**UNITED
        STATES SECURITIES AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 **_________________**
 **Form
        10-Q**
 (Mark
        One)
 þ **QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d)**
 **OF
        THE SECURITIES
        EXCHANGE ACT OF 1934**
 
 **For
        the quarterly
        period ended June 30, 2006**
  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 month (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 is a large accelerated filer,
        an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check
        one):
 
 Large
        accelerated filer þ Accelerated
        filer  ̈ Non-accelerated
        filer  ̈
 
 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 28, 2006, there were 74,056,059 shares of Capitol Federal Financial
        Common Stock outstanding.
 
  1
   PART
                  I -- FINANCIAL INFORMATION
              Page
                NumberItem
                  1.  Financial Statements (Unaudited):Consolidated
                  Balance Sheetsat
                  June 30, 2006 and September 30, 2005
              3Consolidated
                  Statements of Incomefor the three and nine months endedJune
                  30, 2006 and June 30, 2005
              4Consolidated
                  Statement of Stockholders’ Equityfor the nine months endedJune
                  30, 2006
              5Consolidated
                  Statements of Cash Flowsfor the nine months endedJune
                  30, 2006 and June 30, 2005
              6Notes
                  to Consolidated Interim Financial Statements
              8Item
                  2.Management’s
                  Discussion and Analysisof
                  Financial Condition andResults
                  of Operations
              14Item
                  3.Quantitative
                  and Qualitative Disclosure about Market Risk
              42Item
                  4.Controls
                  and Procedures
              52PART
                  II -- OTHER INFORMATIONItem
                  1.Legal
                  Proceedings
              52Item
                  2.UnregisteredSales of Equity Securities and Use of Proceeds
              52Item
                  3.Defaults
                  Upon Senior Securities
              52Item
                  4.Submission
                  of Matters to a Vote of Security Holders
              53Item
                  5.Other
                  Information
              53Item
                  6.Exhibits
              53Signature
                  Page
              54INDEX
                  TO EXHIBITS
              55
 
  2
  **PART
        I -- FINANCIAL INFORMATION**
 **Item
        1. Financial Statements**
 CAPITOL
        FEDERAL FINANCIAL AND SUBSIDIARY
 CONSOLIDATED
        BALANCESHEETS
 (Dollars
        in thousands, per share data and amounts are actual)
 
 June
                  30,
              
              September
                  30,2006
              
              2005ASSETS:
              
              (Unaudited)Cash
                  and cash equivalents
              
              $
              105,162
              
              $
              58,566Investment
                  securities:Available-for-sale,
                  at market (amortized cost of $142,431)
              
              
              142,128
              
              
              --Held-to-maturity,
                  at cost (market value of $230,183 and $424,952)
              
              
              240,000
              
              
              430,499Mortgage-related
                  securities:Available-for-sale,
                  at market (amortized cost of $600,778 and $743,710)
              
              
              594,058
              
              
              737,638Held-to-maturity,
                  at cost (market value of $1,145,363 and $1,383,268)
              
              
              1,194,800
              
              
              1,407,616Loans
                  receivable held-for-sale, net
              
              
              235
              
              
              1,891Loans
                  receivable, net
              
              
              5,564,502
              
              
              5,464,130Capital
                  stock of Federal Home Loan Bank ("FHLB"), at cost
              
              
              167,556
              
              
              182,259Accrued
                  interest receivable
              
              
              33,100
              
              
              36,900Premises
                  and equipment, net
              
              
              25,191
              
              
              22,963Real
                  estate owned, net
              
              
              2,398
              
              
              1,653Income
                  taxes receivable
              
              
              2,095
              
              
              44Deferred
                  income taxes, net
              
              
              32,083
              
              
              50,618Other
                  assets
              
              
              13,865
              
              
              14,910TOTAL
                  ASSETS
              
              $
              8,117,173
              
              $
              8,409,687LIABILITIES:Deposits
              
              $
              3,895,869
              
              $
              3,960,297Advances
                  from FHLB
              
              
              3,207,865
              
              
              3,426,465Other
                  borrowings, net
              
              
              53,453
              
              
              53,410Advance
                  payments by borrowers for taxes and insurance
              
              
              25,719
              
              
              45,437Accounts
                  payable and accrued expenses
              
              
              74,235
              
              
              59,015Total
                  liabilities
              
              
              7,257,141
              
              
              7,544,624STOCKHOLDERS'
                  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 as of June 30, 2006 and September 30, 2005
              
              
              915
              
              
              915Additional
                  paid-in capital
              
              
              427,718
              
              
              421,903Unearned
                  compensation, Employee Stock Ownership Plan ("ESOP")
              
              
              (15,288
              )
              
              (16,721
              )Unearned
                  compensation, Recognition and Retention Plan ("RRP")
              
              
              (911
              )
              
              (539
              )Retained
                  earnings
              
              
              761,105
              
              
              759,643Accumulated
                  other comprehensive loss
              
              
              (4,359
              )
              
              (3,769
              )Less
                  shares held in treasury (17,452,489 and 17,225,398 shares as
                  ofJune
                  30, 2006 and September 30, 2005, at cost)
              
              
              (309,148
              )
              
              (296,369
              )Total
                  stockholders' equity
              
              
              860,032
              
              
              865,063TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              8,117,173
              
              $
              8,409,687
 
 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, per share amounts are actual)
 For
                  the Three Months Ended
              
              For
                  the Nine Months EndedJune
                  30,
              
              June
                  30,2006
              
              2005
              
              2006
              
              2005INTEREST
                  AND DIVIDEND INCOME:Loans
                  receivable
              
              $
              76,123
              
              $
              69,436
              
              $
              226,788
              
              $
              202,187Mortgage-related
                  securities
              
              
              18,175
              
              
              22,656
              
              
              56,469
              
              
              71,280Investment
                  securities
              
              
              4,170
              
              
              5,784
              
              
              13,489
              
              
              20,092Capital
                  stock of FHLB
              
              
              2,483
              
              
              2,211
              
              
              7,339
              
              
              5,995Cash
                  and cash equivalents
              
              
              1,476
              
              
              236
              
              
              2,160
              
              
              749Total
                  interest and dividend income
              
              
              102,427
              
              
              100,323
              
              
              306,245
              
              
              300,303INTEREST
                  EXPENSE:Deposits
              
              
              31,588
              
              
              24,267
              
              
              87,807
              
              
              70,983FHLB
                  advances
              
              
              39,005
              
              
              36,496
              
              
              116,985
              
              
              105,913Other
                  borrowings
              
              
              1,070
              
              
              808
              
              
              3,018
              
              
              2,212Total
                  interest expense
              
              
              71,663
              
              
              61,571
              
              
              207,810
              
              
              179,108NET
                  INTEREST AND DIVIDEND INCOME
              
              
              30,764
              
              
              38,752
              
              
              98,435
              
              
              121,195PROVISION
                  FOR LOAN LOSSES
              
              
              40
              
              
              --
              
              
              170
              
              
              --NET
                  INTEREST AND DIVIDEND INCOMEAFTER
                  PROVISION FOR LOAN LOSSES
              
              
              30,724
              
              
              38,752
              
              
              98,265
              
              
              121,195OTHER
                  INCOME:Retail
                  fees and charges
              
              
              4,299
              
              
              4,145
              
              
              12,471
              
              
              11,600Loan
                  fees
              
              
              439
              
              
              508
              
              
              1,357
              
              
              1,575Insurance
                  commissions
              
              
              434
              
              
              439
              
              
              1,666
              
              
              1,443Other,
                  net
              
              
              897
              
              
              984
              
              
              2,447
              
              
              2,791Total
                  other income
              
              
              6,069
              
              
              6,076
              
              
              17,941
              
              
              17,409OTHER
                  EXPENSES:Salaries
                  and employee benefits
              
              
              10,063
              
              
              9,889
              
              
              30,183
              
              
              30,065Occupancy
                  of premises
              
              
              3,252
              
              
              3,018
              
              
              9,423
              
              
              9,371Regulatory
                  and outside services
              
              
              1,307
              
              
              1,589
              
              
              3,607
              
              
              3,910Deposit
                  and loan transaction costs
              
              
              1,121
              
              
              1,058
              
              
              3,349
              
              
              3,130Advertising
              
              
              819
              
              
              1,031
              
              
              2,384
              
              
              3,078Other,
                  net
              
              
              1,612
              
              
              2,185
              
              
              4,771
              
              
              4,829Total
                  other expenses
              
              
              18,174
              
              
              18,770
              
              
              53,717
              
              
              54,383INCOME
                  BEFORE INCOME TAX EXPENSE
              
              
              18,619
              
              
              26,058
              
              
              62,489
              
              
              84,221INCOME
                  TAX EXPENSE
              
              
              7,313
              
              
              9,898
              
              
              24,283
              
              
              32,006NET
                  INCOME
              
              $
              11,306
              
              $
              16,160
              
              $
              38,206
              
              $
              52,215Basic
                  earnings per common share
              
              $
              0.16
              
              $
              0.22
              
              $
              0.53
              
              $
              0.72Diluted
                  earnings per common share
              
              $
              0.15
              
              $
              0.22
              
              $
              0.52
              
              $
              0.71Dividends
                  declared per share
              
              $
              0.50
              
              $
              0.50
              
              $
              1.80
              
              $
              1.50Weighted
                  average number of common shares outstanding:Basic
              
              
              72,525
              
              
              72,661
              
              
              72,607
              
              
              72,453Diluted
              
              
              72,754
              
              
              73,115
              
              
              72,882
              
              
              73,071
 
 See
        accompanying notes to consolidated interim financial statements.
 
  4
   CAPITOL
        FEDERAL FINANCIAL AND SUBSIDIARY
 CONSOLIDATED
        STATEMENT OF STOCKHOLDERS’ EQUITY
 (Unaudited)
 (Dollars
        in thousands, per share amounts are actual)
 
 
 AccumulatedAdditional
              
              Unearned
              
              Unearned
              
              
              
              OtherCommon
              
              Paid-In
              
              Compensation
              
              Compensation
              
              Retained
              
              Comprehensive
              
              TreasuryStock
              
              Capital
              
              (ESOP)
              
              (RRP)
              
              Earnings
              
              Loss
              
              Stock
              
              TotalBalance
                  at October 1, 2005
              
              $
              915
              
              $
              421,903
              
              $
              (16,721
              )
              $
              (539
              )
              $
              759,643
              
              $
              (3,769
              )
              $
              (296,369
              )
              $
              865,063Comprehensive
                  income:Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              38,206
              
              
              
              
              
              
              
              
              38,206Changes
                  in unrealized gains/losses onmortgage-related
                  securities available-for-salenet of deferred income taxes of $360
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (590
              )
              
              
              
              
              (590
              )Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              37,616Tax
                  benefit of market value change in vestedRRP
                  shares
              
              
              
              
              
              17
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              17Common
                  stock committed to be released forallocation
                  - ESOP
              
              
              
              
              
              3,506
              
              
              1,512
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,018Acquisition
                  of treasury stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (14,882
              )
              
              (14,882
              )Stock
                  options exercised
              
              
              
              
              
              1,475
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,895
              
              
              3,370Treasury
                  stock activity related to RRP, net
              
              
              
              
              
              517
              
              
              
              
              
              (736
              )
              
              
              
              
              
              
              
              208
              
              
              (11
              )Amortization
                  of unearned compensation - RRP
              
              
              
              
              
              
              
              
              
              
              
              364
              
              
              
              
              
              
              
              
              
              
              
              364Stock
                  based compensation expense
              
              
              
              
              
              300
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              300Dividends
                  in excess of debt service cost - ESOP
              
              
              
              
              (79
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              (79
              )Dividends
                  on common stock to stockholders($1.80
                  per public share)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (36,744
              )
              
              
              
              
              
              
              
              (36,744
              )Balance
                  at June 30, 2006
              
              $
              915
              
              $
              427,718
              
              $
              (15,288
              )
              $
              (911
              )
              $
              761,105
              
              $
              (4,359
              )
              $
              (309,148
              )
              $
              860,032
 
 
 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
                  30,2006
              
              2005CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              38,206
              
              $
              52,215Adjustments
                  to reconcile net income to net cash provided byoperating
                  activities:FHLB
                  stock dividends
              
              
              (7,339
              )
              
              (5,994
              )Net
                  loan origination fees (costs)capitalized
              
              
              1,667
              
              
              (3,892
              )Amortization
                  of net deferred loan origination fees
              
              
              (908
              )
              
              (2,452
              )Provision
                  for loan losses
              
              
              170
              
              
              --Losses
                  on sales of premises and equipment, net
              
              
              3
              
              
              55Gains
                  on sales of real estate owned, net
              
              
              (462
              )
              
              (752
              )Gains
                  on sales of loans receivable held-for-sale
              
              
              (46
              )
              
              (56
              )Originations
                  of loans receivable held-for-sale
              
              
              (2,997
              )
              
              (4,807
              )Proceeds
                  from sales of loans receivable held-for-sale
              
              
              4,699
              
              
              7,879Amortization
                  and accretion of premiums and discounts onmortgage-related
                  securities and investment securities
              
              
              5,781
              
              
              9,585Depreciation
                  and amortization of premises and equipment
              
              
              2,807
              
              
              3,111Amortization
                  of deferred debt issuance costs
              
              
              43
              
              
              48Common
                  stock committed to be released for allocation - ESOP
              
              
              5,018
              
              
              5,247Amortization
                  of unearned compensation - RRP
              
              
              364
              
              
              193RRP
                  shares sold, net of forfeitures
              
              
              (11
              )
              
              (21
              )Stock
                  based compensation - stock options
              
              
              300
              
              
              --Changes
                  in:Accrued
                  interest receivable
              
              
              3,800
              
              
              4,928Other
                  assets
              
              
              1,045
              
              
              (893
              )Income
                  taxes payable/receivable and deferred income taxes
              
              
              18,263
              
              
              22,876Accounts
                  payable and accrued expenses
              
              
              (3,380
              )
              
              (2,563
              )Net
                  cash provided by operating activities
              
              
              67,023
              
              
              84,707CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchases
                  of investment securities available-for-sale
              
              
              (142,413
              )
              
              --Proceeds
                  from maturities or calls of investment securities
                  held-to-maturity
              
              
              190,510
              
              
              182,000Proceeds
                  from the redemption of capital stock of FHLB
              
              
              22,042
              
              
              --Principal
                  collected on mortgage-related securities
                  available-for-sale
              
              
              226,262
              
              
              337,518Purchases
                  of mortgage-related securities available-for-sale
              
              
              (87,884
              )
              
              --Principal
                  collected on mortgage-related securities held-to-maturity
              
              
              212,544
              
              
              239,310Purchases
                  of mortgage-related securities held-to-maturity
              
              
              (983
              )
              
              (307,603
              )Loan
                  originations, net of principal collected
              
              
              (65,029
              )
              
              (29,750
              )Loan
                  purchases, net of principal collected
              
              
              (39,948
              )
              
              (421,509
              )Purchases
                  of premises and equipment, net
              
              
              (5,038
              )
              
              (2,234
              )Proceeds
                  from sales of real estate owned
              
              
              3,393
              
              
              6,805Net
                  cash provided byinvesting
                  activities
              
              
              313,456
              
              
              4,537
 
 (Continued)
 
  6
   
 CASH
                  FLOWS FROM FINANCING ACTIVITIES:Dividends
                  paid
              
              
              (36,744
              )
              
              (30,540
              )Dividends
                  in excess of debt service cost of ESOP, net
              
              
              (79
              )
              
              2,069Deposits,
                  net of withdrawals
              
              
              (64,428
              )
              
              (136,285
              )Proceeds
                  from advances/line of credit from FHLB
              
              
              629,100
              
              
              567,000Repayments
                  on advances/line of credit from FHLB
              
              
              (829,100
              )
              
              (567,000
              )Change
                  in advance payments by borrowers for taxes
                  and insurance
              
              
              (19,718
              )
              
              (16,567
              )Acquisitions
                  of treasury stock
              
              
              (14,882
              )
              
              (2,097
              )Acquisitions
                  of treasury stock for exercise of stock options
              
              
              --
              
              
              (2,793
              )Stock
                  options exercised
              
              
              1,968
              
              
              4,855Net
                  cash used in financing activities
              
              
              (333,883
              )
              
              (181,358
              )NET
                  INCREASE (DECREASE)IN
                  CASH AND CASH EQUIVALENTS
              
              
              46,596
              
              
              (92,114
              )CASH
                  AND CASH EQUIVALENTS:Beginning
                  of period
              
              
              58,566
              
              
              171,526End
                  of period
              
              $
              105,162
              
              $
              79,412SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATION:Income
                  tax payments
              
              $
              4,400
              
              $
              8,627Interest
                  payments, net of interest credited to deposits
              
              $
              127,055
              
              $
              114,761SUPPLEMENTAL
                  DISCLOSURE OF NON-CASHINVESTING
                  AND FINANCING ACTIVITIES:Loans
                  transferred to real estate owned
              
              $
              3,772
              
              $
              3,499Loans
                  made on the sale of real estate owned
              
              $
              96
              
              $
              --Loan
                  modifications and refinances
              
              $
              90,269
              
              $
              222,959Tax
                  effect of premature disposal of incentive stock option shares
              
              $
              1,402
              
              $
              4,208Treasury
                  stock activity related to RRP (excluding RRP shares sold foremployee
                  withholding tax purposes)
              
              $
              208
              
              $
              108Tax
                  effect of RRP share transactions
              
              $
              17
              
              $
              25Market
                  value change related to fair value hedge:Interest
                  rate swaps hedging FHLB advances
              
              $
              18,600
              
              $
              8,164
 
 
 (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
        and
        subsidiary (the “Company”) have been prepared in accordance with the
        instructions to Form 10-Q and do not include all of the information and
        footnotes required by generally accepted accounting principles in the United
        States of America (“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 2005 Annual Report on
        Form 10-K to 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 as
        of the
        date of the balance sheet and revenues and expenses for the period. Material
        estimates that are particularly susceptible to significant change in the
        near-term relate to the determination of the valuation of derivative
        instruments, deferred income tax assets and allowances for losses on loans.
        While management believes that these allowances are adequate, future additions
        to the allowances may be necessary based on changes in economic conditions
        and
        other factors. See “Item 2- Management’s Discussion and Analysis of Financial
        Condition and Results of Operations - Critical Accounting
        Policies.”
 
 The
        Company is the sole shareholder of Capitol Federal Savings Bank (the “Bank”).
        The Company’s majority shareholder is Capitol Federal Savings Bank MHC (“MHC”),
        a federally chartered mutual holding company.
 
 All
        dollar amounts are in thousands and per share data is actual, unless otherwise
        indicated.
 
 **2.   Recent
        Accounting Pronouncements**
 In
        February 2006, the Financial Accounting Standards Board (“FASB”) issued
        Statement of Financial Accounting Standards (“SFAS”) No. 155, “Accounting for
        Certain Hybrid Financial Instruments”. SFAS 155 amends SFAS No. 133 “Accounting
        for Derivative Instruments and Hedging Activities” and SFAS 140 “Accounting for
        Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”
SFAS 155 permits fair value remeasurement for any hybrid financial instrument
        that contains an embedded derivative that would otherwise require bifurcation,
        if the holder irrevocably elects to account for the whole instrument on a
        fair
        value basis, and clarifies various aspects of SFAS 133 and SFAS 140 relating
        to
        derivative financial instruments and qualifying special-purpose entities
        holding
        derivative financial instruments. SFAS 155 is effective for all financial
        instruments acquired by the Company after October 1, 2006. The Company does
        not
        anticipate a material impact to the consolidated financial statements when
        SFAS
        155 is adopted.
 
 In
        March
        2006, FASB issued SFAS 156, “Accounting for Servicing of Financial Assets - an
        amendment of FASB Statement No. 140”. SFAS 156 requires an entity to recognize a
        servicing asset or servicing liability each time it undertakes an obligation
        to
        service a financial asset by entering into a servicing contract as defined
        in
        the SFAS. It requires all separately recognized servicing assets and servicing
        liabilities to be initially measured at fair value, if practicable, and allows
        an entity to choose between amortization or fair value measurement methods
        for
        each class of separately recognized servicing assets and servicing liabilities.
        It also permits a one-time reclassification of available-for-sale securities
        to
        trading without tainting the investment portfolio, provided the
        available-for-sale securities are identified in some manner as offsetting
        the
        entity’s exposure to changes in fair value of servicing assets or servicing
        liabilities. SFAS 156 is effective for the Company on October 1, 2006. The
        Company does not anticipate a material impact to the consolidated financial
        statements when SFAS 156 is adopted.
 
