,
2008 to $27.1 million at June 30, 2009.  Of the 30-89
day purchased loans at June 30, 2009, approximately 50% are concentrated in
Arizona, Nevada, Texas, and Illinois, with the remaining 50% spread across
19 other states. During the past three quarters, on average,
approximately 30% of loans that entered the 30 to 89 days delinquent category
made their required loan payments and did not go back into the 30-89 day
delinquent category or paid off during this time period.  During the
same time period, on average, approximately 40% of loans that entered the 30 to
89 days delinquent category made a portion of their required loan payments but
the loans either stayed in the 30 to 89 day delinquent category because not all
required loan payments were made or went back into the 30-89 day delinquent
category at some point during the noted time period as the borrower once again
became delinquent on their loan payments.  Approximately 30% of the
loans that entered the 30-89 days delinquent category during the past three
quarters progressed to the non-performing loan or REO categories.
 
 Non-performing
loans increased $15.4 million from $13.7 million at September 30, 2008 to $29.1
million at June 30, 2009.  Of the purchased non-performing loans at
June 30, 2009, approximately 45% are concentrated in Arizona and Florida, with
the remaining 55% spread across 18 other states.  The increase in
non-performing loans reflects the economic recession coupled with the continued
deterioration of the housing market, particularly in some of the states in which
we have purchased loans.  The deteriorating conditions in the housing
market are evidenced by declining house prices, fewer home sales, increasing
inventories of houses on the market and an increase in the length of time houses
remain on the market.  The increase in non-performing loans increased
our ratio of non-performing loans to total loans from 0.26% as of September 30,
2008 to 0.53% at June 30, 2009.
  32
  
 At June
30, 2009, one-to four-family non-performing loans with LTV ratios greater than
80% comprised approximately 20% of total non-performing loans.  Of
these loans, approximately 70% have PMI which substantially reduces or
eliminates the Bank’s exposure to loss.  The balance of one-to
four-family non-performing loans with LTV ratios greater than 80% with no PMI
was $1.5 million at June 30, 2009.  At origination, these loans had
LTV ratios less than 80%, but as a result of updating the appraisals, the LTV
ratios are now in excess of 80%.
 
 Management
maintains an allowance for loan losses to absorb known and inherent losses in
the loan portfolio based on ongoing quarterly assessments of the loan
portfolio.  Our allowance for loan loss methodology considers a number
of quantitative and qualitative factors, including the trend and composition of
our delinquent and non-performing loans, results of foreclosed property
transactions, and the status and trends of the local and national economies and
housing markets.  See “Critical Accounting Policies – Allowance for
Loan Losses.”  The $3.1 million provision for loan loss recorded in
the current quarter reflects an increase in our purchased loan loss factors in
the formula analysis and purchased loan specific valuation allowances and
accounts for charge-offs during the quarter, primarily related to purchased
loans.  The purchase loan loss factors and specific valuation
allowances were increased in the current quarter due to deterioration in
purchased loan delinquency loan trends and an increase in losses associated with
foreclosed property transactions.  Although management believes the
allowance for loan losses is established and maintained at adequate levels,
additions may be necessary if future economic or other conditions differ
substantially from the current operating environment.
 
 The
following table presents the Company’s activity for the allowance for loan
losses and related ratios at the dates and for the periods
indicated.
 For
      the Three Months Ended
                            
                            
                            For
      the Nine Months EndedJune
      30,
                            
                            
                            March
      31,
                            
                            
                            June
      30,
                            
                            
                            June
      30,2009
                            
                            
                            2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008(Dollars
      in thousands)Beginning
      balance
                            
                            $
                            7,464
                            
                            
                            $
                            6,137
                            
                            
                            $
                            4,250
                            
                            
                            $
                            5,791
                            
                            
                            $
                            4,181Charge-offs:One-
      to four-family loans-originated
                            
                            
                            35
                            
                            
                            
                            12
                            
                            
                            
                            9
                            
                            
                            
                            57
                            
                            
                            
                            39One-
      to four-family loans-purchased
                            
                            
                            293
                            
                            
                            
                            766
                            
                            
                            
                            124
                            
                            
                            
                            1,241
                            
                            
                            
                            124Multi-family
      loans
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            --Commercial
      and other loans
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            --Consumer
      loans
                            
                            
                            6
                            
                            
                            
                            2
                            
                            
                            
                            8
                            
                            
                            
                            19
                            
                            
                            
                            28Total
      charge-offs
                            
                            
                            334
                            
                            
                            
                            780
                            
                            
                            
                            141
                            
                            
                            
                            1,317
                            
                            
                            
                            191Recoveries
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            --Provision
      charged to expense
                            
                            
                            3,112
                            
                            
                            
                            2,107
                            
                            
                            
                            1,602
                            
                            
                            
                            5,768
                            
                            
                            
                            1,721Ending
      balance
                            
                            $
                            10,242
                            
                            
                            $
                            7,464
                            
                            
                            $
                            5,711
                            
                            
                            $
                            10,242
                            
                            
                            $
                            5,711ALLL
      to non-performing loansat
      period end
                            
                            
                            35.18
                            %
                            
                            
                            33.36
                            %
                            
                            
                            43.09
                            %ALLL
      to loans receivable, netat
      period end
                            
                            
                            0.18
                            %
                            
                            
                            0.14
                            %
                            
                            
                            0.11
                            %
 
 Historically,
our charge-offs have been low due to our low level of non-performing loans and
the amount of underlying equity in the properties collateralizing one-to four
family loans.  The increase in non-performing purchased loans and the
decline in real estate and housing markets have begun to result in higher
charge-offs, specifically related to purchased loans.  However, the
overall amount of charge-offs has not been significant because of our strict
underwriting standards and the relative economic stability of the geographic
areas in which the Bank originates loans.
  33
  
 The
following table presents the Company’s allocation of the allowance for loan
losses to each respective loan category at June 30, 2009 and September 30,
2008.
 
 At
                    
                    
                    AtJune
      30, 2009
                    
                    
                    September
      30, 2008Amount
      of
                    
                    
                    %
      of ALLL
                    
                    
                    Total
                    
                    
                    %
      of Loans
                    
                    
                    Amount
      of
                    
                    
                    %
      of ALLL
                    
                    
                    Total
                    
                    
                    %
      of LoansALLL
                    
                    
                    to
      Total ALLL
                    
                    
                    Loans
                    
                    
                    to
      Total Loans
                    
                    
                    ALLL
                    
                    
                    to
      Total ALLL
                    
                    
                    Loans
                    
                    
                    to
      Total Loans(Dollars
      in thousands)One-
      to four-family:Originated
                    
                    $
                    3,647
                    
                    
                    
                    35.6
                    %
                    
                    $
                    4,504,219
                    
                    
                    
                    80.6
                    %
                    
                    $
                    3,076
                    
                    
                    
                    53.2
                    %
                    
                    $
                    4,302,870
                    
                    
                    
                    80.0
                    %Purchased
                    
                    
                    6,183
                    
                    
                    
                    60.4
                    
                    
                    
                    752,976
                    
                    
                    
                    13.5
                    
                    
                    
                    2,307
                    
                    
                    
                    39.8
                    
                    
                    
                    723,488
                    
                    
                    
                    13.5Multi-family
      and commercial
                    
                    
                    73
                    
                    
                    
                    0.7
                    
                    
                    
                    84,358
                    
                    
                    
                    1.5
                    
                    
                    
                    53
                    
                    
                    
                    0.9
                    
                    
                    
                    56,081
                    
                    
                    
                    1.0Construction
      and development
                    
                    
                    25
                    
                    
                    
                    0.2
                    
                    
                    
                    41,429
                    
                    
                    
                    0.7
                    
                    
                    
                    41
                    
                    
                    
                    0.7
                    
                    
                    
                    85,178
                    
                    
                    
                    1.6Consumer
                    
                    
                    314
                    
                    
                    
                    3.1
                    
                    
                    
                    204,148
                    
                    
                    
                    3.7
                    
                    
                    
                    314
                    
                    
                    
                    5.4
                    
                    
                    
                    212,228
                    
                    
                    
                    3.9$
                    10,242
                    
                    
                    
                    100.0
                    %
                    
                    $
                    5,587,130
                    
                    
                    
                    100.0
                    %
                    
                    $
                    5,791
                    
                    
                    
                    100.0
                    %
                    
                    $
                    5,379,845
                    
                    
                    
                    100.0
                    %
 
 
  34
  
 Mortgage-Backed
Securities.  The balance of MBS decreased $133.3 million from
$2.23 billion at September 30, 2008 to $2.10 billion at June 30,
2009.  The decrease was due to maturities and repayments not being
replaced in their entirety; rather, some of the funds were used to purchase
short-term investment securities.  The following tables provide a
summary of the activity in our portfolio of MBS for the periods
presented.  The yields and weighted average life (“WAL”) for purchases
are presented as recorded at the time of purchase.  The yields for the
beginning and ending balances are as of the period presented and are generally
derived from recent prepayment activity on the securities in the portfolio as of
the dates presented.  The decrease in the yield at June 30, 2009
compared to September 30, 2008 was due to repricing and to the purchase of
securities with yields lower than the existing portfolio due to a decline in
market rates.  The beginning and ending WAL is the estimated remaining
maturity after historical prepayment speeds have been applied.  The
decrease in the WAL at June 30, 2009 compared to September 30, 2008 was due to
purchases with a WAL less than the existing portfolio and an increase in
prepayment speeds.
 
 For
      the Three Months EndedJune
      30, 2009
                    
                    
                    March
      31, 2009
                    
                    
                    December
      31, 2008
                    
                    
                    September
      30, 2008Amount
                    
                    
                    Yield
                    
                    
                    WAL
                    
                    
                    Amount
                    
                    
                    Yield
                    
                    
                    WAL
                    
                    
                    Amount
                    
                    
                    Yield
                    
                    
                    WAL
                    
                    
                    Amount
                    
                    
                    Yield
                    
                    
                    WAL(Dollars
      in thousands)Beginning
      balance
                    
                    $
                    2,204,369
                    
                    
                    
                    4.72
                    %
                    
                    
                    5.55
                    
                    
                    $
                    2,176,302
                    
                    
                    
                    4.82
                    %
                    
                    
                    5.81
                    
                    
                    $
                    2,234,339
                    
                    
                    
                    4.82
                    %
                    
                    
                    5.05
                    
                    
                    $
                    2,066,685
                    
                    
                    
                    4.76
                    %
                    
                    
                    4.32Maturities
      and repayments
                    
                    
                    (155,168
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (107,388
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (90,194
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (112,777
                    )Net
      amortization of premiums/discounts
                    
                    
                    (189
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    46
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    27
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    23Purchases:Fixed
                    
                    
                    3,217
                    
                    
                    
                    4.34
                    
                    
                    
                    8.49
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    60,137
                    
                    
                    
                    5.03
                    
                    
                    
                    4.48Adjustable
                    
                    
                    50,983
                    
                    
                    
                    2.83
                    
                    
                    
                    3.58
                    
                    
                    
                    118,469
                    
                    
                    
                    2.68
                    
                    
                    
                    1.90
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    219,888
                    
                    
                    
                    4.99
                    
                    
                    
                    5.07Change
      in valuation on AFS securities
                    
                    
                    (2,214
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    16,940
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    32,130
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    383Ending
      balance
                    
                    $
                    2,100,998
                    
                    
                    
                    4.59
                    %
                    
                    
                    4.55
                    
                    
                    $
                    2,204,369
                    
                    
                    
                    4.72
                    %
                    
                    
                    5.55
                    
                    
                    $
                    2,176,302
                    
                    
                    
                    4.82
                    %
                    
                    
                    5.81
                    
                    
                    $
                    2,234,339
                    
                    
                    
                    4.82
                    %
                    
                    
                    5.05For
      the Nine Months EndedJune
      30, 2009
                    
                    
                    June
      30, 2008Amount
                    
                    
                    Yield
                    
                    
                    WAL
                    
                    
                    Amount
                    
                    
                    Yield
                    
                    
                    WAL(Dollars
      in thousands)Beginning
      balance
                    
                    $
                    2,234,339
                    
                    
                    
                    4.82
                    %
                    
                    
                    5.05
                    
                    
                    $
                    1,414,271
                    
                    
                    
                    4.46
                    %
                    
                    
                    4.04Maturities
      and repayments
                    
                    
                    (352,750
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (387,301
                    )Net
      amortization of premiums/discounts
                    
                    
                    (116
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (770
                    )Purchases:Fixed
                    
                    
                    3,217
                    
                    
                    
                    4.34
                    
                    
                    
                    8.49
                    
                    
                    
                    725,044
                    
                    
                    
                    4.93
                    
                    
                    
                    4.63Adjustable
                    
                    
                    169,452
                    
                    
                    
                    2.73
                    
                    
                    
                    2.41
                    
                    
                    
                    325,286
                    
                    
                    
                    4.68
                    
                    
                    
                    4.80Change
      in valuation on AFS securities
                    
                    
                    46,856
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (9,845
                    )Ending
      balance
                    
                    $
                    2,100,998
                    
                    
                    
                    4.59
                    %
                    
                    
                    4.55
                    
                    
                    $
                    2,066,685
                    
                    
                    
                    4.76
                    %
                    
                    
                    4.32
 
 
  35
  
 
 Investment
Securities.  Investment securities, which consist primarily of
agency bonds (primarily issued by FNMA, FHLMC, or FHLB) and municipal
investments, increased $179.8 million from $142.4 million at September 30, 2008
to $322.2 million at June 30, 2009.  The increase was due to purchases
of short-term securities.  If market rates were to rise, the
short-term nature of these securities may allow management the opportunity to
reinvest the maturing funds at a yield higher than current
yields.  The following tables provide a summary of the activity of
investment securities for the periods presented.  The yields for the
beginning and ending balances are as of the periods presented.  The
decrease in the yield at June 30, 2009 compared to September 30, 2008 was a
result of calls and/or maturities of securities with yields higher than the
overall portfolio yield and to purchases of investment securities with yields
lower than the existing portfolio.  The beginning and ending WAL represent
the estimated remaining maturity of the securities after projected call dates
have been considered, based upon market rates at each date
presented.  The decrease in the WAL at June 30, 2009 compared to
September 30, 2008 was due to issuers of certain securities in the portfolio
exercising their option to call the security, to maturing securities, and to
purchases of investment securities with WALs shorter than the
portfolio.
 
 For
      the Three Months EndedJune
      30, 2009
                    
                    
                    March
      31, 2009
                    
                    
                    December
      31, 2008
                    
                    
                    September
      30, 2008Amount
                    
                    
                    Yield
                    
                    
                    WAL
                    
                    
                    Amount
                    
                    
                    Yield
                    
                    
                    WAL
                    
                    
                    Amount
                    
                    
                    Yield
                    
                    
                    WAL
                    
                    
                    Amount
                    
                    
                    Yield
                    
                    
                    WAL(Dollars
      in thousands)Beginning
      balance
                    
                    $
                    214,410
                    
                    
                    
                    2.16
                    %
                    
                    
                    2.32
                    
                    
                    $
                    105,965
                    
                    
                    
                    3.34
                    %
                    
                    
                    3.64
                    
                    
                    $
                    142,359
                    
                    
                    
                    3.94
                    %
                    
                    
                    6.06
                    
                    
                    $
                    144,346
                    
                    
                    
                    3.94
                    %
                    
                    
                    4.45Maturities
      and calls
                    
                    
                    (25,036
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (22,168
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (37,428
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (119
                    )Net
      amortization of premiums/discounts
                    
                    
                    (685
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (329
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (247
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (244
                    )Purchases:Fixed
                    
                    
                    133,047
                    
                    
                    
                    1.41
                    
                    
                    
                    1.10
                    
                    
                    
                    131,229
                    
                    
                    
                    1.62
                    
                    
                    
                    1.04
                    
                    
                    
                    886
                    
                    
                    
                    4.52
                    
                    
                    
                    2.75
                    
                    
                    
                    --Change
      in valuation of AFS securities
                    
                    
                    430
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (287
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    395
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (1,624
                    )Ending
      balance
                    
                    $
                    322,166
                    
                    
                    
                    1.84
                    %
                    
                    
                    2.02
                    
                    
                    $
                    214,410
                    
                    
                    
                    2.16
                    %
                    
                    
                    2.32
                    
                    
                    $
                    105,965
                    
                    
                    
                    3.34
                    %
                    
                    
                    3.64
                    
                    
                    $
                    142,359
                    
                    
                    
                    3.94
                    %
                    
                    
                    6.06For
      the Nine Months EndedJune
      30, 2009
                    
                    
                    June
      30, 2008Amount
                    
                    
                    Yield
                    
                    
                    WAL
                    
                    
                    Amount
                    
                    
                    Yield
                    
                    
                    WAL(Dollars
      in thousands)Beginning
      balance
                    
                    $
                    142,359
                    
                    
                    
                    3.94
                    %
                    
                    
                    6.06
                    
                    
                    $
                    524,168
                    
                    
                    
                    4.52
                    %
                    
                    
                    1.66Maturities
      and calls
                    
                    
                    (84,632
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (613,899
                    )Net
      amortization of premiums/discounts
                    
                    
                    (1,261
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    274Purchases:Fixed
                    
                    
                    265,162
                    
                    
                    
                    1.52
                    
                    
                    
                    1.09
                    
                    
                    
                    230,512
                    
                    
                    
                    3.96
                    
                    
                    
                    1.07Adjustable
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    3,874
                    
                    
                    
                    6.58
                    
                    
                    
                    28.98Change
      in valuation of AFS securities
                    
                    
                    538
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (583
                    )Ending
      balance
                    
                    $
                    322,166
                    
                    
                    
                    1.84
                    %
                    
                    
                    2.02
                    
                    
                    $
                    144,346
                    
                    
                    
                    3.94
                    %
                    
                    
                    4.45
 
 
  36
  Liabilities.   Total
liabilities increased from $7.18 billion at September 30, 2008 to $7.40 billion
at June 30, 2009.  The $212.6 million increase in liabilities was
primarily a result of an increase in deposits of $251.4 million.  The
increase in deposits was a result of an increase in certificates, money market,
and checking accounts.  We believe the turmoil in the credit and
equity markets has made deposit products in strong financial institutions, like
the Bank, desirable for many customers.  In response to the economic
recession, households have increased their personal savings rate which we
believe has contributed to our growth in deposits.
 