 **3.   Accounting
        for Stock Based Compensation**
 In
        December 2004, FASB issued SFAS No. 123(R), “Share-Based Payment”. SFAS 123(R)
        amended SFAS 123, “Accounting for Stock-Based Compensation” and superseded
        Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued
        to Employees”. In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”)
        No. 107 to provide its guidance on the valuation of share-based payments
        for
        public companies. SFAS 123(R) requires companies to recognize all share-based
        payments, which include stock options and restricted stock, in compensation
        expense over the service period of the share-based payment award. SFAS 123(R)
        establishes fair value as the measurement objective in accounting for
        share-based payment arrangements and requires all entities to apply a
        fair-value-based measurement method in accounting for share-based payment
        transactions with employees, except for equity instruments held by employee
        share ownership plans. At June 30, 2006, the Company had a Stock Option and
        Incentive Plan (the “Option Plan”) and a Recognition and Retention Plan (“RRP”).
  8
  The
        Company adopted SFAS 123(R) effective October 1, 2005 using the modified
        prospective method in which compensation cost is recognized over the service
        period for all awards granted subsequent to the Company’s adoption of SFAS
        123(R) as well as for the unvested portion of awards outstanding as of the
        Company’s adoption of SFAS 123(R). In accordance with the modified prospective
        method, results for prior periods have not been restated.
 
 Compensation
        expense related to the amortization of the RRP awards was recognized in the
        income statement prior to the implementation of SFAS 123(R). Compensation
        expense attributable to stock options and RRP awards during the three months
        ended June 30, 2006 totaled $78 thousand ($47 thousand, net of tax) and $86
        thousand ($52 thousand, net of tax), respectively. Compensation expense
        attributable to stock options and RRP awards during the nine months ended
        June
        30, 2006 totaled $300 thousand ($183 thousand, net of tax) and $364 thousand
        ($223 thousand, net of tax), respectively.
 
 Prior
        to
        the adoption of SFAS 123(R), the Company applied the recognition and measurement
        principles of APB No. 25, “Accounting for Stock Issued to Employees” as allowed
        by SFAS 123 and SFAS 148, “Accounting for Stock-Based Compensation - Transition
        and Disclosure”. Accordingly, no stock based compensation was recognized in net
        income for stock options as all options granted had an exercise price equal
        to
        the market value of the underlying common stock on the date of the grant
        and the
        related number of options granted were fixed at that point in time. The
        following table presents the pro forma impact on earnings and earnings per
        share
        for the three and nine months ended June 30, 2005 if the Company had applied
        the
        fair value recognition provisions of SFAS 123, as amended by SFAS
        148:
 
 June
                  30, 2005For
                  the Three
                Months
                  Ended
              
              For
                  the Nine
                Months
                  Ended(Dollars
                  in thousands, except per share amounts)Net
                  income, as reported
              
              $
              16,160
              
              $
              52,215Add:
                   Stock-based compensation expense includedin
                  reported net income, net of related tax effects(1)
              
              
              28
              
              
              122Deduct: 
                  Total stock-based employeecompensation
                  expense determined underfair
                  value based method for all awards,net
                  of related tax effects(1)
              
              
              66
              
              
              255Pro
                  forma net income
              
              $
              16,122
              
              $
              52,082Net
                  earnings per share:Basic-as
                  reported
              
              $
              0.22
              
              $
              0.72Basic-pro
                  forma
              
              $
              0.22
              
              $
              0.72Diluted-as
                  reported
              
              $
              0.22
              
              $
              0.71Diluted-pro
                  forma
              
              $
              0.22
              
              $
              0.71
 
 (1) The
        amount includes compensation expense related to the RRP awards reported in
        net
        income.
  9
  The
        fair
        value of stock option grants are estimated on the date of the grant using
        the
        Black-Scholes option pricing model. There were no stock option grants during
        the
        quarter ended June 30, 2006. The weighted average grant-date fair value of
        stock
        options granted during the three months ended June 30, 2005 was $4.13 per
        share.
        The weighted average grant-date fair value of stock options granted during
        the
        nine months ended June 30, 2006 and 2005 was $3.98 and $4.69 per share,
        respectively. The following weighted average assumptions were used for valuing
        stock option grants for the periods noted:
 For
                  the ThreeMonths
                  Ended
              
              For
                  the Nine Months EndedJune
                  30,
              
              June
                  30,2005
              
              2006
              2005Risk-free
                  interest rate
              3.8%
              
              4.5%
              4.1%Expected
                  life (years)
              6.5
              
              8.2
              8.6Expected
                  volatility
              22.9%
              
              22.2%
              23.3%Dividend
                  yield
              5.9%
              
              6.1%
              5.7%Estimated
                  forfeitures
              0.0%
              
              0.0%
              0.0%
 
 The
        risk-free interest rate was determined using the yield available on the option
        grant date for a zero-coupon U.S. Treasury security with a term equivalent
        to
        the expected life of the option. The expected life for options granted during
        the nine months ended June 30, 2006 represents the period the option is expected
        to be outstanding and was determined by applying the simplified method as
        allowed by SAB 107. The expected life for the stock options granted during
        the
        three and nine months ended June 30, 2005 was based on the midpoint between
        the
        average vesting term and the average contractual term. The expected volatility
        was determined using historical volatilities based on historical stock prices.
        The dividend yield was determined based upon historical quarterly dividends
        and
        the Company’s stock price on the option grant date. Estimated forfeitures were
        determined based upon voluntary termination behavior and actual option
        forfeitures.
 
 ***Stock
        Option Plan -*** Pursuant
        to the Option Plan, 3,780,718 shares of common stock were reserved for issuance
        by the Company upon exercise of stock options granted to officers, directors
        and
        employees of the Company and the Bank from time to time under the Option
        Plan.
        The Company may issue both incentive and nonqualified stock options under
        the
        Option Plan. The incentive stock options expire in ten years and the
        nonqualified stock options expire in fifteen years from the date of grant.
        The
        date on which the options are first exercisable is determined by the Stock
        Benefits Committee (“sub-committee”), a sub-committee of the Compensation
        Committee (“committee”) of the board of directors. The vesting period of the
        options generally ranges from three to five years. The option price is equal
        to
        the market value at the date of the grant as defined by the Option Plan.
        The
        purpose of the Option Plan is to provide additional incentive to certain
        officers, directors and key employees by facilitating their purchase of a
        stock
        interest in the Company. At June 30, 2006, the Company had 381,518 shares
        available for future grants under the Option Plan.
 
 The
        Option Plan is administered by the sub-committee, which selects the employees
        and non-employee directors to whom options are to be granted and the number
        of
        shares to be granted. The exercise price may be paid in cash, shares of the
        common stock, or a combination of both. The option price may not be less
        than
        100% of the fair market value of the shares on the date of the grant. In
        the
        case of any employee who is granted an incentive stock option who owns more
        than
        10% of the outstanding common stock at the time the option is granted, the
        option price may not be less than 110% of the fair market value of the shares
        on
        the date of the grant, and the option shall not be exercisable after the
        expiration of five years from the grant date. Historically, the Company
        generally has issued shares held in treasury upon the exercise of stock options.
  10
  A
        summary
        of option activity for the three and nine months ended June 30, 2006
        follows:
 
 For
                  the Three Months Ended
              
              For
                  the Nine Months EndedJune
                  30, 2006
              
              June
                  30, 2006Weighted
              
              
              
              WeightedAverage
              
              
              
              AverageNumber
              
              Exercise
              
              Number
              
              Exerciseof
                  Options
              
              Price
              
              of
                  Options
              
              PriceOutstanding
                  at beginning of period
              
              
              759,449
              
              $
              19.28
              
              
              789,749
              
              $
              15.61Granted
              
              
              --
              
              
              --
              
              
              112,000
              
              
              32.69Forfeited
              
              
              --
              
              
              --
              
              
              (1,000
              )
              
              9.22Exercised
              
              
              (64,967
              )
              
              9.74
              
              
              (206,267
              )
              
              9.55Outstanding
                  at June 30, 2006
              
              
              694,482
              
              $
              20.17
              
              
              694,482
              
              $
              20.17
 
 During
        the three months ended June 30, 2006, the total pretax intrinsic value of
        stock
        options exercised was $1.0 million and the tax benefits realized from the
        exercise of stock options was $253 thousand. The fair value of stock options
        vested during the three months ended June 30, 2006 was $65 thousand. During
        the
        nine months ended June 30, 2006, the total pretax intrinsic value of stock
        options exercised was $4.3 million and the tax benefits realized from the
        exercise of stock options was $1.4 million. The fair value of stock options
        vested during the nine months ended June 30, 2006 was $268
        thousand.
 
 The
        following table summarizes information about the stock options outstanding
        and
        exercisable as of June 30, 2006:
 Options
                  Outstanding
              
              Options
                  ExercisableWeighted
              
              Weighted
              
              
              
              
              
              WeightedAverage
              
              Average
              
              
              
              
              
              AverageNumber
              
              Remaining
              
              Exercise
              
              Aggregate
              
              Number
              
              Exercise
              
              AggregateExercise
              
              of
                  Options
              
              Contractual
              
              Price
                  per
              
              Intrinsic
              
              of
                  Options
              
              Price
                  per
              
              IntrinsicPrice
              
              Outstanding
              
              Life
                  (in years)
              
              Share
              
              Value
              
              Exercisable
              
              Share
              
              Value(Dollars
                  in thousands, except per share amounts)$9.22
              
              
              354,182
              
              
              7.78
              
              $
              9.22
              
              $
              8,880
              
              
              354,182
              
              $
              9.22
              
              $
              8,88014.03
                  - 19.68
              
              
              22,400
              
              
              4.66
              
              
              16.25
              
              
              404
              
              
              22,400
              
              
              16.25
              
              
              40425.66
                  - 28.78
              
              
              40,000
              
              
              8.32
              
              
              26.01
              
              
              331
              
              
              27,800
              
              
              25.92
              
              
              23330.19
                  - 36.19
              
              
              277,900
              
              
              10.89
              
              
              33.60
              
              
              320
              
              
              86,633
              
              
              33.84
              
              
              101694,482
              
              
              8.95
              
              $
              20.17
              
              $
              9,935
              
              
              491,015
              
              $
              14.83
              
              $
              9,618
 
 The
        aggregate intrinsic value in the preceding table represents the total pre-tax
        intrinsic value, based on the Company’s closing stock price of $34.29 as of June
        30, 2006, which would have been received by the option holders had all option
        holders exercised their options as of that date. The total number of
        in-the-money options exercisable as of June 30, 2006 was 445,082.
 
 As
        of
        June 30, 2006, the total future compensation cost related to non-vested stock
        options not yet recognized in the income statement was $716 thousand and
        the
        weighted average period over which these awards are expected to be recognized
        was 3.0 years.
 
 ***Recognition
        and Retention Plan -*** The
        objective of the RRP is to enable the Company and the Bank to retain personnel
        of experience and ability in key positions of responsibility. Employees and
        directors of the Bank are eligible to receive benefits under the RRP at the
        sole
        discretion of the sub-committee. The total number of shares originally eligible
        to be granted under the RRP was 1,512,287.
  Compensation
        expense in the amount of the fair market value of the common stock at the
        date
        of grant, as defined by the RRP, to the employee is recognized over the period
        during which the shares vest. A recipient of such restricted stock will be
        entitled to all voting and other stockholder rights (including the right
        to
        receive dividends on vested and non-vested shares), except that the shares,
        while restricted, may not be sold, pledged or otherwise disposed of and are
        required to be held in escrow by the Company. If a holder of such restricted
        stock terminates
   11
  employment
        for reasons other than death or disability, the employee forfeits all rights
        to
        the non-vested shares under restriction. If the participant’s service terminates
        as a result of death, disability, or if a change in control of the Bank occurs,
        all restrictions expire and all non-vested shares become
        unrestricted.
  The
        following table summarizes the activity of non-vested RRP shares during the
        three and nine months ended June 30, 2006:
 For
                  the Three Months Ended
              
              For
                  the Nine Months EndedJune
                  30, 2006
              
              June
                  30, 2006Weighted
              
              
              
              WeightedAverage
              
              
              
              AverageNumber
              
              Grant
                  Date
              
              Number
              
              Grant
                  Dateof
                  Shares
              
              Fair
                  Value
              
              of
                  Shares
              
              Fair
                  ValueNon-vested
                  RRP shares at beginning of period
              
              
              33,400
              
              $
              33.06
              
              
              18,800
              
              $
              33.88Granted
              
              
              --
              
              
              --
              
              
              22,500
              
              
              32.73Vested
              
              
              (1,000
              )
              
              25.66
              
              
              (8,900
              )
              
              33.14Forfeited
              
              
              --
              
              
              --
              
              
              --
              
              
              --Non-vested
                  RRP shares at June 30, 2006
              
              
              32,400
              
              $
              33.29
              
              
              32,400
              
              $
              33.29
 
 The
        estimated forfeiture rate for the RRP shares granted during the nine months
        ended June 30, 2006 was 0% based upon voluntary termination behavior and
        actual
        forfeitures. The fair value of RRP shares that vested during the three and
        nine
        months ended June 30, 2006 totaled $26 thousand and $295 thousand, respectively.
        As of June 30, 2006, there was $911 thousand of unrecognized compensation
        cost
        related to non-vested RRP compensation to be recognized over a weighted average
        period of 3.1 years.
  12
  **4.   Earnings
        Per Share**
 For
        the
        quarter ended June 30, 2006, basic earnings per share were $0.16 and diluted
        earnings per share were $0.15. 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 acquired for its RRP in a manner similar to the ESOP shares; shares
        acquired by the ESOP and 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 earnings per share
        calculations.
 For
                  the Three Months Ended
              
              For
                  the Nine Months EndedJune
                  30,
              
              June
                  30,2006
              
              2005
              
              2006
              
              2005(Dollars
                  in thousands, except per share amounts)Net
                  income
              
              $
              11,306
              
              $
              16,160
              
              $
              38,206
              
              $
              52,215Average
                  common shares outstanding
              
              
              72,423,231
              
              
              72,559,699
              
              
              72,556,486
              
              
              72,401,746Average
                  committed ESOP shares outstanding
              
              
              101,374
              
              
              101,374
              
              
              50,779
              
              
              50,779Total
                  basic average common shares outstanding
              
              
              72,524,605
              
              
              72,661,073
              
              
              72,607,265
              
              
              72,452,525Effect
                  of dilutive RRP shares(1)
              
              
              3,794
              
              
              2,091
              
              
              2,659
              
              
              2,412Effect
                  of dilutive stock options(2)
              
              
              225,289
              
              
              452,100
              
              
              272,284
              
              
              616,078Total
                  diluted average common shares outstanding
              
              
              72,753,688
              
              
              73,115,264
              
              
              72,882,208
              
              
              73,071,015Net
                  earnings per share:Basic
              
              $
              0.16
              
              $
              0.22
              
              $
              0.53
              
              $
              0.72Diluted
              
              $
              0.15
              
              $
              0.22
              
              $
              0.52
              
              $
              0.71
 
 (1)At
        June
        30, 2006, there were 16,000 unvested RRP shares at $32.53 per share that
        were
        excluded from the computation of diluted EPS because they were anti-dilutive
        for
        the nine months ended June 30, 2006.
 (2) Options
        to purchase 249,000 shares of common stock at prices between $32.48 per share
        and $36.19 per share were outstanding as of June 30, 2006, but were not included
        in the computation of diluted EPS because they were anti-dilutive for the
        three
        months and the nine months ended June 30, 2006.
 
 **5.   Reclassifications**
 Certain
        reclassifications have been made to the fiscal 2005 consolidated financial
        statements in order to conform to the fiscal 2006 presentation.
 
 **6.   Subsequent
        Events**
 Subsequent
        to June 30, 2006, the Bank’s board of directors approved a transaction with the
        Federal Home Loan Mortgage Corporation (“FHMLC”), commonly referred to as
        Freddie Mac, to exchange up to $432.0 million of fixed-rate mortgage loans
        for
        marketable securities. The face value of the mortgage loans will be exchanged
        for marketable securities which management intends to classify as
        available-for-sale. The Bank will continue to service the mortgage loans
        exchanged. The transaction affords management the ability to change the
        composition of the balance sheet in a more timely and efficient manner than
        attempting to sell whole loans. The transaction is expected to close during
        the
        fourth quarter of fiscal year 2006. See additional discussion under “Item
        3.  Quantitative and Qualitative Disclosure About Market
        Risk.”
 
 
  13
  **Item
        2.   Management’s Discussion and Analysis of Financial Condition
        and Results of Operations**
 
 We
        may
        from time to time make written or oral “forward looking statements”, including
        statements contained in the documents we file with or furnish to 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; ·
            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; ·
            inflation,
                interest rates, market and monetary fluctuations; ·
            our
                ability to access cost-effective funding; ·
            the
                timely development 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; ·
            the
                possibility that the costs of replacing the Bank’s core information
                technology processing system will be greater than estimated
                amounts; ·
            our
                success in gaining regulatory approval of our products, services
                and
                branching locations, when required; ·
            the
                impact of changes in financial services laws and regulations, including
                laws concerning taxes, banking, securities and
                insurance; ·
            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 exclusive. 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.
  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 assets
        and is
        the principal source of income for the Company.
 
 All
        dollar amounts are in thousands except per share data, unless otherwise
        indicated.
  14
  **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 nonowner-occupied one- to four-family
        residences, permanent and 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 and mortgage-related securities using FHLB advances as
        an
        additional funding source.
 
 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 investments, 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 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, mortgage-related
        securities, and investments, and the interest paid on deposits and borrowings.
        We generally price our loan and deposit products based upon an analysis of
        our
        competition and changes in market rates. On a weekly basis, management reviews
        deposit flows, loan demand, cash levels, and changes in several market rates
        to
        assess all pricing strategies. While we do not explicitly price our products
        at
        a margin to a specific market rate or index, our products tend to be priced
        at a
        margin to general market rates or indices. While national market rates change
        constantly, and rates offered by competitors with nationwide delivery channels
        may change during a business day, our offered rates generally remain available
        to customers for up to a week on deposit products and several days to a week
        on
        loan products. Our one- to four-family mortgage loans are generally priced
        based
        upon the 10-year Treasury rate while the rates on our deposits are generally
        priced based upon short-term Treasury rates. 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 2 years.
 
 The
        yield
        curve continued to be flat or slightly inverted at various points during
        the
        quarter, which generally means that the yield on short-term treasuries equaled
        or exceeded the yield on long-term treasuries. The forward yield curve indicates
        that the market expects interest rates on treasury securities with terms
        to
        maturity of less than or equal to two years will remain flat through the
        end of
        2006. The current inverted-to-flat yield curve scenario is likely to cause
        a
        continuation of the net interest margin compression the Company has experienced
        in recent periods, since the interest-earning assets of the Company generally
        take longer to reprice relative to its interest-bearing liabilities. This
        scenario has resulted in a reduced net interest margin in fiscal year 2006
        compared to fiscal year 2005, as our interest-bearing liabilities are repricing
        to higher rates faster than our interest-earning assets.
 
 Declining
        mortgage loan demand due to a softening of the housing market and the increase
        in the Federal Funds rate could also constrain earnings, as the Federal
        Open Market Committee of the Federal Reserve Board increased the Federal Funds rate by 50 basis points to the current rate of
        5.25%
        during the quarter ended June 30, 2006. The Federal Funds rate is the rate
        at
        which depository institutions lend reserve requirement surplus balances at
        the
        Federal Reserve to other depository institutions in deficit of their reserve
        requirement. An increase in this rate does not directly impact the rates
        offered
        loan consumers, but the trickle-down effect caused by an increase in borrowing
        costs for banks is eventually realized in mortgage, consumer, and corporate
        loan
        rates. During the last two months of the quarter, the rates on the Bank’s
        existing home equity loans were not increased, despite the increase in the
        Federal Funds rate. This action was taken to retain home equity loans that
        might
        otherwise have been refinanced. The Bank has not yet experienced an appreciable
        decline in loan demand based upon economic conditions. See additional discussion
        of interest rate risk in "Quantitative and Qualitative Disclosure About Market
        Risk."
 
   15
  Net
          income for the quarter ended June 30, 2006 was $11.3 million compared to
          $16.2
          million for the same quarter one year ago. The decrease in net income was
          primarily a result of an increase in interest expense, specifically interest
          expense on the certificate of deposit portfolio and the interest rate swaps,
          which are both generally priced based upon short-term interest rates (two
          year
          and shorter maturities). The increase in interest expense was partially
          offset
          by an increase in interest income on loans and cash and cash equivalents,
          and a
          decrease in income tax expense due to a reduction in earnings between the
          two
          periods.
  The
        Bank’s loan portfolio increased $100.4 million during fiscal year 2006 to $5.56
        billion at June 30, 2006. The growth was a result of originations, mortgage
        loan
        purchases, and a slow down in prepayment speeds due to an increase in long-term
        interest rates. Prepayments on loans generally decline as long-term rates
        rise
        because borrowers are less likely to refinance their current mortgage or
        move
        into more expensive homes due to costs associated with higher rates on new
        mortgages. The Bank has experienced an increase in originations
        quarter-over-quarter, primarily due to competitive pricing and seasonality
        in
        housing demand.
 
 As
        a
        result of the Bank’s continuing need to satisfy the collateral requirements of
        its interest-rate swap counterparties, public unit depositors, and to manage
        interest rate risk exposure according to limits set by the board of directors,
        the Bank intends to purchase more adjustable-rate mortgage-related and
        investment securities rather than purchase mortgage loans for the foreseeable
        future. The majority of the purchased securities will be classified as
        available-for-sale for collateral purposes and to give management the ability
        to
        change more rapidly the composition of the balance sheet if deemed necessary.
        In
        the fourth quarter of fiscal year 2006, the Bank intends to enter into a
        transaction with the FHMLC to exchange up to $432.0 million of fixed-rate
        mortgage loans for marketable securities. See additional information in “Item 3.
        Quantitative and Qualitative Disclosure About Market Risk.”
 
 Cash
        and
        cash equivalents increased $46.6 million during fiscal year 2006 to $105.2
        million at June 30, 2006 primarily due to the timing of cash receipts and
        their
        subsequent reinvestment. The cash balance in excess of short-term liquidity
        needs will continue to be invested in short-duration assets in an effort
        to
        manage interest rate risk exposure by diversifying the term to maturity of
        our
        assets.
 
 FHLB
        advances decreased $218.6 million during fiscal year 2006 to $3.21 billion
        at
        June 30, 2006. The primary reason for the decrease was the repayment of $200.0
        million in FHLB advances which matured in the first half of fiscal year 2006.
 
 The
        Bank
        experienced continued high levels of competition for retail deposit dollars
        due
        to aggressive pricing by other financial institutions in its local markets.
        The
        Bank increased the average rates on the money market and certificate of deposit
        portfolios to remain competitive in our markets, with an emphasis on the
        mid-term maturity certificate of deposit market. The Bank’s entire deposit
        portfolio decreased $64.4 million during fiscal year 2006 to $3.90 billion
        at
        June 30, 2006 which was primarily a result of certificate maturities that
        the
        Bank did not retain, and a decrease in the money market portfolio. On April
        1,
        2006, the Federal Deposit Insurance Corporation (“FDIC”) increased the level of
        insurance on certain retirement accounts from $100 thousand to $250 thousand.
        This change could potentially increase the level of IRA deposits held at
        the
        Bank from depositors who currently deposit at multiple financial institutions
        due to FDIC coverage limits. Management continues to monitor the Bank’s local
        deposit market pricing environment for its impact on the Bank’s operations and
        will adjust the Bank’s pricing on deposit accounts accordingly. Management
        actively looks for pricing opportunities that will allow the Bank to maintain
        its current size or grow in a profitable manner.
 
 The
        Bank
        plans to open a new in-store branch in the fall of 2006 in Johnson County,
        Kansas. Once this branch is open, the Bank will have 38 branches in seven
        counties in the State of Kansas. Management will continue to explore branch
        expansion opportunities in our market areas.
 
 
 **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.
 
 
  16
  **Critical
          Accounting Policies**
 
 Our
          most
          critical accounting policies are the methodologies used to determine the
          allowance for loan losses and deferred income tax assets, and our policy
          regarding derivative instruments. These policies are important to the
          presentation of our financial condition and results of operations, involve
          a
          higher 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 and board of directors. 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** .
        We
        maintain an allowance for loan losses to absorb losses known and inherent
        in the
        loan portfolio based upon ongoing quarterly assessments of the loan portfolio.
        Our methodology for assessing the appropriateness of the allowance consists
        of
        several key elements, which includes a formula allowance, specific allowances
        for identified problem loans and portfolio segments, and knowledge of economic
        conditions that may lead to credit risk concerns about the loan portfolio
        or
        segments of the loan portfolio. In addition, the allowance incorporates the
        results of measuring impaired loans as provided in SFAS No. 114, “Accounting by
        Creditors for Impairment of a Loan” and SFAS No. 118, “Accounting by Creditors
        for Impairment of a Loan - Income Recognition and Disclosures.” These accounting
        standards prescribe the measurement methods, income recognition and disclosures
        related to impaired loans.
 
 One-
        to
        four-family mortgage loans and consumer loans that are not impaired, as defined
        in SFAS No. 114 and No. 118, are collectively evaluated for impairment using
        a
        formula allowance as permitted by SFAS No. 5, “Accounting for Contingencies”.
        Loans on residential properties with greater than four units, residential
        construction loans and commercial properties that are delinquent or where
        the
        borrower’s total loan concentration balance is greater than $1.5 million
        (excluding one- to four-family mortgage loans) are evaluated for impairment
        on a
        loan by loan basis. If no impairment exists, these loans are included in
        the
        formula allowance. The formula allowance is calculated by applying loss factors
        to outstanding loans based on the internal risk evaluation of pools of loans.
        Changes in risk evaluations of both performing and non-performing loans affect
        the amount of the formula allowance. Loss factors are based both on our
        historical loss experience and on significant factors that, in management’s
        judgment, affect the collectability of the portfolio as of the evaluation
        date.
        Loan loss factors for portfolio segments are representative of the credit
        risks
        associated with loans in those segments. The greater the credit risks associated
        with a particular segment, the greater the loss factor. Loss factors increase
        as
        individual loans become classified, delinquent, the foreclosure process begins,
        or as economic conditions warrant.
 
 Management
        reviews the appropriateness of the allowance based upon its evaluation of
        then-existing economic and business conditions affecting our key lending
        areas.
        Other conditions management considers in determining the appropriateness
        of the
        allowance include, but are not limited to, changes in our underwriting
        standards, credit quality trends (including changes in the balance and
        characteristics of non-performing loans expected to result from existing
        economic conditions), trends in collateral values, loan volumes and
        concentrations, and recent loss experience in particular segments of the
        portfolio as of the balance sheet date. Management also measures the impact
        that
        such conditions were believed to have had on the collectability of impaired
        loans.
 
 Senior
        management reviews these conditions quarterly. To the extent that any of
        these
        conditions are evidenced by a specifically identifiable problem loan or
        portfolio segment as of the evaluation date, management’s estimate of the effect
        of such condition may be reflected as a specific allowance applicable to
        such
        loan or loans. Where any of these conditions are not evidenced by a specifically
        identifiable problem loan or portfolio segment as of the evaluation date,
        management’s evaluation of the loss related to these conditions is reflected in
        the allowance associated with our homogeneous population of mortgage loans.
        The
        evaluation of the inherent loss with respect to these conditions is subject
        to a
        higher degree of uncertainty because they are not identified with specific
        problem loans or portfolio segments.
 
 The
        amounts actually observed with respect to these losses can vary significantly
        from the estimated amounts. Our methodology permits adjustments to any loss
        factor used in the computation of the formula allowance in the event that,
        in
        management’s judgment, significant factors which affect the collectability of
        the portfolio, as of the evaluation date, are not reflected in the current
        loss
        factors. By assessing the estimated losses inherent in our loan portfolios
        on a
        quarterly basis, we can adjust specific and inherent loss estimates based
        upon
        more current information.
 
  17
  Assessing
          the adequacy of the allowance for loan losses is inherently subjective
          as it
          requires making material estimates, including the amount and timing of
          future
          cash flows expected to be received on impaired loans, and changes in the
          market
          value of collateral securing loans, which may be susceptible to volatility.
          In
          the opinion of management, the allowance, when taken as a whole, is adequate
          to
          absorb reasonable estimated loan losses inherent in our loan
          portfolios.
 Derivative
        Instruments.
  The
        Bank
        has entered into interest rate swap agreements to hedge certain FHLB advances
        (“swapped FHLB advances”). When the Bank entered into the interest rate swap
        agreements, they were designated as fair value hedges. All terms of the interest
        rate swap agreements relating to the pay, fixed-rate components and timing
        of
        cash flows match the terms of the swapped FHLB advances. Therefore, the Bank
        has
        assumed no ineffectiveness in the hedging relationship and accounts for the
        interest rate swaps using the shortcut method, under which any gain or loss
        in
        the fair value of the interest rate swaps is recorded as an other asset or
        liability and is offset by a gain or loss on the hedged FHLB
        advances.
 
 Before
        entering into the interest rate swap agreements, management formally documented
        its risk management objectives and strategy, and the relationship between
        the
        interest rate swap agreements and the swapped FHLB advances. To qualify for
        hedge accounting, the interest rate swaps and the related FHLB advances must
        be
        designated as a hedge. Both at the inception of the hedge and on an ongoing
        basis, management assesses whether the hedging relationship is expected to
        be
        highly effective in offsetting changes in fair values of the swapped FHLB
        advances. If at some point it is determined that the interest rate swaps
        are not
        highly effective as a hedge, hedge accounting will be discontinued. If hedge
        accounting is discontinued, changes in the fair value of the interest rate
        swaps
        will be recorded in earnings and the swapped FHLB advances will no longer
        be
        adjusted for changes in fair value.
 
 **Deferred
        Income Tax Assets.** Management assesses the available positive and negative evidence surrounding
        the
        recoverability of deferred income tax assets on a quarterly basis. A valuation
        allowance will be recorded to reduce deferred income tax assets when it is
        more
        likely than not that the assets will not be realized. Management believes
        no
        valuation allowance was required at June 30, 2006.
 
 
 **Financial
        Condition**
 
 Total
        assets decreased $292.5 million from $8.41 billion at September 30, 2005
        to
        $8.12 billion at June 30, 2006. The decrease in assets was attributed mainly
        to
        a decrease in mortgage-related securities of $356.4 million and partially
        to a
        decrease in investment securities of $48.4 million. The decrease in assets
        was
        partially offset by an increase in loans receivable of $100.4 million and
        cash
        and cash equivalents of $46.6 million.
 
 Total
        liabilities decreased $287.5 million from $7.54 billion at September 30,
        2005 to
        $7.26 billion at June 30, 2006. The decrease in liabilities was due primarily
        to
        the repayment of $200.0 million in FHLB advances and a decrease in deposits
        of
        $64.4 million, particularly in the certificate of deposit and money market
        portfolios.
 
 Stockholders’
        equity decreased $5.1 million from $865.1 million at September 30, 2005 to
        $860.0 million at June 30, 2006. The decrease was primarily a result of $36.7
        million in dividend payments and partially a result of a $12.8 million increase
        in treasury stock primarily due to stock repurchases. The decrease in
        stockholders’ equity was partially offset by $38.2 million in net income and a
        $5.8 million increase in additional paid-in capital.
  18
  The
        following table presents selected balance sheet data for the Company at the
        dates indicated.
 June
                  30,
              
              March
                  31,
              
              December
                  31,
              
              September
                  30,
              
              June
                  30,2006
              
              2006
              
              2005
              
              2005
              
              2005(Dollars
                  in thousands, except per share amounts)Selected
                  Balance Sheet Data:Total
                  assets
              
              $
              8,117,173
              
              $
              8,252,195
              
              $
              8,318,836
              
              $
              8,409,687
              
              $
              8,419,210Cash
                  and cash equivalents
              
              
              105,162
              
              
              206,175
              
              
              51,333
              
              
              58,566
              
              
              79,412Loans
                  receivable, net
              
              
              5,564,502
              
              
              5,522,825
              
              
              5,565,077
              
              
              5,464,130
              
              
              5,201,325Mortgage-related
                  securities
              
              
              1,788,858
              
              
              1,839,593
              
              
              1,967,564
              
              
              2,145,254
              
              
              2,369,765Investment
                  securities
              
              
              382,128
              
              
              380,518
              
              
              430,517
              
              
              430,499
              
              
              455,497Capital
                  stock of FHLB
              
              
              167,556
              
              
              187,115
              
              
              184,642
              
              
              182,259
              
              
              180,120Deposits
              
              
              3,895,869
              
              
              4,015,128
              
              
              3,937,237
              
              
              3,960,297
              
              
              3,991,180Advances
                  from FHLB
              
              
              3,207,865
              
              
              3,213,342
              
              
              3,385,502
              
              
              3,426,465
              
              
              3,441,265Other
                  Borrowings
              
              
              53,453
              
              
              53,438
              
              
              53,424
              
              
              53,410
              
              
              53,396Stockholders'
                  equity
              
              
              860,032
              
              
              861,813
              
              
              862,238
              
              
              865,063
              
              
              865,332Accumulated
                  other comprehensiveloss
              
              
              (4,359
              )
              
              (3,397
              )
              
              (3,470
              )
              
              (3,769
              )
              
              (2,426
              )Equity
                  to total assets at end of period
              
              
              10.60
              %
              
              10.44
              %
              
              10.36
              %
              
              10.29
              %
              
              10.28
              %Book
                  value per share
              
              $
              11.85
              
              $
              11.87
              
              $
              11.87
              
              $
              11.91
              
              $
              11.90Shares
                  outstanding
              
              
              72,565,520
              
              
              72,598,164
              
              
              72,653,502
              
              
              72,654,981
              
              
              72,691,466
 
 The
        following table presents rate information at the dates
        indicated.
  June
                  30,
              
              March
                  31,
              
              December
                  31,
              
              September
                  30,
              
              June
                  30,2006
              
              2006
              
              2005
              
              2005
              
              2005Average
                  Yield / Cost at End of Period:(annualized)Loans
                  receivable
              5.59
              %
              
              5.55
              %
              
              5.51
              %
              
              5.49
              %
              
              5.44
              %Mortgage-related
                  securities
              4.14
              
              
              4.01
              
              
              3.84
              
              
              3.71
              
              
              3.78Investment
                  securities
              4.35
              
              
              4.41
              
              
              4.54
              
              
              4.54
              
              
              4.59Deposits
              3.40
              
              
              3.07
              
              
              2.86
              
              
              2.67
              
              
              2.51FHLB
                  advances
              4.82
              
              
              4.70
              
              
              4.59
              
              
              4.42
              
              
              4.24Borrowings,
                  other
              7.84
              
              
              7.37
              
              
              6.92
              
              
              6.37
              
              
              5.91
 
  **Loans
        Receivable.** The loan
        portfolio increased from $5.46 billion at September 30, 2005 to $5.56 billion
        at
        June 30, 2006. The $100.4 million growth in the loan portfolio was a result
        of
        $595.5 million in originations, $244.0 million in mortgage loan purchases
        and a
        slow down in prepayment speeds during the nine months ended June 30, 2006.
        The
        slow down in prepayment speeds was a result of an increase in long-term rates,
        specifically the 10-year treasury rate, during fiscal year 2006. The increase
        in
        the portfolio due to originations and purchases was partially offset by $732.8
        million in principal repayments during the nine month period.
 
 Included
        in the loan portfolio at June 30, 2006 was $429.4 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. Of the interest-only loans purchased during fiscal years 2006
        and
        2005, 56% of the loans do not require principal payments for five years and
        the
        remaining 44% do not require principal payments for up 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
        are
        required. We attempt to mitigate the risk of interest-only loans by using
        prudent underwriting criteria. The interest-only loans we purchased have
        an
        average credit score of 735 and an average loan-to-value ratio of 80% or
        less at
        the time of purchase. As of June 30, 2006, we have not experienced performance
        problems with our interest-only loans.
  Purchased
        loans from nationwide lenders represented 20% of the loan portfolio at June
        30,
        2006 compared to 22% at September 30, 2005. As of June 30, 2006, the average
        balance of a purchased loan was approximately $340 thousand compared to the
        average balance of approximately $110 thousand for an originated loan.
        Purchasing mortgage loans rather than mortgage-related securities has resulted
        in more assets earning a higher rate with no anticipated material increase
        in
        credit risk exposure.Our
        purchased mortgage loans, as measured for interest rate
   19
  risk
        sensitivity, were less sensitive to changes in rates than the fixed-rate
        loans
        we originate as the majority of our purchased loans are adjustable-rate mortgage
        ("ARM") loans.  Our purchased loans are more sensitive to changes in
        rates than the mortgage-related and investment securities we would have
        purchased, which would have likely consisted of ARMs with reprice terms of
        less
        than 36 months and other short duration investments.
  Loans
        purchased from nationwide and correspondent lenders during the current nine
        month period totaled $244.0 million at a weighted average rate of 5.33% compared
        to $557.6 million at a weighted average rate of 5.00% during the same period
        one
        year ago. Of the loans purchased during the current nine month period and
        the
        same period one year ago, $179.3 million and $449.5 million, respectively,
        were
        adjustable-rate. The majority of purchased ARM loans have reprice terms of
        36
        months or greater. Generally, when acquired or originated, the initial rates
        on
        ARM loans are lower than the rates on fixed-rate loans. The underwriting
        standards of the lenders from whom the Bank purchases loans are substantially
        similar to the Bank’s internal underwriting standards. Lenders are required to
        fully document all data sources for each application. “No Doc” or “Stated
        Income, Stated Assets” loans are not permitted. We believe these requirements
        reduce the credit risk associated with the loans we purchase. Before committing
        to purchase a pool of loans, the Bank’s Chief Lending Officer or Secondary
        Marketing Manager reviews specific criteria such as loan amount, credit scores,
        loan-to-value 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 may 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
        loan underwriter reviews 25% of the loan files and the supporting documentation
        in the pool. If a loan does not meet the Bank’s underwriting standards for these
        loans, it is removed from the pool prior to funding.
  Total
        one- to four-family loan originations during the current nine month period
        were
        $471.9 million at an average rate of 5.85% compared to one- to four-family
        loan
        originations of $487.4 million at an average rate of 5.21% for the same period
        one year ago. Of the one- to four- family loans originated during the current
        nine month period and the same period one year ago, $359.0 million and $339.7
        million, respectively, were fixed-rate.
 
 In
        order
        to remain competitive in its market areas, the Bank currently originates
        ARM
        loans at introductory rates that are in effect until the first repricing
        date.
        The Bank qualifies borrowers based on this initial discounted rate for our
        three, five and seven year ARM loans. ARM loans can pose different credit
        risks
        than fixed-rate loans, primarily because as interest rates rise, the borrower’s
        monthly payment also rises, increasing the likelihood of default. This specific
        risk category is known as repricing risk. In the current economic environment,
        repricing risk is an especially valid concern because the Federal Reserve
        has
        indicated that inflationary concerns were a factor behind many recent rate
        increases. In order to forestall additional rate increases, the economy would
        need to show signs of weakness. An increasing rate environment is not a
        favorable scenario for borrowers with ARM loans. We believe that any repricing
        risk associated with our ARM loans is adequately assessed and addressed in
        the
        repricing risk component of our formula based loan valuation model.
 