 During
the nine months ended June 30, 2009, the Bank prepaid a total of $875.0 million
of fixed-rate FHLB advances with a weighted average contractual rate of
5.65%.  The prepaid FHLB advances were replaced with $875.0 million of
fixed-rate FHLB advances with a weighted average contractual interest rate of
3.41%.  The Bank paid a $38.4 million prepayment penalty to the FHLB,
which is being deferred as an adjustment to the carrying value of the new
advances and will be recognized as expense over the life of the new
advances.  As a result, the prepayment penalty will effectively
increase the interest rate on the new advances 96 basis points at the time of
the transaction.  See additional discussion of the transaction in
“Notes to Financial Statements - Note 6 - FHLB Advances.”
 
 The
following table presents the amount, average rate and percentage of total
deposits for checking, savings, money market and certificates for the periods
presented.
 
 At
                  
                  At
                  
                  At
                  
                  AtJune
      30, 2009
                  
                  March
      31, 2009
                  
                  December
      31, 2008
                  
                  September
      30, 2008Average
                  
                  %
      of
                  
                  
                  
                  
                  Average
                  
                  %
      of
                  
                  
                  
                  
                  Average
                  
                  %
      of
                  
                  
                  
                  
                  Average
                  
                  %
      ofAmount
                  
                  
                  Rate
                  
                  Total
                  
                  Amount
                  
                  
                  Rate
                  
                  Total
                  
                  Amount
                  
                  
                  Rate
                  
                  Total
                  
                  Amount
                  
                  
                  Rate
                  
                  Total(Dollars
      in thousands)Checking
                  
                  $
                  446,431
                  
                  
                  
                  0.21
                  %
                  
                  
                  10.69
                  %
                  
                  $
                  448,086
                  
                  
                  
                  0.21
                  %
                  
                  
                  10.89
                  %
                  
                  $
                  429,170
                  
                  
                  
                  0.21
                  %
                  
                  
                  11.10
                  %
                  
                  $
                  400,461
                  
                  
                  
                  0.21
                  %
                  
                  
                  10.21
                  %Savings
                  
                  
                  230,161
                  
                  
                  
                  0.72
                  
                  
                  
                  5.51
                  
                  
                  
                  229,905
                  
                  
                  
                  0.72
                  
                  
                  
                  5.58
                  
                  
                  
                  227,773
                  
                  
                  
                  0.87
                  
                  
                  
                  5.89
                  
                  
                  
                  232,103
                  
                  
                  
                  1.51
                  
                  
                  
                  5.91Money
      market
                  
                  
                  841,522
                  
                  
                  
                  0.88
                  
                  
                  
                  20.16
                  
                  
                  
                  826,488
                  
                  
                  
                  1.04
                  
                  
                  
                  20.08
                  
                  
                  
                  781,832
                  
                  
                  
                  1.12
                  
                  
                  
                  20.21
                  
                  
                  
                  772,323
                  
                  
                  
                  1.48
                  
                  
                  
                  19.68Certificates
                  
                  
                  2,657,137
                  
                  
                  
                  3.30
                  
                  
                  
                  63.64
                  
                  
                  
                  2,612,035
                  
                  
                  
                  3.45
                  
                  
                  
                  63.45
                  
                  
                  
                  2,428,529
                  
                  
                  
                  3.64
                  
                  
                  
                  62.80
                  
                  
                  
                  2,518,996
                  
                  
                  
                  3.91
                  
                  
                  
                  64.20Total
      deposits
                  
                  $
                  4,175,251
                  
                  
                  
                  2.34
                  %
                  
                  
                  100.00
                  %
                  
                  $
                  4,116,514
                  
                  
                  
                  2.46
                  %
                  
                  
                  100.00
                  %
                  
                  $
                  3,867,304
                  
                  
                  
                  2.59
                  %
                  
                  
                  100.00
                  %
                  
                  $
                  3,923,883
                  
                  
                  
                  2.91
                  %
                  
                  
                  100.00
                  %
 
 At June
30, 2009, $71.5 million of the $2.66 billion in certificates were brokered
deposits, compared to $180.6 million in brokered deposits at September 30,
2008.  The remaining brokered deposits at June 30, 2009 will mature
within one year.  Management regularly considers brokered deposits as
a source of funding, but does not currently consider the cost of this funding
source to be balanced with investment opportunities.  As of June 30,
2009, $80.2 million in certificates were public unit deposits, compared to no
public unit deposits at September 30, 2008.  Management will continue
to monitor the wholesale deposit market for attractive
opportunities.
  37
  
 Stockholders’
Equity.Stockholders’ equity increased $51.4 million from
$871.2 million at September 30, 2008 to $922.6 million at June 30,
2009.  The increase was primarily a result of net income of $49.5
million and an increase in unrealized gains on AFS securities of $29.5 million,
partially offset by dividends paid of $33.6 million.
 
 Dividends
from the Company are the only source of funds for MHC.  It is expected
that MHC will waive future dividends except to the extent they are needed to
fund its continuing operations.  The following table shows the number
of shares eligible to receive dividends (“public shares”) because of the waiver
of dividends by MHC at June 30, 2009.  The unvested shares in the ESOP
receive cash equal to the dividends paid on the public shares.  The
cash received is used to repay the annual debt obligation on the loan taken out
by the ESOP from the Company at the time of the mutual-to-stock conversion of
the Bank to purchase shares for the ESOP.  These shares are held in
trust for a future employee benefit, and are therefore excluded from the
calculation of public shares.
 
 Total
      voting shares outstanding at September 30, 2008
                  
                  
                  74,079,868Treasury
      stock acquisitions
                  
                  
                  (56,063
                  )RRP
      grants
                  
                  
                  2,500Options
      exercised
                  
                  
                  71,850Total
      voting shares outstanding at June 30, 2009
                  
                  
                  74,098,155Unvested
      shares in ESOP
                  
                  
                  (1,008,194
                  )Shares
      held by MHC
                  
                  
                  (52,192,817
                  )Total
      shares eligible to receive dividends at June 30, 2009 (public
      shares)
                  
                  
                  20,897,144
  38
  
 
 The
following table presents quarterly dividends paid in calendar years 2009, 2008,
and 2007.  The dollar amounts represent dividends paid during the
quarter.  The actual amount of dividends to be paid during the quarter
ending June 30, 2009, as approved by the board of directors on July 20, 2009,
will be based upon the number of shares outstanding on the record date of August
7, 2009.  All shares outstanding presented in the table below, except
for the quarter ending June 30, 2009, are as of the date of record per the
dividend declaration.  For the purposes of the table below, the number
of dividend shares for the quarter ending June 30, 2009 is based upon shares
outstanding on July 27, 2009.  This does not represent the actual
dividend payout, but rather management’s estimate of the number of shares
eligible to receive the dividend and the total dividend payout as of July 27,
2009.
 
 Calendar
      Year2009
                        
                        
                        2008
                        
                        
                        2007(Dollars
      in thousands, except per share amounts)Quarter
      ended March 31Number
      of dividend shares
                        
                        
                        20,874,269
                        
                        
                        
                        20,660,510
                        
                        
                        
                        20,520,793Dividend
      per share
                        
                        $
                        0.50
                        
                        
                        $
                        0.50
                        
                        
                        $
                        0.50Total
      dividends paid
                        
                        $
                        10,437
                        
                        
                        $
                        10,330
                        
                        
                        $
                        10,261Quarter
      ended June 30Number
      of dividend shares
                        
                        
                        20,892,544
                        
                        
                        
                        20,661,660
                        
                        
                        
                        20,673,933Dividend
      per share
                        
                        $
                        0.50
                        
                        
                        $
                        0.50
                        
                        
                        $
                        0.50Total
      dividends paid
                        
                        $
                        10,446
                        
                        
                        $
                        10,331
                        
                        
                        $
                        10,337Quarter
      ended September 30Number
      of dividend shares
                        
                        
                        20,897,644
                        
                        
                        
                        20,668,519
                        
                        
                        
                        20,694,333Dividend
      per share
                        
                        $
                        0.50
                        
                        
                        $
                        0.50
                        
                        
                        $
                        0.50Total
      dividends paid
                        
                        $
                        10,449
                        
                        
                        $
                        10,334
                        
                        
                        $
                        10,347Quarter
      ended December 31Number
      of dividend shares
                        
                        
                        
                        
                        
                        
                        20,881,157
                        
                        
                        
                        20,860,278Dividend
      per share
                        
                        
                        
                        
                        
                        $
                        0.50
                        
                        
                        $
                        0.50Total
      dividends paid
                        
                        
                        
                        
                        
                        $
                        10,441
                        
                        
                        $
                        10,430Special
      year end dividendNumber
      of dividend shares
                        
                        
                        
                        
                        
                        
                        20,881,157
                        
                        
                        
                        --Dividend
      per share
                        
                        
                        
                        
                        
                        $
                        0.11
                        
                        
                        $
                        --Total
      dividends paid
                        
                        
                        
                        
                        
                        $
                        2,297
                        
                        
                        $
                        --Calendar
      year-to-date dividends per share
                        
                        $
                        1.50
                        
                        
                        $
                        2.11
                        
                        
                        $
                        2.00
 
  39
  Analysis
of Net Interest Income
 
 Net
interest income represents the difference between interest income earned on
interest-earning assets, such as mortgage loans, investment securities, and MBS,
and interest paid on interest-bearing liabilities, such as deposits, FHLB
advances, and other borrowings.  Net interest income depends on the
balance of interest-earning assets and interest-bearing liabilities, and the
interest rates earned or paid on them.  The following table presents
the average balances of our assets, liabilities and stockholders’ equity and the
related annualized yields and rates on our interest-earning assets and
interest-bearing liabilities for the periods indicated and the yield/rate on our
interest-earning assets and interest-bearing liabilities at June 30,
2009.
 At
                            
                            
                            For
      the Three Months EndedJune
      30, 2009
                            
                            
                            June
      30, 2009
                            
                            
                            March
      31, 2009
                            
                            
                            December
      31, 2008
                            
                            
                            September
      30, 2008
                            
                            
                            June
      30, 2008Average
                            
                            
                            
                            
                            
                            Average
                            
                            
                            
                            
                            
                            Average
                            
                            
                            
                            
                            
                            Average
                            
                            
                            
                            
                            
                            AverageYield/
                            
                            
                            Outstanding
                            
                            
                            Yield/
                            
                            
                            Outstanding
                            
                            
                            Yield/
                            
                            
                            Outstanding
                            
                            
                            Yield/
                            
                            
                            Outstanding
                            
                            
                            Yield/
                            
                            
                            Outstanding
                            
                            
                            Yield/Rate
                            
                            
                            Balance
                            
                            
                            Rate(4)
                            
                            
                            Balance
                            
                            
                            Rate(4)
                            
                            
                            Balance
                            
                            
                            Rate(4)
                            
                            
                            Balance
                            
                            
                            Rate(4)
                            
                            
                            Balance
                            
                            
                            Rate(4)Assets:
                            
                            
                            
                            
                            (Dollars
      in thousands)Interest-earning
      assets:Loans
      receivable (1)
                            
                            
                            5.42
                            %
                            
                            $
                            5,532,573
                            
                            
                            
                            5.55
                            %
                            
                            $
                            5,485,551
                            
                            
                            
                            5.65
                            %
                            
                            $
                            5,419,179
                            
                            
                            
                            5.66
                            %
                            
                            $
                            5,328,776
                            
                            
                            
                            5.69
                            %
                            
                            $
                            5,316,794
                            
                            
                            
                            5.62
                            %MBS(2)
                            
                            
                            4.59
                            
                            
                            
                            2,115,159
                            
                            
                            
                            4.58
                            
                            
                            
                            2,120,481
                            
                            
                            
                            4.73
                            
                            
                            
                            2,201,531
                            
                            
                            
                            4.80
                            
                            
                            
                            2,192,268
                            
                            
                            
                            4.77
                            
                            
                            
                            2,107,757
                            
                            
                            
                            4.72Investment
      securities(2)
                            
                            
                            1.84
                            
                            
                            
                            246,588
                            
                            
                            
                            2.07
                            
                            
                            
                            125,932
                            
                            
                            
                            3.03
                            
                            
                            
                            136,295
                            
                            
                            
                            3.89
                            
                            
                            
                            144,718
                            
                            
                            
                            3.95
                            
                            
                            
                            128,784
                            
                            
                            
                            4.03Capital
      stock of FHLB
                            
                            
                            2.49
                            
                            
                            
                            131,287
                            
                            
                            
                            2.42
                            
                            
                            
                            130,574
                            
                            
                            
                            2.42
                            
                            
                            
                            124,958
                            
                            
                            
                            2.48
                            
                            
                            
                            124,365
                            
                            
                            
                            4.72
                            
                            
                            
                            128,379
                            
                            
                            
                            4.71Cash
      and cash equivalents
                            
                            
                            0.24
                            
                            
                            
                            84,360
                            
                            
                            
                            0.23
                            
                            
                            
                            103,768
                            
                            
                            
                            0.26
                            
                            
                            
                            33,025
                            
                            
                            
                            0.58
                            
                            
                            
                            59,351
                            
                            
                            
                            1.92
                            
                            
                            
                            90,556
                            
                            
                            
                            2.03Total
      interest-earning assets (1)
      (2)
                            
                            
                            4.95
                            
                            
                            
                            8,109,967
                            
                            
                            
                            5.08
                            
                            
                            
                            7,966,306
                            
                            
                            
                            5.24
                            
                            
                            
                            7,914,988
                            
                            
                            
                            5.32
                            
                            
                            
                            7,849,478
                            
                            
                            
                            5.36
                            
                            
                            
                            7,772,270
                            
                            
                            
                            5.29Other
      noninterest-earning assets
                            
                            
                            
                            
                            
                            
                            219,154
                            
                            
                            
                            
                            
                            
                            
                            201,462
                            
                            
                            
                            
                            
                            
                            
                            161,092
                            
                            
                            
                            
                            
                            
                            
                            151,695
                            
                            
                            
                            
                            
                            
                            
                            187,701Total
      assets
                            
                            
                            
                            
                            
                            $
                            8,329,121
                            
                            
                            
                            
                            
                            
                            $
                            8,167,768
                            
                            
                            
                            
                            
                            
                            $
                            8,076,080
                            
                            
                            
                            
                            
                            
                            $
                            8,001,173
                            
                            
                            
                            
                            