 Generally,
        during the nine month period ended June 30, 2006, the Bank’s 30 year fixed-rate
        loans, with no points paid by the borrower, were priced at approximately
        160
        basis points above the average 10-year Treasury rate, while the Bank’s 15 year
        fixed-rate loans were priced approximately 120 basis points above the average
        10-year Treasury rate. The Bank’s loan pricing is comparable to the secondary
        mortgage market pricing.
   20
  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. Included in the three months ending March 31, 2006 and the
        nine
        months ending June 30, 2006 repayment amounts are $47.6 million of loans
        which
        were repurchased by a seller. These loans were purchased during fiscal year
        2005.
  For
                  the Three Months EndedJune
                  30, 2006
              
              March
                  31, 2006
              
              December
                  31, 2005
              
              September
                  30, 2005Amount
              
              Rate
              
              Amount
              
              Rate
              
              Amount
              
              Rate
              
              Amount
              
              RateLoans
                  receivable:
              
              (Dollars
                  in thousands)Beginning
                  balance
              
              $
              5,554,691
              
              
              5.45
              %
              $
              5,600,378
              
              
              5.41
              %
              $
              5,494,387
              
              
              5.39
              %
              $
              5,236,109
              
              
              5.38
              %Originations
                  and refinances
              
              
              249,077
              
              
              6.46
              
              
              150,741
              
              
              6.34
              
              
              195,665
              
              
              5.98
              
              
              264,867
              
              
              5.67Purchases
              
              
              40,115
              
              
              5.99
              
              
              53,917
              
              
              5.51
              
              
              149,992
              
              
              5.09
              
              
              299,648
              
              
              5.11Repayments
              
              
              (242,449
              )
              
              
              
              
              (249,837
              )
              
              
              
              
              (240,559
              )
              
              
              
              
              (307,092
              )Other
              
              
              (223
              )
              
              
              
              
              (508
              )
              
              
              
              
              893
              
              
              
              
              
              855Ending
                  balance
              
              $
              5,601,211
              
              
              5.51
              %
              $
              5,554,691
              
              
              5.45
              %
              $
              5,600,378
              
              
              5.41
              %
              $
              5,494,387
              
              
              5.39
              %For
                  the Nine Months EndedJune
                  30, 2006
              June
                  30, 2005Amount
              
              
              Rate
              
              
              Amount
              
              
              RateLoans
                  receivable:
              
              (Dollars
                  in thousands)Beginning
                  balance
              
              $
              5,494,387
              
              
              5.39
              %
              $
              4,794,442
              
              
              5.38
              %Originations
                  and refinances
              
              
              595,483
              
              
              6.27
              
              
              602,654
              
              
              5.43Purchases
              
              
              244,024
              
              
              5.33
              
              
              557,560
              
              
              5.00Repayments
              
              
              (732,845
              )
              
              
              
              
              (719,083
              )Other
              
              
              162
              
              
              
              
              
              536Ending
                  balance
              
              $
              5,601,211
              
              
              5.51
              %
              $
              5,236,109
              
              
              5.38
              %
 
   21
   The
        following table presents the Company’s loan portfolio at the dates indicated.
  June
                  30, 2006
              
              March
                  31, 2006
              
              September
                  30, 2005Amount
              
              Average
                  Rate
              
              %
                  of Total
              
              Amount
              
              Average
                  Rate
              
              %
                  of Total
              
              Amount
              
              Average
                  Rate
              
              %
                  of Total(Dollars
                  in thousands)Real
                  Estate Loans:One-
                  to four-family
              
              $
              5,280,768
              
              
              5.38
              %
              
              94.28
              %
              $
              5,244,704
              
              
              5.33
              %
              
              94.42
              %
              $
              5,189,006
              
              
              5.30
              %
              
              94.44
              %Multi-family
              
              
              48,789
              
              
              6.49
              
              
              0.87
              
              
              43,634
              
              
              6.47
              
              
              0.79
              
              
              40,636
              
              
              6.51
              
              
              0.74Commercial
              
              
              8,570
              
              
              6.36
              
              
              0.15
              
              
              8,423
              
              
              6.33
              
              
              0.15
              
              
              8,927
              
              
              6.42
              
              
              0.16Construction
                  and development
              
              
              44,458
              
              
              5.54
              
              
              0.80
              
              
              43,459
              
              
              5.39
              
              
              0.78
              
              
              45,312
              
              
              5.10
              
              
              0.82Total
                  real estate loans
              
              
              5,382,585
              
              
              5.39
              
              
              96.10
              
              
              5,340,220
              
              
              5.34
              
              
              96.14
              
              
              5,283,881
              
              
              5.31
              
              
              96.16Consumer
                  Loans:Savings
                  loans
              
              
              7,809
              
              
              5.77
              
              
              0.14
              
              
              7,879
              
              
              5.47
              
              
              0.14
              
              
              8,377
              
              
              5.08
              
              
              0.15Automobile
              
              
              3,385
              
              
              6.90
              
              
              0.06
              
              
              2,879
              
              
              6.97
              
              
              0.05
              
              
              2,555
              
              
              7.05
              
              
              0.05Home
                  equity
              
              
              204,381
              
              
              8.41
              
              
              3.65
              
              
              201,517
              
              
              8.24
              
              
              3.63
              
              
              197,626
              
              
              7.58
              
              
              3.60Other(1)
              
              
              3,051
              
              
              8.18
              
              
              0.05
              
              
              2,196
              
              
              8.24
              
              
              0.04
              
              
              1,948
              
              
              7.84
              
              
              0.04Total
                  consumer loans
              
              
              218,626
              
              
              8.29
              
              
              3.90
              
              
              214,471
              
              
              8.12
              
              
              3.86
              
              
              210,506
              
              
              7.48
              
              
              3.84Total
                  loans receivable
              
              
              5,601,211
              
              
              5.51
              %
              
              100.00
              %
              
              5,554,691
              
              
              5.45
              %
              
              100.00
              %
              
              5,494,387
              
              
              5.39
              %
              
              100.00
              %Less:Loans
                  in process
              
              
              20,445
              
              
              
              
              
              
              
              
              15,720
              
              
              
              
              
              
              
              
              14,803Deferred
                  fees and discounts
              
              
              11,615
              
              
              
              
              
              
              
              
              11,466
              
              
              
              
              
              
              
              
              10,856Allowance
                  for losses
              
              
              4,649
              
              
              
              
              
              
              
              
              4,680
              
              
              
              
              
              
              
              
              4,598Total
                  loans receivable, net
              
              $
              5,564,502
              
              
              
              
              
              
              
              $
              5,522,825
              
              
              
              
              
              
              
              $
              5,464,130Other
                  information:Loans
                  serviced for others
              
              $
              390,117
              
              
              
              
              
              
              
              $
              408,531
              
              
              
              
              
              
              
              $
              448,420
 
 (1) Included
        in this amount were non-real estate commercial loans totaling $63 thousand,
        $65
        thousand and $70 thousand at June 30, 2006, March 31, 2006 and September
        30,
        2005, respectively.
 
  22
  **Asset
        Quality**
  Non-performing
        loans consist primarily of loans 90 or more days delinquent and loans in
        the
        process of foreclosure. Non-performing loans increased $1.7 million during
        fiscal year 2006 to $6.9 million at June 30, 2006. The increase in
        non-performing loans increased our ratio of non-performing loans to total
        loans
        from 0.09% as of September 30, 2005 to 0.12% at June 30, 2006. The increase
        in
        non-performing loans was a result of the $1.2 million increase in one- to
        four-family loans classified as 90 or more days delinquent, and $456 thousand
        related to one- to four-family loans in foreclosure. Of the $6.9 million,
        $5.4
        million, or 78%, of non-performing loans are located in our market areas.
        At
        June 30, 2006, the value of the collateral underlying each of the non-performing
        loans exceeded the amount necessary to pay off the remaining loan balance.
 
 Loans
        30
        to 89 days delinquent, which are not included in non-performing loans, decreased
        approximately $3.3 million from $25.5 million at September 30, 2005 to $22.2
        million at June 30, 2006. Of the $22.2 million at June 30, 2006, $16.4 million,
        or 74% of 30-89 day delinquent loans represent loans located in our market
        areas.
 
 The
        risk
        that the balance of our non-performing and other delinquent loans may increase
        is primarily driven by the state of the local economies in which we lend.
        Since
        the loans we originate in our market areas are geographically concentrated,
        we
        attempt to mitigate the risks of this concentration by purchasing loans from
        outside our market areas. In most of our market areas, the economy has continued
        to be generally stable. Other risks to our loan portfolio remained largely
        unchanged from September 30, 2005, as property values have remained stable
        or
        increased.
 
 The
        following table presents the Company’s 30-89 day delinquent loans,
        non-performing loans, and real estate owned at the dates indicated. The ratios
        of non-performing loans to total loans and non-performing assets to total
        assets
        do not include loans that are 30-89 days delinquent. Non-performing assets
        include non-performing loans and real estate owned.
 June
                  30,
              
              March
                  31,
              
              December
                  31,
              
              September
                  30,2006
              
              2006
              
              2005
              
              2005Asset
                  quality information:
              
              (Dollars
                  in thousands)Loans
                  30-89 days delinquent
              
              $
              22,229
              
              $
              23,027
              
              $
              27,690
              
              $
              25,518Non-performing
                  loans
              
              
              6,854
              
              
              8,682
              
              
              9,558
              
              
              5,158Real
                  estate owned
              
              
              2,398
              
              
              1,932
              
              
              1,678
              
              
              1,653Asset
                  quality ratios:Non-performing
                  assets to total assets
              
              
              0.11
              %
              
              0.13
              %
              
              0.14
              %
              
              0.08
              %Non-performing
                  loans to total loans
              
              
              0.12
              %
              
              0.16
              %
              
              0.17
              %
              
              0.09
              %
 
 The
        allowance for loan losses as a percentage of non-performing loans was 67.83%
        at
        June 30, 2006, compared to 89.14% at September 30, 2005. The decrease in
        the
        ratio of allowance for loan losses to non-performing loans primarily resulted
        from an increase in non-performing loans. Charge-offs, net of recoveries,
        totaled $119 thousand for the current nine month period and represented 0.92%
        of
        average non-performing loans and less than 0.01% of the average outstanding
        balance of loans receivable.
  23
  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,
              
              June
                  30,2006
              
              2005
              
              2006
              
              2005Allowance
                  for loan losses:
              
              (Dollars
                  in thousands)Beginning
                  balance
              
              $
              4,680
              
              $
              4,454
              
              $
              4,598
              
              $
              4,495Losses
                  charged against the allowance:One-
                  to four-family loans
              
              
              56
              
              
              33
              
              
              89
              
              
              65Multi-family
                  loans
              
              
              --
              
              
              --
              
              
              --
              
              
              --Commercial
                  and other loans
              
              
              --
              
              
              --
              
              
              --
              
              
              --Consumer
                  loans
              
              
              15
              
              
              14
              
              
              31
              
              
              42Total
                  charge-offs
              
              
              71
              
              
              47
              
              
              120
              
              
              107Recoveries
              
              
              --
              
              
              6
              
              
              1
              
              
              25Provision
                  charged to expense
              
              
              40
              
              
              --
              
              
              170
              
              
              --Ending
                  balance
              
              $
              4,649
              
              $
              4,413
              
              $
              4,649
              
              $
              4,413Allowance
                  for loan losses to non-performing
                  loans
              
              
              
              
              
              
              
              
              67.83
              %
              
              101.05
              %Allowance
                  for loan losses to loansreceivable,
                  net
              
              
              
              
              
              
              
              
              0.08
              %
              
              0.08
              %
 
 
 
  24
  **Mortgage-Related
        Securities.** The
        balance of mortgage-related securities decreased $356.4 million from $2.15
        billion at September 30, 2005 to $1.79 billion at June 30, 2006. As previously
        stated, the Bank intends to purchase mortgage-related and investment securities
        as needed to manage interest rate risk according to limits set by the board
        of
        directors and to satisfy the collateral requirements of its interest-rate
        swap
        counterparties, public unit depositors, and brokered depositors. See additional
        discussion regarding the Bank’s interest rate risk position in “Quantitative and
        Qualitative Disclosure About Market Risk.”
 
 The
        following table provides a summary of the activity in our portfolio of
        mortgage-related securities 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 increase in the
        yield
        at June 30, 2006 compared to September 30, 2005 was primarily a result of
        existing adjustable-rate securities in the portfolio repricing upward. The
        beginning and ending WAL is the estimated remaining maturity of the underlying
        collateral after projected prepayment speeds have been applied. The increase
        in
        the WAL at June 30, 2006 can be attributed primarily to an increase in interest
        rates.
 For
                  the Three Months EndedJune
                  30, 2006
              
              March
                  31, 2006
              
              December
                  31, 2005
              
              September
                  30, 2005Amount
              
              Yield
              
              WAL
              
              Amount
              
              Yield
              
              WAL
              
              Amount
              
              Yield
              
              WAL
              
              Amount
              
              Yield
              
              WALMortgage-related
                  securities:
              
              (Dollars
                  in thousands)Beginning
                  balance
              
              $
              1,839,593
              
              
              4.01
              %
              
              3.30
              
              $
              1,967,564
              
              
              3.84
              %
              
              3.43
              
              $
              2,145,254
              
              
              3.71
              %
              
              3.38
              
              $
              2,369,765
              
              
              3.78
              %
              
              2.98Maturities
                  and repayments
              
              
              (135,663
              )
              
              
              
              
              
              
              
              (127,409
              )
              
              
              
              
              
              
              
              (175,734
              )
              
              
              
              
              
              
              
              (221,101
              )Net
                  amortization of premiums/discounts
              
              
              (1,709
              )
              
              
              
              
              
              
              
              (1,662
              )
              
              
              
              
              
              
              
              (2,439
              )
              
              
              
              
              
              
              
              (3,150
              )Purchases:Fixed
              
              
              10,092
              
              
              6.50
              
              
              1.65
              
              
              983
              
              
              5.65
              
              
              7.88
              
              
              --
              
              
              --
              
              
              --
              
              
              1,903
              
              
              5.28
              
              
              6.20Adjustable
              
              
              77,792
              
              
              5.98
              
              
              2.14
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Change
                  in valuation on AFS securities
              
              
              (1,247
              )
              
              
              
              
              
              
              
              117
              
              
              
              
              
              
              
              
              483
              
              
              
              
              
              
              
              
              (2,163
              )Ending
                  balance
              
              $
              1,788,858
              
              
              4.14
              %
              
              3.85
              
              $
              1,839,593
              
              
              4.01
              %
              
              3.30
              
              $
              1,967,564
              
              
              3.84
              %
              
              3.43
              
              $
              2,145,254
              
              
              3.71
              %
              
              3.38For
                  the Nine Months EndedJune
                  30, 2006
              June
                  30, 2005Amount
              
              
              Yield
              
              
              WAL
              
              
              Amount
              
              
              Yield
              
              
              WALMortgage-related
                  securities:
              
              (Dollars
                  in thousands)Beginning
                  balance
              
              $
              2,145,254
              
              
              3.71
              %
              
              3.38
              
              $
              2,648,708
              
              
              3.57
              %
              
              3.35Maturities
                  and repayments
              
              
              (438,806
              )
              
              
              
              
              
              
              
              (576,828
              )Net
                  amortization of premiums/discounts
              
              
              (5,810
              )
              
              
              
              
              
              
              
              (9,003
              )Purchases:Fixed
              
              
              11,075
              
              
              6.42
              
              
              2.18
              
              
              117,040
              
              
              4.52
              
              
              4.72Adjustable
              
              
              77,792
              
              
              5.98
              
              
              2.14
              
              
              190,563
              
              
              4.50
              
              
              9.82Change
                  in valuation on AFS securities
              
              
              (647
              )
              
              
              
              
              
              
              
              (715
              )Ending
                  balance
              
              $
              1,788,858
              
              
              4.14
              %
              
              3.85
              
              $
              2,369,765
              
              
              3.78
              %
              
              2.98
 
  25
  **Investment
        securities** .
        Investment securities, which consist of agency bonds (primarily issued by
        Fannie
        Mae and Freddie Mac), decreased from $430.5 million at September 30, 2005
        to
        $382.1 million at June 30, 2006. The following table provides 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, 2006 compared to September 30, 2005 was a result of
        securities maturing with yields greater than the portfolio, partially offset
        by
        $142.4 million of security purchases with yields greater than the overall
        portfolio yield but less than the yield of the maturing securities. The maturing
        securities were purchased in May 2001 and had a weighted average yield of
        approximately 5.50% at maturity. The beginning and ending WAL represent the
        estimated remaining maturity of the underlying collateral after projected
        call
        dates have been considered, based upon market rates at each date presented.
        The
        increase in the WAL at June 30, 2006 compared to September 30, 2005 was due
        to
        maturities that occurred during the current quarter and the purchase of new
        securities.
 
 For
                  the Three Months EndedJune
                  30, 2006
              
              March
                  31, 2006
              
              December
                  31, 2005
              
              September
                  30, 2005Amount
              
              Yield
              
              WAL
              
              Amount
              
              Yield
              
              WAL
              
              Amount
              
              Yield
              
              WAL
              
              Amount
              
              Yield
              
              WALInvestment
                  securities:
              
              (Dollars
                  in thousands)Beginning
                  balance
              
              $
              380,518
              
              
              4.41
              %
              
              2.84
              
              $
              430,517
              
              
              4.54
              %
              
              2.73
              
              $
              430,499
              
              
              4.54
              %
              
              2.48
              
              $
              455,497
              
              
              4.59
              %
              
              1.63Maturities
                  and calls
              
              
              (140,510
              )
              
              
              
              
              
              
              
              (50,000
              )
              
              
              
              
              
              
              
              --
              
              
              
              
              
              
              
              
              (25,000
              )Net
                  amortization of premiums/discounts
              
              
              10
              
              
              
              
              
              
              
              
              1
              
              
              
              
              
              
              
              
              18
              
              
              
              
              
              
              
              
              2Purchases
                  - Fixed
              
              
              142,413
              
              
              5.32
              
              
              1.27
              
              
              --
              
              
              
              
              
              
              
              
              --
              
              
              
              
              
              
              
              
              --Change
                  in valuation on AFS securities
              
              
              (303
              )
              
              
              
              
              
              
              
              --
              
              
              
              
              
              
              
              
              --
              
              
              
              
              
              
              
              
              --Ending
                  balance
              
              $
              382,128
              
              
              4.35
              %
              
              3.09
              
              $
              380,518
              
              
              4.41
              %
              
              2.84
              
              $
              430,517
              
              
              4.54
              %
              
              2.73
              
              $
              430,499
              
              
              4.54
              %
              
              2.48For
                  the Nine Months EndedJune
                  30, 2006
              June
                  30, 2005Amount
              
              
              Yield
              
              
              WAL
              
              
              Amount
              
              
              Yield
              
              
              WALInvestment
                  securities:
              
              (Dollars
                  in thousands)Beginning
                  balance
              
              $
              430,499
              
              
              4.54
              %
              
              2.48
              
              $
              638,079
              
              
              4.89
              %
              
              1.73Maturities
                  and calls
              
              
              (190,510
              )
              
              
              
              
              
              
              
              (182,000
              )Net
                  amortization of premiums/discounts
              
              
              29
              
              
              
              
              
              
              
              
              (582
              )Purchases
                  - Fixed
              
              
              142,413
              
              
              5.32
              
              
              1.27
              
              
              --Change
                  in valuation on AFS securities
              
              
              (303
              )
              
              
              
              
              
              
              
              --Ending
                  balance
              
              $
              382,128
              
              
              4.35
              %
              
              3.09
              
              $
              455,497
              
              
              4.59
              %
              
              1.63
 
 
 
 
  26
   **Liabilities.** Liabilities decreased $287.5 million from $7.54 billion at September 30,
        2005 to
        $7.26 billion at June 30, 2006. The decrease was primarily a result of the
        repayment of $200.0 million in FHLB advances and a decrease of $64.4 million
        in
        deposits, primarily the certificate of deposit and money market
        portfolios.
 
 During
        fiscal year 2006, the Bank paid down $200.0 million of maturing FHLB advances
        rather than entering into new advances as the interest rate on the Bank’s
        short-term investment opportunities for those funds were less than or equal
        to
        what the rate would have been on the new advances as a result of the current
        inverted-to-flat yield curve. Management will continue to monitor the Bank’s
        investment opportunities and balance those opportunities with the cost of
        FHLB
        advances or other funding sources.
 
 The
        $64.4
        million decrease in the deposit portfolio was primarily a result of a $39.6
        million decrease in the certificate of deposit portfolio and a $39.1 million
        decrease in the money market portfolio, offset by a $22.4 million increase
        in
        checking accounts. As previously discussed, the Bank has experienced aggressive
        deposit pricing by other financial institutions in its local markets.
 
 At
        June
        30, 2006, $199.6 million of our $2.53 billion in certificates were brokered
        and
        public unit deposits, compared to $207.8 million and $285.7 million in brokered
        and public unit deposits at September 30, 2005 and March 31, 2006, respectively.
        The $86.1 million decrease between March 31, 2006 and June 30, 2006 is primarily
        attributed to the maturity of brokered and public unit deposits that were
        not
        retained because the Bank did not price at the top market rate for public
        units
        and is not currently in the brokered deposit market. Management will continue
        to
        monitor the wholesale deposit market for attractive opportunities that will
        allow the Bank to grow in a sound and profitable manner.
 
 At
              
              At
              
              At
              
              AtJune
                  30, 2006
              
              March
                  31, 2006
              
              December
                  31, 2005
              
              September
                  30, 2005Average
              
              %
                  of
              
              
              
              Average
              
              %
                  of
              
              
              
              Average
              
              %
                  of
              
              
              
              Average
              
              %
                  ofAmount
              
              Cost
              
              Total
              
              Amount
              
              Cost
              
              Total
              
              Amount
              
              Cost
              
              Total
              
              Amount
              
              Cost
              
              Total(Dollars
                  in thousands)Checking
              
              $
              420,933
              
              
              0.21
              %
              
              10.80%
              
              $
              433,913
              
              
              0.21
              %
              
              10.81%
              
              $
              423,148
              
              
              0.21
              %
              
              10.75%
              
              $
              398,490
              
              
              0.21
              %
              
              10.06
              %Passbook
                  & passcard
              
              
              113,018
              
              
              0.65
              
              
              2.90
              
              
              118,582
              
              
              0.65
              
              
              2.95
              
              
              115,075
              
              
              0.65
              
              
              2.92
              
              
              121,133
              
              
              0.65
              
              
              3.06Money
                  market
              
              
              834,419
              
              
              3.15
              
              
              21.42
              
              
              854,350
              
              
              2.53
              
              
              21.28
              
              
              869,398
              
              
              2.32
              
              
              22.08
              
              
              873,570
              
              
              2.06
              
              
              22.06Certificates
              
              
              2,527,499
              
              
              4.14
              
              
              64.88
              
              
              2,608,283
              
              
              3.83
              
              
              64.96
              
              
              2,529,616
              
              
              3.59
              
              
              64.25
              
              
              2,567,104
              
              
              3.35
              
              
              64.82Total
                  deposits
              
              $
              3,895,869
              
              
              3.40
              %
              
              100.00%
              
              $
              4,015,128
              
              
              3.07
              %
              
              100.00%
              
              $
              3,937,237
              
              
              2.86
              %
              
              100.00%
              
              $
              3,960,297
              
              
              2.67
              %
              
              100.00
              %
 
 
  
   27
   **Stockholders’
        Equity.** Total
        stockholders’ equity decreased $5.1 million from $865.1 million at September 30,
        2005 to $860.0 million at June 30, 2006. As previously discussed, the decrease
        was primarily a result of $36.7 million in dividend payments and partially
        a
        result of a $12.8 million increase in treasury stock due primarily to treasury
        stock purchases. These decreases in stockholders’ equity were partially offset
        by $38.2 million in net income and a $5.8 million increase in additional
        paid-in
        capital primarily due to mark-to-market adjustments as shares were allocated
        to
        the ESOP and stock-based compensation items.
 
 It
        is
        management’s intent to repurchase more of the Company’s stock during fiscal year
        2006 than in fiscal year 2005 subject, however, to a number of factors including
        market conditions, the Company’s financial condition and results of operations,
        the local economy and regulatory requirements. The Company repurchased 433,975
        shares at an average price of $32.66 during the nine months ended June 30,
        2006,
        compared to 61,500 shares repurchased at an average price of $34.10 during
        the
        same period one year ago. Excluded from the share repurchase numbers are
        shares
        that were received in exchange for the exercise of options, which totaled
        21,883
        and 76,337 for the nine months ended June 30, 2006 and 2005, respectively.
        During the quarter, the board of directors approved a new stock repurchase
        program. Under the new plan, the Company intends to repurchase up to 500,000
        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. The new plan has no expiration
        date
        and will commence at the end of the current program, which had approximately
        52,500 shares remaining as of June 30, 2006. See additional discussion in
“Item
        2 - Unregistered Sales of Equity Securities and Use of Proceeds.”
 
 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, 2006. The unvested shares in the ESOP receive cash equal to the
        dividends paid on the public shares. The cash received is used first 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. Cash received in excess of the debt obligation is distributed to
        participants in the plan. Because these shares are held in trust for a future
        employee benefit, they are excluded from the calculation of public
        shares.
  
  Total
                  voting shares outstanding at September 30, 2005
              
              
              74,286,889Treasury
                  stock acquisitions
              
              
              (455,858
              )RRP
                  grants, net
              
              
              22,500Options
                  exercised, net
              
              
              206,267Total
                  voting shares outstanding at June 30, 2006
              
              
              74,059,798Unvested
                  shares in ESOP
              
              
              (1,613,108
              )Shares
                  held by MHC
              
              
              (52,192,817
              )Total
                  shares eligible to receive dividends at June 30, 2006 (public
                  shares)
              
              
              20,253,873
 
   28
  The
        following table presents quarterly dividends paid in calendar years 2006,
        2005
        and 2004. The amount represents dividends paid during the quarter, based
        on
        earnings from the previous quarter. The actual amount of the dividend to
        be paid
        during the quarter ending September 30, 2006, as declared on July 25, 2006,
        will
        be based upon the number of shares outstanding on the record date of August
        4,
        2006. All shares outstanding presented in the table below, except for the
        quarter ending September 30, 2006, are as of the date of record per the dividend
        declaration. The number of dividend shares for the quarter ending September
        30,
        2006 is based upon shares outstanding on July 28, 2006. 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
        28, 2006.
  
 Calendar
                  Year2006
              
              2005
              
              2004(Dollars
                  in thousands, except per share amounts)Quarter
                  ended March 31Number
                  of dividend shares
              
              
              20,457,283
              
              
              20,634,728
              
              
              19,220,972Dividend
                  per share
              
              $
              0.50
              
              $
              0.50
              
              $
              0.50Total
                  dividends paid
              
              $
              10,229
              
              $
              10,317
              
              $
              9,610Quarter
                  ended June 30Number
                  of dividend shares
              
              
              20,257,420
              
              
              20,393,519
              
              
              19,633,381Dividend
                  per share
              
              $
              0.50
              
              $
              0.50
              
              $
              0.50Total
                  dividends paid
              
              $
              10,129
              
              $
              10,197
              
              $
              9,817Quarter
                  ended September 30Number
                  of dividend shares
              
              
              20,250,134
              
              
              20,363,619
              
              
              19,777,200Dividend
                  per share
              
              $
              0.50
              
              $
              0.50
              
              $
              0.50Total
                  dividends paid
              
              $
              10,125
              
              $
              10,182
              
              $
              9,889Quarter
                  ended December 31Number
                  of dividend shares
              
              
              
              
              
              20,483,464
              
              
              20,051,788Dividend
                  per share
              
              
              
              
              $
              0.50
              
              $
              0.50Total
                  dividends paid
              
              
              
              
              $
              10,242
              
              $
              10,026Special
                  year end dividendNumber
                  of dividend shares
              
              
              
              
              
              20,483,464Dividend
                  per share
              
              
              
              
              $
              0.30
              
              $
              --Total
                  dividends paid
              
              
              
              
              $
              6,145
              
              $
              --Calendar
                  year-to-date dividends per share
              
              $
              1.50
              
              $
              2.30
              
              $
              2.00
 
 
  29
   **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
        mortgage-backed securities, and interest paid on interest-bearing liabilities,
        such as deposits and FHLB advances. Net interest income depends on the volume
        of
        interest-earning assets and interest-bearing liabilities, and the interest
        rates
        earned or paid on them.
 
 **Average
        Balance Sheet.** 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. Average yields are derived by dividing annualized income by the
        average balance of the related assets and average costs are derived by dividing
        recorded expense by the average balance of the related liabilities, for the
        periods shown. Average balances are derived from average daily balances.
        The
        yields and costs include amortization of fees, costs, premiums and discounts
        which are considered adjustments to interest rates.
 
 
 
  For
                  the Three Months EndedJune
                  30, 2006
              
              March
                  31, 2006
              
              December
                  31, 2005
              
              September
                  30, 2005
              
              June
                  30, 2005Average
              
              
              
              Average
              
              
              
              Average
              
              
              
              Average
              
              
              
              AverageOutstanding
              
              Yield/
              
              Outstanding
              
              Yield/
              
              Outstanding
              
              Yield/
              
              Outstanding
              
              Yield/
              
              Outstanding
              
              Yield/Balance
              
              Rate
              
              Balance
              
              Rate
              
              Balance
              
              Rate
              
              Balance
              
              Rate
              
              Balance
              
              RateAssets:
              
              (Dollars
                  in thousands)Interest-earning
                  assets:Loans
                  receivable(1)
              
              $
              5,541,566
              
              
              5.50
              %
              $
              5,538,579
              
              
              5.46
              %
              $
              5,544,057
              
              
              5.42
              %
              $
              5,315,738
              
              
              5.40
              %
              $
              5,092,962
              
              
              5.45
              %Mortgage-related
                  securities
              
              
              1,801,196
              
              
              4.04
              
              
              1,914,287
              
              
              3.96
              
              
              2,067,450
              
              
              3.74
              
              
              2,276,926
              
              
              3.59
              
              
              2,470,965
              
              
              3.67Investment
                  securities
              
              
              372,980
              
              
              4.47
              
              
              397,463
              
              
              4.45
              
              
              430,505
              
              
              4.55
              
              
              434,297
              
              
              4.56
              
              
              496,781
              
              
              4.66Cash
                  and cash equivalents
              
              
              122,098
              
              
              4.85
              
              
              57,048
              
              
              4.30
              
              
              8,658
              
              
              3.62
              
              
              56,697
              
              
              3.29
              
              
              34,069
              
              
              2.79Capital
                  stock of FHLB
              
              
              165,584
              
              
              6.02
              
              
              184,670
              
              
              5.43
              
              
              182,262
              
              
              5.19
              
              
              180,143
              
              
              4.71
              
              
              177,934
              
              
              4.98Total
                  interest-earning assets(1)
              
              
              8,003,424
              
              
              5.12
              
              
              8,092,047
              
              
              5.05
              
              
              8,232,932
              
              
              4.95
              
              
              8,263,801
              
              
              4.83
              
              
              8,272,711
              
              
              4.85Other
                  noninterest-earning assets
              
              
              176,790
              
              
              
              
              
              152,641
              
              
              
              
              
              142,423
              
              
              
              
              
              155,077
              
              
              
              
              
              182,027Total
                  assets
              
              $
              8,180,214
              
              
              
              
              $
              8,244,688
              
              
              
              
              $
              8,375,355
              
              
              
              
              $
              8,418,878
              
              
              
              
              $
              8,454,738Liabilities
                  and stockholders' equity:Interest-bearing
                  liabilities:Deposits
              
              $
              3,916,142
              
              
              3.24
              
              $
              3,953,841
              
              
              2.97
              
              $
              3,898,896
              
              
              2.77
              
              $
              3,968,963
              
              
              2.60
              
              $
              3,993,758
              
              
              2.44FHLB
                  advances(2)
              
              
              3,211,783
              
              
              4.79
              
              
              3,268,757
              
              
              4.68
              
              
              3,441,450
              
              
              4.53
              
              
              3,436,204
              
              
              4.37
              
              
              3,441,390
              
              
              4.22Borrowings,
                  other
              
              
              53,443
              
              
              7.92
              
              
              53,193
              
              
              7.47
              
              
              53,415
              
              
              6.99
              
              
              53,401
              
              
              6.45
              
              
              53,386
              
              
              5.99Total
                  interest-bearing liabilities
              
              
              7,181,368
              
              
              3.97
              
              
              7,275,791
              
              
              3.77
              
              
              7,393,761
              
              
              3.62
              
              
              7,458,568
              
              
              3.44
              
              
              7,488,534
              
              
              3.28Other
                  noninterest-bearing liabilities
              
              
              138,571
              
              
              
              
              
              105,852
              
              
              
              
              
              116,026
              
              
              
              
              
              95,046
              
              
              
              
              
              104,833Stockholders'
                  equity
              
              
              860,275
              
              
              
              
              
              863,045
              
              
              
              
              
              865,568
              
              
              
              
              
              865,264
              
              
              
              
              
              861,371Total
                  liabilities andstockholders'
                  equity
              
              $
              8,180,214
              
              
              
              
              $
              8,244,688
              
              
              
              
              $
              8,375,355
              
              
              
              
              $
              8,418,878
              
              
              
              
              $
              8,454,738
  (Continued)
 30
  
 Net
                  interest rate spread
              
              
              
              
              
              1.15
              %
              
              
              
              
              1.28
              %
              
              
              
              
              1.33
              %
              
              
              
              
              1.39
              %
              
              
              
              
              1.57
              %Net
                  interest-earning assets
              
              $
              822,056
              
              
              
              
              $
              816,256
              
              
              
              
              $
              839,171
              
              
              
              
              $
              805,233
              
              
              
              
              $
              784,177Net
                  interest margin
              
              
              
              
              
              1.54
              %
              
              
              
              
              1.67
              %
              
              
              
              
              1.64
              %
              
              
              
              
              1.68
              %
              
              
              
              
              1.87
              %Ratio
                  of interest-earning assetsto
                  interest-bearing liabilities
              
              
              
              
              
              1.11
              
              
              
              
              
              1.11
              
              
              
              
              
              1.11
              
              
              
              
              
              1.11
              
              
              
              
              
              1.10Selected
                  performance ratios:Return
                  on average assets (annualized)
              
              
              
              
              
              0.55
              %
              
              
              
              
              0.66
              %
              
              
              
              
              0.64
              %
              
              
              
              
              0.61
              %
              
              
              
              
              0.76
              %Return
                  on average equity (annualized)
              
              
              
              
              
              5.26
              %
              
              
              
              
              6.30
              %
              
              
              
              
              6.15
              %
              
              
              
              
              5.94
              %
              
              
              
              
              7.50
              %Average
                  equity to average assets
              
              
              
              
              
              10.52
              %
              
              
              
              
              10.47
              %
              
              
              
              
              10.33
              %
              
              
              
              
              10.28
              %
              
              
              
              
              10.19
              %
 
 (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) Includes
        an increase in net interest expense of $2.6 million, $1.7 million and $814
        thousand as a result of interest rate swaps for the three months ended June
        30,
        2006, March 31, 2006 and December 31, 2005, respectively. Includes a decrease
        in
        net interest expense of $338 thousand and $1.3 million as a result of interest
        rate swaps for the three months ended September 30, 2005 and June 30, 2005,
        respectively.
  
  (Concluded)
   31
   
 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
                  30,2006
              
              2006
              
              2005
              
              2005
              
              2005Selected
                  income statement data:
              
              (Dollars
                  in thousands, except per share amounts)Interest
                  and dividend income:Loans
                  receivable
              
              $
              76,123
              
              $
              75,505
              
              $
              75,160
              
              $
              71,785
              
              $
              69,436Mortgage-related
                  securities
              
              
              18,175
              
              
              18,950
              
              
              19,344
              
              
              20,462
              
              
              22,656Investment
                  securities
              
              
              4,170
              
              
              4,425
              
              
              4,894
              
              
              4,947
              
              
              5,784Other
                  interest anddividend
                  income
              
              
              3,959
              
              
              3,078
              
              
              2,462
              
              
              2,610
              
              
              2,447Total
                  interest and dividend income
              
              
              102,427
              
              
              101,958
              
              
              101,860
              
              
              99,804
              
              
              100,323Interest
                  expense:Deposits
              
              
              31,588
              
              
              28,974
              
              
              27,245
              
              
              26,016
              
              
              24,267FHLB
                  advances
              
              
              39,005
              
              
              38,176
              
              
              39,804
              
              
              38,197
              
              
              36,496Other
                  borrowings
              
              
              1,070
              
              
              993
              
              
              955
              
              
              880
              
              
              808Total
                  interest expense
              
              
              71,663
              
              
              68,143
              
              
              68,004
              
              
              65,093
              
              
              61,571Provision
                  (recovery) for loan losses
              
              
              40
              
              
              (138
              )
              
              268
              
              
              215
              
              
              --Net
                  interest and dividend income(after
                  provision (recovery) forloan
                  losses)
              
              
              30,724
              
              
              33,953
              
              
              33,588
              
              
              34,496
              
              
              38,752Other
                  income
              
              
              6,069
              
              
              6,022
              
              
              5,850
              
              
              5,939
              
              
              6,076Other
                  expenses
              
              
              18,174
              
              
              17,943
              
              
              17,600
              
              
              19,281
              
              
              18,770Income
                  tax expense
              
              
              7,313
              
              
              8,445
              
              
              8,525
              
              
              8,310
              
              
              9,898Net
                  income
              
              $
              11,306
              
              $
              13,587
              
              $
              13,313
              
              $
              12,844
              
              $
              16,160Basic
                  earnings per share
              
              $
              0.16
              
              $
              0.19
              
              $
              0.18
              
              $
              0.18
              
              $
              0.22Diluted
                  earnings per share
              
              $
              0.15
              
              $
              0.19
              
              $
              0.18
              
              $
              0.18
              
              $
              0.22Dividends
                  declared per share
              
              $
              0.50
              
              $
              0.50
              
              $
              0.80
              
              $
              0.50
              
              $
              0.50
 
 
   32
  **Comparison
        of Operating Results for the Three Months Ended June 30, 2006 and
        2005**
  For
        the
        three months ended June 30, 2006, the Company recognized net income of $11.3
        million, compared to net income of $16.2 million for the same quarter one
        year
        ago. The $4.9 million decrease in net income was primarily a result of a
        $10.1
        million increase in interest expense. This increase in interest expense was
        mainly attributable to higher rates on the certificate of deposit portfolio
        and
        interest rate swaps which are both generally priced based upon short-term
        interest rates (two year and shorter maturities). The increase in interest
        expense was partially offset by a $2.6 million decrease in income tax expense
        due to a reduction in earnings between the two periods and a $2.1 million
        increase in interest and dividend income.
 
 Total
        interest and dividend income for the quarter was $102.4 million compared
        to
        $100.3 million for the prior year quarter. The $2.1 million increase was
        primarily a result of an increase in interest income on loans receivable
        due to
        growth in the loan portfolio, which was partially offset by a decrease in
        interest income on mortgage-related and investment securities.
 
 Interest
        income on loans receivable for the quarter was $76.1 million compared to
        $69.4
        million for the prior year quarter. The $6.7 million increase in interest
        income
        was primarily a result of a $448.6 million increase in the average balance
        of
        the loan portfolio between the two periods due to the origination and purchase
        of mortgage loans and a slowdown in prepayment speeds. In addition, there
        was a
        5 basis point increase in the weighted average yield of the loan portfolio
        to
        5.50% for the current quarter. The increase in the weighted average yield
        can be
        attributed to loans originated at rates higher than the portfolio rate, an
        increase in the weighted average rate of the consumer loan portfolio, and
        ARM
        loans repricing to higher rates.
 
 Interest
        income on mortgage-related securities for the quarter was $18.2 million compared
        to $22.7 million for the prior year quarter. The $4.5 million decrease in
        interest income was a result of a $669.8 million decrease in the average
        balance
        of the mortgage-related securities portfolio between the two periods. The
        decrease in the average balance was a result of management’s emphasis on
        purchasing mortgage loans with excess funds and repayments of mortgage-related
        securities rather than purchasing mortgage-related securities as, generally,
        the
        rates on purchased mortgage loans were more favorable than the rates on
        mortgage-related securities at the time of investment. The decrease in the
        average balance was partially offset by a 37 basis point increase in the
        portfolio weighted average yield to 4.04% for the current quarter. The increase
        in the weighted average yield was primarily a result of adjustable-rate
        securities in the portfolio repricing to higher rates.
 
 Interest
        income on investment securities for the quarter was $4.2 million compared
        to
        $5.8 million for the prior year quarter. The $1.6 million decrease in interest
        income was primarily a result of a $123.8 million decrease in the average
        balance of the portfolio and, to a lesser extent, a 19 basis point decrease
        in
        the weighted average portfolio yield to 4.47% for the current quarter. The
        decrease in the average balance was a result of called or maturing securities
        that were not replaced in their entirety during fiscal years 2005 and 2006.
        The
        decrease in the weighted average yield of the portfolio was attributed to
        called
        and maturing securities during fiscal years 2005 and 2006 with weighted average
        yields greater than that of the remaining portfolio.
 
 Interest
        expense on deposits for the current quarter was $31.6 million compared to
        $24.3
        million for the prior year quarter. The $7.3 million increase in interest
        expense was primarily a result of an increase in the average rate on the
        money
        market and certificate of deposit portfolios. The weighted average rate of
        the
        money market portfolio for the current quarter was 2.81% compared to 1.87%
        for
        the prior year quarter. The weighted average rate of the certificate of deposit
        portfolio for the current quarter was 3.98% compared to 3.08% for the prior
        year
        quarter. The Bank increased retail deposit rates in response to the general
        trend of all rates increasing to remain competitive in its markets, which
        resulted in an increase in the weighted average rate of the certificate of
        deposit and money market portfolios.
 
 Interest
        expense on FHLB advances for the current quarter was $39.0 million compared
        to
        $36.5 million for the prior year quarter. The $2.5 million increase in interest
        expense was a result of an increase in the paying rate on the interest rate
        swaps, partially offset by a decrease in the average balance of advances
        as a
        result of the repayment of $200.0 million in advances during fiscal year
        2006.
        The weighted average paying rate on the variable-rate interest rate swaps
        was
        7.46% for the current quarter compared to 5.50% for the prior year quarter.
        The
        196 basis point increase was due to the increase in the one month LIBOR rate
        between the two periods. Currently, the Bank is in a net paying position
        on the
        interest rate swaps. If the one month LIBOR rate remains higher than 3.68%
        (weighted average break even LIBOR rate), then the Bank will continue to
        be in a
        paying position on the interest rate swaps. The interest rate swap agreements
        are summarized by maturity date under “Item 3 - Quantitative and Qualitative
        Disclosure About Market Risk.”
  33
  
 Total
        other income for the current quarter remained relatively unchanged at $6.1
        million compared to the prior year quarter, also at $6.1 million. Total other
        expenses for the current quarter were also relatively flat compared to the
        prior
        year quarter, at $18.2 million and $18.8 million, respectively. The decrease
        in
        other expenses was primarily due to a decrease in regulatory and outside
        services expense and partially to a decrease in marketing expense. The decrease
        in regulatory and outside services expense was primarily a result of a reduction
        in consulting and audit fees associated with Section 404 of the Sarbanes-Oxley
        Act of 2002 (“SOX 404”) compliance due to higher expenses associated with the
        first year of compliance during the prior year quarter.
 
 Income
        tax expense for the current quarter was $7.3 million compared to $9.9 million
        in
        the prior year quarter. The decrease in income tax expense was a direct result
        of a decrease in earnings compared to the prior year quarter.
  The
        effective tax rate for the current quarter was 39.3%, compared to 38.0% for
        the
        prior year quarter. The increase in the effective tax rate was primarily
        a
        result of a change in the Company’s estimate of the impact of tax benefits
        associated with the ESOP.
 