                            
                            $
                            7,959,971Liabilities
      and stockholders' equity:Interest-bearing
      liabilities:Savings
                            
                            
                            0.72
                            
                            
                            $
                            230,869
                            
                            
                            
                            0.73
                            
                            
                            $
                            227,431
                            
                            
                            
                            0.74
                            
                            
                            $
                            229,540
                            
                            
                            
                            1.07
                            
                            
                            $
                            231,986
                            
                            
                            
                            1.66
                            
                            
                            $
                            230,164
                            
                            
                            
                            1.42Checking
                            
                            
                            0.21
                            
                            
                            
                            442,227
                            
                            
                            
                            0.21
                            
                            
                            
                            423,107
                            
                            
                            
                            0.20
                            
                            
                            
                            405,787
                            
                            
                            
                            0.21
                            
                            
                            
                            403,327
                            
                            
                            
                            0.20
                            
                            
                            
                            412,468
                            
                            
                            
                            0.20Money
      market
                            
                            
                            0.88
                            
                            
                            
                            838,281
                            
                            
                            
                            0.93
                            
                            
                            
                            800,155
                            
                            
                            
                            1.08
                            
                            
                            
                            775,386
                            
                            
                            
                            1.31
                            
                            
                            
                            799,408
                            
                            
                            
                            1.45
                            
                            
                            
                            814,074
                            
                            
                            
                            1.53Certificates
                            
                            
                            3.30
                            
                            
                            
                            2,639,347
                            
                            
                            
                            3.36
                            
                            
                            
                            2,529,090
                            
                            
                            
                            3.52
                            
                            
                            
                            2,473,763
                            
                            
                            
                            3.75
                            
                            
                            
                            2,485,619
                            
                            
                            
                            3.99
                            
                            
                            
                            2,508,743
                            
                            
                            
                            4.32Total
      deposits
                            
                            
                            2.34
                            
                            
                            
                            4,150,724
                            
                            
                            
                            2.39
                            
                            
                            
                            3,979,783
                            
                            
                            
                            2.52
                            
                            
                            
                            3,884,476
                            
                            
                            
                            2.73
                            
                            
                            
                            3,920,340
                            
                            
                            
                            2.94
                            
                            
                            
                            3,965,449
                            
                            
                            
                            3.15FHLB
      advances (3)
                            
                            
                            4.13
                            
                            
                            
                            2,410,956
                            
                            
                            
                            4.21
                            
                            
                            
                            2,451,927
                            
                            
                            
                            4.40
                            
                            
                            
                            2,477,961
                            
                            
                            
                            4.72
                            
                            
                            
                            2,469,082
                            
                            
                            
                            4.73
                            
                            
                            
                            2,547,450
                            
                            
                            
                            4.75Other
      borrowings
                            
                            
                            3.96
                            
                            
                            
                            713,609
                            
                            
                            
                            3.97
                            
                            
                            
                            713,600
                            
                            
                            
                            3.99
                            
                            
                            
                            713,585
                            
                            
                            
                            4.24
                            
                            
                            
                            638,463
                            
                            
                            
                            4.10
                            
                            
                            
                            452,458
                            
                            
                            
                            4.09Total
      borrowings
                            
                            
                            4.09
                            
                            
                            
                            3,124,565
                            
                            
                            
                            4.16
                            
                            
                            
                            3,165,527
                            
                            
                            
                            4.31
                            
                            
                            
                            3,191,546
                            
                            
                            
                            4.61
                            
                            
                            
                            3,107,545
                            
                            
                            
                            4.60
                            
                            
                            
                            2,999,908
                            
                            
                            
                            4.65Total
      interest-bearing liabilities
                            
                            
                            3.09
                            
                            
                            
                            7,275,289
                            
                            
                            
                            3.15
                            
                            
                            
                            7,145,310
                            
                            
                            
                            3.31
                            
                            
                            
                            7,076,022
                            
                            
                            
                            3.58
                            
                            
                            
                            7,027,885
                            
                            
                            
                            3.67
                            
                            
                            
                            6,965,357
                            
                            
                            
                            3.80Other
      noninterest-bearing
                              liabilities
                            
                            
                            
                            
                            
                            
                            127,389
                            
                            
                            
                            
                            
                            
                            
                            114,699
                            
                            
                            
                            
                            
                            
                            
                            121,970
                            
                            
                            
                            
                            
                            
                            
                            103,332
                            
                            
                            
                            
                            
                            
                            
                            122,747Stockholders'
      equity
                            
                            
                            
                            
                            
                            
                            926,443
                            
                            
                            
                            
                            
                            
                            
                            907,759
                            
                            
                            
                            
                            
                            
                            
                            878,088
                            
                            
                            
                            
                            
                            
                            
                            869,956
                            
                            
                            
                            
                            
                            
                            
                            871,867Total
      liabilities andstockholders'
      equity
                            
                            
                            
                            
                            
                            $
                            8,329,121
                            
                            
                            
                            
                            
                            
                            $
                            8,167,768
                            
                            
                            
                            
                            
                            
                            $
                            8,076,080
                            
                            
                            
                            
                            
                            
                            $
                            8,001,173
                            
                            
                            
                            
                            
                            
                            $
                            7,959,971
 
 (Continued)
 
 40
 
 Net
      interest rate spread
              1.86
              %
              
              
              1.93
              %
              
              
              1.93
              %
              
              
              1.74
              %
              
              
              1.68
              %
              
              
              1.49
              %Net
      interest-earning assets
              
              
              $              834,678
              
              
              
              $         820,996
              
              
              
              $         838,966
              
              
              
              $         821,593
              
              
              
              $         806,913Net
      interest margin
              
              
              
              
              2.26
              %
              
              
              2.30
              %
              
              
              2.08
              %
              
              
              2.03
              %
              
              
              1.89
              %Ratio
      of interest-earning assetsto
      interest-bearing liabilities
              
              
              
              
              1.11
              
              
              
              1.11
              
              
              
              1.12
              
              
              
              1.12
              
              
              
              1.12Selected
      performance ratios:Return
      on average assets (annualized)
              
              
              
              
              0.74
              %
              
              
              0.89
              %
              
              
              0.79
              %
              
              
              0.79
              %
              
              
              0.72
              %Return
      on average equity (annualized)
              
              
              
              
              6.68
              %
              
              
              7.99
              %
              
              
              7.22
              %
              
              
              7.25
              %
              
              
              6.59
              %Average
      equity to average assets
              
              
              
              
              11.12
              %
              
              
              11.11
              %
              
              
              10.87
              %
              
              
              10.87
              %
              
              
              10.95
              %
 
 (Concluded)
  
 (1)Calculated net of deferred loan fees, loan discounts, and loans in
process.  Non-accruing loans are included in the loans receivable
average balance with a yield of zero percent.
  (2)MBS
and investment securities classified as AFS are stated at amortized cost,
adjusted for unamortized purchase premiums or discounts.
  (3)FHLB
advances are stated net of deferred gains and deferred prepayment
penalties.
  (4)Average yields are derived by dividing annualized income by the average
balance of the related assets and average rates are derived by dividing
annualized expense by the average balance of the related liabilities, for the
periods shown.  Average outstanding balances are derived from average
daily balances, except as noted.  The yields and rates include
amortization of fees, costs, premiums and discounts which are considered
adjustments to yields/rates. Yields on tax-exempt securities were not calculated
on a tax-equivalent basis.
 
 
  
   41
  
 The
following table presents selected income statement information for the quarters
indicated.
  For
      the Three Months EndedJune
      30,
                  
                  
                  March
      31,
                  
                  
                  December
      31,
                  
                  
                  September
      30,
                  
                  
                  June
      30,2009
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2008
                  
                  
                  2008Selected
      income statement data:
                  
                  (Dollars
      in thousands, except per share amounts)Interest
      and dividend income:Loans
      receivable
                  
                  $
                  76,745
                  
                  
                  $
                  77,446
                  
                  
                  $
                  76,716
                  
                  
                  $
                  75,830
                  
                  
                  $
                  74,651MBS
                  
                  
                  24,211
                  
                  
                  
                  25,088
                  
                  
                  
                  26,402
                  
                  
                  
                  26,153
                  
                  
                  
                  24,869Investment
      securities
                  
                  
                  1,279
                  
                  
                  
                  955
                  
                  
                  
                  1,326
                  
                  
                  
                  1,428
                  
                  
                  
                  1,298Other
      interest and dividend income
                  
                  
                  843
                  
                  
                  
                  846
                  
                  
                  
                  829
                  
                  
                  
                  1,766
                  
                  
                  
                  1,967Total
      interest and dividend income
                  
                  
                  103,078
                  
                  
                  
                  104,335
                  
                  
                  
                  105,273
                  
                  
                  
                  105,177
                  
                  
                  
                  102,785Interest
      expense:FHLB
      advances
                  
                  
                  25,307
                  
                  
                  
                  26,653
                  
                  
                  
                  29,545
                  
                  
                  
                  29,543
                  
                  
                  
                  30,248Deposits
                  
                  
                  24,705
                  
                  
                  
                  24,711
                  
                  
                  
                  26,785
                  
                  
                  
                  29,083
                  
                  
                  
                  31,174Other
      borrowings
                  
                  
                  7,144
                  
                  
                  
                  7,109
                  
                  
                  
                  7,725
                  
                  
                  
                  6,693
                  
                  
                  
                  4,682Total
      interest expense
                  
                  
                  57,156
                  
                  
                  
                  58,473
                  
                  
                  
                  64,055
                  
                  
                  
                  65,319
                  
                  
                  
                  66,104Provision
      for loan losses
                  
                  
                  3,112
                  
                  
                  
                  2,107
                  
                  
                  
                  549
                  
                  
                  
                  330
                  
                  
                  
                  1,602Net
      interest and dividend income(after
      provision for loan losses)
                  
                  
                  42,810
                  
                  
                  
                  43,755
                  
                  
                  
                  40,669
                  
                  
                  
                  39,528
                  
                  
                  
                  35,079Other
      income
                  
                  
                  8,232
                  
                  
                  
                  6,936
                  
                  
                  
                  6,642
                  
                  
                  
                  7,589
                  
                  
                  
                  7,345Other
      expenses
                  
                  
                  26,411
                  
                  
                  
                  21,995
                  
                  
                  
                  22,187
                  
                  
                  
                  21,795
                  
                  
                  
                  19,836Income
      tax expense
                  
                  
                  9,155
                  
                  
                  
                  10,564
                  
                  
                  
                  9,272
                  
                  
                  
                  9,563
                  
                  
                  
                  8,233Net
      income
                  
                  $
                  15,476
                  
                  
                  $
                  18,132
                  
                  
                  $
                  15,852
                  
                  
                  $
                  15,759
                  
                  
                  $
                  14,355Efficiency
      ratio
                  
                  
                  48.77
                  
                  
                  
                  41.66
                  
                  
                  
                  46.36
                  
                  
                  
                  45.94
                  
                  
                  
                  45.05Basic
      earnings per share
                  
                  $
                  0.21
                  
                  
                  $
                  0.25
                  
                  
                  $
                  0.22
                  
                  
                  $
                  0.22
                  
                  
                  $
                  0.20Diluted
      earnings per share
                  
                  $
                  0.21
                  
                  
                  $
                  0.25
                  
                  
                  $
                  0.22
                  
                  
                  $
                  0.22
                  
                  
                  $
                  0.20Dividends
      declared per public share
                  
                  $
                  0.50
                  
                  
                  $
                  0.50
                  
                  
                  $
                  0.61
                  
                  
                  $
                  0.50
                  
                  
                  $
                  0.50
 
  
  42
  Comparison
of Operating Results for the Three Months Ended June 30, 2009 and
2008
  Net
income for the quarter ended June 30, 2009 was $15.5 million compared to $14.4
million for the same period in the prior fiscal year. The $1.1 million increase
in net income was primarily a result of an $8.9 million decrease in interest
expense, partially offset by a $6.6 million increase in other expenses and a
$1.5 million increase in provision for loan loss.
 
 Interest
and Dividend Income
 Total
interest and dividend income for the current quarter was $103.1 million compared
to $102.8 million for the prior year quarter.  The $293 thousand
increase was a result of an increase in interest income on loans receivable of
$2.1 million, partially offset by a decrease in dividends received on FHLB stock
of $709 thousand, a decrease in interest income on MBS of $658 thousand, and a
decrease in interest income on cash and cash equivalents of $415
thousand.
 
 Interest
income on loans receivable for the current quarter was $76.7 million compared to
$74.7 million for the prior year quarter.  The $2.0 million increase
was a result of an increase of $215.8 million in the average balance of the loan
portfolio between the two periods due primarily to purchases and, to a lesser
extent, an increase in deferred fee amortization as a result of modifications
and prepayments.  The weighted average yield of the portfolio
decreased by seven basis point from 5.62% in the prior year quarter to 5.55% for
the current quarter. The decrease in the weighted average yield was a result of
modifications, refinances, and originations at rates below the existing
portfolio and to the repricing of the home equity loan portfolio to lower market
interest rates, partially offset by an increase in deferred fee
amortization.
 
 Interest
income on MBS for the quarter was $24.2 million compared to $24.9 million for
the prior year quarter.  The $658 thousand decrease in interest income
was due to a decrease of 14 basis points in the weighted average yield to 4.58%
for the current quarter.  The weighted average yield of the MBS
portfolio decreased between the two periods due to repricing and purchases of
MBS at a lower average yield than the existing portfolio between the two
periods.
 
 Interest
income on investment securities for the current quarter was relatively unchanged
at $1.3 million for the current and prior year quarter, despite an increase of
$117.8 million in the average balance of the portfolio.  The weighted
average portfolio yield decreased 196 basis points to 2.07% for the current
quarter due to calls and maturities of higher yielding securities, and to
purchases and reinvestments made at lower yields than the overall portfolio
yield.  The funds for the purchases came from MBS principal repayments
and maturities, and calls and maturities of investment
securities.  The majority of the securities were purchased during the
second and third quarters of fiscal year 2009.  The securities
purchased had a WAL of approximately one year at the time of
purchase.  If market rates were to rise, this may allow management the
opportunity to reinvest the maturing funds into higher yielding
investments.
 
 Dividends
on FHLB stock for the current quarter were $793 thousand compared to $1.5
million for the prior year quarter.  The $709 thousand decrease was
due to a 229 basis point decrease in the weighted average yield.  The
dividend rate on FHLB stock correlates to the federal funds rate, which
decreased between periods.
 
 Interest
income on cash and cash equivalents for the current quarter was $50 thousand,
compared to $465 thousand in the prior year quarter.  The decrease was
primarily due to a 180 basis point decrease in the weighted average yield due to
a decrease in short-term interest rates between periods.
 
 Interest
Expense
 Total
interest expense for the quarter ended June 30, 2009 was $57.2 million, compared
to $66.1 million for the prior year period.  The $8.9 million decrease
was due to a decrease in interest expense on deposits of $6.5 million and
interest expense on FHLB advances of $4.9 million, partially offset by a $2.4
million increase in interest expense on other borrowings.
 
 Interest
expense on FHLB advances for the current quarter was $25.3 million compared to
$30.2 million for the prior year quarter.  The $4.9 million decrease
in interest expense was primarily a result of a decrease in the average rate as
a result of the refinance of $875.0 million of advances during fiscal year 2009,
and to a decrease in the average balance as some maturing FHLB advances were
replaced with repurchase agreements.  See additional discussion of the
refinance of the FHLB advances in “Notes to Financial Statements - Note 6 - FHLB
advances.”
 
 Interest
expense on deposits for the current quarter was $24.7 million compared to $31.2
million for the prior year quarter.  The $6.5 million decrease in
interest expense was a result of a decrease in the average rate paid on the
certificate of deposit, money market, and savings portfolios due to the
portfolios repricing to lower market rates, partially offset by a $185.3 million
increase in
 
 43
 the
average balance, primarily in the certificate of deposit
portfolio.  We believe the turmoil in the credit and equity markets
has made deposit products in strong financial institutions, like the Bank,
desirable for many customers.  In response to the economic recession,
households have increased their personal savings rate which we believe has
contributed to our deposit growth.
 
 Interest
expense on other borrowings was $7.1 million compared to $4.7 million in the
prior year quarter.  The $2.4 million increase was due to an increase
in the average balance of other borrowings due to the Bank entering into $260.0
million of repurchase agreements between the two periods.  The
proceeds from the repurchase agreements were used to purchase MBS and to repay
maturing FHLB advances.
 