 The
        Company’s efficiency ratio for the current quarter was 49.41% compared to 41.99%
        for the prior year quarter. The increase in the efficiency ratio was largely
        due
        to the decrease in net interest income. The efficiency ratio measures a
        financial institution’s total other expenses as a percent of its net interest
        margin and other income. A lower value indicates that a financial institution
        is
        generating revenue with a lower level of expense. Another measure of a financial
        institution’s ability to operate efficiently is the ratio of other expenses to
        total average assets, the “operating expense ratio”. The Company’s operating
        expense ratio for the current quarter was 0.89%, which is unchanged from
        the
        prior year quarter.
  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, 2006 to the quarter ended
        June
        30, 2005. 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 30,2006
                  vs. 2005Increase
                  (Decrease) Due toVolume
              
              Rate
              
              Total(Dollars
                  in thousands)Interest-earning
                  assets:Loans
                  receivable, net
              
              $
              6,109
              
              $
              578
              
              $
              6,687Mortgage-related
                  securities
              
              
              (7,121
              )
              
              2,640
              
              
              (4,481
              )Investment
                  securities
              
              
              (1,392
              )
              
              (222
              )
              
              (1,614
              )Capital
                  stock of FHLB
              
              
              (137
              )
              
              410
              
              
              273Cash
                  equivalents
              
              
              963
              
              
              276
              
              
              1,239Total
                  interest-earning assets
              
              $
              (1,578
              )
              $
              3,682
              
              $
              2,104Interest-bearing
                  liabilities:Passbook
                  and passcard
              
              $
              (18
              )
              $
              --
              
              $
              (18
              )Checking
                  and money market
              
              
              (236
              )
              
              1,820
              
              
              1,584Certificates
              
              
              59
              
              
              5,696
              
              
              5,755FHLB
                  advances and other borrowings
              
              
              (2,259
              )
              
              5,030
              
              
              2,771Total
                  interest-bearing liabilities
              
              $
              (2,454
              )
              $
              12,546
              
              $
              10,092Net
                  change in net interest and dividend income
              
              $
              876
              
              $
              (8,864
              )
              $
              (7,988
              )
 
  34
  **Comparison
        of Operating Results for the Three Months Ended June 30, 2006 and March 31,
        2006**
 
 For
        the
        quarter ended June 30, 2006, the Company recognized net income of $11.3 million,
        compared to net income of $13.6 million for the quarter ended March 31, 2006.
        The $2.3 million decrease in net income was primarily a result of an increase
        of
        $3.5 million in interest expense, partially offset by a decrease in income
        tax
        expense of $1.1 million and an increase in total interest and dividend income
        of
        $469 thousand.
 
 Total
        interest and dividend income increased $469 thousand from $102.0 million
        for the
        quarter ended March 31, 2006 to $102.4 million for the current quarter. The
        increase was a result of an increase in interest income on loans receivable
        and
        cash and cash equivalents.
 
 Interest
        income on loans receivable for the current quarter was $76.1 million compared
        to
        $75.5 million for the quarter ended March 31, 2006. The $618 thousand increase
        in interest income was a result of a 4 basis point increase in the average
        yield
        of loans receivable to 5.50%, and a slight increase in the average balance
        of
        the portfolio. The increase in the average yield can be attributed primarily
        to
        fixed-rate mortgage loans being originated at rates higher than the loan
        portfolio rate and to ARM loans repricing.
 
 Interest
        income on mortgage-related securities for the current quarter was $18.2 million
        compared to $19.0 million for the quarter ended March 31, 2006. The $775
        thousand decrease in interest income was a result of a $113.1 million decrease
        in the average balance which was partially offset by an increase in the average
        rate. The average balance decreased as a result of maturities and repayments,
        partially offset by purchases during the quarter. The weighted average rate
        increased 8 basis points to 4.04% for the current quarter, primarily due
        to
        adjustable-rate securities in the portfolio repricing to a higher
        rate.
 
 Interest
        income on investment securities for the current quarter was $4.2 million
        compared to $4.4 million for the quarter ended March 31, 2006. The $255 thousand
        decrease in interest income was a result of a decrease of $24.5 million in
        the
        average balance for the quarter. The average balance decreased due to the
        timing
        of maturities and purchases made during the current quarter.
 
 Interest
        income on cash and cash equivalents for the current quarter was $1.5 million
        compared to $605 thousand for the quarter ended March 31, 2006. The $871
        thousand increase in interest income was primarily a result of a higher average
        balance for the quarter, earning a higher average yield. The average balance
        for
        the current quarter was $122.1 million, earning an average yield of 4.85%,
        compared to an average balance of $57.0 million during the quarter ending
        March
        31, 2006, earning an average yield of 4.30%. During the quarter ended March
        31,
        2006, the Bank paid off a $100.0 million maturing FHLB advance and also paid
        down the FHLB line-of-credit, which resulted in a lower average balance than
        the
        current quarter. The average yield in the current quarter was higher than
        the
        quarter ended March 31, 2006 due to an increase in short-term interest
        rates.
 
 Interest
        expense increased to $71.7 million for the current quarter from $68.1 million
        for the quarter ended March 31, 2006. Interest expense on deposits for the
        current quarter was $31.6 million compared to $29.0 million for the quarter
        ended March 31, 2006. The $2.6 million increase in interest expense on deposits
        was primarily a result of an increase in the average rate on the money market
        and certificate of deposit portfolios. As previously discussed, the Bank
        has
        raised certain retail interest rates to remain competitive in our markets.
 
 Interest
        expense on FHLB advances for the current quarter was $39.0 million compared
        to
        $38.2 million for the quarter ended March 31, 2006. The $829 thousand increase
        in interest expense on advances was primarily a result of an increase in
        the
        paying rate on the interest rate swaps. The weighted average paying rate
        on the
        variable-rate interest rate swaps was 7.46% for the current quarter compared
        to
        7.01% for the quarter ended March 31, 2006.
 
 Total
        other income for the current quarter remained relatively unchanged at $6.1
        million compared to $6.0 million for the quarter ended March 31, 2006.
 
 Total
        other expenses for the current quarter also remained relatively unchanged
        at
        $18.2 million compared to $17.9 million for the quarter ended March 31, 2006.
        The slight increase can be attributed to an increase in consulting
        and audit fees associated with SOX 404 compliance.
 
 Income
        tax expense for the current quarter was $7.3 million compared to $8.4 million
        for the quarter ended March 31, 2006. The decrease in income tax expense
        was
        primarily due to a decrease in earnings for the current quarter. The effective
        tax rate for the current quarter was 39.3% compared to 38.3% for the quarter
        ended March 31, 2006. The increase in the effective tax rate was primarily
        a
        result of increasing the year-to-date effective tax rate to
        38.9%
  35
  at
        June
        30, 2006 compared to a year-to-date effective tax rate of 38.7% at March
        31,
        2006. The increase in the year-to-date effective tax rate was applied to
        all of
        fiscal year 2006 pre-tax income in the current quarter resulting in a higher
        current quarter effective tax rate. The slight increase in the year-to-date
        effective tax rate at June 30, 2006 compared to the year-to-date effective
        tax
        rate at March 31, 2006 was due to adjustments in the Company’s estimate of
        non-deductible items.
 
 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, 2006 to the quarter ended
        March 31, 2006. 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, 2006 vs. March 31, 2006Increase
                  (Decrease) Due toVolume
              
              Rate
              
              Total(Dollars
                  in thousands)Interest-earning
                  assets:Loans
                  receivable, net
              
              $
              40
              
              $
              578
              
              $
              618Mortgage-related
                  securities
              
              
              (1,151
              )
              
              376
              
              
              (775
              )Investment
                  securities
              
              
              (273
              )
              
              18
              
              
              (255
              )Capital
                  stock of FHLB
              
              
              (249
              )
              
              260
              
              
              11Cash
                  equivalents
              
              
              783
              
              
              87
              
              
              870Total
                  interest-earning assets
              
              $
              (850
              )
              $
              1,319
              
              $
              469Interest-bearing
                  liabilities:Passbook
                  and passcard
              
              $
              (1
              )
              $
              (5
              )
              $
              (6
              )Checking
                  and money market
              
              
              (31
              )
              
              894
              
              
              863Certificates
              
              
              (330
              )
              
              2,087
              
              
              1,757FHLB
                  advances and other borrowings
              
              
              (804
              )
              
              1,710
              
              
              906Total
                  interest-bearing liabilities
              
              $
              (1,166
              )
              $
              4,686
              
              $
              3,520Net
                  change in net interest and dividend
                  income
              
              $
              316
              
              $
              (3,367
              )
              $
              (3,051
              )
 
  **Comparison
        of Operating Results for the Nine Months Ended June 30, 2006 and
        2005**
  For
        the
        nine month period ended June 30, 2006, the Company recognized net income
        of
        $38.2 million, compared to net income of $52.2 million for the nine month
        period
        ended June 30, 2005. The $14.0 million decrease in net income was a result
        of a
        $22.8 million decrease in net interest and dividend income offset by a $7.7
        million decrease in income tax expense.
 
 Net
        interest and dividend income for the current nine month period was $98.4
        million
        compared to $121.2 million for the nine month period ended June 30, 2005.
        The
        $22.8 million decrease between the two periods was a result of a $28.7 million
        increase in interest expense, which was partially offset by a $5.9 million
        increase in interest and dividend income.
 
 Interest
        income on loans receivable for the current nine month period was $226.8 million
        compared to $202.2 million for the nine month period ended June 30, 2005.
        The
        $24.6 million increase in interest income was primarily due to a $585.5 million
        increase in the average balance of the portfolio as a result of loan
        originations and purchases and a slowdown in prepayment speeds due to an
        increase in long-term interest rates. The weighted average yield of the loan
        portfolio for the current nine month period increased 2 basis points to 5.46%,
        compared to 5.44% for the same period one year ago due to the increase in
        the
        rate of the consumer loan portfolio, most notably the home equity loan
        portfolio, ARM loans repricing to higher rates, and also to fixed-rate mortgage
        loans being originated at rates higher than the loan portfolio rate.
  36
  
 Interest
        income on mortgage-related securities for the current nine month period was
        $56.5 million compared to $71.3 million for the nine month period ended June
        30,
        2005. The $14.8 million decrease in interest income was a result of a $671.4
        million decrease in the average balance of the portfolio, which was partially
        offset by an increase in the weighted average yield of 24 basis points to
        3.90%.
        The average balance decreased as a result of maturities and repayments, offset
        by a small amount of purchases. The weighted average rate increased for the
        current nine month period primarily due to adjustable-rate securities in
        the
        portfolio repricing to a higher rate.
 
 Interest
        income on investment securities for the nine month period was $13.5 million
        compared to $20.1 million for the prior year period. The $6.6 million decrease
        in interest income was primarily a result of a $160.8 million decrease in
        the
        average balance of the portfolio and, to a lesser extent, a 28 basis point
        decrease in the weighted average yield to 4.49% for the current nine month
        period. The decrease in the average balance was a result of called and maturing
        securities that were not replaced in their entirety. The decrease in the
        weighted average yield of the portfolio was attributed to called and maturing
        securities with weighted average yields greater than that of the remaining
        portfolio.
 
 Interest
        expense on deposits for the current nine month period was $87.8 million compared
        to $71.0 million for the nine month period ended June 30, 2005. The $16.8
        million increase was primarily a result of an increase in the average rate
        on
        the certificate of deposit and money market portfolios which was slightly
        offset
        by a decrease in the average balance of each portfolio. The weighted average
        rate of the certificate of deposit portfolio for the current nine month period
        was 3.71% compared to 2.93% for the same period one year ago. The weighted
        average rate of the money market portfolio for the current nine month period
        was
        2.46% compared to 1.74% for the same period one year ago. The Bank increased
        deposit rates in response to the general trend of increasing interest rates
        to
        remain competitive in its markets, thus resulting in an increase in the
        certificate of deposit and money market portfolios’ weighted average rates.
 
 Interest
        expense on FHLB advances for the current nine month period was $117.0 million
        compared to $105.9 million for the nine month period ended June 30, 2005.
        The
        $11.1 million increase in interest expense was primarily a result of an increase
        in the paying rate on the interest rate swaps, partially offset by a decrease
        in
        the average FHLB advance balance. The weighted average paying rate on the
        variable-rate interest rate swaps was 7.01% for the current nine month period
        compared to 5.02% for the nine month period ended June 30, 2005. The average
        balance of FHLB advances decreased as a result of the repayment of $200.0
        million of maturing FHLB advances during fiscal year 2006.
 
 Total
        other income increased $532 thousand to $17.9 million during the current
        nine
        months compared to $17.4 million for the same period one year ago. Retail
        fees
        and charges increased $871 thousand as a result of increased debit card usage,
        an increase in overdraft protection fees and a decrease in the amount of
        overdrawn account charge-offs. Other income, net decreased $344 thousand
        primarily as a result of a decrease in profits on sales of real estate owned
        due
        to a decrease in the average gain per property sold and fewer properties
        sold.
 
 Total
        other expenses decreased $666 thousand to $53.7 million during the current
        nine
        months compared to $54.4 million for the same period one year ago. The slight
        decrease can be primarily attributed to a decrease in advertising expense
        due to
        the timing of marketing and advertising campaigns, offset by a slight increase
        in deposit and loan transaction expenses. Advertising expense is expected
        to be
        higher in the fourth quarter of fiscal year 2006 compared to the fourth quarter
        of fiscal year 2005 due to scheduled advertising campaigns, which will bring
        the
        total annual expense approximately equal to fiscal year 2005.
 
 Income
        tax expense for the current nine month period was $24.3 million compared
        to
        $32.0 million for the nine month period ended June 30, 2005. The decrease
        was
        primarily a result of a decrease in earnings in the current nine month period
        compared to the prior nine month period. The effective tax rate for the current
        nine month period was 38.9%, compared to 38.0% for the same period in the
        prior
        year. The increase in the effective tax rate was primarily a result of a
        change
        in the Company’s estimate of the impact of tax benefits associated with the
        ESOP.
  37
  The
        following table presents the average balances of our assets, liabilities
        and
        stockholders’ equity and the related yields and costs on our interest-earning
        assets and interest-bearing liabilities for the periods indicated. Average
        yields are derived by dividing recorded income by the average balance of
        the
        related assets and average costs are derived by dividing recorded expense
        by the
        average balance of the related liabilities, for the periods shown. Average
        balances are derived from average daily balances. The yields and costs include
        amortization of fees, costs, premiums and discounts which are considered
        adjustments to interest rates.
 
 For
                  the Nine Months EndedJune
                  30, 2006
              
              
              
              June
                  30, 2005Average
              
              
              
              
              
              AverageOutstanding
              
              Yield/
              
              
              
              Outstanding
              
              Yield/Balance
              
              Rate
              
              
              
              Balance
              
              RateAssets:
              
              (Dollars
                  in thousands)Interest-earning
                  assets:Loans
                  receivable(1)
              
              $
              5,541,421
              
              
              5.46
              %
              
              
              
              $
              4,955,953
              
              
              5.44
              %Mortgage-related
                  securities
              
              
              1,928,206
              
              
              3.90
              
              
              
              
              
              2,599,558
              
              
              3.66Investment
                  securities
              
              
              400,437
              
              
              4.49
              
              
              
              
              
              561,201
              
              
              4.77Cash
                  and cash equivalents
              
              
              62,424
              
              
              4.63
              
              
              
              
              
              45,266
              
              
              2.21Capital
                  stock of FHLB
              
              
              177,496
              
              
              5.53
              
              
              
              
              
              176,014
              
              
              4.55Total
                  interest-earning assets(1)
              
              
              8,109,984
              
              
              5.04
              
              
              
              
              
              8,337,992
              
              
              4.80Other
                  noninterest-earning assets
              
              
              152,741
              
              
              
              
              
              
              
              
              180,356Total
                  assets
              
              $
              8,262,725
              
              
              
              
              
              
              
              $
              8,518,348Liabilities
                  and stockholders' equity:Interest-bearing
                  liabilities:Deposits
              
              $
              3,922,759
              
              
              2.99
              
              
              
              
              $
              4,079,841
              
              
              2.33FHLB
                  advances(2)
              
              
              3,307,962
              
              
              4.66
              
              
              
              
              
              3,444,482
              
              
              4.08Borrowings,
                  other
              
              
              53,351
              
              
              7.46
              
              
              
              
              
              53,373
              
              
              5.47Total
                  interest-bearing liabilities
              
              
              7,284,072
              
              
              3.78
              
              
              
              
              
              7,577,696
              
              
              3.15Other
                  noninterest-bearing liabilities
              
              
              115,503
              
              
              
              
              
              
              
              
              89,985Stockholders'
                  equity
              
              
              863,150
              
              
              
              
              
              
              
              
              850,667Total
                  liabilities and stockholders' equity
              
              $
              8,262,725
              
              
              
              
              
              
              
              $
              8,518,348Net
                  interest rate spread
              
              
              
              
              
              1.26
              %
              
              
              
              
              
              
              
              1.65
              %Net
                  interest-earning assets
              
              $
              825,912
              
              
              
              
              
              
              
              $
              760,296Net
                  interest margin
              
              
              
              
              
              1.62
              %
              
              
              
              
              
              
              
              1.94
              %Ratio
                  of interest-earning assetsto
                  interest-bearing liabilities
              
              
              
              
              
              1.11
              
              
              
              
              
              
              
              
              1.10Selected
                  Performance Ratios:Return
                  on average assets (annualized)
              
              
              
              
              
              0.62
              %
              
              
              
              
              
              
              
              0.82
              %Return
                  on average equity (annualized)
              
              
              
              
              
              5.90
              %
              
              
              
              
              
              
              
              8.18
              %Average
                  equity to average assets
              
              
              
              
              
              10.45
              %
              
              
              
              
              
              
              
              9.99
              %
 
  (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) Includes
        an increase in net interest expense of $5.1 million as a result of interest
        rate
        swaps for the nine months ended June 30, 2006, and includes a decrease in
        net
        interest expense of $6.9 million as a result of interest rate swaps for the
        nine
        months ended June 30, 2005.
  
   38
  
  The
        table
        below presents the dollar amount of changes in interest income and interest
        expense for major categories of interest-earning assets and interest-bearing
        liabilities, comparing the nine-months ended June 30, 2006 to the nine-months
        ended June 30, 2005. 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, 2006 vs. June 30, 2005Increase
                  (Decrease) Due toVolume
              
              Rate
              
              Total(Dollars
                  in thousands)Interest-earning
                  assets:Loans
                  receivable, net
              
              $
              23,666
              
              $
              935
              
              $
              24,601Mortgage-related
                  securities
              
              
              (19,852
              )
              
              5,041
              
              
              (14,811
              )Investment
                  securities
              
              
              (5,474
              )
              
              (1,129
              )
              
              (6,603
              )Capital
                  stock of FHLB
              
              
              51
              
              
              1,293
              
              
              1,344Cash
                  equivalents
              
              
              364
              
              
              1,047
              
              
              1,411Total
                  interest-earning assets
              
              $
              (1,245
              )
              $
              7,187
              
              $
              5,942Interest-bearing
                  liabilities:Passbook
                  and passcard
              
              $
              (45
              )
              $
              (9
              )
              $
              (54
              )Checking
                  and money market
              
              
              (604
              )
              
              4,272
              
              
              3,668Certificates
              
              
              (1,721
              )
              
              14,931
              
              
              13,210FHLB
                  advances and other borrowings
              
              
              (4,250
              )
              
              16,128
              
              
              11,878Total
                  interest-bearing liabilities
              
              $
              (6,620
              )
              $
              35,322
              
              $
              28,702Net
                  change in net interest and dividend
                  income
              
              $
              5,375
              
              $
              (28,135
              )
              $
              (22,760
              )
 
  **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, represented by cash and cash
        equivalents, available-for-sale mortgage-related and investment securities
        and
        short-term investment securities, are a product of its operating, investing,
        and
        financing activities. The Bank’s primary sources of funds are deposits, FHLB
        advances, repayments on and maturities of outstanding loans and mortgage-related
        securities, maturing or called investment securities, other short-term
        investments, and funds provided from operations. While scheduled payments
        from
        the amortization of loans and mortgage-related securities and payments,
        maturities, or exercised calls on investment securities are relatively
        predictable sources of funds, deposit flows and prepayments on loans and
        mortgage-related securities are greatly influenced by general interest rates,
        economic conditions, and competition, and are less predictable sources of
        funds.
        To the extent possible, the Bank manages the cash flows of its portfolios
        by the
        rates it offers customers. Available funds are used primarily to meet our
        ongoing operations, to pay maturing certificates of deposit and savings
        withdrawals, and to fund loan commitments.
  At
        June
        30, 2006, cash and cash equivalents totaled $105.2 million. The cash balance
        in
        excess of short-term liquidity needs will be invested in short-duration assets
        in an effort to manage interest rate risk exposure by shortening the average
        term to maturity of our assets.
  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. At June 30, 2006, the Bank’s ratio of the face amount of advances to
        total assets, as reported to the Office of Thrift Supervision (“OTS”), was
        39.9%. 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 percent of total assets, but not exceeding 55 percent of total assets,
        may
        be approved by the president of FHLB Topeka based upon a review of documentation
        supporting the use of the
   39
  advances.
        In July 2006, the president of FHLB Topeka approved a renewal of our request
        to
        increase the Bank’s borrowing limit to 45 percent of total assets for one year.
        Currently, the blanket pledge is sufficient collateral for the 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 percent of total
        assets. In the past, the Bank has utilized other sources for liquidity, such
        as
        secondary market reverse repurchase agreements, but in recent years it has
        relied primarily on the FHLB advances.
  In
        March
        2004, the Company issued $53.6 million in Junior Subordinated Deferrable
        Interest Debentures (“Debentures”) in connection with a trust preferred
        securities offering. The Company received, net, $52.0 million 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, 2006, Capitol Federal
        Financial, at the holding company level, had $113.5 million in cash and
        certificates of deposit.
  On
        December 28, 2005, the Bank entered into a series of agreements with third
        party
        entities in connection with the planned replacement of the Bank’s core
        information technology processing system. The agreements provide for the
        Bank’s
        purchase of hardware, purchase and licensing of software and receipt of
        maintenance, support and other services. The principal software maintenance
        agreement has an initial term of five and one-half years, renewable thereafter
        for successive terms of 33 months. Also in connection with the replacement
        of
        its core information technology processing system, the Bank entered into
        a
        license and service agreement with a third party for the use of the third
        party’s proprietary mortgage loan origination system software. Under this
        agreement, maintenance services are to be provided for an initial term of
        five
        years, renewable thereafter for additional one-year terms. At June 30, 2006,
        the
        Company estimated that the total cash outflows associated with the replacement
        of the Bank’s core information technology processing system would be
        approximately $7.2 million, most of which will be capitalized and depreciated
        over a period not greater than five years. Management is anticipating incurring
        approximately 75% of fiscal year 2005 consulting fees related to SOX 404
        during
        fiscal year 2006 as a result of documenting and testing controls of the new
        core
        information technology processing system, prior to conversion to the new
        system,
        to comply with SOX 404. It is anticipated that following the conversion,
        operating expenses associated with our information technology process will
        be
        largely unchanged.
 
  **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 and mortgage-related
                securities, ·
            extensions
                of credit on home equity loans and construction
                loans, ·
            terms
                and conditions of operating leases, and ·
            funding
                withdrawals of savings accounts at
                maturity. 
  40
  The
        Company’s contractual obligations related to operating leases and debentures
        have not changed significantly from September 30, 2005. The following table
        summarizes our other contractual obligations as of June 30, 2006.
 
 Maturity
                  RangeLess
                  than
              
              1
                  -
                  3
              
              3
                  -
                  5
              
              More
                  thanTotal
              
              1
                  year
              
              years
              
              years
              
              5
                  years(Dollars
                  in thousands)FHLB
                  advances
              
              $
              3,250,000
              
              $
              400,000
              
              $
              1,775,000
              
              $
              1,075,000
              
              $
              --Certificates
                  of deposit
              
              
              2,527,499
              
              
              1,474,007
              
              
              958,050
              
              
              86,349
              
              
              9,093Commitments
                  to originate andpurchase
                  mortgage loans
              
              
              138,813
              
              
              138,813
              
              
              --
              
              
              --
              
              
              --Commitments
                  to fund unusedhome
                  equity lines of credit
              
              
              273,190
              
              
              273,190
              
              
              --
              
              
              --
              
              
              --Unadvanced
                  portion ofconstruction
                  loans
              
              
              20,445
              
              
              20,445
              
              
              --
              
              
              --
              
              
              --
 
 The
        maturity schedule for our certificate of deposit portfolio at June 30, 2006
        is
        located under “Item 3. Quantitative and Qualitative Disclosure About Market
        Risk”.  We
        anticipate that we will continue to have sufficient funds, through repayments
        and maturities of loans and securities, deposits and borrowings, to meet
        our
        current commitments.
  The
        following table presents the maturity of FHLB advances at par as of June
        30,
        2006. The balance of advances excludes the $42.1 million unrealized loss
        adjustment on
        the
        swapped FHLB advances.
 Actual
                      rates
                  
                  Effectivewithout
                  
                  rates
                      withMaturity
                      by
                  
                  interest
                      rate
                  
                  interest
                      rateFiscal
                      year
                  Amount
                  swaps
                  
                  swaps(Dollars
                      in thousands)2007
                  $     750,000
                  3.52
                  %
                  3.52
                  %2008
                  1,125,000
                  4.23
                  
                  4.602009
                  600,000
                  4.24
                  
                  4.242010
                  775,000
                  5.90
                  
                  6.85Total
                  $
                      3,250,000
                  4.47
                  %
                  4.82
                  %
   During
        December 2003, the Bank entered into interest rate swap agreements with a
        notional amount of $800.0 million. The Bank entered into the interest rate
        swap
        agreements to modify its interest rate risk profile. The counterparties with
        whom we have entered into the interest rate swap agreements are rated as
        AA- or
        higher per our internal policies. Counterparties to the interest rate swaps
        require collateral for their exposure to the Bank’s net payable mark-to-market
        position under the terms of the interest rate swap agreements. The exposure
        is
        estimated daily by the counterparties calculating a market value for each
        swap
        on a net settlement basis. When the valuation indicates that the Bank has
        a net
        payable to the counterparty, the Bank may be required to post collateral
        sufficient to satisfy the counterparty’s exposure. When required, the collateral
        pledged to the counterparty would be restricted and not available-for-sale.
        Each
        counterparty has different collateralization requirements. The Bank posted
        available-for-sale mortgage-related securities with an estimated market value
        of
        $47.1 million as collateral as of June 30, 2006. If the future obligation
        indicates that the Bank has a net receivable mark-to-market position from
        the
        counterparties, the Bank could have a certain level of exposure to the extent
        the counterparties are not able to satisfy their obligations to the Bank.
   41
  **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 period or future
        periods.
  
 **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 for the Bank was $779.7 million at June
        30,
        2006, or 9.6% of total bank assets on that date. As of June 30, 2006, the
        Bank
        exceeded all capital requirements of the OTS. The following table presents
        the
        Bank’s regulatory capital ratios at June 30, 2006 based upon regulatory
        guidelines.
 
 RegulatoryRequirementBank
              
              For
                  “WellRatios
              
              Capitalized”
                  StatusCore
                  capital
              9.6%
              
              5.0%Tier
                  I risk-based capital
              21.9
              
              6.0Total
                  risk-based capital
              21.8
              
              10.0
 
 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. Due to the impact refinancing the FHLB advances
        had on
        earnings in 2004, the Bank cannot distribute capital to the Company unless
        it
        receives waivers of the safe harbor regulation from the OTS during the current
        waiver period. The Bank had previously reported that a waiver would be required
        for capital distributions through at least December 31, 2006. As a result
        of net
        interest margin compression, earnings may not be at the levels originally
        forecasted which would likely result in a waiver being required through December
        31, 2007. Currently, the Bank has authorization from the OTS to distribute
        capital from the Bank to the Company through the quarter ending June 30,
        2007.
        So long as the Bank continues to maintain excess capital, operate in a safe
        and
        sound manner, and comply with the interest rate risk management guidelines
        of
        the OTS, it is management’s belief that the Bank will continue to receive
        waivers allowing it to distribute the net income of the Bank to the Company,
        although no assurance can be given in this regard.
 
 **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, 2005, attached as Exhibit 13 to the Company’s Annual Report on
        Form 10-K for the year ended September 30, 2005.
 
 The
        asset
        liability committee 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 measuring the 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 MVPE under those
        alternative interest rate environments.
 
 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 are presented. The percentage change
        in
        each interest rate environment represents the difference between estimated
        net
        interest income in the 0 basis point interest rate environment (“base case”,
        assumes market and product interest rates do not change from the as-of date)
        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).  Estimations of net
        interest income used in preparing the table below are based upon the assumptions
        that the total composition of interest-earning assets and interest-bearing
        liabilities does not change materially and that any
  42
  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 change in the amount of unamortized
        premium
        on mortgage-related securities, any projected gain-on-sale related to the
        sale
        of loans or the effect of the use of new interest rate swaps or income derived
        from non-interest income sources, but does include the use of different
        prepayment assumptions in the alternative interest rate environments. 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 Income (next four
                  quarters)**Change
              
              At(in
                  Basis Points)
              
              June
                  30,
              
              March
                  31,
              
              December
                  31,
              
              September
                  30,
              
              June
                  30,in
                  Interest Rates(1)
              
              2006
              
              2006
              
              2005
              
              2005
              
              2005-300
                  bp
              
              n/m(2)
              
              n/m(2)
              
              n/m(2)
              
              n/m(2)
              
              n/m(2)-200
                  bp
              
              9.98
              
              3.51
              
              4.12
              
              1.53
              
              -2.31-100
                  bp
              
              7.81
              
              4.88
              
              5.87
              
              4.48
              
              1.830
                  bp
              
              --
              
              --
              
              --
              
              --
              
              --+100
                  bp
              
              -9.54
              
              -6.66
              
              -9.11
              
              -8.97
              
              -7.74+200
                  bp
              
              -20.25
              
              -14.76
              
              -19.80
              
              -19.47
              
              -17.37+300
                  bp
              
              -31.55
              
              -23.43
              
              -31.26
              
              -30.76
              
              -27.94
 
 (1) Assumes
        an instantaneous, permanent and parallel change in interest rates at all
        maturities.
 (2) Not
        meaningful, some market rates would compute to a rate less than zero
        percent.
 
 The
        primary drivers for the decrease in the estimated net interest income in
        the
        increasing rate environments are anticipated increases in costs of deposits
        and
        interest rate swaps in excess of the increases in yield in the loan and
        investment and mortgage-related securities portfolios. The increase in the
        cost
        of deposits is primarily a result of the relatively short average maturity
        of
        the Bank’s certificate of deposit portfolio and anticipated increases in the
        cost of money market accounts. The increase in the costs of the interest
        rate
        swaps is due to the immediate repricing nature of the interest rate swaps,
        which
        would result in the interest rate swaps experiencing the full impact of the
        rate
        change immediately. Changes in the rates on the mortgage loan and
        mortgage-related securities portfolios happen at a slower pace, compared
        to the
        interest-bearing liabilities, because only the amount of cash flow received
        on
        the repayment of these portfolios is reinvested at the higher rates. As interest
        rates increase, the rate of prepayment on loans generally decrease, which
        results in less cash available to be reinvested at higher rates.
 
 In
        the
        increasing rate environments at June 30, 2006, modeled net interest income
        was
        lower than at March 31, 2006 and the difference to base case net interest
        income
        increased. Net interest income was lower at June 30, 2006 compared to March
        31,
        2006 as a result of the continued increase in the cost of our certificate
        of
        deposit portfolio and our interest rate swaps. As previously discussed, our
        interest-bearing liabilities are repricing to higher rates faster than our
        interest-earning assets due to the nature of the portfolios.
 
 The
        increase in the estimated net interest income if interest rates were to decrease
        is primarily the result of the immediate decrease in the cost of our interest
        rate swaps and the rapid decrease in the cost of deposits compared to a slower
        decrease in the yield on our interest-earning assets.
 
 The
        forward yield curve indicates that the market expects interest rates on treasury
        securities to remain flat through the end of calendar year 2006. Based upon
        the
        relatively short term to repricing of our liabilities compared to our assets,
        the Bank’s net interest margin will be lower in fiscal year 2006 compared to
        fiscal year 2005. The extent of the reduction in the net interest margin
        will
        depend upon such factors as the increased cost of deposits based upon our
        deposit pricing in response to expected higher short-term market rates, the
        volume of deposit flows on a net basis into or out of the Bank, the amount
        of
        loan prepayments and the reinvestment of those prepayments into new assets
        and
        the rates received on those assets relative to the change in the cost of
        liabilities.
 
 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 percentage change in each interest
        rate
        environment represents the difference between MVPE in the base case and MVPE
        in
        each alternative interest rate environment. The estimations of MVPE used
        in
        preparing the table below are based upon the assumptions that the  43
 total
        composition of interest-earning assets and interest-bearing liabilities does
        not
        change, that any repricing of assets or liabilities occurs at current product
        or
        market rates for the alternative rate environments as of the dates presented
        and
        that 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 MVPE**Change
              
              At(in
                  Basis Points)
              
              June
                  30,
              
              March
                  31,
              
              December
                  31,
              
              September
                  30,
              
              June
                  30,in
                  Interest Rates(1)
              
              2006
              
              2006
              
              2005
              
              2005
              
              2005-300
                  bp
              
              n/m(2)
              
              n/m(2)
              
              n/m(2)
              
              n/m(2)
              
              n/m(2)-200
                  bp
              
              14.92
              
              5.43
              
              1.84
              
              -3.08
              
              -10.71-100
                  bp
              
              12.83
              
              7.81
              
              6.30
              
              2.89
              
              -2.700
                  bp
              
              --
              
              --
              
              --
              
              --
              
              --+100
                  bp
              
              -16.70
              
              -12.48
              
              -13.09
              
              -11.68
              
              -8.60+200
                  bp
              
              -35.37
              
              -26.77
              
              -28.60
              
              -26.22
              
              -20.91+300
                  bp
              
              -56.03
              
              -42.78
              
              -45.47
              
              -41.87
              
              -34.89
 (1)
          Assumes an instantaneous, permanent and parallel change in interest rates
          at all
          maturities.
 (2)
          Either not meaningful, as some market rates would compute to a rate less
          than
          zero percent, or this rate environment is not currently monitored by
          management.
  Changes
        in the estimated market values of our financial assets and liabilities drive
        changes in estimates of MVPE. The market value of shorter term-to-maturity
        financial instruments is 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). These
        characteristics of financial assets and liabilities result in a decrease
        in the
        estimated value of the Bank’s MVPE in rising rate environments and increases our
        estimates of sensitivity to changes in MVPE.
 
 The
        Bank’s measure of its MVPE sensitivity to decreases in interest rates indicates
        a positive change. The increase in MVPE if interest rates drop 100 basis
        points
        is primarily driven by an assumed negligible increase in prepayment speeds
        on
        mortgage-related assets. Given the current composition of our loan portfolio
        and
        the current interest rate environment, it is unlikely that many of our customers
        would be economically enticed to refinance or modify their mortgage loans
        with a
        100 basis point decline in rates. The primary reason for this is that during
        fiscal years 2002, 2003 and 2004, many loan customers took advantage of lower
        interest rates and either refinanced or modified the terms of their mortgage
        loans. For MVPE to be significantly negatively impacted in a decreasing rate
        environment, it would take an increase in cash flows from mortgage prepayments,
        refinances or modifications.
 
 The
        Bank’s estimate of its changes in MVPE from the base case in rising rate
        environments continued its trend towards more sensitivity (most of the
        improvement in March 2006 was due to updates in assumptions). This was primarily
        driven by the increase in the 30 year fixed-rate loan portfolio, the trend
        for
        customers to shorten the maturities of their certificates of deposit, and
        the
        average shorter maturity of our FHLB advances as they move toward maturity.
        As
        rates increase, the estimated fair values of the liabilities with short average
        lives do not respond to rates in the same manner as the longer maturity loans,
        which are primarily 30 year fixed-rate loans, which have longer average lives.
        The prepayment assumptions on the fixed-rate loans in particular, and all
        loans
        in general, anticipate prepayment rates in the increasing rate environments
        that
        would only be realized through normal changes in customers lives, such as
        divorce, death, job-related relocations, and other life changing events.
        The
        lower prepayment assumptions extend the expected average lives on these assets
        thereby increasing their sensitivity to changes in interest rates. The net
        effect of these characteristics of short-lived liabilities and long-lived
        assets
        is to increase the sensitivity of the Bank to changes in interest
        rates.
 
 Management
        realizes that this level of sensitivity, while expected to be in compliance
        with
        limits established by the board of directors, exposes the Bank to significant
        challenges in its operations. Because of this, management is intentionally
        shortening the maturity of its assets by purchasing securities with short
        average lives. In conjunction with the board-approved swap of loans for
        securities with the FHLMC, the securities received as a result of the swap
may
        be
        sold, and the corresponding proceeds reinvested into securities with short
        average lives, generally under two years.
  44
  
 The
        loans
        that will be swapped with the FHLMC are fixed-rate and have a current average
        yield of approximately 5.80%. As required under FAS No. 140 and Emerging
        Issues
        Task Force No. 88-11, the Bank will allocate the basis of the established
        mortgage servicing rights, excess servicing rights, and the fair value of
        the
        securities to establish the basis of each in the new securities. The general
        valuation allowance and net deferred fees/costs associated with the swapped
        loans will be used to adjust the original basis of the securities received.
        The
        effective yield of the new securities, after accounting for the above mentioned
        adjustments to the securities carrying value, is estimated to be approximately
        5.80%. In addition, the Bank will earn 25 basis points on the servicing of
        the
        loans swapped. If the transaction would have been completed on June 30, 2006,
        there would have been an unrealized loss of approximately $7.7 million recorded
        in accumulated other comprehensive income/loss on the securities received
        because their estimated fair value was below book value.  These estimates
        are based upon loans originally selected for review.  The actual amounts
        and yields will be based upon balances closer to the settlement date, currently
        expected to be in September 2006, and market prices at that time.
 
 Management
        will continue to closely monitor the sensitivity of the balance sheet to
        changes
        in interest rates and may pursue strategies that will assist in the management
        of this sensitivity. This may include long-term strategies that will impact
        the
        composition of the balance sheet and could potentially have a negative impact
        to
        earnings.
 
 
 
  45
   **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, 2006,
        based on the information and assumptions set forth in the notes
        below.
 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(1):
              
              
              
              (Dollars
                  in Thousands)Loans
                  receivable(2):Mortgage
                  loans:Fixed
              
              
              
              
              $
              137,783
              
              $
              378,287
              
              $
              824,196
              
              $
              617,390
              
              $
              1,501,763
              
              $
              3,459,419Adjustable
              
              
              
              
              
              158,879
              
              
              463,850
              
              
              734,374
              
              
              522,869
              
              
              24,880
              
              
              1,904,852Other
                  loans
              
              
              
              
              
              159,291
              
              
              6,166
              
              
              9,376
              
              
              6,202
              
              
              37,436
              
              
              218,471Securities:Non-mortgage(3)
              
              
              
              
              
              --
              
              
              40,000
              
              
              292,431
              
              
              --
              
              
              50,000
              
              
              382,431Mortgage-related
                  securities(4)
              
              
              
              
              
              107,769
              
              
              480,540
              
              
              683,748
              
              
              264,671
              
              
              258,850
              
              
              1,795,578Other
                  interest-earning assets
              
              
              
              
              
              69,700
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              69,700Total
                  interest-earning assets
              
              
              
              
              
              633,422
              
              
              1,368,843
              
              
              2,544,125
              
              
              1,411,132
              
              
              1,872,929
              
              
              7,830,451Interest-bearing
                  liabilities:Deposits:Passbook
                  and passcard(5)
              
              
              
              
              
              2,345
              
              
              7,036
              
              
              18,988
              
              
              15,936
              
              
              68,713
              
              
              113,018Checking(5)
              
              
              
              
              
              9,172
              
              
              27,516
              
              
              69,218
              
              
              57,690
              
              
              257,337
              
              
              420,933Money
                  market(5)
              
              
              
              
              
              36,923
              
              
              110,769
              
              
              199,426
              
              
              153,255
              
              
              334,046
              
              
              834,419Certificates
              
              
              
              
              
              380,232
              
              
              1,093,776
              
              
              958,050
              
              
              86,349
              
              
              9,092
              
              
              2,527,499Borrowings(6)
              
              
              
              
              
              800,000
              
              
              400,000
              
              
              1,550,000
              
              
              500,000
              
              
              53,453
              
              
              3,303,453Total
                  interest-bearing liabilities
              
              
              
              
              
              1,228,672
              
              
              1,639,097
              
              
              2,795,682
              
              
              813,230
              
              
              722,641
              
              
              7,199,322Excess
                  (deficiency) of interest-earning assets overinterest-bearing
                  liabilities
              
              
              
              
              $
              (595,250
              )
              $
              (270,254
              )
              $
              (251,557
              )
              $
              597,902
              
              $
              1,150,288
              
              $
              631,129Cumulative
                  excess (deficiency) of interest-earningassets
                  over interest-bearing liabilities
              
              
              
              
              $
              (595,250
              )
              $
              (865,504
              )
              $
              (1,117,061
              )
              $
              (519,159
              )
              $
              631,129Cumulative
                  excess (deficiency) of interest-earningassets
                  over interest-bearing liabilities as apercent
                  of total assets at June 30, 2006
              
              
              
              
              
              (7.33
              )%
              
              (10.66
              )%
              
              (13.76
              )%
              
              (6.40
              )%
              
              7.78
              %Cumulative
                  one-year gap at September 30, 2005
              
              
              
              
              
              
              
              
              (4.01
              )Cumulative
                  one-year gap at September 30, 2004
              
              
              
              
              
              
              
              
              (5.54
              )
 
  46
   (1)
        Adjustable-rate loans are included in the period in which the rate is next
        scheduled to adjust, rather than in the period in which the loans are due
        or in
        the period in which repayments are expected to occur prior to their next
        rate
        adjustment. Fixed-rate loans are included in the periods in which they are
        scheduled to be repaid, based on scheduled amortization and prepayment
        assumptions.
 (2)
        Balances have been reduced for non-performing loans, which totaled $6.9 million
        at June 30, 2006.
 (3)
        Based
        on contractual maturities, and excludes the unrealized loss adjustment of
        $303
        thousand on available-for-sale investment securities.
 (4)
        Reflects estimated prepayments of mortgage-related securities in our portfolio,
        and excludes the unrealized loss adjustment of $6.7 million on
        available-for-sale mortgage-related securities.
 (5)
        Although our checking, passbook and passcard 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 used on these accounts are based on assumptions
        developed based upon our actual experience with these accounts. If all of
        our
        checking, passbook and passcard 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 $2.04 billion,
        for a
        cumulative one-year gap of (25.13)% of total assets.
 (6)
        Borrowings exclude the $42.1 million unrealized loss adjustment on the swapped
        FHLB advances.
 