 Provision
for Loan Losses
 The Bank
recorded a provision for loan losses of $3.1 million during the current quarter,
compared to $1.6 million in the prior year quarter.  The provision for
loan losses recorded in the current quarter reflects an increase in our
purchased loan loss factors in the formula analysis and purchased loan specific
valuation allowances and accounts for charge-offs during the quarter, primarily
related to purchased loans. See additional discussion regarding the
provision for loan losses in the sections entitled “Critical Accounting Policies
– Allowance for Loan Losses” and “Asset Quality.”
 
 Other
Income and Expense
 Total
other income for the current quarter was $8.2 million compared to $7.3 million
in the prior year quarter.  The increase was primarily a result of a
$1.4 million increase in gains on sale of LHFS, net primarily due to the sale of
modified loans during the current quarter.
 
 Total
other expenses for the current quarter increased $6.6 million to $26.4 million,
compared to $19.8 million in the prior year quarter.  The increase was
due largely to an increase in federal insurance premium of $5.2 million as a
result of the FDIC special assessment and increases in the regular quarterly
deposit insurance premiums.  See additional discussion regarding the
FDIC special assessment and deposit insurance premiums under “Liquidity and
Capital Resources.”  Other expenses, net increased $1.4 million
primarily due to an impairment and valuation allowance on the mortgage servicing
rights (“MSR”) asset of $545 thousand in the current quarter due to an increase
in prepayment speeds, compared to a recovery on the MSR asset of $510 thousand
in the prior year quarter.  The increase in other expenses, net is
also due to an increase in expense associated with REO operations.
 
 Income
Tax Expense
 Income
tax expense for the current quarter was $9.2 million compared to $8.2 million in
the prior year quarter.  The increase in income tax expense was
primarily due to an increase in earnings compared to the prior year
quarter.  The effective tax rate was 37.2% for the current year
quarter, compared to 36.4% for the prior year quarter.
  44
  
 
 The table below presents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities, comparing the quarter ended June 30,
2009 to the quarter ended June 30, 2008.  For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (1) changes in volume, which are changes in
the average balance multiplied by the previous year’s average rate and (2)
changes in rate, which are changes in the average rate multiplied by the average
balance from the previous year.  The net changes attributable to the
combined impact of both rate and volume have been allocated proportionately to
the changes due to volume and the changes due to rate.
 
 Quarter
      Ended June 30,2009
      vs. 2008Increase
      (Decrease) Due toVolume
                    
                    
                    Rate
                    
                    
                    Total(Dollars
      in thousands)Interest-earning
      assets:Loans
      receivable
                    
                    $
                    2,991
                    
                    
                    $
                    (897
                    )
                    
                    $
                    2,094MBS
                    
                    
                    87
                    
                    
                    
                    (745
                    )
                    
                    
                    (658
                    )Investment
      securities
                    
                    
                    811
                    
                    
                    
                    (830
                    )
                    
                    
                    (19
                    )Capital
      stock of FHLB
                    
                    
                    34
                    
                    
                    
                    (743
                    )
                    
                    
                    (709
                    )Cash
      equivalents
                    
                    
                    (30
                    )
                    
                    
                    (385
                    )
                    
                    
                    (415
                    )Total
      interest-earning assets
                    
                    $
                    3,893
                    
                    
                    $
                    (3,600
                    )
                    
                    $
                    293Interest-bearing
      liabilities:Savings
                    
                    $
                    3
                    
                    
                    $
                    (403
                    )
                    
                    $
                    (400
                    )Checking
                    
                    
                    15
                    
                    
                    
                    11
                    
                    
                    
                    26Money
      market
                    
                    
                    90
                    
                    
                    
                    (1,256
                    )
                    
                    
                    (1,166
                    )Certificates
                    
                    
                    1,350
                    
                    
                    
                    (6,279
                    )
                    
                    
                    (4,929
                    )FHLB
      advances
                    
                    
                    (1,162
                    )
                    
                    
                    (3,779
                    )
                    
                    
                    (4,941
                    )Other
      borrowings
                    
                    
                    2,613
                    
                    
                    
                    (151
                    )
                    
                    
                    2,462Total
      interest-bearing liabilities
                    
                    $
                    2,909
                    
                    
                    $
                    (11,857
                    )
                    
                    $
                    (8,948
                    )Net
      change in net interest and dividend income
                    
                    $
                    984
                    
                    
                    $
                    8,257
                    
                    
                    $
                    9,241
 
 
  Comparison
of Operating Results for the Nine Months Ended June 30, 2009 and
2008
  Net
income for the nine months ended June 30, 2009 was $49.5 million compared to
$35.2 million for the same period in the prior fiscal year. The $14.3 million
increase in net income was primarily a result of a $31.6 million decrease in
interest expense and a $7.1 million increase in interest and dividend income,
partially offset by a $10.4 million increase in other expenses, a $9.4 million
increase in income tax expense, and a $4.0 million increase in provision for
loan loss.
 
 Interest
and Dividend Income
 Total
interest and dividend income for the nine months ended June 30, 2009 was $312.7
million compared to $305.6 million for the prior year period.  The
$7.1 million increase was a result of an increase in interest income on MBS of
$13.5 million and an increase in interest income on loans receivable of $4.7
million, partially offset by a decrease in interest income on investment
securities of $4.9 million, a decrease in interest income on cash and cash
equivalents of $3.1 million, and a decrease in dividends received on FHLB stock
of $3.1 million.
 
 Interest
income on loans receivable for the nine months ended June 30, 2009 was $230.9
million compared to $226.2 million for the prior year period.  The
$4.7 million increase was a result of a $167.7 million increase in the average
balance of the loan portfolio between the two periods, partially offset by a
decrease of six basis points in the weighted average yield of the portfolio to
5.62% for the current nine month period.  The increase in the average
balance was due to loan purchases during fiscal year 2009. The decrease in the
weighted average yield was a result of purchases and originations at a lower
rate than the portfolio and the home equity loan portfolio repricing to lower
market interest rates, partially offset by an increase in deferred fee
amortization as a result of prepayments, modifications and
refinances.
 
 
 45
 
 Interest
income on MBS for the nine months ended June 30, 2009 was $75.7 million compared
to $62.2 million for the prior year period.  The $13.5 million
increase in interest income was primarily due to an increase of $359.9 million
in the average balance and, to a lesser extent, an increase of 5 basis points in
the weighted average yield to 4.70% for the current nine month
period.  The increase in the average portfolio balance was a result of
purchases.  The funds for the purchases came from maturities and calls
of investment securities and from new borrowings.  The weighted
average yield of the MBS portfolio increased between the two periods due to
purchases of MBS during the last quarter of fiscal year 2008 at an average yield
higher than the existing portfolio.
 
 Interest
income on investment securities for the nine months ended June 30, 2009 was $3.6
million compared to $8.5 million for the prior year period.  The $4.9
million decrease in interest income was a result of a decrease of $105.6 million
in the average balance of the portfolio and a 131 basis point decrease in the
weighted average portfolio yield to 2.80% for the current nine month
period.  The decrease in the average balance was a result of calls and
maturities which were not reinvested in their entirety into the investment
securities portfolio, but rather into the higher yielding MBS
portfolio.  The decrease in the weighted average yield of the
portfolio was attributed to maturities and calls of securities with weighted
average yields greater than the portfolio, and also due to reinvestments made at
lower yields than the overall portfolio yield.
 
 Dividends
on FHLB stock for the nine months ended June 30, 2009 were $2.4 million compared
to $5.4 million for the prior year period.  The $3.0 million decrease
was due primarily to a 312 basis point decrease in the weighted average
yield.  The dividend rate on FHLB stock correlates to the federal
funds rate, which decreased during the period.
 
 Interest
income on cash and cash equivalents for the nine months ended June 30, 2009 was
$167 thousand, compared to $3.3 million in the prior year period.  The
decrease was due to a 303 basis point decrease in the weighted average yield due
to a decrease in short-term interest rates between the two periods, and a
decrease in the average balance of $46.3 million.  The decrease in the
average balance was a result of cash being utilized to purchase
MBS.
 
 Interest
Expense
 Total
interest expense for the nine months ended June 30, 2009 was $179.7 million,
compared to $211.3 million for the prior year period.  The $31.6
million decrease was primarily due to a decrease in interest expense on deposits
of $28.2 million.
 
 Interest
expense on FHLB advances for the current nine month period was $81.5 million
compared to $96.2 million for the prior year period.  This $14.7
million decrease was a result of the termination and maturity of the interest
rate swap agreements during fiscal year 2008, maturing advances which were
replaced with repurchase agreements, and a decrease in the rate due to the
refinance of $875.0 million of advances during the second and third quarters of
fiscal year 2009.  The decrease was also due to a decrease in the
average balance as a result of maturing advances that were replaced with
repurchase agreements.  See additional discussion of the refinance of
the FHLB advances in “Notes to Financial Statements - Note 6 - FHLB
advances.”
 
 Interest
expense on deposits for the nine months ended June 30, 2009 was $76.2 million
compared to $104.4 million for the prior year period.  This $28.2
million decrease was primarily a result of a decrease in the average rate paid
on the certificate of deposit, money market and savings portfolios due to the
portfolios repricing to lower market rates.
 
 Interest
expense on other borrowings was $22.0 million compared to $10.8 million in the
prior year period.  The $11.2 million increase was due to an increase
in the average balance of other borrowings due to the Bank entering into $260.0
million of repurchase agreements between the two periods.  The
proceeds from the repurchase agreement funds were used to purchase MBS and to
repay maturing FHLB advances.
  46
  
 
 Provision
for Loan Losses
 The Bank
recorded a provision for loan losses of $5.8 million during the current nine
month period, compared to a provision of $1.7 million in the prior year
period.  Of the $5.8 million, $3.1 million was recorded in the current
quarter as a result of an increase in our purchased loan loss factors in the
formula analysis, an increase in our purchased loan specific valuation
allowances and charge-offs during the quarter, primarily related to purchased
loans.  During the second quarter of fiscal year 2009, a $2.1 million
provision for loan loss was recorded which reflected changes in our allowance
for loan loss methodology and charge-offs during the quarter. See additional
discussion regarding the provision for loan losses in the sections entitled
“Critical Accounting Policies – Allowance for Loan Losses” and “Asset
Quality.”
 
 Other
Income and Expense
 Total
other income for the current nine month period was $21.8 million compared to
$22.4 million in the prior year period.  The $589 thousand decrease in
other income was a result of a $1.7 million decrease in other income, net and a
decrease in income from BOLI of $923 thousand due to a decrease in the net
crediting rate as a result of a decrease in market interest rates, partially
offset by an increase in gains on sale of LHFS, net of $1.7
million.  The decrease in other income, net was due primarily to the
redemption of shares received in the Visa, Inc. initial public offering of $992
thousand in the prior year period and to interest received on a tax refund of
$235 thousand also in the prior year period, with no corresponding item in the
current period.
 
 Total
other expenses for the current nine month period was $70.6 million compared to
$60.2 million in the prior year period.  The $10.4 million increase
was due to an increase in federal insurance premium of $5.4 million, an increase
in other expense, net of $2.2 million, and an increase in advertising expense of
$2.0 million.  The increase in federal insurance premium was a result
of the FDIC special assessment and increases in the regular quarterly deposit
insurance premiums.  See additional discussion regarding the FDIC
special assessment and deposit insurance premiums under “Liquidity and Capital
Resources.”  The increase in other expense, net was due primarily to
an impairment and valuation allowances on the MSR asset due to an increase in
prepayment speeds and to an increase in net expense related to REO
operations.  These increases were partially offset by the reversal of
a portion of the Visa, Inc. litigation liability accrued in the prior year
period.  The increase in advertising expense was due to expense
associated with the Bank’s new debit card rewards program and to advertising
campaigns undertaken to reassure customers of the Bank’s safety and soundness in
response to current economic conditions.
 
 Income
Tax Expense
 Income
tax expense for the current nine month period was $29.0 million compared to
$19.6 million in the prior year period.  The increase in income tax
expense was primarily due to an increase in earnings compared to the prior year
period.  The effective tax rate was 37.0% for the current year period,
compared to 35.8% for the prior year period.  The 120 basis point
difference in effective tax rates between the two periods was primarily a result
of a decrease in nontaxable income from BOLI, an increase in nondeductible
expenses associated with the ESOP and an increase in pre-tax income which
reduced the effective tax rate benefit of nontaxable income.
  47
  
 
 
 The
following table presents the average balances of our assets, liabilities and
stockholders’ equity and the related annualized yields and costs on our
interest-earning assets and interest-bearing liabilities for the periods
indicated.
 
 For
      the Nine Months EndedJune
      30, 2009
                  
                  
                  June
      30, 2008Average
                  
                  
                  
                  
                  
                  AverageOutstanding
                  
                  
                  Yield/
                  
                  
                  Outstanding
                  
                  
                  Yield/Balance
                  
                  
                  Rate(4)
                  
                  
                  Balance
                  
                  
                  Rate(4)Assets:
                  
                  (Dollars
      in thousands)Interest-earning
      assets:Loans
      receivable (1)
                  
                  $
                  5,478,858
                  
                  
                  
                  5.62
                  %
                  
                  $
                  5,311,111
                  
                  
                  
                  5.68
                  %MBS(2)
                  
                  
                  2,146,021
                  
                  
                  
                  4.70
                  
                  
                  
                  1,786,085
                  
                  
                  
                  4.65Investment
      securities(2)
                  
                  
                  169,643
                  
                  
                  
                  2.80
                  
                  
                  
                  275,234
                  
                  
                  
                  4.11Capital
      stock of FHLB
                  
                  
                  128,919
                  
                  
                  
                  2.44
                  
                  
                  
                  130,845
                  
                  
                  
                  5.56Cash
      and cash equivalents
                  
                  
                  84,116
                  
                  
                  
                  0.26
                  
                  
                  
                  130,375
                  
                  
                  
                  3.29Total
      interest-earning assets (1)
      (2)
                  
                  
                  8,007,557
                  
                  
                  
                  5.21
                  
                  
                  
                  7,633,650
                  
                  
                  
                  5.34Other
      noninterest-earning assets
                  
                  
                  183,097
                  
                  
                  
                  
                  
                  
                  
                  197,944Total
      assets
                  
                  $
                  8,190,654
                  
                  
                  
                  
                  
                  
                  $
                  7,831,594Liabilities
      and stockholders' equity:Interest-bearing
      liabilities:Savings
                  
                  $
                  229,288
                  
                  
                  
                  0.84
                  
                  
                  $
                  230,426
                  
                  
                  
                  1.81Checking
                  
                  
                  423,643
                  
                  
                  
                  0.21
                  
                  
                  
                  396,785
                  
                  
                  
                  0.21Money
      market
                  
                  
                  804,517
                  
                  
                  
                  1.10
                  
                  
                  
                  806,359
                  
                  
                  
                  2.29Certificates
                  
                  
                  2,547,198
                  
                  
                  
                  3.54
                  
                  
                  
                  2,514,228
                  
                  
                  
                  4.60Total
      deposits
                  
                  
                  4,004,646
                  
                  
                  
                  2.54
                  
                  
                  
                  3,947,798
                  
                  
                  
                  3.52FHLB
      advances (3)
                  
                  
                  2,447,044
                  
                  
                  
                  4.44
                  
                  
                  
                  2,581,022
                  
                  
                  
                  4.94Other
      borrowings
                  
                  
                  713,598
                  
                  
                  
                  4.06
                  
                  
                  
                  307,922
                  
                  
                  
                  4.60Total
      borrowings
                  
                  
                  3,160,642
                  
                  
                  
                  4.35
                  
                  
                  
                  2,888,944
                  
                  
                  
                  4.90Total
      interest-bearing liabilities
                  
                  
                  7,165,288
                  
                  
                  
                  3.34
                  
                  
                  
                  6,836,742
                  
                  
                  
                  4.10Other
      noninterest-bearing liabilities
                  
                  
                  121,378
                  
                  
                  
                  
                  
                  
                  
                  124,741Stockholders'
      equity
                  
                  
                  903,988
                  
                  
                  
                  
                  
                  
                  
                  870,111Total
      liabilities and stockholders' equity
                  
                  $
                  8,190,654
                  
                  
                  
                  
                  
                  
                  $
                  7,831,594Net
      interest rate spread
                  
                  
                  
                  
                  
                  
                  1.87
                  %
                  
                  
                  
                  
                  
                  
                  1.24
                  %Net
      interest-earning assets
                  
                  $
                  842,269
                  
                  
                  
                  
                  
                  
                  $
                  796,908Net
      interest margin
                  
                  
                  
                  
                  
                  
                  2.21
                  %
                  
                  
                  
                  
                  
                  
                  1.65
                  %Ratio
      of interest-earning assetsto
      interest-bearing liabilities
                  
                  
                  
                  
                  
                  
                  1.12
                  
                  
                  
                  
                  
                  
                  
                  1.12Selected
      Performance Ratios:Return
      on average assets (annualized)
                  
                  
                  
                  
                  
                  
                  0.81
                  %
                  
                  
                  
                  
                  
                  
                  0.60
                  %Return
      on average equity (annualized)
                  
                  
                  
                  
                  
                  
                  7.30
                  %
                  
                  
                  
                  
                  
                  
                  5.39
                  %Average
      equity to average assets
                  
                  
                  
                  
                  
                  
                  11.04
                  %
                  
                  
                  
                  
                  
                  
                  11.11
                  %
 
 (1)Calculated net of deferred loan fees, loan discounts, and loans in
process.  Non-accruing loans are included in the loans receivable
average balance with a yield of zero percent.
  (2)MBS
and investment securities classified as AFS are stated at amortized cost,
adjusted for unamortized purchase premiums or discounts.
  (3)FHLB
advances are stated net of deferred gains and deferred prepayment penalties.
 