 The
        increase in the negative cumulative gap in the table on the previous page
        is a
        result of the approaching FHLB advance maturity dates, and customers shifting
        from long-term to short-term certificates of deposit. The Bank’s asset lives are
        extending as a result of the continued growth in the 30 year fixed-rate mortgage
        loan portfolio while the liability lives (FHLB advances and certificate of
        deposit portfolio) are shortening.
 
 The
        table
        on the previous page contains certain assumptions which affect the presentation.
        Although certain assets and liabilities may have similar maturities or periods
        to repricing, they may react in different degrees to changes in market interest
        rates. 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 likely would deviate significantly from those assumed in calculating
        the
        table.
 
 The
        FHLB
        advances designated in hedging relationships have maturities ranging from
        May
        2008 to August 2010. At June 30, 2006, the Bank was in a paying position
        on the
        interest rate swaps. If the one month LIBOR rate remains higher than 3.68%
        (weighted average break even LIBOR rate), then the Bank will continue to
        be in a
        paying position on the interest rate swaps. The following summarizes the
        interest rate swap agreements by maturity date at June 30, 2006:
 
 June
                  30, 2006PayingFiscal
              
              Notional
              1
                  Month
              
              
              ReceivingYear
              Fair
              Principal
              LIBOR
              
              Interest
              InterestMaturity
              Value(1)
              Amount
              Rate(2)
              Margin
              Rate
              Rate
              Spread(Dollars
                  in thousands)2008
              $
                  (8,903)
              $
                  225,000
              5.11%
              2.41%
              7.52%
              5.68%
              (1.84)%2010
              (33,232)
              575,000
              5.11
              2.51
              7.62
              6.35
              (1.27)$
                  (42,135)
              $
                  800,000
              5.11%
              2.48%
              7.59%
              6.16%
              (1.43)%
 
 (1)  The
        one
        month LIBOR rate as of June 30, 2006 was 5.33%. This rate was used to calculate
        the fair value of the interest rate swaps at June 30, 2006.
 (2)  The
        one
        month LIBOR rate as of May 30, 2006 was 5.11%. This rate plus the margin
        noted
        above was the paying interest rate during June 2006.
 
  47
  **Changes
        in portfolio composition.** The
        following tables provide information regarding the fixed- and adjustable-rate
        composition of our loan, investment and mortgage-related security portfolios
        as
        well as the change in the composition of these portfolios from September
        30,
        2005 to June 30, 2006. Also presented is the certificate of deposit portfolio,
        which shows the change in composition between periods in terms of maturity
        range.
 
 The
        following table presents loan origination, refinance, purchase, and modification
        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, 2006
              
              June
                  30, 2005Amount
              
              Rate
              
              %
                  of Total
              
              Amount
              
              Rate
              
              %
                  of TotalFixed-rate:
              
              (Dollars
                  in thousands)One-
                  to four-family<=
                  15 years
              
              $
              27,593
              
              
              5.93
              %
              
              9.54%
              
              $
              30,413
              
              
              5.18
              %
              
              7.50
              %>
                  15 years
              
              
              146,918
              
              
              6.28
              
              
              50.80
              
              
              114,922
              
              
              5.64
              
              
              28.35Other
                  real estate
              
              
              5,950
              
              
              6.76
              
              
              2.06
              
              
              2,830
              
              
              6.13
              
              
              0.70Non
                  real estate
              
              
              14,865
              
              
              7.72
              
              
              5.14
              
              
              8,909
              
              
              7.03
              
              
              2.20Total
                  fixed-rate
              
              
              195,326
              
              
              6.35
              
              
              67.54
              
              
              157,074
              
              
              5.64
              
              
              38.75Adjustable-rate:One-
                  to four-family<=
                  36 months
              
              
              9,895
              
              
              5.50
              
              
              3.42
              
              
              50,458
              
              
              5.09
              
              
              12.45>
                  36 months
              
              
              57,879
              
              
              5.68
              
              
              20.02
              
              
              164,394
              
              
              5.16
              
              
              40.56Non
                  real estate
              
              
              26,092
              
              
              8.60
              
              
              9.02
              
              
              33,406
              
              
              6.78
              
              
              8.24Total
                  adjustable-rate
              
              
              93,866
              
              
              6.47
              
              
              32.46
              
              
              248,258
              
              
              5.36
              
              
              61.25Total
                  loan originations and purchases
              
              $
              289,192
              
              
              6.39
              %
              
              100.00%
              
              $
              405,332
              
              
              5.47
              %
              
              100.00
              %Purchased
                  loans included above:Fixed-rate
                  purchased loans
              
              $
              18,851
              
              
              6.34
              %
              
              
              
              $
              15,313
              
              
              5.64
              %Adjustable-rate
                  purchased loans
              
              $
              21,264
              
              
              5.68
              %
              
              
              
              $
              157,521
              
              
              5.26
              %
 
 
 
  48
   For
                    the Nine Months Ended
                
                For
                    the Nine Months EndedJune
                    30, 2006
                
                June
                    30, 2005Amount
                
                Rate
                
                %
                    of Total
                
                Amount
                
                Rate
                
                %
                    of TotalFixed-Rate:
                
                (Dollars
                    in thousands)One-
                    to four-family<=
                    15 years
                
                $
                84,200
                
                
                5.61
                %
                
                10.03%
                
                $
                170,224
                
                
                5.04
                %
                
                14.67
                %>
                    15 years
                
                
                339,549
                
                
                6.07
                
                
                40.45
                
                
                277,552
                
                
                5.61
                
                
                23.92Other
                    real estate
                
                
                12,648
                
                
                6.45
                
                
                1.51
                
                
                8,188
                
                
                6.39
                
                
                0.71Non
                    real estate
                
                
                34,716
                
                
                7.59
                
                
                4.13
                
                
                19,511
                
                
                6.94
                
                
                1.68Total
                    fixed-rate
                
                
                471,113
                
                
                6.11
                
                
                56.12
                
                
                475,475
                
                
                5.47
                
                
                40.98Adjustable-Rate:One-
                    to four-family<=
                    36 months
                
                
                58,423
                
                
                4.88
                
                
                6.96
                
                
                142,686
                
                
                4.66
                
                
                12.30>
                    36 months
                
                
                233,760
                
                
                5.32
                
                
                27.84
                
                
                454,538
                
                
                4.94
                
                
                39.18Non
                    real estate
                
                
                76,211
                
                
                8.21
                
                
                9.08
                
                
                87,515
                
                
                6.26
                
                
                7.54Total
                    adjustable-rate
                
                
                368,394
                
                
                5.85
                
                
                43.88
                
                
                684,739
                
                
                5.05
                
                
                59.02Total
                    loan originations and purchases
                
                $
                839,507
                
                
                6.00
                %
                
                100.00%
                
                $
                1,160,214
                
                
                5.22
                %
                
                100.00
                %Purchased
                    loans included above:Fixed-rate
                    purchased loans
                
                $
                64,726
                
                
                5.93
                %
                
                
                
                $
                108,057
                
                
                5.19
                %Adjustable-rate
                    purchased loans
                
                $
                179,298
                
                
                5.11
                %
                
                
                
                $
                449,503
                
                
                4.95
                %
 49
   The
        following table presents the distribution of our loan portfolio at the dates
        indicated. Our loan portfolio remains primarily weighted in fixed-rate loans.
  June
                    30, 2006
                
                March
                    31, 2006
                
                September
                    30, 2005Amount
                
                Rate
                
                %
                    of Total
                
                Amount
                
                Rate
                
                %
                    of Total
                
                Amount
                
                Rate
                
                %
                    of Total(Dollars
                    in thousands)Fixed-rate
                    loans:One-
                    to four- family real estate:<=
                    15 years(1)
                
                $
                1,224,729
                
                
                5.29
                %
                
                21.87%
                
                $
                1,250,761
                
                
                5.28
                %
                
                22.52%
                
                $
                1,300,342
                
                
                5.28
                %
                
                23.67
                %>
                    15 years(1)
                
                
                2,165,183
                
                
                5.90
                
                
                38.66
                
                
                2,072,941
                
                
                5.88
                
                
                37.32
                
                
                1,973,285
                
                
                5.89
                
                
                35.91Other
                    real estate
                
                
                84,029
                
                
                6.28
                
                
                1.50
                
                
                78,916
                
                
                6.18
                
                
                1.42
                
                
                75,405
                
                
                6.12
                
                
                1.38Non
                    real estate
                
                
                60,814
                
                
                7.41
                
                
                1.08
                
                
                51,401
                
                
                7.29
                
                
                0.92
                
                
                39,687
                
                
                7.05
                
                
                0.72Total
                    fixed-rate loans
                
                
                3,534,755
                
                
                5.72
                
                
                63.11
                
                
                3,454,019
                
                
                5.69
                
                
                62.18
                
                
                3,388,719
                
                
                5.67
                
                
                61.68Adjustable-rate
                    loans:One-
                    to four- family real estate:<=
                    36 months(2)
                
                
                908,099
                
                
                4.72
                
                
                16.21
                
                
                834,587
                
                
                4.70
                
                
                15.02
                
                
                825,473
                
                
                4.63
                
                
                15.02>
                    36 months(2)
                
                
                982,757
                
                
                4.96
                
                
                17.55
                
                
                1,086,415
                
                
                4.84
                
                
                19.56
                
                
                1,089,906
                
                
                4.77
                
                
                19.84Other
                    real estate
                
                
                17,788
                
                
                5.09
                
                
                0.31
                
                
                16,600
                
                
                4.94
                
                
                0.30
                
                
                19,470
                
                
                4.67
                
                
                0.35Non
                    real estate
                
                
                157,812
                
                
                8.63
                
                
                2.82
                
                
                163,070
                
                
                8.38
                
                
                2.94
                
                
                170,819
                
                
                7.58
                
                
                3.11Total
                    adjustable-rate loans
                
                
                2,066,456
                
                
                5.14
                
                
                36.89
                
                
                2,100,672
                
                
                5.06
                
                
                37.82
                
                
                2,105,668
                
                
                4.94
                
                
                38.32Total
                    loans
                
                
                5,601,211
                
                
                5.51
                %
                
                100.00%
                
                
                5,554,691
                
                
                5.45
                %
                
                100.00%
                
                
                5,494,387
                
                
                5.39
                %
                
                100.00
                %Less:Loans
                    in process
                
                
                20,445
                
                
                
                
                
                
                
                
                15,720
                
                
                
                
                
                
                
                
                14,803Deferred
                    fees and discounts
                
                
                11,615
                
                
                
                
                
                
                
                
                11,466
                
                
                
                
                
                
                
                
                10,856Allowance
                    for loan losses
                
                
                4,649
                
                
                
                
                
                
                
                
                4,680
                
                
                
                
                
                
                
                
                4,598Total
                    loans receivable, net
                
                $
                5,564,502
                
                
                
                
                
                
                
                $
                5,522,825
                
                
                
                
                
                
                
                $
                5,464,130
 (1)
            Loans
                are reported based on their remaining term to maturity as of the
                date
                indicated. (2)
            Loans
                are reported based on their term to next rate reset as of the date
                indicated. 
  50
   The
        following table presents the distribution of our investment and mortgage-related
        securities portfolios, at cost, at the dates indicated. Overall, fixed-rate
        securities comprised 49.3% of these portfolios at June 30, 2006 compared
        to
        46.7% at September 30, 2005. The WAL is the estimated remaining maturity
        of the
        underlying collateral after projected prepayment speeds have been applied.
  June
                  30, 2006
              
              March
                  31, 2006
              
              December
                  31, 2005
              
              September
                  30, 2005Balance
              
              Rate
              
              Yield
              
              Balance
              
              Rate
              
              Yield
              
              Balance
              
              Rate
              
              Yield
              
              Balance
              
              Rate
              
              Yield(Dollars
                  in thousands)Fixed-rate
                  investments:Agency
                  bonds
              
              $
              382,431
              
              
              4.25
              %
              
              4.35%
              
              $
              380,518
              
              
              4.42
              %
              
              4.41%
              
              $
              430,517
              
              
              4.53
              %
              
              4.54%
              
              $
              430,499
              
              
              4.53
              %
              
              4.54
              %Mortgage-related
                  securities, at cost
              
              
              690,716
              
              
              4.54
              
              
              4.57
              
              
              711,309
              
              
              4.54
              
              
              4.57
              
              
              738,900
              
              
              4.54
              
              
              4.57
              
              
              775,464
              
              
              4.55
              
              
              4.57Total
                  fixed-rate investments
              
              
              1,073,147
              
              
              4.44
              
              
              4.49
              
              
              1,091,827
              
              
              4.50
              
              
              4.51
              
              
              1,169,417
              
              
              4.54
              
              
              4.56
              
              
              1,205,963
              
              
              4.54
              
              
              4.56WAL
                  (in years)
              
              
              3.95
              
              
              
              
              
              
              
              
              3.86
              
              
              
              
              
              
              
              
              3.84
              
              
              
              
              
              
              
              
              3.75Adjustable-rate
                  investments:Mortgage-related
                  securities, at cost
              
              
              1,104,862
              
              
              4.55
              
              
              3.86
              
              
              1,133,757
              
              
              4.37
              
              
              3.66
              
              
              1,234,253
              
              
              4.29
              
              
              3.40
              
              
              1,375,862
              
              
              4.18
              
              
              3.22Total
                  adjustable-rate investments
              
              
              1,104,862
              
              
              4.55
              
              
              3.86
              
              
              1,133,757
              
              
              4.37
              
              
              3.66
              
              
              1,234,253
              
              
              4.29
              
              
              3.40
              
              
              1,375,862
              
              
              4.18
              
              
              3.22WAL
                  (in years)
              
              
              3.49
              
              
              
              
              
              
              
              
              2.61
              
              
              
              
              
              
              
              
              2.79
              
              
              
              
              
              
              
              
              2.78Total
                  investment portfolio, at cost
              
              $
              2,178,009
              
              
              4.49
              %
              
              4.17%
              
              $
              2,225,584
              
              
              4.43
              %
              
              4.08%
              
              $
              2,403,670
              
              
              4.41
              %
              
              3.96%
              
              $
              2,581,825
              
              
              4.35
              %
              
              3.85
              %
 
 The
        certificate of deposit portfolio decreased from September 30, 2005 to June
        30,
        2006 by $39.6 million and the average cost of the portfolio increased 79
        basis
        points between the two reporting dates. Certificates maturing in one year
        or
        less at June 30, 2006 were $1.47 billion with an average cost of 4.12%. The
        following table presents the maturity of certificates of deposit at the dates
        indicated.
 
 June
                  30, 2006
              
              March
                  31, 2006
              
              December
                  31, 2005
              
              September
                  30, 2005Amount
              
              Rate
              
              Amount
              
              Rate
              
              Amount
              
              Rate
              
              Amount
              
              Rate(Dollars
                  in thousands)Certificates
                  maturing within0
                  to 3 months
              
              $
              380,232
              
              
              3.96%
              
              $
              585,102
              
              
              3.57%
              
              $
              489,620
              
              
              3.41%
              
              $
              495,367
              
              
              3.04
              %3
                  to 6 months
              
              
              378,694
              
              
              4.07
              
              
              299,494
              
              
              3.66
              
              
              433,208
              
              
              3.21
              
              
              398,471
              
              
              3.156
                  months to one year
              
              
              715,081
              
              
              4.23
              
              
              589,824
              
              
              3.89
              
              
              547,920
              
              
              3.69
              
              
              604,548
              
              
              3.19One
                  year to two years
              
              
              782,935
              
              
              4.15
              
              
              834,002
              
              
              4.00
              
              
              696,012
              
              
              3.82
              
              
              681,637
              
              
              3.74After
                  two years
              
              
              270,557
              
              
              4.18
              
              
              299,861
              
              
              3.91
              
              
              362,856
              
              
              3.70
              
              
              387,081
              
              
              3.53Total
                  certificates
              
              $
              2,527,499
              
              
              4.14%
              
              $
              2,608,283
              
              
              3.83%
              
              $
              2,529,616
              
              
              3.59%
              
              $
              2,567,104
              
              
              3.35
              %Average
                  maturity (in years)
              
              
              1.04
              
              
              
              
              
              1.03
              
              
              
              
              
              1.06
              
              
              
              
              
              1.07
 
 
  51
   
 
 **Item
        4** **.
        Controls and Procedures**
 
 The
        Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under
        the Securities Exchange Act of 1934 as amended, (the “Act”)) were evaluated as
        of June 30, 2006 under the supervision and with the participation of our
        Chief
        Executive Officer, Chief Financial Officer, and several other members of
        our
        senior management. The Chief Executive Officer and Chief Financial Officer
        concluded that, as of June 30, 2006, the Company’s disclosure controls and
        procedures were effective in ensuring that the information required to be
        disclosed by the Company in the reports it files or submits under the Act
        is (i)
        accumulated and communicated to management (including the Chief Executive
        Officer and Chief Financial Officer) to allow timely decisions regarding
        required disclosures, and (ii) recorded, processed, summarized and reported
        within the time periods specified in the SEC’s rules and forms.
 
 During
        the quarter ended June 30, 2006, no change occurred in the Company’s internal
        control over financial reporting (as defined in Rule 13a-15(f) under the
        Act)
        that has materially affected, or is 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.
 
 
 <Index>
 **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, 2006 and additional information regarding our share repurchase
        program. Our current repurchase plan of 1,536,102 shares was announced on
        November 7, 2002. The plan has no expiration date and had approximately 52,500
        shares remaining as of June 30, 2006. On May 26, 2006, the board of directors
        approved a new stock repurchase program. Under the new plan, the Company
        intends
        to repurchase up to 500,000 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. The
        plan
        has no expiration date and will commence at the end of the current
        program.
  Total
              
              Total
                  Number of
              Additional
                  Number
              Maximum
                  NumberNumber
                  of
              Average
              Shares
                  Purchased as
              of
                  Shares Allowed
              of
                  Shares that MayShares
              Price
                  Paid
              Part
                  of Publicly
              for
                  Repurchase
              Yet
                  Be PurchasedPeriod
              Purchased(1)
              per
                  Share(2)
              Announced
                  Plans(1)
              Under
                  New Plan
              Under
                  the PlanApril
                  1, 2006 throughApril
                  30, 2006
              85,107
              32.19
              85,107
              
              116,268May
                  1, 2006 throughMay
                  31, 2006
              48,270
              32.44
              48,270
              500,000
              567,998June
                  1, 2006 throughJune
                  30, 2006
              15,644
              33.44
              15,644
              
              552,354Total
              149,021
              32.39
              149,021
              
              552,354
 
 (1) Included
        in the share counts are 16,250 shares that were received in exchange for
        the
        exercise of options.
 (2) Reflects
        the average price paid per share to purchase the shares acquired in
        the  open
        market.
 
 <Index>
 **Item
        3.  Defaults Upon Senior Securities**
 Not
        applicable
 **<Index>**
  52
  **Item
        4.  Submission of Matters to a Vote of Security Holders**
 None.
 
 **<Index>**
 **Item
        5.  Other Information**
 Not
        applicable
 
 **<Index>**
 **Item
        6.  Exhibits**
 See
        Index
        to Exhibits
  53
  **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,
        2006  By: /s/
        John B.
        Dicus
 John B. Dicus, President and
 Chief Executive Officer
 
 
 Date:   August
        4,
        2006  By: /s/
        Kent G.
        Townsend
 Kent G. Townsend, Executive Vice President,
 Chief Financial Officer and Treasurer
 
 
 <Index>
 
  54
   **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 August 4, 2004 as Exhibit
                  3(ii) tothe
                  June 30, 2004 Form 10-Q4(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 debt10.1
              
              Registrant’s
                  Thrift and Stock Ownership Plan filed on December 14, 2005 as Exhibit
                  10.1
                  tothe
                  Annual Report on Form 10-K10.2
              
              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)10.3
              
              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)10.4
              
              Deferred
                  Incentive Bonus Plan filed on December 31, 2001 as Exhibit 10.4
                  to the
                  Annual Report onForm
                  10-K10.5
              
              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-Q10.6
              
              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-Q10.7
              
              Form
                  of Restricted Stock Agreement under the RRP filed on February 4,
                  2005 as
                  Exhibit 10.7 to theDecember
                  31, 2004 Form 10-Q10.8
              
              Description
                  of Named Executive Officer Salary and Bonus Arrangements filed
                  on December
                  14,2005
                  as Exhibit 10.8 to the Annual Report on Form 10-K for the fiscal
                  year
                  ended September 30, 200510.9
              
              Description
                  of Director Fee Arrangements filed on February 6, 2006 as Exhibit
                  10.9 to
                  the December 31, 2005 Form 10-Q10.10
              
              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,
                  200511
              
              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, 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, Chief Financial Officer and
                  Treasurer32
              
              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, Chief Executive
                  Officer, and Kent G. Townsend, Chief Financial Officer and Treasurer
 *Incorporated
        by reference from Capitol Federal Financial’s Registration Statement on Form S-1
        (File No. 333-68363) filed on February 11, 2000, 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.
 
 
  55