 
  48
 (4)Average yields are derived by dividing annualized income by the average
balance of the related assets and average rates are derived by dividing
annualized expense by the average balance of the related liabilities, for the
periods shown.  Average outstanding balances are derived from average
daily balances, except as noted.  The yields and rates include
amortization of fees, costs, premiums and discounts which are considered
adjustments to yields/rates. Yields on tax-exempt securities were not calculated
on a tax-equivalent basis.
  
 The table
below presents the dollar amount of changes in interest income and interest
expense for major components of interest-earning assets and interest-bearing
liabilities, comparing the nine months ended June 30, 2009 to the nine months
ended June 30, 2008.  For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in volume, which are changes in the average balance multiplied by
the previous year’s average rate and (2) changes in rate, which are changes in
the average rate multiplied by the average balance from the previous
year.  The net changes attributable to the combined impact of both
rate and volume have been allocated proportionately to the changes due to volume
and the changes due to rate.
 
 For
      the Nine Months EndedJune
      30, 2009 vs. June 30, 2008Increase
      (Decrease) Due toVolume
                      
                      
                      Rate
                      
                      
                      Total(Dollars
      in thousands)Interest-earning
      assets:Loans
      receivable
                      
                      $
                      6,991
                      
                      
                      $
                      (2,274
                      )
                      
                      $
                      4,717MBS
                      
                      
                      12,777
                      
                      
                      
                      682
                      
                      
                      
                      13,459Investment
      securities
                      
                      
                      (2,689
                      )
                      
                      
                      (2,240
                      )
                      
                      
                      (4,929
                      )Capital
      stock of FHLB
                      
                      
                      (79
                      )
                      
                      
                      (3,016
                      )
                      
                      
                      (3,095
                      )Cash
      and cash equivalents
                      
                      
                      (861
                      )
                      
                      
                      (2,234
                      )
                      
                      
                      (3,095
                      )Total
      interest-earning assets
                      
                      $
                      16,139
                      
                      
                      $
                      (9,082
                      )
                      
                      $
                      7,057Interest-bearing
      liabilities:Savings
                      
                      $
                      (16
                      )
                      
                      $
                      (1,678
                      )
                      
                      $
                      (1,694
                      )Checking
                      
                      
                      42
                      
                      
                      
                      --
                      
                      
                      
                      42Money
      market
                      
                      
                      (32
                      )
                      
                      
                      (7,228
                      )
                      
                      
                      (7,260
                      )Certificates
                      
                      
                      1,117
                      
                      
                      
                      (20,356
                      )
                      
                      
                      (19,239
                      )FHLB
      advances
                      
                      
                      (4,541
                      )
                      
                      
                      (10,159
                      )
                      
                      
                      (14,700
                      )Other
      borrowings
                      
                      
                      12,176
                      
                      
                      
                      (960
                      )
                      
                      
                      11,216Total
      interest-bearing liabilities
                      
                      $
                      8,746
                      
                      
                      $
                      (40,381
                      )
                      
                      $
                      (31,635
                      )Net
      change in net interest and dividend income
                      
                      $
                      7,393
                      
                      
                      $
                      31,299
                      
                      
                      $
                      38,692
 
 Comparison
of Operating Results for the Three Months Ended June 30, 2009 and March 31,
2009
 
 For the
quarter ended June 30, 2009, the Company recognized net income of $15.5 million,
compared to net income of $18.1 million for the quarter ended March 31,
2009.  The decrease in net income between periods was primarily due to
the FDIC special assessment at June 30, 2009 and an increase in the regular
quarterly deposit insurance premiums.  However, due to an additional
day of interest expense in the current quarter, the net interest margin also
decreased between the two periods from 2.30% to 2.26%.
 
 Interest
and Dividend Income
 Total
interest and dividend income for the current quarter was $103.1 million compared
to $104.3 million for the quarter ended March 31, 2009.  The decrease
of $1.2 million was primarily a result of decreases in interest income on MBS of
$877 thousand and loans receivable of $701 thousand, partially offset by an
increase in interest income on investment securities of $324
thousand.
  49
  
 
 Interest
income on loans receivable for the current quarter was $76.7 million compared to
$77.4 million for the quarter ended March 31, 2009.  The $701 thousand
decrease in interest income was primarily a result of a decrease of 10 basis
points in the weighted average yield to 5.55% for the current quarter, partially
offset by a $47.0 million increase in the average balance of the
portfolio.  The decrease in the weighted average yield was due to
modifications, refinances and originations at rates lower than the overall loan
portfolio rate, partially offset by an increase in deferred fee amortization as
a result of prepayments, modifications and refinances.
 
 Interest
income on MBS for the current quarter was $24.2 million compared to $25.1
million for the quarter ended March 31, 2009.  The $877 thousand
decrease was primarily a result of a decrease in the weighted average yield of
15 basis points to 4.58% for the current quarter and a $5.3 million decrease in
the average balance of the portfolio due to principal repayments which were not
replaced.  The weighted average yield decreased between the two
periods due to an increase of prepayments on MBS with yields higher than the
existing portfolio and, to a lesser extent, purchases of MBS at a lower average
yield than the existing portfolio between the two periods and securities
repricing to lower market rates.
 
 Interest
income on investment securities for the current quarter was $1.3 million
compared to $955 thousand for the quarter ended March 31, 2009.  The
increase was primarily a result of a $120.7 million increase in the average
balance, partially offset by a decrease in the average yield of 96 basis points
to 2.07% for the current quarter.  The average balance increased due
to the purchase of $127.9 million of short-term securities during the current
quarter.  The average yield decreased due to purchases at yields lower
than the overall portfolio yield.
 
 Interest
Expense
 Interest
expense decreased $1.3 million to $57.2 million for the current quarter from
$58.5 million for the quarter ended March 31, 2009.  The decrease was
due to a decrease in interest expense on FHLB advances as a result of the
refinance of $300.0 million of FHLB advances during the current
quarter.  See additional discussion of the refinance of the FHLB
advances in “Notes to Financial Statements - Note 6 - FHLB
advances.”
 
 Provision
for Loan Losses
 The Bank
recorded a provision for loan losses of $3.1 million during the current quarter,
compared to a provision of $2.1 million in the quarter ended March 31,
2009.  The $3.1 million provision for loan loss recorded in the
current quarter reflects an increase in our purchased loan loss factors in the
formula analysis and purchased loan specific valuation allowances and accounts
for charge-offs during the quarter, primarily related to purchased
loans.  See additional discussion regarding the provision for loan
losses in the sections entitled “Critical Accounting Policies – Allowance for
Loan Losses” and “Asset Quality.”
 
 Other
Income and Expense
 Total
other income was $8.2 million for the current quarter compared to $6.9 million
for the quarter ended March 31, 2009.  The $1.3 million increase was
due primarily to an increase of $1.1 million in gains on sale of LHFS, net due
to the sale of certain modified loans.
 
 Total
other expenses for the current quarter were $26.4 million for the current
quarter, compared to $22.0 million in the prior quarter.  The $4.4
million increase was due primarily to an increase in federal insurance premium
of $5.1 million.  The increase in federal insurance premium was a
result of the FDIC special assessment and an increase in the regular quarterly
deposit insurance premiums.  See additional discussion regarding the
FDIC special assessment and deposit insurance premiums under “Liquidity and
Capital Resources.”
 
 Income
Tax Expense
 Income
tax expense for the current quarter was $9.2 million compared to $10.6 million
for the quarter ended March 31, 2009.  The $1.4 million decrease was
due to a decrease in earnings between periods.  The effective tax rate
for the quarter ended June 30, 2009 was 37.2%, compared to 36.8% for the quarter
ended March 31, 2009.
  50
  
 
 The table
below presents the dollar amount of changes in interest income and interest
expense for major components of interest-earning assets and interest-bearing
liabilities, comparing the quarter ended June 30, 2009 to the quarter ended
March 31, 2009.  For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in volume, which are changes in the average balance multiplied by
the previous year’s average rate and (2) changes in rate, which are changes in
the average rate multiplied by the average balance from the previous
year.  The net changes attributable to the combined impact of both
rate and volume have been allocated proportionately to the changes due to volume
and the changes due to rate.
 
 Quarter
      EndedJune
      30, 2009 vs. March 31, 2009Increase
      (Decrease) Due toVolume
                      
                      
                      Rate
                      
                      
                      Total(Dollars
      in thousands)Interest-earning
      assets:Loans
      receivable
                      
                      $
                      670
                      
                      
                      $
                      (1,371
                      )
                      
                      $
                      (701
                      )MBS
                      
                      
                      (63
                      )
                      
                      
                      (814
                      )
                      
                      
                      (877
                      )Investment
      securities
                      
                      
                      698
                      
                      
                      
                      (374
                      )
                      
                      
                      324Capital
      stock of FHLB
                      
                      
                      10
                      
                      
                      
                      6
                      
                      
                      
                      16Cash
      and cash equivalents
                      
                      
                      (12
                      )
                      
                      
                      (7
                      )
                      
                      
                      (19
                      )Total
      interest-earning assets
                      
                      $
                      1,303
                      
                      
                      $
                      (2,560
                      )
                      
                      $
                      (1,257
                      )Interest-bearing
      liabilities:Savings
                      
                      $
                      6
                      
                      
                      $
                      (6
                      )
                      
                      $
                      --Checking
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --Money
      market
                      
                      
                      152
                      
                      
                      
                      (156
                      )
                      
                      
                      (4
                      )Certificates
                      
                      
                      990
                      
                      
                      
                      (992
                      )
                      
                      
                      (2
                      )FHLB
      advances
                      
                      
                      (84
                      )
                      
                      
                      (1,262
                      )
                      
                      
                      (1,346
                      )Other
      borrowings
                      
                      
                      78
                      
                      
                      
                      (43
                      )
                      
                      
                      35Total
      interest-bearing liabilities
                      
                      $
                      1,142
                      
                      
                      $
                      (2,459
                      )
                      
                      $
                      (1,317
                      )Net
      change in net interest and dividend income
                      
                      $
                      161
                      
                      
                      $
                      (101
                      )
                      
                      $
                      60
 
 
 Liquidity
and Capital Resources
 
 Liquidity
management is both a daily and long-term function of our business
management.  The Bank’s most available liquid assets are represented
by cash and cash equivalents, AFS MBS and investment securities and short-term
investment securities.  The Bank’s primary sources of funds are
deposits, FHLB advances, other borrowings, repayments on and maturities of
outstanding loans and MBS, other short-term investments, and funds provided from
operations.  While scheduled payments from the amortization of loans
and MBS and payments on short-term investments are relatively predictable
sources of funds, deposit flows and prepayments on loans and MBS are greatly
influenced by general interest rates, economic conditions and competition and
are less predictable sources of funds.  The most significant liquidity
challenge we currently face is the variability in cash flows as a result of
mortgage modification and refinance activity.  To the extent possible,
the Bank manages the cash flows of its loan and deposit portfolios by the rates
it offers customers.  Sources of funds are used primarily to meet
ongoing operations, to pay maturing certificates of deposit and savings
withdrawals, and to fund loan commitments.  At June 30, 2009, $1.64
billion of the $2.66 billion in certificates of deposit were scheduled to mature
within one year.  Included in the $1.64 billion are $71.5 million of
brokered deposits and $80.2 million in public unit deposits.  Based on
our deposit retention experience and our pricing strategy, we anticipate the
majority of the maturing retail deposits will renew, although no assurance can
be given in this regard.  Management will continue to monitor the
wholesale deposit market for attractive opportunities.
 
 
 51
 
 The Bank
has paid competitive rates for its deposits while not “paying-up” in rates to
grow its deposit base beyond the Bank’s need for funding.  The Bank’s
borrowings have been used primarily to invest in U.S. government agency
securities in order to improve the earnings of the Bank and to help with the
management of its interest rate risk while maintaining its capital ratios in
excess of regulatory standards for well-capitalized financial
institutions.  In addition, the Bank’s focus on managing risk has
provided it liquidity capacity by remaining below borrowing limits at FHLB and
through the uncollateralized balance of its government agency MBS and investment
securities available as collateral for borrowings.
  The Bank
has used FHLB advances to provide funds for lending and investment
activities.  FHLB lending guidelines set borrowing limits as part of
their underwriting standards, which, for the Bank, is 40% of total
assets.  At June 30, 2009, the Bank’s ratio of the face amount of
advances to total assets, as reported to the Office of Thrift Supervision
(“OTS”), was 29%.  Our advances are secured by a blanket pledge of our
loan portfolio, as collateral, supported by quarterly reporting to FHLB
Topeka.  Advances in excess of 40% of total assets, but not exceeding
55% of total assets, may be approved by the president of FHLB Topeka based upon
a review of documentation supporting the use of the
advances.  Currently, the blanket pledge is sufficient collateral for
our outstanding FHLB advances.  It is possible that increases in our
borrowings or decreases in our loan portfolio could require the Bank to pledge
securities as collateral on the FHLB advances.  The Bank’s policy
allows borrowing from FHLB of up to 55% of total assets.
  The Bank
has used repurchase agreements primarily to fund purchases of MBS and to repay
maturing FHLB advances.  The repurchase agreements are treated as
secured borrowings and are reported as a liability of the Company on a
consolidated basis.  The Bank has pledged securities with a fair value
of $773.9 million as collateral.  At the maturity date of these
borrowings, the pledged securities will be delivered back to the
Bank.  The Bank may enter into additional repurchase agreements as
management deems appropriate.  At June 30, 2009, repurchase agreements
were 8% of total assets.  The Bank’s policy allows for repurchase
agreements to total up to 15% of Bank assets.
 
 In 2004,
the Company issued $53.6 million in debentures in connection with a trust
preferred securities offering.  The Company received $52.0 million,
net, from the issuance of the debentures and an investment of $1.6 million in
Capitol Federal Financial Trust I (the “Trust”).  The Company did not
down-stream the proceeds to be used by the Bank for Tier 1 capital because the
Bank exceeded all regulatory requirements to be a well-capitalized
institution.  Instead, the Company deposited the proceeds into
certificate accounts at the Bank to be used to further the Company’s general
corporate and capital management strategies, which could include the payment of
dividends.
  At June
30, 2009, cash and cash equivalents totaled $74.1 million, a decrease of $13.0
million from September 30, 2008.  The cash was used to fund loan
originations and purchase securities.  The Bank maintains access to
additional liquidity through its management of the level of borrowings from the
FHLB and counterparties of repurchase agreements through the availability of
high quality collateral for borrowings.  At June 30, 2009, $1.03
billion of securities were eligible but unused for
collateral.  Securities eligible for collateral consist of unpledged
securities with current fair value of $10.0 million or greater.  The
Bank also has access to the brokered deposit market but does not currently
consider the cost of this funding source to be balanced with investment
opportunities.
  The Bank
is a member of the DIF, which is administered by the FDIC.  Deposits
are insured up to the applicable limits by the FDIC and such insurance is backed
by the full faith and credit of the United States Government.  As
insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured
institutions.  Recent bank failures have decreased the DIF to levels
below its required reserve ratio.  When the reserve ratio is below
$1.15 for every $100 insured, the FDIC is required to replenish the fund by
increasing deposit insurance premiums.  In order to replenish the DIF,
the FDIC has increased deposit insurance premiums at a rate designed to restore
the DIF to required levels within seven years, and has imposed a special
assessment of five basis points to be collected on September 30, 2009, based
upon total Bank assets less Tier 1 capital balances at June 30,
2009.  As of June 30, 2009, management has estimated the Bank’s
deposit insurance premium will be approximately 16 basis points (annualized) in
future periods.  An institution (or its successor) insured by the FDIC
on December 31, 1996 which had previously paid assessments was eligible for
certain credit against deposit insurance assessments.  This credit had
offset the majority of the Bank’s FDIC premium expense in past fiscal years but
was fully utilized during the third quarter of fiscal year 2009.  For
the current quarter, the Bank has recorded $1.5 million in expense related to
the regular FDIC quarterly premiums, compared to $227 thousand for the quarter
ended March 31, 2009, and $3.8 million in expense related to the special
assessment.  The FDIC has the authority to impose additional special
assessments of up to 5 basis points on all insured depository institutions based
on each institution’s total assets less Tier 1 capital whenever the FDIC
estimates the DIF reserve ratio will fall to a level the FDIC believes
would adversely impact public confidence or to a level that will be close to or
below zero.  Any additional special assessment would be capped at 10
basis points of an institution’s assessment base for the corresponding quarter’s
risk based assessment.  The authority for the FDIC to impose any
additional special assessments terminates January 1, 2010.
  52
  
 
 The Bank
also participates in the FDIC’s Transaction Account Guarantee Program
(“TAGP”).  The TAGP extended the FDIC’s insurance to full coverage of
noninterest-bearing transaction accounts for participating institutions through
the end of 2009 at an annualized rate of 10 basis points on deposit balances in
excess of the $250 thousand insurance limit currently in place.  The
Bank does not expect this program to have a material impact on the FDIC
premium.
 
 At June
30, 2009, CFFN, at the holding company level, had $121.8 million in cash and
certificates of deposit at the Bank to be used to further the Company’s general
corporate and capital management strategies, which could include the payment of
dividends.  It is management’s and the board of directors’ intention
to continue to pay regular quarterly dividends of $0.50 per share for the
foreseeable future.  Dividend payments depend upon a number of factors
including the Company's financial condition and results of operations, the
Bank’s regulatory capital requirements, regulatory limitations on the Bank's
ability to make capital distributions to the Company, the amount of cash at the
holding company and the continued waiver of dividends by MHC.  See
additional discussion and calculation of public shares in “Item 2, Management’s
Discussion and Analysis – Stockholders’ Equity.”
  The
long-term ability of the Company to pay dividends to its stockholders is based
primarily upon the ability of the Bank to make capital distributions to the
Company.  Under OTS safe harbor regulations, the Bank may distribute
to the Company capital not exceeding net income for the current calendar year
and the prior two calendar years.  At June 30, 2009, the Bank was in
compliance with the OTS safe harbor regulations.  The Bank has
received a waiver from the OTS to distribute capital from the Bank to the
Company, not to exceed 100% of the Bank's net quarterly earnings, through June
30, 2010 so the Bank will not be required to notify the OTS prior to paying
dividends through that date.
  
 Off
Balance Sheet Arrangements, Commitments and Contractual Obligations
  The
Company, in the normal course of business, makes commitments to buy or sell
assets or to incur or fund liabilities.  Commitments may include, but
are not limited to:
  ·
              the
      origination, purchase, or sale of
loans,
 ·
              the
      purchase or sale of investment securities and
  MBS,
 ·
              extensions
      of credit on home equity loans and construction
  loans,
 ·
              terms
      and conditions of operating leases,
and
 ·
              funding
      withdrawals of deposit
accounts.
  53
  
 
 The
Company’s contractual obligations related to operating leases and debentures
have not changed significantly from September 30, 2008.  The following
table summarizes our other contractual obligations as of June 30,
2009.
 
 Maturity
      RangeLess
      than
                  
                  
                  
                  1 -
      3
                  
                  
                  
                  3 -
      5
                  
                  
                  More
      thanTotal
                  
                  
                  1
      year
                  
                  
                  years
                  
                  
                  years
                  
                  
                  5
      yearsCertificates
      of Deposit
                  
                  $
                  2,657,137
                  
                  
                  $
                  1,635,029
                  
                  
                  $
                  924,348
                  
                  
                  $
                  96,690
                  
                  
                  $
                  1,070Weighted
      average rate
                  
                  
                  3.30
                  %
                  
                  
                  3.10
                  %
                  
                  
                  3.64
                  %
                  
                  
                  3.43
                  %
                  
                  
                  3.80
                  %FHLB
      Advances
                  
                  
                  2,446,000
                  
                  
                  
                  120,000
                  
                  
                  
                  776,000
                  
                  
                  
                  1,075,000
                  
                  
                  
                  475,000Weighted
      average rate
                  
                  
                  3.80
                  %
                  
                  
                  4.13
                  %
                  
                  
                  4.21
                  %
                  
                  
                  3.53
                  %
                  
                  
                  3.67
                  %Repurchase
      Agreements
                  
                  
                  660,000
                  
                  
                  
                  --
                  
                  
                  
                  395,000
                  
                  
                  
                  145,000
                  
                  
                  
                  120,000Weighted
      average rate
                  
                  
                  3.97
                  %
                  
                  
                  --
                  %
                  
                  
                  3.94
                  %
                  
                  
                  3.81
                  %
                  
                  
                  4.24
                  %Commitments
      to originate andpurchase
      mortgage loans
                  
                  
                  211,236
                  
                  
                  
                  211,236
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --Weighted
      average rate
                  
                  
                  5.04
                  %
                  
                  
                  5.04
                  %
                  
                  
                  --
                  %
                  
                  
                  --
                  %
                  
                  
                  --
                  %Commitments
      to fund unused homeequity
      lines of credit
                  
                  
                  270,374
                  
                  
                  
                  270,374
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --Weighted
      average rate
                  
                  
                  4.44
                  %
                  
                  
                  4.44
                  %
                  
                  
                  --
                  %
                  
                  
                  --
                  %
                  
                  
                  --
                  %Unadvanced
      portion ofconstruction
      loans
                  
                  
                  23,740
                  
                  
                  
                  23,740
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
 
 A
percentage of commitments to originate mortgage loans are expected to expire
unfunded, so the amounts reflected in the table above are not necessarily
indicative of future liquidity requirements.  Additionally, the Bank
is not obligated to honor commitments to fund unused home equity lines of credit
if a customer is delinquent or otherwise in violation of the loan
agreement.
 
 The
maturity schedule for our certificate of deposit portfolio at June 30, 2009 is
located under “Item 3. Quantitative and Qualitative Disclosure About Market
Risk.”  We anticipate we will continue to have sufficient funds, through
repayments and maturities of loans and securities, deposits and borrowings, to
meet our current commitments.
 
 
 54
  The
following table presents the maturity of FHLB advances at par and repurchase
agreements as of June 30, 2009.  The balance of FHLB advances excludes
the deferred gain on the terminated interest rate swaps and the deferred
prepayment penalty.  Management will continue to monitor the Bank’s
investment opportunities and balance those opportunities with the cost of FHLB
advances or other funding sources.
 
 Weighted
                          
                          
                          WeightedFHLB
                          
                          
                          Repurchase
                          
                          
                          Average
                          
                          
                          AverageMaturity
      by
                          
                          Advances
                          
                          
                          Agreements
                          
                          
                          Contractual
                          
                          
                          EffectiveFiscal
      year
                          
                          Amount
                          
                          
                          Amount
                          
                          
                          Rate
                          
                          
                          Rate(1)(Dollars
      in thousands)2009
                          
                          $
                          20,000
                          
                          
                          $
                          --
                          
                          
                          
                          5.09
                          %
                          
                          
                          5.09
                          %2010
                          
                          
                          350,000
                          
                          
                          
                          45,000
                          
                          
                          
                          4.33
                          
                          
                          
                          4.332011
                          
                          
                          276,000
                          
                          
                          
                          200,000
                          
                          
                          
                          4.42
                          
                          
                          
                          4.422012
                          
                          
                          350,000
                          
                          
                          
                          150,000
                          
                          
                          
                          3.67
                          
                          
                          
                          3.672013
                          
                          
                          525,000
                          
                          
                          
                          145,000
                          
                          
                          
                          3.74
                          
                          
                          
                          4.002014
                          
                          
                          450,000
                          
                          
                          
                          100,000
                          
                          
                          
                          3.33
                          
                          
                          
                          3.962015
                          
                          
                          200,000
                          
                          
                          
                          20,000
                          
                          
                          
                          3.50
                          
                          
                          
                          4.162016
                          
                          
                          275,000
                          
                          
                          
                          --
                          
                          
                          
                          3.86
                          
                          
                          
                          4.39$
                          2,446,000
                          
                          
                          $
                          660,000
                          
                          
                          
                          3.84
                          %
                          
                          
                          4.10
                          %
 
 (1) The
effective rate includes the net impact of the amortization of deferred
prepayment penalties related to the prepayment of certain FHLB advances and
deferred gains related to the termination of interest rate swaps during fiscal
year 2008.
 
 The
following table presents the maturity of FHLB advances and other borrowings for
the next four quarters as of June 30, 2009.  There are no maturities
of repurchase agreements during the next four quarters.
 
 WeightedAverageMaturity
      by
                              
                              
                              
                              
                              ContractualQuarter
      End
                              
                              Amount
                              
                              
                              Rate(Dollars
      in thousands)September
      30, 2009
                              
                              $
                              20,000
                              
                              
                              
                              5.09
                              %December
      31, 2009
                              
                              
                              --
                              
                              
                              
                              --March
      31, 2010
                              
                              
                              --
                              
                              
                              
                              --June
      30, 2010
                              
                              
                              100,000
                              
                              
                              
                              3.94$
                              120,000
                              
                              
                              
                              4.13
                              %
 
 Contingencies
  In the
normal course of business, the Company and its subsidiary are named defendants
in various lawsuits and counter claims.  In the opinion of management,
after consultation with legal counsel, none of the currently pending suits are
expected to have a materially adverse effect on the Company’s consolidated
financial statements for the current interim or future periods.
 
 55
 
  Capital
  Consistent
with our goal to operate a sound and profitable financial organization, we
actively seek to maintain a “well-capitalized” status in accordance with
regulatory standards.  Total equity under GAAP for the Bank was $839.9
million at June 30, 2009, or 10% of total Bank assets on that
date.  As of June 30, 2009, the Bank exceeded all capital requirements
of the OTS.  The following table presents the Bank’s regulatory
capital ratios at June 30, 2009 based upon regulatory guidelines.
 
 RegulatoryRequirementBank
                          
                          
                          For
      “Well-Ratios
                          
                          
                          Capitalized”
      StatusTangible
      equity
                          
                          
                          9.8
                          %
                          
                          
                          N/ACore
      capital
                          
                          
                          9.8
                          %
                          
                          
                          5.0
                          %Tier
      I risk-based capital
                          
                          
                          22.9
                          %
                          
                          
                          6.0
                          %Total
      risk-based capital
                          
                          
                          23.0
                          %
                          
                          
                          10.0
                          %
 
 A
reconciliation of the Bank’s equity under GAAP to regulatory capital amounts as
of June 30, 2009 is as follows (dollars in thousands):
 
 Total
      equity as reported under GAAP
                        
                        $
                        839,929Unrealized
      gains on AFS securities
                        
                        
                        (23,511
                        )Other
                        
                        
                        (348
                        )Total
      tangible and core capital
                        
                        
                        816,070Allowance
      for loan losses
                        
                        
                        5,848Total
      risk based capital
                        
                        $
                        821,918
  
  Item 3.   Quantitative and Qualitative
Disclosure About Market Risk
 
 For a
complete discussion of the Company’s asset and liability management policies, as
well as the potential impact of interest rate changes upon the market value of
the Company’s portfolios, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Asset and Liability Management and Market
Risk” in the Company’s Annual Report to Stockholders for the year ended
September 30, 2008, attached as Exhibit 13 to the Company’s Annual Report on
Form 10-K for the year ended September 30, 2008.
 
 The
general objective of our interest rate risk management is to determine and
manage an appropriate level of interest rate risk while maximizing net interest
income, in a manner consistent with our policy to reduce, to the extent
possible, the exposure of our net interest income to changes in market interest
rates.  ALCO regularly reviews the interest rate risk exposure of the
Bank by forecasting the impact of hypothetical, alternative interest rate
environments on net interest income and market value of portfolio equity
(“MVPE”) at various dates.  The MVPE is defined as the net of the
present value of the cash flows of an institution’s existing assets, liabilities
and off-balance sheet instruments.  The present values are determined
in alternative interest rate environments providing potential changes in net
interest income and MVPE under those alternative interest rate environments. The
Bank’s analysis of its MVPE at June 30, 2009 indicates a decrease in its risk
exposure compared to September 30, 2008 primarily due to lower interest rates at
June 30, 2009 compared to September 30, 2008.  The Bank’s analysis of
the sensitivity of its net interest income to parallel changes in interest rates
at June 30, 2009 indicates a decrease in sensitivity since September 30,
2008.
 
 For each
period end presented in the following table, the estimated percentage change in
the Bank’s net interest income based on the indicated instantaneous, parallel
and permanent change in interest rates is presented.  The percentage
change in each interest rate environment represents the difference between
estimated net interest income in the zero basis point interest rate environment
(“base case”, assumes the forward market and product interest rates implied by
the yield curve are realized) and estimated net interest income in each
alternative interest rate environment (assumes market and product interest rates
have a parallel shift in rates across all maturities by the indicated change in
rates).  At June 30, 2009, the three-month Treasury bill yield was
less than one
 56
 
 percent,
so the -100 and -200 basis point scenarios are not
presented.  Estimations of net interest income used in preparing the
table below are based upon the assumptions the total composition of
interest-earning assets and interest-bearing liabilities does not change
materially and any repricing of assets or liabilities occurs at anticipated
product and market rates for the alternative rate environments as of the dates
presented.  The estimation of net interest income does not include any
projected gain or loss related to the sale of loans or securities, or income
derived from non-interest income sources, but does include the use of different
prepayment assumptions in the alternative interest rate
environments.  Although certain assets and liabilities may have
similar maturities or periods to repricing, they may react differently to
changes in market interest rates.  Assumptions may not reflect how
actual yields and costs respond to market changes. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types of assets and liabilities
may lag behind changes in market interest rates.  Certain assets, such
as ARM loans, have features that restrict changes in interest rates on a
short-term basis and over the life of the asset.  In the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed. It is important to consider that
the estimated changes in net interest income are for a cumulative four-quarter
period.  These do not reflect the earnings expectations of
management.
 
 Percentage
      Change in Net Interest IncomeAtChange
      (in Basis Points)
                
                June
      30,
                
                March
      31,
                
                September
      30,in
      Interest Rates(1)
                
                2009
                
                2009
                
                2008000
      bp
                
                --
                
                --
                
                --+100
      bp
                
                1.57%
                
                3.52%
                
                -2.20%+200
      bp
                
                2.19%
                
                3.58%
                
                -5.08%+300
      bp
                
                2.78%
                
                3.26%
                
                -8.62%
 
 (1)
              Assumes
      an instantaneous, permanent and parallel change in interest rates at all
      maturities.
 
 The
percentage change in the estimated net interest income for March 31, 2009 and
June 30, 2009 was positive for all interest rate shock scenarios
presented.  The percentage increase in net interest income as of June
30, 2009 was smaller compared to March 31, 2009.  At March 31, 2009,
the percentage change in net interest income was quite large in the +100 basis
point scenario, with a marginal improvement in the +200 basis point scenario
before decreasing somewhat between the +200 and +300 basis point
scenarios.  At June 30, 2009, the percentage change in net interest
income increase more consistently as rates were shocked higher.  Two
factors changed between March 31, 2009 and June 30, 2009 which caused the change
in the projected net interest income.  The first change was the
increase in interest rates between the two periods.  This resulted in
a significant decline in expected cash flows from mortgage-related assets, as
borrowers have less incentive to make additional principal payments or refinance
their mortgage.  The decline in cash flows resulted in a smaller
benefit to the Bank in the rising interest rate scenarios at June 30, 2009,
particularly in the +100 basis point scenario, as a result of fewer cash flows
reinvesting at higher rates.  At March 31, 2009, expected cash flows
from mortgage-related assets remained relatively high in the +100 basis point
scenario as a result of the low level of interest rates at that
time.  As of June 30, 2009, interest rates for the base case had moved
up considerably from March 31, 2009, resulting in a decrease in expected cash
flows and therefore a corresponding decrease in net interest income on
mortgage-related assets in the base case as compared to March 31,
2009.
 
 The
second change was, in May 2009, the Bank refinanced $300.0 million of FHLB
advances that were expected to mature in July 2009 into new advances with longer
maturities.  The negative impact to net interest income at June 30,
2009 due to the significant decline in cash flows of our mortgage-related assets
was primarily offset by the impact of the FHLB refinances.  See
additional discussion of the refinance of the FHLB advances in “Notes to
Financial Statements - Note 6 - FHLB advances.”  The refinance
decreased the amount of interest-bearing liabilities at June 30, 2009 that are
expected to reprice in the upcoming year, as compared to March 31,
2009.  As a result, when interest rates are shocked upwards from the
base case, interest expense is much lower at June 30, 2009 than March 31, 2009
which results in an increase in net interest income.
  57
  
 
 The
following table sets forth the estimated percentage change in MVPE at each
period end presented based on the indicated instantaneous, parallel and
permanent change in interest rates.  The MVPE is defined as the net of
the present value of the cash flows of an institution’s existing assets,
liabilities and off-balance sheet instruments.  The percentage change
in each interest rate environment represents the difference between MVPE in the
base case and MVPE in each alternative interest rate environment.  At
June 30, 2009, the three-month Treasury bill was less than one percent, so the
-100 and -200 basis point scenarios are not presented.  The
estimations of MVPE used in preparing the table below are based upon the
assumptions the total composition of interest-earning assets and
interest-bearing liabilities does not change, any repricing of assets or
liabilities occurs at current product or market rates for the alternative rate
environments as of the dates presented, and different prepayment rates are used
in each alternative interest rate environment.  The estimated MVPE
results from the valuation of cash flows from financial assets and liabilities
over the anticipated lives of each for each interest rate
environment.  The table presents the effects of the change in interest
rates on our assets and liabilities as they mature, repay or reprice, as shown
by the change in the MVPE in changing interest rate environments.
  Percentage
      Change in MVPEAtChange
      (in Basis Points)
                
                June
      30,
                
                March
      31,
                
                September
      30,in
      Interest Rates(1)
                
                2009
                
                2009
                
                2008000
      bp
                
                --
                
                --
                
                --+100
      bp
                
                -5.95%
                
                0.70%
                
                -6.99%+200
      bp
                
                -16.17%
                
                -6.51%
                
                -19.37%+300
      bp
                
                -29.18%
                
                -18.34%
                
                -34.88%
 
 (1)
              Assumes
      an instantaneous, permanent and parallel change in interest rates at all
      maturities.
 
 Changes
in the estimated market values of our financial assets and liabilities drive
changes in the estimates of MVPE.  The market value of shorter
term-to-maturity financial instruments are less sensitive to changes in interest
rates than the market value of longer term-to-maturity financial
instruments.  Because of this, our certificates of deposit (which have
relatively short average lives) tend to display less sensitivity to changes in
interest rates than do our mortgage-related assets (which have relatively long
average lives).  However, the expected average life on our
mortgage-related assets varies under different interest rate environments
because borrowers have the ability to prepay their mortgage
loans.  Prepayment assumptions change on mortgage-related assets under
various interest rate environments because many borrowers look to obtain
financing at the lowest cost available.  Generally, there is no
penalty to prepay a mortgage loan we have originated or purchased.  If
interest rates decrease, the borrower has an economic incentive to lower their
mortgage payment (through a lower interest rate) with only the fees associated
on the new mortgage or loan modification as a cost to lower this
rate.  In a decreasing interest rate environment, prepayments increase
and the average life of a mortgage shortens compared to higher interest rate
environments.  When interest rates increase, the economic incentive
for borrowers to refinance or modify their mortgage payment is reduced,
resulting in lower prepayment assumptions and longer average lives.
 
 The MVPE
decreased in all interest rate shock scenarios as of June 30, 2009 and became
more sensitive to changes in interest rates compared to March 31,
2009.  The changes from March 31, 2009 were primarily driven by the
increase in interest rates between the two periods.  This increase
resulted in a significant increase in the WAL of all mortgage-related assets as
borrowers have less economic incentive to lower their mortgage
payment.  This caused an increase in the price sensitivity of all
mortgage-related assets, and as a result, in interest-earning assets as a
whole.  At June 30, 2009, interest-earning assets were more price
sensitive than interest-bearing liabilities, resulting in a decrease in the MVPE
in all interest rate shock scenarios presented.  At March 31, 2009,
interest rates were at levels low enough that interest-earning assets did not
become more sensitive to changes in interest rates compared to interest-bearing
liabilities until the +200 basis point scenario.
 
 Gap Table:  The
following gap table summarizes the anticipated maturities or repricing of our
interest-earning assets and interest-bearing liabilities as of June 30, 2009,
based on the information and assumptions set forth in the notes
below.  Cash flow projections for mortgage loans and MBS are
calculated based on current interest rates.  Prepayment projections
are subjective in nature, involve uncertainties and assumptions and, therefore,
cannot be determined with a high degree of accuracy. For additional
information regarding the impact of changes in interest rates, see the
Percentage Change in Net Interest Income and Percentage Change in MVPE tables
above.
  58
  
 June
      30, 2009
                                                        Within
      Three Months
                                                        
                                                        
                                                        Three
      Months To One Year
                                                        
                                                        
                                                        More
      Than One Year to Three Years
                                                        
                                                        
                                                        More
      Than Three Years to Five Years
                                                        
                                                        
                                                        Over
      Five Years
                                                        
                                                        
                                                        TotalInterest-earning
      assets:
                                                        
                                                        (Dollars
      in thousands)Loans
      receivable(1):Mortgage
      loans:Fixed
                                                        
                                                        $
                                                        379,571
                                                        
                                                        
                                                        $
                                                        515,468
                                                        
                                                        
                                                        $
                                                        928,803
                                                        
                                                        
                                                        $
                                                        608,368
                                                        
                                                        
                                                        $
                                                        1,732,246
                                                        
                                                        
                                                        $
                                                        4,164,456Adjustable
                                                        
                                                        
                                                        152,489
                                                        
                                                        
                                                        
                                                        532,585
                                                        
                                                        
                                                        
                                                        437,234
                                                        
                                                        
                                                        
                                                        46,526
                                                        
                                                        
                                                        
                                                        9,673
                                                        
                                                        
                                                        
                                                        1,178,507Other
      loans
                                                        
                                                        
                                                        135,765
                                                        
                                                        
                                                        
                                                        23,193
                                                        
                                                        
                                                        
                                                        23,583
                                                        
                                                        
                                                        
                                                        8,787
                                                        
                                                        
                                                        
                                                        12,312
                                                        
                                                        
                                                        
                                                        203,640Securities:Non-mortgage
      securities(2)
                                                        
                                                        
                                                        30,726
                                                        
                                                        
                                                        
                                                        29,727
                                                        
                                                        
                                                        
                                                        194,890
                                                        
                                                        
                                                        
                                                        39,772
                                                        
                                                        
                                                        
                                                        28,628
                                                        
                                                        
                                                        
                                                        323,743MBS(3)
                                                        
                                                        
                                                        380,617
                                                        
                                                        
                                                        
                                                        579,306
                                                        
                                                        
                                                        
                                                        454,749
                                                        
                                                        
                                                        
                                                        246,449
                                                        
                                                        
                                                        
                                                        400,501
                                                        
                                                        
                                                        
                                                        2,061,622Other
      interest-earning assets
                                                        
                                                        
                                                        65,204
                                                        
                                                        
                                                        
                                                        --
                                                        
                                                        
                                                        
                                                        --
                                                        
                                                        
                                                        
                                                        --
                                                        
                                                        
                                                        
                                                        --
                                                        
                                                        
                                                        
                                                        65,204Total
      interest-earning assets
                                                        
                                                        
                                                        1,144,372
                                                        
                                                        
                                                        
                                                        1,680,279
                                                        
                                                        
                                                        
                                                        2,039,259
                                                        
                                                        
                                                        
                                                        949,902
                                                        
                                                        
                                                        
                                                        2,183,360
                                                        
                                                        
                                                        
                                                        7,997,172Interest-bearing
      liabilities:Deposits:Savings(4)
                                                        
                                                        
                                                        104,187
                                                        
                                                        
                                                        
                                                        8,395
                                                        
                                                        
                                                        
                                                        19,356
                                                        
                                                        
                                                        
                                                        15,013
                                                        
                                                        
                                                        
                                                        83,210
                                                        
                                                        
                                                        
                                                        230,161Checking
      (4)
                                                        
                                                        
                                                        10,474
                                                        
                                                        
                                                        
                                                        31,745
                                                        
                                                        
                                                        
                                                        107,525
                                                        
                                                        
                                                        
                                                        61,871
                                                        
                                                        
                                                        
                                                        234,816
                                                        
                                                        
                                                        
                                                        446,431Money
      market (4)
                                                        
                                                        
                                                        36,972
                                                        
                                                        
                                                        
                                                        102,233
                                                        
                                                        
                                                        
                                                        193,969
                                                        
                                                        
                                                        
                                                        164,375
                                                        
                                                        
                                                        
                                                        343,973
                                                        
                                                        
                                                        
                                                        841,522Certificates
                                                        
                                                        
                                                        441,632
                                                        
                                                        
                                                        
                                                        1,193,397
                                                        
                                                        
                                                        
                                                        924,348
                                                        
                                                        
                                                        
                                                        96,690
                                                        
                                                        
                                                        
                                                        1,070
                                                        
                                                        
                                                        
                                                        2,657,137Borrowings
      (5)
                                                        
                                                        
                                                        73,608
                                                        
                                                        
                                                        
                                                        100,000
                                                        
                                                        
                                                        
                                                        1,171,000
                                                        
                                                        
                                                        
                                                        1,220,000
                                                        
                                                        
                                                        
                                                        595,000
                                                        
                                                        
                                                        
                                                        3,159,608Total
      interest-bearing liabilities
                                                        
                                                        
                                                        666,873
                                                        
                                                        
                                                        
                                                        1,435,770
                                                        
                                                        
                                                        
                                                        2,416,198
                                                        
                                                        
                                                        
                                                        1,557,949
                                                        
                                                        
                                                        
                                                        1,258,069
                                                        
                                                        
                                                        
                                                        7,334,859Excess
      (deficiency) of interest-earning assets over interest bearing
      liabilities
                                                        
                                                        $
                                                        477,499
                                                        
                                                        
                                                        $
                                                        244,509
                                                        
                                                        
                                                        $
                                                        (376,939
                                                        )
                                                        
                                                        $
                                                        (608,047
                                                        )
                                                        
                                                        $
                                                        925,291
                                                        
                                                        
                                                        $
                                                        662,313Cumulative
      excess (deficiency) of interest-earning assets over interest-bearing
      liabilities
                                                        
                                                        $
                                                        477,499
                                                        
                                                        
                                                        $
                                                        722,008
                                                        
                                                        
                                                        $
                                                        345,069
                                                        
                                                        
                                                        $
                                                        (262,978
                                                        )
                                                        
                                                        $
                                                        662,313Cumulative
      excess (deficiency) of interest-earningassets
      over interest-bearing liabilities as apercent
      of total assets at June 30, 2009
                                                        
                                                        
                                                        5.74
                                                        %
                                                        
                                                        
                                                        8.68
                                                        %
                                                        
                                                        
                                                        4.15
                                                        %
                                                        
                                                        
                                                        (3.16
                                                        )%
                                                        
                                                        
                                                        7.96
                                                        %Cumulative
      excess (deficiency) at September 30, 2008
                                                        
                                                        
                                                        (0.10
                                                        )%
                                                        
                                                        
                                                        1.90
                                                        %
                                                        
                                                        
                                                        (1.19
                                                        )%
                                                        
                                                        
                                                        (4.16
                                                        )%
                                                        
                                                        
                                                        9.05
                                                        %
  59
  (1)  Adjustable-rate
loans are included in the period in which the rate is next scheduled to adjust
or in the period in which repayments are expected to occur prior to their next
rate adjustment, rather than in the period in which the loans are
due.  Fixed-rate loans are included in the periods in which they are
scheduled to be repaid, based on scheduled amortization and prepayment
assumptions.  Balances have been reduced for non-performing loans,
which totaled $29.1 million at June 30, 2009.
 (2)  Based
on contractual maturities, or terms to call date or pre-refunding dates as of
June 30, 2009, and excludes the unrealized loss adjustment of $1.6 million on
AFS investment securities.
 (3)  Reflects
estimated prepayments of MBS in our portfolio, and excludes the unrealized gain
adjustment of $39.4 million on AFS MBS.
 (4)  Although
our checking, savings and money market accounts are subject to immediate
withdrawal, management considers a substantial amount of such accounts to be
core deposits having significantly longer effective maturities.  The
decay rates (the assumed rate at which the balance of existing accounts would
decline) used on these accounts are based on assumptions developed based upon
our actual experience with these accounts.  If all of our checking,
savings and money market accounts had been assumed to be subject to repricing
within one year, interest-bearing liabilities which were estimated to mature or
reprice within one year would have exceeded interest-earning assets with
comparable characteristics by $502.1 million, for a cumulative one-year gap of
(6.04)% of total assets.
 (5)  Borrowings
exclude $35.9 million of deferred prepayment penalty costs and $837 thousand of
deferred gain on the terminated interest rate swaps.
 
 The
change in the one-year gap to 8.68% at June 30, 2009 from 1.90% at September 30,
2008 was a result of a significant decrease in interest rates, particularly
mortgage interest rates, and to the extension in the maturity of
borrowings.  The decrease in mortgage interest rates increased
projected cash flows from mortgage loan prepayments which resulted in
shorter average lives and quicker repricing of interest-earning assets at June
30, 2009 compared to September 30, 2008.
 
 
 
 
 
  60
  
 Changes in
portfolio composition.  The following table presents the
distribution of our investment and MBS portfolios, at cost, at the dates
indicated.  Overall, fixed-rate securities comprised 56% of these
portfolios at June 30, 2009.  The WAL is the estimated remaining
maturity after historical prepayment speeds and projected call option
assumptions have been applied.  The decrease in the WAL between
September 30, 2008 and June 30, 2009 was due to faster prepayment speeds and
purchases of securities with WALs shorter than the portfolio, maturity of
securities, and to calls with WALs longer than the portfolio.  The
decrease in the yield between September 30, 2008 and June 30, 2009 was a result
of a decrease in the yield of adjustable-rate MBS that reset during the year to
lower market rates, calls and maturities of higher yielding investment
securities, and purchases of securities with yields lower than the overall
securities portfolio.
 
 
 June
      30, 2009
                    
                    
                    March
      31, 2009
                    
                    
                    December
      31, 2008
                    
                    
                    September
      30, 2008Balance
                    
                    
                    WAL
                    
                    
                    Yield
                    
                    
                    Balance
                    
                    
                    WAL
                    
                    
                    Yield
                    
                    
                    Balance
                    
                    
                    WAL
                    
                    
                    Yield
                    
                    
                    Balance
                    
                    
                    WAL
                    
                    
                    Yield(Dollars
      in thousands)Fixed-rate
      investments:U.S.
      government-sponsored agencies
                    
                    $
                    254,424
                    
                    
                    
                    1.01
                    
                    
                    
                    1.49
                    %
                    
                    $
                    152,067
                    
                    
                    
                    0.75
                    
                    
                    
                    1.68
                    %
                    
                    $
                    45,036
                    
                    
                    
                    0.24
                    
                    
                    
                    3.22
                    %
                    
                    $
                    82,552
                    
                    
                    
                    5.55
                    
                    
                    
                    4.28
                    %MBS
                    
                    
                    1,025,056
                    
                    
                    
                    3.07
                    
                    
                    
                    4.84
                    
                    
                    
                    1,105,095
                    
                    
                    
                    4.03
                    
                    
                    
                    4.84
                    
                    
                    
                    1,164,744
                    
                    
                    
                    5.08
                    
                    
                    
                    4.88
                    
                    
                    
                    1,207,086
                    
                    
                    
                    4.92
                    
                    
                    
                    4.88Municipal
      bonds
                    
                    
                    65,530
                    
                    
                    
                    4.02
                    
                    
                    
                    3.23
                    
                    
                    
                    60,537
                    
                    
                    
                    4.27
                    
                    
                    
                    3.31
                    
                    
                    
                    58,806
                    
                    
                    
                    4.17
                    
                    
                    
                    3.41
                    
                    
                    
                    58,062
                    
                    
                    
                    4.81
                    
                    
                    
                    3.39Total
      fixed-rate investments
                    
                    
                    1,345,010
                    
                    
                    
                    2.73
                    
                    
                    
                    4.13
                    
                    
                    
                    1,317,699
                    
                    
                    
                    3.66
                    
                    
                    
                    4.41
                    
                    
                    
                    1,268,586
                    
                    
                    
                    4.87
                    
                    
                    
                    4.75
                    
                    
                    
                    1,347,700
                    
                    
                    
                    4.95
                    
                    
                    
                    4.78Adjustable-rate
      investments:MBS
                    
                    
                    1,036,566
                    
                    
                    
                    6.03
                    
                    
                    
                    4.34
                    
                    
                    
                    1,057,683
                    
                    
                    
                    7.15
                    
                    
                    
                    4.60
                    
                    
                    
                    986,908
                    
                    
                    
                    6.68
                    
                    
                    
                    4.75
                    
                    
                    
                    1,034,734
                    
                    
                    
                    5.21
                    
                    
                    
                    4.76Trust
      preferred securities
                    
                    
                    3,789
                    
                    
                    
                    27.98
                    
                    
                    
                    2.29
                    
                    
                    
                    3,812
                    
                    
                    
                    28.23
                    
                    
                    
                    2.98
                    
                    
                    
                    3,842
                    
                    
                    
                    28.48
                    
                    
                    
                    3.66
                    
                    
                    
                    3,859
                    
                    
                    
                    28.73
                    
                    
                    
                    4.48Total
      adjustable-rate investments
                    
                    
                    1,040,355
                    
                    
                    
                    6.11
                    
                    
                    
                    4.33
                    
                    
                    
                    1,061,495
                    
                    
                    
                    7.25
                    
                    
                    
                    4.59
                    
                    
                    
                    990,750
                    
                    
                    
                    6.79
                    
                    
                    
                    4.75
                    
                    
                    
                    1,038,593
                    
                    
                    
                    5.32
                    
                    
                    
                    4.76Total
      investment portfolio, at cost
                    
                    $
                    2,385,365
                    
                    
                    
                    4.20
                    
                    
                    
                    4.22
                    %
                    
                    $
                    2,379,194
                    
                    
                    
                    5.26
                    
                    
                    
                    4.49
                    %
                    
                    $
                    2,259,336
                    
                    
                    
                    5.71
                    
                    
                    
                    4.75
                    %
                    
                    $
                    2,386,293
                    
                    
                    
                    5.11
                    
                    
                    
                    4.77
                    %
 
 
   61
  
  The
certificate of deposit portfolio increased $138.1 million from September 30,
2008 to June 30, 2009, and the average cost of the portfolio decreased 61 basis
points between the two reporting dates due to certificates repricing to lower
market rates.  Retail certificates, public units, and brokered
deposits maturing in one year or less at June 30, 2009 were $1.64 billion with
an average cost of 3.10%.  The following table presents the maturity
of certificates of deposit at the dates indicated.
 
 
 June
      30, 2009
                                            
                                            
                                            March
      31, 2009
                                            
                                            
                                            December
      31, 2008
                                            
                                            
                                            September
      30, 2008Amount
                                            
                                            
                                            Rate
                                            
                                            
                                            Amount
                                            
                                            
                                            Rate
                                            
                                            
                                            Amount
                                            
                                            
                                            Rate
                                            
                                            
                                            Amount
                                            
                                            
                                            Rate(Dollars
      in thousands)Retail
      certificates maturing within:0
      to 3 months
                                            
                                            $
                                            395,427
                                            
                                            
                                            
                                            3.24
                                            %
                                            
                                            $
                                            347,478
                                            
                                            
                                            
                                            3.08
                                            %
                                            
                                            $
                                            333,638
                                            
                                            
                                            
                                            3.14
                                            %
                                            
                                            $
                                            409,684
                                            
                                            
                                            
                                            4.39
                                            %3
      to 6 months
                                            
                                            
                                            407,767
                                            
                                            
                                            
                                            3.02
                                            
                                            
                                            
                                            386,295
                                            
                                            
                                            
                                            3.29
                                            
                                            
                                            
                                            339,065
                                            
                                            
                                            
                                            3.14
                                            
                                            
                                            
                                            327,479
                                            
                                            
                                            
                                            3.266
      months to one year
                                            
                                            
                                            683,179
                                            
                                            
                                            
                                            3.08
                                            
                                            
                                            
                                            623,949
                                            
                                            
                                            
                                            3.11
                                            
                                            
                                            
                                            670,432
                                            
                                            
                                            
                                            3.37
                                            
                                            
                                            
                                            634,102
                                            
                                            
                                            
                                            3.36One
      year to two years
                                            
                                            
                                            504,788
                                            
                                            
                                            
                                            3.64
                                            
                                            
                                            
                                            579,138
                                            
                                            
                                            
                                            3.98
                                            
                                            
                                            
                                            496,201
                                            
                                            
                                            
                                            4.15
                                            
                                            
                                            
                                            559,607
                                            
                                            
                                            
                                            4.15After
      two years
                                            
                                            
                                            514,320
                                            
                                            
                                            
                                            3.61
                                            
                                            
                                            
                                            484,315
                                            
                                            
                                            
                                            3.69
                                            
                                            
                                            
                                            493,310
                                            
                                            
                                            
                                            3.90
                                            
                                            
                                            
                                            407,549
                                            
                                            
                                            
                                            3.93$
                                            2,505,481
                                            
                                            
                                            
                                            3.31
                                            %
                                            
                                            $
                                            2,421,175
                                            
                                            
                                            
                                            3.46
                                            %
                                            
                                            $
                                            2,332,646
                                            
                                            
                                            
                                            3.58
                                            %
                                            
                                            $
                                            2,338,421
                                            
                                            
                                            
                                            3.81
                                            %Average
      maturity (in years)
                                            
                                            
                                            1.12
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            1.16
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            1.16
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            1.13Public
      unit and brokered deposits maturing within:0
      to 3 months
                                            
                                            $
                                            46,206
                                            
                                            
                                            
                                            1.11
                                            %
                                            
                                            $
                                            70,910
                                            
                                            
                                            
                                            2.70
                                            %
                                            
                                            $
                                            --
                                            
                                            
                                            
                                            0.00
                                            %
                                            
                                            $
                                            84,686
                                            
                                            
                                            
                                            5.21
                                            %3
      to 6 months
                                            
                                            
                                            86,450
                                            
                                            
                                            
                                            4.58
                                            
                                            
                                            
                                            27,500
                                            
                                            
                                            
                                            1.38
                                            
                                            
                                            
                                            24,434
                                            
                                            
                                            
                                            5.21
                                            
                                            
                                            
                                            --
                                            
                                            
                                            
                                            0.006
      months to one year
                                            
                                            
                                            16,000
                                            
                                            
                                            
                                            1.09
                                            
                                            
                                            
                                            89,450
                                            
                                            
                                            
                                            4.48
                                            
                                            
                                            
                                            71,449
                                            
                                            
                                            
                                            5.20
                                            
                                            
                                            
                                            24,435
                                            
                                            
                                            
                                            5.21One
      year to two years
                                            
                                            
                                            3,000
                                            
                                            
                                            
                                            1.76
                                            
                                            
                                            
                                            3,000
                                            
                                            
                                            
                                            1.76
                                            
                                            
                                            
                                            --
                                            
                                            
                                            
                                            0.00
                                            
                                            
                                            
                                            71,454
                                            
                                            
                                            
                                            5.20$
                                            151,656
                                            
                                            
                                            
                                            3.10
                                            %
                                            
                                            $
                                            190,860
                                            
                                            
                                            
                                            3.33
                                            %
                                            
                                            $
                                            95,883
                                            
                                            
                                            
                                            5.20
                                            %
                                            
                                            $
                                            180,575
                                            
                                            
                                            
                                            5.21
                                            %Average
      maturity (in years)
                                            
                                            
                                            0.34
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            0.43
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            0.76
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            0.61Total
      retail certificates, public unit,
                                              and brokered deposits
                                            
                                            $
                                            2,657,137
                                            
                                            
                                            
                                            3.30
                                            %
                                            
                                            $
                                            2,612,035
                                            
                                            
                                            
                                            3.45
                                            %
                                            
                                            $
                                            2,428,529
                                            
                                            
                                            
                                            3.64
                                            %
                                            
                                            $
                                            2,518,996
                                            
                                            
                                            
                                            3.91
                                            %Total
      average maturity (in years)
                                            
                                            
                                            1.08
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            1.11
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            1.15
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            1.09
  62
  Item
4.  Controls and
Procedures
 Our
management, with the participation of our Chief Executive Officer and our Chief
Financial Officer, evaluated the Company’s disclosure controls and procedures
(as defined in Rule 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act
of 1934, as amended, the “Act”) as of June 30, 2009.  Based upon this
evaluation, our Chief Executive Officer and our Chief Financial Officer have
concluded that as of June 30, 2009, such disclosure controls and procedures were
effective to ensure that information required to be disclosed by the Company in
the reports it files or submits under the Act is accumulated and communicated to
the Company’s management (including the Chief Executive Officer and Chief
Financial Officer) to allow timely decisions regarding required disclosure, and
is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms.
 
 Changes
in Internal Control Over Financial Reporting
 During
the quarter ended June 30, 2009, there were no changes in the Company’s internal
control over financial reporting as defined by Rule 13a-15(d) of the Act that
have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
 
 Part II -   OTHER
INFORMATION
 
 Item 1.  Legal Proceedings
 We are
not involved in any pending legal proceedings other than routine legal
proceedings occurring in the ordinary course of business.  We believe
that these routine legal proceedings, in the aggregate, are immaterial to our
financial condition and results of operations.
 
 Item 1A.  Risk Factors
 There
have been no material changes to our risk factors since September 30,
2008.  For a summary of other risk factors relevant to our operations,
see Part I, Item 1A in our 2008 Annual Report on Form
10-K.
 
 Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds
 See
“Liquidity and Capital Resources - Capital” in “Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations” regarding the OTS
restrictions on dividends from the Bank to the Company.
 
 The
following table summarizes our share repurchase activity during the three months
ended June 30, 2009 and additional information regarding our share repurchase
program.   Our current repurchase plan of 500,000 shares was
announced on May 26, 2006.  The plan has no expiration date and had
130,368 shares remaining as of June 30, 2009.  The Company intends to
repurchase shares from time to time, depending on market conditions, at
prevailing market prices in open-market and other transactions.  The
shares would be held as treasury stock for general corporate use.
  Total
                  
                  
                  
                  
                  
                  Total
      Number of
                  
                  
                  Maximum
      NumberNumber
      of
                  
                  
                  Average
                  
                  
                  Shares
      Purchased as
                  
                  
                  of
      Shares that MayShares
                  
                  
                  Price
      Paid
                  
                  
                  Part
      of Publicly
                  
                  
                  Yet
      Be PurchasedPeriod
                  
                  Purchased
                  
                  
                  per
      Share
                  
                  
                  Announced
      Plans
                  
                  
                  Under
      the PlanApril
      1, 2009 throughApril
      30, 2009
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  130,368May
      1, 2009 throughMay
      31, 2009
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  130,368June
      1, 2009 throughJune
      30, 2009
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  130,368Total
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  --
 
 <Index>
 Item
3.  Defaults Upon Senior Securities
 Not
applicable.
 
 <Index>
 Item
4.  Submission of Matters to a Vote of Security Holders
 None.
 
 <Index>
 
 
 63
 Item
5.  Other Information
 Not
applicable.
 
 <Index>
 Item
6.  Exhibits
 See Index
to Exhibits.
  64
  SIGNATURES
 
 Pursuant
to the requirement of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 CAPITOL
FEDERAL FINANCIAL
 
 
 Date:  August
4,
2009                                                By: /s/ John B.
Dicus
 John B. Dicus, Chairman, President and
 Chief Executive Officer
 
 
 Date:  August
4,
2009                                               By: /s/ Kent G.
Townsend
 Kent G. Townsend, Executive Vice President and
 Chief Financial Officer
 
 
 <Index>
  65
  INDEX TO EXHIBITS
 Exhibit
                Number
              Document2.0
              
              Plan
      of Reorganization and Stock Issuance Plan*3(i)
              
              Federal
      Stock Charter of Capitol Federal Financial*3(ii)
              
              Bylaws
      of Capitol Federal Financial filed on November 29, 2007 as Exhibit 3(ii)
      tothe
      Annual Report on Form 10-K and incorporated herein by
      reference4(i)
              
              Form
      of Stock Certificate of Capitol Federal Financial*4(ii)
              
              The
      Registrant agrees to furnish to the Securities and Exchange Commission,
      upon request, theinstruments
      defining the rights of the holders of the Registrant’s long-term
      debt.10.1(i)
              
              Registrant’s
      Thrift Plan filed on November 29, 2007 as Exhibit 10.1(i)
    tothe
      Annual Report on Form 10-K and incorporated herein by
      reference10.1(ii)
              
              Registrant’s
      Stock Ownership Plan filed on November 29, 2007 as Exhibit 10.1(ii)
      tothe
      Annual Report on Form 10-K and incorporated herein by
      reference10.2
              
              Registrant’s
      2000 Stock Option and Incentive Plan (the “Stock Option Plan”) filed on
      April 13,2000
      as Appendix A to Registrant’s Revised Proxy Statement (File No. 000-25391)
      and incorporated herein by reference10.3
              
              Registrant’s
      2000 Recognition and Retention Plan (the “RRP”) filed on April 13, 2000
      asAppendix
      B to Registrant’s Revised Proxy Statement (File No. 000-25391) and
      incorporated herein by reference10.4
              
              Capitol
      Federal Financial Deferred Incentive Bonus Plan, as amended, filed on May
      5, 2009 as Exhibit 10.4 to the March 31, 2009 Form 10-Q and incorporated
      herein by reference10.5
              
              Form
      of Incentive Stock Option Agreement under the Stock Option Plan filed on
      February 4, 2005as
      Exhibit 10.5 to the December 31, 2004 Form 10-Q and incorporated herein by
      reference10.6
              
              Form
      of Non-Qualified Stock Option Agreement under the Stock Option Plan filed
      on February 4,2005
      as Exhibit 10.6 to the December 31, 2004 Form 10-Q and incorporated herein
      by reference10.7
              
              Form
      of Restricted Stock Agreement under the RRP filed on February 4, 2005 as
      Exhibit 10.7 to theDecember
      31, 2004 Form 10-Q and incorporated herein by reference10.8
              
              Description
      of Named Executive Officer Salary and Bonus Arrangements filed on December
      1,2008
      as Exhibit 10.8 to the Annual Report on Form 10-K and incorporated herein
      by reference10.9
              
              Description
      of Director Fee Arrangements filed on February 4, 2009 as Exhibit 10.9 to
      the December 31, 2008 Form 10-Q and incorporated herein by
      reference10.10
              
              Short-term
      Performance Plan filed on December 14, 2005 as Exhibit 10.10 to the
      AnnualReport
      on Form 10-K for the fiscal year ended September 30, 2005 and incorporated
      herein by reference11
              
              Statement
      re: computation of earnings per share**31.1
              
              Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 made by John B.
      Dicus, Chairman, President and Chief Executive Officer31.2
              
              Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 made by Kent G.
      Townsend, Executive Vice President and Chief Financial
Officer32
              
              Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 made by John B. Dicus, Chairman, President
      and Chief Executive Officer, and Kent G. Townsend, Executive Vice
      President and Chief Financial
Officer
 
 *Incorporated
by reference from Capitol Federal Financial’s Registration Statement on Form S-1
(File No. 333-68363) filed on February 11, 1999, as amended and declared
effective on the same date.
 
 **No
statement is provided because the computation of per share earnings on both a
basic and fully diluted basis can be clearly determined from the Financial
Statements included in this report.
  65